FS KKR Capital restructures DEI, converting debt into equity

FS KKR Capital Corp. restructured an investment in audio-equipment maker DEI Holdings Inc. in the recent quarter, investors heard today in an earnings call.

DEI Holdings operates as Sound United. Sound United, based in Vista, Calif., designs and manufactures luxury home speakers, custom installation products and audio systems to the automotive and television markets. Brands include Denon, Polk Audio, Marantz, Definitive Technology, Classe and Boston Acoustics. In October 2020, Sound United closed an acquisition of Bowers & Wilkins.

FS KKR Capital's investment in DEI Holdings included $86 million of subordinated debt due 2023 (9%, 7% pay-in-kind) as of Sept. 30. FS KKR also owned equity in the company at the time.

In the quarter ended Dec. 31, FS KKR converted debt into equity via a "consensual" transaction with the sponsor. FS KKR Capital's investment portfolio as of year-end included debt and equity to Sound United LLC, including $15 million of L+700 (1% floor) first-lien debt due 2023 and $21.8 million of 13.5% PIK second-lien debt due 2024, plus equity.

"We essentially equitized a large portion of our existing debt. We put in new money to be supportive of what we view as a highly accretive acquisition they're doing. So that, during the course of 2020, was a pretty negative overall P&L event," Daniel Pietrzak, chief investment officer of FS KKR Capital Corp., said in the call.

"But we think that company is quite well positioned to go forward and actually has a real potential for a significant recovery versus the restructuring work we did," Pietrzak said.

DEI Holdings placed first- and second-lien loans in 2011 backing a $305 million buyout of the company by Charlesbank Capital Partners. The private equity firm raised its offer for the company to match a rival bid from Gibson Guitar. GE Capital and Oppenheimer arranged the buyout financing.

FS KKR also restructured a second-lien debt investment in Belk in the quarter. Belk filed for Chapter 11 in February and received confirmation for a reorganization plan the next day.

FS KKR's non-accrual loans at year-end totaled 2.5% of the portfolio at fair value, down from 2.8% a year earlier.

No new investments were placed on non-accrual status in the quarter. Three investments were removed: DEI, Chisholm Oil & Gas Operating LLC and Z Gallerie LLC.

Chisholm Oil and Gas filed for bankruptcy in June 2020. The company received court approval in September for a reorganization plan that converted debt into equity.