Covia Holdings – a publicly traded “provider of mineral-based material solutions for the Industrial and Energy markets” – announced a series of financial measures intended to improve its “financial flexibility” on December 31, 2019. The most material development was the arrangement of an $85 million committed credit facility from PNC Bank. The new facility is secured by the Company’s U.S. accounts receivable. At the same time the company voluntarily canceled its $200 million revolving standby credit facility that contained restrictive covenants.
The above measures – and other actions taken as outlined in the company’s press release – are supposed to improve future results and provide liquidity. Nonetheless, substantial worries remain given Covia’s recent poor financial performance and exposure to the energy market. In fact, we added the company to the Under Performers List back in IVQ 2018, with a CCR of 3, based on a reduction in the value of the 2025 Term Loan held by the only BDC lender – Oaktree Specialty Lending or OCSL – to a discount of (28%). Subsequently the value of that debt has fluctuated, closing as of December 31 2019 of (24%).
We retain hope that the company can pull itself out of its doldrums, but note that debt to Adjusted EBITDA is very high (in excess of 10x by our estimate) and that the debt contains no covenants. The fact that Covia is raising new debt by essentially carving out valuable balance sheet assets to maintain liquidity is more worrying than reassuring for existing lenders who are essentially being pushed down the priority repayment scale.
At September 30, 2019 OCSL’s exposure – all in the 2025 Term Loan – amounted to $7.9mn, and $0.5mn of investment income is at risk. That’s a modest exposure for the public BDC (0.5% of its portfolio) and – apparently – not in any imminent danger. This article initiates our coverage in the BDC Credit Reporter. We’ll be checking back in periodically as new results are published.