Constellis Holdings: Added To Under-Performing List

With the publication of the IIQ 2019 valuations by 8 BDCs with $107mn in various forms of debt exposure (2022-2024 and both senior and second lien), we’ve added Constellis Holdings to our under-performers list with an initial rating of CCR 3 (Watch List). The debt has been discounted between (6%-30%) from 0% to (5%) in the prior quarter.

This is not surprising as there has been a massive number of changes in senior management in recent months and downgrades from both S&P and Moody’s in the spring, worried about high leverage; cash flow losses and operational challenges. For the BDC sector, this is very big exposure in aggregate, with annual income of approx. $9mn at risk should the company default down the road. With that said $90mn of the debt is held by the three FS-KKR non traded BDCs (FS II-III and IV), which are intending to go public under one banner before long. How Constellis plays out will be of above average interest at FS Investment-KKR in the quarters ahead.

Crius Energy: Acquired By Vistra Energy

On July 15, 2019 publicly traded “integrated energy company” Vistra Energy (VST) announced – by way of a press release – the successful acquisition of Crius Energy Trust, also a public entity traded on a Canadian exchange. The deal had been contemplated since February and sweetened along the way. Here are highlights from the press release:

As a result of the closing today, Crius Energy unitholders are entitled to receive C$8.80 per trust unit upon the redemption of such units. In addition, Crius Energy unitholders that were holders of record on March 26, 2019 will receive C$0.209 per unit for the distribution previously declared by Crius Energy on Jan. 16, 2019. The combination of these amounts results in total cash payable to Crius Energy unitholders of C$9.009 per unit. Crius Energy expects that the distribution of C$0.209per unit will be payable today, with the transaction consideration of C$8.80 payable within three business days of today’s date. The units of Crius Energy are expected to be delisted from the Toronto Stock Exchange as of the close of markets on July 17, 2019, and Crius Energy is expected to be wound-up following the redemption of the trust units on July 18, 2019.

This is good news for the only BDC with exposure to Crius Energy: MVC Capital (MVC). A couple of years ago MVC sold its largest portfolio company – US Gas & Electric (USGE) – to Crius in return for units in the Trust. Moreover, MVC has a $37.5mn second lien debt position, yielding 9.5%, in USGE’s debt, held by a subsidiary. Admittedly, thanks to the dropping value of the Crius Energy trust units that occurred in the quarters preceding the buy-out offer – and which caused us to place the investment on our under-performing list  – MVC will not receive back all its $25.9mn investment, as per the latest filing. (When interest is added to the principal balance received, the return is positive). However, Realized Loss likely to be booked in the  fiscal quarter ended July 2019 should be modest: under $5mn by our estimate, and there may even be a write up on an unrealized basis, by comparison with the $21.3mn FMV valuation at the of April 2019.  The USGE debt remains on the books, assumed by the new owner. However, the creditworthiness of Vistra is much greater than that of Crius, which allows us to return USGE’s debt to Performing status. All in all, a positive outcome for MVC (which is likely to be repaid in full by Vistra before long) on a credit that was headed south fast. Just before Vistra stepped in with its checkbook , the Crius trust units had been written down (49%) on the BDC’s books on an unrealized basis.

Crius Energy/U.S. Gas & Electric: Company Sold

Good news and bad news for MVC Capital (MVC) as its portfolio company Crius Energy  – in which the BDC held both equity units and debt – is sold to Vistra Energy, according to a press release issued by the buyer Crius shareholders approved the deal months ago but only now have regulatory approvals come in from the Federal Energy Regulatory Commission. MVC holds units in Crius – received when selling its biggest portfolio investment US Gas & Electric – to the Canadian company a couple of years back. MVC had already valued those units at $21.3mn at the end of April 2019, and we expect little increase in value when this deal settles as the ultimate purchase price was mostly already locked in. Also to be received are some accrued distributions which, presumably, will be booked through the income statement. We’re not clear what will happen to MVC’s second lien loan in U.S. Gas & Electric – a subsidiary of Crius since the acquisition. If that debt – which is MVC’s largest income producing investment with an FMV of nearly $40mn  – is repaid (priced at 9.50% and due in 2025), the bad news for the BDC will be redeploying the proceeds and the Crius units into new investments in a timely manner. That might leave a hole in MVC’s results for a quarter or two as $60mn (nearly 20% of the BDC’s assets) look for a new home. We’ll be waiting for the next quarterly results of MVC to try and work out the final numbers and determine whether the sale of US Gas & Electric to Crius and the subsequent sale of the acquiror by Vistra – after Crius unit prices began to head south – was a win, loss or draw for MVC and its shareholders. We know MVC had $65mn in assets when the original Crius deal was penned, and that has reduced only slightly from debt amortization. If MVC ends up with $63.5mn or more in FMV when all is said and done, MVC should be in the green.

Black Diamond Rentals: Restructured And Upgraded

Black Diamond Oilfield Rentals was on our Watch List through IIIQ 2018. However, following the release of Alcentra Capital’s (ABDC) IVQ 2018 results we’ve returned the company to Performing status. Details are sparse, but ABDC indicated on its Conference Call that  the private equity sponsor of the privately-held entity injected additional capital into the business. Moreover, the BDC’s debt, which consisted of first lien and second lien, was redirected into a first lien position in the quarter. ABDC accepted lower pricing (L+ 650) versus as high as 14.0% previously. That tool the company off non-accrual and off ABDC’s Watch Lis – and ours too. We also note that MVC Capital (MVC) has also had both a second lien debt and equity in Black Diamond for a year which has remained current and valued at par or above. That debt matures in 2022, two years after the ABDC debt. At 1/31/2019, the small equity stake was valued at a premium to cost, which also figured in our assessment.