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.

BlackHawk Mining: Post Bankruptcy Financing Approval

On August 13, a news report indicated that troubled coal miner BlackHawk Mining has received bankruptcy court approval for $240mn of post-petition financing. That’s important as it suggests the company may shortly complete the restructuring of its debt and leave Chapter 11 status behind. For the two BDCs involved with $10.5mn of exposure at cost – as discussed in our earlier post on July 18, 2019 – that might mean the conversion of some portion of its debt to equity and new loan advances. We’re a little confused as to why both FS-KKR Capital (FSK) and Solar Capital (SLRC) still carry the debt as accruing at June 2019 and at full value. Neither BDC discussed the miner in their most recent Conference Calls. We’ve got more to learn obviously.

Blackhawk Mining: More Details Of Restructuring Plan

As noted in an earlier post, coal miner Blackhawk Mining is preparing to file a pre-packaged Chapter 11. The BDC Credit Reporter’s main interest is estimating the impact on the two BDCs involved : FS-KKR Capital (FSK) and Solar Capital (SLRC), both with roughly equal shares in the first lien debt with an aggregate cost of $11.2mn. We’ve learned additional details about the plan going forward: “On the effective date of the plan, the company’s $639 million first lien term loan will be discharged and lenders will receive 71 percent of the company’s equity and a newly issued $375 million first lien term loan”. That suggests 40% of the first lien debt will be written off and swapped. That will reduce the nearly $1.5mn of investment income received by $0.600mn between the two BDCs. How the BDCs will value the equity is unknown, but a Realized Loss is probable. In addition, we have learned that:  “To further strengthen the business, the company will receive $50 million of new money debtor in-possession financing from certain of its lenders that will be part of the exit facility for the company”. Chances are FSK and SLRC will be part of this financing as well, increasing their exposure to the troubled miner. The lenders will be reassuring themselves that after the restructuring is done that “based upon the company’s current projections, pro forma leverage will be less than 2.0x debt to EBITDA and in line with industry peers”. We would add that any industry where standard debt/EBITDA leverage is only 2.0x is highly risky and the lenders/investors involved are far from being out of the woods. One could argue – with greater capital potentially deployed and much of the exposure soon to be in equity, and with lower investment income forthcoming, FSK and SLRC have gone only deeper into those woods.

Blackhawk Mining: To File Chapter 11

Another BDC portfolio company prepares to  file for Chapter 11. This time, the filer is Blackhawk Mining, LLC, which operates coal mines in two states. Given other bankruptcies going on in this sector, the news is not entirely unsurprising. Still, the two BDCs involved – FS-KKR Capital (FSK) and Solar Capital (SLRC) valued their $11.2mn in senior debt positions at 3/31/2019 at par. That’s unlikely to continue, even though management and creditors have a pre-packaged plan ready and expect to be operating normally in 60 days. The plan involves reducing debt by 60%, which may entail a debt for equity swap for senior lenders – including the two BDCs – and all the challenges of owning a “dirty fuel” company at the wrong point in history. Income – running at an annual pace of $1.2mn for FSK and SLRC – is likely to drop by more than half. Neither BDC will be greatly affected given the relatively small exposure each holds, but the setback does beg the question as to how both BDCs investment committees could have green lighted (as recently as 2018) such commodity loans. Blackhawk brings to 20 the number of BDC portfolio companies currently in bankruptcy and the total capital invested at cost to $578mn, according to the BDC Credit Reporter’s calculations.

Hudson Technologies: Stock Price Drop

As of June 19, 2019 the stock price of publicly traded refrigerants distributor Hudson Technologies (ticker: HDSN) has dropped below $1.00 and become a “penny stock”. The company – based on BDC valuations – has been under-performing since June 2018. As a public entity, we’ve been able to review quarterly filings and read the ever bullish Conference Call transcripts. We added Hudson first to our Watch List (CCR 3) and then – more recently – to our Worry List (CCR 4) and are concerned that the company may soon join our Bankruptcy List (CCR 5). Admittedly as of IQ 2019, the company was in compliance with much adjusted covenants on both its secured Revolver and its Term Loan.  The business is admittedly seasonal but Operating Income was under a quarter million dollars and interest expense $2.4mn. Total debt, which includes the 2023 Term debt where all BDC exposure sits, is $131mn. All of which to say that the signs do not look good for the business and for its lenders. BDC exposure is $102mn, and generates $13mn of annual investment income. All the BDCs are part of the FS Investments-KKR complex and include publicly traded FSK ($39mn) and non-traded FSIC II, FSIC III and FSIC IV.  At March 31, 2019 the Term debt had already been discounted (29%).  The debt is publicly traded and that discount holds as of June 19, 2019 based on Advantage Data’s middle market loan real-time data. Unfortunately, the fundamentals of the industry in which the company operates are currently negative and we worry that if a Chapter 11 filing or out of court restructuring occurs there will be both income interruption and further losses both realized and unrealized. At worst, the BDC lenders might have to write off (or convert to equity) 50% of debt outstanding, or around $50mn, compared to ($30mn) already discounted. Given the size of the BDC exposure; the substantial investment income accruing; the very sharp drop in the stock price and the negative tilt in recent results, this is a credit worth paying close attention to.

CTI Food Holdings: Exits Bankruptcy

On May 7, 2019 huge food distributor CTI Foods Holdings emerged from Chapter 11, after a short stay that began less than 2 months before. In addition, the company announced the arrangement of a new $110mn Revolver to fund post-bankruptcy operations. For the 3 BDCs with $37mn in debt exposure to CTI Foods, this will result in likely booking of Realized Losses in the IIQ 2019 results. There is $28mn of second lien debt from FSK, CCT II and Guggenheim Credit Income Fund which will be written off as part of the restructuring. Apparently, CTI Foods is shedding $400mn in debt to become viable after many months of deteriorating performance in 2018. Less clear is what happens going forward to first lien and secured DIP financing (advanced in the IQ 2019 to help the transition) outstanding. For the BDC Reporter’s Views on this credit, and for further details, see the Company File.

Bellatrix Corporation: Completes Restructuring

On June 4, 2019 Canadian oil exploration company Bellatrix  announced the completion of its restructuring plan, which we wrote about in an earlier post on April 17, 2019. The press release provides useful summary details of the various components of the recapitalization but also addresses the 2023 second lien debt, which accounts for the $106mn BDC exposure to 4 different FS-KKR Capital BDCs, both traded (FSK) and non-traded. The deal is a partial debt for equity swap with lenders reducing the oil company’s total debt load by $110mn.

Sequential Brands: IQ 2019 Results

On May 10, 2019 publicly traded Sequential Brands (SQBG) published its 10-Q. Two days earlier, the company held its regular Conference Call and issued its earnings press release. We reviewed the results on May 29, which only reinforced our concerns about the future of the business. Without getting into all the details, Sequential has $600mn in debt outstanding and is generating $16.8mn in “Adjusted EBITDA” and $15.6mn in interest. Plus, performance is headed south, with first quarter result “below expectations”. The stock is virtually worthless, valued at $0.6670, close to its all-time low. Yet, the 4 BDCs with a sit up and notice $293mn in exposure at cost continue to value their debt at or close to par. Admittedly, there is $10mn of equity invested which has been virtually written off, following the stock price. That leaves, though, a whopping $283mn in debt – almost all nominally first lien. The BDCs with exposure – ranking from largest to lowest are FSIC II, FSIC III, FSK and AINV, all in the 2024 Term Loan. FSK has exposure of $63mn and AINV $13mn. Should the company default, both the income loss from a non accrual and the potential loss of capital in a restructuring or bankruptcy could be sizeable. We assume in a Worst Case, the BDC lenders would lose all their equity stake and half their debt outstanding, or over $150mn in total. Given the size of the exposure; the financial condition of the borrower and the possibly overly optimistic valuation we’re placing Sequential on our Daily Watch List to make sure we don’t miss any development.

Z Gallerie: Sold At Bankruptcy Auction

According to the Wall Street Journal, online furniture and appliance seller DirectBuy Home Improvement Inc., a subsidiary of e-commerce business CSC Generation, has won a bankruptcy auction for home-decor retailer Z Gallerie LLC with a bid valued at $20.3 million. DirectBuy’s bid comprises $7.7 million cash and $12.6 million in debt provided by KKR Credit Advisors and B. Riley Financial Inc, according to papers filed in the U.S. Bankruptcy Court in Wilmington, Del. Further details are sparse. The bottom line, though, from a BDC standpoint is that FSK ($30.2mn) and non-traded Sierra Income ($4.4mn) are likely to have to book an almost complete Realized Loss. At March 31, 2019 the respective values were a;ready down to $4.8mn and $1.4mn. The final discount could be higher. We note that KKR Credit Advisors is providing some of the financing, but don’t yet know how that relates to FSK , which is a JV between KKR and FS Investments. In any case, this is a reverse for both companies, albeit one that has been on non accrual for several quarters.

 

Payless Inc: Lenders & Creditors Question Role of Majority Shareholder Post-Bankruptcy

On April 29, 2019 USA Today published an in-depth article regarding disputes occurring between the majority shareholder of twice bankrupt Payless, Inc. (aka Payless Shoesource) and certain creditors and lenders. With the future of Payless very much in doubt, the full repayment of $21mn of secured debt held by two BDCs is also questionable. Just a year ago when Payless went bankrupt for the first time, secured lenders got out whole. This time some of those same BDC lenders who funded the Company post bankruptcy may have a harder time collecting 100 cents on the dollar. See the Company File for all the details and our view.

Sequential Brands: Sells Two Major Brands

On April 17, 2019 Sequential Brands Group, Inc. sold two major brand lines to Marquee Brands LLC for $175mn and an earn-out. The Company plans to use a substantial portion of the proceeds from the transaction to pay down debt. The transaction is expected to close in the IIQ 2019. BDC exposure to the Company is high at $295mn, in first lien, second lien and equity. See the Company File for our updated View.

Bellatrix Exploration: Schedules Restructuring Meeting

Publicly traded Canadian gas explorer Bellatrix Exploration is once again seeking to restructure its debt-heavy balance sheet. A Canadian court has allowed a meeting of debt and equity holders to be scheduled for May 15, 2019. At the meeting a complex arrangement of debt exchange, forgiveness and additional issuance, and the issuance of new stock, will  be voted on by the different classes of stakeholders. The Company appears to have garnered broad – but not conclusive – support for its plans. If the recapitalization occurs any immediate leverage or cash flow concerns will be alleviated. If not approved, the potential outcome is hard to evaluate but is unlikely to be positive for most of the parties. BDC exposure is high at $105mn and all concentrated in the second lien 2023 Term Loan. For our View of the credit risks involved see the Company File.

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.

Sungard Availability Services: Files Chapter 11 UPDATED

Sungard Availability Services “has officially confirmed that the company will enter a ‘pre-packaged’ Chapter 11 bankruptcy filing on or around May 1st 2019”, according to a news report.  The IT company has already negotiated a restructuring agreement with secured and unsecured creditors and expects to exiting bankruptcy shortly. The restructuring involves a debt for equity swap, which is reportedly going to reduce total debt “by over two-thirds”. In the interim, a $100mn Debtor In Possession financing has been arranged, and business continues as usual.

BDC exposure to the Company is substantial: $79mn, according to Advantage Data records. There are three tranches involved: two are senior debt maturing in 2021 and 2022 and subordinated debt due 4/1/2022. The BDCs involved are principally from the FS KKR Group: FSK, FSIC II and FSIC III and also GECC. $26mn at cost is in the subordinated debt, which was the tranche most written down at 12/31/2018, discounted by over &0%). Valuations on the senior tranches are generally much closer to par, varying between a discount of (2%) to (14%). Based on what we’ve heard of the size of the debt forgiveness, we’re surprised at how relatively modest the unrealized depreciation is. That’s complicated by the fact that the BDCs involved are likely to have been aware of the restructuring proposals when setting the valuation level. Will there be further write-downs of the senior and subordinated debt value now the bankruptcy cat is out of the bag or are we done ? Frankly, we don’t know, but will put a pin in the subject until the next portfolio filing.  Till then, we’ll limit ourselves to projecting Realized Losses will range between $20mn-$26mn, and income will be interrupted as the Company moves through the bankruptcy process, affected IIQ 2019 investment income.

UPDATED: The BDC Reporter was contacted following the origination of this post by GECC which noted that its Sungard position was closed in January at a net gain. Here is what the 10-K said in “Subsequent Developments”: 

In January 2019, we sold $4.8 million of par value of Sungard Availability Services Capital, Inc. first lien senior secured loan at a price of approximately 78% of par value. [Page 62]

By our calculation, 78% of par equals proceeds of $3.750mn.

Advantage Data records shows GECC’s exposure to the Company’s debt began in IVQ 2017 (12/2/2017), with $6.0mn of par purchased for $5.7mn. This exposure reached as high as $11.380mn at par, and a cost of $11.049mn in the IIIQ 2018. A portion was sold in IVQ 2018 and the rest – as mentioned above- in January 2019.

According to GECC’s Investor Presentation for the IVQ 2018 – which includes a section  detailing “Individual Realized Investments”, a slide indicated : “GECC sold the entirety of its investment at approximately $0.92 in IVQ 2018 / IQ 2019, resulting in an IRR of 6.7% and a cash-on-cash return of 1.05x, net of accrued interest & amortization”. See page 12.

Nine West Holdings: Exits Bankruptcy

On March 20, 2019 Nine West Holdings, Inc. (“Nine West” and some of its affiliated entities announced in a press release their exit from Chapter 11 bankruptcy. The company – which has been renamed Premier Brands Group Holdings, LLC is under the  ” majority equity ownership of CVC Credit Partners and Brigade Capital”. The press release describes the company in this way:  “a leading jeanswear, women’s apparel, accessories and licensing company with a portfolio of brands that includes Anne Klein, Gloria Vanderbilt, Kasper, and Napier. The Company is a wholesale partner to major U.S. and international retailers”. Nine West filed Chapter 11 in April 2018, sold off certain subsidiaries and – after a number of delays as the parties argued over terms – were able to reduce pre-petition debt levels by $1.0bn.

The only BDC with exposure is FS KKR Capital (FSK), which inherited the investments from Corporate Capital Trust (CCT), which merged into the BDC in December 2018. CCT had been an equity investor and senior secured lender to Nine West since 2014. Moreover, CCT participated in the Debtor-In-Possession (“DIP”) financing necessary to maintain operations following the filing. CCT’s exposure was part of a much bigger exposure by the combined FS Investment – KKR group, but we believe the initial deal was booked when FS Investment was aligned with GSO Blackstone.  At cost, FSK’s exposure totaled $14.7mn at 12/31/2018. According to Advantage Data records, maximum exposure was $23.2mn in the IIQ of 2018 but much of the original Term Loan, due 3/31/2019 was repaid, possibly from the sale of the assets mentioned above. Currently, the 3/31/2019 Term Loan has a cost of $2.5mn and a FMV and par value  of $2.6mn. The DIP financing has a cost of $5.7mn, a par value of $6.2mn and a FMV of $6.0mn. The valuation may be increased to par now the Chapter 11 exit has occurred and is likely to be reflected in the IQ 2019 FSK results. We are unclear if the Term Loan and the DIP debt will be rolled into the new company and on what terms. The DIP financing is currently only earning L + 375%, below FSK’s target earnings. Finally, FSK has $6.5mn invested in the equity of Nine West Holdings, dating back several years and written down to zero since IIQ 2016. We expect FSK will have to book a Realized Loss for the entire amount now the bankruptcy has ended. However, that should not affect net book value given the investment has already been written down. Not exactly a recovery for FSK, but the giant BDC gets to place this deal in the Resolved column and move on to larger, still ongoing under-performing credits.