Oliver Street Dermatology: Defaults On Debt

Right up front we have to warn that the BDC Credit Reporter is playing the “name game” here. Here’s the background: Bloomberg reported on February 5, 2020 that “U.S. Dermatology Partners has defaulted on a $377 million financing provided by a group of investment firms, according to people with knowledge of the matter“. The article went on to say the debt was funded – at least in part – by BDC offshoots of Golub Capital (GBDC); Carlyle Group (CGBD) and Ares Management (ARCC). The rub ? No such company name exists in the Advantage Data records, nor even the prior name of the business: Dermatology Associates.

After much rifling through virtual files, we’ve worked out that GBDC carries its portion of the unitranche debt – which is nominally publicly traded – as Oliver Street Dermatology and has a $27.5mn investment at cost, all but $0.2mn of which is in the May 2022 unitranche loan. At September 30, 2019 that debt was discounted between (12%) and (18%). CGBD’s exposure is even bigger ($73mn) and goes under the name Derm Growth Partners III. Like ARCC, CGBD has a sliver of equity in the company ($1mn), valued at zero. The debt – in that same 2022 unitranche loan – was discounted (30%). We’ve not been able to clarify if ARCC has any exposure to the troubled company under yet another name.

What we do know is that we placed the company on the Under Performers List with a CCR 3 rating in the IQ 2019, when the equity stake was written down by CGBD by (86%), after being carried at a 45% premium the quarter before. That kind of valuation change is what draws our attention to previously performing companies.

The rating was dropped to CCR 4 when the debt – as mentioned above – was discounted (30%), compared to (13%) in the IIQ 2019. Now, with the default, we’ll be downgrading the company by whatever name to CCR 5.

We know a little about what’s ailing the privately-held company from CGBD’s last Conference Call: “We’re working through some operational and financial performance challenges with the sponsor and the company“. CGBD, though, waxed optimistic about any ultimate outcome because “this is a first lien tranche“. Still, if we read the filings right, the interest rate on the debt has been upped by 1.0% recently and was entirely on PIK through September 2019 – typical signs of credit weakness.

Now we seem to be looking at yet another “debt for equity swap” – a favored resolution in these situations amongst leveraged lenders, who move from lender to owner, or some hybrid thereof. We’ll wait for further details before drawing any grandiose conclusions but, given the $100mn of public BDC exposure to the business – owned by ABRY Partners since 2016 – this is a story worth following.