We are posting this a little late, even though we heard about the sale of Copperweld Bimetallics some days ago from Direct Lending Deals, because we needed some time to dig into the details and the backstory. Anyway, here is an extract from Direct Lending:
“Twin Brook Capital provided $39 million in senior financing to back Kinderhook Industries’ acquisition of Copperweld Bimetallics, a Fayetteville, Tenn.-based provider of wiring products, according to sources. Twin Brook was administrative agent.The purchase was announced last week. THL Credit [TCRD] was the seller. The finance company took control of Copperweld in an October 2016 restructuring, whereby THL exchanged a $19.3 million second-lien term loan for $3.4 million of preferred equity, $9 million of common equity, a $5.4 million stub of second-lien, and $1.5 million loss. Flash forward to 2019. At June 30, the common equity was marked to market at $23.6 million; the preferred had nudged to $4 million, and the second-lien was flat, at par. Anglin Reichmann Armstrong audited Copperweld’s books in March: 2018 sales were $91.1 million. —Kelly Thompson“
This is both good news and bad news for the only BDC lender and owner -this was a Control position – TCRD. We assume the $5.4mn of debt will have been repaid at par and – depending on the price paid – TCRD will be receiving $25mn-$30mn for the Preferred and equity, versus $12.5mn invested. That could be redeployed at 10% – the current target yield – and earn TCRD $2.5mn of investment income. Also good news for TCRD is that the BDC has been successful in guiding this once non-performing credit back to health after three years, and after TCRD suffered a setback trying to do the same with Charming Charlie, an almost total write-off.
The bad-ish news is that Copperweld was already earning a 12.0% yield on both the second lien debt and Preferred, or $1.1mn of investment income. There was also a healthy dividend received from the common stock owned, which we’ve not been able to quantify. As a result, there may not be any major increase of investment income going forward and a dip in the short run till the proceeds from the October sale are re-invested, affecting IVQ 2019 results.
Nonetheless – assuming no fire sale was involved – a gold star for TCRD and a rare example of a under-performing company returning to performing (or even out-performing) status without any further losses, besides the ($1.5mn) taken in 2016.