We hear that Limetree Bay Ventures LLC , the owner of the troubled refinery in St Croix – which is bankruptcy – will be seeking to sell the operation. Jeffries haves been engaged and a target date for a closing has been – optimistically – set for mid-October.
The BDC Credit Reporter noted this quote: “According to Bloomberg, existing creditors have the option of using the debt owed to them to make a bid on the refinery business”. Of course, lenders always have that option and many bankruptcies these days use that process. In this case we can’t imagine who else but the existing lenders might be interested in taking on this highly polluting, highly controversial hot potato.
This is important because the only BDC lender to Limetree – FS Energy & Power – already has $300mn invested in the company. Should the BDC – and other lenders involved – seek to become the owners of the refinery that could result in the likelihood of having to advance substantial more funds just to get the business operational again. Furthermore, there’s the risk of litigation from the U.S. government and others to contend with.
On the other hand, if the existing lenders are a last resort and decline to step up, a complete write-down of FS Energy’s investment is likely. Plus, there’s no certainty that there might not be litigation anyway. This places the BDC in a difficult position, but one management must have been preparing for. We’ll be interested to see in the weeks ahead if the existing lenders do actually fashion a bid to purchase the refinery.
We’ve written extensively about publicly traded Sequential Brands (ticker: SQBG) , beginning in the spring of 2019. In a nutshell, the company has a huge amount of debt but only modest revenues and EBITDA – both of which are in decline – to service their obligations. The debt has required multiple waivers from lenders, which continue at present. On July 26, 2021 Sequential filed an 8-K discussing the non-filing of its financial statements as required by NASDAQ. Making matters more complicated, the Board of the company has now recognized that the 10-K and its IIIQ 2020 10-Q require restatement and can no longer be relied on. The company has a plan to deal with these inadequacies but admits that nothing is yet resolved with its lenders despite months of negotiations:
“The Company cannot assure you that its lenders would be willing to negotiate further changes to its financial covenants when necessary and the Company cannot obtain further waivers of the defaults under the Credit Agreements without the consent of the respective lenders thereunder. If the Company is unable to obtain additional waivers of ongoing defaults, or otherwise is unable to comply with its debt arrangements, the obligations under the indebtedness may be accelerated. If an acceleration were to occur, the Company does not have sufficient liquidity to satisfy the loan, and the Company would potentially need to seek protection under the federal bankruptcy code“.
For a time common stock investors – apparently believing in the fundamental value of the many brands Sequential licenses – were looking beyond these difficulties, pushing the stock price to nearly $40 a share in March. However, the mood is darker now, with the stock price under $10 a share. Likewise, back in 2019 and 2020 we were surprised by the full valuations the BDC lenders to Sequential were continuing to book, despite the very obvious challenges.
However, that has changed of late and may change again once a resolution is reached. As of March 31, 2021 BDC exposure to Sequential remained huge: $290mn. All but $10mn (which is in equity) consists of debt due in 2024, split between FS KKR Capital (FSK) and Apollo Investment (AINV). (95% of the debt and all the equity is held by FSK). Currently, the equity has been written to zero – the stock price notwithstanding. The debt is discounted as much as (18%), but seems to be current. (We have to wonder if Sequential is actually paying its interest bill in cash or the lenders are just adding the amount due to the principal, and what might happen when a settlement occurs. FSK and AINV might have to unwind income previously booked).
Anyway, trying to handicap how this transaction might end up for the BDCs is well nigh impossible. Sequential has been shedding assets but the proceeds are too modest to ameliorate the overall picture by much and will only add to the income decline. Everything seems to point to the lenders taking over in some sort of bankruptcy filing before long. However, whether this will be just a modest setback – especially for FSK – or a major realized loss, remains unclear. We will continue to watch this unfolding story and will be interested to see how FSK and AINV value their investments at June 30, 2021 and whether they speak to the subject on their upcoming conference calls. (AINV reports 8/5/2021 and FSK 4 days later).
C2 Educational Systems is a K-12 test preparation company. As you might expect, with schools closed and face-to-face tutoring banned in many places, the company did not fare well during the pandemic. In fact, we just learned from the public record that the company received a $10.0mn PPP loan to tide matters over. (Also disclosed is that the company employs around 500). We hear from the corporate website that “We’re Back In Person”, which must be good news both for the company and its students.
The only BDC with exposure is Saratoga Investment (SAR), which has been a lender since 2017. For years, the investment was valued at par. However, during the pandemic – and as recently as the quarter ended November 2020 – SAR wrote down its first lien $16mn loan by a fifth. In the quarter ended February 2021, the term debt that was due 5/31/2021 was extended to 5/31/2023, and the pricing increased by 2% to LIBOR + 8.50%, presumably reflecting additional risk. In the most recent quarter ended May 2021, total debt increased by $2.5mn and SAR invested half a million dollars in preferred stock. The discount on the debt has been reduced – but remains in underperforming territory at (13%).
All the above suggests that C2 has needed substantial financial support, but is pulling through. Interest – which amounts to 10.0% in absolute terms – is current and the preferred is valued at a (very) slight premium. We have rated the company CCR 3 since the second calendar quarter of 2020. If the debt investment ultimately returns to par, SAR could see a $2.5mn increase in asset value, plus whatever the preferred becomes worth.
We are adding C2 to our Trending List because the next time the BDC reports earnings – for the quarter ended August 2021 – we may see a material improvement in valuation. However, the recent upsurge in Covid cases could delay this turn around. Given the size of this investment to SAR , this is a company worth tracking regularly for both good and bad news.
Limetree Bay Ventures LLC is the holding company for a refinery and terminals owned by EIG Global Equity Partners. The businesses are held in separate subsidiary companies. On July 12, 2021, Limetree Bay Refining LLC filed for bankruptcy protection in the State of Texas, although the business operates out of the U.S. Virgin Islands. As this attached article makes clear, the terminals business has not (yet ?) filed for bankruptcy protection.
All BDC exposure – which totals $301mn – is to Limetree Bay Ventures LLC – and consists of first lien debt, subordinated debt, preferred and equity. At March 31, 2021 – weeks before the refinery was closed by the EPA and before liquidity ran out – all the equity, preferred and subordinated had been written to zero. The senior debt had a fair market value of $151mn. However, given what we’ve read from multiple sources about the financial and ecological disaster engendered by Limetree, we’d be very surprised if this does not end up being a complete write-off.
The only BDC with exposure is FS Energy & Power Fund, which began advancing $75mn in 2018 and has managed to quadruple its exposure in the intervening period. At March 31, 2021, all the debt was already on non accrual. As a result, the likely greatest impact on the BDC might be a further ($151mn) unrealized loss – which will likely be booked in the IIQ 2021. The realized loss that we expect will have to await the resolution of this bankruptcy and others that may occur. (The company is rated CCR 5 – due to the non accrual – and added to our Trending List because we expect the next set of FS Energy’s results to reflect drastic change in value).
This is obviously a major exposure for FS Energy. The $151mn of value remaining is equal to 10% of the non-traded BDC’s net book value, and continues a long list of energy faux pas that has resulted in half its equity capital being written down or off. A quick look down the BDC’s portfolio company list suggests, though, that Limetree is the biggest single exposure at cost remaining on its books.
We’ll circle back as we learn more in the weeks ahead, but at this stage “disaster” is writ large for both Limetree and FS Energy.
Poor old publicly traded U.S. Well Services (USWS) is spending more time in court these days than in its business of providing drills for the oil and gas business. A Delaware judge has ruled recently against the company in a contract dispute with Smart Sand Inc. (ticker: SND) and required USWS to pay $48mn in damages. That’s a major blow for an oil services company that is going through a major transition – dropping diesel pumps for electric ones and letting go of 171 employees as part of the transition. In a filing, USWS has indicated it’s likely to appeal the judge’s decision so this legal drama will play out a little longer.
All this is bad news for the two remaining BDCs with exposure: Capitala Finance (CPTA) and PennantPark Investment (PNNT). Both own over 1mn shares each in the company. (In the past, BlackRock Investment has as much as $46mn invested at cost in the stock, but that’s been sold, leaving only CPTA and PNNT). At March 31, 2021, when the last valuation was fixed, USWS was valued at $1.040. That price has dropped to $0.9593, an (8%) drop. The total value was $2.6mn in March and should move materially lower by the end of the second quarter. Thankfully, the amounts are not significant for either BDC.
We are retaining a CCR 4 rating for USWS and adding the company to our Trending list, given the likely (modest) change in fair market value to occur in the IIQ 2021.
As we reported all the way back in October 2020 , Global Knowledge or GK Holdings has been acquired by a special purpose acquisition company (“SPAC”) , which itself is going public on June 14, 2021. The new company is being called Skillsoft Corp, under the ticker SKIL. Skillsoft – of course – is a leading training company, which was also gobbled up by the new public entity, which has put its name on the new public business.
Where the BDC lenders to GK Holdings are concerned, this must be good news. According to Advantage Data, there are nominally 6 lenders to the company, with a total cost of $31.1mn. However, these include Harvest Capital and Portman Ridge (PTMN). The former has just been acquired by the latter, so there are only 5 BDCs involved. (Then there’s non-traded Audax Credit whose exposure to the company is carried under the name Global Knowledge Training LLC, albeit the amount advanced at cost is minimal at $0.9mn).
The FMV of all this BDC exposure at March 31, 2021 was $20.9mn. The roughly ($10mn) discounted was from both first lien and second lien debt held, all of which was on non accrual at March 31, 2021. Unless we are very mistaken, all that debt should be repaid in full with the IPO of Skillsoft and the unrealized loss reversed. All the BDCs involved – led by Goldman Sachs BDC (GSBD); non traded Sierra Income and Stellus Capital (SCM) – should be able to record material unrealized gains and re-deploy the proceeds into new investments.
All the above is based on surmise rather than an explicit acknowledgment by any of the BDCs involved, so we’ll wait till the IIQ 2021 results come out before changing the credit rating from CCR 5 – non performing – to CCR 6, or “repaid”. (The exception to that statement is GSBD, which went on the record months ago about its expectation of not incurring any loss on GK Holdings thanks to the SPAC deal, and is the principal basis for our optimism in this regard for all the lenders involved). However, we’re certainly adding the company to our Trending list as we expect both value and income to drastically change in the IIQ 2021 results.
Pace Industries – an aluminum, zinc and magnesium die casting company – entered into and exited Chapter 11 bankruptcy last year. How the private company is performing since the exit is unclear. We do know that the company sold a 22,000 office building in Arkansas recently and is said to be re-locating its HQ to suburban Detroit where it has existing space. For our two prior articles about the company, click here.
There is only one BDC with exposure : TCW Direct Lending. A review of the valuation of the $133.3mn advanced by the BDC to Pace does not clarify the picture. TCW has increased its exposure from $96mn at cost – all in senior debt, just before the bankruptcy. Now, TCW has “doubled down” and has $133mn invested in first lien, subordinated debt and equity. The equity is written to zero, the subordinated debt is discounted only (7%) – BUT is carried as non performing – and the first lien debt is valued at par.
This is a Major exposure for TCW given the amounts involved. At first, when the company exited bankruptcy we upgraded its rating from CCR 5 to CCR 3 but are now returning to CCR 5 – i.e. non performing – given that the subordinated debt is on non accrual. By the way, the senior debt is paying a sub-market rate of 3.5% – all paid in kind. This all seems to suggest – despite the generous debt valuations – that Pace is not out of the woods yet. Given that TCW’s total exposure is equal to more than a fifth of its capital this should be a worry to its manager and shareholders. To date – from what we can tell – the BDC has not booked any realized loss on this investment and much could yet go wrong.
As you might expect a company with a name like “Direct Travel Inc.” – “a leading provider of corporate travel management services” – has been impacted by the pandemic. Apparently – according to a brief mention on a BDC’s conference call – the company was restructured in October 2020 with term loans due 12/1/2021 being extended to 10/1/2023, and re-priced to allow most interest to be paid in PIK. Furthermore, lenders took a majority percentage of the company’s equity as well. At March 31, 2021, total BDC exposure was $105.4mn, and the FMV $83.2. In this second quarter after the restructuring the valuations were unchanged from IVQ 2020.
There are two BDCs involved with Direct Travel: Bain Capital Specialty Finance (BCSF) and TCG BDC (CGBD). The former has two-thirds of the exposure mentioned above, and the latter the rest. Of the pre-restructuring debt, CGBD is more “conservative” in its valuation at (20%), while BCSF applies a (30%) haircut. More importantly, CGBD carries its legacy debt as non performing while BCSF does not.
Our policy in these situations is to rate the company with the most “conservative” approach – or CCR 5 in this case, which has been the case since IIQ 2020. (As recently as IVQ 2019, the company was carried as “performing”).
How is Direct Travel Inc. doing under its new owners and with a new capital structure that includes new debt ? From the public record, we can’t really tell. Common sense – and the number of people we’ve seen rubbed elbows on planes with recently – would suggest that business should be improving. If so, the BDCs involved might well benefit above and beyond getting repaid on their loans if their equity gets “in the money”. However, we’re getting ahead of ourselves and will need to see what future valuations might look like before any upgrade is possible.
We don’t fully understand what’s happening at marketing company Ansira Holdings, although two public BDCs – Bain Capital Specialty Finance (BCSF) and New Mountain Finance (NMFC) – have first lien debt outstanding, along with one non-traded player – Audax Credit BDC. (Total BDC exposure is $86.4mn – some in delayed draw debt and some in Revolver and some in unitranche). We do know, though, that some BDCs started writing down their debt by more than (10%) in IVQ 2019 and that rose to as much as (28%) in IQ 2020. At that point, the maturity of the debt was extended from June 2022 to June 2024, presumably related to the impact of the pandemic.
As of the IQ 2021, the debt is discounted just over a fifth by the BDCs involved (except for BCSF’s Revolver, which is valued at par – which may have different collateral or repayment rights). The BDC Credit Reporter has rated the company CCR 4 out of an abundance of caution and because we know so little about a company which has been underperforming for 6 quarters. (Neither NMFC or BCSF have provided any update on their conference calls). Total investment income involved is $6.5mn, with BCSF with the biggest share, followed by NMFC.
Ansira Holdings has a moneyed sponsor – Advent International – and market conditions must be improving. Also, the debt valuations have been stable since the maturity extension. So it’s possible we’ll be in a position to upgrade the credit rating in future periods. However, we cannot discern any specific catalyst for a change in the short term , so we’re not adding Ansira to the Trending list, and will just continue to track the privately-owned company’s progress as best we can.
We’ve written once before about this joint venture, which invests in large cap borrower syndicated loans, between Main Street Capital (MAIN) and Capital Southwest (CSWC). That was back in the beginning of the pandemic as the nature of the investments, the leverage being used and lower LIBOR were all conspiring to drive down I-45’s value. This caused the two BDC partners to ante up additional capital. At its worst – in the IQ 2021 – the discount applied was (42%).
Since then the situation has greatly improved. Some of the extra capital advanced has been returned; troubled credits have improved in value and the discount on the JV – whose total cost is now $91mn – has been reduced to (21%). This is what CSWC’s management said about the status of the JV on May 26, 2021:
“The I-45 portfolio also continued to show improvement during the quarter as our investment in the I-45 joint venture appreciated by $1.5 million. Leverage at the I-45 fund level is now 1.27 debt-to-equity at fair value. The increase in leverage at I-45 was mainly driven by an equity distribution to the JV partners during the quarter, which represented most of the capital contributed to the JV during the hike of the COVID-related market disruptions. … As of the end of the quarter, 95% of the I-45 portfolio is invested in first lien senior secured debt with diversity among industries and an average hold size of 2.8% of the portfolio…In March 2021, we amended our I-45 credit facility, lowering our cost of capital to LIBOR plus 215 basis points and extending the maturity of the facility to 2026“.
We are retaining the CCR 4 rating on the company, the above notwithstanding, as we still expect a material realized loss will be recognized when I-45 is ultimately wound up. Last time round we projected that hypothetical loss – still years away – could amount to ($15mn-$20mn). We stand by that estimate, but at the moment the unrealized loss is ($19.4mn), 4/5ths of which will inure to CSWC.
We have the JV on our Trending list because we expect a material – albeit not very large – value increase in the IIQ 2021. That’s because large cap borrower loans are in great demand – the JV has 36 companies in its portfolio – and their value has probably increased since March 31, 2021. Overall, though, this is not an investment that causes us much concern under existing market conditions.
On June 4, 2021 S&P announced that conference audio and video provider Premier Global Services Inc., (dba PGi), whose wholly owned subsidiary is American Teleconferencing Services, was downgraded to CCC-, from CCC+, with a negative outlook, with the rating agency citing “significantly” deteriorating operating performance over the past quarter. Also downgraded was the company’s senior secured debt to CCC-, from CCC+. S&P noted that the company’s declining operating performance “increases the likelihood that [PGi] will default or undertake a distressed exchange” in the next six months unless the company’s private equity sponsor injects equity. Just the day before, Moody’s was more radical and just withdrew its ratings altogether, citing “insufficient information”.
This is obviously not good for the company or for the 10 BDCs with $171mn in first lien and second lien debt exposure to PGi or its subsidiary. At March 31, 2021, a couple of lenders were already carrying their exposure as non performing but most had not yet made the move. Aggregate FMV was already down to $117mn, a (32%) discount.
Our last update on these pages dates back to August 26, 2020 when the business was already struggling, and we applied a CCR 4 rating. Now, PGi/American Teleconferencing might slip into non performing – CCR 5 – status shortly judging by the rating agency hullabaloo. Most at risk are likely to be BDC lenders holding the second lien debt, which can often get written to zero in these situations. There is currently nearly $24mn in second lien debt at FMV. Then there are wide variations in how first lien debt is discounted: from (6%) to (46%). We calculate that after netting out already non performing loans, some $12mn of investment income is still at risk of interruption temporarily, or forever should the company fail.
We expect we’ll be circling back to PGi/American Teleconferencing again shortly as the situation clarifies. At the moment, the chances of further unrealized losses seems the likeliest short term outcome, which could show up in the IIQ 2021 BDC valuations.
We’ve written twice before about Dynamic Product Tankers, a company owned 85% by Apollo Investment (AINV), which is also a junior lender. The last time was in November 28, 2020 when the $22mn in subordinated debt on the books was valued at par and the $49.8mn at cost in equity was valued at $27.1mn. Jump forward two quarters and the cost remains the same; the subordinated debt is still valued at par and the equity has a slightly lower value – $25.5mn. We rated the company CCR 4.
AINV has not said anything about what’s happening to this shipping investment in some time so there is no news to report. However, the fundamentals of the sector have been improving with the uptick in business activity and this might benefit the company. We’ll find out more when IIQ 2021 results are published. Dynamic is being added to the Trending list because odds are good we might see a material change in value.
In any case, with $1.2mn in annual investment income (a below market 5.31% yield) and a current FMV equal to nearly 5% of the BDC’s net assets, this is an important asset for AINV. This is the second largest underperforming company by value on the BDC’s books as of March 31, 2021. As we’ve seen with other troubled investments of long standing held by AINV, this seemed like an almost certain eventual loss till this year. That might yet be the case, but there’s also a possibility that the BDC – which has been invested in the business since 2015 – might get some or all its $50mn invested back.
We’ve written about Apollo Investment’s (AINV) long standing and ill fated investment in Spotted Hawk Development (aka SHD Oil & Gas) twice before. The last time – back on November 27, 2020 – we noted that two of the three debt tranches AINV has advanced were on non accrual and the FMV of the $115mn invested was only $42.3mn, based on IIIQ 2020 results.
Six months later – and going off the IQ 2021 AINV results – not much has changed. Total exposure at cost remains the same and two of the debt facilities remain on non accrual. The FMV is $35.4mn. (However, that valuation is slightly better than in the IVQ 2020 when the FMV was $32.4mn, the lowest ever. Maybe the increase in the price of oil has begun to revive Spotted Hawk’s value, if only on paper.
Back on May 20, 2021 AINV’s management had the following, vaguely encouraging, update to offer on the company:
“Sort of now that oil prices have picked up, and there’s some sense of — there’s some — visibility is too strong a word. There’s some possibility of sort of constructive transactions. We’re going to be as aggressive as we can there to sort of exit that, but we don’t have anything”.
We continue to rate the oil and gas explorer as CCR 5 – given the two non accruals. However, we have the investment on our Trending List because there’s a strong possibility – with $70+ oil and much enthusiasm about everything in the markets these days – that the value of the business might be improving and its cash flows – potentially – increasing. Furthermore, we’re sure that if anyone shows any interest in AINV’s 38% interest in the company, they’ll find a receptive seller. This may yet be an almost complete write-off when AINV finally creates some resolution, but there’s a chance the BDC might do better than one might have expected just a few months ago. Of course, these things change very quickly in any commodity industry.
We’ve not written about SIMR, LLC (aka STATinMED Research) before but the life sciences data company has been underperforming since IIIQ 2019, when we first noted a drop in the equity valuation of the BDCs that held those positions. The situation got worse in 2020 with first lien debt discounted by increasing percentages and the equity written to zero. At IQ 2021, the debt was discounted (10%)-(15%) by the two BDCs with a position: Capital Southwest (CSWC) and non-traded Cion Investment. Overall, BDC exposure at cost was $45.4mn and FMV $27.1mn.
That FMV versus cost alone is cause for concern. However, we also note that back in 2019 the lenders ramped up pricing from LIBOR + 9.00% to LIBOR + 17.00% plus a 2.00% floor ! That’s an all-in rate of nearly 20% and a sure sign that all is not well. For CSWC, that’s a worrying $2.6mn of annual investment income at risk if SIMR should default and even more at Cion: $3.4mn.
We do not know what’s gone wrong at SIMR – which was acquired in 2018 by Ancor Capital Partners. CSWC has been mum about the situation and Cion does not hold conference calls. The public record has provided no clues. We have rated the company CCR 4, but have not added the name to our Trending List as the valuation has been stable of late, and there is no obvious catalyst for a change in value or income in the IIQ 2021 results. However, given the high amount of income at risk (equal – for CSWC – to 8.2% of its FY 2021 Net Investment Income), this is a company whose fortunes are worth tracking regularly.
We last wrote about Glacier Oil & Gas back on August 18, 2020 shortly after Apollo Investment (AINV) placed its debt on non accrual. At the time the BDC had invested $67mn at cost in the Alaskan oil & gas company and valued its investment at $14.7mn. Not much has changed in the interim. The debt remains on non accrual and the value of the BDC’s investment has been reduced somewhat to $8.1mn. That’s unchanged from the IVQ 2020 value.
With no income being generated, and little in the way of remaining value, we were tempted to categorize Glacier as non material and not bother with providing a written update. (This is a long standing “legacy investment” of Apollo that was previously known as Miller Energy, and which was restructured back in 2016 with no success). However, with the price of oil above $70 hope springs eternal that the company may escape its CCR 5 (non performing) status.
Unfortunately AINV has not discussed the company since April 2020, so we don’t have any updates to offer. The BDC does own 47% of Glacier’s equity, as well as holding that non accruing debt and could well benefit if the economics of the industry finally turn in its favor. We’re not taking anything for granted, but are adding the company to our Trending List because the value of Glacier may increase when the IIQ 2021 results are published. In the past, we’ve assumed the final value of Apollo’s misguided foray into oil and gas investing might be zero once AINV finally settles its account. At least now there is a glimmer of hope for AINV – and its long suffering shareholders – that some recovery might be possible. We’ll provide an update after the IIQ 2021 AINV results are published.
Apollo Investment (AINV) has been invested in Golden Bear 2016-R since IVQ 2016, and the investment has been underperforming – by our standards – since IQ 2018. However, we’ve refrained from writing about Golden Bear before because we were – and remain – somewhat unclear what the investment consists of. We know Golden Bear is some sort of securitization – presumably the equity portion – and that AINV is a 100% owner. We also know that the BDC booked $1.2mn of dividend income from that source in the IQ 2021, which is consistent with the payout in the last three years. What we don’t know is what assets Golden Bear is securitizing, and why AINV has reduced by a third the value of the $16.8mn invested at cost in the vehicle.
We have rated Golden Bear CCR 4 because it seems unlikely the BDC will recoup its capital invested. The latest valuation is slightly better than the prior quarter, and improved on the worst discount of 45% reached in the IIIQ 2020.
We’ll continue to provide occasional updates, but neither the amount of FMV nor the income involved is of great importance to AINV.
Last time we wrote about Paper Source Inc., the stationery retailer was bankrupt and Mid Cap Financial – an affiliate of Apollo Global Group – was preparing to acquire the company in a “stalking horse bid”. This would have made Apollo Investment (AINV) – a lender and investor to the company – a part owner (and also likely a lender) to the post-bankruptcy business. AINV as of March 31, 2021 had $16.4mn in debt at cost to Paper Source (its equity stake had no dollars attached) and a value of $13.4mn. For some reason, AINV carried the debt as performing, notwithstanding the bankruptcy.
Anyway, scrub all the above. In the interim, Elliott Management – owner of Barnes and Noble – has swooped in and acquired Paper Source out of bankruptcy for $91.5mn. Here is a link to a trade publication article on the subject, and an extract which explains the appeal of Paper Source to the buyer:
“In a presentation, Elliott described the businesses of Barnes & Noble and Paper Source as “highly complementary, with shared product ranges and a common commitment to excellent customer service.” The investment firm noted that Paper Source will continue to operate independently and keep to its core product offering of greeting cards, stationery,office supplies, gifts and other products. At the same time, Elliott noted that “considerable opportunities exist for mutually beneficial retail partnerships.”
Although Mid Cap/AINV lost the opportunity to acquire Paper Source – something of a mixed blessing given brick and mortar’s endemic challenges regardless of the pandemic – this is probably good news for the BDC. We get the impression the first lien debt – as well as DIP financing recently provided – will be repaid in full. That should allow AINV to post a several million dollar increase in value from the ultimate proceeds, which should show up in the IIQ 2021 results, or by the third quarter at the latest, as the transaction closes.
We may be jumping the gun, but expect to take Paper Source off our underperformers list. Given the potential increase in value, we are adding the company to our Trending List for the IIQ 2021 given the likely upside to be booked. This was never going to be a major setback for AINV and now looks likely to be a minor success. As has been the case on multiple occasions of late, thanks are due to a frothy financial environment and the fast recovery from the pandemic conditions that initially brought the company low.
With Apollo Investment’s (AINV) IQ 2021 filings, we can provide our fifth update on Maxus Carbon (aka Carbonfree Chemicals). The BDC valued the now all equity investment with a cost of $77.8mn at $25.4mn. That’s essentially unchanged from the prior two quarters and since AINV’s debt to the business was converted into equity.
The valuation might suggest that nothing much – good or bad – is happening at Maxus Carbon but what was said on the May 20, 2021 AINV conference call suggests otherwise. Here is what was said by AINV’s CEO Howard Widra:
“[Maxus Carbon] has some really good developments there. And that’s an all equity debt investment that had been converted to our equity. But that’s all equity and is a carbon-efficient business that has a lot of demand, obviously, where the world is going right now. And so, we hope that over the next year can have some real significant positive things happen to it”.
We can’t tell if the above is something specific getting underway or just hopeful comments from the BDC. It’s about time something happened at Maxus Carbon – on the books since 2013, and non-income producing since IIIQ 2020.
We are retaining our CCR 4 rating and not adding Maxus to our Trending List given the unchanged nature of the recent valuations and the vague nature of management’s status update. In the current environment, though, where capital is loose, it’s not impossible that SOMETHING might happen of a positive nature where this long standing “zombie” investment is concerned. That’s at variance with our earlier thoughts that the most likely resolution would be a write-off of the project and a complete loss. At this stage, both good news or bad news are equally likely.
Apollo Investment (AINV) has reported its full year and fiscal IVQ 2021 results through March 31, 2021. To management’s credit, much was said about the BDC’s largest investment – aircraft lessor and maintenance company Merx Aviation Finance LLC. We’ve written about Merx before on three occasions. The BDC Credit Reporter has been skeptical of the – let’s say – “generous” valuations AINV has placed on its debt and equity investments in Merx, despite the severe impact of the pandemic on flying and the value of aircraft and their leases. Both in the IVQ 2020 and in the IQ 2021 results, AINV has increased the value of its investment in Merx after a modest unrealized write-down earlier in 2020. As of now, the $190.5mn of first lien debt is carried at par, as was the case before the pandemic. The value of the now $120.3mn in equity is given as $125.1mn, up $0.5mn in the period.
On the latest conference call AINV sought to explain how Merx could be re-leasing planes at lower rates than before the pandemic or having to sell them off and still see an increase in the value of the equity stake. (Previously the BDC pointed to increases in their aircraft maintenance activities for its higher valuation, but this was not mentioned in the most recent conference call). Much as we’d like to, we don’t follow how AINV maintains such a high equity valuation despite the undeniably tough conditions. We rate the company CCR 4 despite the fact that AINV values its overall investment modestly over cost. However, we encourage readers to review the conference call transcript and decide for themselves.
With all that said, industry trends seem to be on the mend for Merx and total capital at risk – thanks to a large principal repayment – has dropped from $321mn as of March 2020 to $311mn a year later. The debt is performing at a 10% yield (down from 12% previously). The equity is non-income producing. The overall annual return on assets invested – both debt and equity – is 6.4% versus something closer to 15% pre-Covid when the loan yield was higher and dividends were being paid. AINV’s management does not envisage a return to those halcyon days but hopes for a ROA somewhere in-between.
This is very much a work in progress, but if industry conditions improve as expected, AINV should be able to avoid any further reduction in its debt yield from Merx. Once securitizations of aircraft are sufficiently paid down – which are senior to where AINV sits – we may even see a resumption of some dividend payouts. However, we cannot estimate when that might occur. We are maintaining our CCR 4 rating till we get more substantive good news and the credit remains Trending because we would not be surprised to see values and income change materially again – probably for the better – in IIQ 2021.
Even if AINV extricates itself from Merx without a realized loss (even though the loss of investment income has been substantial in recent quarters), the question remains why a BDC supposedly committed to portfolio diversification would invest 30% of its capital (using the IQ 2021 numbers) in a single company ?
We’ve discussed Ambrosia Buyer Corp, which also goes by the name Trimark USA LLC and TMK Hawk Parent Corp on BDC books twice in the past. The first article was on November 26, 2020 when we discussed a major dispute between different lender groups. On February 5, 2021, we confirmed that second lien debt outstanding had been placed on non accrual by Apollo Investment (AINV). However, several other BDC lenders – involved in both the first and second lien debt – had discounted the value of their positions but had not placed the obligations on non performing status. AINV admitted to continuing to receive contractual interest, but applying the proceeds to reducing the cost basis of their investment.
Neither AINV nor the other public BDC with exposure (first lien) New Mountain Finance (NMFC) addressed what is happening at the company on their IQ 2021 conference calls. Last we heard, the dispute between different lender groups was before a judge but we’ve not been able to determine an outcome, if any has occurred. Still, in the IQ 2021 both AINV and NMFC reduced the discount applied to their debt positions. The former’ discount is now (38%) versus (52%) in the prior quarter but remains on non accrual and the cost is still being reduced from interest proceeds. NMFC has reduced its own discount by 10%.
From what we can gather the disputed rescue package has provided the company with much needed liquidity and – presumably – market conditions are improving as lockdowns end and people are eating out again. Moody’s still rates the company Caa2 – or did in January 2021. We’d like to offer more clarity but with the BDC lenders mum, we can only suggest that the company is on the mend and a major financial crisis does not seem likely.
We continue to rate Ambrosia CCR 5, even if NMFC and two other BDCs still have the debt as performing. The company is still Trending, because it’s likely that the valuation will change again – probably for the better – in the IIQ 2021 results when they come out. Moreover, the lawsuit between lenders may get resolved.