Last time we wrote about AGY Holding Corp in May 2020, we darkly warned that “caution is warranted. Forewarned is forearmed“. This was not a very bold statement as at the time the company had been on partial non accrual since IIIQ 2019. Still, the two BlackRock public BDCs, BlackRock Investment (BKCC) and BlackRock TCP Capital (TCPC) were continuing to carry first lien obligations as current and at full value.
Now we hear from TCPC on its IIIQ 2020 conference call that the company has been restructured. Apparently, all the debt has been sold for a nominal amount and the TCPC and BKCC left with small preferred stock positions with little immediate value. Furthermore, TCPC has booked a realized loss of somewhere between ($16.5mn and ($18.0mn). Just from last quarter, the FMV of the BDC’s exposure has dropped by ($4.0mn).
Management put a brave face on the subject but the truth of the matter is that the company is an almost complete loss for the BlackRock BDCs, with over ($70mn) in capital invested likely to be written off. In an even worse position than TCPC is BKCC, which was showing $57mn invested at cost as of June 2020. The coming realized loss is greater than 12% of all the losses BKCC has booked over its long history. Even the loss of net book value per share between this quarter and June will knock about ($0.20) out of BKCC, or about (4%).
The amount of investment income lost is over ($8.0mn) on an annual basis, some of which was still being taken into income all the way through June and – maybe – beyond. Now the realized losses have been booked, per our system, we are upgrading the remaining preferred investment in a restructured AGY to CCR 3 from CCR 5. However, judging by the $0.5mn left on TCPC’s books as a preferred stock investment from the IIIQ 2020 on, the size of the public BDC exposure may not be material by the BDC Credit Reporter’s standards and may get dropped from coverage.
To conclude by stating the obvious, the amount of the AGY loss – and the very high discount to cost involved – represents a serious setback for both BDC lenders. The problem appears to have been an increase in the cost of one critical ingredient in AGY’s business which management and its lenders never found a way around over a multi-quarter period of distress. As is often the case in this situation, the BDCs have been slow to write down the value of their failing investment. Even when the first non accrual occurred, the combined FMV was still $57mn versus a cost of $64mn. Roll forward one year and another $50mn plus has received the ax.