Public IPO:  $15.00   NAV 6-30-2016: $21.11

Posts for Main Street Capital Corporation

AAC Holdings: To Receive Forbearance From Lenders

On October 22, 2019 AAC Holdings issued a press release indicating that the company was just about to arrive at a mutually satisfactory arrangement with its lenders, following events of default under the debt. This was carefully worded – because nothing has been signed – as follows: “The Company expects to enter into an agreement securing additional liquidity and receiving a forbearance from its senior secured lenders regarding certain previous events of default. The Company expects to finalize the agreement with its senior secured lenders next week, although no assurance can be made that an agreement will result from these discussions within that time frame or that an agreement consistent with these discussions will be reached at all“.

The company also expects to finalize the appointment of three new directors, after losing that many in a mass resignation, which was the subject of our last post. That will allow AAC to remain a public entity.

If all the above happens, AAC Holdings will cheat the hangman a little while longer. That gives the company time to improve fundamentals at its addiction centers and sell off real estate to reduce debt, as has been the plan for some time. Nonetheless, even if the forbearance is formally approved, we continue to keep AAC Holdings rated CCR 4 (Worry List) and on our Bankruptcy Imminent list. BDC exposure is high at $66mn. Click here for all our prior articles. Like Game Of Thrones, the story makes more sense if you begin at the beginning.

AAC Holdings: Directors Resign.

On October 1, 2019 4 of 7 directors at AAC Holdings (aka American Addiction Centers) resigned. Shortly afterwards, the SEC warned that the troubled public company was not in compliance with rules regarding the minimum number of audit committee members because of the departures. At the same time, the stock price of AAC continues to plumb new lows, dropping to $0.50 a share at time of writing.

In our minds this more evidence that AAC is close to filing Chapter 11 or restructuring out of court. We’ve added AAC to our Bankruptcy Imminent list (our version of Fitch Ratings Loans Of Concern), and the company is already rated CCR 4.

To be fair, the 2020 and 2023 debt in which several BDCs are invested are publicly traded – as reported by Advantage Data – and the former is trading almost at par and the latter at a (11%) discount, not that much worse than the valuations at June 2019. Nonetheless, if we are right and the markets are wrong ( a tall order admittedly) there is a lot at stake for the 4 BDCs involved with $66.3mn of exposure at cost and valued almost at full value, and with over $7.0mn of investment income involved.

Pier 1 Imports: Reports IIQ 2019 Results

The embattled retailer Pier 1 Imports, who we wrote about on April 17 and April 29, reported second quarter 2019 results on September 25, and they were not pretty. One example: comparable store sales dropped (12.6%). As you might expect, the stock price dropped in reaction: by (12%).

Management, though, continues to argue that its turnaround plans will bear fruit and the company will be able to avoid Chapter 11 or equivalent. We have our doubts – as do the two BDCs with exposure, who’ve discounted their debt to the company by (74%) as of IIQ 2019, from (44%) in the prior quarter. (At the moment, based on Advantage Data‘s middle market liquid debt records, the same discounts apply as in June). There’s $1.0mn of annual investment income at risk, held by publicly listed Main Street Capital (MAIN) and non-listed sister BDC HMS Income.

Bluestem Brands: Reports Weaker IIQ 2019 Results

We’ve written about Bluestem Brands before on two occasions, on April 12, 2019 and June 19, 2019. Now the multi-name retailer – whose results are publicly made available every quarter – has just completed its IIQ 2019 results. Unfortunately, the turnaround at Bluestem continues, and there are signs that the situation is getting a little worse. We won’t undertake an in-depth diagnosis, although we’ve reviewed both the earnings press release and the Conference Call transcript.

We’ll focus on a key metric – and one of two material debt covenants. Required minimum liquidity – demanded by the senior lenders – is $40mn. This quarter, Bluestem had $50mn, down from $59mn the prior quarter. That’s pretty close, and principally why we’re writing this update.

We have a Corporate Credit Watch of 4 (Worry List) for the company, which has been “troubled” since 2016. The latest results don’t change our rating, but we continue to worry that the company is just one reverse away from a covenant default. That would not be the end of the world, but might suggest the attempt to turnaround the business with its current capital structure is unfeasible. That might involve some debt haircut in some form. Given BDC exposure of $29mn – already discounted – by (23%) by 3 of the 4 BDCs, there could be some further Unrealized Losses to come in the short term.

(We should point out that – for reasons unknown – Capitala Finance (CPTA has only a (4%) discount on its share of the 2020 senior debt, one sixth of what Main Street Capital (MAIN), HMS Income and Monroe Capital (MRCC) have valued the same exposure. There’s been a deviation between CPTA and the other BDCs for several quarters, and we don’t know why. If matters do get worse, CPTA – with $3.7mn of debt at cost – has the farthest to fall).

AAC Holdings: Reports IIQ Results, Addresses Debt Defaults

We have written about AAC Holdings (aka American Addiction Centers) 5 times already since April 2019. That’s for two reasons. First, this is a public company (ticker:AAC), which means there’s plenty of information available to relay. Second, the $66mn of BDC exposure – mostly carried at a small discount or even at a premium to cost by 4 funds – means the stakes are high.

Anyway, on September 1, 2019 AAC Holdings held its IIQ 2019 Conference Call; summarizing its latest results and (sort of ) addressing some of its problems with its lenders. Here’s what’s happening with EBITDA:

“On a sequential basis, adjusted EBITDA went from a loss of $12 million in the fourth quarter of 2018 to a loss of $6.5 million in the first quarter of 2019 to positive adjusted EBITDA of $3 million in the second quarter of 2019. This represents a $15 million or 125% improvement in quarterly adjusted EBITDA since the fourth quarter of 2018. Overall, as Michael mentioned earlier on the call, while we still have a lot of work to do, I’m pleased with the sequential momentum so far in 2019.

Turning to our 2019 guidance, our full year guidance has revenue in the range of $255 million to $275 million and adjusted EBITDA in the range of $16 million to $21 million. Taking into account actual results through the first half of 2019, this implies revenue of $137 million to $157 million and adjusted EBITDA of $20 million to $25 million in the second half of 2019″.

As to the company’s relationship with its lenders:

We remain committed to our strategic initiatives to improve the balance sheet and enhance value to all stakeholders by the end of the year. Our goal is to utilize our existing assets to reduce our senior debt by at least $100 million by the end of the year in order to reduce the cost [of] capital.

Finally, we remain engaged in active discussions with our lenders on our credit agreement and are making progress on reaching an agreement that will resolve our covenant obligations in the near term.

I’m confident that we will reach an agreement that is favorable to all stakeholders”.

Later in the CC this was said in response to a question: “I mean I think our banks have been extremely supportive. They see the trajectory that we’re making. I think we see the trajectory we’re making, there’s both sides of it. Part of it hinges on us unlocking some of the value of the real estate, which we’ve been actively working on. We’re looking at all proposals, and so we certainly want to get this resolved as soon as possible“.

The BDC Credit Reporter continues to be more conservative/skeptical than either AAC’s management or lenders about the ultimate outcome, which is only appropriate. We have a CCR 4 rating on our 1-5 scale. Much of the turnaround required remains to come, especially the sale of real estate to pay down debt. How that turns out will be critical, both to AAC and its stake holders and as a validation or otherwise of the lenders – which include Capital Southwest (CSWC), New Mountain Finance (NMFC) and Main Street (MAIN) – credit underwriting. Expect to see many more updates before this file gets closed.

AAC Holdings: Major Investors Selling Out

An August 26, 2019 article indicates several of the largest institutional investors in AAC Holdings (aka American Addiction Centers) have been dumping their shares in the troubled public company.

Deerfield Management, the company’s largest shareholder in March and a major investor since 2015, sold all of its holdings in AAC during the second quarter. Similarly, TimesSquare Capital Management — another of the largest shareholders early this year — and Apollo Management also had sold all of their shares by the end of June. And Morgan Stanley’s stake in the company fell from 1.4 million shares in June 2018 to about 1,600 shares in June 2019“.

So what ? The defections suggest some of the most knowledgeable investors are not buying in to management’s oft repeated plans of a turnaround plan. At $0.58 a share, the stock trades only $0.08 off its all-time low and supports the BDC Reporter’s fears that AAC will eventually file for Chapter 11 or undertake a wide ranging restructuring. Debt holders should probably pay attention.

At June 30, 2019, there were 4 BDCs with $66mn of exposure – all first lien – in the company and more than $7mn in annual income at risk. To date, discounts taken on cost have been very modest, which will make the potential impact on BDC net assets all that more telling should AAC stumble.

Joerns Healthcare: Restructuring Complete

On August 21, 2019 Joerns Healthcare announced the restructuring of the company – undertaken under bankruptcy court protection – is complete. As noted in our two earlier posts on July 3 and August 10, the key element of the company’s plan was a debt for equity swap which will extinguish $320mn out of $400mn of pre-petition debt, and turn lenders into owners.

For the three BDCS involved (Golub Capital, Main Street and HMS Income), with $30mn of exposure – mostly in first lien pre-petition debt – this means Realized Losses will shortly be taken which will show up in the third quarter 2019 results. We expect losses taken to be over $20mn. Similarly, there will be income lost as most of the capital invested in debt form will either be written off or converted to equity.

The biggest impact will be felt by Main Street (MAIN), which has close to $15mn invested and will lose a substantial portion of its invested capital, which dates back to 2013. The Good News ? The whole bankruptcy/restructuring process has occurred over a relatively short time frame, benefiting both the company and its long term prospects and its creditors/owners.

Nonetheless, Joerns will remain on our under-performing list even now the restructuring is complete and notwithstanding the above average debt write-off. This was supposed to be a lower risk, standard loan in an industry beloved by most every lender out there. This set-back is worrisome both for Joerns itself and for the huge healthcare sector as a whole. For what it’s worth, the BDC Credit Reporter has so far identified 23 under-performing companies held by BDCs, or 10% of all under-performing credits in our database.

Joerns Healthcare: Restructuring Plan Approved By Bankruptcy Court

On August 9, 2019, news reports indicated Joerns Healthcare Inc. has had its restructuring plan approved by the bankruptcy court. As we wrote earlier, the company had filed for Chapter 11 back in July. One of the BDCs involved – Main Street Capital (MAIN) – had indicated as much on its Conference Call :

” Joerns is, basically, liquidity squeeze based on transition of the business from a sale model more than rental business. And from a capital structure perspective, we need to equitize the debt. That company entered bankruptcy in the second quarter, and we expect to exit here in the next 15 to 30 days with a restructured balance sheet”.

Joerns is wiping out $320mn in debt out of $400mn, according to news reports. In addition, the company is gaining $40mn in fresh advances. Looking at the (45%) discounts being taken by the unitranche lenders in the IIQ 2019 valuations, BDC losses on the $28mn of exposure will be significant. With those lenders becoming equity holders – a Golub representative will be sitting on the Board , amongst others – investment income from the original capital will be greatly reduced. There was $2.8mn of investment income spread amongst MAIN, Golub Capital (GBDC) and HMS Income. That’s all been suspended since July and is likely to resume by the end of September. When interest income does resume, the amount may be 50%, or more, lower.

Nor is the company out of the woods. The CEO has left and the new lender-owners are out seeking a replacement. This will be another test of whether lenders – including several well known BDCs – are well suited to “turn around” their own failing companies.

Also noteworthy is that the BDCs involved were marking this credit at only modest discounts to book until IVQ 2018, when all 3 discounted the unitranche loan by a tenth. Two quarters later the debt is on non accrual and written down 4.5x more…However, we read in a trade article that the company was in default under its debt from 2018, and much was happening behind the scenes to attempt a rescue. All of which ultimately failed to get traction and resulted in the pre-packaged deal with the unitranche lenders. This big a haircut, though, indicates the lenders underwriting was far too generous, and the timing of the write-downs suggests the BDC’s shareholders were being kept out of a loop that they deserved to be included in.

On the plus side, these are losses the BDCs involved can absorb on an individual basis without too much difficulty. For example, the amount MAIN invested at cost is equal to 0.5% of its total assets. Still, this a serious credit reverse for what was envisaged as a low to mid risk loan, priced at LIBOR + 6.00%.

AAC Holdings: Receives Third Warning Of De-Listing From Exchange

On July 9, 2019 news reports indicated troubled AAC Holdings (aka American Addiction Centers) had received a third warning from the New York Stock Exchange (NYSE) that its stock might be shortly de-listed. The reason: the company’s stock (ticker: AAC) has been trading under $1.0 for a thirty day period. The company is seeking a reprieve and has submitted a plan to the NYSE. According to a press release by the company, “submitting a plan to the stock exchange should allow the company to continue trading. The plan makes AAC eligible for an 18 month period to improve market capitalization and a six month period to improve share prices”.  Notwithstanding management’s ambitious plans to re-position and turn around the business, the BDC Credit Reporter remains concerned about a possible bankruptcy filing or restructuring in 2019. Total exposure is $63.6mn in 2020 and 2023 Term debt still carried at high valuations as of March 2019. The key holders are New Mountain Finance (NMFC); Main Street Capital (MAIN); Capital Southwest (CSWC) and non-traded MAIN sister BDC HMS Income. Total investment income at risk should the company default is in excess of $7.0mn annually. We should say that the publicly traded debt does continue to trade at only a slight discount to par, suggesting our worries may be overblown. Time will tell.

Joerns HealthCare: Files Chapter 11

Joerns Healthcare has filed for Chapter 11. “The company is seeking court approval of a restructuring plan that is supported by the majority of its lenders and noteholders. The plan will eliminate a substantial amount of debt and provide operating capital during the restructuring process and beyond. The company has requested that the plan be approved and the process complete within the next 30-45 days”. This is bad news for the three BDCs with $27.9mn in exposure in 2020 senior/unitranche debt – all publicly traded. Main Street Capital (MAIN) has the biggest share with $13.3mn, and sister non traded fund HMS Income ($11.0mn). Golub Capital (GBDC) comes in third with only $3.5mn, but we imagine the asset manager has exposure in other affiliated funds. Until a restructuring falls into place $0.200mn a month of interest income will be lost. The company was still carried as performing through IIIQ 2018, but the discount increased from the IVQ 2018 and closed the IQ 2019 at (15%).  Chances look high that a Realized Loss will have to be booked, but we’ll postpone making any predictions till we review the restructuring plan that the company is so confident will be approved and implemented in short order.

AAC Holdings: Number Two Executive Steps Down

This can’t be good. A month after addiction treatment company AAC Holdings (ticker:AAC) announced an ambitious long term strategic plan to address its recent business woes, its President has resigned unexpectedly. He was with the company for only 18 months. Not surprisingly, AAC’s stock price dropped, and is now at $0.70 a share, not far from it’s all-time low. We continue to worry about a Chapter 11 filing or restructuring – see our earlier post from April 16, 2019. Currently, total BDC exposure is up to $63.6mn, spread over 4 BDCs.

TOMS Shoes: Downgraded by S&P

On June 18, 2019, the famous TOMS Shoes LLC received a downgrade from S&P Global Ratings. The first sentence of the press release tells you enough: “[the company’s] turnaround effort is taking longer than expected and its adjusted leverage remains elevated at around 10x, which will make it difficult for the company to address its upcoming term loan maturity in 2020 without undertaking a subpar exchange”. If that’s not enough to worry you, then there’s this sentence from further on in S&P’s report:“The negative outlook also incorporates TOMS’ continued sales declines, eroding liquidity, and its fixed-charge coverage ratio, which is at or below covenant levels, due to the challenging retail environment and the company’s continued weak operating performance”.The ratings were dropped to CCC from CCC+ for both the company and the first lien debt. The $9.3mn in aggregate BDC exposure (Main Street and HMS Income) is in the 2020 first lien debt and was already written down by (18%) in the last couple of quarters, even though income is still current. None of this is any surprise to the BDC Credit Reporter, which has had TOMS on its under-performing list since late 2015 and on our Worry List for about the same time. Our current Credit Corporate Credit Rating is 4, just one notch above non performing. Bankruptcy or a debt for equity swap seems almost inevitable despite the best efforts of PE owner Bain Capital to effect a turnaround. The BDC lenders involved seem at risk of absorbing $0.750mn of annualized investment income interruption for some period, and a Realized Loss at some point in the sub $5mn range. This may become yet another lender-owned company. Still, the amount of income and book value at risk are relatively modest for MAIN and its sister BDC.

Bluestem Brands: Reports Latest Results

On June 18, 2019 multi-unit retailer Bluestem Brands reported results for the quarter ended May 3, 2019. We reviewed the earnings press release, and the Conference Call transcript on Sentieo (not yet linkable).  Notwithstanding lower sales in the period compared to a year earlier, the company reported progress in “turning around” the business in several areas. Adjusted EBITDA was barely positive but that’s an improvement over ($12.6mn) a year earlier. Most importantly, from a credit standpoint the company was nowhere near triggering the several key metrics imposed by its senior lenders. Nonetheless, the burden of total debt has remained unchanged over the past several quarters, and its principal Term debt becomes due in late 2020. We have a CCR 4 Credit Rating, which remains unchanged. There are 4 BDCs with $29mn in exposure – all in the 2020 Term debt. In the IQ 2019, the unrealized depreciation was reduced in the BDC valuations and may receive a modest boost in the IIQ, based on these results. Nonetheless, the retailer is far from being out of the woods.

Tom’s Shoes: Ratings Affirmed by Moody’s.

Under-performing shoe manufacturer Tom’s Shoes, LLC saw its Moody’s ratings affirmed. The senior debt remains at Caa3, as did the Corporate Rating. The outlook was downgraded from stable to negative. Apparently, Moody’s is worrying that leverage is too high to expect 2020 debt maturities to be met in the ordinary course. This is a long standing under-performing credit that dates back to 2016, so no great surprise. BDC exposure – all in the afore mentioned 2020 debt- is $9.3mn, equally split between related BDCs MAIN and HMS Income, which have written down the debt by (18%) as of March 2019. The discount has been higher in the past, but actions such as these suggest we should be worried. After all, 2020 is just round the corner.

Pier 1: S&P Warns Chapter 11 Filing Possible

USA Today reported on April 25, 2019 that S&P warned that the home goods retailer Pier 1 might be headed for Chapter 11 bankruptcy. That should be a surprise to no one as the company is caught up in the retail revolution; same store sales are dropping; a turnaround plan has failed to be effective and management has been changed, etc. S&P dropped its debt rating to CCC- from CCC+. Yes, the writing is all over the wall.There are two sister BDCs with $16.3mn in senior debt  exposure to the beleaguered company which has already been written down by a quarter. Those are MAIN and non-traded HMS Income. Our assessment of potential income and realized losses remains the same as expressed in the Company File on April 17, 2019.

Pier 1 Imports: Reports IQ 2019 Financial Results

Another retailer is having serious problems: Pier 1 Imports. The Company reported very poor IQ 2019 results. We’ve updated the Company File. The two BDCs (MAIN & HMS Income) with $16mn at risk must be worried about further unrealized write-downs in the short run and – medium term – non accrual of interest and realized losses.

AAC Holdings: Reports IVQ 2018 Results

AAC Holdings – aka American Addiction Centers – had a terrible IVQ 2018, with sales, EBITDA and earnings down. That’s reflected in the just published results and caused the Company to seek – as reported previously – additional debt financing to the tune of $30mn. On the Company’s Conference Call, management remained optimistic that a $30mn cost cutting program and a rebound in occupancy at its facilities would allow AAC to rebound. Still, with projected EBITDA for 2019 of $45mn-$55mn and $300mn in debt (97% due within 12 months), we have reasonable doubts. So do the public shareholders, who’ve brought the stock under $2.0 a share. The 4 BDCs with $60mn of senior debt exposure (at December 31 2018) must have their concerns as well, given that new debt has been added and real estate may be sold and leased back. If the other shoe drops at ACC, the BDC lenders may face material write-downs from the par valuation at year end 2018 and the risk of close to $6.0mn of income interruption if the debt goes on non-accrual.

Charlotte Russe: Name Change Explained

Charlotte Russe is back. Or, at least, the name of the iconic women’s retailer is again in the marketplace with the promise of opening 100 new stores. However, the ultimate owner is now YM Inc., which bought the name and trademark from the former owners – a conglomerate of lenders who gained control of the company as part of its first bankruptcy two years ago. Those owners have been selling everything following the latest Chapter 11 filing to recoup what they can – even the right to use the Charlotte Russe name. YM Inc. appears to have no BDC lenders or investors. The former Charlotte Russe company, though, continues to have $42mn of remaining exposure – of both debt and equity – spread over 3 BDCs. Expect big realized losses when the affairs of the bankrupt entity are settled. Affected with be FSK, MAIN and sister non-traded BDC HMS Income.

Bluestem Brands: Reports Unaudited Consolidated Fourth Quarter Fiscal 2019 Earnings Results

The troubled e-commerce retailer published quarterly and annual results for the period ended February 1 and 2, 2019.  Despite closing down several brands and taking one-time losses, the Company’s Adjusted EBITDA and key bank covenants, as well as liquidity, all appear better. May stop the gradual erosion in BDC debt values underway since late 2016, which peaked in IVQ 2018. We updated the Company file and the BDC Credit Reporter’s views accordingly. For all the details, see the Company File.

AAC Holdings: Updated Company File

AAC Holdings, Inc. that does business as American Addiction Centers has been on our Watch List for some time. We’ve just updated the Company file with various recent developments and renewed our view that some sort of “credit event” is likely in the short term.