On November 1, 2019 Fidus Investment (FDUS) reported IIIQ 2019 results and updated the status of portfolio company GreenFiber, LLC. We learned that “in early September, we took control of the company via a recapitalization transaction, investing $2.8 million, primarily in second lien debt, alongside the previous control investor and a new investor. This recapitalization is intended to provide the company with sufficient liquidity to execute its strategic plan“.
In response to questioning from an analyst FDUS gave some additional color: “It was… in the works for quite a while. We were in a situation where … the private equity group did not have a lot of capital left in the fund that they invested out of, and we worked through this over a period of time. It took longer than it should have, unfortunately, but that’s what happened.They did invest a small dollar amount in this, so they’re still involved with the company. But we did invest the majority of the capital and did take control of the business on a go-forward basis.And you’re right, the company has had numerous, and I’m not going to get into them just exogenous events, if you will, that impacted the performance. Having said that, it’s a niche leader. It has real presence in its marketplace, and it’s a company that we think has some staying power. And that’s why we invested in it. And our hope is that there are better times ahead, but it remains a fluid situation. And obviously, we’ve kept it on nonaccrual. It did pay our cash portion of our interest this quarter, but we’ve kept it on nonaccrual for obvious reasons. And so our hope is that we see good improvement here over time“.
At the end of the quarter, the existing FDUS second lien loan of $14.9mn was still discounted at (69%); while its $0.6mn in equity is – understandably – marked to zero. The new debt added in the period – also second lien – which adds up to $4.6mn – is carried at par, Both loans are on non accrual even though – as FDUS mentioned above – interest was actually paid in the period. (On paper, $1.4mn of investment income annually is non accruing).
FDUS has been invested in the company since 2014, but matters only began to go sideways from the IIIQ of 2018 when we added the name to our under-performing list. Non accrual occurred one quarter later and now we have a full restructuring and FDUS taking control. This is not unusual either for the BDC or companies in this segment of the market. However, we have insufficient information to determine whether FDUS is doing the age old “throwing of good money after bad” or potentially rescuing a worthy business and all the capital invested to date and more.
As anticipated Oaktree Medical Centre filed for Chapter 7 liquidation, According to an AP news report, the filing occurred on September 23, 2019. That almost completes an unfortunate credit story that we’ve written about previously – punctuated by claims of massive fraud by the company brought by the DOJ – and which resulted in Fidus Investment (FDUS) having to write to zero its $13.4mn investment. The BDC may book the realized loss in the third quarter results or at year end, but with all the investment reserved and no income forthcoming, this one’s over.
Obviously for FDUS not a satisfying conclusion and which deserves some future discussion by investors and analysts as to whether there were warning signs of the fraud that due diligence or ongoing monitoring could have caught. Most likely the BDC’s managers would just like to forget this investment was ever made but there’s plenty to learn from a discussion of process and procedures even after the fact.
We had been worried about spray foam producer SES Investors (aka SES Foam) for the last several quarters. Back in the IIQ of 2018, its only BDC lender – Fidus Investment (FDUS) – had written down its second lien debt by (32%) and small equity stake to zero. Recent valuation trends, though, have been favorable and $1mn was repaid late in 2018.
Now we hear the company has just acquired “a state-of-the-art manufacturing plant in Spring, Texas, USA”. Of course, we can’t say if that’s a positive or a negative, knowing nothing of the nitty gritty financial details. Common sense, though, suggests this demonstrates the company is doing well given the “tremendous growth we have achieved over these last few years”, as mentioned in the press release.
This is a small investment even for a smaller sized BDC like FDUS, with only $3.7mn remaining of exposure (outstandings used to be $12.5mn) but is notable because chances look good that SES investors might be one of a minority of BDC under-performing companies that shortly makes its way back to the performing ranks. At June 30, 2019, we rated the company CCR 3 (Watch List) due to the 9% discount on the second lien debt and the (26%) discount on the equity stake. Maybe we’ll even see a modest increase in the value of the SES stock held ?
On August 9, Oaktree Medical Centre – which does business as Pain Management Associates – confirmed all its locations will be closed and 380 employees laid off in a process to be completed by the end of August. That provides confirmation – if any was needed – that lenders , including Fidus Investment (FDUS), will not be getting any proceeds from their exposure to the chain, accused of multiple frauds by the Justice Department. See our prior article dated August 5.
With BDC earnings season, we learned a little more about the troubles of Oaktree Medical Centre, a pain management chain, which was sued by the Department of Justice back in March 2019 and was raided by the FBI as far back as October 2018. The only BDC lender with exposure is Fidus Management (FDUS), which carried its debt at par or above through September 2018. At the end of the IQ 2019, some of the debt was on PIK non accrual and written down (8%)-(22%). Now, with the IIQ results, FDUS has thrown in the towel, placed all the debt -$13.4mn at cost – on non accrual and written down the value to zero. Looking at the public record, the chances of any eventual recovery is slim if the fraud the company’s principals are accused of is proved, and even if not. As often in these situations, and with the benefit of hindsight, FDUS seems to have been slow to reflect in its valuation the scale of the threat to recovery. At the end of March, even as the IRS accused the company of massive fraud, some of the debt was barely discounted. Another reminder – if one was needed – that BDC investors need independent the BDC Credit Reporter’s independent assessment.