The BDC Credit Reporter tracks under-performing BDC-financed companies. However, any given company on our list may have debt or equity investments that are performing normally and some that are not. That’s just to explain that Abaco Energy Technologies – which is rated CCR 3 on our five point scale – repaid its 2020 Term Loan, but remains under-performing. The debt – which is publicly traded – had been valued at or close to par in recent years and has been now been called in as of mid-October 2019. (As usual, that’s a bitter-sweet proposition for the lenders, who’ve been involved since 2014. The sweet is getting repaid in full. The bitter is losing a high yielding first lien loan priced at LIBOR + 950 bps).
Notwithstanding the debt pay-off Abaco remains on our Under Performers List as the two non-listed BDCs which held the 2020 debt also have common stock and preferred invested in the company. To confuse matters more, the equity is valued – as of September 2019 – at a (62%) discount to cost. However, the BDCs also hold a preferred position, valued at 880% of cost. In fact, the fair market value of the common and preferred combined is greater than its cost. (The preferred was added in mid-2017 in some sort of restructuring and has obviously gained greatly in relative value).
Nonetheless, we continue to be worried about the future of Abaco for three reasons. First, the values of both common and preferred were marked lower in the latest period. That’s a two quarter “trend”. Second, S&P and Moody’s downgraded the company in the year, based on concerns about the ability to repay the Term Loan and a Revolver – both subsequently accomplished – but also about its fundamental performance. Now Moody’s has withdrawn its ratings with no debt to evaluate but that does not change the fact that Abaco remains a small company with a “narrow product scope”. Finally, just in case we need to be explicit, the company operates in an industry segment under considerable strain at the moment and with no reprieve in sight.
So we are maintaining a CCR rating of 3 for FS Energy & Power and FS Investment Corp II‘s $12mn of equity and preferred exposure at cost. Remember that FS Investment Corp II may shortly become a public company. Still, the amount of capital at risk is modest by comparison with the size of these two BDCs and given that no income is being generated, there is little to lose if Abaco’s future performance deteriorates.