Acosta Holdco: Payment default expected

We’re a few days late on this major story: Acosta Inc. – a leading marketing company to major brands – is about to miss a scheduled bond payment on October 1 2019, according to the Wall Street Journal. The company has been in trouble for some time and has hired a turnaround adviser and recently been downgraded by Moody’s.

Now a restructuring is underway, which appears to be arranged in conjunction with the company’s many bank lenders and bond investors. “ The Jacksonville, Fla.-based company, owned by private-equity firm Carlyle Group , has notified its lenders and bondholders they should sign nondisclosure agreements to enter into formal restructuring negotiations in advance of an expected credit default“, according to “people familiar with the matter“.

The immediate challenge for Acosta, which is squeezed for cash, is a $31 million coupon payment due on Oct. 1 to bondholders that own $800 million in unsecured debt maturing in 2022. BDC exposure, though , is in its 9/26/2021 Term Loan. Aggregate debt at cost is $40.1mn, all held by 5 BDC funds – both listed and non-listed – controlled by KS-KKR Capital. For example, FSK has $19.1mn of debt outstanding. Total income at risk for the group is $2.1mn as the debt is priced at only LIBOR + 325 bps.

Given that the Carlyle Group is the sponsor and as you can tell by the pricing, this was supposed to be a “safer” loan, given that the income barely covers the BDCs cost of debt capital. Unfortunately, the company has been under-performing – by our standards – since the IIQ 2017. At June 2019 the debt was discounted by as much as (59%) on the various BDCs books. As of today – according to Advantage Data’s real-time loan pricing records – the discount has increased to (67%) and could go lower.

We expect the debt to be shown as on non accrual in the upcoming IIIQ FS-KKR portfolios when earnings are released and to be written down to the market level, which should cut the fair market value by at least $6mn. We’re likely to see a restructuring done relatively quickly – if past experience is any guide – and a realized loss is likely to follow but we don’t have sufficient information to estimate the extent. This is almost certainly going to be another reverse for the FS-KKR organization. Curiously FSK, FSIC III and FSIC IV appear to have jumped in relatively recently – perhaps ill advisedly seeking a bargain. Total BDC exposure jumped from $13.4mn at the end of 2017 to the $40.1mn current level. That’s a tripling of Acosta debt held.