1888 Industrial Services: IQ 2020 Valuation Update

We’ve discussed oil services company 1888 Industrial Services before and the opaque nature of the business reporting and valuation we get from the BDCs involved. Now IQ 2020 results have partially been filed, we can now compare how Medley Capital (MCC) and Investcorp Credit Management (ICMB) are treating their debt exposure to the highly troubled company, caught up in the drastic drop in energy related activity. MCC has written to zero two tranches of 9/30/2021 Term debt, and both are on non accrual. To confuse matters another tranche is still accruing income and is fully valued. By contrast, ICMB has 4 tranches of the same debt (or seems to on paper) and none are carried on non accrual and all but one are fully valued. One tranche, though, has been written down to $4.1mn from $8.0mn in this most recent quarter.

ICMB’s manager did discuss the latest performance at the company in general terms, maintaining an optimistic tone:

1888 is operating in the same challenging environment as Liberty and ProFrac [two other oil services portfolio companies], driven primarily by decrease in the rig count. With activity in the Permian Basin essentially coming to a halt, they have been focused on cutting costs and maintaining the most important relationships. They are also the beneficiary of funds under the PPP loan program, which will help offset some of the operating costs.1888’s forecast currently shows this company will have adequate liquidity through 2020 at the current oil price levels. We believe the company is doing all the right things to ward this storm“.

The BDC still values its mix of different debt tranche and equity exposure at $12.5mn on $16.3mn invested at cost That’s a discount of less than a quarter overall. By contrast MCC’s discount of its exposure is three times as high. Furthermore, we note that all the income ICMB is booking is in Pay-In-Kind form, given the company’s underlying cash needs, but not a reassuring factor.

The BDC Credit Reporter has already downgraded the company in our rating system as much as we can. However, we’re now reducing our estimate of likely proceeds that will occur at the end of this long and winding road. At the moment we expect only 50% of the $62mn invested at cost by 3 BDCs (non-traded Sierra Income is also invested) to be recovered. This suggests that ICMB still has further write-downs coming whether realized or unrealized. Even receiving PPP monies can only be a temporary relief. In fact, most of the benefit from that move will have faded by the end of the IIQ. There’s nothing in the most recent industry trends that provides any encouragement either. Even at a 50% final loss we may prove to be too sanguine…

We hope we are wrong, but the company – and the capital invested at all levels of the capital structure – seem headed to a seemingly inevitable bankruptcy, which could be Chapter 11 or 7. Most at risk at this point is ICMB for whom 1888 Industrial Services is one of their single largest company exposures. Understandably, that may explain an optimism that seems unfounded to those of us on the outside looking in.