Just three years after filing for Chapter 11 bankruptcy Sungard Availability Services – an IT company – has done so again. A pre-packaged bankruptcy plan agreed with its lenders has taken the company in and out of Chapter 11 status, with similar filings in the UK and Canada. Management is putting the best possible spin on this “Chapter 22”:
“Like many companies, our business has been affected by challenges in our capital structure, driven by the global COVID-19 pandemic and other macroeconomic trends including delayed customer spending decisions, insourcing and reductions in IT spending, energy inflation, and reduction in demand for certain services,” said Michael K. Robinson, Chief Executive Officer and President, Sungard Availability Services. “Over the past three years, we’ve made significant network, product and infrastructure investments which are being well-received by customers and gaining significant traction. We believe the chapter 11 process is a right and critical step forward for the future of our business and our stakeholders.”Sungard Availability Services Press Release- April 11, 2022
The company has arranged $95mn of Debtor In Possession (“DIP”) financing and with monies in hand will tackle over the next several months “uneconomical leases and underutilized space”. Thanks to the DIP monies “Sungard AS intends to meet its financial obligations, including paying suppliers in the normal course of business for goods and services delivered from today forward. The Company also has filed the customary motions to honor its ongoing commitments to employees and customers”.
There is only one BDC with exposure: FS KKR Capital (FSK). The bankruptcy move will not be a surprise to FSK which has been involved with the business since 2014, when an earlier manager of the BDC first booked exposure. FSK – and its sister BDCs that have since been combined into FSK – were involved in the 2019 restructuring and took an undetermined amount of realized losses. As of year end 2021, FSK’s exposure at cost amounted to $26.3mn in first lien, second lien and equity. (The last of those seems to have been added after the 2019 restructuring). The FMV was $14.3mn, with the equity written to zilch, the second lien discounted (39%) – and placed on non accrual. The first lien debt was valued at a slight premium.
We have very few details – if any exist – about what post-Chapter 22 Sungard will look like. We can reasonably imagine, though, that the equity and second lien debt will be written off (cost $20.6mn and an additional $8.3mn loss at FMV). The impact on FSK’s income should be modest as the second lien loan is already non accruing. Even if the first lien debt becomes non performing, there is only $5.8mn outstanding and at a sub-market, non income producing rate of 3.8% PIK.
Or, in other words, most of the damage – except for the potential further write-down of the second lien (equal to 0.1% of FSK’s net assets) – is already done, earlier in 2021 and back in 2019. The most interesting aspect of all this might be whether FSK receives more equity going forward in Sungard and whether that amounts to anything more than a wing and prayer.
As we’ve been writing about of late, BDCs do have the ability to take the long view and benefit therefrom should a turnaround occur. (An article we’ve read – which may be out of date – indicates a FSK representative sits on the Board of this company that used to have over $1bn in annual sales). The amounts invested here, and FSK’s share of the DIP financing, may prove to be too small to provide much of a potential upside, but still deserves watching.