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.
On Tuesday August 6, 2019 Capitala Finance (CPTA) on its Conference Call gave further details about the change of fortunes at equipment lifting company AAE Acquisition, which resulted in a ($20.4mn) Realized Loss. Apparently the company was up for sale but no buyers came through and the first lien lender foreclosed. CPTA was in the second lien and equity, which had been only mostly written down in the first quarter 2019. As a result, 100% of the investment was written off once and for all and $1.2mn of investment income (all previously in PIK at a 6.0% rate) lost. That’s about 2.5% of the BDC’s investment income as of March 2019 (annualized) and – for a sense of proportion rather than a calculation – 7.5% of Net Investment Income. This is a black eye for CPTA, especially given the surprise write-off. We did have the company – due to the valuation – on our under-performing list from the IQ 2019, but this was a surprise to us as well.
On June 18, 2019 multi-unit retailer Bluestem Brands reported results for the quarter ended May 3, 2019. We reviewed the earnings press release, and the Conference Call transcript on Sentieo (not yet linkable). Notwithstanding lower sales in the period compared to a year earlier, the company reported progress in “turning around” the business in several areas. Adjusted EBITDA was barely positive but that’s an improvement over ($12.6mn) a year earlier. Most importantly, from a credit standpoint the company was nowhere near triggering the several key metrics imposed by its senior lenders. Nonetheless, the burden of total debt has remained unchanged over the past several quarters, and its principal Term debt becomes due in late 2020. We have a CCR 4 Credit Rating, which remains unchanged. There are 4 BDCs with $29mn in exposure – all in the 2020 Term debt. In the IQ 2019, the unrealized depreciation was reduced in the BDC valuations and may receive a modest boost in the IIQ, based on these results. Nonetheless, the retailer is far from being out of the woods.
The troubled e-commerce retailer published quarterly and annual results for the period ended February 1 and 2, 2019. Despite closing down several brands and taking one-time losses, the Company’s Adjusted EBITDA and key bank covenants, as well as liquidity, all appear better. May stop the gradual erosion in BDC debt values underway since late 2016, which peaked in IVQ 2018. We updated the Company file and the BDC Credit Reporter’s views accordingly. For all the details, see the Company File.