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Serta's bankruptcy raises consumer products default rate

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Illustration: Sarah Grillo/Axios

Serta Simmons' Chapter 11 filing in Texas on Monday lifts the leveraged loan default rate for the last 12 months to 8.8% from 5.3%, says Eric Rosenthal, senior director of leveraged finance at Fitch Ratings.

Why it matters: A default rate in the high single digits indicates an industry is in distress. Consumer products is in distress.

  • The default rate, however, is largely driven by two issuers, Serta Simmons and Revlon (which filed for bankruptcy in June), Rosenthal notes.

What we're watching: Among the most distressed issuers aside from Serta Simmons according to Fitch, S&P Global Ratings and Moody's Investor Services are:

  • San Francisco-based beauty company Rodan & Fields
  • Los Angeles-based cosmetics business Anastasia Beverly Hills
  • Austin, Texas-based home decor company KNB Holdings Corp.
  • New York-based apparel manufacturer Premier Brands Group.

The big picture: The institutional loan default rate across industries for the trailing 12 months rose to 1.7% from 1.6%, the highest level since June 2021, Rosenthal says.

  • The large middle market (LMM) default rate is expected to increase from 1.2% "due to a greater vulnerability to rising interest rates," he adds.

Driving the news: Under bankruptcy protection, Serta Simmons aims to restructure its debt, reducing it from $1.9 billion to $300 million.

  • The prepackaged plan includes $125 million of debtor-in-possession financing and another $125 million once it exits Chapter 11.

Between the lines: In addition to significant debt maturities this year, Serta Simmons cited reduced consumer spending, rising material costs, supply chain disruptions and the adverse effects of COVID-19 as the reasons behind its bankruptcy.

  • Ongoing litigation also played a role, says Judah Gross, also a senior director of leveraged finance at Fitch.

Catch up fast: Serta Simmons is being sued by a group of funds including Apollo for allowing rival lenders to jump ahead in seniority in exchange for $200 million in fresh capital as part of a 2020 restructuring.

What they're saying: "Serta envisions a restructuring that will delever the company by about $1.6 billion and hand over the lion’s share of the equity to first-lien, second-out lenders," Gross explains.

  • "However, Serta acknowledges that its ability to restructure its balance sheet and emerge from Chapter 11 is inextricably tied to the resolution of the disputes raised in connection with the 2020 priming transactions," he says.
  • "Together with its bankruptcy filing, Serta also filed a litigation with the bankruptcy court seeking a declaratory judgment that the priming transactions executed in 2020 were valid," Gross adds.

The bottom line: Given reduced spending, inflation and a difficult debt financing market, Serta Simmons will be joined by a number of consumer-facing companies as this year unfolds.

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