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.

Oaktree Medical Centre: Business Closing

On August 9, Oaktree Medical Centre – which does business as Pain Management Associatesconfirmed 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.

Oaktree Medical Centre: Full Write-Down

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.