BJ Services Company: IIIQ 2021 Update

Last time we wrote about oil field services company BJ Services Company, the business had just filed for Chapter 11, and without a pre-packaged plan. Subsequently – as we’ve gleaned from the public record – at least some of BJ’s assets were sold to other entities such as American Cementing. More recently, BJ’s former headquarter’s building was sold for $40mn.

Where does this leave the 4 BDCs previously with $25.2mn invested in the company’s unitranche debt when bankruptcy occurred ? As of September 30, 2021, total exposure at cost was down to $10.6mn and only Crescent Capital (CCAP) and Portman Ridge (PTMN) – who acquired the loan from now defunct Garrison Capital – are still involved. PTMN is carrying its modest $1.4mn position at par. The BDC has a “first out” status in the unitranche loan and that might explain the valuation and why the debt is carried as performing.

Over at CCAP – which has most of the exposure – one tranche of debt with a cost of $8.0mn is valued at $5.5mn, down (35%), just slightly off the prior quarter and the lowest value given since the bankruptcy occurred. The debt remains on non-accrual, and is a “last out” structure. (Confusingly, there’s also a $1.2mn senior loan from CCAP that is carried as current and valued at cost.)

We’re surmising – because neither PTMN or CCAP are explaining anything – that the BDCs are waiting for the asset sales to be complete to tot up their losses – if any – on BJ Services and close out these loans. With the sale of the HQ, we’d guess this process is almost complete and the BJ Services book will shortly be closed.

The only loss that will ensue – if we’re right – is a realized one by CCAP for ($2.5mn) or so, offset by receiving some proceeds to be re-invested. If that’s the case, CCAP will probably be mildly pleased as the BDC had nearly $13mn invested when BJ Services – seemingly out of the blue – filed for Chapter 11 back in 2020.

All this should be confirmed shortly, possibly when the IVQ 2021 results BDC results are published. For the moment, we’re retaining BJ Services as a CCR 5 – i.e. non performing – credit and Trending, because we expect something material to occur.

Casper Sleep: Company To Be Sold

Casper Sleep is a mixed e-commerce and brick and mortar retailer of “sleep products” – i.e. mattresses. Through the dint of good marketing, the company gained a celebrity following and became a growth story in a highly competitive, non glamorous corner of retail. In February 2020, the company went public but already the bloom was off the rose as the final price was half the initial target. Since then, matters have gotten worse as the company has been burning through cash to fuel its growth, and its stock price has dropped sharply. A few days ago, though, the Board agreed to a take-private buyout offer by Durational Management, whose offer is supported by debt from KKR Credit and Callodine Commercial Finance. $30mn in bridge finance is being made immediately available and has been agreed to by the existing lenders.

Right in the middle of all this is publicly-traded BDC TriplePoint Venture Growth (TPVG), a subordinated lender and investor in Casper since 2017. (Wells Fargo administers a secured, asset based revolver, senior to TPVG). As of the IIIQ 2021, the venture-debt BDC had invested $32.0mn to the company, mostly in the form of two subordinated term loans due in 2022 and 2023. The debt is valued at par. Also, the BDC has invested $1.2mn of preferred and equity, which has been almost completely written down. (By the way, Casper in its official filings says TriplePoint has invested $50mn. The discrepancy might be a related TriplePoint fund being also involved).

We imagine that upon hearing of the buy-out offer TPVG sighed in relief. In recent months, Casper’s liquidity has greatly tightened and management has taken a hacksaw to costs to survive. Lenders have had to waive defaults while a solution was found by the stakeholders. In any case, both Wells Fargo and TPVG quickly agreed to the $30mn of additional “bridge financing” involved.

Based on what we’ve heard, TPVG is likely to get out of this sticky situation with nary a credit scratch, with even its equity stake valued a little higher than just before the LBO announcement. However, the transaction has not yet been consummated, so neither TPVG, nor the BDC Credit Reporter, can count its chickens as yet.

For the moment, we’re rating the company CCR 3, where the likelihood of full repayment is greater than of loss. That could change in a New York minute should something go wrong. We are tagging this company as Trending for obvious reasons. We will provide an update whenever a material new development occurs. We expect the company – even in the best of circumstances – will remain on TPVG’s books through the end of 2021.

Custom Alloy Corporation: IIIQ 2021 Update

Now that Barings BDC (BBDC) has reported IIIQ 2021 results, we see that Custom Alloy Corporation‘s debt outstanding has been discounted by as much as (17%). Overall, BBDC has invested $40.8mn at cost, but the FMV has dropped to $36.0mn. As a result we’ve added the company back to the underperformers list, with a CCR 3 rating.

Previously, the company was added to the underperformers in IQ 2020 but was returned to performing status (CCR 2) in the IVQ 2020, as valuation returned to par. We’re not sure why BBDC has discounted the debt again, but note that the rate charged is very high (15.0%) and pay-in-kind, suggesting this is a troubled borrower.

This is a credit worth tracking as Custom Alloy accounts for 7% of BBDC’s total investment, and even more of its NII because of the high rates being charged. We have added the company to the Trending List and will be monitoring BBDC’s IVQ 2021 results with great interest for signs of any further weakening. We were encouraged, though, by a recent October 2021 news item that indicated the company is investing $8.1mn in a new facility to service a Navy contract. Maybe Custom Alloy’s troubles – whatever they are – are just a passing phase and – once again – the company will be removed from the underperformers list.

Legal Solutions Holdings: Placed On Non Accrual

Frankly we don’t know much about Legal Solutions Holdings. The public record does not offer much information. However, we do know that the company used to be financed by MVC Capital, which was acquired by Barings BDC (BBDC) in late 2020. We also know that in the IIIQ 2021, BBDC placed its senior subordinated loan to the company, which was yielding 16.0%, on non -accrual for the first time.

This debt has a par value of $11.4mn, a cost of $10.1mn and – surprisingly given the above – a fair market valuation of $11.0mn. Judging by the valuation at least, BBDC expects to be repaid in full and more on this debt nominally due in March 2022.

This investment dates back to 2014 and was valued by MVC just before the BBDC acquisition at $9.3mn. Why the value has increased in a one year period despite becoming non performing is not clear to us. We’ll reach out to BBDC and see if we can find an explanation. This may have something to do with the blanket “Credit Support Agreement” Barings offered when acquiring MVC’s assets for BBDC.

In the interim, the company is being rated CCR 5, downgraded from CCR 2 in the IIQ 2021 when the valuation was roughly equal to cost. We assume BBDC is – at least temporarily- deprived of $1.8mn of annual investment income from Legal Solutions, most of which was already in pay-in-kind form.

The valuation seems to suggest BBDC should get out of this non performing credit scott free, or better. However, till we learn more from the BDC’s managers or in the next earnings release, this remains a question mark.

Chief Fire Intermediate: IIIQ 2021 Update

We’ve got nothing positive to report about Chief Fire Intermediate, which we’ve discussed previously. After reviewing Logan Ridge Finance’s (LRFC) IIIQ 2021 results, the debt remains on non accrual and the entire investment has been written to zero, and has been for the last two quarters.

The company is rated CCR 5, and we expect a 100% realized loss will be booked at some point on the $9.0mn of debt, preferred and equity invested at cost. Given the non accrual and the 100% discount, this should not impact LRFC.

Carlson Travel: Files Chapter 11

On November 11, 2021 Carlson Travel Inc. filed for Chapter 11 bankruptcy protection, as part of a pre-packaged plan. A month earlier, the key components of the plan agreed between the owners and most of the lenders was spelled out:

Through the plan, the debtors seek to implement a restructuring that deleverages the debtors’ balance sheet from $1.6 billion prepetition to $625 million in exit notes as well as a $150 million exit revolving credit facility that is presumed to be undrawn at emergence. $500 million of the exit notes will provide new money to the estate (either via a marketed offering or a backstopped rights offering to existing creditors). The plan also provides for $350 million of new equity financing, split between a rights offering to the plan’s Class 5 and “direct allocations” to supporting parties…“.

From Reorg.com 10/6/2021

The key creditor is Barings, Inc. As a result, two of the asset manager’s BDCs are involved – non traded Barings Capital Investment and publicly traded Barings BDC (BBDC) with an aggregate exposure at cost as of September 2021 of $13.6mn. The exposure consists of first lien debt and “super senior secured debt” and a sliver of equity. Barings has been involved with the company since at least IIIQ 2020 as a BDC lender.

Despite the big debt haircut reported BBDC and Barings Capital don’t seem to be at risk of any loss, judging by the IIIQ 2021 valuation. Both debt tranches are valued at a premium. The only loss should come in the immaterial $0.13mn of equity invested.

We have downgraded Carlson from CCR 3 to CCR 5 on the news of the bankruptcy but are optimistic – on the basis of the public record that this is a bullet that the Barings BDC lenders can duck. What we don’t know, though, is whether these lenders will receive equity in the post-bankruptcy entity. We’ll update readers after the IVQ 2021 BBDC results are published, which should address the issue if the company formally emerges from court protection by that date.

Dynamic Product Tankers: IIIQ 2021 Update

Last time we wrote about Dynamic Product Tankers – in June 2021 – we were optimistic that valuations might improve going forward. In fact, we were wrong. As of the IQ 2021, Apollo Investment (AINV) valued its debt and equity position – with a cost of $71.8mn – at $47.5mn. Two quarters later and the value has dropped to $38.1mn. All the deterioration came in the equity stake AINV owns in its 85% of the business. The $22mn unsecured Term Loan remains valued at par and continues to charge a subsidized 5.16% rate to the shipper. The equity has dropped from $25.5mn to $16.1mn.

This is a closely held company with no useful public information found, so we’re reliant on disclosures from AINV. Unfortunately, the BDC has said nothing on its conference calls since 2018. We’re left to speculate – due to the valuation numbers – that the business is softening.

It’s impossible to determine if this “non core” asset will get sold any time soon. However, even at this lower valuation a considerable amount of pro-forma income is involved. Assuming a FMV of $38.1mn invested at 9%, AINV could generate $3.4mn of annual investment income, as opposed to $1.1mn currently. That’s nearly $0.04 a share of hypothetical incremental investment income.

On the other hand, should AINV be forced to write off just the remaining equity, the loss of NAV Per Share would be ($0.25). We have no view either way given the absence of information, but the ultimate resolution of Dynamic will be important to AINV.

For the moment, the company is rated CCR 4, and is possibly trending as the unrealized loss last quarter was substantial and could be repeated. We’ll probably report again when the IVQ 2021 AINV results are released in 2022.

Spotted Hawk Development: IIIQ 2021 Update

The BDC Credit Reporter has written three times before about Bakken oil and gas operator Spotted Hawk Development. Since our last article in June, the company has been restructured yet again. This has required the only BDC with debt exposure (and a 38% equity interest) – Apollo Investment (AINV) – to convert one of its debt tranches to equity and another tranche was written off. This resulted in a ($44.4mn) realized loss, or roughly one third of the amount the BDC had invested in the company.

Currently, AINV has one debt tranche of $24.7mn valued slightly above par and current on its 12% interest. The debt matures at the end of June 2022. Two tranches of equity with a cost of $45.5mn is valued at $6.7mn. The total FMV of AINV’s position is $32.2mn. (At its peak in 2020 AINV had $116mn invested at cost in the business).

We get the impression from AINV’s latest conference call that some sort of liquidity event for Spotted Hawk is planned in the next 12 months. Here’s a quote from AINV’s IIQ 2021 conference call that is relatively explicit on the BDC’s motivations.

“And we are — 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”.

AINV Conference Call – May 20, 2021

This latest restructuring may have been arranged to facilitate that purpose. How this plays out will be important for the BDC’s net asset value and income.

If AINV receives $32mn – as per the latest valuation – the income generated from re-investing the proceeds will not make any difference as AINV’s new investments yield about 9% (or lower), which would generate the same income as currently from the 12% Spotted Hawk Term Loan. NAV would not change either. However, if this turns out to be a write-off, AINV will lose ($2.9mn) of annual investment income and take a further ($0.5) per share hit to net asset value per share. Given that something is LIKELY to happen in the next few quarters, we have the company as Trending. However, whether the trend will be positive or negative is hard to handicap. Oil prices are high, but that did not help in prior periods, so the outcome is unclear.

For the moment, Spotted Hawk remains rated CCR 5. We’ll report back if we hear any news or when the IVQ 2021 AINV results are published.

Solarplicity Group: IIIQ 2021 Update

Given the small amounts involved, the BDC Credit Reporter’s coverage of Solarplicity Group Limited (aka AMP Solar UK and Solarplicity UK Holdings) will be limited. As of the IIIQ 2021, the only BDC with exposure is Apollo Investment (AINV) which has $13.0mn in debt, preferred and equity invested in Solarplicity UK and a value of only $2.2mn.

The BDC has a long history with Solarplicity dating back to 2015. In FY 2018, AINV booked a realized loss of ($27.1mn) and the total investment at cost – which used to be one of the BDC’s biggest portfolio companies – was reduced from $155mn to $19mn, following a sale of the business. In FY 2020, AINV booked a further ($4.7mn) realized loss on some of the first lien debt left in the company.

As of now, there is $7.4mn in remaining debt at cost that has been non performing since IQ 2020 and has a value of just $2.2mn, down from $2.5mn in the prior quarter. The preferred and common have no value.

We rate the company CCR 5 because of the non performing debt and have no expectation – based on what we can glean – that any recovery is plausible. (Management of AINV has not provided an update on what’s happening at the solar company since 2018).

Given that we don’t cover any investment with a value below $2mn, we’ll probably be dropping Solarplicity to Not Material status shortly.

Renew Financial LLC: IIIQ 2021 Update

We have only a flimsy understanding of Apollo Investment’s (AINV) Renew Financial LLC position, which also includes an affiliate called AIC SPV Holdings II, LLC, and also goes by the name Renewable Funding, LLC. If that wasn’t enough, there’s also a Renew JV LLC stake. Taking these businesses together, AINV has invested $16.9mn – all in preferred or common. As of September 30, 2021, the FMV was given as $6.1mn – a (64%) discount, and no income was being generated. This finance company for alternative energy investments dates back to as 2014 when alternative energy was a core investment target for the BDC , and its parent the Apollo Group.

That’s all changed and Renew is now counted as “non-core”, but we get very little to nothing in terms of updates from AINV’s management as to any exit strategy that might be involved. All we know is that these related companies have been underperforming since IQ 2020, and just reached a valuation low point.

The Renew entities are rated CCR 4, as an eventual loss seems more likely than a recovery. In fact – given the trend and the junior nature of the capital – a full write-off might be in the cards one day. Given the absence of any income therefrom and the low cost (0.6% of total cost) and FMV this is a minor exposure for AINV. (If the investment gets written down below $2mn we will drop coverage). The investment is not Trending as recent write-downs were modest – under ($1mn). This is just another example amongst many of AINV investments gone wrong that just sit in the BDC’s portfolio ad infinitum, and with no clear raison d’etre or exit strategy as far as we have been told.

Glacier Oil & Gas: IIIQ 2021 Update

We’ve written about moribund Glacier Oil & Gas before on two occasions. Most recently, we noted that at the end of the IQ 2021 the FMV of the $67mn invested was worth only $8.1mn, according to Apollo Investment (AINV). $36.9mn of the exposure was in first lien debt that has been on non accrual since IQ 2020.

With the publication of AINV’s IIIQ 2021 results, we learn that the BDC booked a ($20.9mn) realized loss on Glacier, bringing the nominal cost to $45.1mn. The FMV is now just $4.9mn. Despite the increase in the price of oil, this seems like an almost certain complete loss for AINV.

With no income coming in and – apparently – little chance of any material recovery this investment is becoming increasingly non material, by dints of realized and unrealized losses, to AINV and may be dropped from coverage shortly.

For the moment, Glacier remains rated CCR 5. We’re not sure if the investment will be “Trending” in the IVQ 2021 results.

Sequential Brands: IIIQ 2021 Update

We’ve now written about Sequential brands twelve times ! Most of the time we’ve focused on FS KKR Capital’s (FSK) substantial exposure to the now bankrupt business. However, we’ve mentioned Apollo Investment (AINV_ which has also been a long time lender, but only in the second lien debt and for a much smaller amount than FSK. With the IIIQ 2021 AINV results, though, we see that the second lien debt was placed on non accrual. That was expected given the Chapter 11 filing.

What we didn’t know till AINV reported is that the BDC and FSK had advanced another $6.5mn and $133mn respectively to Sequential recently but with a maturity at the end of 2022 and in a first lien position. This is DIP financing presumably. That debt is valued at par and the discount on the second lien has been reduced to only (8%). Furthermore – and also both reassuring and expected since we heard the sale of Sequential was turning out well – FSK values its own exposure at or above par – even its non performing loan.

All this suggests that both FSK and AINV will extract themselves from the slow moving train wreck that has been Sequential Brands with nary a scratch. We rate the company CCR 5 because of the bankruptcy but do not expect any material loss for anyone at the end of the day. (The only exception remains $2.8mn of equity invested back in the day by FSK, which continues to have a value of zero). Sequential is rated as Trending given that the final settlement of the transaction could result in substantial changes in holdings and proceeds received. That may occur in the IVQ 2021 or IQ 2022 results of FSK and AINV.

Maxus Carbon: IIIQ 2021 Update

We last updated what was happening at Maxus Carbon (aka Carbonfree Chemicals SPE) after Apollo Investment’s (AINV) IQ 2021 results. At the time, the BDC – which controls the alternative energy company – was promising better times ahead for this long standing investment that has fared poorly over the years.

We were in a “show me” frame of mind after seeing the debt at the company converted to equity and the $78mn invested at cost written down to a FMV of $25.4mn. Thankfully, matters do seem to have improved. As of the IIIQ 2021, Maxus Carbon’s FMV has increased to $45.2mn, or $19.8mn. (The cost is $78.2mn). For two quarters in a row the investment has been valued higher, suggesting more improvement might be in sight.

We even received a brief update about the business – in the broadest terms – on the most recent AINV CC:

…”our investment in carbon-free consists of an investment in the company’s proprietary carbon capture technologies and an investment in the company’s chemical plant. Carbon free is benefiting from strong interest in carbon capture, utilization and storage as part of broader ESG trends. We believe carbon-free is a leader in this space as evidenced by partnerships announced during the quarter, which demonstrate market acceptance for its technology

AINV Conference Call 11/4/2021

This is a closely-held investment and AINV does not offer much in the way of details and the public record is spotty. Nonetheless, there are reasons to be optimistic that AINV – one day – might find a way to dispose of this non-income producing investment. Even if sold at the latest FMV, the proceeds re-invested at 8.0% would generate a material $35mn plus in annual income.

We are retaining a CCR 4 rating on the company, but added the investment to the Trending list as AINV may increase the FMV in the IVQ 2021.

Ambrosia Buyer Corp: IIIQ 2021 Update

We’ve written about Ambrosia Buyer Corp (aka Trimark USA) three times before, with the most recent update after the IQ 2021. We wish we could tell what’s going on of late at the restaurant supply company from the public record, but we can’t. However, we can report that as of the IIIQ 2021 Apollo Investment (AINV), which holds second lien debt with a cost of $19.6mn continues to carry the debt as non performing. The amount invested at cost is reducing from quarter to quarter, suggesting that the BDC might still be receiving debt service but is paying down the principal with the proceeds.

At 9/30/2021 the AINV FMV in Ambrosia is $9.3mn, a (53%) discount from cost. The par value given is $21.4mn. The discount in the IIQ 2021 was substantially the same. This is an increased discount from the IQ 2021, which was (38%). We’re guessing that the disputes between the lenders to Ambrosia is still being fought out in court.

We continue to rate Ambrosia as CCR 5, with some ($1.3mn) of annual income forgone since the IVQ 2020. We can’t estimate what the final outcome might be as the company – and the debt – remains in flux.

Kadmon Holdings: Company Sold

Kadmon Holdings is a publicly traded biopharmaceutical company (ticker: KDMN) that has just been sold to Sanofi, a much larger biopharmaceutical concern with a global footprint and 100,000 employees. The equity holders of Kadmon are receiving $9.50 a share or $1.9bn in total.

We believe this is good news for the only BDC with exposure to Kadmon: PennantPark Investment (PNNT). The company has been on PNNT’s books in some form since 2010. Of late, though, the BDC only had a small equity stake with a cost of $2.3mn in 252,014 shares. The FMV as of June 2021 was $1.0mn. Now that’s worth $2.4mn, a $1.4mn increase and cash proceeds that can be rolled from a non-income producing to a yielding status.

We had Kadmon rated as underperforming since 2016 (!) with a CCR 3 rating but Non Material giving the sub-$2.0mn valuation. We’ve upgraded the investment to CCR 1 because of the sale and added to the Trending list. That’s because the BDC should book a final realized gain in IVQ 2021 and a higher value than the latest number we have as of June 2021. A small, but satisfying gain for PNNT given that KDMN’s stock price was as low as $3.36 in the last 52 weeks.

Hylan Datacom & Electrical: Placed On Non Accrual.

Hylan Datacom & Electrical is a “leading provider of full-service turnkey communications solutions, electrical infrastructure design and construction services for wireline, wireless and smart city municipal services across the United States”. According to one of its BDC lenders – BlackRock TCP Capital (TCPC) – the company is facing difficulties for the following reasons:

…”[the] nature of implementing and carrying out their service wasn’t run as well as it could have been. And in the meantime, the impact of that with the level of debt they’ve had, put challenges on them in terms of liquidity”

Extract from BlackRock TCP Capital conference call, dated November 4, 2021

As a result, the company – already underperforming has seen two of its three loans with TCPC placed on non accrual. The first lien debt has a total cost of $18.1mn and an FMV of $12.1mn. Non-traded BDC Sierra Income had a $15.5mn debt exposure to Hylan as of the IIQ 2021 and that’s probably on non accrual and further written down. TCPC is facing ($1.2mn) of currently forgone investment income from becoming non performing. Given that the BDC has in excess of $160mn of annual investment income, the impact is minimal.

TCPC – in its comments about the situation – sounds hopeful that Hylan can be turned around:

“So those seem to be resolvable issues, obviously, is going to be a longer tail process to get to the right outcome. We feel like we know what we’re doing there, and we have a good asset with which to start with. But I think we’ll just provide updates as we can quarter-over-quarter”.

Extract from BlackRock TCP Capital conference call, dated November 4, 2021

The BDC Credit Reporter has downgraded Hylan from CCR III – which dates back to IIIQ 2019 – to CCR 5. For the moment, we project the ultimate loss – the first lien debt status notwithstanding – might be between 25%-50% of the investment involved, which totaled $33.1mn in June 2021 with both BDCs reporting.

TCPC went out of its way to indicate Hylan’s problems are “idiosyncratic” and not related to the current theme of supply chain disruption or other Covid-related issues.

Sequential Brands: Auction Cancelled

Bankrupt Sequential Brands was going to hold an auction for its multi-brand assets, but ended up cancelling. Some of the company’s brands – like Jessica Simpson which was sold back to the celebrity herself for $65mn – were disposed of previously. The principal transaction, though, was a $330mn bid by Galaxy Capital Partners, a portfolio of Gainline Capital Partners – a PE group. Earlier this year, Galaxy bought Apex Global Brands including, Hi-Tec, Magnum and Tony Hawk and has licensing deals with top brands such as Justice, London Fog and many others.

This transaction is being financed with $55mn in cash and the assumption of debt. That debt is held – amongst others – by the two BDC lenders involved – FS KKR Capital (FSK) and Apollo Investment (AINV) to the tune of at least $231mn. As far as we can understand, Galaxy will be the new borrower and FSK – and to a much lesser degree – AINV, will also hold an equity stake in the business.

How all this gets reflected in the two BDCs schedule of investments is impossible to tell in advance. We’d guess that the $3.0mn in equity FSK invested in Sequential might be written off. AINV’s debt was valued at a discount of (12%) as of June 30, 2021 and might result in a haircut but total exposure at cost was only $12.6mn, so any impact will be minimal.

The most intriguing question is how FSK – with $216mn invested at cost in debt treats that investment. We expect no loss will be recognized but some portion of the debt may be converted into equity in Galaxy. Also unknown is whether the new facility will be priced as attractively as the advance to Sequential: LIBOR + 875%. When we get those sort of details we’ll be able to tell what the impact on FSK’s investment income – seemingly running at $24mn per annum before the bankruptcy – will look like. There’s some financial sleight of hand going on here, but the bottom line is that FSK – and seemingly AINV – are undertaking a mixture of a debt refinancing and debt for equity swap.

Sequential remains rated CCR 5 until the bankruptcy judge approves the many moving parts of this transaction and Galaxy gains control. We’ll report back when we hear more from the BDC lenders involved.

Horizon Technology Finance: IIIQ 2021 Underperformers

Horizon Technology Finance (HRZN) has reported its IIIQ 2021 results. Total portfolio assets amount to $452.3mn (including $21mn in equity and warrants) spread over 74 companies.

According to HRZN’s own investment rating system – see below – there are only 3 underperforming investments, including 1 in its lowest rating. The total fair market value of these investments is $13.941mn, or 3.2% of the BDC’s total debt investments. That’s down from 4 investments and $14.612mn at December 31, 2021, or 4.4% of total debt.

 September 30, 2021   December 31, 2020   
  Debt Percentage  Debt Percentage 
 Number of Investments at of Debt Number of Investments at of Debt 
 Investments Fair Value Investments Investments Fair Value Investments 
 (Dollars in thousands)      
Credit Rating      
 4 5 $                       56,337 13.1% 6 $                       77,950 23.4%
 3 35 359,658 83.7 24 240,933 72.2
 2 2 11,141 2.6 3 12,875 3.9
 1 1 2,800 0.6 1 1,737 0.5
Total 43 $                    429,936 100.0% 34 $                    333,495 100.0%
HRZN: Investment Rating Table -IIIQ 2021

The three investments/companies – the BDC Credit Reporter believes – are MacuLogix, Inc. – a medical device manufacturer; Betrabrand Corporation, a technology driven women’s clothing company and MVI (ABDC) LLC, aka Stereo Vision, Inc – a software company.

We rate the first two companies CCR 3 in the BDC Credit Reporter’s system, where the likelihood of full recovery is greater than of loss. However, Stereo Vision – which went on non accrual in the IIIQ 2021 – is rated CCR 5.

MacuLogix is an investment that dates back to 2018 from HRZN. As of September 2021, HRZN has advanced $7.2mn at cost, mostly in the form of first lien term debt due in 2023. The preferred is discounted (59%) and the first lien debt (4%), from par in the prior quarter. The company was added to the underperformers list from the IIIQ 2021.

The company develops equipment for the treatment of macular degeneration. We have no idea – from the public record what might be going on at the company. We calculate that investment income potentially at risk is $1.25mn annually.

Betraband Corporationdesigns amazingly comfortable clothing for women who like to stay active all day long“. HRZN has invested $7.9mn in the business, dating back to IQ 2019. The name was added to the underperformers list from the IVQ 2020 but has been improving in valuation of late. The first lien debt is being discounted only (1%) and the preferred has been written to zero. On paper, $0.8mn of investment income annually is at risk, but this name might be returned to performing status shortly.

The only seriously troubled underperformer is Stereo Vision, which manufactures facial recognition technology for the army. However, HRZN’s exposure is modest: $3.8mn, of which $3.0mn is in debt. The BDC is foregoing (0.240mn) of investment income as a result of being on non accrual. The debt has been discounted between (7%) and (11%). The company was added to the underperformers in the IIQ 2021 and became non performing in the IIIQ 2021. We have no information as to why the investment has been written down.

We’ll be tracking all 3 companies in our daily searches of the public record, but only Stereo Vision – currently – in seriously enough impacted to warrant full length updates.

Limetree Bay Ventures LLC: Refinery May Not Reopen

We last wrote about Limetree Bay Ventures LLC, which owns a much troubled refinery in St Croix back on July 31, 2021, shortly after its bankruptcy filing, which we’d also covered in an earlier article. Since then, the only BDC with exposure – FS Energy & Power – has faced the inevitable and taken a huge realized loss on the investment, which we estimate at ($283mn) on $300mn invested. As of the IIQ 2021, the BDC had only $13mn advanced in first lien, debtor-in-possession debt and $19.1mn in equity, valued at par.

The DIP debt, though, was already discounted by (28%) to $10mn. That’s because – as becomes clearer with every day – the risk of the refinery not re-opening increases with every day. This is confirmed by a WSJ article describing what is being said by the company and potential buyers at a bankruptcy court hearing . What the EPA will or will not agree to where the re-opening of the refinery is concerned is critical.

If that wasn’t enough, one of the refinery’s post-bankruptcy lenders has not been paid in full and could trigger a default, as we heard a week ago in another WSJ article.

All of this makes the prospects of FS Energy – which has already taken a beating – recovering any monies very bleak. We expect this will all resolve itself relatively quickly if the EPA gives a flat no answer to the re-opening of the refinery, regardless of who might be the owner. This looks like FS Energy & Power is saddled with one of the largest credit losses in recent BDC history.