Solo Stove’s parent company, Solo Brands, ran into some financial difficulty over the past six months. They separated with the CEO, named an interim CEO, and noted that they’d be in default if they couldn’t restructure their debt.

Despite having trading suspended for their shares on the stock exchange, they’re working to get their company back on a good path. They’ve been cutting costs while still investing in innovation.

There were two major announcements today that are big news for their future. They announced that their interim CEO, John Larson, has been named the permanent CEO, and that they’ve restructured their debt.

This is a pivotal time for Solo Brands, and we have a strong team in place to implement our plans. This successful debt restructuring marks a substantial step forward, creating a significant runway and providing financial flexibility to execute our strategic vision. We believe we have taken appropriate steps to strengthen our balance sheet and liquidity position that underpins our multi-year transformational growth strategy.

We are confident that our strong brand recognition, coupled with our turnaround efforts and value accretive initiatives, will position us to continue down the pathway to stabilize and transform the business. We appreciate the collaboration and support from our lenders. Finally, I am excited to continue in the CEO role, permanently, as the team, Board, and I are well aligned.

John Larson, Solo Brands’ President and CEO

New Debt Structure

Solo Brands amended their credit agreement, which is the agreement that lays out all the terms of their loan. This helped them in two ways, it gave them access to more capital and it opened up their negative covenants which they weren’t in compliance of previously.

Under their credit agreement they have a term loan, which is a fixed amount of borrowing with a regular payment schedule (like a car loan), and a revolver, which is like a credit card or line of credit. To give them easier access to capital they paid down their existing revolver with the fixed term loan, and rolled over some onto the new revolver.

Their term loan is for $240 million, while the revolver has a limit of $90 million. With the term loan, they paid $136.5 million of existing revolving loans and $32.5 of existing term loans. The net is their revolver has $19.7 million in borrowing, leaving capacity of $70.3 million that they can access.

It’s important for a business that’s highly seasonal, like a fire pit business, to have access to a revolver. This gives them the flexibility to stock up on inventory and invest in their business in the off season, then pay down the debt in the season that their making money.

Covenant Waiver

The most imminent threat to their business is they weren’t in compliance with the covenants in their credit agreement. Covenants are key business metrics that companies have to comply with when they borrow money. They ensure that the borrower can pay back the money that they borrow.

If a company is out of compliance, a bank can remedy it many different ways including forcing liquidation of the business. It’s common though if a business hits a rough patch, but has a plan forward, the bank will give them a waiver for a period of time. That’s what happened with Solo Brands.

In addition to the short-term waiver, they also reworked their covenants in the credit agreement. The two main ones that they have are a Fixed Charge Coverage ratio, which is a calculation that measures a their ability to make interest and principal payments, and a maximum Leverage Ratio, which is the ratio of total debt to earnings.

Their covenants on their previous agreement were pretty tight. For example, their previous leverage ratio had a maximum of 3.5 to 1, which means if their earnings were $1 for the next year, they could have debt of $3.5. In the private equity space, companies will often have leverage in the range of 5 or 6 to 1, with the maximum on the covenant set over 7 to 1.

Their new maximum leverage covenant is 9.5 to 1, and it slowly ratchets down to 7 to 1 in 2028. That should allow them the debt they need without bumping into their covenant and restricting their ability to operate the business. It allows them to focus on the business itself, rather than managing their business to hit their covenants.