On August 9, 2019, news reports indicated Joerns Healthcare Inc. has had its restructuring plan approved by the bankruptcy court. As we wrote earlier, the company had filed for Chapter 11 back in July. One of the BDCs involved – Main Street Capital (MAIN) – had indicated as much on its Conference Call :
” Joerns is, basically, liquidity squeeze based on transition of the business from a sale model more than rental business. And from a capital structure perspective, we need to equitize the debt. That company entered bankruptcy in the second quarter, and we expect to exit here in the next 15 to 30 days with a restructured balance sheet”.
Joerns is wiping out $320mn in debt out of $400mn, according to news reports. In addition, the company is gaining $40mn in fresh advances. Looking at the (45%) discounts being taken by the unitranche lenders in the IIQ 2019 valuations, BDC losses on the $28mn of exposure will be significant. With those lenders becoming equity holders – a Golub representative will be sitting on the Board , amongst others – investment income from the original capital will be greatly reduced. There was $2.8mn of investment income spread amongst MAIN, Golub Capital (GBDC) and HMS Income. That’s all been suspended since July and is likely to resume by the end of September. When interest income does resume, the amount may be 50%, or more, lower.
Nor is the company out of the woods. The CEO has left and the new lender-owners are out seeking a replacement. This will be another test of whether lenders – including several well known BDCs – are well suited to “turn around” their own failing companies.
Also noteworthy is that the BDCs involved were marking this credit at only modest discounts to book until IVQ 2018, when all 3 discounted the unitranche loan by a tenth. Two quarters later the debt is on non accrual and written down 4.5x more…However, we read in a trade article that the company was in default under its debt from 2018, and much was happening behind the scenes to attempt a rescue. All of which ultimately failed to get traction and resulted in the pre-packaged deal with the unitranche lenders. This big a haircut, though, indicates the lenders underwriting was far too generous, and the timing of the write-downs suggests the BDC’s shareholders were being kept out of a loop that they deserved to be included in.
On the plus side, these are losses the BDCs involved can absorb on an individual basis without too much difficulty. For example, the amount MAIN invested at cost is equal to 0.5% of its total assets. Still, this a serious credit reverse for what was envisaged as a low to mid risk loan, priced at LIBOR + 6.00%.