Accent Food Services: IIQ 2020 Update

We’ve learned a little more – sufficient to put pen to paper for an update – regarding Accent Food Services. This vending machine company has been on non accrual since IVQ 2019, and performance appears to be deteriorating. Everything we know comes from Fidus Investment (FDUS), the only BDC lender to the Texas-based company and which recently published its IIQ 2020 valuation and commented briefly on an ensuing conference call. The BDC has written down its second lien and equity stake – with a cost of $35.3mn to $16.1mn. Two quarters ago when the debt first became non performing, the FMV was twice as high. In the most recent quarter the FMV dropped ($9.6)mn.

As to what is happening or not happening at the company, details are scarce. We know that management is implementing operational improvements, a process that began before the pandemic. We imagine business conditions – with so many companies closed or working at part capacity – has only compounded Accent’s problems. This is what FDUS said: “And quite frankly, the company has been impacted by the shelter-in-place orders and also its geographic locations, in particular, its biggest locations in Texas“.

We know too little – even the identity of the first lien lender and its payment status – so we can’t estimate whether Accent will pull out of this valuation dive or not. Given the second lien status, though, a complete write-off is possible. That’s why lenders like FDUS get paid a 10.0% yield: to take those junior capital risks. This is a material position for the BDC, representing over 5% of the entire portfolio at cost and about 4% of its pre-default investment income. It’s too early to tell, though, if this is going to be a significant credit setback or just a bump along the way. FDUS speaks highly of the business and the management but that’s no guarantee that all will end well.

Accent, which FDUS added to its books in 2016, has been underperforming since IIQ 2017 and was rated CCR 3 until – as mentioned – it went on non accrual at the end of 2019. We are retaining our rating of CCR 5 and an outlook of Significant Loss until we hear otherwise.