In December 2020 , the Vistria Group – a private equity firm – acquired Edmentum Inc. and its parent, Edmentum Ultimate Holdings. Terms were not disclosed but the press release announcing the acquisition indicated “New Mountain Finance Corporation and funds managed by BlackRock will retain ownership positions“.
From a BDC perspective this is a very important transaction as Edmentum was – through September 30, 2020 – one of the larger BDC-financed portfolio companies (number 79 on the list maintained by Advantage Data). Also, there are five BDCs involved, many of them with very large dollar exposure. These include New Mountain Finance (NMFC) and BlackRock TCP Capital (TCPC). Also important is that with the Vistria Group acquisition the future exposure of the 5 BDCs involved is changing. See the Advantage Data Table for IIIQ 2020 of all BDC exposure:
Edmentum has been on BDC books since IVQ 2012 – initially only in the form of first and second lien debt -and has had a chequered past. In 2015 the company was restructured and several of the lenders recognized realized losses. (For example, NMFC lost half of its $31mn then invested). In the restructuring, Oaktree Specialty Lending (OCSL); Prospect Capital (PSEC), NMFC and BKCC initiated equity stakes. To keep a long story short, over the years BDC exposure increased to reach $204.4mn even as some of the debt outstanding was carried as non-performing at different times by different lenders. The BDC Credit Reporter has carried Edmentum on its underperforming list since the IVQ 2014.
However, in recent quarters the valuation of the BDC investments has been improving. As of September 2020 virtually all the different debt and equity stakes held by BDCs were valued at par or at a premium, with the exception of a small equity stake held by Gladstone Capital (GLAD). Now as we begin to hear from BDCs about IVQ 2020 results the outcome of their investments is becoming known, with varying results. GLAD reported the following :
In December 2020, our investment in Edmentum Ultimate Holdings, LLC was sold, which resulted in a realized loss of approximately $2.4 million on our equity investment. In connection with the sale, we received net cash proceeds of approximately $4.9 million, including the repayment of our debt investment of $4.6 million at par.
PSEC fared better: On December 11, 2020, we sold our 11.51% Class A voting interest in Edmentum Holdings and recorded a realized gain of $3,724 in our Consolidated Statement of Operations for the quarter ended December 30, 2020. Concurrently, Edmentum Holdings fully repaid the $9,312 Unsecured Senior PIK Note and the $45,277 Unsecured Junior PIK Note, and Edmentum, Inc. fully repaid the $8,758 Second Lien Revolving Credit Facility receivable to us at par.
OCSL also ended up in the black : “We realized a full par recovery on our debt investment and recorded a total gain of $23 million”.
Not heard from yet are NMFC and BKCC. However, we get the impression from the press release and comments made by TCPC after the IIIQ 2020 results that New Mountain and BlackRock intend to maintain investments in post-sale Edmentum. Here’s what NMFC said on its November 5, 2021 conference call in answer to a question about its intentions for Edmentum: “We’d like to maybe take some chips off the table, recapitalize the balance sheet, maybe bring in a partner. But at the same time, we do think there’s very significant upside from here that you probably wouldn’t quite get until you show the sustainability of the earnings trend, which we absolutely believe in. And so we may elect to hold some exposure for another period of time to get the benefit of that incremental value gain”.
So while 3 BDCs are going out the door, these two others are likely to remain, but we’ll need the IVQ 2020 results to suss out all the details. The GLAD realized loss and the earlier 2015 losses notwithstanding, this is a positive turnaround for Edmentum, which was rated CCR 5 as recently as September 2019 and which we have maintained at a CCR 3 rating ever since. After we hear from TCPC and NMFC we’re likely to return Edmentum to CCR 2 status, especially if and when we get a better understanding of the new capital structure and prospects for the business.