05 March 2015
Shortly after it filed for Chapter 11, I wrote this post about the bankruptcy of Family Christian Stores, the largest (by number of stores) retailer of popular-level Christian books and knick-knacks in America. Family Christian Stores does not plan to reorganize its balance sheet and emerge as a leaner business operation. Instead, it proposes to sell itself to another entity, FCS Acquisition Holdings.
In that post I mused about this question: "Why would the current lender to Family Christian Stores agree to let the company's assets, in which that lender no doubt has a blanket security interest, go for less than it's owed?"
Since then, while skimming through Family Christian Stores's bankruptcy schedules (filed on March 4), I noticed that it has two secured creditors. The first, the well-known commercial lender Credit Suisse is owed just south of $35 million and has a first security interest in "FFE" (furniture, fixtures, and equipment) and "intangibles." The other secured lender is "FC Special Funding LLC" and it has a first lien on Family Christian Stores's inventory and accounts receivable. FC Special Funding is owed a little more than $23 million.
A quick internet search failed to disclose exactly who FC Special Funding is but that search in turn lead me to a more complete answer to my initial question. For at least some of the back-story go here to read an account at PublishersWeekly.com of the first-day hearing in the bankruptcy case. It turns out that FC Special Funding is an investment vehicle for Richard L. Jackson who, it turns out purchased Family Christian Stores in 2012 (and donated it to Family Christian Ministries) and is the principal mover behind the prospective purchaser, FCS Acquisition Holdings.
In other words, Jackson was the previous owner, is the current lender, and proposes to be the next buyer of Family Christian Stores.
This is not, to be sure, evidence of anything untoward. Owners may also be legitimate lenders although courts will scrutinize such relationships to insure that the owners (or former owner in the case of Richard Jackson) did not undercapitalize the corporation by turning what should have been equity into debt.
Of greater significance is the point raised in the news account of the hearing, that is, when a lender is also the lead buyer of the corporate assets. Jackson's deep connections with the debtor give him a leg up on the purchase and may dampen the interest of other potential buyers who know they don't have equal access to financial information. I expect the unsecured creditors and the bankruptcy judge will look very closely at the fairness of the process by which Family Christian Stores is sold.
In addition, Jackson may be able to credit bid up to the current amount of his debt. That is, the first $23 million bid by FCS Acquisition Holdings need not be in cash but simply a reduction in the amount FC Special Funding is owed. There are several hooks in the path of such a credit bid but again I'm confident the unsecured creditors will be watching this issue closely.