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 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.

Centric Brands Inc: Reorganization Plan Approved

Since May 2020 Centric Brands, Inc. has been under bankruptcy court protection. Now, though, the company is poised to exit that status by mid-October 2020 following court approval of a reorganization plan and some well placed settlement payments to disgruntled creditors. The deal seems like a debt-for-equity swap, with first lien and second lien lenders receiving equity in the restructured company while continuing as lenders in new, smaller, debt facilities.

After all conditions have been finalized, Centric Brands — whose owned brands include Zac Posen, Hudson and Swims — plans to exit Chapter 11 by the end of October with a “recapitalized” balance sheet, as well as new financing facilities, “significantly reduced” debt and interest payments, plus the full support of all of its lenders.

This is a Major BDC investment by BDC Credit Reporter’s standards: i.e. over $100mn at cost or $129.9mn in this case. There are three BDCs involved, headed by Ares Capital (ARCC), which is invested in both the debt and equity of Centric. Then there’s non-traded TCW Direct Lending VII and publicly traded Garrison Capital (GARS). The debt held by the BDCs matures in 2021 and 2023. The latter with a cost of close to $100mn is valued at roughly a (15%) discount and is likely to be partly written off when the company exits bankruptcy. That will result in about ($15mn) in realized losses along with nearly ($25mn) ARCC holds in the equity of the insolvent entity, or a total loss of about ($40mn). The 2021 debt is Debtor In Possession financing and is likely to be repaid in full. What we don’t know is if the lender-now-owners will have to inject incremental new capital or not. More details to follow.

This will be a significant – but not overwhelming loss, principally for ARCC, and to a much lesser degree for the other two. On the other hand, it looks like all the players will live to fight another day and – potentially – recoup proceeds lost from an eventual sale of the restructured Centric Brands another day.

We will be upgrading the company from CCR 5 to CCR 3 or CCR 4 when the exit from bankruptcy occurs. As we’ve written in earlier articles about Centric, much will depend on how generous the new lender owners have been in structuring the going forward balance sheet. The company continues to operate in an industry – lifestyle brands sold mostly at retail – that continues to be pandemic impacted. Furthermore, some debt for equity swaps in the past have been done with less than generous terms, rapidly returning the business to the bankruptcy court. We hope Centric won’t be a “Chapter 22” story.

Roli, Ltd: IIQ 2020 Update

On August 6, 2020, TriplePoint Venture Growth (TPVG) offered up an update on troubled portfolio company Roli, Ltd on its IIQ 2020 conference call:

We have one company rated 4 on our watch list, Roli, a music technology company. During the quarter, we further marked down our loans on Roli, reflecting the impact of COVID on some of our recovery assumptions associated with the ongoing turnaround of the company. Here in Q3, the company has made good progress, and we expect to see some favorable trends over the next couple of quarters“.

The BDC Reporter wrote the following in its review of TPVG’s Conference Call where Roli was discussed: “TPVG has advanced $29mn to Roli Ltd, which has been on non accrual since IIQ 2019. The current value is just $15.0mn. By the way, just before Roli became non performing, the debt and equity outstanding was valued almost at par” The company is rated CCR 5 and we expect the ultimate outcome is likely to be some sort of realized loss, but concede that – except for these occasional updates from the lender – we have little inside information about the company’s fortunes.

School Specialty, Inc. : Restructured

On September 15, 2020 we heard from School Specialty, Inc. that essentially all its assets had been acquired by a group led by TCW Asset Management and a couple of other partners. The company will now operate as School Specialty, LLC. The company’s Chief Operating Officer has been named Chief Executive Officer.

We’ve been following the School Specialty story for some time and divine – given that the company’s lenders included non-traded BDC TWC Direct Lending – that this is a restructuring, rather than a sale to a third party. The restructuring has been on the cards for some time, as discussed in our earlier article published on April 13,2020.

What we don’t know, though, is how the company was restructured and what the implications will be for different creditors, including TCW Direct Lending. As of the IIQ 2020, the original debt was trading at a discount of only (13%) and $8mn in new debt advanced more recently to tide the business over was carried at par. This suggests the BDC does not expect to take any great write-offs. However, we won’t know anything tangible till when the IIIQ 2020 TCW Direct Lending results are published, when we expect to work out the impact on income and FMV.

The BDC Credit Reporter had rated the company CCR 4, but is now upgrading the rating to CCR 3. We can’t in good conscience place the company back on “performing normally” status (CCR 2) till we see how generous the capital restructure was, and we learn more about the outlook for the school supplies business. We can’t even be sure whether the BDC will be writing off any interest unpaid during a long forbearance period. We believe the odds are high that some income – at the very least – will have been lost.

School Specialty was having trouble even before Covid-19 came along and made matters much worse. Given that TCW now seems to be both lender and investor, this company could be in the database – if not the underperformers list – for many more years to come, rather than being paid off in 2020 as previously anticipated. From what little we know, though, the damage on is a large position for the BDC appears to be modest.

Lonestar Resources: Restructuring Agreed

According to Debtwire, E&P company Lonestar Resources has agreed upon a restructuring agreement between the various creditors of the company in which the unsecured debt holders will gain “the bulk” of the equity going forward. The WSJ says $390mn in debt and preferred will be written off in the arrangement. The BDC Credit Reporter last wrote about Lonestar Resources on July 6, 2020 when the company missed an interest payment.

The only BDC with exposure remains FS Energy & Power, with $23.2mn invested in the junior debt, which was valued at $2.4mn as of June 2020. The debt was still accruing income at that point. We expect the debt is now on non-accrual and will be converted into non-income producing equity in return for a small stake. Some ($2.5mn) of annual investment income will be lost. It’s hard to estimate what the final value of the capital will be, but is likely to be close to the June number, which means FS Energy will b e booking a ($20mn) realized loss.

FS Energy has been involved with Lonestar since 2014, according to Advantage Data. Values have fluctuated all over the place all over those six years but the latest drop in value began pre-Covid in the IIIQ 2019 and has just gotten worse and worse with every quarter. If nothing else this restructuring creates some hope that the business can continue operating and – at some time – the BDC might recoup some of its capital. That day, though, could be many years away.

TooJay’s Management LLC: Exits Chapter 11

Restaurant chain TooJay’s Management LLC is out of bankruptcy protection after seeking Chapter 11 in April in the middle of the pandemic. The company used the bankruptcy process to relinquish several leases and ends up with 21 locations from 30. All are now operating with dine-in capabilities, as well as takeout and delivery. As part of the restructuring, TooJay’s has shed all its debt.

The new owner is Monroe Capital, whose various funds including publicly traded the publicly traded BDC (MRCC) were the prior lenders to the company. As a result, we expect that MRCC’s $4.1mn in 2022 Term debt and Revolver has been converted to equity. No word yet if any new financing will be provided. The BDC continued to carry the debt as performing through the IIQ 2020 because of the existence of plenty of collateral. Should that debt be converted into common stock as the news suggests, the likely loss of investment income will be just over ($0.25mn) a year. The BDC had written down the debt by only (5%-7%) so no material loss in value is expected going forward now that the company’s near term future is known.

Presumably this means MRCC and its parent will be tied to the restaurant operator for some time. If a successful exit ever occurs, MRCC might make back some or all the write-down associated with the restructuring and any income that might be forgone going forward.

We are upgrading TooJay’s from CCR 5 to CCR 3, reflecting the under-leveraged nature of the post-bankruptcy structure but keeping in mind that the business remains in a thin margin, pandemic-sensitive sector. There are more details to learn but at first approach MRCC – and any other Monroe funds involved – appear to have fared well in what could have a liquidation situation.

Iqor US, Inc.: Files Chapter 11

On September 10, 2020 IQor Holdings and each of its subsidiaries (including Iqor US) filed for voluntary Chapter 11 protection in Texas. The company has a restructuring plan in place and above-average support in situations of this kind from its creditors. Furthermore, debtor in possession facilities have been negotiated with a value of $130mn. No wonder the company is optimistic about being in and out of bankruptcy in 45 days.

There is only one BDC with exposure to the company: non-traded Sierra Income with $20.6mn advanced at cost in two loans. As of June 2020, the smallest of those loans was already on non accrual and the total FMV of debt outstanding was $12.7mn. Given that a restructuring has been in the cards for some time we imagine the latest value may be close to where the debt will be marked when the restructuring occurs in the next few weeks. As a result, by year’s end we should see Sierra book a realized loss of ($8mn) or more. We’re not certain how the balance sheet will be restructured but a loss of income – given that most of the debt was still current through June – is likely as well.

This is the second BDC-financed company bankruptcy in September to date. As is the case in most bankruptcies in recent months a restructuring agreement was in place when the filing occurs. This propensity has resulted in more companies going out than coming out of court protection lately. As for the reason for Iqor ending up in this situation ? As the press release itself discloses, an acquisition gone wrong is the culprit rather than the usual suspect: Covid-19.

Cenveo Corp: Sells Businesses

Sometimes the BDC Credit Reporter has to read the tea leaves and come to some conclusions without all the salient facts because we’re dealing with private companies and disclosure is limited. This is the situation with BDC-portfolio company Cenveo Corporation, a global printing solutions company. We last wrote about Cenveo in May when a plant was closed, with Covid-19 blamed. At the time we downgraded the company to CCR 4 from CCR 3. Now we hear that in August Cenveo sold two printing plants and – on September 10 – a trade publication indicatesCenveo Publisher Services and Cenveo Learning were sold to a third party.

This seems to be a pattern of business divestment by Cenveo that might signal an improvement in its credit standing. As of June 2020, Main Street Capital (MAIN) and non-traded sister BDC HMS Capital valued the $9.7mn debt of Cenveo at a modest discount to book. The $9.5mn equity in the company – apparently received a few years ago in a restructuring – is discounted by (50%). For the lenders, Cenveo has been a troubled borrower/investment since inception in 2015. A look at the Advantage Data valuation table shows loan – and later – equity – values rising and dropping and rising and dropping again over the past 5 years.

We are presuming – based on the evidence above – that the asset sales will help the business. That’s a leap of faith and readers should make their own minds up. We are upgrading the company from CCR 4 to CCR 3. However, the debt on the books of the BDCs is not due till 2023 so much could yet happen for good or ill.

We will revert back after the IIIQ 2020 results are published by the BDCs involved to see if our presumption has proved correct.

Energy Alloys, LLC: Files Chapter 11

According to multiple news reports, Energy Alloys, LLC filed for Chapter 11 on September 9, 2020. The company bills itself as “the only 100% oil and gas focused supplier of specialty metals to the global oilfield industry“, so you can imagine how the business ended up in Chapter 11. Energy Alloys has operations both in North America and around the world, but in its bankruptcy filing claimed just $10mn- $50mn in assets and $100mn-$500mn in liabilities. Curiously GSO Blackstone – the credit arm of Blackstone- has been the owner since 2011.

What this all means for the only BDC lender to the company – Sixth Street Specialty Lending (TSLX) – is not clear. As of June 30, 2020, the BDC had $18.3mn lent at cost in an asset-based Term Loan to the company, which was valued at par. TSLX had made the following disclosure in an earnings press release dated July 23, 2020: “As a result of the challenging commodity price environment, Energy Alloys, our second largest energy exposure at quarter end, is pursuing an out-of-court wind-down of the business through a liquidation of its assets. Post quarter end, we received a paydown on half of our principal position on Energy Alloys and expect to be fully repaid by Q4“.

No mention there of a bankruptcy filing which leads is to believe conditions may have worsened since July. Or – possibly – this was all part of the unwinding plan for the troubled business. Up in the air is whether TSLX will receive that last $9mn or so in outstandings in the IVQ 2020 or not. This might impact both income – which was still being accrued through the IIQ 2020 – and the expected repayment in full. We should learn more when TSLX reports IIIQ 2020 results in October, but a final settling of accounts may take till the end of the year or longer if the company lingers in bankruptcy.

As is often the case TSLX zigged when most other lenders would have zagged, booking the debt to Energy Alloys as recently as III 2019, but before the oil price meltdown and everything that has followed. The BDC points to its highly collateralized status as the reason for its comfort, carrying its position at par through its short history. The ultimate outcome of this transaction will tell us whether the uber confidence TSLX demonstrates in these difficult credit situations are justified. However, even if a loss does get booked at the final hurdle, the amount is modest by comparison with the BDC’s billion dollar net worth and should not materially impact future results.

We are downgrading the company from CCR 4 to CCR 5. Energy Alloys was on our Weakest Links list previously.

J.C. Penney: Non Binding Purchase Agreement Finalized

Despite what you may have heard in the headlines, J.C. Penney has not yet been purchased by mall owners Simon Property Group and Brookfield Property Partners. The reality is more complicated and more interesting. The parties have only agreed on a non-binding letter of intention to acquire certain assets of the bankrupt retailer and are far from being in charge as yet. Furthermore, the existing first lien lenders will become owners of two new REITs that will own stores and distribution centers respectively. The lenders would also receive $500mn in “take back” debt and new financing is being arranged as well. With a bit of luck, a very restructured J.C. Penney – in name – would be back and running out of bankruptcy by year’s end. (All the above learned from an excellent synopsis by WYCO Researcher on Seeking Alpha).

This is important news for the only BDC with exposure to Penney’s: Sixth Street Specialty Lending (TSLX). The picture here is complex as well. The current Debtor In Possession (DIP) financing, with a cost of $5.781mn and yielding 13.0% is most likely to get repaid in full. This is what TSLX anticipates, given the premium valuation at June 2020. More difficult to suss out is what the value will be of the two first lien debt positions owned – due in 2023 – and both already on non accrual. We expect TSLX will gain a small non income producing equity stake in the two REITs and some performing debt paper. From an income standpoint that can’t be any worse than the $20.0mn at cost in non-DIP debt held which is being carried as non performing. From a valuation standpoint it’s impossible to tell – even for TSLX at this stage – whether the new arrangement is more valuable than the $8.7mn in FMV as of June 2020.

Most of all, TSLX will probably be glad to have the Penney situation resolved – even if only for a while. This looks like one of the rare instances where the crafty BDC – whose non-DIP debt was bought at a discount in mid-2019 – will not come out of a bankruptcy situation smelling like roses. TSLX has admitted as much in its last 10-Q: “Given expectations for less-than-par recoveries, the Company has applied the regularly scheduled cash interest payments it received to the amortized cost of these positions, all of which were acquired at prices less than par“. Based on the latest values, TSLX could be booking a realized loss of anywhere from ($6mn-$9mn) in the IVQ 2020. Painful but manageable for a BDC with a net book value in excess of a billion dollars.

Boardriders Inc.: Restructured

We hear from S&P that Boardriders Inc. has recently been significantly restructured by its sponsor Oaktree and with the support of some of its lenders and other parties:

“S&P noted that Boardrider recently issued $155 million of new money debt, including:

  • $65 million contributed by Boardriders’ financial sponsor owner, Oaktree, consisting of a $45 million initial term loan and a $20 million delayed draw term loan (currently undrawn);
  • $45 million contributed by other existing lenders; and
  • $45 million via a facility backed by a European government.

The transaction provides needed liquidity and fund an operational turnaround

S&P considers the new debt “distressed” and has lowered its rating to SD or Selective Default, but may raise it back to CCC shortly. (This is part of the complex mechanics of rating groups). S&P is not optimistic about the medium term outlook given “[Boardriders] still-unsustainable debt leverage, high debt service commitments, and our view that the company will likely have difficulty generating consistently positive free cash flow before its next significant debt maturity in 2023].

Great Elm Corporation (GECC) remains the only BDC with exposure. What we don’t know is whether the BDC participated in the restructuring and advanced new monies or did not and became structurally subordinated to the new debt in what sounds like a controversial move by the principals. We are retaining the CCR 4 rating on the company that dates back to May and are not choosing to add Boardriders to the Weakest Links list as all the new cash will temporarily help liquidity and ensure debt service. Nonetheless, the outlook for GECC – one way or another – remains highly uncertain. The BDC has discounted its 2024 Term Loan position by (28%) at the end of June, but current market indicators shown by Advantage Data suggest – not surprisingly – that the discount might be (40%).

We’ll be checking the IIIQ 2020 GECC results to learn more about how the BDC acted when asked for more funds and what that has done to total exposure and valuation. In any case, this is a credit whose tribulations are likely to continue for some time to come so – unless GECC sells out its position – expect to hear more. Attached, though, are our prior two articles.

Accent Food Services: IIQ 2020 Update

We’ve learned a little more – sufficient to put pen to paper for an update – regarding Accent Food Services. This vending machine company has been on non accrual since IVQ 2019, and performance appears to be deteriorating. Everything we know comes from Fidus Investment (FDUS), the only BDC lender to the Texas-based company and which recently published its IIQ 2020 valuation and commented briefly on an ensuing conference call. The BDC has written down its second lien and equity stake – with a cost of $35.3mn to $16.1mn. Two quarters ago when the debt first became non performing, the FMV was twice as high. In the most recent quarter the FMV dropped ($9.6)mn.

As to what is happening or not happening at the company, details are scarce. We know that management is implementing operational improvements, a process that began before the pandemic. We imagine business conditions – with so many companies closed or working at part capacity – has only compounded Accent’s problems. This is what FDUS said: “And quite frankly, the company has been impacted by the shelter-in-place orders and also its geographic locations, in particular, its biggest locations in Texas“.

We know too little – even the identity of the first lien lender and its payment status – so we can’t estimate whether Accent will pull out of this valuation dive or not. Given the second lien status, though, a complete write-off is possible. That’s why lenders like FDUS get paid a 10.0% yield: to take those junior capital risks. This is a material position for the BDC, representing over 5% of the entire portfolio at cost and about 4% of its pre-default investment income. It’s too early to tell, though, if this is going to be a significant credit setback or just a bump along the way. FDUS speaks highly of the business and the management but that’s no guarantee that all will end well.

Accent, which FDUS added to its books in 2016, has been underperforming since IIQ 2017 and was rated CCR 3 until – as mentioned – it went on non accrual at the end of 2019. We are retaining our rating of CCR 5 and an outlook of Significant Loss until we hear otherwise.

Denbury Resources: Court Approves Restructuring Plan

Once a company agrees a restructuring plan and files for bankruptcy, a quick exit is often in the cards. That seems to be the case for energy player Denbury Resources, who has just had its pre-packaged Restructuring Plan blessed by its bankruptcy judge. According to a company press release: “The Plan received the overwhelming support of the Company’s stakeholders, receiving high consensus across all voting classes and unanimous acceptance from second lien and convertible noteholders.  The Company expects to successfully complete its financial restructuring and emerge from Chapter 11 in mid-September“.

The key element in the Restructuring Plan is that the company’s $1.2bn in pre-filing term debt will be converted into equity, in a standard “debt for equity swap”, where lenders become the new owners. As a result, we expect FS Energy & Power – the only BDC with exposure – will become an equity owner of the company when it emerges from Chapter 11 status later in the month and that will be reflected in the IIIQ 2020 results of the BDC.

As of the IIQ 2020, the BDC valued its debt at $17.1mn versus a cost of $42.1mn, suggesting a realized loss of at least ($25.0mn) will be booked. It’s possible the BDC will also be involved in any new financing added to the restructured balance sheet. Otherwise, though, the chances are this becomes a small equity, non income producing, stake that may or may not have value in the future.

We will circle back when the company formally emerges from Chapter 11 and when FS Energy & Power reports IIIQ 2020 results. In the interim, we’re upgrading the company from CCR 5 to CCR 3 prospectively, given the favorable capital structure envisaged. At this stage, more BDC-financed companies seem to be getting off the mat – typically by way of restructuring agreements like these but also from liquidations – than are newly filing for bankruptcy. Still, the damage to the investment income of the BDCs involved has been done.

BigMouth, Inc. : Liquidated

The BDC Credit Reporter has learned some of the background to the recent failure of BigMouth, Inc., a portfolio company of Capitala Finance (CPTA) and – most likely – other Capitala Group entities. We know from CPTA’s 10-Q that in July 2020 a final $2.4mn payment was received by the BDC on $5.372mn invested at cost in the company. At the end of the IQ 2020, total outstandings at cost were $10.3mn. During the second quarter either CPTA received a repayment of the $5mn difference or wrote the debt off. An equity stake had been previously written off in the IVQ 2019.

From a trade article we learned that BigMouth – on the CPTA books since 2016 and on the underperforming list since IVQ 2018 – missed a debt payment to its lenders – including CPTA as recently as April 1, 2020, due to the impact of the pandemic on its business of selling pool inflatables. Very quickly after that a receiver was appointed and the business liquidated in short order. We learned that “Capitala filed suit against BigMouth April 23, claiming that BigMouth owes it $22.9 million. The amount, Capitala said in the filing, includes $20.7 million in principal on the term loan, $2 million in principal on the revolving credit, plus interest on both“.

This all happened very fast and we can’t tell from the 10-Q if the $2.4mn received in July represented the only proceeds or – as mentioned above – whether some other funds were received previously. Overall, the transaction represents a modest-sized setback for the BDC and for the Capitala Group. Unfortunately, the company seems to have been beyond saving as private equity sponsor CID Capital does not seem to have stepped in with any support, nor did Capitala seek a “debt for equity swap”.

CPTA will permanently lose close to ($1.0mn) per annum in investment income from the first lien debt lent to the company. A final realized loss will be booked in the IIIQ 2020. For our records, we have moved BigMouth from CCR 5 to CCR 6, which is the rating system we used for companies no longer held on any BDC’s books, for whatever reason. That’s why you will not find in the BDC Credit Reporter’s database of underperformers.

Great Western Petroleum: Debt Exchange Fails

We’re writing this story based on one tweet from Debtwire claiming that Great Western Petroleum’s planned debt exchange has fallen through and the beleaguered company is being helped by a major bank to find a private credit alternative. If correct – and we have no reason to doubt the author or the publication, that will be yet another setback for the company’s attempts to reshape its balance sheet and increases the risk of a Chapter 11 filing.

We first wrote about Great Western on April 26 2020 when first downgrading the company from CCR 3 to CCR 4 on news of the now-failed restructuring. At that point, the only BDC lender – FS Energy & Power – had only discounted its junior capital positions by a modest (7%) to (10%). Now with two more quarters of reported results our skepticism about those values has been – partly – vindicated. As of the IIQ 2020, preferred held is discounted (35%) and one of its two subordinated debt holdings maturing in 2021 is discounted by (38%). On the other hand, another subordinated debt position maturing in 2025 is valued at only (1%) below cost. These values may be based on an expectation of the restructuring occurring as planned.

As in our earlier post, given the strains on the industry and the junior status of all the BDC lender’s capital, we continue to believe a complete realized loss is possible and made all the more likely by the latest, hot off the bad news presses. With $93.3mn invested at cost, this a material exposure for much battered FS Energy & Power. We continue to believe a default is likely, retaining the company on our Weakest Links list.

Alternative Biomedical Solutions: Restructured

The BDC Credit Reporter believes privately-held Alternative Biomedical Solutions LLC, a Centre Lane Partners portfolio company, was restructured in the IIQ 2020. We did not find an official announcement but a review of Capitala Finance’s (CPTA) 10-Q suggested some of the 2022 Term debt due the BDC may have been converted into Preferred stock and warrants were issued. Total exposure by CPTA dropped by a third, suggesting a possible realized loss of ($6mn) in the period but that’s not explicitly confirmed in the 10-Q.

Unfortunately, all our information is from CPTA’s results and cannot address the company’s overall balance sheet or what other lenders – if any – might have done. Furthermore, we don’t know if the sponsor made any capital contribution as part of the restructuring. The company had been underperforming since the IQ 2018 and in 2019 CPTA revealed trailing EBITDA had been headed lower but was stabilizing. As of the IQ 2020, the company’s debt was carried as non performing by the BDC.

As a result of the restructuring, we have upgraded the company from CCR 5 to CCR 3. The remaining debt is valued by CPTA at par, as well as the new preferred. The original $0.800mn in equity remains valued at zero. Total cost is $13.1mn and FMV $12.3mn.

We are keeping the company on the underperformers list despite the restructuring, both because the equity remains valued at zero and due to the recent non accrual and need for restructuring. We hope to learn more in the future.

Isagenix International, LLC: Capital Infusion By Owners

Did the cavalry arrive in the nick of time at Isagenix International LLC ? On almost the same day as Fitch Ratings suggested the company might default before year-end, a press release indicates the principals of the company have injected $35mn in new equity capital. Moreover – but with less specificity- we learn that the existing lenders to the troubled company “have reconfirmed their support for the business with an amendment to their credit agreement, which will give the company greater flexibility for growth“.

That’s just as well for the 6 BDCs with an aggregate of $35.6mn in first lien loans to the company. As of June 2020, the debt was being discounted by (60%) or more. The debt – priced at a moderate LIBOR + 575 bps – was poised to be added to the BDC Credit Reporter’s Weakest Links list. We’ll hold off for the moment. By the way, the principal debt holder amongst the BDCs involved is non-traded Cion Investment with $13.4mn at cost; followed by Crescent Capital (CCAP) with $6.3mn and then by sister funds Main Street Capital and HMS Income Fund, both with $5.7mn.

We will retain the current Corporate Credit Rating of 4 till further details are made available and we hear more about the financial performance of the closely-held weight loss company. Nonetheless, the news of the capital support must be a positive for everyone involved. Although we’re writing about Isagenix for the first time here, the company has been underperforming since the IIQ 2019, first with a CCR 3 rating and CCR 4 since IQ 2020. Maybe this capital infusion will be what it takes to return Isagenix to the ranks of normal performance.

Houghton Mifflin Harcourt: Downgraded By Moody’s

Moody’s has downgraded education publishers Houghton Mifflin Harcourt Publishers (“Houghton” or “HMH”) to Caa1 from B3. Here’s an extract from the press release on the subject:

“The downgrades reflects Moody’s expectation of a sharp decline in revenue in 2020 caused by budgetary constraints and likely deferrals of purchasing decisions by school districts amid the coronavirus pandemic, which will lead to HMH’s earnings decline and a spike in leverage in the next 12-18 months,” according to Dilara Sukhov, Moody’s lead analyst on Houghton Mifflin. “Meaningful rebound in the company’s performance in 2021 is unlikely given the potential educational funding pressures at state and local level, making it difficult for HMH to achieve earnings growth that is necessary to reduce its very high leverage and generate positive free cash flow”

BDC exposure is modest ($8.9mn) – all in first lien debt) and limited to Oaktree Specialty Lending (OCSL) and non-traded Guggenheim Credit. We are downgrading the company – given that the current rating is in the speculative spectrum and industry conditions are clearly difficult – to CCR 4 from CCR 2. Nonetheless, Moody’s suggests the company is in no immediate danger of liquidity crisis or default so we’ll leave Harcourt off the Weakest Links list.