Holland Intermediate Acquisition: IIIQ 2019 Update

Holland Intermediate Acquisition Corp. is a closely-held energy company which has been funded by THL Credit (TCRD) since IIQ 2013. TCRD is one of only two BDCs with exposure and essentially the only source of news about how the business is performing given that non-traded Sierra Income rarely discusses portfolio issues. Total exposure at cost is $25.6mn, 80% of which is held by TCRD. As you’d expect for a company in the energy sector, Holland Intermediate has been on the under-performing list for some time: since IIIQ 2015; based on the first lien debt being written down by more than (10%) by one of the BDC lenders.

At June 2019, TCRD was discounting its first lien debt to the company – which is the same facility as Sierra owns – by (15%). The non-traded BDC was using a materially more conservative discount of (31%). We had already assigned the company a Corporate Credit Rating of 4 (Worry List); alarmed by both Sierra’s valuation and the negative trends in the sector. At the time TCRD offered this pint-sized assessment of the company’s status: “The business continues to make progress, albeit at a slower-than-expected pace, and we’ve adjusted the value of our holdings this quarter to reflect this

In the third quarter 2019 results, both BDCs doubled the discount on their positions, with Sierra Income writing down the debt by (68%), the highest ever in any quarter judging from the Advantage Data records. TCRD increased its discount to (35%). From TCRD’s Conference Call on November 5, 2019 we learned that the BDC is “closely monitoring” the company. The color offered on the call was as follows: “The business continued to face market headwinds this quarter due to overall reduced M&A activity in the energy space, and was marked down accordingly“.

Obviously, these are clear signals to be concerned about, even if the underlying business reason is not clear. We also worry about whether the debt – which is coming up to its maturity in May 2020 will get repaid. The loan is priced at an expensive – but not inordinate – LIBOR + 900 bps. AD’s records show, though, that this loan just refinanced the lenders original loan booked in 2013, which had a 5 year maturity, in 2018. When lenders refinance a medium term loan with a much shorter time period that’s usually sign of stress. We may see another short term loan with the same lenders occur in the first half of 2020. However, if things go awry and a default occurs, there is a material $2.8mn of investment income at risk. We’ll be updating the Holland Intermediate story every quarter when we hear from TCRD, or if we learn something from the public record which – to date – has offered no clues.