Akorn Inc. : Files Chapter 11

On May 21, 2020 Akorn Inc. filed for Chapter 11. Last time we wrote about the pharmaceutical company on April 6, 2020 was to warn that a bankruptcy was coming up. The company appears to have agreed a plan with its lenders, which will involve both a debt-for-equity swap and the arrangement of debtor-in-possession financing. This ends a sorry period that included a failed sale; accusations of fraud and many other disturbing revelations. From a lender’s perspective, news that the company had “not made an annual profit in two years and generated $310 million in negative EBITDA in 2018” is the most disturbing of all. As always, we remind readers that filing Chapter 11 – especially when lenders become owners and sometimes have to ante up further funds to keep business ticking over – is just one more twist in the tale. We’ll be writing again about Akorn before long.

Thankfully, BDC exposure is limited to Garrison Capital (GARS) with only $2.0mn invested in the first lien debt as of March 31, 2020 and valued at $1.6mn. Still, the interest rate being charged was very high: over 15%, so GARS will be losing out on $0.3mn of annual investment income. A realized loss is likely to be booked in the next quarter or two once the company exits bankruptcy. We won’t even try to assess what the final results might be given the immaterial size of this position.

Otherwise, this bankruptcy falls into the category of the already walking wounded companies that existed before the Covid-19 crisis. The current conditions have not helped, but the possible wave of directly-related virus defaults has not yet hit. We are downgrading Akorn from CCR 4 to CCR 5; removing the name from the Weakest Links list now that non accrual has happened but added it to the ever longer list of bankrupt BDC-financed companies.