On occasion, there are credit evaluations where the BDC Credit Reporter differs in its assessment materially from the BDC’s internal evaluation and even from that of the market. This is the case of public recruitment company GEE Group (ticker: JOB). The only BDC with exposure is Investcorp Credit Management (ICMB), which has $11.3mn invested in the company’s 2021 Term Loan. ICMB at September 30, 2019 valued the debt at par. The loan is itself publicly traded and is priced currently at or above par.
The BDC Credit Reporter, though, does not share the complacency about the value of the debt and its repayment in fifteen months. Given that GEE is a public company, we’ve been reading the quarterly filings regularly, which indicate a slow, but definite, downward business performance. We’ve just reviewed the latest 10-K for the year ended September 30, 2019, which only confirmed our earlier concerns. Sales were down, Adjusted EBITDA was down and the latter was insufficient in the last quarter of the fiscal year to even cover interest expense. Net Losses on a GAAP basis were ($17.8mn), higher than ($7.7mn) the year before.
To add fuel to our concern, the company has many layers of debt and in the 10-K admitted to having needed to amend its debt facilities 6 times to avoid defaults. Here is the disclosure from the 10-K about the latest concession by lenders: “On May 15, 2019, the Company and its subsidiaries, as Borrowers, entered into a fifth amendment and waiver (the “Fifth Amendment”) to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”). Under the Fifth Amendment, the Company and its Lenders have negotiated and agreed to a waiver for non-compliance with the financial covenants under the Credit Agreement as of March 31, 2019, and amendments to the financial covenants and to the remaining scheduled principal payments“.
The company has just $4.1mn of cash and $0.5mn available under the Revolver but needs to pay $6.5mn in the 2020 fiscal year in principal payments. An even bigger hill to climb will be refinancing the Revolver and Term Loan in March 2021. Remarkably, GEE Group is paying yields of 17%-19% on the Revolver and close to 20.0% on the Term Loan. We won’t even discuss the more junior debt. As to the value of the company’s stock : it’s dropped to $0.40 a share, down (52%) in the last year.
For ICMB, a stumble here would be expensive as the loan pays out interest equal to 15% of the BDC’s annual net investment income and the amount outstanding is equal to 8% of book value. That’s why a proper evaluation of the credit risk here – which we’ve rated CCR 3 but probably should be moved to CCR 4 – is so important. We hope we’re wrong but everything points to a liquidity crunch in calendar 2020 and – possibly – a move to non accrual. We hope we are wrong and ICMB and the market is right, but there are just so many red flags…