An August 22, 2019 article about Lannett Company on Seeking Alpha is a useful summary of the bear case about future business prospects. For our part, we were intrigued by the argument made that the company is “dangerously leveraged at 5.8x adj. Net Debt to EBITDA and just 1.76x interest coverage”. This mirrors earlier concerns expressed by Moody’s last year when the company’s corporate and debt ratings were all downgraded following the loss of a major contract.
As of the IIQ 2019, the two BDCs with $9mn of aggregate exposure are Oaktree Strategic Income (OCSI) and Oaktree Specialty Lending (OCSL) in two senior debt loans maturing in 2020 and 2022. The biggest discount is modest – (6%) – but we have placed Lannett on our under-performing list in the Watch category (CCR 3) since the IIIQ of 2018 regardless, due to the concerns reflected above about high leverage and business reverses. As of now, the 2022 debt – which is publicly traded – remains valued at the same discount as of June 2019. However, that could change and $0.700mn of income is at risk. Neither BDC has a substantial exposure (although OCSI has the proportionately much bigger position and in the riskier 2022 loan) , but still deserves mention.