With the publication of the IIQ 2019 valuations by 8 BDCs with $107mn in various forms of debt exposure (2022-2024 and both senior and second lien), we’ve added Constellis Holdings to our under-performers list with an initial rating of CCR 3 (Watch List). The debt has been discounted between (6%-30%) from 0% to (5%) in the prior quarter.
This is not surprising as there has been a massive number of changes in senior management in recent months and downgrades from both S&P and Moody’s in the spring, worried about high leverage; cash flow losses and operational challenges. For the BDC sector, this is very big exposure in aggregate, with annual income of approx. $9mn at risk should the company default down the road. With that said $90mn of the debt is held by the three FS-KKR non traded BDCs (FS II-III and IV), which are intending to go public under one banner before long. How Constellis plays out will be of above average interest at FS Investment-KKR in the quarters ahead.
Since the BDC Credit Reporter first warned of a possible Chapter 11 at Empire Resorts, owned by Montreign Operating Company, we’ve learned more. One of its BDC lenders – PennantPark Floating Rate (PFLT) – simultaneously wrote its senior debt down and predicted no loss would occur on its IIQ 2019 Conference Call. We also read a news article from a trade publication providing further information about the roughly $0.5bn in debt outstanding that might be in need of a haircut or restructuring. All this was included in the Company File we keep on every under-performing business, which we’ve updated. Our view of the likelihood of loss – PFLT’s optimism notwithstanding – has increased.
Resorts World Catskills is owned and operated by Montreign Operating Company, LLC, an indirect wholly-owned subsidiary of Empire Resorts, Inc., a gaming and entertainment corporation which has operated in the Catskills since 1993. On August 9, Empire Resorts, stung by heavy losses from under-performance at its facility, raised the possibility of a voluntary Chapter 11 filing.
As a result, we’ve reduced the company’s Corporate Credit Rating from CCR 3 to CCR 4- Worry List. There are 3 BDCs – all in the senior debt with $67mn at cost outstanding: PennantPark Floating Rate (PFLT), CM Finance (CMFN) and Business Development Corporation of America (BDCA). Most recently PFLT discounted its debt by (18%), but that may prove too conservative if Chapter 11 occurs. The other two BDCs- whose valuations dates back to March – have discounts of (8%) and (9%), and are likely to be taking bigger reserves for loss when their second quarter results come out.
According to Informa, Fusion Connect has filed its bankruptcy plan with the court and hopes to get a hearing by October 1st and – if all goes well – exit Chapter 11 shortly thereafter. The plan includes a very large debt swap/forgiveness that is said to cut total borrowings from $680mn to $380mn. Currently, the restructuring appears to have the first lien lenders gaining control of the business in return for writing off a goodly portion of their debt. The two BDCs involved – CM Finance (CMFN) and Garrison Capital (GARS) have $18mn invested at cost, but that liability may have increased as senior lenders provided DIP financing. That original debt is on non accrual and won’t – in any form – be paying interest till the IVQ 2019. That’s three quarters without LIBOR + 7.25%. Moreover, a write-off of some kind must be coming. We’ll learn more when CMFN and GARS report IIQ 2019 portfolios. The valuations are likely to be close to the final, if all goes to plan. See our prior posts on June 12, 2019 and April 17, 2019.
The Company filed for Chapter 11 on June 3. On June 11, in an article from the Global Legal Chronicle we learned that “ad hoc group of lenders also backstopped Fusion’s debtor-in-possession financing facility in the aggregate principal amount of $59.5 million, which consists of $39.5 million of new money term loans”. This suggests that the two BDCs with $18mn in senior debt exposure – CMFN and GARS – have increased their exposure to what was till very recently a fast growing enterprise, cobbled together from multiple acquisitions. It’s still too early to determine how this will all play out. The business may yet be sold or the existing lenders may be involved in a debt for equity swap. In either case, income from the pre-petition debt is going to be interrupted for months, and some sort of realized loss is likely. At 3/31/2019, the discount to cost that the BDCs were using ranged between (12%) and (17%). However, any income and return from the DIP financing should be money good.
Publicly traded Fusion Connect has entered into a Forbearance Agreement with its Revolver lenders and 70%+ of first lien lenders. As the press release states : “Under the terms of the Forbearance Agreement, these first lien lenders have agreed not to exercise the remedies available to them related to Fusion’s decision not to make its scheduled principal payments due on April 1 and 2, 2019 and certain other defaults under the Company’s credit agreement. The Forbearance Agreement extends until April 29, 2019 unless certain specified events occur”. In the interim, the Company has hired turnaround advisers and appropriate legal counsel in an effort to restructure the balance sheet out of bankruptcy. However, the odds are stacked against the highly leveraged business. See the Company File for the BDC Credit Reporter’s View. The two BDCs with $18mn in exposure appear to be in a first lien loan due in 2023. The publicly traded debt – valued by the BDCs at close to par at 12/31/2018 – currently trades at a (25%) discount). That suggests CMFN and GARS are likely to have to write down their debt by close to $5mn or more in the IQ 2019 results and face the risk of additional Realized and Unrealized Losses. The most immediate impact is likely to be interruption of interest income: $1.1mn on an annual basis for CMFN and $0.7mn for GARS.
On April 11, 2019,TransPerfect – the world’s largest language provider by revenue – filed a complaint in the Southern District of New York against rival Lionbridge Technologies and its owner, private equity firm HIG. TransPerfect is seeking at least $700m in damages and compensation. For all the details, see the press release. We have no way to determine who will win the lawsuit or any terms that might be involved. Nonetheless, the amount is sufficiently large – and with recent experience of companies losing major cases in court and being financially crippled thereby in mind – we’ve decided to add Lionbridge Technologies to our Watch List, with a CCR 3 rating. Till this news – and using IVQ 2018 values – there are three BDCs with $31mn in first lien and second lien debt exposure, all carried at par. We’ve also opened a Company File, which we’ll keep updated as this issue wends its way through the courts.