LATEST: At the end of IIIQ 2019, AINV's investment assets had an aggregate cost of $2,890mn and FMV of $2,804mn. There are 138 companies in the portfolio, and 1 CLO. We have identified 13 companies that are under-performing, and 125 that are performing, plus the one CLO investment,.

Of the under-performing loans to 4 companies are on non accrual. The companies involved are Vari-Form; KLO Holdings; SHD Oil & Gas (which also includes performing loans) and Magnetation.   

There are 6 companies rated Corporate Credit Rating 4 – our Worry List: These are: Accelerate Parent Corp (non meaningful); Carbonfree Caustic SPE; Solarplicity Group; Glacier Oil & Gas; Pelican Energy, and Bumble Bee Foods/Connor Brothers (its Canadian subsidiary).

There are 3 under-performing companies on our Watch List CCR 3 : Sequential Brands, CT Technologies Intermediate and AMP Solar Group.

We estimate that at least two of the above companies may file for bankruptcy in the upcoming quarter: KLO Holdings and Bumble Bee Foods.

AINV does not provide an investment rating system for its portfolio assets.

Posts for Apollo Investment

Connor Brothers Clover Leaf Seafoods: Files Bankruptcy In Canada

As expected, the Canadian subsidiary of bankrupt Bumble Bee Foods has filed for protection itself under Canadian law. The subsidiary is the long named Connor Brothers Clover Leaf Seafoods, which we’ve written about in the past. On December 2, 2019 trade publication – SeaFoodSource reportedConnors Bros. has commenced court-supervised restructuring proceedings under Canada’s Companies’ Creditors Arrangement Act, as has fellow Bumble Bee affiliate Cloverleaf Holdings Company, according to the CBC. The companies operate the Bumble Bee, Clover Leaf, and Brunswick brands in Canada“.

Connors Bros. operates a fish processing plant in Blacks Harbour, New Brunswick in Canada that employs between 400 and 800 people depending on the season and packs a variety of products, including tinned herring and sardines.

The Canadian bankruptcy- which is materially different than the process in the U.S. – is not expected to result in much change operationally or lead to liquidation. That may explain why the 2023 debt issued by Connor Brothers, held by the two BDCs with exposure thereto, is trading at only a (7%) discount to par when we checked Advantage Data’s Middle Markets loan module on December 3, 2019. In total, there is $13.6mn at cost of exposure. Two-thirds is held by non-listed TCW Direct Lending and one third by Apollo Investment (AINV). Both BDCs have modest discounts on the debt held, but will – presumably – be losing approximately $2mn of investment income on an annualized basis until the bankruptcy is resolved. Bumble Bee is reportedly going to be sold. We imagine – but have no confirmation – that Connor Brothers will be included in whatever transaction occurs.

Overall, the Bumble Bee/ Connor Brothers failure is a material blow to both BDCs involved, with over $60mn of exposure and $7.5mn of income interrupted. What we don’t know yet is how long the bankruptcies will go on for – impacting IVQ 2019 results already – and what recovery rates will look like. In theory, the lenders could still collect all principal and interest once the dust settles. Or not.

In any case, we’ve added Connor Brothers to the BDC Credit Reporter’s list of BDC-funded companies in bankruptcy. See in the Data Room.

Bumble Bee Foods: Files Chapter 11

As long expected, Bumble Bee Foods filed for Chapter 11 on November 21, 2019. The BDC Credit Reporter had first reported on the tuna manufacturer’s business and legal woes on July 22, 2019, when we placed Bumble Bee on our CCR 4 (Worry List). On two subsequent occasions we’ve mentioned the prospect of bankruptcy on August 10 and – most recently – on November 19, 2019.

With the filing, we’ve learned that the company has assets and liabilities of as much as $1 billion each, according to court papers. Furthermore “It has arranged an $80 million term loan from its current lenders and a $200 million revolving credit facility to keep operating while in bankruptcy, the documents showed“.

Bumble Bee is in litigation with the Department of Justice and has been pleading poverty to reduce fines owed, according to news reports: “The company flagged its financial distress at the time of sentencing, arguing the $81.5 million fine initially levied could push it into insolvency. The U.S. Department of Justice agreed, cutting the amount to $25 million and giving Bumble Bee an installment plan over several years that required no more than $2 million upfront“. Now that’s a deal.

Most importantly to the company’s lenders, Taiwan-based FCF Fishery has offered $925mn for the company as a “stalking horse” bidder. We don’t have a complete picture of Bumble Bee’s finances, and a full sales process will be required to ensure creditors get top dollar, but it’s an encouraging sign for the two BDCs (Apollo Investment or AINV and TCW Direct Lending) with $48mn lent to the company via its 2023 Term loan. That debt was valued at only a (7%) discount as of September 2019 by AINV. That’s the discount which the traded debt continues to be valued at when we just checked Advantage Data’s records. The FCF proposal “calls for paying down part of Bumble Bee’s existing first-lien debt“, according to the Wall Street Journal. In fact, we might see the lenders getting back 100 cents on the dollar once negotiations are complete. In either case, if the current valuation for Bumble Bee holds and other legal issues are resolved the lenders – notwithstanding this bankruptcy – might dodge a major credit bullet.

KLO Acquisition: Further Details On Credit Problems

We first wrote about KLO Acquisition (aka Hemisphere Design Works) back on November 3, 2019, although the company has been on non-accrual since the IIQ 2019. Then – and now – we were concerned about the future of the world’s largest kayak manufacturer. With Apollo Investment’s (AINV) IIIQ 2019 Conference Call, we have learned a little more about what ails the company and what to expect next, albeit in that shorthand that BDCs use when conveying bad news about a portfolio company. Here is what was said:

Regarding KLO, our investment was placed on non accrual status last quarter due to the underperformance from lower customer demand, consolidation challenges and higher costs. The company’s liquidity position has continued to weaken. The company expects to complete a comprehensive restructuring in the coming months“.

The credit is already rated CCR 5 (Non Accrual), but AINV reduced its fair market value to $4.8mn from $11.8mn at the end of June. That suggests the BDC expects – despite its first lien secured status – a major haircut from the $13.9mn at cost. We also have a Bankruptcy Imminent rating on the company, which would include any kind of major restructuring that would occur. Given what little AINV grudgingly revealed that seems on the cards at any moment.

Vari-Form: Written Down In IIIQ 2019

We learned from Apollo Investment’s (AINV) IIIQ 2019 10-Q filing (see page 5) that its investment in troubled Vari-Form (Crowne Group) was partially written off. The $8mn at cost of first lien 2023 Term debt outstanding at June 2019 was written down to $1.3mn. The debt is valued at cost, but the par value is $8.3mn. No explanation was given for the realized loss taken. The loan continues to be on non-accrual and is rated CCR 5.

Sequential Brands: Reports IIIQ 2019 Results

In early November 2019, Sequential Brands Group , Inc. (SQBG) reported earnings, held a Conference Call and filed a 10-Q. As usual, and despite widening losses and the absence of a permanent CEO and the recent announcement by the Board of its intention to explore strategic options, the tone of management remained upbeat. Here’s an extract of what acting CEO and Chairman William Seedler said on the CC:

While we’re in the final stages of our CEO search, I’m pleased to fill in and join today’s call with Peter. The executive team has been hard at work executing on the plan to best position Sequential for long-term success…

First, the management team remains focused on driving revenue growth across the portfolio. …Second, we are well underway to rightsizing the cost structure of the business post the sale of Martha Stewart, which includes a significant reduction of our expenses. As management previously outlined, we expect an operating expense base of approximately $30 million before minority interest starting next year. This new optimized operating expense base reflects a significant reduction to the company’s current overhead, including corporate head count, SG&A and headquarter-related expenses. To that end, we’ve made significant progress on the sublease front. … We expect these savings to drive a significant and immediate margin improvement as we head into 2020. Third, we recently amended our lending agreement with KKR, which further improves our liquidity and cash flow and demonstrates the continued support of our lenders. With no upcoming debt maturities, we believe that the company has ample runway to focus on driving the business forward”.

We remain concerned nonetheless as Adjusted EBITDA in the latest quarter was $13.2mn, just covering interest of $13.0mn. Debt to EBITDA annualized was 8.3x… In fact, even debt to REVENUES is 4.4x ! Most importantly, liquidity, as per the 10-Q, includes just $5mn in cash and $24mn of availability under the company’s Revolver. Yet, last quarter Sequential registered ($18mn) in negative cash flow from continuing operations.

Frankly, we’ve been expecting “something to happen” at Sequential for months, since our first report in April of this year. We continue to rate the company CCR 4 (Worry List) and BDC exposure (concentrated in the FS-KKR group) huge at $292mn. Our jaundiced view is that the proverbial can is getting kicked down the road, judging by a second amendment to the lenders loan agreement in so many years. A bankruptcy filing could affect a whopping $281mn of BDC debt from 4 funds (one of which is Apollo Investment or AINV). That’s about $30mn of annual investment income at risk of – at least – interruption. We’re loath to add the credit to our Bankruptcy Imminent List given both that Sequential has survived for longer than we expected and the optimistic tone of the Chairman and the fact that there are only 6 weeks left in the current quarter. We’ll shortly see if we have become too lax in our assessment. In any case, it’s hard to imagine Sequential getting through another year without a bankruptcy or major restructuring event. As we are talking about the retail sector here – in an indirect way – it’s hard to see how the company or its lenders (who also own its almost worthless stock) come out of this undamaged. Unfortunately, neither AINV nor FSK even mentioned the company in their most recent Conference Calls, according to our review of the transcripts.

Bumble Bee Foods, LLC: Preparing To File Chapter 11

For weeks rumors have swirled around about a soon-to-occur Chapter 11 filing by Bumble Bee Foods, LLC. The latest comes from the Wall Street Journal on November 15, 2019, relying on “unidentified people familiar with the matter” (lawyers ? bankers ? the janitor ?). This may be posturing by one of the parties involved as part of the gamesmanship that comes with the territory. Still, we’ve been warning about bad things likely to happen since July 22, 2019, with a follow-up on July 23. We explicitly reported that a Chapter 11 was likely back in August, and noted BDC exposure at that time.

This time is different only in that the WSJ is a pretty reliable source and we have the IIIQ 2019 BDC exposure numbers to update readers on. TCW Direct Lending has two thirds of the exposure at $32.6mn at cost but has chosen to write the position down only by (3%) at FMV. Apollo Investment (AINV) has $15.2mn, and has marginally increased its fair market discount to (7%). Both lenders are in the publicly traded 2023 Term loan, which trades at that same (7%) discount at time of writing.

It seems like both lenders expect to be able to ride out any bankruptcy or restructuring with minimal damage, and we have no alternative data to suggest otherwise. Still, an interruption of investment income is likely – which may or may not be ultimately recouped. We have added Bumble Bee to our Bankruptcy Imminent List, which we’re now limiting to credits that we expect to take such action in the current (IVQ) quarter. Also, let’s not forget Bumble Bee’s Canadian subsidiary Connor Brothers Clover Leaf Seafoods, where AINV and TCW have an additional exposure at cost of $13.6mn. We’re not sure of the Canadian company would be included in the American parent’s bankruptcy, but it’s worth keeping an eye on to judge full exposure.

KLO Acquisition: Laying Off Employees

A news report on October 29, 2019 indicated Hemisphere Design Works (the new name of KLO Acquisition, also known as KLO Intermediate Acquisition or KLO) is laying off employees and shutting down operations in Muskegon,MI.

Phones were turned off at the company’s headquarters in downtown Muskegon and doors were locked at the Muskegon Lake-front headquarters.

According to a notice of the facility’s closing obtained by Muskegon Chronicle/MLive.com from a Hemisphere employee, the company plans to close its operations at 1790 and 1880 Sun Dolphin Drive in Muskegon, but did not specify when the closure would become permanent.

There was more damning information in the article which suggests that the manufacturer’s problems involve more than work force reduction, but might result in Chapter 11 or Chapter 7 liquidation.

 The company admitted in a letter to experiencing “challenging business circumstances” and that they had been working to secure additional funding sources, but had failed.

Although we anticipated receiving additional capital as we worked through these circumstances, we have now learned that the term lender will not provide additional funding,” the letter reads.

One employee said workers were told Dicks Sporting Goods had canceled a major contract for kayaks, leading to financial troubles and a bank taking control of the company. There have been other layoffs and work slow-downs leading up to Tuesday’s announcement, he said.

There are two BDCs with exposure, which totals $16.1mn, both in the 2022 Term Loan and which has been on non-accrual at the end of the IIQ 2019. Apollo Investment (AINV) has a $5mn position, with the rest held by non-listed Cion Investment. The debt is priced at LIBOR + 775 bps. and valued at a (14%) discount as of mid-year. More recently, the debt – which is institutionally traded – was valued a little lower but we don’t know if that reflects real market value. From what we’ve learned to date, including this damning expose, things could go from bad to worse. Here’s an extract to give you a sense:

After the company moved employees into a facility behind Pizza Ranch in East Muskegon, Kolberg [a former employee] said there were significant issues, from little heat to plumbing problems (things got so bad that Kolberg said employees would often use the portable toilet outside their office).

People actually started to go to the bathroom on the floor in the building,” Kolberg said. “After that happened, human resources came over and said one day a month, each person would have to clean the bathroom. When someone said they wouldn’t, she [the human resources employee] said, ‘You will or there will be disciplinary action.

We are adding the company – the world’s largest kayak manufacturer – to our Bankruptcy Imminent List (our version of Loans Of Concern that the rating groups publish).

Sequential Brands: To Sell Brands

On October 14, 2019 Sequential Brands, Inc. announced its intention to explore various strategic options, including a sale of some of its brands. Other alternatives were also mooted including a stock buyback; making an acquisition and “others”, but the sale is the most likely. The Chairman of the company said the decision was triggered by interest expressed by third parties in acquiring some of the company’s retail lines.

We’ve been tracking Sequential for some time and get the impression the Board is putting a good face on a bad situation. As we reported back on May 29, 2019, the company is under-performing financially and highly leveraged – a deadly combination. As noted on April 19, 2019 Sequential already sold two brands, but with little lasting impact. More recently, in another ominous sign, its CEO has resigned and Stifel has been hired to help explore its options.

Something is going to happen here before long but exactly what is unclear, though our money in on an asset sale or a bankruptcy filing. The lenders involved – which includes 4 BDCs and exposure at cost of $292mn – will be very interested in the outcome. All but $13mn of the BDC exposure is held by one of three KS-KKR BDCs, including $61mn by publicly traded FSK. The only unrelated BDC is Apollo Investment (AINV). The $10mn invested in the equity of the company – all by FS-KKR entities – seems a lost cause as Sequential’s stock price continues to reach new all-time lows and currently is a penny stock with a value just $0.27.

More important will be how the 2024 Term debt in which all the remaining BDC exposure lies- currently trading at a modest (3%) discount – will fare. The lenders will be hoping that Sequential will sell assets sufficient to pay off some or all its debt. That could happen, but nothing is for certain in the retail sector these days, so we’ll be staying tuned to what is likely to be a major news story in the weeks ahead, given the size of BDC exposure, and the urgent tone of the proceedings.

Bumble Bee Foods: Bankruptcy Likely

On August 9, 2019 news reports indicated Bumble Bee is seriously considering Chapter 11 to “relieve its financial stress connected to a guilty plea to a government price-fixing charge”. Here are more details, all of which suggest a filing is almost inevitable even if there are supposedly other alternatives on the table: “

Bloomberg reports, citing people familiar with the proceedings, the prospect of a court-supervised restructuring under Chapter 11 is among several options being evaluated, with a sale of the business another possibility. But the people, who asked not to be named, said potential buyers would have to deal with the aftermath of the legal proceedings, which are still ongoing.

Bumble Bee is also facing a cash squeeze, according to Bloomberg’s sources. Class-action lawsuits related to the antitrust case have increased its potential liability, while the company is also encountering claims it mislabelled products as dolphin-safe, they said.

The seafood supplier has also exceeded the maximum leverage ratio allowed under its senior debt facility, a US$650m term loan due in 2023, one of the people told Bloomberg“.

We’ve written about the company and its Canadian subsidiary twice before on July 22 and July 23. With the latest earnings reports, we see Apollo Investment (AINV) – one of two BDC lenders with exposure – has discounted its senior debt position only (7%) from (1%) the quarter before. That seems unrealistically optimistic even if AINV – and the other BDC lender TCW Direct – are in the 2023 first lien debt. Still, we checked the real time price on Advantage Data for that publicly traded loan, which was trading at 92 cents on the dollar.

This is what AINV said on its latest Conference Call, which does not augur well for the 6/30/2019 being as Bad As Its Gets:

“Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division – MD

 And then you guys’ investment in Bumble Bee. I think that company is about to file for bankruptcy or may have just been announced that they’re going to file for bankruptcy. Just wanted to know, does your 6/30 fair value market — you guys have it marked at about 95% of cost. Is that mark inclusive of if they have to run through bankruptcy?

 Tanner Powell, Apollo Investment Corporation – President & CIO of Apollo Investment Management [38]

 What I’d say there is that is an LCD article that came out today or yesterday. Our valuations are a point in time. The company has had, has experienced issues not only related to tariffs, but also related to historical issues with price fixing and consequent litigation expenses. We are a participant in a broader facility and are working with the borrower to deal with the issues and move things forward. But in terms of the specifics, our valuation is a point in time with the information available to us at the time as of quarter-end”.

Time will tell, but we expect a bigger ultimate Realized Loss is coming.

AINV has $2.0mn of annualized investment income at risk, so even a temporary interruption from a stay in bankruptcy court could impact the BDC. TCW’s exposure is even larger at $42mn and $4.5mn of investment income is involved, but we’ve not seen a June 2019 valuation as yet from the non traded BDC.

Bumble Bee Foods: Further Information About Financial Problems

We first wrote about the troubles at Bumble Bee Foods, LLC just yesterday (July 22, 2019). We added the tuna fisher/processor to our Worry List right away on the news that a turnaround firm had been hired to advise management. That’s never a good sign where credit is concerned. Now we learn from a trade publication that the company has been in ‘”technical default’ since March of 2019 and has breached a “financial covenant” on a $650 million loan. This only validates our decision to move the company – still valued by its two BDC senior lenders at a discount of less than 10% (our typical trigger level) to the Worry List. What we still don’t know is whether the senior debt that the BDCs are involved in can expect full recovery if Bumble Bee does stumble into bankruptcy or an out-of-court restructuring.

Bumble Bee Foods, LLC/Connor Bros Clover Leaf Seafoods : Turnaround Firm Hired. Sale Prospect.

We heard from the Wall Street Journal on July 19, 2019 that famous Bumble Bee Foodshas hired turnaround firm AlixPartners LLP as the seafood purveyor seeks to recover after pleading guilty to fixing prices on canned tuna, according to people familiar with the matter”. In another news report, we also discovered that “Italy’s Bolton Group International is now seen as the frontrunner to acquire Bumble Bee Foods’ Canadian operation.  The company owns “Clover Leaf, Brunswick and Beach Cliff brands”. This process appears to be some way down the road as ‘one source close to the process said Bolton is now exclusive for Clover Leaf, while another told Undercurrent a deal is “close” and could emerge at the end of July or in early August“. We first heard reports of a prospective sale back in April. From a BDC perspective, there are two senior lenders to the U.S. parent and Canadian subsidiary with $61mn of exposure at cost. The BDCs involved are non-traded TCW Direct Lending and Apollo Investment (AINV) in a 2:1 ratio. At 3/31/2019 the debt was valued close to par: TCW had a (7%) discount and AINV (1%). Total income at risk is over $6.5mn. Both BDCs have been invested in the 2023 Term Loan since 2017. We have no idea how serious Bumble Bee’s troubles might be to be impelled to bring on a turnaround specialist, nor is it clear if the valuation from March end is out of date. The 2023 Term Loan, according to Advantage Data’s real-time loan pricing system, is discounted only (3%) at time of writing. Nonetheless, we’re placing Bumble Bee on our Worry List, skipping the Watch List category, moving down from Performing.

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.

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.