During the BlackRock Capital (BKCC) IIIQ 2019 Conference Call on October 31, 2019 , we learned that the $24.2mn second lien loan in AGY Holdings, subsidiary of KAGY Holdings, has been placed on non accrual. No date was given. The reason for the move was given by BKCC as the need to “fund various initiatives at the business at this time. And so it does reflect sort of things going on in the business that are generally operational things that we wanted to do“. BKCC is both investor and lender, with another $24.8mn in first lien debt still current.
With this move BKCC reduces the FMV of its second lien debt at one fell swoop from a discount of (1%) to (29%) and loses ($2.9mn) of annual investment income. That’s a material impact on BKCC: 3.7% of Investment Income and almost 8% of Net Investment Income. Should the first lien debt go the way of the second lien and the $11mn of equity and Preferred, written to zero, the loss of income would be even worse. Overall, BKCC has invested $60mn in KAGY/AGY, and still values the investment at $42mn.
We have found very little information about the glass yarn manufacturer but Advantage Data records and the occasional word from BKCC management indicates this has been a troubled credit since 2012 and has been restructured before with only limited results so far. We have to at least consider the possibility that this could yet turn out to be a complete write-off given that the common stock and Preferred have no value and the second lien has just been discounted.
The other BDC with exposure is sister fund BlackRock TCP Capital (TCPC) with $16mn invested at cost. Included therein is $8.6mn at cost in a $10.3mn second lien tranche identical to that of BKCC. If that’s placed on non accrual as well, $1.1mn of annualized investment income will be affected. The investment was carried at a big premium last quarter so the unrealized depreciation involved could be material.
For our part, we had carried KAGY Holdings in the under-performing group at CCR 5, due to the non-accrual on the Preferred. However, we’d left AGY as “performing” and a CCR 2 rating. In the absence of third party information, we were led by the high valuations given the company for both its first and second lien debt. That was too generous. We’ve now rated the second lien as CCR 5 (Non Performing) and the first lien at CCR 4 (Worry List). Fool me once, etc.
On August 13, 2019 Great Elm Corporation (GECC) reported its IIQ 2019 portfolio. Included were new advances to long troubled satellite operator Avanti Communications. Despite GECC and other BDC lender/investor BlackRock TCP Capital (TCPC) writing down the existing debt and equity to the company in the quarter, management waxed enthusiastically about lending out more to Avanti. CEO Peter Reed used the opportunity to re-iterate GECC’s increasing confidence in the company, and its new CEO on the most recent Conference Call:
“When we formed GECC, Avanti was struggling to monetize the capacity of its satellite network.As Avanti encountered financial difficulty, we worked with other key creditors to improve the company through deleveraging its balance sheet, launching its biggest satellite to date and identifying and recruiting new Board members who brings stability and strategic insight into company. These improvements paved the way to hire Kyle Whitehill as the new CEO in April of 2018.
Since Kyle’s start, he has dramatically overhauled sales and marketing, resulting in large contract wins and rapidly growing recurring core bandwidth revenue. With the business heading in an exciting direction, Great Elm and other significant Avanti stakeholders were given the unique opportunity to participate in the new 1.5 lien delayed draw term loan facility.
As you can see from the tables on the bottom of the slide, the debt carries only an attractive interest rate but also a significant [feed] that accretes to GECC’s benefit. On its current trajectory and with minimal required capital expenditure, we expect that Avanti will have visibility into generating positive unlevered free cash flow”.
There is now $105mn of senior, second lien and equity exposure by the two BDCs in Avanti, with a value of about $45mn. There is no doubt that the company has made some progress recently, with a new satellite successfully launched just a few days ago. Even more recently Avanti has chosen to de-list itself from the London stock exchange given its concentration of ownership in 5 major shareholder groups. Unfortunately, that will make even less public information available to those of us on the outside looking in.
The BDC Credit Reporter will continue to remain fair minded but skeptical, given the company’s history; high levels of debt, opaque reporting and the very large amounts of BDC capital involved. Is Avanti a proverbial can being kicked down a very long road or a bona fide turnaround in the making ? We just can’t tell as we mostly have the BDC managers – with their conflicts of interest – as one of our principal sources of information.
According to news reports, UK-based Green Biologics, Inc., whose plant is based in Minnesota, is closing down its U.S. operations. (We’re not clear if there are operations elsewhere). Since 2015, the company – which produces acetone and 1-butanol via fermentation at a modified ethanol plant in Little Falls, Minnesota – has sought to become commercially viable. However, the board of the company has admitted to being unable to access additional funding to get the business to break-even and has chosen to close down, letting 50 staff go. Information in the public record is minimal but BlackRock TCP Capital (TCPC) appears to be the only BDC with exposure. The amount at risk at March 31 2019 was $20.5mn at cost ($34mn of face value) and valued at just $3.2mn. The exposure is all in equity, but till recently TCPC had both debt and equity exposure. We assume that debt was converted into equity in recent months as creditors and owners sought to find a way to stay afloat. We’re guessing TCPC will be taking a significant Realized Loss when the time comes – which might be in the IIIQ – and be possibly writing down at the end of June even the small amount of FMV on its books. Some other scenario is always possible but no word yet of any other alternative but liquidation of what was a major capital investment, reportedly beginning with $100mn committed in 2015. Technically speaking , till we hear otherwise, Green Biologics is not yet in Chapter 11, so we’re not adding the company to the BDC Reporter’s Bankruptcy List. If we did or do so in the future, that would bring the number of bankrupt BDC portfolio companies at 21.
On April 23, 2019, Jennifer Lopez backed Fuse Media filed for a pre-packaged Chapter 11 bankruptcy, seeking to unload $200mn of debt of $242mn on books. For only BDC with exposure – TCPC – that likely means the realizing of the $0.300mn invested at cost and already written down to zero. We have no Company File as Fuse Media was not a material investment.