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.

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.