A few days ago, when Oxford Square (OXSQ) was holding its conference call, an analyst noted that the number of non accrual companies on its books had increased from 1 to 2. When asked who the new non-performer was, management demurred, pointing to the soon-to-be-published 10-K for the answer. Now that filing has been made, we now know the new non-accruing company was Imagine! Print Solutions (aka The Imagine Group). The BDC has invested $14.9mn in the second lien debt – which has been on our underperformers list since IIQ 2018 and was rated CCR 4 most recently, as OXSQ discounted the position by (51%) as of the IIIQ 2019. In light of what we’ve learned, the company credit rating has been dropped to a 5 our our 5 point scale.
Now the 2023 Term Loan has been placed on non accrual, and the discount increased to (85%). OXSQ may have been reticent to provide information but we know Moody’s downgraded the already speculative grade company to Caa3 from Caa1 in December 2019. This extract from Moody’s report should provide a sense of what is going wrong: “The company’s revenue and profitability significantly declined in 2019, driven by the loss of a material customer and significant weakness in its Midnight Oil subsidiary. This resulted in very high financial leverage on a debt/EBITDA basis of 9.1x for the twelve months ending October 2, 2019, up from 6.1x at the end of fiscal year 2018“.
Clearly the company is highly likely to file for Chapter 11 or restructure shortly. Chances are the second lien will not survive any remaking of the company’s capital structure. OXSQ will be losing ($1.6mn) of annual investment income permanently in the most likely scenario. We should note that non-traded Audax Credit BDC has a small $1.4mn position in the company’s 2022 first lien Term Loan, discounted only (15%) at 9/30/2019. However, judging by the parlous condition of the borrower and looking at Advantage Data’s Middle Market Loans pricing module at time of writing, the current discount may be (60%).
It’s no wonder that OXSQ’s management may not have wanted to engage in any discussion of Imagine, as the final outcome for the BDC and – to a lesser degree- for Audax , seems pretty grim.