CentralSquare Technologies: Downgraded By Moody’s

On June 19, 2020 Moody’s downgraded CentralSquare Technologies – a software company – to its “Caa2” rating from “Caa1”. Both the company’s first lien and second lien debt have received a downgrade, and the outlook is “Negative”. Of greatest interest to us – because BDC exposure is limited to the 2026 second lien Term Loan – was rated just “Ca” from Caa3″. The ratings group is worried by Covid-19 impacted sales; very high leverage (above 11x debt to EBITDA !) and liquidity concerns, especially as the company appears to be generating negative cash flows and has tapped out its Revolver. That leaves only its cash to service debt and cash flow losses.

We are adding the company to our underperformers list for the first time. Even through March 31, 2020 the company’s $54.7mn of second lien debt at cost was only discounted (7.5%) by New Mountain Finance (NMFC). With this latest news we are leapfrogging our rating from CCR 2 (Performing) to CCR 4 (Worry). Just under $5.0mn of annual investment income is at risk for NMFC. The danger of that income stream is all the more at risk given that we’re adding CentralSquare to our Weakest Links list of companies greatest at risk of seeing their debt move to non performing status.

We’re playing catch up with our own rating partly because we rely on seeing BDC discounts greater than (10%) before we move a credit to underperforming status, barring any other information. We now know that even though NMFC has barely discounted its debt – held since IIIQ 2018 – Moody’s had already downgraded the company to “speculative” as far back as August 5, 2020. Even then debt to EBITDA was over 10x. If we’d been aware of the Moody’s action, we would have downgraded the company to at least CCR 3 status in the summer of 2019.

With a still weak business environment and cash possibly melting away the company may be within our crosshairs for an update sooner rather than later. We’ll also be interested to see what value NMFC places on its debt given the new Moody’s downgrades when the June 30, 2020 portfolio values are set.