On June 26, 2020 Mood Media announced that it has entered into a comprehensive Restructuring Support Agreement with certain of its lenders, noteholders and equity sponsors on the terms of a “prepackaged” financial restructuring plan that will reduce the Company’s debt by $404 million. The company also indicated that – after soliciting creditor approvals – a Chapter 11 filing would ensue in Texas in late July.
“In connection with the expected court-supervised process, the Company has received a commitment for up to approximately $240 million in new financing, including $40 million of new capital, from HPS Investment Partners, LLC and other first lien term loan lenders. The new financing will be subject to Court approval and, together with cash generated from the Company’s ongoing operations, is expected to provide ample liquidity for the Company to continue operating in the ordinary course during and after the contemplated court-supervised process“.
Unfortunately, this is another major set-back for BDC lenders, with total outstandings at $120mn at cost divided over three BDCs: FS-KKR Capital (FSK); FS-KKR Capital II (FSKR) and non-listed Business Development Corporation of America.We expect more than ($100mn) will shortly be written off. Even at March 31, 2020, the aggregate value had been cut in half to $57.5mn and the 14.0% second lien PIK debt held by the FS-KKR BDCs had been placed on non accrual, and their equity positions (from an earlier restructuring) written down to zero. Only BDCA – mostly invested in the first lien debt – may salvage some capital. What’s impossible to tell as yet is whether one or more of the BDCs will be involved in the new financing, stretching out this long sad relationship with Mood Media, which dates back to 2011 for FSK.
Mood Media is part of the “First Wave” of credit defaults, already deeply in trouble before Covid-19 caused virtually all its customers to close and not need piped-in music. In fact, Moody’s has had the company rated “speculative” since 2018. More recently, the ratings group wrote this in June 2019 : “With only $18 million of cash on the balance sheet, no available external liquidity sources, and covenant cushion erosion owing to step downs in 2019 and 2020, a more fulsome balance sheet restructuring or other default is highly likely over the next 12 to 18 months“. All this way before Covid-19. In other words, the company was an accident waiting to happen.
Yet, the BDCs involved carried their debt outstandings at or above par and had only reduced the value of their equity holdings by (50%) as of IIQ 2019. This suggests – and is consistent with many prior examples – that BDC valuations can often seem wildly optimistic or a little foolish with the benefit of hindsight. This makes relying on stated asset values difficult. For our part, if we hear the word “speculative” from a ratings group we’re going to apply a CCR 4 rating right away.
In any case, where the BDC Credit Reporter is currently concerned Mood Media remains CCR 5 or non-performing. When an actual bankruptcy occurs we’ll add the name to that ever lengthening list, probably next month as scheduled. We expect to hear more about the details of the restructuring and the way forward from Mood Media shortly but are not optimistic that the substantial losses we’ve predicted versus the value at IQ 2020 will change much for the better.