ASC Ortho Management Company: Added To Underperformers

ASC Ortho Management Company, which also does business as Washington Spine Institute and OrthoBethesda is a health-care provider of musculoskeletal care to patients in the greater Washington, DC market. Based on a website search, we’ve noted that the company’s clinics – due to Covid-19 – have been discouraging office visits since mid-March and – in all likelihood – postponing all but the most essential surgeries. The company is owned by PE group Atlantic Partners and financed by three different BDCs who have provided a total of $25.7mn of a mix of first lien debt , second lien debt (all in PIK) and equity. At year end 2019 an unused Revolver was also available. The BDCs involved are Capital Southwest (CSWC), as well as Main Street (MAIN) and non-traded HMS Income.

Without much more information than we’ve shared above, we’re adding the company to the Underperformers list on the common sense assumption that revenues will be greatly impacted by the indirect impact of Covid-19. Given that the company is highly leveraged and the BDCs involved have significant amount of junior capital at risk, this might result in a lower valuation at March 31, 2020. We are initiating coverage at a CCR of 3, down from CCR 2. As of IVQ 2019, all the debt was valued at par, but the equity stake was discounted by (24%) for a second quarter in a row.

We will be focused especially on CSWC, which has half the overall exposure, including the riskier second lien ($3.6mn and all paid with PIK) and a sliver of common equity. Reassuring is that the company does have access to the Revolver and the support of a well known equity partner and that there is nothing fundamentally wrong with the business or its long term prospects because of Covid-19. This might well return to performing status in the second or third quarter. We shall see.