We learn from Golub Capital’s (GBDC) December 1, 2020 10-K filing and subsequent conference call that portfolio company Elite Dental Partners, LLC was restructured in the IIIQ 2020. A “debt for equity” swap was involved and GBDC booked a ($6.5mn) realized loss. (As far as we can tell, this was the largest realized loss incurred by GBDC in FY 2020 where total realized losses reached -$18.7mn, and one of two such setbacks in the dental field). After the restructuring was completed, the debt – which was on non accrual – returned to accrual status. Currently total remaining exposure amounts to $15.5mn, with $11.4mn in a unitranche loan and the rest in equity. GBDC values its overall investment at a slight discount to cost. The maturity (2023) and pricing of the debt (L + 525 bps) is unchanged from before the default and restructuring.
We wish we had more color to offer but GBDC is typically very tight lipped about its troubled credits and this is no exception. We believe Elite Dental – default notwithstanding – avoided filing for bankruptcy with this restructuring. We can also deduce that GBDC went from owning less than 5% of the equity to having somewhere between 5%-25%. Finally, we believe that the company’s troubles – which had begun to show up from a valuation perspective in the IVQ 2019 – were exacerbated by the pandemic and the virtual shut-down of dental practices in most places. Understandably the stakeholders – including GBDC – must have concluded that the fundamental business was worth saving and have done so.
The BDC Credit Reporter has upgraded the company from CCR 5 – non performing – to CCR 3. We are leaving the company on the underperformers list because the dental business continues to be challenged by rolling stay-at-home orders. Furthermore, we don’t know how generous the lenders were in cutting debt service obligations and what other creditors might be involved and on what terms. We do note that the unitranche debt is paying only 2% in cash going forward, with the remainder in PIK form. That suggests boosting/preserving liquidity remains important to Elite’s management.
We will continue to monitor the progress – of what remains a relatively large investment for GBDC – going forward. Given that the company is privately-held much of what we might learn – unless conditions deteriorate – will be from GBDC’s quarterly revaluations. Some $0.7mn of annual investment income remains in play.