US TelePacific Corp: Debt Refinancing Concerns

Privately-held communications company U.S. TelePacific (aka as TPx Communications) is in protracted negotiations with its existing lenders. Apparently, since November 2021 the company has brought on an adviser to assist in negotiations regarding its revolver and term loan, which mature in May 2022 and May 2023 respectively. The debt markets are already valuing the Term Loan at 75.6% of par. Furthermore, back in September 2021 S&P – and later Fitch – downgraded the company. The former has downgraded the business to a CCC+ rating. Commentators are projecting that private equity group Siris Capital Group – which acquired the company back in February 2020 – and has already lobbed some extra capital in to support the business might have to write another cheque. If not, liquidity might become a serious problem within months….

This is a material problem for 4 BDCs with exposure to the company – all in that $655mn Term Loan. Three of the BDCs are publicly traded: Main Street Capital (MAIN) with $17.0mn at cost; TCG BDC (CGBD) with $6.6mn and Capital Southwest (CSWC) with $5.2mn. Non-traded MSC Investment has $12.4mn at risk.

Till the IIQ 2021 – based on the BDC valuations – the company was rated as “performing to plan”, as the maximum discount taken on the debt (the S&P downgrade notwithstanding) was (7%). [The BDC Credit Reporter does not typically move any company to “underperforming” until a (10%) discount or greater has been reached]. However, in the IIIQ 2021 – probably reflecting the challenges mentioned above – the discount reached (18%). Given what we’ve heard of the current valuation a further unrealized loss is likely in the IVQ 2021. As a result, we rate the company as Trending (i.e. likely to show a material change in valuation on the next quarterly valuation).

We are rating U.S. TelePacific CCR 4 (An eventual realized loss is more likely than full repayment) because the market discount is substantial for a “secured” term loan. Moreover, we hear that many of the outstandings are held by CLOs, which might make finding a resolution – such as a debt for equity swap – more difficult. Finally, we’re concerned that 10 weeks or more have passed without a resolution between borrower and lenders.

Both the CSWC and CGBD positions are held in their joint ventures, but MAIN and – we believe – MDC Investment’s are carried on their balance sheet. We’ll learn more when IVQ 2021 results are published but a final resolution – positive or negative – is likely not to occur till later in 2022, or even later is no meeting of the minds can be reached.