Forming Machining Industries: Downgraded

On June 18, 2020 Moody’s downgraded manufacturer of complex assemblies for commercial, military, and business aircraft Forming Machining Industries (whose dba is Atlas Group) to Caa1 from Caa2. This company is heavily involved in the aerospace industry and with Boeing’s ill-fated 737 MAX aircraft. Covid-19 has not helped the situation and liquidity is weak, forcing the company to rely on drawing on its Revolver to make up for break-even or negative cash flow. As you’d expect, leverage is very high as well.

There is one BDC with exposure to the company’s first lien and second lien debt: Bain Capital Specialty Finance (BCSF). Total exposure is $23.1mn at cost and was added to the underperformers list when the BDC discounted the debt by a fifth in the IQ 2020. We calculate that about ($1.25mn) of annual investment income is at risk for BCSF. Our initial rating was a CCR 3, but now we’re downgrading the company to a CCR 4. There does not seem any immediate threat of default so we’re leaving the company off our Weakest Links list for the moment, although the backstory does not seem promising.

This is just one of 142 companies added to the underperformers list (now at 583 companies) in 2020, mostly due to the impact of Covid-19. Of those only 19 so far have slipped two investment ratings down to CCR 4. This is an example of a potential Second Wave credit default candidate – a company that was performing as anticipated before the impact of the virus on its business environment was felt, except for the troubles with the 737 MAX.

We will circle back when new information comes out. We’ve heard today (June 19) that a new CEO has joined the troubled company, so we expect some sort of turnaround effort is underway.