AGY Holding: Second Lien Loan Discounted

The BDC Credit Reporter first wrote about AGY Holding back in November 2019 when its BDC lender – BlackRock Capital (BKCC) – placed its second lien debt on non accrual. (There’s also a first lien loan which – then and now – remains performing). Two quarters later – and in the early days of Covid-19 – BKCC has almost completely written down that second lien exposure to just $0.5mn from a cost level of $24.5mn. That represents ($16.7mn) in fair market value lost in two quarters since our first mention.

BKCC sought to explain what’s happening at the company on its May 7, 2020 conference call in these terms: ” At AGY, that is a company that — the top line performance of that company has continued to hold up, but profitability is under pressure, as we have discussed before, due to a significant and atypical spike in one of the metals used in their production process. And so that has impacted profitability, which then impacted the valuation of the business in the market“. That’s instructive but not conclusive in any way.

Till we learn more, the BDC Credit Reporter is getting more concerned about the nearly $32mn in first lien debt to AGY Holding held by BKCC and sister BDC BlackRock TCP Capital (TCPC). That’s still accruing income for both lenders at 12.00% or $3.8mn of investment income annually. Note, though, that the income is Pay-In-Kind.

Furthermore, given the importance of the company to BKCC as a “Control” investment, we have access to summary results in the filings. These show sales flat but a Net Loss of ($63.3mn) in 2019. Compare that with 2018 where the loss was “only ($2.7mn). Furthermore, the $11mn invested in the equity by BKCC in the parent – KAGY Holding – remains written down to zero as of 3/31/2020. These are obvious red flags and pre-date any Covid-19 impact…

We do not have enough information to value the first lien debt – which BKCC and sister BDC TCPC – have been carrying at par or better. Common sense, though, suggests caution is warranted. Forewarned is forearmed.