Community Intervention Services: IVQ 2019 Update

Community Intervention Services is a PE-owned dependency treatment center chain that has attracted BDC financing as far back as 2015. The two BDCs involved were Triangle Capital, whose loan was acquired by Business Development Corporation of America (BDCA) some time ago when all its assets were sold to the non-traded BDC; and OFS Capital (OFS).

The initial subordinated loan facility was led by Triangle Capital and OFS was a participant, according to the latter. At the height, the two BDCs had $25.7mn invested in the company, but that’s down to $7.6mn at December 31, 2019. That’s because BDCA wrote off its entire investment back in 2019. OFS continues to have the $7.6mn at cost outstanding on its books.

However, the company has been on non-accrual since 2016 and the investment written to zero since 2017. That’s due to one of the company’s subsidiaries being caught up in a medical fraud case – a very familiar story in the healthcare sector. For some reason OFS has not followed the lead of its BDC peer and booked a realized loss as yet. We do know quite a lot more from periodic updates by OFS on conference calls over the years, but given that the investment is unlikely to ever be worth anything, we won’t revisit what has become ancient history in credit terms.

However, the BDC Credit Reporter has to assume OFS will eventually write off its position and the company will be removed from the list of BDC funded companies. At the moment, though, Community Intervention Services is an example of a “zombie” investment, of which there are many in BDC portfolios as lenders wait for final resolutions on investments gone bad.

The good news from the OFS perspective – at least – is that the company can have no further impact on its income or book value, except to increase its realized loss column when the time is right. The bad news is the reminder to BDC debt investors that debt investments can result in 100% losses when things go awry, as happened here.