We don’t know what’s going wrong exactly at Rug Doctor (aka RD Holdco) – the carpet cleaner rental company, but matters seem to be getting worse. Admittedly, based on the trend of BDC valuations we’ve tracked on Advantage Data, performance has not met expectations since – at least – 2018. Now that Ares Capital (ARCC) has reported its IQ 2022 results ahead of its peers, we can report the company’s second lien debt – due 5/2023 – has been placed on non accrual for the first time.
There are 3 other BDCs with exposure to the debt and equity of the company, and total outstandings at cost (using the year end 2021 data) amounted to $92mn. For ARCC, the loss of income on an anualized basis will amount to about ($2.2mn). That a 10% yield on $22mn at cost. The BDC also has $14mn invested in the equity but that remains valued at zero, unchanged at that level since IQ 2020.
The other BDCs – SLR Investment (SLRC); Main Street Capital (MAIN) and non-traded MSC Income Fund share $56mn in combined exposure and have not yet reported their IQ 2022 valuations. SLRC has the biggest stake – also in second lien and equity – and will probably be writing down both from a cost of $32mn to $9mn if they follow the ARCC lead. SLRC’s total value as of IVQ 2021 was $17mn, so there’s a potential ($8mn) unrealized write-down in play.
MAIN has $10.9mn in a “Senior Note” which was last valued at par and may not be subject to as much of a potential write-down, if any. Ditto for MSC Income Fund with $12mn in that same senior facility.
Looking down the road is not easy, given we know so little about what ails Rug Doctor. However, one can make a case that the – given this latest non accrual and years of underperformance – both the equity invested and the second lien obligations are in danger of a complete realized loss at some point. If that’s how matters pan out, two-thirds of the funds invested at cost by the BDCs could be lost – all of which would affect ARCC and SLRC. Both BDCs are sufficiently large in terms of capital base to absorb such losses, but this would be a reverse nonetheless and one that’s been a long time coming.
For the moment, we are downgrading Rug Doctor from CCR 4 to CCR 5. We’ll provide an update as we learn more from the BDCs involved and/or publicly available information.