AGY Holding: Second Lien Placed On Non Accrual

During the BlackRock Capital (BKCC) IIIQ 2019 Conference Call on October 31, 2019 , we learned that the $24.2mn second lien loan in AGY Holdings, subsidiary of KAGY Holdings, has been placed on non accrual. No date was given. The reason for the move was given by BKCC as the need to “fund various initiatives at the business at this time. And so it does reflect sort of things going on in the business that are generally operational things that we wanted to do“.  BKCC is both investor and lender, with another $24.8mn in first lien debt still current.

With this move BKCC reduces the FMV of its second lien debt at one fell swoop from a discount of (1%) to (29%) and loses ($2.9mn) of annual investment income. That’s a material impact on BKCC: 3.7% of Investment Income and almost 8% of Net Investment Income. Should the first lien debt go the way of the second lien and the $11mn of equity and Preferred, written to zero, the loss of income would be even worse. Overall, BKCC has invested $60mn in KAGY/AGY, and still values the investment at $42mn.

We have found very little information about the glass yarn manufacturer but Advantage Data records and the occasional word from BKCC management indicates this has been a troubled credit since 2012 and has been restructured before with only limited results so far. We have to at least consider the possibility that this could yet turn out to be a complete write-off given that the common stock and Preferred have no value and the second lien has just been discounted.

The other BDC with exposure is sister fund BlackRock TCP Capital (TCPC) with $16mn invested at cost. Included therein is $8.6mn at cost in a $10.3mn second lien tranche identical to that of BKCC. If that’s placed on non accrual as well, $1.1mn of annualized investment income will be affected. The investment was carried at a big premium last quarter so the unrealized depreciation involved could be material.

For our part, we had carried KAGY Holdings in the under-performing group at CCR 5, due to the non-accrual on the Preferred. However, we’d left AGY as “performing” and a CCR 2 rating. In the absence of third party information, we were led by the high valuations given the company for both its first and second lien debt. That was too generous. We’ve now rated the second lien as CCR 5 (Non Performing) and the first lien at CCR 4 (Worry List). Fool me once, etc.