Oops, they’re going to do it again: filing Chapter 11 – or even Chapter 7 liquidation – if news reports about NY grocery chain Fairway Market are accurate. The New York Post reported on January 2, 2020 that a new filing is in the works, based on “multiple sources”. We’ve been down this road before back in 2016, but the grocer emerged quickly after a major debt for equity swap, as lenders became owners. Currently – according to the Post – the beleaguered 14 store chain is owned by  “lead shareholders Brigade Capital Management and Goldman Sachs Group“.

The owners sought a buyer in September but no one came forward. There is a small mountain of debt coming due in 2023 and 2024, but the company does not seem to have the resources to even hang in till then. Given that the company is reportedly looking to sell its flagship store and has closed several other locations, we’re guessing a liquidation – and some major credit losses – are in the works.

This is a privately held business so we don’t know all the details. However, thanks to Advantage Data’s records we know there are two non-listed BDCs with $30.9mn in first lien , second lien and equity in the company. Some of the debt is already on non accrual and the entire exposure has already been written down substantially to a FMV of $16.6mn at September 30 2019. The two BDCs are FS Investment II and FS Investment III, which will shortly be merged with the former as the surviving entity.

Some investment income will be lost if all debt facilities go on non accrual but cash won’t be affected as the interest income of late has been pay-in-kind. We don’t pretend to have an intimate understanding of the debt structure at the grocer, but chances are high the two BDCs – which already took a Realized Loss in 2016 – will be booking significant losses above and beyond the September 2019 valuation, and sooner rather than later. Presumably, this was one more troubled investment that FS-KKR inherited from the prior co-manager of the funds: GSO Blackstone. What’s not clear is who green lit the nearly 30% increase in exposure in IIIQ 2018. Was it the new combo of FS Investments and KKR or GSO ? In any case we’ve added Fairway to our Bankruptcy Imminent List for the IQ 2020.

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