Moody’s has downgraded pharmaceutical preparation company Alcami Corporation (“Alcami Holdings” in Advantage Data) to a corporate credit rating of Caa2 from Caa1. The ratings group believe the underlying industry is strong, but worries about high leverage (adjusted debt/EBITDA over 10x) ; worsening liquidity and the chances the company might seek a “distressed” exchange in the near future.
There are two BDCs with “Major” exposure to the company – i.e. any aggregate amount at cost over $100mn, but 99% is held by Ares Capital (ARCC), with $145.6mn. The other BDC involved but with less than a $1mn outstanding is non-traded Audax Credit BDC. We’ll focus most of what follows on ARCC. As of March 31, 2020 ARCC held positions in two first lien term loans due in 2023 and 2025, a second lien loan and equity in Alcami. Only the last two had been materially discounted by ARCC’s valuation group: (15%) and (61%) respectively.
The BDC Credit Reporter has rated the company as underperforming with a CCR 3 handle since IVQ 2018 but only because of the discounted equity, written down (20%) at that time. Even the second lien loan was discounted only (9%) through the end of 2019. Now we are downgrading Alcami to CCR 4, as the chances of an ultimate loss seem higher than full recovery. Moreover, we’re adding the company to the Weakest Links list, based on the tight liquidity at the business and Moody’s view about a possible “distressed exchange” – something that is getting to be very common these days.
Given the size of the overall exposure, and with $112mn of exposure in the equity and second lien debt, Alcami represents a significant problem for ARCC. Total investment income at risk is close to ($9.0mn) on an annual basis. That’s roughly equal to 1% of the BDC’s annualized Net Investment Income Per Share. In the short run – unless ARCC ignores Moody’s – we expect to see a lower valuation in the second and/or third quarter valuations. Should the worse happen, a write-off of the second lien and equity is not impossible, which would drop value by ($78.6mn) from the value at the end of March. (Ironically, ARCC made a huge gain of $324mn on the sale of Alcami – inherited from American Capital – back in 2018).
In terms of investment size, this is the biggest Weakest Link added to our list – currently 28 companies long – since May 2020. We’ll be paying close attention to what’s happen next at Alcami, including peeping at how the BDC valued its positions at June 30, 2020 when those results come out shortly.