NEW YORK: B. Riley Financial Inc, the boutique investment bank that’s been whipsawed by a US probe into a former business partner, a string of losses and a plunging stock price, has a new headache: a struggling Texas home-furnishings chain it doesn’t even own.

Conn’s Inc is teetering near bankruptcy, and B. Riley is potentially on the hook for about US$148mil, around a third of its entire loan portfolio. Much of that stems from a loan B. Riley made in December to help Conn’s buy a troubled rival, W.S. Badcock.

The twist is that the seller was Franchise Group Inc, or FRG, an owner of retail chains where B. Riley is among the biggest shareholders. There’s potentially more at risk for the duo because instead of getting paid in cash, FRG took stock in Conn’s - and Conn’s shares have since lost most of their value.

Short sellers have been relentlessly betting against B. Riley for the past year over soured acquisitions and its dealings with FRG and founder Brian Kahn, whom US authorities have probed for his alleged role in the collapse of a hedge fund.

Now they’ve latched onto the Conn’s deal, calling it a threat to the health of FRG and thus to B. Riley - an important investment bank and adviser for dozens of smaller public companies.

B. Riley, led by founder Bryant Riley, said critics are making a mountain out of a financial mole hill. The firm’s US$108mil loan in December to Conn’s - which was whittled to US$93mil in February - is expected to be fully repaid in any scenario, according to a spokesperson’s emailed statement.

The Conn’s stake is one of the smallest assets in Franchise Group’s portfolio, and B. Riley is an “active participant and fully engaged with Conn’s and other stakeholders,” the spokesperson said. “B. Riley is comfortable with its position and protections in place for this investment.”

Representatives for Conn’s and Kahn didn’t respond to requests for comment. Kahn has maintained he didn’t do anything wrong and hasn’t been charged by authorities. He left FRG in January but stayed on as a consultant for strategic matters, mergers and acquisitions.

Market prices reflect some concern among investors about all three companies.

Conn’s shares, which fetched about US$3 before the Badcock deal, now hover around 65 US cents, and Los Angeles-based B. Riley tumbled to a four-year low this month. Franchise Group’s senior debt is quoted at around 67 US cents on the dollar with the yield topping 35%, a level that typically reflects fear of a default.

Bloomberg has reported that FRG creditors have consulted legal advisers.

“B. Riley needs to come clean with investors as to what is really going on at the company, rather than covering up their dire financial situation,” said Marc Cohodes, a prominent short-seller who has made several bets against the firm.

Short sales against B. Riley amount to just over 60% of the stock’s float, data from S3 Partners show. That’s the biggest such bet of its kind among the almost 1,500 publicly traded US companies that have attracted short wagers worth at least US$100mil, according to S3 director Matthew Unterman.

Conn’s morphed from a family-owned plumbing company in Beaumont, Texas, in the 19th century into a home-goods chain based in The Woodlands, Texas.

It has hundreds of stores sprawled across southern states that give low-income customers loans so they can afford to buy its appliances, furniture, mattresses and electronics.

 - Bloomberg