This is not exactly breaking news: Delphi Behavioral Health Group, LLC (“Delphi”) has appointed a new CEO, according to an August 11, 2022 trade article. In fact, we’re not sure if that’s good news or bad news from a credit standpoint, but is a useful jumping off point to re-address the status of this mental health provider – last reviewed on August 20, 2020.
Back then, the business was quickly restructured, a realized loss of ($5.5mn) taken by its BDC lender Capital Southwest (CSWC), which then proceeded to double down to become both lender and part owner of the rejigged business. Unfortunately two years on we are not sure the company has gotten out of the credit woods.
In the IVQ 2021, CSWC suddenly sharply discounted its first lien debt by (15%) and its equity stake – previously written down only (5%) – by (31%). Furthermore, a “Protective Advance” was made at a very high rate, suggesting new monies were needed. As of IIQ 2022, that Protective Advance has grown in amount and the debt and equity discounts remain at the IVQ 2021 level.
All this validates our maintaining a CCR 3 rating on the company because uncertainty remains as to whether the BDC’s management will be able to “turn around” the company – involved in a difficult sector beset with reimbursement issues since Babylonian times and now facing the challenge of staff shortages and higher wage pressures. That similar business on CSWC’s books – which also went through a restructuring : AAC Holdco is also facing problems.
At the moment, CSWC has $7.9mn invested at cost in Delphi, and has valued its positions at $6.3mn. We will be curious to see if the new CEO is being brought in as a final gambit to save the company or to take the business to the next level. This is a credit that should be on every CSWC shareholder’s dance card to keep track of in the quarters ahead.