Knowland Technology Holdings: Placed On Non Accrual

We’ve written about Knowland Technology Holdings (aka Knowland Group) once before, back on January 7, 2022. Already, at that point the company had been on the BDC Credit Reporter’s list of underperformers since May 2020, and was rated CCR 4. We were worried then that $1.7mn of annual investment income might get interrupted in the future.

Here we are a few months, and two quarterly periods later, and the only BDC lender – Saratoga Investment (SAR) – to Knowland has placed its $15.9mn in second lien debt on non accrual as we feared. Just what ails the business was not discussed by SAR on its just completed conference call for the quarter ended May 31, 2022 but may relate to the slow recovery in group travel in the wake of Covid.

We are downgrading Knowland from CCR 4 to CCR 5. Given that the outstanding debt is in a junior position, there is a very real possibility of an eventual significant realized loss. As of the latest 10-Q, SAR has discounted its debt by (37%), from (33%) in the prior quarter. That’s nearly ($6mn) of unrealized write-down already, and that might get worse, or better.

Knowland and SAR, according to the latter, might agree to converting the cash interest payments to pay-in-kind, which might allow the BDC to resume recognizing income. This quarter, though, the BDC reversed 5 months of interest while placing the debt on non accrual. The fact that SAR is considering such a move is bullish from a credit standpoint.

Clearly, Knowland – the only non accrual on SAR’s books – will be worth tracking because of the current and future material impact on the BDC’s earnings and net asset value. We’ll revert with any development we pick up from the public record, or when SAR reports its next quarterly results.