Increasingly Business Development Companies are “turning around” their own under-performing portfolio companies. This drastically changes the profile of an investment – usually both increasing the capital put at risk and extending the holding period. Furthermore the ultimate prospective return changes as equity stakes taken from a turn-around can range widely in value over time. With that in mind, the BDC Credit Reporter is very interested in chronicling every instance of a BDC seeking to tackle a distressed asset. In this case, Fidus Investment (FDUS) took charge of FDS Avionics in 2014, investing $7.2mn of subordinated debt and equity.
By 2017, the company was in trouble and FDUS booked a ($2.4mn) realized loss and invested another $750,000 “along with certain co-investors and management, giving us a controlling interest”. In 2019 FDUS – on a conference call – explained its approach: “This is an aerospace parts company, it’s primarily electronics. It serves the general aviation, the commercial and the military end markets, so there’s some diversity there. It’s been lumpy historically. And it also was in need of a product refresh whereby customers really wanted to wait for certain new products versus buying some of the legacy products. We continue to believe in, I’d say, the value proposition of the business. And as such, we made a control equity investment probably 20 months ago now.”
Through IVQ 2020, FDUS exposure at cost was $8.4mn in first and second lien debt, preferred and common. At one point FMV had dropped as low as $4.0mn. Now we learn the following: ” On February 12, 2021, we [FDUS] exited our debt and equity investments in FDS Avionics Corp. (dba Flight Display Systems). Flight Display Systems was acquired and combined with Calculex Inc. and Argon Corporation under a new holding company, Spectra A&D Holdings (“Spectra”). We received payment in full of $5.1 million on our second lien and revolving debt. We sold our preferred and a portion of our common equity investments for a realized gain of approximately $1.0 million. In conjunction with the transaction, we invested $8.0 million in first lien debt and $4.1 million in preferred equity, of which $2.0 million was rolled over from our original common equity investment in Flight Display Systems”.
So FDUS is clawing back $1.0mn of the ($2.7mn) lost in 2017 but has actually increased its exposure by one third. The BDC will be accruing income on the loan (terms not yet revealed) and -possibly – on the preferred (unlikely). For a time consuming investment that was fraught with problems this is a successful interim resolution, but far from the final word. We may be years away from a final tally.
We are upgrading the company – now Spectra A&D Holdings – to CCR 3 from CCR 4 and we will periodically revisit how the new owners are performing.