C2 Educational Systems: IIQ 2021 Update

C2 Educational Systems is a K-12 test preparation company. As you might expect, with schools closed and face-to-face tutoring banned in many places, the company did not fare well during the pandemic. In fact, we just learned from the public record that the company received a $10.0mn PPP loan to tide matters over. (Also disclosed is that the company employs around 500). We hear from the corporate website that “We’re Back In Person”, which must be good news both for the company and its students.

The only BDC with exposure is Saratoga Investment (SAR), which has been a lender since 2017. For years, the investment was valued at par. However, during the pandemic – and as recently as the quarter ended November 2020 – SAR wrote down its first lien $16mn loan by a fifth. In the quarter ended February 2021, the term debt that was due 5/31/2021 was extended to 5/31/2023, and the pricing increased by 2% to LIBOR + 8.50%, presumably reflecting additional risk. In the most recent quarter ended May 2021, total debt increased by $2.5mn and SAR invested half a million dollars in preferred stock. The discount on the debt has been reduced – but remains in underperforming territory at (13%).

All the above suggests that C2 has needed substantial financial support, but is pulling through. Interest – which amounts to 10.0% in absolute terms – is current and the preferred is valued at a (very) slight premium. We have rated the company CCR 3 since the second calendar quarter of 2020. If the debt investment ultimately returns to par, SAR could see a $2.5mn increase in asset value, plus whatever the preferred becomes worth.

We are adding C2 to our Trending List because the next time the BDC reports earnings – for the quarter ended August 2021 – we may see a material improvement in valuation. However, the recent upsurge in Covid cases could delay this turn around. Given the size of this investment to SAR , this is a company worth tracking regularly for both good and bad news.