KLO Acquisition: Update

Did you ever wonder what happened to KLO Acquisition (aka Hemisphere Design Works), a kayak manufacturer which was a fruit of the combination of a combination of Michigan-based KL Outdoor and Montreal, Canada-based GSC Technologies ? We did. We last wrote about the business on January 31, 2020 when the business was already in deep trouble and on non accrual since mid-2019. Overall, we’d written three articles about the company, based on BDC valuations and what we were able to learn from the public record.

Now, thanks to a regional publication in Muskegon, Michigan we’ve been (almost) fully updated about what has happened to the company in recent months:

After an abrupt closure last year, kayak-maker KL Outdoors is back under new ownership, and business is “booming,” according to a company representative...KL Outdoors has since been resurrected by the founder of the Canadian company, GSC Technologies, state records show. The company has produced 64,000 kayaks since purchasing the liquidated assets of KLO Industries in June, David Baun of the new KL Outdoors told the Muskegon City Commission earlier this week.“We have 84 employees and we’re looking at continuing to grow,” Baun said.

As of June 2020 there were two BDCs with $11.8mn invested in the 2022 Term Loan of KLO Acquisition and KLO Intermediate – the predecessor company and its subsidiary : Apollo Investment (AINV) and Cion Investment. The former- public – BDC had written down its $4.8mn stake to zero. (For some reason, Cion, although invested in the same facility still valued its position at $1.6mn). Given what we know, we expect that both BDCs will take a 100% realized loss on the liquidation of the company in the IIIQ 2020 results. For AINV, this means a modest loss given the amount involved and the BDC’s size and a more material hit for Cion. We estimate the loss of annual investment income will be ($1.6mn), but that’s already impacted both lenders for over a year.

Neither BDC has revealed much about the fate of KLO since an update was made by AINV on a November 5, 2019 conference call, which amounted to the following:

Regarding KLO, our investment was placed on nonaccrual status last quarter due to the underperformance from lower customer demand, consolidation challenges and higher costs. The company’s liquidity position has continued to weaken. The company expects to complete a comprehensive restructuring in the coming months“.

BDC credit stories like these with their only episodic updates and large omissions are part of the impetus for publishing the BDC Credit Reporter. Otherwise, investors are left with more answers than questions by the BDCs involved and have to read the tea leaves of those gradually reducing quarterly valuations. Back in June 2019 when the company’s debt was first placed on non accrual (by one of the BDCs involved but not the other), the discount taken was just (14%), but then increased to (70%) by year end 2019 and now to (100%) and a likely complete write-off. We wonder if AINV will even mention KLO when reporting third quarter 2020 results ?

GK Holdings: To Be Acquired/Upgraded

A very complex transaction involving a SPAC (“special purpose acquisition company”) is happening that will involve its merger with Skillsoft and the concurrent acquisition of Global Knowledge Training LLC (aka GK Holdings Inc. in our records). Both Skillsoft and Global Knowledge/GK Holdings are BDC-financed companies and both are currently on non accrual. Given that the value of the transactions is said to be $1.5bn, chances are the two companies involved – and their lenders – are about to experience a change of fortune.

As of June 2020, Global Knowledge/GK Holdings was financed to the tune of $15mn by three BDCs led by publicly traded Goldman Sachs BDC (GSBD). The BDC has both a first lien and second lien debt position. The latter has been on non accrual since IQ 2020, as the pandemic impacted the education business. Also with outstandings – both in the second lien – are public BDC Harvest Capital (HCAP) with $3.0mn at cost and non traded Audax Credit BDC with $1.0mn. Then there’s non traded Business Development Corporation of America (BDCA for short) which has invested $14.5mn in Skillsoft’s debt, most of which is also on non accrual since the IIQ 2020.

Most likely – as far as we can tell – all this troubled debt will be repaid as part of the envisaged two part transaction and some ($11mn) of unrealized losses reversed by the lenders to the two companies involved. The BDC with the most to gain is BDCA, with GSBD close behind. HCAP’s exposure is small but so is the BDC, which means any improvement in the value of their second lien debt, written down by (40%), will be gratefully accepted.

We’ll be digging deeper and learning more but, at first blush, this all seems to be good news in a situation that was previously headed ever southwards, as detailed in our prior article on April 27, 2020, written before either company’s debt was known to be on non accrual. Based on what we currently understand, the BDC Credit Reporter will be upgrading Skillsoft and Global Knowledge/GK Holdings from CCR 5 all the way back to CCR 2 if and when the deal closes in January 2021. Of course, at that time BDC exposure might be nil if the debt is repaid, making the rating CCR 6 (no further exposure). We will update readers when matters become clearer.

California Resources Corp: Restructuring Plan Approved

A bankruptcy judge has approved the restructuring plan agreed between California Resources Corp and its creditors. Now the troubled and highly leveraged energy company is set to exit from bankruptcy protection shortly, only months after filing in July. As previously announced, the restructuring involves a $5bn debt forgiveness in return for equity control of the business by the lenders. Existing public shareholders are wiped out.

For the only BDC involved – non traded Business Development Corporation of America (BDCA) – this means their relationship with the company – which dates back to 2017 – is likely to go on for years to come but in a new form. As of June 2020, the BDC had written down its $10.3mn term loan position by (64%). We expect that whatever realized loss BDCA might book – probably in the IVQ 2020 – will be in the ($6mn-$7mn) range. Any DIP monies advanced in July might be converted to long term financing or repaid.

This is not over for California Resources or BDCA, but the future remains cloudy. We expect that – the restructuring and exit notwithstanding – the investment will remain on the underperforming list for some time yet.

MD America Energy LLC: Files Chapter 11

Credit troubles continue to haunt the oil patch and – occasionally – still involve BDC lenders. On October 12, 2020 MD America Energy LLC – a Texas E&P company – filed Chapter 11. As per the usual, the company and its lenders have a plan. This would involve cutting the $117mn or so of debt on the balance sheet in half and giving the existing lenders control of the company’s equity in a now-standard debt for equity swap. New debt of $60mn would be issued as part of this transaction and management expects to be back operating normally before very long.

However, the existing owner of the company – Meidu Energy Corp – who lost out in court to the MD America lenders – is not happy about the outcome, and is suing. So consider all the above provisional until the litigation is resolved.

The only BDC lender with exposure – surprisingly enough – is Sixth Street Specialty Lending (TSLX), which has $18.6mn invested in a 2023 Term Loan about to be converted into equity and a likely part recipient of the new, smaller Term loan proposed. TSLX had written down its position by only (14%) as of June 2020. With the bankruptcy, some ($1.9mn) of annual interest income will be interrupted for an undetermined period. If the restructuring plan is accepted, when income does resume half will not be coming back, and TSLX will have to look to some auspicious future and to its new common shares in the company for future value. We are expecting the BDC will book a realized loss of ($5mn-$8mn), probably in the IVQ 2020, but also possibly next year given the MeiDu Energy litigation.

We are downgrading the company from CCR 3 – which only occurred in the IIQ 2020 – to CCR 5 and adding the name to our Bankruptcy list. In our self appointed role as Monday Morning Credit Quarterback, we don’t see why TSLX had to involve itself in this sector (already bitten by another problematic energy borrower: Mississippi Resources). Moreover, the data at the moment suggests the ultimate loss here might be more severe than reserved for in June – when the oil sector was already in deepest trouble. TSLX may yet prove us wrong, so we’ll wait, see and report back.

General Nutrition Inc: Company Sold

On October 7, 2020 General Nutrition Inc (parent General Nutrition Holdings) was sold to Chinese-firm Harbin Pharmaceuticals as previously agreed to by the bankruptcy court. Just as well given that the $780mn purchase offer for the troubled supplements retailer was the only one on the table. Thankful creditors – both secured and unsecured – overwhelmingly voted for the Harbin plan even though virtually every constituency will lose money. General Nutrition admitted to owing $895mn when first filing bankruptcy. As to the future of the company ? “New GNC will be a wholly owned subsidiary of Harbin and registered in Delaware as a limited liability company“.

For the only BDC involved – publicly traded Harvest Capital (HCAP) – this will be a relief and may even involve in some improvement in net proceeds than the (63%) discount booked as of June 2020 on its $4.0mn in first lien term debt to GNC. Furthermore, as revealed in a footnote in the 10-Q, HCAP advanced additional monies as well:

Subsequent to GNC’s bankruptcy filing and quarter-end, the Company [HCAP] invested $1.0 million in a debtor-in-possession term loan to GNC, which carries an interest rate of LIBOR + 13.0% with a 1.00% LIBOR floor. In addition, the Company converted approximately $1.0 million of its existing senior secured term loan into a new first lien first-out term loan that carries an interest rate of L + 10.0%“. 

We can’t tell you exactly how much of the $5.0mn at cost that HCAP has advanced will end up back in the BDC’s pocket but – we’ll guess – more than $3.0mn. That suggests any realized loss will be minimal, even though HCAP will be losing a nice little 14% earning asset in that DIP loan mentioned above. More importantly, the BDC will have $3mn or more to recycle into new investments or to pay its April dividend, which has been declared but no payment date set. The GNC final tally will show up in the IVQ 2020 books.

We are re-rating General Nutrition to CCR 6 (no longer a BDC portfolio company) from CCR 5. If we’re right, this could be an almost happy ending for a credit that HCAP booked in IQ 2019 and which performed normally till 2020 when Covid-19 was its undoing. This also removes one more BDC-financed portfolio company from the ranks of the bankruptcy list. There are now more exits than entries as troubled companies like GNC get sorted out in a variety of ways.

Mallinckrodt Intl Finance SA: Files Chapter 11

The long projected bankruptcy filing of Mallinckrodt PLC and many of its subsidiaries (including Mallinckrodt Intl Finance SA) has finally occurred on October 12, 2020. Our last article on September 28 had called out a likely filing, but the BDC Credit Reporter has been mentioning the high likelihood of this move since September 2019. Bankruptcy is accompanied by a huge and highly complex restructuring agreement affecting creditors, plaintiffs and other interested parties. However, from our perspective the most important news is the following statement in the company’s press release about the restructuring:

All allowed First Lien Credit Agreement Claims, First Lien Note Claims and Second Lien Note Claims are expected to be reinstated at existing rates and maturities

From what we can tell, the only BDC with exposure is publicly-traded Barings BDC (BBDC), which has invested $3.2mn in first lien debt due in 2024. Based on the above, we expect that no loss is forthcoming. As of June 2020, BBDC carried the debt at a (25%) discount. That is likely to get reversed if and when the restructuring plan is implemented as envisaged. The valuation is likely to be increased in the IIIQ 2020 results when published but a final resolution will have to await what might be a relatively short trip through the bankruptcy process. It’s also possible that BBDC has already sold this position and all the above is moot. In its most recent conference call BBDC did admit to trading out of these large cap, liquid positions where other troubled names were concerned. Maybe Mallinckrodt was on the list…

We are downgrading the company from CCR 4 to CCR 5 for the moment, but may upgrade to CCR 3 – or even CCR 2 – when the bankruptcy process is complete. The company is removed from the Weakest Links list of companies expected to default. As we’ve said in earlier updates, this bankruptcy will be big news in the broader financial markets but is of little importance in the BDC sector given the very modest, single BDC, exposure and at the top of the capital structure.

Centric Brands Inc.: Exits Bankruptcy

The long line of companies that filed for bankruptcy as the pandemic took hold in the spring of 2020 is now headed in the other direction with cleaned up balance sheets, new owners and high hopes. Included in this group is Centric Brands, which exited Chapter 11 on October 9, 2020 following a “debt for equity swap” with its well known lenders, including Blackstone and Ares Management. Old debt is being forgiven in return for a controlling equity and new debt (including a securitisation facility) being provided by the owner/lenders.

The BDC Credit Reporter has been writing about Centric for some time, and with special interest, given the large amounts of BDC capital advanced to the company even before the restructuring : $129.9mn at cost. We’re guessing that the valuations by the 3 BDCs involved as of June 2020 must be close to the final deal struck, which has been in the works since the filing in May. Almost certainly written off is the $24.6mn invested in the equity of pre-bankruptcy Centric by Ares Capital (ARCC), which the BDC has written down to zero. That was carried at par back in early 2019.

Then there’s $98.5mn in first lien 2023 Term debt, held by ARCC, TCW Direct Lending VII and Garrison Capital (GARS), which has been discounted between (4%) and (16%) by the lenders involved. There are some “last out” arrangements in the debt which may explain the discrepancies.

Interestingly, and despite the bankruptcy, none of the BDCs carried any of their debt as non-performing as of June 2020. That may be because the 2023 debt was Pay-In-Kind anyway. Finally, there’s $6.7mn in 2021 DIP financing provided by the same trio, which is likely to be folded into the post-bankruptcy capital structure. In fact, we wouldn’t be surprised that after all is said and done the BDCs involved end up with more capital in Centric than ever before.

Exactly how large the realized losses will be is impossible to tell as each BDC might value its new equity stake differently. We’re guessing that total losses booked will be ($35mn-$40mn), or roughly a third of the capital invested at June 30. ARCC will be the biggest loser by far, followed by TCW Direct Lending and with GARS losing ($1mn-$2mn). Losses could have been much higher but the BDCs were positioned above $700mn+ in second lien debt held by Blackstone. That’s the debt being written off and which will reduce leverage by about half. For that Blackstone receives 70% of the equity of the new Centric and the other lenders 30%.

Of course, neither Centric Brands nor BDC exposure is going anywhere and success is not guaranteed. We are upgrading the company from CCR 5 to CCR 3, still on the underperformers list. Centric has had to lay off hundreds of employees and continues to be leveraged, so questions will remain for some time about its viability under its new lender ownership.

We will circle back with an update when IIIQ 2020 or IVQ 2020 BDC results are published and we can ascertain what realized losses were booked and what the revised outstandings look like for all three BDCs involved.

C2 Educational Systems: Valuation Update

Saratoga Investment (SAR) has just reported quarterly results one month ahead of the BDC pack, which has provided a number of updates on where underperforming companies stand, based on valuations as of August 2020. This includes C2 Educational Systems – which was added to the underperformers list as of the IIQ 2020 by SAR – its only BDC lender – and downgraded from CCR 2 to CCR 3 by the BDC Credit Reporter.

As of August 2020, SAR’s valuation remains essentially unchanged with a (19%) discount to cost applied. SAR – as usual – had little to say about any specifics. Research in the public record, though, shows that the company received a significant PPP loan in April, which should have helped the business. We also expect that C2 – which is in the face to face business of tutoring K-12th grade students – is also making necessary changes to its business model by increasing the emphasis on “virtual tutoring”. The business was performing normally – based on SAR’s valuations at the time – before Covid-19 and should be a survivor. The involvement of lower middle market group PE group Serent Capital as owner is also a plus, even though we don’t know if any new capital has been added or will be.

We are maintaining our CCR 3 rating on the company and do not currently expect a loss of any kind down the road. SAR has $16.0mn invested in first lien debt at cost. Should the company return to performing status SAR could book a $3.0mn increase in value.

We’ll continue to track the company’s valuation quarterly via SAR and report back to our readers.

Travelport Worldwide: Upgraded By S&P

Good news for Travelport Worldwide and subsidiary Travelport Finance (Luxembourg) SARL. Both were upgraded on October 2, 2020 by S&P to CCC+, after completing a debt restructuring and exchange. As we’ve reported previously – and all over the financial press – Travelport was previously up in arms against its lenders and much huffing and puffing by lawyers on both sides was previously going on. That’s behind us now since a September 17 agreement where the company – and its sponsor Elliott Management – agreed not to spin off intellectual property rights and lenders agreed to advance more monies, and not call a default. Importantly – because all BDC exposure is concentrated therein – the company’s 2026 Term Loan has been given a rating of CCC-, up from D.

By no means is the business of the company – tied to the much suffering global travel and tourism industries – out of the woods yet. Liquidity has been bolstered by the restructuring and the immediate threat of lender foreclosure has passed but S&P is making forecasts about revenue levels and profits in the rest of 2020 and 2021 that must – under current conditions – be not much more than glorified guesses.

Nonetheless, the BDC Reporter is upgrading GSO Blackstone’s position to CCR 3 from CCR 4 , which is good news for the non-traded BDC which had written down its nearly $100mn debt by nearly ($30mn). Some positive reversal is likely in the IIIQ 2020. Likewise Garrison Capital (GARS) – which had placed its $2.6mn in the 2026 debt on non accrual and taken a (34%) haircut as of June – will be able to return the debt to accrual status. We’ve also removed Travelport from our Weakest Links category, as the prospect of a default now recedes, albeit after being very close to being forced into bankruptcy and a contentious dispute between the parties.

The BDC Credit Reporter, though, is not done with Travelport. We expect that we’ll be revisiting the status of the company and the substantial exposure (by Blackstone/GSO at least) for some time to come. After all, there are still 6 years left on the loan and S&P is only granting the position one of its weakest ratings. Over at Moody’s, which also adjusted its ratings on September 28, 2020, the view is that they “continue to perceive Travelport’s capital structure as unsustainable due to the continued operating performance weakness and the overall uncertainties around the extent of recovery“. Maybe a CCR 3 rating is too generous

Kenan Advantage Group: Acquires Bulk Transporter

According to a news report on October 2, 2020 , Kenan Advantage Group has acquired Paul’s Hauling Ltd.

The North Canton, Ohio-based tank truck transportation and logistics provider said the acquisition, announced Oct. 2, was completed through its Canadian subsidiary, KAG Canada/RTL Westcan. Paul’s Hauling provides bulk transport services in western Canada“.

The BDC Credit Reporter thought this was a good sign for the financial health of Kenan, which was recently added in the IQ 2020 to the underperformers list with a CCR 3 rating, due to its first and second lien debt discounted as much as (19%). Even in the IIQ 2020, the first lien – held by Barings BDC (BBDC) – was still discounted (10%) and thus remains just within the boundary of underperforming. However, we are going to be bold and – based on this latest news – suppose the trucking company is back to performing as expected.

As a result, we are upgrading Kenan to CCR 2 from CCR 3, one of many companies that made a quick cameo on the underperforming list and can now be removed for the right reason. Besides BBDC, the other BDC lender is FS KKR Capital (FSK), which has $17.30mn in Kenan’s subordinated debt. Don’t expect to see much of a pick up in value at FSK when IIIQ results are published. Already in the IIQ 2020 FSK reduced its discount to (1%) from (16%) in the IQ. The principal beneficiary – if they still hold the position – is BBDC, whose $4.3mn senior debt position was discounted by a tenth and should be valued back to par. That’s worth a few hundred thousands of unrealized appreciation, but unlikely to move any needles.

Lonestar Resources: Files Chapter 11

Energy company Lonestar Resources kicks off October as the first BDC-financed company to file. However, the Chapter 11 was expected, and discussed in a prior article on September 15, 2020. In effect, the company is using the bankruptcy process to get a “debt for equity swap” deal done that was agreed on several weeks ago with most of its creditors. Under the plan, bondholders would receive 96% of the company’s new common stock.

We won’t dwell too much on the details because the only BDC lender with exposure – $23.2mn from FS Energy & Power – is in second lien debt and has already written down the fair value of its position (as of June 2020) to just $2.4mn. We won’t know till all the dust has settled what final value the BDC ascribes to any equity stake possibly received, but we’re not expecting much movement up or down.

Obviously, this is yet another BDC credit disaster from lending into the energy arena. However, that’s what FS Energy & Power was created to lend into, giving the manager little in way of attractive options,. Still, investing in the junior debt has almost always resulted in big or complete write-offs in this sector when things go wrong. In this case, the secured revolver lenders, though, are being paid out in full, with interest. What a difference a points of yield and a different position on the balance sheet can make…

We are downgrading – as long expected – Lonestar from CCR 4 to CCR 5. Shortly, we expect to see the company exit Chapter 11 and may re-rate the business to CCR 3. However, if FS Energy has no material stake, which we’ll find out shortly, we may drop further coverage.

Neiman Marcus: Exits Bankruptcy

After many disputes, Neiman Marcus has emerged from Chapter 11 protection on September 25, 2020. According to news reports, the iconic retailer has shed $4.0bn of its $5.5bn in debt. That’s $200mn a year of debt service saved. The new ownership “which include PIMCO, Davidson Kempner Capital Management, and Sixth Street” have  arranged $750mn in new exit financing that will repay the Debtor-In-Possession borrowings outstanding. There’s also a $125mn FILO secured facility and

.. “liquidity provided by $900 million in asset-based lending (ABL) led by Bank of America and a consortium of commercial banks. With the support of its new shareholders and funds available from the exit financing, FILO facility, and ABL facility, the company expects to be able to execute on strategic initiatives to help ensure long-term operations for Neiman Marcus“.

As you can see there a lot of comings and goings where the debt is concerned. This is important because all BDC exposure is held by Sixth Street Specialty Lending (TSLX) in three debt facilities. The fate of one of those debt facilities is straightforward – the $11.2mn 2020 DIP loan – which is about to be repaid, fees and all. That’s why TSLX carries the debt at a premium. Less clear is what happens to 2021 Term Loan, with a cost of $71.4mn. However, we expect that gets paid off as well and TSLX has valued the position very close to par. There’s a tiny 2023 Term Loan with a cost of only $0.8mn, which is likely to be written off.

We don’t know if TSLX will be signing up for a new tour of duty or whether the presence of the Sixth Street organization amongst the buyers makes that problematic. Chances are TSLX will receive its proceeds and as early as the end of the IIIQ 2020 (and may have already) and will exit Neiman with very little in the way of collateral damage. If so, that will be another feather in the cap of TSLX. By getting out whole from a credit where others have lost billions, the BDC validates its unique strategy of running towards – rather than away – from some of the worst bankruptcy prone companies in recent American history.

We will be upgrading Neiman from CCR 5 to CCR 3 if any BDC exposure remains, which we’ll learn more about when IIIQ 2020 results are published.

Online Tech Stores: Update

We are updating the BDC Credit Reporter’s file on Online Tech Stores, a wholesaler of computer printing products, as of June 30, 2020. The company went on non accrual in the IQ 2020. Given that the company was performing as planned before the pandemic – based on valuation levels anyway – we expect the reason for the non-performance was the slowdown in business activity. On the other hand, we heard from a trade report that the CEO was let go in April and a new executive appointed in May by the PE group that controls the company, so the troubles at Online Tech Stores might have been going on for some time.

In any case, the only two BDCs with exposure are publicly-traded OFS Capital (OFS), which has advanced $16.1mn and non-traded Hancock Park Corporate Income with a modest $1.0mn. Both lenders are involved in a 2023 Subordinated Loan that was first launched in 2018, shortly after Blackford Capital acquired the company. As mentioned, the debt became non-performing from the IQ 2020 – resulting in ($1.8mn) of annual investment income being impacted. The discount taken by both BDCs was (54%) and that remains almost the same as of June 2020: (56%).

OFS has not been forthcoming about what the plans are to turn the company around or what the PE group might be doing. We’re not reassured by the nature of the business at this stage, nor about the junior nature of the capital advanced by the BDCs. We downgraded the company from CCR 2 to CCR 5 in one fell swoop in the IQ 2020, and that rating still obtains.

Hopefully, OFS will let us know more about what’s happening when IIIQ 2020 results are announced in late October or early November 2020. The BDC still has plenty to lose: over ($0.50) a share in book value if that Subordinated debt gets fully written off. On the other hand, if a recovery is possible, the BDC has both an increase in fair market value and in income forthcoming. Hancock Park has a much smaller upside and downside.

Mallinckrodt Intl Finance SA: To File Chapter 11 ?

We are seeing almost daily “revelations” that Mallinckrodt PLC is preparing to file for Chapter 11 “within weeks” and is feverishly negotiating a restructuring agreement with its lenders and creditors. The latest such article is from the Wall Street Journal on September 25, 2020 in its premium Pro Bankruptcy publication. While we don’t doubt the veracity of the carefully placed rumor – this is the WSJ after all – the BDC Credit Reporter has been quoting experts warning of an imminent bankruptcy filing for the pharmaceutical giant as far back as September 2019 and as recently as February 2020.

If and when a bankruptcy occurs, it’s going to be big news given the size of the business and the billions of dollars lent to the Ireland-headquartered company. Thankfully, the BDC sector will be almost completely unimpacted. Only one BDC – publicly-traded Barings BDC (BBDC) – has any Mallinckrodt exposure. As of June 30, 2020, BBDC had advanced $3.2mn to the company in a Term Loan due 9/1/2024. The BDC had discounted the debt by (25%) already, to $2.4mn. It’s even possible that BBDC – based on what we’ve seen in other troubled large company loans – has already divested itself of the Mallinckrodt position. We’ll learn if that’s the case when IIIQ 2020 results come out. Either way, the loss is likely to be modest for BBDC. The investment income at risk is less than ($0.100mn).

We have already rated the company CCR 4 and placed the name on the Weakest Links list since May 2020. The likelihood that the company will move to CCR 5 has grown a little stronger with the WSJ report, even if these reports seem carefully timed by participants in the process seeking some advantage.

3rd Rock Gaming Holdings LLC: Debt On Non Accrual

We heard from publicly traded BDC OFS Capital (OFS) in a comment on their most recent conference call made on July 31, 2020 that software company 3rd Rock Gaming Holdings LLC has become non performing as of the IIQ 2020:

” 3rd Rock Gaming is a first lien, senior secured investment. We have rescheduled 3rd Rock Gaming’s June 30 principal on interest payment. The impact of COVID on its customers, which include gaming venues, has been substantial due to social distancing needs. The delays in reopening the venues and the timing associated with the return of significant customer traffic is unknown. The fair value as a percentage of cost was taken down to 61.5% this quarter from 81.4% last quarter”. 

In total, including a $2.5mn equity investment at cost that was written down to zero, OFS has $23.5mn in exposure to the company, now with a FMV of just $12.9mn. Some ($1.6mn) of annual investment interest income has been suspended.

We have downgraded the company from CCR 3 to CCR 5. See our update on March 14, 2020 for some background reading. It’s hard with what little we know to handicap the ultimate outcome. We’d venture to say the equity stake is probably a complete loss but the potential realized hit to the first lien debt – if any – is unknowable. For OFS, this is a relatively large position remaining, leaving material downside and potential further book value loss. However, if one is a glass half full sort of person, the income and value recovery could yet be substantial if the company can be returned to performing status. We will learn more when the BDC reports third quarter 2020 results. No date has yet been set.

California Pizza Kitchen: Reaches Agreement With Lenders

According to multiple reports, California Pizza Kitchen (“CPK”) – in Chapter 11 bankruptcy – has reached an agreement in principle in late September 2020 with its first lien lenders and unsecured creditors. That should shortly allow the restaurant chain – already making operational plans for post-bankruptcy operations – to make an exit shortly from the court’s protection.

With a bit of luck CPK should exit bankruptcy in the IVQ 2020 and we’ll get a clear picture of which of the now 6 BDC lenders involved ended up where. Total outstandings from the BDC lenders is $49.5mn in IIQ 2020, slightly higher than in the IQ 2020. (BTW, Prospect Flexible Income appears to be no longer a lender). We already know, though, that this will prove to have been a misstep for all the BDCs involved.

NPC International Inc : Bankruptcy Court Dispute

The Wall Street Journal and other publications are reporting that NPC International Inc. – the huge Pizza Hut franchisee which is in Chapter 11 – is in dispute with the franchisor in bankruptcy court. In a nutshell, Pizza Hut wants more say in who the potential buyer of the company’s assets might be and how they behave. The franchisor wants to ensure that the group who will be in charge of 1,200 restaurant locations bearing its name will follow all the rules involved with being a franchisee.

From the standpoint of the only BDC involved with NPC –Bain Capital Specialty Finance (BCSF) – this is potentially Bad News. The longer the bankruptcy endures, the more expenses pile up. Furthermore, the more Pizza Hut inserts itself into the sales process the greater the risk of the final price being received (currently pegged at $325mn) for the business being lower than originally hoped for.

The BDC Credit Reporter has the company rated CCR 5 and expects most of the $14.4mn invested in first lien and second lien debt to be written off. As of June 30, 2020, the FMV is only $3.3mn. If this drama continues, BCSF can expect to recover even less than that and a resolution may get pushed further out.

GlassPoint Solar Inc: In Liquidation

As the BDC Credit Reporter works its way through the hundreds of underperforming companies showing up in the IIQ 2020 BDC portfolios we’ve identified – a little late in the day – a liquidation. According to a trade journal GlassPoint Solar Inc. was liquidated by its owners in May 2020.

The Omani government—GlassPoint’s largest investor—issued a statement on Sunday (17 May) confirming that it liquidated its 31% stake in the company. The move effectively shuttered the Silicon Valley company that has received an estimated $130 million in funding since it was founded in 2008. The liquidation decision of GlassPoint Solar comes after the steep fall in oil and gas prices caused by the global economic slowdown in the wake of the coronavirus pandemic and its negative impact on business across the globe, especially on hydrocarbon producers, travel, and hospitality businesses,” read a statement issued by the Omani Ministry of Finance which oversees the state’s strategic investment portfolio. The statement added that some of the current investors have expressed interest in purchasing GlassPoint’s intellectual property. Other major shareholders included the national oil company Petroleum Development Oman (PDO) and Shell which has been a minority investor since 2012″.

The only BDC involved is BlackRock TCP Capital (TCPC), which is both lender and investor in Glasspoint, dating back to IQ 2027, with $7.4mn in aggregate advanced, mostly in first lien debt. As of the IIQ 2020, the debt was placed on non-accrual. The debt was discounted by more than half and the equity written to zero. Still, the BDC’s managers remain hopeful – as expressed on their conference call – that even in liquidation some value can be found because of the interesting technology the company owns. This is what was said on the call:

GlassPoint had been in the late stages of obtaining equity financing but the process was pulled as a result of COVID. Our team is working with the equity owner to find an alternative solution which may include a monetization of the business, assets in IP”.

That leaves hope for $3.2mn of the investment – as of June 2020 . The BDC Credit Reporter is a little more skeptical as we know – also from press reports – that the company had been having troubles long before Covid-19 came along and had been on the underperformers list since IIQ 2018. We expect most – if not all – the $7.4mn invested is likely to be written off. In the short term, TCPC will be missing out on about ($0.600mn) of investment income. We are maintaining our CCR 5 rating on Glasspoint until a final resolution is announced, and – belatedly – adding the company to our Bankruptcy list, found in the Data Room.

Even without knowing the final outcome, the BDC Credit Reporter points out that this was more of a project finance deal than a typical leveraged loan and in the energy services field to boot, added to the BDC’s books after the oil price drop of 2014-2016. Admittedly, the technology involved is intriguing: “The company was going to use concentrated solar arrays housed in glass greenhouses to produce steam at gigawatt scale instead of using natural gas“. That sounds very “green energy”, but also outside the normal ambit of what BDCs consider normal risk. The good news from TCPC’s perspective: even at worst the amount of capital involved was modest. We expect some final resolution in the months ahead, including a realized loss and – possibly – a further write down.

General Nutrition Inc: Company To Be Sold In Bankruptcy

A judge has cleared the acquisition of General Nutrition Holdings (including General Nutrition Inc.) out of Chapter 11 bankruptcy for $770mn by China-based Harbin Pharmaceutical Group. The transaction should close by year end 2020. The company had filed for bankruptcy in June.

For the only BDC involved – publicly traded Harvest Capital (HCAP) – this is both good news and bad news. Let’s start with the latter: the first lien lender may be paid less than full value from the sale proceeds. The available trade articles are not clear. As of June 2020, the BDC had bought $5.0mn of debt for $4.9mn and had valued its position at just $2.447mn. (We are including here a $1.0mn Debtor In Possession loan funded after bankruptcy, which we expect to be repaid in full). If that holds up, HCAP – whose debt is on non accrual – will write off close to ($2.5mn), probably in the IVQ 2020.

The good news is i) the proceeds may be higher than initially anticipated; ii) any amount recovered will flow back to the BDC, much in the need of liquidity at the moment. However, we will probably not be told the final numbers till the IVQ 2020 results are published.

For HCAP – based on valuation – this was a performing business that we only added to the underperformers in IQ 2020 at CCR 3; dropped to CCR 4 and then CCR 5 in the course of the IIQ 2020 and should be off the books by the end of 2020. HCAP has lost ($0.350mn) in annual investment income, but may gain some of that back in the future from the recovery.

The BDC Credit Reporter, playing armchair credit quarterback, would question why years into the “retail apocalypse” HCAP decided to lend to a brick and mortar seller of nutritional supplements ? To be fair, though, and thanks to the fact that GNC was a public company, we can see that adjusted EBITDA was doing well in the quarter in which HCAP began lending. A year later Adjusted EBITDA had dropped by more than half thanks to Covid-19. Chalk this one up – mostly – to bad luck. After all HCAP was willing to step in with other lenders and become the owner but was beaten out by Harbin.