Let’s not bury the lead here: Ares Capital (ARCC) has a big problem with its investment in generic pharmaceutical manufacturer Teligent,Inc. As Reuters – and many other sources report – the company filed for bankruptcy on October 14, 2021. Vladimir Kasparov, managing director at Portage Point Partners – an interim management firm – has been appointed chief restructuring officer.
In a court filing, Kasparov said the company, which manufactured topical pharmaceutical products and other generic drugs, pointed to a 2019 warning letter by the FDA as an initial event leading to the bankruptcy. The letter, which stemmed from an inspection of Teligent’s plant in Buena, New Jersey, identified several violations of good manufacturing practice regulations and required the company to take steps to come into compliance.Nate Raymond in Reuters – October 14, 2021
Optimistically Mr Kasparov hopes to find a buyer for the troubled business, and has lined up a $12mn Debtor In Possession (“DIP”) line of credit to provide interim liquidity. The company is public, so there’s plenty of information for anyone who wants to read more.
However, our focus is on the impact of underperforming companies on the BDCs involved. In this case, the only exposure is that held by ARCC, which amounted at June 2021 to $73.8mn at cost. (That may go higher if the BDC supplies the DIP, as we’re assuming). All that exposure is in second lien debt, which is already non performing for over a year and which is discounted (44%-45%). The BDC also owns 91% of the equity, but there’s no cost involved as this was received in an earlier restructuring.
Cutting to the chase – after reviewing the stated financial condition of the borrower; the amount of debt involved; the position on the balance sheet the ongoing problems with the FDA, and the very short leash in terms of DIP financing made available, the BDC Credit Reporter believes a complete write-off is possible for ARCC. That would be just over an additional ($40mn) to write down and off – assuming the DIP monies get out intact. Overall – as noted above – ARCC holds $73.8mn -all of which could turn into a realized loss.
In the short term, we expect ARCC to book an additional unrealized loss of unknown amount in the IIIQ 2021. Given the company’s limited cash availability, we’re guessing a final resolution will occur by the IQ 2022, and we’ll be able to assess if we’re being too conservative. Given the regulatory problems, we don’t think so.
Teligent retains a CCR 5 rating. For a sense of context ARCC’s total equity at 6/30/2021 was just over $8bn and total net realized losses in all of 2020 – the worst year in a long time – were ($166mn). Or, in other words, if ARCC’s investment does go to the wall, this will be a significant loss for the well regarded BDC. Income, though, will not be affected as all the debt is already non performing.