Acosta Holdco: To Exit Bankruptcy

Well, that was quick. According to the Wall Street Journal, Acosta Inc. – which is held by Acosta Holdco – is close to exiting bankruptcy just two weeks after filing. That was what expected back on September 30, 2019 months before the actual filing, when we first wrote about the credit problems of the marketing company.

Here’s what we wrote at the time, most every bit of which has turned out to be correct:

We expect the debt [of Acosta] 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 FSKFSIC 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.

In the IIIQ 2019 results, all 5 BDCs involved – with aggregate exposure of $39.7mn – placed the debt on non accrual and wrote it down between (58%) and (65%), according to Advantage Data records. (Interestingly, every BDC involved – all of whom are in the FS-KKR family and all of whom are in the same 2021 Term Loan – used a different discount percentage). What we don’t know yet is how the lenders will treat this negotiated debt-for-equity swap, but we expect to see realized losses booked if bankruptcy is exited by year end.

We know from another Wall Street Journal article – and other sources – the outline of the new structure. Remarkably, the company is having its entire debt written off and is receiving $250mn in new equity capital. That might just get Acosta off our under-performing company list, from a rating of CCR 5 (Non Performing) currently. Still, the BDCs involved will be losing roughly $2.0mn in annual investment income. They will be hoping Acosta is able to use this second chapter to become successful and earn back – one day – any realized losses incurred from this drastic restructuring. For the medium term, though, the BDC capital lent/invested in Acosta will be “dead money”.