Akorn, Inc.: May File Chapter 11

This came out of left field for Akorn,Inc.’s debt and common stock holders. Sort of. The company – which has been the subject of numerous lawsuits – has been in a standstill period with its lenders since May 6, 2019. The idea was that the company and lenders would arrive at a “comprehensive amendment to the Term Loan Agreement” by December 15, 2019. By the deadline no agreement had been reached and the standstill was extended a few days ago to February 7, 2019. However, in the 8-K filing where this extension was memorialized, the company admitted one of its possible alternative solutions was a Chapter 11 filing. All hell broke loose and the common stock price dropped (28%) on the day. The volume of shares traded was 12x the normal volume.

To this point, we had rated the company as performing as expected, or CCR 2. After all, it’s only BDC lender – Garrison Capital (GARS) carried its 2021 Term Loan at only a modest (7%) discount to par as of September 30, 2019. Absent any other adverse information, the BDC Credit Reporter typically does not add any company to the under-performers list without a downward move on debt held by (10%) or more. Clearly, we had missed the standstill agreement, which normally would have been a red flag and caused a downgrade to under-performing.

Now, we’ve skipped down two levels to CCR 4 (Worry List), based both on what Akorn said in the 8-K and the tight deadline the lenders are giving the company, which suggests the parties are not close to a satisfactory resolution. Some $854mn in debt could immediately come due and payable at any time…

We can’t imagine that if the company does file Chapter 11, the GARS debt – besides becoming non-performing – will not drop further in value. The loan is being charged at LIBOR + 625 bps, increased from two quarters before as compensation for the standstill. If Akorn files for Chapter 11, $0.160mn in annual investment income will be interrupted. This is likely to accelerate very quickly – either to a resolution or a filing – so stay tuned.