Business Development Corporation of America (BDCA) is a non-listed BDC that was launched in May 2010 and started selling shares on January 25, 2011. The BDC is externally managed by BDCA Adviser, LLC, a subsidiary of Benefit Street Partners LLC, a leading credit-focused alternative asset management firm. BDCA invest primarily in senior secured loans, and to a lesser extent, mezzanine loans, unsecured loans and equity of predominantly private U.S. middle-market companies. Middle market companies are defined as those with annual revenues up to $1 billion. BDCA also purchase interests in loans or corporate bonds through secondary market transactions.

LATEST: At September 2019, total assets at cost were $2,688mn and $2,577mn at FMV. There were 232 portfolio companies.

Under-performing companies include Anchor Glass; Constellis Holdings; Foresight Energy; Medical Depot Holdings; McDermott International; Monitronics; and Murray Energy.

Posts for Business Development Corporation of America

Murray Energy: Lenders Seek To Acquire Company

As we’ve written about earlier, controversial coal company Murray Energy is in Chapter 11. According to Law360, though, progress is being made towards a plan that will get Murray out of Chapter 11. Apparently, senior lenders with $1.7bn of debt outstanding have clubbed together to offer themselves as a buyer for essentially all the company’s assets. Given that so much of business news is hidden behind a paywall – an ironic complaint from the publisher of the BDC Reporter with its own premium version – we don’t know many of the details.

Speculating, though, remains free. Should the senior lenders successfully become the buyers of the highly troubled company in a declining industry – the likely format is the exchange of much – if not all – existing debt for equity. Most likely, new monies would have to be advanced by those same lenders in some form as well. For the 6 BDCs involved with $52.5mn of debt exposure at September 30, 2019, that’s likely to mean no or little income forthcoming from capital already invested and the prospect of dipping into their pockets for more advances. The $5.7mn of investment income that was being collected before the filing is unlikely to be returning any time soon.

Most affected by the Murray Energy debacle is the FS-KKR complex with roughly $40mn of the BDC debt outstanding, led by FS-KKR Capital (FSK) with $18.9mn already at risk, according to Advantage Data.

How this all plays out remains up in the air, and is subject to further updates before Murray exits bankruptcy court protection. Even after that, given the industry in which the company operates, we imagine we’ll be discussing the company – possibly under a new name – for some time to come as its lenders seem to be digging in.

Monitronics International: Reports IIIQ 2019 Results

Last time we discussed Monitronics International (dba Brinks Home Security), the company was filing for Chapter 11. Even then, management was aiming to be back operating normally once a major restructuring was effected. We were skeptical – wrongfully so – that this could be accomplished by September 2019 given the many moving parts. Our apologies to the many professionals involved because Monitronics was up and running again out of bankruptcy as a public company (ticker: SCTY) by the end of August.

The company did manage to shed a great deal of debt, as reinforced on the latest Conference Call: “Restructuring resulted in the elimination of over $800 million of debt, including $585 million of bond, and $250 million of the company’s term loans“.

Funnily enough, though, BDC exposure to Monitronics has substantially increased following the voluntary Chapter 11 and restructuring. From $51mn at cost in June 2019, BDC advances have nearly tripled to $148mn. The BDCs involved today are those who were present before, but generally speaking their exposure has greatly increased. That’s because of the nature of the restructuring which saw prior debt partly paid off in cash, equity in SCTY and new Term debt due in 2024. To that was added $295mn in new Term debt and a Revolver. Regarding the latter, $124mn has yet to be drawn.

This is all a wonder of financial engineering, but from what we can tell term debt has only been decreased by just under $100mn, and the revolving debt – if fully drawn – will be greater than the prior balance outstanding. The big change is the write-off of $585mn in 2020 Senior Notes, which received a little cash and 18% of the equity. For all the turgid details see pages 16-18 of the 10-Q.

This leaves Monitronics less leveraged, but not necessarily out of the woods. The company reported its latest results on November 13, which are a mix of before and after bankruptcy and not very instructive from an earnings standpoint. Management did not brave any questions and is still working on its 2020 Plan. As a result neither the BDC Credit Reporter, nor anyone else, has any meaningful metrics to work with. We do note, though, that debt to Adjusted EBITDA (annualizing the IIIQ) remains close to 5:1, and that’s before we get into any mandatory capex.

In any case, Monitronics/Brinks is facing a changing industry, and real challenges with customer attrition that lower debt will not change. Management is promising to make major improvements in how the business is run, promising a “best-in-class” customer experience, including transforming the “sales process from hiring to training, to performance management” and much more in that vein. We wish Monitronics well, but there’s a lot to do in what remains a highly leveraged business with myriad competitors.

This is a classic example of stakeholders – including BDC lenders – “doubling down” on a failing business through a restructuring process. Historically security companies like this one have been cash cows and Brinks has a well known and respected name. So we understand the impetus to try again with a new capital structure and strategic approach. There are no regulators to wag their fingers at the lenders involved and if this does not work out failure is likely to be some time off given the Revolver availability. Regardless, we are rating the “new” Monitronics CCR 4 (WorryList) till we get more tangible news about post-bankruptcy performance, but expect we’ll be reporting back periodically for some time.

Murray Energy: Files For Chapter 11

Back on September 13, we wrote when first posting about Murray Energy: “We don’t want to bury the lead: Murray Energy is likely to file for bankruptcy or re-organize and the BDC lenders involved are going to absorb some rather large losses“. On October 29, 2019 the coal company filed for Chapter 11 protection.

Given that we have already quoted ourselves once, here is what we said about BDC exposure at the time, which remains the most up to date picture we have:

BDC exposure totals $52.4mn, spread over 6 BDCs. These include publicly traded FS-KKR Capital (FSK) and three sister non-traded BDCs funds (FSIC IIFSIC III and FSIC IV but not – surprisingly – FS Energy). Then there are two others: Cion Investment and Business Development Corporation Of America.The exposure is in two different loans, one which matures in 2021 and the other in 2022. The debt has been on our under-performing list since IVQ 2018 and is currently rated CCR 4 (Worry List), where the chances of an eventual loss are greater than a full recovery.

As of June 2019, the 2021 debt was carried at par but the 2022 debt was discounted by a third. Currently, though, the 2022 debt trades at twice that discount, suggesting holders are not optimistic. We wouldn’t be surprised to see the 2022 debt fully written off once the dust settles, which would result in ($8.5mn) of further losses and ($12.5mn) in Realized Losses, to be absorbed by Cion and BDCA. Less clear is what might happen to the 2021 debt, which still trades at par. We won’t speculate at this point but will point out that – overall – $5.5mn of annual investment income is at risk.

This was a useful first test of our Bankruptcy Imminent list, on which Murray Energy had been placed since October 4, 2019, when we were told the company’s banks were in forbearance. Like snow in May, loan forbearances rarely stays around for long – unless you’re Greece.

We won’t speculate too much about the way forward at this stage or try to evaluate how much more capital the existing BDC lenders might advance and what ultimate credit and investment income losses might look like. We’ll wait till more is heard about Murray’s exit plans and just how bad its financial position is. Even if the coal giant does successfully leave Chapter 11, with coal industry fundamentals headed ever further downwards, any remaining BDC exposure post-bankruptcy will remain on the under-performing list.

Frontier Communications: Hedge Fund Recommends Bankruptcy

The Frontier Communications saga continues with hedge fund and investor Robert Citrone recommending the company file for Chapter 11 bankruptcy sooner rather later. As the attached article reminds us, there’s an ongoing debate amongst “stakeholders” as to what the communications company should do to deal with its heavy debt load and uncertain future.

“Normally haste makes waste, but in this instance we believe haste limits waste,” Ormond said in the letter. “The further the delays in addressing the balance sheet and state of the business in a court-supervised process, the greater the risk to the corporation, operating assets, employees and surrounding Norwalk.”

Increasing subscriber losses and turnover, combined with limited financial guidance, will only lead to further deterioration in the business, according to the letter.

We have no view on whether to file or not is better, but the pressure does increase the chances of the former. We are adding Frontier to our Bankruptcy Imminent list. The company is already rated CCR 4 (Worry List). As a reminder BDC exposure is substantial at $61.7mn and valued close to par. A bankruptcy could have detrimental effects – but to varying degrees – on the 9 BDCs involved.

McDermott International: SA Article

On October 23, 2019 Seeking Alpha author Henrik Alex wrote an article about McDermott International entitled: “The ‘One McDermott Way’ Might Still End In Bankruptcy Court“. The article lays out in useful detail the various options available to the company and the obstacles faced in taking advantage of the supposed “financial lifeline” offered by certain secured lenders. Any one interested in the subject will find the article helpful. For our own earliest posts about McDermott, click here.

Mr Alex’s conclusion is as follows:

Even after Monday’s bridge loan announcement, the much-touted “One McDermott Way” might still end in bankruptcy court if the company fails to arrange a quick sale of the Lummus Technology business given the dealbraker requirement to exchange at least 95% of the company’s senior unsecured notes into new PIK notes. While secured lenders would likely waive a minor consent shortfall (e.g. 90%), I do not expect them to approve a material amount of holdouts. But even if the condition will be waived, McDermott will face a reduction in borrowing capacity and letters of credit.

Judging by this week’s trading pattern so far, both unsecured bond- and equityholders seem to have very little conviction in the company avoiding a bankruptcy filing and so do I.

That said, the company still has until January 31, 2020 to enter into a firm purchase agreement for Lummus Technology “in form and substance satisfactory to the Supermajority Lenders and the Administrative Agents” as required by the terms of the credit agreement.

Should McDermott indeed have to seek bankruptcy protection, common equityholders will almost certainly end up with nothing. Even unsecured noteholders might see very little or even no recovery as already implied by the very low trading price.

That conclusion largely coincides with our own thoughts, except that we are more skeptical about the chances of selling Lummus Technology, which has been for sale for some time. This validates our decision to add McDermott to our Bankruptcy Imminent list. Thankfully, BDC exposure is small: limited to two BDCs. Business Development Corporation of America has the biggest chunk: $9.8mn and Oaktree Strategic Income (OCSI) just $1.3mn.

McDermott International: Stock Price Drops

Despite the financial lifeline offered by certain lenders to McDermott International, which we discussed two days ago, the company’s stock price continues to drop and has reached $1.6550 at time of writing, falling nearly (7%) intra-day. We have McDermott on our recently launched Bankruptcy Imminent list – our attempt to give readers a heads up on what credit calamity might be round the next corner. We’ve also checked on the current value of the company’s publicly traded loans and bonds, and both seem to be trending down in value in most cases. This is all adding to our concern that McDermott – and the $11.1mn of first lien BDC exposure to two BDCs – could default or be restructured in the fourth quarter 29019.

McDermott International: Arranges Additional Financing

Nominally on October 21, troubled oil services company McDermott International arranged $1.7bn of additional financing to meet an upcoming severe cash shortfall.  That sounded like very good news to the stock and bond markets worried about the solvency of the company for several weeks now. The stock price jumped. However, investors soon began to have second thoughts and the stock and bonds both dropped ! The Wall Street Journal reportedMcDermott’s bond rose as high as 33 cents on the dollar after the refinancing was announced, from about 29 cents on Friday, before falling to about 24 cents when the revised estimates were disclosed in a U.S. Securities and Exchange Commission filing. The company’s shares plotted a similar course, opening 21% higher at $2.84 before dropping to $2.04“.

The reasons include the fact that the “lifeline” debt cannot be accessed in one lump sum , or at will, but only in 4 tranches that relate to performance and require “sign-off” by other creditors, which is another word from concessions. Those were well spelled out in another article, this time from Bloomberg. Furthermore, the company paid out millions in retention bonuses to senior executives. Often when you’re paying your senior people a small fortune to do the work they’ve been doing for a healthy paycheck already, the chances of things going off the rails is high. Just as importantly, the company revised its earlier financial projections for 2019:

The company changed its estimate of earnings before interest, tax, depreciation and amortization, or Ebitda, to $474 million in 2019 from $725 million because of incremental charges on existing projects, according to the SEC filing. It also revised its free-cash-flow estimate for the year to negative $1.2 billion from negative $640 million.

This is far from resolving McDermott’s financial troubles and may – ironically enough – accelerate the need for a Chapter 11 filing or a full scale reorganization. We’ve been writing about the credit since September 19, 2019 when a restructuring firm was first hired, but the company has been rated CCR 4 – our Worry List – since July 30. We followed up with an update regarding this impending lifeline on September 25, 2019.  Now – as then – we remain skeptical that McDermott can dodge the bankruptcy/restructuring bullet.  Furthermore, we’re placing the company on our still-under-development Bankruptcy Imminent list, which means we believe there is a strong chance of a filing or re-organization occurring within the next 3 months. Judging by the market reactions by closing time, we may not be alone. This would cause – judging by the current valuation of the 2025 debt in the markets – a (35%) or greater loss for the two BDCs involved, or close to ($4mn) between the two, and the loss for some time of nearly $0.800mn of investment income. Not disastrous for either BDC but another reminder that the “oil patch” is a difficult place to play in.

Murray Energy: Forbearance Extended Two Weeks

On October 16, 2019 Murray Energy announced that its lenders “amended a forbearance agreement regarding debt payments until Oct. 28 at 11:59 p.m. The company originally had until Oct. 14 at 11:59 p.m., but the deal allowed the agreement to be extended. Lenders have agreed to not exercise available remedies related to payments due on Sept. 30“. We had previously discussed the initial forbearance in a post on October 3.

The coal company took the opportunity to also announce its intention not to pay debt service due on two other debt agreements.

This only means that the day of reckoning – which is unlikely to be favorable to the company and its lenders – has been slightly delayed. Given the continuing weakness in the coal sector, we are not optimistic. However, we should note that the bulk of $52.4mn in BDC exposure is in the 2021 Term Loan, which continues to trade at only a (2%) discount to par.

However, non-listed Business Development Corporation of America and Cion Investment with $12.5mn of exposure in the 2022 Term Loan may be less sanguine. According to Advantage Data, that debt is trading at a (66%) discount. Last time the position was valued the discount was (33%), suggesting further unrealized write-downs are coming in the third quarter. If we get a Chapter 11 filing there’s $5.6mn of investment income at risk. A little further down the road: material Realized Losses.

Constellis Holdings: Hires Restructuring Firm

The Wall Street Journal reports on October 9 that defense contractor Constellis Holdingshas engaged PJT Partners Inc. to engineer a plan for restructuring the company’s debt-laden balance sheet, according to people familiar with the matter“. PJT Parners is an investment bank, often used in turnaround work.

Otherwise, the WSJ article has no new information, except a recap of some of the highlights from the most recent financial filings. Some of that data is admittedly dire. We noticed that even after a recent asset sale – the subject of our last post about Constellis – “the company’s liquidity remained tight, amounting to just $33 million of cash and $18 million of availability on a revolving credit facility as of June 30“. That alone should send chills down the spines of anyone concerned about the company.

Anyway, the advent of a restructuring firm and those slim liquidity numbers suggests a day of reckoning is coming – and fast.

We discussed BDC exposure before when we first added Constellis to the under-performing list back in August. Judging by the current market valuations (source: Advantage Data) of the three different loans outstanding in which BDC lenders are involved, the debt is discounted from (8%) to (70%), higher than in June. Thankfully, 90% of of BDC exposure is in the 2022 Term Loan, which is valued the highest even after the news of a prospective restructure. Nonetheless, at current levels – and things could get much worse – potential ultimate realized losses could reach $20mn on the $109mn invested at cost, most of which has not been recognized even on an unrealized basis as of June 2019. Not to mention the loss of investment income, which we’ve previously pegged at $9mn annually.

Unfortunately Constellis has the possibility of being one of the biggest credit hotspots of the fourth quarter (if that’s when the rubber meets the road) for the BDC sector. The prospective damage will be widespread. There are 4 FS-KKR related non-listed funds with $90mn at cost lent to Constellis. OFS Capital (OFS) and Garrison Capital (GARS) and – to a lesser degree – two non-listed BDCs are also exposed.

Murray Energy: Lenders Agree To Forebear

On October 2, 2019 coal producer Murray Energy announced by press release its intention not to pay principal and interest payments due on September 30, 2019. However, the company was also able to announce a majority of lenders under its most senior loan agreements agreed to “forbear”, or hold back from acting on the upcoming payment default. This is not much to write home about as the forbearance only lasts till October 14. We assume – as we wrote in an earlier update – that Murray will be using the extra time on the clock to complete its ongoing negotiations with stakeholders in an effort to keep from falling into involuntary bankruptcy proceedings.

For the 6 BDCs with $52.4mn invested at risk, this development does not move the valuation needle but suggests that some sort of resolution will be coming shortly. Very shortly. Judging by what little we know that will mean some sort of Realized Loss is likely, which is why Murray Energy is rated CCR 4 (Worry List), and could be at CCR 5 (Non Performing) within a fortnight. Back on September 13 we wrote that we expected to hear more about Murray Energy “before long”. After the latest news, the same prediction continues to apply.

Foresight Energy: Skips Interest Payment

Here we go again: another coal miner is in deep trouble. The Wall Street Journal, and multiple other publications, report that “struggling coal miner” Foresight Energy LP has decided to miss making a scheduled bond interest payment and is preparing to restructure its balance sheet. On the other side, lenders and bond holders have hired specialist financial advisers for the negotiations ahead.

There are 4 BDCs – all non listed – with $22.4mn exposure to the troubled coal miner: Business Development Corporation of America (BDCA), and three FS-KKR entities, Corporate Capital Trust II, FSIC II and FSIC III. All are in the 2022 Term Loan and all are looking at a significant unrealized depreciation write-down in the coming quarter. As of June 2019, the debt was valued at a (18%) discount by the most conservative valuation. At time of writing on October 1, 2019 Advantage Data’s middle market real-time loan pricing shows the discount has risen to (46%). That’s , at least, an extra ($6mn) write-down from the mid year number. Annual income at risk is $1.8mn. Also very likely a little way down the road is a debt for equity swap of some kind and some sort of material realized loss.

We note – wryly – that the debt at Foresight was valued close to par all the way through the IQ 2019 valuations, suggesting the lenders involved were not expecting the upcoming financial crisis. Only in the IIQ of 2019 was the debt written down sufficiently to be automatically added to our under-performing list as the Watch List level (CCR 3).

As most everyone must know, the coal mining sector has been in trouble for some time, and the recent trend is for ever greater problems. In the few months we’ve been publishing the BDC Credit Reporter, we’ve written about Murray Energy and Blackhawk Mining. One is considering Chapter 11 and the other is already there. As we’ve said before, why any BDC lender would invest in this notoriously challenging corner of the energy sector is beyond us. Admittedly, Corporate Capital Trust II has been involved for some time and might be able to argue that the risks have increased since writing their cheque. However BDCA only invested for the first time in the IQ 2019 and FSIC III in the IVQ of 2018.

Capstone Nutrition: Acquired By PE firm

The news – reported on September 24, 2019 – that PE firm Brightstar Capital had finalized its acquisition of Capstone Nutrition should have been music to the ears of its 3 BDC lenders, with an aggregate $117mn in exposure. That’s a pretty penny to have outstanding and to a contract manufacturer much of whose debt has been on non accrual since 2016 !

The BDCs involved are Medley Capital (MCC), Sierra Income and Business Development Corporation of America. Big discounts in excess of three-quarters of cost have been taken as of the latest IIQ 2019 results.

What we don’t know – and nobody is saying – is whether the purchase price was large enough to ensure the repayment in full of the lenders – including the afore mentioned 3 BDCs. If so, that will be a major gain (over $80mn) – and elicit a huge sigh of relief from the BDCs and their shareholders. If not, a realized loss of an undetermined amount will be crystallised as early as the third quarter 2019 BDC results.

McDermott International: Seeks Bridge Loan

We first wrote about trouble at oil field services giant McDermott International back on September 19, 2019 when a restructuring firm was hired. Now there are reports that the company is seeking a huge bridge loan to fund a $1.7bn working capital deficit until assets can be sold to repay existing debt. Here’s what Bloomberg said about what asset sales might accomplish:

The company confirmed it was working with Evercore to explore unsolicited interest in its Lummus Technology business, with a valuation exceeding $2.5 billion. That amount combined with its $1.5 billion in boats, equipment and buildings, as well as $500 million in storage assets, could be enough to cover its debt and preferred stock, Citi research analysts wrote in a Sept. 18 note.

McDermott said it had about $3.8 billion of gross debt at the end of the second quarter and $1 billion of cash available.

If it were to sell the technology business for more than $500 million, McDermott’s bond rules stipulate that it must use the net proceeds to repay debt, according to a Covenant Review report“.

We’re not expert enough in the intricacies of McDermott’s arrangements to determine if asset sales – were they to happen – would be positive or negative for the 2025 Term Loan held by the two BDCs with $11mn in exposure at cost. What does seems clear: the McDermott story – thanks to its massive cash needs and already high debt – will be on the front burner where credit developments are concerned through the rest of 2019. We maintain a CCR 4 (Worry) rating.

Medical Depot Holdings: Raises New Equity, Restructures Debt

Last time we wrote about Medical Depot Holdings, also known as Drive DeVilbiss, we concluded in this manner: “It’s hard to envisage a scenario where some sort of loss does not occur given the amount of debt involved, but we’ll have to wait and see. We have a Corporate Credit Rating of 4. That’s our Worry List”.

On September 20, 2019 the company announced by press release that it “had agreed in principle” to receive $35mn of additional capital “together with a reduction in cash debt service obligations from its current
lenders
“. This was quickly picked up and repeated in different forms by financial and trade publications as evidence of a successful “rescue operation”.

However, from the BDC Credit Reporter’s standpoint, the company’s announcement raises more questions than answers. There’s the “in principle” part; the source and form of the $35mn and what is meant by “reduction in cash debt service“. Also not clear is what the lenders have received in return – besides the heartfelt thanks of the company and its owners. So we’re marking this development as trending positive, but not changing our Credit Rating till the many blanks get filled in. When that might occur – and from what source- remains unclear.

We have reported that there are two BDCs with $32.4mn of exposure at cost: Bain Capital Specialty Finance (BCSF) and Business Development Corporation of America (BDCA). We may learn from them what “reduction in cash debt service” means. We’re guessing: a lower interest rate on the debt (but whose ?) and – potentially – lower income.

McDermott International: Hires Restructuring Firm

We placed giant oil field services company McDermott International, Inc. on our under-performing list back on July 30, 2019 with a Corporate Credit Rating of 4 (Worry List) after results came in much worse than expected and the stock sank. Now matters are getting worse, as the company has just hired turn around firm AlixPartners. What followed was the equivalent of an earthquake in terms of market reaction, even more so than back in the summer. Here’s what Bloomberg reported: ” The Houston-based company’s stock plunged as much as 76% Wednesday — trading was halted for volatility at least five times — while its bonds dropped more than 30 cents to 37 cents on the dollar, making them Tuesday’s most actively traded debt in the U.S. high-yield market..

BDC exposure is relatively modest ($11mn at cost), divided between two BDCs: non-listed Business Development Corporation of America (BDCA) and listed Oaktree Strategic Income (OCSI). Both appear to be in the same April 2025 senior Term Loan and both valued their exposure at June 30, 2019 at par, or very close. We expect next time round that valuation will drop and even more so if McDermott files for Chapter 11 or restructures. There’s about $750,000 of annual investment income at risk, with BDCA having the bulk of the exposure.

The troubles of McDermott are part and parcel of the distress in the energy industry – especially but not exclusively in oil field services of one type or another, as we’ve previously mentioned. We expect to hear considerably more about the company and its less well known peers in the months ahead. In this segment at least recession-like conditions are already in play.

Frontier Communications: Makes Scheduled Debt Payments

Those are sighs of relief you’re hearing. On September 16, 2019 the Wall Street Journal reported that Frontier Communications was making its scheduled debt payments. This would not normally be news, but many investors were – apparently – concerned the troubled and highly leveraged communications company might choose to file for Chapter 11 or a restructuring instead.

That’s good news of a kind, but the problems at Frontier continue, so this may be more respite than anything else. (We’ve written about the company multiple times previously. Here’s a link to the list of articles). There is $62mn of debt outstanding at 8 different BDCs and over $5mn of annual investment income at risk. The exposure is carried as of June 2019 at close to par, so if anything negative happens to Frontier in the future the impact will be material from a BDC perspective (and much more so in the high yield bond market). For the moment lenders and shareholders can breathe easy. Tomorrow, though, is another day.

Constellis Holdings: Sells Assets To Improve Liquidity

According to the Wall Street Journal’s crack Pro publication, Constellis Holdings – a troubled leading defense contractor with multiple operations – has sold a training facility for $40mn. More than the amount involved – which is modest by comparison with the debt on the company’s balance sheet – we noted that the WSJ article indicated the sale was undertaken to “avert a liquidity crunch”.

We added Constellis to the under-performing list (CCR 3) only in the IIQ 2019, as reported in a post on August 17, 2019 and based in downward valuation changes, rating downgrades and changes in the C-suite. As we become more familiar with the Apollo Global-owned private company, we recognize that Constellis should have been a candidate for our concern some time before. The drawdown of US forces in Afghanistan and Iraq, which has been going on for some time, is one negative factor; along with a major restructuring of its business underway, discussed by its CEO in a recent article in a defense trade publication.

The sale of the training facility by itself will not be sufficient to right the ship, and we’ll be keeping a close eye on developments at the company in the months ahead. Given the over $100mn invested by 9 BDCs – especially 4 FS-KKR entities – this deserves watching.

Anchor Glass: Downgraded By S&P

On September 5, S&P Global Ratings downgraded packaging company Anchor Glass Container Corp to CCC+. That’s bad news for non-traded BDC Business Development Corporation of America (BDCA), which has a $20.0mn position in the company’s 2024 second lien debt. S&P reduced the rating on that debt to CCC-.

As of June 2019, BDCA had discounted its debt position by (30%). However, this is a traded loan and the current price is at 50% of par, suggesting an unrealized depreciation is coming in the IIIQ 2019 of (20%) or about ($4mn).

Judging by what S&P is saying about the financial performance, cash flow and leverage at Anchor Glass that may be the least of BDCA’s problems. If the company files for bankruptcy or restructures, there is $2.0mn+ in annual investment income at risk for BDCA. Last time we checked (two seconds ago) BDCA’s annualized Net Investment Income Per Share was just under $110mn. In these situations a 100% write-off of junior debt is possible, so a material Realized Loss is possible.

Given that debt to EBITDA is over 10x; capex requirements are heavy and the economic backdrop is not favorable, the odds of things going wrong seem high. However, according to S&P, the company – thanks to an asset based Revolver – has no immediate liquidity problems so this is likely to be a slow burn.

Murray Energy: Assessing Restructuring Options

We don’t want to bury the lead: Murray Energy is likely to file for bankruptcy or re-organize and the BDC lenders involved are going to absorb some rather large losses. On September 10, 2019 the Wall Street Journal’s bankruptcy publication reported that the privately-held coal miner had hired Kirkland & Ellis and Evercore to assess restructuring options.

That follows a recent downturn in the short term prospects for the U.S. coal industry, according to Moody’s and as reported by S&P… That’s not to mention the obvious secular decline in the prospects for coal mining and coal usage. Previously in 2019 , the rating groups had downgraded the company’s debt to SD or Selective Default, so the writing has been on the wall.

BDC exposure totals $52.4mn, spread over 6 BDCs. These include publicly traded FS-KKR Capital (FSK) and three sister non-traded BDCs funds (FSIC II, FSIC III and FSIC IV but not – surprisingly – FS Energy). Then there are two others: Cion Investment and Business Development Corporation Of America.The exposure is in two different loans, one which matures in 2021 and the other in 2022. The debt has been on our under-performing list since IVQ 2018 and is currently rated CCR 4 (Worry List), where the chances of an eventual loss are greater than a full recovery.

As of June 2019, the 2021 debt was carried at par but the 2022 debt was discounted by a third. Currently, though, the 2022 debt trades at twice that discount, suggesting holders are not optimistic. We wouldn’t be surprised to see the 2022 debt fully written off once the dust settles, which would result in ($8.5mn) of further losses and ($12.5mn) in Realized Losses, to be absorbed by Cion and BDCA. Less clear is what might happen to the 2021 debt, which still trades at par. We won’t speculate at this point but will point out that – overall – $5.5mn of annual investment income is at risk.

In any case, we expect we’ll be discussing Murray Energy again in the weeks ahead.

Medical Depot Holdings: Downgraded By Moody’s, BDC Credit Reporter.

On June 19, 2019 Moody’sdowngraded Medical Depot Holdings, Inc.’s (d/b/a Drive DeVilbiss – “Drive”) Corporate Family Rating to Caa2 from Caa1. Moody’s also downgraded the company’s Probability of Default Rating to Caa2-PD from Caa1-PD, its first lien credit facilities to Caa2 from Caa1 and its second lien term loan to Ca from Caa3. The outlook is stable“.

The ratings group believes the capital structure of the medical equipment manufacturer is “unsustainable“. Added: “Adjusted debt/EBITDA (based on management’s adjusted EBITDA) exceeded 12 times for the twelve months ended March 31, 2019. At the same time, the company’s liquidity has weakened given sustained negative free cash flow and increased utilization of its revolving credit facility. This is due to the cash costs associated with restructuring activities and weaker operating performance“.

All the above is bad news for the two BDCs with exposure to the company: Bain Capital Specialty Finance (BCSF) and Business Development Corporation of America (BDCA). Both are lenders in the first lien 2023 debt, with exposure of $32.4mn and $2.7mn of income at risk of interruption. At June 20219, both lenders had sharply discounted their loans (23%) and (27%). Yet, since then the market value has dropped even further: to a (30%) discount, as we write this on August 31, 2019.

It’s hard to envisage a scenario where some sort of loss does not occur given the amount of debt involved, but we’ll have to wait and see. We have a Corporate Credit Rating of 4. That’s our Worry List.