Legal Solutions Holdings: Placed On Non Accrual

Frankly we don’t know much about Legal Solutions Holdings. The public record does not offer much information. However, we do know that the company used to be financed by MVC Capital, which was acquired by Barings BDC (BBDC) in late 2020. We also know that in the IIIQ 2021, BBDC placed its senior subordinated loan to the company, which was yielding 16.0%, on non -accrual for the first time.

This debt has a par value of $11.4mn, a cost of $10.1mn and – surprisingly given the above – a fair market valuation of $11.0mn. Judging by the valuation at least, BBDC expects to be repaid in full and more on this debt nominally due in March 2022.

This investment dates back to 2014 and was valued by MVC just before the BBDC acquisition at $9.3mn. Why the value has increased in a one year period despite becoming non performing is not clear to us. We’ll reach out to BBDC and see if we can find an explanation. This may have something to do with the blanket “Credit Support Agreement” Barings offered when acquiring MVC’s assets for BBDC.

In the interim, the company is being rated CCR 5, downgraded from CCR 2 in the IIQ 2021 when the valuation was roughly equal to cost. We assume BBDC is – at least temporarily- deprived of $1.8mn of annual investment income from Legal Solutions, most of which was already in pay-in-kind form.

The valuation seems to suggest BBDC should get out of this non performing credit scott free, or better. However, till we learn more from the BDC’s managers or in the next earnings release, this remains a question mark.