We last wrote about refrigerants distributor Hudson Technologies back in mid-2019, and we were not optimistic about the outlook for the business. We had rated Hudson CCR 4 and anticipated that a restructuring or bankruptcy filing was possible. Since then, the underlying business of the company has continued to deteriorate; the existing working capital lender (PNC) has been replaced by a new one (Wells Fargo) ; the Term debt covenants have been reset and the common stock of this public entity may shortly be de-listed from NASDAQ. Not to mention that Hudson ended the IIIQ 2019 with a “Going Concern” anvil above its head.
Nonetheless – and to their credit – Hudson is still with us. Thanks to the new facility and the amendment/waivers from its Term Lenders, the company lives to fight another day. On Seeking Alpha at least one author is projecting that “great days lie ahead” for shareholders.
We’re sorry to throw cold water on all this, but our review of the Term Loan Amendment and the attendant measures agreed between the company and its lenders does not reassure us. It’s true that the lenders – in the short term – have agreed to an incredibly high new leverage level (16.57x this quarter), but that quickly ramps down to “just” 10.67x in the following three months. Moreover – and ominously – lenders have required the appointment – at a cost of $120,000 a month – of a Chief Restructuring Officer (CRO) brought in from Grant Thornton. He took up his post on January 2, 2020. There’s much more besides that causes us to believe this is more a transition to an eventual bankruptcy or major restructuring than a good odds rescue effort within the current capital and ownership structure. This provision in the amendment illustrates what we mean:
The Fourth Amendment also adds a new covenant providing that in the event of a breach of a financial covenant contained in the Term Loan Facility or any failure to make a required principal repayment (a “Trigger Event”), then on or prior to six months after a Trigger Event, the Company shall commence a process to (x) sell its businesses and/or assets, and/or (y) consummate a refinancing transaction with respect to the Term Loan Facility (a “Transaction”), in each case, subject to enumerated time milestones contained in the Fourth Amendment, and which requires that Transaction shall, in any event, be consummated on or prior to the eighteen (18) month anniversary of the Trigger Event.
BDC exposure to Hudson is major – just over $100mn – and the debt involved (the 2023 Term Loan referenced above) was discounted (44%) at September 30, 2019, according to Advantage Data. When we hear from the FS-KKR organization about IVQ 2019 results, we’ll be interested to see if the valuation has been increased in light of the amendment. Even if it has, we will continue to be highly skeptical of the company’s odds of survival in its current form. For the BDC lenders involved – including publicly traded FS-KKR Capital (FSK) with $38.5mn at cost – there is a large amount of investment income at risk: about $12mn a year. Given that the company is public and FSK will shortly be reporting its valuations, expect to hear back from us with yet another update sooner rather than later.