K&N Engineering: In Restructuring Negotiations With Lenders

Bloomberg Law on July 29, 2022 ran a story for its subscribers indicating that K&N Engineering Inc. (aka K&N Parent) “began confidential negotiations with its lenders ahead of upcoming debt maturities, according to people with knowledge of the matter”. The sponsor is reportedly Goldman Sachs Asset Management and the object of the negotiations are first lien and second lien debt due in 2023 and 2024 respectively.

Here’s a brief lowdown on the company in the crosshairs, drawn from Wikipedia: “K&N Engineering, Inc. is a manufacturer of air filters, cold air intake systems, oil filters, performance parts, and other related products. K&N manufactures over 12,000 parts for various makes and models of cars, trucks, SUVs, motorcycles, ATVs, industrial applications and more.”

This is not a complete surprise to the BDC Credit Reporter because K&N was added to the underperformers list in the IQ 2022 when the BDCs holding the second lien debt increased their fair market discount to cost to as much as (30%). Even though the first lien remained mark near cost, we downgraded the company from CCR 2 to CCR3.

With this latest news, the odds of loss has greatly increased, and we are downgrading the company further to CCR 4. As of the IQ 2022, there were 4 BDCs with nearly $80mn of exposure: CION Investment (CION) is only in the first lien and Apollo Investment (AINV) only in the second lien. Barings BDC (BBDC) and Prospect Capital (PSEC) are in both layers of debt.

In the IIQ 2022, only AINV has published results, continuing to value its $23.6mn of junior debt at $19.5mn , only slightly less than in the prior quarter. Still, there’s a good chance the $51mn held by AINV, PSEC and BBDC (the latter has a very small exposure) in second lien debt could face ultimate losses of (20%) or more. Moreover, both the first and second lien debt is at risk of income interruption should a default occur.

What ails K&N ? We can’t make out what the challenges might be from a quick review of the public record and none of the BDCs involved are talking, but we’ll continue to root around. In the interim, we’ll be keeping an eye on how PSEC, BBDC and CION value their positions as IIQ 2022 results come out.