Avanti Communications: IIQ 2019 Update

On August 13, 2019 Great Elm Corporation (GECC) reported its IIQ 2019 portfolio. Included were new advances to long troubled satellite operator Avanti Communications. Despite GECC and other BDC lender/investor BlackRock TCP Capital (TCPC) writing down the existing debt and equity to the company in the quarter, management waxed enthusiastically about lending out more to Avanti. CEO Peter Reed used the opportunity to re-iterate GECC’s increasing confidence in the company, and its new CEO on the most recent Conference Call:

“When we formed GECC, Avanti was struggling to monetize the capacity of its satellite network.As Avanti encountered financial difficulty, we worked with other key creditors to improve the company through deleveraging its balance sheet, launching its biggest satellite to date and identifying and recruiting new Board members who brings stability and strategic insight into company. These improvements paved the way to hire Kyle Whitehill as the new CEO in April of 2018.

 Since Kyle’s start, he has dramatically overhauled sales and marketing, resulting in large contract wins and rapidly growing recurring core bandwidth revenue. With the business heading in an exciting direction, Great Elm and other significant Avanti stakeholders were given the unique opportunity to participate in the new 1.5 lien delayed draw term loan facility.

 As you can see from the tables on the bottom of the slide, the debt carries only an attractive interest rate but also a significant [feed] that accretes to GECC’s benefit. On its current trajectory and with minimal required capital expenditure, we expect that Avanti will have visibility into generating positive unlevered free cash flow”.

There is now $105mn of senior, second lien and equity exposure by the two BDCs in Avanti, with a value of about $45mn. There is no doubt that the company has made some progress recently, with a new satellite successfully launched just a few days ago. Even more recently Avanti has chosen to de-list itself from the London stock exchange given its concentration of ownership in 5 major shareholder groups. Unfortunately, that will make even less public information available to those of us on the outside looking in.

The BDC Credit Reporter will continue to remain fair minded but skeptical, given the company’s history; high levels of debt, opaque reporting and the very large amounts of BDC capital involved. Is Avanti a proverbial can being kicked down a very long road or a bona fide turnaround in the making ? We just can’t tell as we mostly have the BDC managers – with their conflicts of interest – as one of our principal sources of information.

Zep, Inc: New CEO Hired

On August 20, 2019 Zep Inc., an industrial cleanings product developer, announced the hiring of a new CEO: Dan Smytka.

That’s notable from a BDC standpoint, both because of the substantial exposure to the company ($126.6mn at June 2019) from 6 public and non-traded BDCs and because the business has been under-performing of late. That caused the second lien debt in the latest quarter to be written down by as much as (30%) and first lien debt by (19%), according to Advantage Data‘s records. (As usual there’s much variation in values between BDCs). By comparison, a year ago the debt was valued, in all cases, close to par. We checked the latest prices on Advantage Data for both tranches of debt and found discounts of (25%) and (30%), suggesting the markets have been getting more pessimistic since mid-year.

What’s more, Moody’s downgraded the company to speculative status back in April, including the first lien secured debt. The rating group is concerned about debt to EBITDA that exceeds 10x ! A saving grace is that the earliest debt maturity is 2022.

Clearly Mr Smytka has a big challenge ahead and the BDCs involved – especially three Goldman Sachs funds with the bulk of the exposure – will be watching with great interest if a turnaround can be achieved. With over $12mn of annual investment income at risk, this is one of the largest BDC trouble spots. We have the company on our Worry List or CCR 4.

Lago Resort & Casino: Ownership Change

On August 19, 2019 news reports indicate an ownership change has occurred at upstate New York hotel/casino Del Lago. One 50/50 JV partner is buying out the other. By itself that’s not a reason for a post, but with nearby competitor Resorts World Catskills talking “voluntary Chapter 11” , attention is deserved. Note, too, that Moody’s downgraded Del Lago back in January to Caa3.

As of June 2019, only one BDC – PennantPark Floating Rate (PFLT) – has exposure to Del Lago. According to Advantage Data records, the first lien debt has been on the BDC’s books since 2016 and consistently valued close to par. That includes the period after the Moody’s downgrade. Nonetheless, we are adding Del Lago to the under-performing BDC portfolio company list, with an initial Corporate Credit Rating (Watch) of 3 on our 5 point scale.

Constellis Holdings: Added To Under-Performing List

With the publication of the IIQ 2019 valuations by 8 BDCs with $107mn in various forms of debt exposure (2022-2024 and both senior and second lien), we’ve added Constellis Holdings to our under-performers list with an initial rating of CCR 3 (Watch List). The debt has been discounted between (6%-30%) from 0% to (5%) in the prior quarter.

This is not surprising as there has been a massive number of changes in senior management in recent months and downgrades from both S&P and Moody’s in the spring, worried about high leverage; cash flow losses and operational challenges. For the BDC sector, this is very big exposure in aggregate, with annual income of approx. $9mn at risk should the company default down the road. With that said $90mn of the debt is held by the three FS-KKR non traded BDCs (FS II-III and IV), which are intending to go public under one banner before long. How Constellis plays out will be of above average interest at FS Investment-KKR in the quarters ahead.

OCI Holdings: Increased In Value

On August 12, 2019 OHA Investment (OHAI) reported its IIQ 2019 results, which included a slight increase in the valuation of OCI Holdings, a health care provider. The Texas-based company remains on non-accrual, which began in October 2018. The subordinated debt is discounted (89%) to $2.5mn, and an equity stake written to zero. Why OCI, grappling with reimbursement challenges from the Texas government, merited this slight uptick in value was not explained by OHAI on its Conference Call.

With the upcoming transition of the OHAI portfolio to Portman Ridge Financial (PTMN), we’ll be keeping a close eye on what happens to this fallen angel in which the BDC has invested $26mn at cost and was once its largest investment at fair value. A rebound in the value is possible but so is a complete write-off. It’s PTMN shareholders who will reap the benefit or consequences.

Energy Bankruptcies: On Rise. BDC Impact.

According to news reports, energy company bankruptcies are on the rise again:

“The number of oil and gas bankruptcy filings through mid-August has nearly equaled the total tally from 2018, and the aggregate debt from 2019 bankruptcy filings of almost $20 billion has already surpassed the roughly $17 billion from a year ago, according to the energy bankruptcy monitor maintained by the Houston law firm Haynes and Boone“.

The article goes on to name names: “The biggest filings this year includes the oilfield services giant Weatherford International and a slew of oil and gas producers such as Houston’s Sanchez EnergyHalcón Resources, Vanguard Natural Resources and Midland-based Legacy Reserves”. Of those only Weatherford has BDC exposure, and has been the subject of an earlier post.

However, we queried our own database of BDC-financed energy companies and found 38 names, with a total cost of $2.378bn. Of those, 25 are under-performing to some extent, or two-thirds. The investment at risk is $1.171bn at cost and is spread over 30 different public and non-traded BDCs. We’ll be working with Advantage Data to develop an even more comprehensive list of BDC-funded energy names, but readers should expect to hear more about trouble in the oil patch in the months ahead.

Hollander Sleep Products: Chapter 11 Plan To Progress

Bedding manufacturer Hollander Sleep Products is under bankruptcy court protection since May, but seeking to get its plan approved and to return to a normal, but less leveraged status. On July 22, 2019 the company “sought a court order … approving a settlement with unsecured creditors that revises its restructuring support agreement and marks an important step toward the maker of bedding products emerging from Chapter 11 bankruptcy”.

There are two sister BDCs with $34mn of exposure to Hollander: PennantPark Floating Rate (PFLT) and PennantPark Investment (PNNT). Most of that exposure is in pre-petition debt and on non accrual. (There is also $3.7mn of DIP financing paying interest currently). At June 2019, the Pennants had discounted the old debt by (53%), up from (13%) after the debt first became non performing. That suggests realized losses – when Chapter 11 exit does likely occur in the IVQ – will exceed ($20mn) and leave the two BDCs with over $2.0mn a year in lower investment income. What the new capital structure of Hollander will look like; whether there will be a debt for equity swap and what the role of the two BDCs will be we’ll leave for a future post as the dust settles.

Arthur Penn – CEO of both BDCs- did address the subject of Hollander on the latest PNNT Conference Call on August 8, 2019. He made clear PNNT/PFLT were not leading the debt discussions, He said there were “stalking horse” bids, but did not seem confident what the ultimate value of the company might be in the marketplace. That leaves open the possibility that the value at June 30, 2019 may yet materially drop further, making a bad situation worse for both PFLT and PPNT.

SolAero Technologies: Acquired By New Investor Group

On April 16, 2019, SolAero Technologies, ” a leading provider of satellite solar power and structural solutions” , announced by press release a new financing arrangement which will cede control of the business to a new group of investors/lenders. The new group includes the Carlyle Group, GSO Capital Partners LP, First Eagle Private Credit LLC and Ares Management Corporation.

This allowed the company to restructure its debt – most of which was on non accrual. Based on a review of the IIQ 2019 10-Q, the only BDC with exposure – TCG BDC (CGBD) – seems to have booked an interim Realized Loss of ($9.1mn) and been left with $22mn of debt and equity in the restructured entity. The debt is carried at par, but we’re still keeping the company on the under-performing list with a Corporate Credit Rating of 3, till we see real improvements in the business. Solar has been a graveyard for capital and this story is only half told.

As is often the case where CGBD is concerned, none of the above was discussed on the latest (IIQ 2019) Conference Call or in any earlier communication with shareholders. Unfortunately, asset managers that have sprung out of private equity origins can be close mouthed about sharing investment details with public shareholders. It just goes against all their training. All the better for justifying the BDC Credit Reporter to our readers , so we’re not complaining.

Dimensional Dental Management: Placed On Non Accrual

On August 6, 2019, TCG BDC (CGBD) reported IIQ 2019 results, including placing its first lien debt to dental services chain Dimensional Dental Management on non accrual. This debt has been on the books since IQ 2016, and on the under-performing list from IIIQ 2018. We have no information from CGBD as to what’s going wrong in the PE-owned company, but a (37%) discount, up from (15%) just a quarter before, suggests a loss is more likely than not when the smoke clears. CGBD has already been deprived of $3.0mn of annualized investment income, and could yet lose some substantial portion of the $33.3mn at cost, currently valued at $20.9mn.

Indra Holdings: Valuation Reduced. Placed On Non Accrual

With the release of TCG BDC’s (CGBD) 10-Q on August 8, 2019, we see that the first lien debt held by the Carlyle BDC has been placed on non-accrual and written down on an unrealized basis by (57%). Ares Capital (ARCC), which has both first and second lien debt outstanding – also on non accrual in both case – has discounted the former by (42%) and (94%). All this augurs badly for the two BDCs. If all continues to go poorly for Indra – which owns clothes manufacturer Totes Isotoner – the second lien loan ($65mn at cost) and most of the senior debt ($25mn) could become a Realized Loss, and relatively soon. At least, this troubled debt will no longer have any income impact on either BDC going forward. Nonetheless, if things don’t turn around for Indra, these loans – on the books since 2014 – promise to be major reverses for ARCC and CGBD and for their credit underwriting track records.

J.C. Penney: Discussion Of Debt Swap

Bloomberg reported on August 7, 2019 that J.C. Penney creditors are seriously considering a debt swap to give the troubled department store chain more time to turn its business round.

That may not affect the several BDCs with $6.8mn of first lien exposure (most recently TPG Specialty – TSLX – has gotten involved), but will draw in second lien debt.

In any case, although the company has liquidity and no immediate debt maturities, chances are increasing that something will happen in the weeks ahead. That might result in lower values for the 3 FS-KKR non-traded funds involved, all of whom have valued their modest exposure at or close to par last time results were published – in IQ 2019.

The retail apocalypse marches on.

LifeCare Holdings: Court Approves Sale Of Hospitals

Law360 reports that a bankruptcy judge approved the sale of 15 hospitals for $34mn by LifeCare Holdings. That brings ever closer the resolution – and likely liquidation – of the long term care chain, which filed for Chapter 11 in May, 2019. The company has been on the BDC Credit Reporter’s Bankruptcy List, but may get removed shortly.

The only BDC with exposure is PennantPark Floating Rate (PFLT), with $4.6mn at cost, written down to just $0.758mn at June 2019 and on non accrual since the IQ 2019. Presumably, the latest valuation was based on the likely proceeds from the proposed sale, so no great increase in what PFLT might receive at the end of the day is expected. The worrisome element here from a PFLT perspective is not the size of the investment – which was small, nor the minimal of income lost, but the likely severe discount of proceeds from the cost basis, despite a “first lien secured debt” status: (84%). Investors expect recovery rates on failed loans will be substantially higher for senior debt, and makes us worry about the prospects for other loans of PFLT- and similar BDC lenders – when defaults occur.

BlackHawk Mining: Post Bankruptcy Financing Approval

On August 13, a news report indicated that troubled coal miner BlackHawk Mining has received bankruptcy court approval for $240mn of post-petition financing. That’s important as it suggests the company may shortly complete the restructuring of its debt and leave Chapter 11 status behind. For the two BDCs involved with $10.5mn of exposure at cost – as discussed in our earlier post on July 18, 2019 – that might mean the conversion of some portion of its debt to equity and new loan advances. We’re a little confused as to why both FS-KKR Capital (FSK) and Solar Capital (SLRC) still carry the debt as accruing at June 2019 and at full value. Neither BDC discussed the miner in their most recent Conference Calls. We’ve got more to learn obviously.

Montreign Operating Company: Updated Company File

Since the BDC Credit Reporter first warned of a possible Chapter 11 at Empire Resorts, owned by Montreign Operating Company, we’ve learned more. One of its BDC lenders – PennantPark Floating Rate (PFLT) – simultaneously wrote its senior debt down and predicted no loss would occur on its IIQ 2019 Conference Call. We also read a news article from a trade publication providing further information about the roughly $0.5bn in debt outstanding that might be in need of a haircut or restructuring. All this was included in the Company File we keep on every under-performing business, which we’ve updated. Our view of the likelihood of loss – PFLT’s optimism notwithstanding – has increased.

Avenue Stores: To Close All Stores

On August 13, 2019 news reports indicate plus-size women’s clothes retailer Avenue Stores is about to close all its locations. Employees were reportedly told by conference call. Apparently, according to an article in Retail Dive “The New York Post reported earlier in August that Avenue had 60 days to find a buyer or it would have to shut down its 260 stores. (The company’s website currently says it has about 300 stores.) Sourcing Journal also reported the retailer planned to close some stores. In recent months, local media outlets have reported on individual closures. State filings last week confirmed more than 150 layoffs in New Jersey“.

The only BDC exposure through the IQ 2019 was from Goldman Sachs BDC (GSBD). The BDC has reported IIQ 2019 results already and there’s no Avenue Stores exposure listed. We don’t know if the BDC sold the investment at a loss or at par in the last few months.

Montreign Operating Company: May File Chapter 11

Resorts World Catskills is owned and operated by Montreign Operating Company, LLC, an indirect wholly-owned subsidiary of Empire Resorts, Inc., a gaming and entertainment corporation which has operated in the Catskills since 1993. On August 9, Empire Resorts, stung by heavy losses from under-performance at its facility, raised the possibility of a voluntary Chapter 11 filing.

As a result, we’ve reduced the company’s Corporate Credit Rating from CCR 3 to CCR 4- Worry List. There are 3 BDCs – all in the senior debt with $67mn at cost outstanding: PennantPark Floating Rate (PFLT), CM Finance (CMFN) and Business Development Corporation of America (BDCA). Most recently PFLT discounted its debt by (18%), but that may prove too conservative if Chapter 11 occurs. The other two BDCs- whose valuations dates back to March – have discounts of (8%) and (9%), and are likely to be taking bigger reserves for loss when their second quarter results come out.

Joerns Healthcare: Restructuring Plan Approved By Bankruptcy Court

On August 9, 2019, news reports indicated Joerns Healthcare Inc. has had its restructuring plan approved by the bankruptcy court. As we wrote earlier, the company had filed for Chapter 11 back in July. One of the BDCs involved – Main Street Capital (MAIN) – had indicated as much on its Conference Call :

” Joerns is, basically, liquidity squeeze based on transition of the business from a sale model more than rental business. And from a capital structure perspective, we need to equitize the debt. That company entered bankruptcy in the second quarter, and we expect to exit here in the next 15 to 30 days with a restructured balance sheet”.

Joerns is wiping out $320mn in debt out of $400mn, according to news reports. In addition, the company is gaining $40mn in fresh advances. Looking at the (45%) discounts being taken by the unitranche lenders in the IIQ 2019 valuations, BDC losses on the $28mn of exposure will be significant. With those lenders becoming equity holders – a Golub representative will be sitting on the Board , amongst others – investment income from the original capital will be greatly reduced. There was $2.8mn of investment income spread amongst MAIN, Golub Capital (GBDC) and HMS Income. That’s all been suspended since July and is likely to resume by the end of September. When interest income does resume, the amount may be 50%, or more, lower.

Nor is the company out of the woods. The CEO has left and the new lender-owners are out seeking a replacement. This will be another test of whether lenders – including several well known BDCs – are well suited to “turn around” their own failing companies.

Also noteworthy is that the BDCs involved were marking this credit at only modest discounts to book until IVQ 2018, when all 3 discounted the unitranche loan by a tenth. Two quarters later the debt is on non accrual and written down 4.5x more…However, we read in a trade article that the company was in default under its debt from 2018, and much was happening behind the scenes to attempt a rescue. All of which ultimately failed to get traction and resulted in the pre-packaged deal with the unitranche lenders. This big a haircut, though, indicates the lenders underwriting was far too generous, and the timing of the write-downs suggests the BDC’s shareholders were being kept out of a loop that they deserved to be included in.

On the plus side, these are losses the BDCs involved can absorb on an individual basis without too much difficulty. For example, the amount MAIN invested at cost is equal to 0.5% of its total assets. Still, this a serious credit reverse for what was envisaged as a low to mid risk loan, priced at LIBOR + 6.00%.

Bumble Bee Foods: Bankruptcy Likely

On August 9, 2019 news reports indicated Bumble Bee is seriously considering Chapter 11 to “relieve its financial stress connected to a guilty plea to a government price-fixing charge”. Here are more details, all of which suggest a filing is almost inevitable even if there are supposedly other alternatives on the table: “

Bloomberg reports, citing people familiar with the proceedings, the prospect of a court-supervised restructuring under Chapter 11 is among several options being evaluated, with a sale of the business another possibility. But the people, who asked not to be named, said potential buyers would have to deal with the aftermath of the legal proceedings, which are still ongoing.

Bumble Bee is also facing a cash squeeze, according to Bloomberg’s sources. Class-action lawsuits related to the antitrust case have increased its potential liability, while the company is also encountering claims it mislabelled products as dolphin-safe, they said.

The seafood supplier has also exceeded the maximum leverage ratio allowed under its senior debt facility, a US$650m term loan due in 2023, one of the people told Bloomberg“.

We’ve written about the company and its Canadian subsidiary twice before on July 22 and July 23. With the latest earnings reports, we see Apollo Investment (AINV) – one of two BDC lenders with exposure – has discounted its senior debt position only (7%) from (1%) the quarter before. That seems unrealistically optimistic even if AINV – and the other BDC lender TCW Direct – are in the 2023 first lien debt. Still, we checked the real time price on Advantage Data for that publicly traded loan, which was trading at 92 cents on the dollar.

This is what AINV said on its latest Conference Call, which does not augur well for the 6/30/2019 being as Bad As Its Gets:

“Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division – MD

 And then you guys’ investment in Bumble Bee. I think that company is about to file for bankruptcy or may have just been announced that they’re going to file for bankruptcy. Just wanted to know, does your 6/30 fair value market — you guys have it marked at about 95% of cost. Is that mark inclusive of if they have to run through bankruptcy?

 Tanner Powell, Apollo Investment Corporation – President & CIO of Apollo Investment Management [38]

 What I’d say there is that is an LCD article that came out today or yesterday. Our valuations are a point in time. The company has had, has experienced issues not only related to tariffs, but also related to historical issues with price fixing and consequent litigation expenses. We are a participant in a broader facility and are working with the borrower to deal with the issues and move things forward. But in terms of the specifics, our valuation is a point in time with the information available to us at the time as of quarter-end”.

Time will tell, but we expect a bigger ultimate Realized Loss is coming.

AINV has $2.0mn of annualized investment income at risk, so even a temporary interruption from a stay in bankruptcy court could impact the BDC. TCW’s exposure is even larger at $42mn and $4.5mn of investment income is involved, but we’ve not seen a June 2019 valuation as yet from the non traded BDC.

Oaktree Medical Centre: Business Closing

On August 9, Oaktree Medical Centre – which does business as Pain Management Associatesconfirmed all its locations will be closed and 380 employees laid off in a process to be completed by the end of August. That provides confirmation – if any was needed – that lenders , including Fidus Investment (FDUS), will not be getting any proceeds from their exposure to the chain, accused of multiple frauds by the Justice Department. See our prior article dated August 5.

AAE Acquisition: Details On Realized Loss

On Tuesday August 6, 2019 Capitala Finance (CPTA) on its Conference Call gave further details about the change of fortunes at equipment lifting company AAE Acquisition, which resulted in a ($20.4mn) Realized Loss. Apparently the company was up for sale but no buyers came through and the first lien lender foreclosed. CPTA was in the second lien and equity, which had been only mostly written down in the first quarter 2019. As a result, 100% of the investment was written off once and for all and $1.2mn of investment income (all previously in PIK at a 6.0% rate) lost. That’s about 2.5% of the BDC’s investment income as of March 2019 (annualized) and – for a sense of proportion rather than a calculation – 7.5% of Net Investment Income. This is a black eye for CPTA, especially given the surprise write-off. We did have the company – due to the valuation – on our under-performing list from the IQ 2019, but this was a surprise to us as well.