We first wrote about Phymed Management, LLC back in April 2022 when Ares Capital (ARCC) – and later SLR Investment (SLRC) – placed their combined $94mn in secxond lien debt to the company on non accrual during the IQ 2022. At that point – without explaining why – both BDCs wrote the debt down: (74%) and (50%) respectively.
Roll forward to ARCC’s latest IIQ 2022 10-Q, and the discount on the still non performing debt increased further, to a value of only $1.2mn on a cost of $55.8mn. That means – as we suspected in our prior article – that a complete realized loss is the most likely outcome here. No explanation or “color” has been forthcoming from ARCC’s external manager and the public record does not provide any insights.
The most “actionable” news here is that SLRC – which has yet to report IIQ 2022 earnings – should be taking a further unrealized loss that might amount to ($18mn) if the BDC adopts the same discount percentage as ARCC has. If the entire $37.8mn SLRC investment at cost ends up a realized loss, that will be a material “hit” to the BDC. For a sense of context, total realized losses over the last three full fiscal years at SLRC were less than ($30mn).
We continue to rate Phymed CCR 5, but might switch the company to a non material status if the fair market value drops to a negligible value, which would end regular coverage. Still, both the BDC Credit Reporter and – we expect – our readers might want to understand what went wrong at the company, and so quickly. (As recently as the IVQ 2022 the company was performing, and rated CCR 2). For the moment, management at ARCC and SLRC are like Sergeant Schultz in Hogan’s Heroes: “I see nothing! I hear nothing! I know nothing!”