AAC Holdings: Files Chapter 11

On Saturday June 20, 2020 AAC Holdings (dba American Addiction Centers) filed for Chapter 11 bankruptcy protection, ending a year and a half long “will they ? won’t they ?”. AAC Holdings, according to news reports, listed $517.4mm of total debts against $449.4mm of total assets. The company is planning ahead for the next phase, having arranged $62.5mn of debtor-in-possession financing from its lenders. Other details are still sparse including any agreed amount of debt forgiveness. We’ll circle back later with those details later.

The BDC Credit Reporter has been skeptical of the company’s ability to remain a “going concern” for some time. We’ve written nearly a dozen articles about AAC dating back to early 2019. At the time of the filing, we already rated the company as non performing – CCR 5 – as several BDCs had already ceased booking any investment income from the first lien senior debt. Total exposure is currently $69.9mn (using IQ 2020 numbers), all in debt of one kind or another. Some debt tranches are recent – and were advanced to support the business and are carried as income generating. The original debt, though, has been non performing since the IIIQ 2019.

The BDCs involved include Main Street Capital (MAIN), its sister non-traded BDC HMS Income and Capital Southwest (CSWC), which has a strong relationship with the other two BDCs. The biggest individual position, though, is held by New Mountain Finance (NMFC). For some reason, NMFC’s $25mn 2022 Term Loan position was still accruing income through March 21, 2020, involving close to $2.5mn of investment income that must now be interrupted.

How much the BDCs might lose in this Chapter 11/restructuring and whether lenders will become owners and advance even more monies is not yet known. We can report that at 3/31/2020 the total unrealized write-down was (37%), or ($25.7mn). If the over-optimistic BDC valuations in the past are anything to go by, final losses could be even higher than what’s already booked and the impact on income (especially for NMFC) will be material.

For our part, AAC Holdings retains its CCR 5 rating, but the company is removed from our Weakest Links list after many months of our crying wolf, and is added to the BDC-financed company Bankruptcy list. This is the 9th BDC bankruptcy in June, and the 26th in 2020. By both cost and fair market value this is the 8th largest BDC bankruptcy in the year.

By no means do we believe this will be one of the last posts we’ll be writing about AAC. We get the feeling a debt for equity swap is in the cards and the BDCs on the books will be involved for many more years to come and the amounts of capital deployed will yet increase, possibly to over $80mn.