AAC Holdings: Lenders Terminate Forbearance

In an 8-K on January 16, 2020 treatment center operator AAC Holdings Inc. announced that its banks had terminated a Forbearance Agreement that had been in place since October of 2019, and were exploring all options regarding defaults under their credit agreement. In fact, the break-up occurred on January 9, with the delivery of a notice by the lenders, headed by Credit Suisse.

The BDC Credit Reporter has written about the troubles at AAC – also known as American Addiction Centers – eight times, starting in April 2019 and – most recently- on October 25, 2019 when the forbearance was agreed upon. Throughout, based upon our review of the company’s publicly available financial statements and due to the ever lower stock price, we’ve been pessimistic about the likelihood of AAC Holdings being able to right its own ship without a restructuring or bankruptcy. With this move by the lenders, our thesis seems ever more likely to be realized.

Not helping is that the falling out with the lenders was – if this latest filing is to be believed – triggered by ” the failure of the Company under the Forbearance Agreements to have provided the Forbearing Lenders with a three-year business plan for the Company“. There’s more going on because the company also announced – in a highly unusual or even bizarre move – the “conditional resignation” of its CEO. We’ll quote from the release to leave no doubts as to the situation:

On January 8, 2020, Michael T. Cartwright, Chairman of the Board of Directors (the “Board”) and Chief Executive Officer of AAC
Holdings, Inc., a Nevada corporation (the “Company”), delivered to the Board his conditional resignation as Chief Executive Officer.
Mr. Cartwright’s resignation as Chief Executive Officer will become effective only upon (i) the Company entering into amendments to its two
previously reported forbearance agreements, each dated October 30, 2019, entered into between the Company and the lenders under the
Company’s two primary credit facilities and (ii) the Company receiving $10.0 million of incremental funding under the Company’s previously
disclosed credit facility entered into by the Company in March 2019. Mr. Cartwright currently intends to remain as Chairman of the Board.
Also on January 8, 2020, the Board appointed Andrew W. McWilliams, the Company’s Chief Financial Officer, to serve as Chief Executive
Officer, commencing upon the effectiveness of Mr. Cartwright’s resignation, as described above.

As the AAC Holdings credit story becomes more confused, we remind readers that BDC exposure is material: $66mn at cost spread over 4 BDCs, three public and one non-listed. The public BDCs are Capital Southwest (CSWC); Main Street Capital (MAIN) and New Mountain Finance (NMFC). The private BDC is HMS Income, which is managed by MAIN. The debt is in the company’s 2020 and 2023 Term Loans and three BDCs marked their positions as being on non accrual from the IIIQ 2019. The FMV totals $56mn, leaving plenty of room for further valuation losses.

This is publicly traded debt and we’ve checked Advantage Data’s Middle Market Loan marketplace and found the 2020 Term Loan still valued at par by the market and the 2023 discounted (25%), only slightly lower than at 9/30/2019. Nonetheless – re-iterating the position we’ve held for some time – we have little hope that the company can avoid bankruptcy/restructure for much longer, and we expect ultimate recoveries to be lower than current valuations. Most immediately at risk for the BDC lenders is receiving any investment income. In total, there’s nearly $10mn of annual interest in play over all facilities. According to Advantage Data records, the BDC with the greatest dollar exposure is NMFC with nearly $25mn at cost, but all in the 2020 debt. Tied for most at risk in the 2023 Term Loan is MAIN and HMS Income, with CSWC in third place.

We expect to be reporting back shortly on what is becoming a strange credit story and a potentially material set-back for several well regarded BDC lenders. On the other hand, we’d be the first to admit that it’s not over till it’s over.