Lignetics Inc : Initiated at CCR 3 rating

Back in late March 2020 when the debt of Lignetics Inc. – a major wood pellet manufacturer – was trading at a (20%) discount to par, we downgraded the company to underperforming from performing: i.e. from CCR 2 to CCR 3. Since then the debt discount has narrowed, but we are maintaining the 3 rating.

The company has recently raised $70mn in new senior debt financing from Fifth Third Business Capital and from its only BDC lender – Gladstone Capital (GLAD) – to fund a major acquisition that was on the cards before the Covid-19 crisis developed. Shortly after that, the enlarged company had to make entreaties to state authorities in Pennsylvania to be deemed an “essential business”. That eventually occurred and allows the business to operate “normally”, according to recent news reports.

Now back manufacturing pellet heating fuel for homes and businesses, Energex Inc.—recently acquired by Lignetics, the largest residential wood pellet manufacturer in the U.S.—and all other facilities owned by Lignetics are taking extensive COVID-19 precautions”

This will be reassuring for GLAD which is both a second lien lender and equity investor in the company, with $24mn invested at cost as of December 31, 2019. In January 2020 GLAD advanced $5.5mn more in a mixture of debt and equity. Total annual investment income – given a 12.0% interest rate on the second lien debt – is substantial at approx. $3.0mn. With many mills closing in recent days, Lignetics may not be safe yet. We shall learn more when GLAD reports IQ 2020 results in early May.