With no guidance from BDC lender Apollo Investment (AINV), the BDC Credit Reporter – who fancies itself a bit of a corporate sleuth – recently wrote an update on October 17, 2020 about KLO Holdings – holding company for a kayak manufacturer with operations in the US and Canada. We posited that the BDC investment in the business – which failed earlier in the year – would result in a 100% write-off and everyone would move on.
Now that we’ve had a chance to dig into AINV’s IIIQ 2020 financials we’re changing our story. Once again we are getting no help from AINV – which like most BDC managers only episodically shares an anecdote or two about underperforming portfolio companies. We do know, though, from the 10-Q that AINV booked a ($3.7mn) realized loss in the IIIQ 2020 associated with KLO Holdings. However, a new borrower is now listed in the KLO Holdings Group : 1244311 B.C. Ltd. To this entity AINV has advanced $4.0mn in debt and $1.0mn in equity.
The $4.8mn invested in cost at the KLO Holdings subsidiary KLO Acquisition, in the form of a loan, remains valued at zero and on non accrual. The Canadian subsidiary of KLO holdings 9357-5991 Quebec Inc. had a cost of $8.657mn as of June, also in the form of a loan. That’s cost has now been reduced to zero. We’re guessing this is where the ($3.7mn) realized loss came from and the remaining $5.0mn transferred to the new entity: 1244311 B.C. Ltd. Of that $4mn in new debt, three quarters is cash paying, according to the 10-Q, and $1mn is in PIK form. AINV has valued its “new” $5.0mn investment at $4.844mn. The rest of the historic advances to KLO Acquisition and 9357-5991 Quebec Inc. are valued at zero.
That took us half an hour to parse out, so if you’re confused we sympathize. The bottom line, though, is that AINV has taken a small realized loss equal to one quarter of its June 2020 exposure to the KLO Holdings companies, but continues to have exposure to a new company by moving obligations around and changing their form. This means KLO Holdings is both a non performing and a performing loan, depending what subsidiary entity you’re talking about !
We have clearly under-estimated the unwillingness of AINV to give up and walk away. Only time will tell though if these are just realized losses delayed by these clever transactions or whether the BDC might participate in some turnaround and eventual partial or full recovery. Admittedly, the current FMV is low: just $2.157mn, and the amount of interest income being now received is very modest. For readers, this story of the changing nature of AINV’s kayak investment is a useful example of the flexibility BDCs have to re-characterize and restructure their assets. Investors have the challenge of trying to keep up in order to have a sense of what value is lost or created.