Posts for Oaktree Strategic Income

TridentUSA Health Services: Written Off

Ares Capital (ARCC) – the largest BDC lender to TridentUSA Health Services (also known as New Trident Holdcorp and Trident Health Services) – has taken a 100% realized loss on its non-performing debt outstanding to the company, which filed for bankruptcy back in February, and which we discussed in a post on September 30, 2019. The loss was realized in the IIIQ 2019. This has a resulted in a major loss for the BDC: $96mn. Moreover, that means 3 other BDCs with another $12mn of exposure are likely to be taking similar write-offs when their results are published: Gladstone Capital (GLAD), Solar Senior Capital (SUNS) and Oaktree Strategic Income (OCSI).

What’s more, back in IVQ 2017 when the company first went on non-accrual other BDCs, such as PennantPark Floating (PFLT) and Investcorp Credit Management BDC (ICMB) had positions as well. In fact, total BDC exposure was $157mn at its peak but only $108mn as of June 2019 when the debt had all been effectively written down on an unrealized basis to zero. We expect those departed BDCs took some sort of realized loss to depart the scene early. If the other BDCs lenders still involved follow ARCC’s path, SUNS will be losing ($7.7mn), GLAD ($4.4mn) and OCSI well under ($1mn). About $12mn of investment income that was being charged will be lost.

This is a credit that dates back to 2013 for ARCC (and other involved) when the BDC giant made a $80mn second lien investment. The debt was added to the under-performing list in the IIQ 2016. The valuation went up and down from there, including rising at one point on the hope of a sale. However, by IVQ 2017, the second lien debt was placed on non accrual. ARCC advanced $16mn in additional debt, on a first lien basis. In the spring of 2018 new debt was advanced and existing debt renegotiated, which Moody’s deemed to be “a distressed exchange” and downgraded the company. Finally, in February 2019 the New Trident filed for Chapter 11. By then most BDCs had written down their exposure 100% or close to.

What went wrong ? You’d be hard pressed to find out from ARCC – which prides itself on its transparency – from the latest Conference Call transcript. Management only discussed the company in response to a question, describing the investment as “unsuccessful” and the amount lost as “pretty substantial”. We’d agree with that last assessment: $96mn is equal to 1.3% of ARCC’s equity capital at par and is equivalent to 45% of this quarter’s Net Investment Income.

We know that the company and its subsidiaries is owned by private equity sponsors Formation Capital, Audax Group, and Revelstoke Capital Partners and that annual revenues are approximately $500 million, according to Moody’s. A couple of BDCs have been quick to say the health care company’s problems were “idiosyncratic” but the bankruptcy has occurred at a time when both the BDC Credit Reporter and rating groups have noticed a deterioration in the sector more generally – a grave concern considering the ubiquity of health care related credits in leveraged lending.

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.

Citgo Holdings: Possible Foreclosure of Shares

Here’s a “down the rabbit hole” credit story that’s just come to our attention, but which might have a happy ending for the BDCs involved. Citgo Holdings has pledged 50.1% of its stock to support its parent – Petroleos de Venezuela’s (PDVSA)- 2020 bonds. A billion dollar debt payment is due, and the funds are not available. Big debt holder of the PDVSA bonds Ashmore Group wants to be repaid and proposes to foreclose if not paid. However – and this where business and politics torn from the headlines intersects – the Trump Administration might intervene to prevent the seizure. That’s because PDVSA and Citgo are effectively controlled by Venezuela’s opposition leader and “self proclaimed President” Juan Guaido.

Guaido is a U.S. ally and an opponent of actual President Nicolas Maduro. That’s making the Trump administration consider an unusual intervention in the debt markets. This is ably described in a Bloomberg article by Ben Bartenstein published on October 22 about the subject:

While some U.S. officials are leery of interfering in the bond market or property rights, the White House also worries that it would be a political disaster for Guaido to lose Citgo, the Houston-based refining unit of Venezuela’s state-owned oil company, the people said. President Nicolas Maduro’s regime could blame that on Guaido, Trump and Wall Street, they said.

As a result, officials in Washington are acknowledging the increasing likelihood that the Treasury Department’s Office of Foreign Assets Control revokes General License 5, effectively putting transactions related to the PDVSA 2020 bonds on the same footing as other Venezuelan financial deals that are prohibited. There’s still some opposition to such a move, the people said, and talks continue. The U.S. has refrained from formally promising this to Guaido’s representatives because that may dissuade them from negotiating with creditors, the people said.

“If OFAC revokes GL5 and makes changes to the related FAQ guidance, the enforcement on the collateral securing the 2020 bonds will be unauthorized,” said Cecely Hugh, investment counsel in emerging-market debt at Aberdeen Standard Investments in London. “This means that the collateral would be effectively worthless while the sanctions are in place.”

At June 30, 2019 one BDC – Oaktree Specialty Lending (OCSL) had invested $21.8mn in Citgo Holdings debt due 2020. The debt was valued at par. Now the good news: on August 15, 2019 the 2020 debt seems to have been refinanced, according to a company press release. What we don’t know is if OCSL doubled down and invested in either of the two new facilities that “took out” the 2020 debt. Also both OCSL and sister BDC Oaktree Strategic Income (OCSI) have close to $30mn invested in the debt of Citgo Petroleum Corp, a subsidiary of Holdings. We don’t know if that debt will be affected now – or by the final maturity in 2024 – by what’s happening in the world of realpolitik. The good news is that all publicly traded Citgo Petroleum debt – as opposed to the PDVSA debt – is trading at or above par.

This is more complicated than our usual credits, but we’re adding Citgo – parent and subsidiary – to the under-performers list with a CCR rating of 3 (Watch List) till the smoke clears.

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.

TridentUSA Health Services: Settles Whistleblower Suits

TridentUSA is already in bankruptcy, and has been since February of this year. On September 26, 2019 the company settled two outstanding whistleblower lawsuits brought by the government, agreeing to pay out $8.5mn, as reported by the Baltimore Business Journal.Trident provides mobile diagnostic services to residents of nursing homes. The company earns federal money to provide mobile x-rays to Medicare and Medicaid participants in the nursing homes. The whistleblowers had alleged that Trident had violated federal law by engaging in a kickback scheme, which led to a government investigation of Trident’s pricing arrangements and its costs to provide mobile x-rays at these facilities“.

In a round-about way, this settlement might be a Good Thing for the embattled company and facilitate its exit from Chapter 11. This report tells us nothing of the bigger picture.

For the BDCs involved, there is nowhere to go but up from here. Four well known public BDCs have $108mn in first and second lien loans to the company or its equally compromised sister entities. The exposure has been almost completely written off as of June 2019 and well over $10mn of investment income lost. The BDCs involved are all publicly listed: Solar Senior Capital (SUNS), Oaktree Strategic Income (OCSI), Gladstone Capital (GLAD) and the biggest player of all Ares Capital (ARCC).

Trident is one of a series of significant healthcare failures due to some kind of fraud that we’ve come across of late. Most recently, we discussed Oaktree Medical Centre in a similar vein on these pages. In recent memory, but before the advent of the BDC Credit Reporter, there have been at least two other similar cases of healthcare fraud or other catastrophic difficulty involving BDC lenders. One notable example would be RockDale BlackHawk. Maybe we should ask harder questions about the due diligence capabilities of the BDC underwriters or are stories like these just the exceptions to the rule ?

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.

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.

Lannett Company: Negative Seeking Alpha Article

An August 22, 2019 article about Lannett Company on Seeking Alpha is a useful summary of the bear case about future business prospects. For our part, we were intrigued by the argument made that the company is “dangerously leveraged at 5.8x adj. Net Debt to EBITDA and just 1.76x interest coverage”. This mirrors earlier concerns expressed by Moody’s last year when the company’s corporate and debt ratings were all downgraded following the loss of a major contract.

As of the IIQ 2019, the two BDCs with $9mn of aggregate exposure are Oaktree Strategic Income (OCSI) and Oaktree Specialty Lending (OCSL) in two senior debt loans maturing in 2020 and 2022. The biggest discount is modest – (6%) – but we have placed Lannett on our under-performing list in the Watch category (CCR 3) since the IIIQ of 2018 regardless, due to the concerns reflected above about high leverage and business reverses. As of now, the 2022 debt – which is publicly traded – remains valued at the same discount as of June 2019. However, that could change and $0.700mn of income is at risk. Neither BDC has a substantial exposure (although OCSI has the proportionately much bigger position and in the riskier 2022 loan) , but still deserves mention.

Zep, Inc: New CEO Hired

On August 20, 2019 Zep Inc., an industrial cleanings product developer, announced the hiring of a new CEO: Dan Smytka.

That’s notable from a BDC standpoint, both because of the substantial exposure to the company ($126.6mn at June 2019) from 6 public and non-traded BDCs and because the business has been under-performing of late. That caused the second lien debt in the latest quarter to be written down by as much as (30%) and first lien debt by (19%), according to Advantage Data‘s records. (As usual there’s much variation in values between BDCs). By comparison, a year ago the debt was valued, in all cases, close to par. We checked the latest prices on Advantage Data for both tranches of debt and found discounts of (25%) and (30%), suggesting the markets have been getting more pessimistic since mid-year.

What’s more, Moody’s downgraded the company to speculative status back in April, including the first lien secured debt. The rating group is concerned about debt to EBITDA that exceeds 10x ! A saving grace is that the earliest debt maturity is 2022.

Clearly Mr Smytka has a big challenge ahead and the BDCs involved – especially three Goldman Sachs funds with the bulk of the exposure – will be watching with great interest if a turnaround can be achieved. With over $12mn of annual investment income at risk, this is one of the largest BDC trouble spots. We have the company on our Worry List or CCR 4.

99 Cents Only Stores: Completes Recapitalization

On July 18, 2019, 99 Cents Only Stores announced by press release the completion of a restructuring plan that the BDC Credit Reporter discussed more than a month ago. Basically, the second lien and third lien debt holders are undertaking a debt for a minority equity stake position in the troubled value retailer. In addition, the sponsors – Ares Management and a Canadian pension fund – and other players will be injecting new equity capital as well. Moody’s has already – back on June 12, 2019 – called the restructuring ” a distressed exchange” , and downgraded the company’s rating. We had previously believed that a $20mn portion of the $55mn at cost in BDC exposure owned by sister funds Oaktree Specialty Lending (OCSL) and Oaktree Specialty Income (OCSI) was going to convert to equity, as part of the restructuring. (We assumed the asset-based loan in which TPG Specialty – TSLX –  has $32mn invested would either continue unchanged or be refinanced). On further review, and without any guidance on the subject from the BDCs involved or the company’s press release, we’ve changed our mind and assume the first lien debt will continue as before and not be involved in the conversion to equity. Both the OCSI/OCSL debt and the facility in which TSLX is involved in were trading at the close on July 19, 2019 at a (9%) discount to par, and were paying interest normally. (These are publicly traded debt issues, and we used Advantage Data’s real-time loan and bond pricing module). Given the new capital structure; the infusion of capital and reports that the operational turnaround underway at 99 Cents Only Stores that has been underway for months is bearing fruit, the short term credit outlook is up. We are upgrading the company from a CCR 4 Rating (what we call or Worry List) to a CCR 3 rating (aka Watch List). Much remains to be done following this second restructuring in so many years, and we do not forget that 99 Cents Only operates in the Bermuda Triangle industry of retail where other players have restructured or gone through Chapter 11 only to go bankrupt again. For the moment, though, we are cautiously optimistic and expect Moody’s may shortly upgrade the company and the remaining debt.

Frontier Communications: S&P Downgrades Debt Rating

On June 20, 2019, S&P Global Ratings downgraded “its long-term issuer credit rating and issue-level rating to CCC from CCC+, with a negative outlook. It’s also trimmed its rating on senior secured first- and second-lien debt to B- from B”, according to Seeking Alpha. The rating group went to say: “Notwithstanding its favorable near-term liquidity position,” the company will likely look at options “given the business’ downward trajectory and inability to refinance looming unsecured debt maturities in 2022, which are trading at deeply distressed levels,” S&P says. From the BDC Credit Reporter‘s standpoint, this only confirms our prior assessment that a bankruptcy or restructuring is more likely than not. We’ve had the company on our Worry List all year. The stock price is now $1.35, but was recently at an all time low of $1.21.

Frontier Communications: Restructuring And Chapter 11 Alternatives

Bloomberg published an excellent article about the different constituencies amongst Frontier Communications creditors, and the several alternatives being considered to cope with the telecom company’s mountain of debt. No change to the BDC Credit Reporter‘s views, as noted in the Company File.

99 Cents Only Stores: Completes Debt For Equity Swap

The good news for 99 Cents Only Stores, LLC – which is owned by Ares Management and the Canada Pension Plan Investment Board ? Chapter 11 bankruptcy has been averted. Back on June 7, we warned on our Twitter feed that bankruptcy was a risk. Now the bad news: Ducking a trip to the bankruptcy court has been accomplished by a debt for equity swap and a fresh capital raise. According to Retail Dive:  “under the agreement, 99 Cents Only is to issue common and preferred stock in return for its outstanding $146 million second-lien term loan facility and $143 million secured notes”. From what we can tell, there are two BDCs in the secured notes : sister BDCs OCSL and OCSI, with aggregate exposure at cost of over $20mn, and generating over $1.5mn in annual investment income. (The bulk of the exposure is at OCSL). At March 31, 2019 the debt was still performing and written down only modestly (11-14%), although restructuring negotiations were already underway. This is not a transaction the “new” management at OCSL/OCSI can blame on Fifth Street. According to Advantage Data, the debt was added in late 2017 after Oaktree’s investiture as external manager.

Frankly, we’re a little surprised at how generously the BDCs have valued their exposure throughout. As late as IIIQ 2018, the debt was carried at par even though 99 Cents Only has been in trouble almost from day one, thanks to heavy leverage placed on the 2011 buyout. For a sense of proportion – and quoting Moody’s – debt to EBITDA was around 8x. In 2017, the company almost filed for Chapter 11 and was only saved by an earlier debt restructuring. It’s unclear if this second restructuring will do the trick, but OCSL and OCSI are now in for the long term in a non income producing position at the bottom of a still leveraged balance sheet. We’ll have to wait till the publication of the IIQ 2019 results to see how the BDCs value their new positions and whether any realized losses are booked. BDCs have great latitude in this area, so investors should pay attention to what is done as well as said.

Also with exposure is asset-based specialist TSLX, with $32.2mn in 2021 debt. The BDC has continued to mark the position at par, suggesting TSLX will be repaid in full on its FILO ABL facility when the time comes. We have no further details from the public record. We do know – from Advantage Data – that TSLX will be paid more than OCSL and OCSI and – as far as we can tell – have a better credit outcome thanks to their ABL approach. No wonder multiple other BDCs are eyeing getting into this specialized form of lending. By the way – outside of the public filings – none of the three BDCs involved appear to have discussed the challenges at the company since the debt was booked, either on a Conference Call or Investor Presentation. (We use Sentieo which searches all available filings for any input keywords).

By the way, we don’t have a Company File for the company, but will be adding one given that – this restructuring notwithstanding – BDC exposure continues and the final resolution of the greater than $50mn invested is some way off. After all, S&P has a rating of CC for the company…

Frontier Communications: Sells Assets To Repay Debt

May 30, 2019: Yahoo Finance reported Frontier Communications Corporation (ticker: FTR)  announced that it has inked a deal to sell its assets and operations in 4 states. The transaction is valued at $1.352 billion in cash, and is subject to regulatory approvals.The sale proceeds are likely to be utilized to pay off the company’s financial obligations. As of Mar 31, 2019, it had $119 million in cash and equivalents with $16,526 million of long-term debt. At the end of first-quarter 2019, Frontier Communications’ leverage ratio was 4.76:1. For the 5 BDCs involved, with $44mn in senior and subordinated debt at risk, this keeps the wolf at bay but is unlikely to result in full repayment at par. This remains on our Watch List.

Lannett Company: Article Questions Ability To Remain Solvent

According to an article published on Seeking Alpha and in charges brought by the State Of Connecticut, Lannett Company (LCI)  and ” many other generic pharmaceutical firms have been conspiring for years to drive prices of generics up”. The author of the SA article continues :

…there is no clear path for LCI to remain solvent if they receive a fine roughly equivalent to their market cap (high end of the proposed range). In a previous report I highlighted how little free cash flow was projected given the current guidance. With a run rate of ~$107m in EBITDA, $68m in interest expense and $32.5m in CapEx (mid-range of the guidance) the company will be producing ~$7m in FCF.

$7m in FCF isn’t going to be very helpful in paying off the $650m in net debt, but in a situation where the government tacks on a few hundred million of additional liabilities – that probably spells bankruptcy protection”.

Admittedly, the author is short the stock. Nonetheless, there is cause for concern. There are 3 BDCs with $16.4mn in senior secured exposure to the highly leveraged company: OCSI, Cion Investment and OCSL with a smaller position. In the IIIQ 2018, the debt was written down sufficiently to cause us to place the Company on our Watch List. In the IVQ 2018 the discounts increased t0 a range of (6%) to (18%). More write-downs might be ahead or even non-accrual. About $1.25mn of investment income is at risk.

Monitronics: Convertible Debt Repurchase Terms Changed

Monitronics, which does business as Brinks Home Security, is a wholly owned subsidiary of Ascent Capital Group, a public company with the ticker ASCMA. The business is very highly leveraged, with debt of $1.8bn and adjusted EBITDA at Brink’s for nine months annualizing at under $300mn. The auditor of ASCMA has raised “Going Concern” doubts in its IIIQ 2018 statements .  In January 2019, the parent hired Moelis to help them consider “strategic alternatives” , which  include “an investment in the Company or its operating subsidiary Brinks Home Security by a third party”. Amidst of all this, ASCMA has been attempting to restructure its debt mountain and – controversially – has been seeking to redeem Convertible Notes due 2020. This has been going on for months, but the latest press release on March 22, 2019 suggests the transaction has been achieved by raising the tender price offered. In the greater scheme of things, though, the problems of Monitronics and its parent appear far from over. ASCMA has become a penny stock, closing at $0.65, down hugely in the past year from over $ a share. Surprisingly, the 4 BDCs with $12mn of aggregate exposure to Monitronics have continued to mark their investment at close to par value through September 2018. All the BDCs – which include Oaktree Strategic (OCSI), FS Investment non-traded funds II & III  and non-traded CCT II (the last 3 all part of the FS KKR construct) – are invested in the 2022 Term Loan. The senior nature of the obligation may have justified the generous values ascribed. However, in the IVQ 2018 valuations OCSI discounted the debt by (10%) for the first time and the other BDCs also applied lower valuations than in the past. Looking at the numbers, the huge amount of debt and the little liquidity available – not to mention the auditor’s Going Concern doubts – has kept this credit on our Watch List for some time, regardless of the BDCs numbers. We don’t know if the Convertible Debt repurchase is a win, or a loss or neutral, but before long we still expect a credit event  – such as a default or non-payment – to occur. About $1mn of investment income is at risk spread roughly evenly over the BDCs mentioned. Furthermore, barring a well heeled buyer coming along, full repayment of the 2022 Term Loan also has to be questionable.

Frontier Communications: Refinancing Debt

On March 12, 2019 publicly traded telecom company Frontier Communications (FTR) announced its intention to raise $1.65 billion in “First Lien Secured Notes”,  due in 2027. The proceeds from the new debt will be used – amongst other purposes – to refinance “all outstanding indebtedness under its senior secured term loan A facility, which matures in March 2021”.  Oaktree Strategic Income (OCSI) is the only public BDC with exposure to Frontier Communications, all in the 3/31/2021 term loan A facility. Total outstandings at cost are $2.859mn and were valued at December 31, 2019 at $2.780mn. No date for the closing of the refinancing has been set, which could occur in the IQ of 2019 or the IIQ. OCSI should book an immaterial increase in value and lose an asset earning only LIBOR + 2.75%, or slightly over 5% per annum. This is a recent loan for OCSI, which only began lending in the IIIQ of 2018 under the new Oaktree management.