Bioplan USA Inc. : Moody’s Downgrades

On March 24, 2021 Moody’s downgraded BioPlan USA Inc. (also known as Arcade Beauty) to “D-PD from Caa2-PD, following the recent restructuring of the company’s first-lien and second-lien credit facilities“. By its standards, Moody’s considers the just completed restructuring at the company as a “distressed exchange and thus a default“. Here’s a link to a Moody’s press release with much more information.

The basic issue is that the lenders to the company appear to have “kicked the can down the road“, extending the maturity of all outstanding debt, and adding a payment-in-kind (“PIK”) requirement which will effectively increase the balance owed. Although the sponsor – Oaktree Capital Management – kicked in another $20mn of equity capital, Moody’s still believe the company’s capital structure is “unsustainable“. As the press release makes clear BioPlan has plenty of challenges including negative free cash flow; a slow return to “normal conditions“; very high leverage and much more.Still, the lenders and the sponsor seem to believe there’s a way out given enough time

There are two BDCs with exposure to the beauty products company: publicly traded Investcorp Credit Management (ICMB) and non-traded Guggenheim Credit, with total exposure at cost – all in the just restructured first lien 2021 Term Loan – of $18.2mn. The former BDC is on the record on its conference calls as being optimistic about the company’s prospects and has discounted its debt by (22%). Guggenheim is more conservative and has a (37%) discount.

We have had a CCR 4 rating for the company since the IQ 2020 when the onset pandemic sharply cut foot traffic at malls and the demand for fragrance sprays. We are adding Bioplan to our Trending list because we expect that with the restructuring there might be a change – probably upward – in the debt’s valuation. This should show up in the IQ or IIQ 2021 results of the two BDCs involved and – for the moment – reduces the risk of the debt going on non accrual. We cannot say whether in the long run this will result in a loss for the BDCs involved. Most at risk – but only modestly so – is ICMB, which could see nearly $0.7mn of annual investment income interrupted should the debt go on non accrual. Ironically, in the short term, the BDC’s income (and Guggenheim’s ) could increase thanks to the new PIK pricing…

We’ll circle back when ICMB and Guggenheim report 2021 results.