AAC Holdings: Completes Restructuring

The BDC Credit Reporter write about AAC Holdings, Inc (aka “American Addiction Centers”) a lot. This is our eleventh update and will not be the last. Last time we wrote – back on June 21, 2020 – we concluded in this way: “We get the feeling a debt for equity swap is in the cards and the BDCs on the books will be involved for many more years to come and the amounts of capital deployed will yet increase, possibly to over $80mn“.

That’s just what seems to have happened, based on a press release from the company on December 14, 2020. This announced the completion of “ a financial restructuring process” which involves a much lower debt load ($500mn !); a new CEO (picked from within the ranks of the company’s senior management) and a new Board. The Chairman of that new 7 person Board is Bowen Diehl, the CEO of Capital Southwest (CSWC). The BDC is one of four BDCs – both public and private – with what is now $82mn in exposure to the company.

Otherwise, the press release is un-generous in providing the details of what is clearly a debt for equity swap that will take the previously public business private. Perhaps we’ll have to wait till the IVQ 2020 BDC results are published in February 2021 to learn what realized loss might be booked and which lender owns what of AAC and what debt is left ? As of September 2020, the lenders-future owners had already taken ($24mn) in unrealized losses, or nearly 30% of funds advanced. Some of the lenders in the 2023 Term debt had booked discounts of (54%).

Clearly, from a credit standpoint and with some of the debt on non accrual for over a year (from IIIQ 2019) this has been a material setback for CSWC; Main Street Capital (MAIN); New Mountain Finance (NMFC) and non-traded HMS Income, which MAIN manages. We assume that the lenders have high hopes that the company – still facing plenty of pandemic-related operational challenges – can recoup some or all what has been lost in the years ahead with the lenders at the tiller. Before that begins, though, we need to know what the bill has been for the BDCs shareholders so far.

This is going to be an excellent test case of whether the BDCs involved can successfully rescue a portfolio company or whether good money (and managers time) is going after bad. CSWC is very familiar with this sector and Mr Diehl is a logical Chairman of a re-structured AAC. Still, that’s no guarantee that the business can be saved.