The BDC Credit Reporter has written on four prior occasions about Fusion Connect Inc. ever since the “leading provider of integrated technology solutions” failed to make an interest payment on its debt back in April 2019. Subsequently the company agreed to a debt for equity swap with its senior lenders and filed for Chapter 11 back on June 4, 2019. Those senior lenders were owed $574mn. From today’s announcement, we know $400mn of debt has been written off. Furthermore, some existing lenders have agreed to provide $115mn in an “exit financing loan”. We’re not sure if that rolls up the D.I.P. financing in place or is a new facility.
Back in July we’d anticipated the Chapter 11 exit momentarily, so there’s been some delay. In the interim, the company has appointed a new CEO from within.
With the exit, we are upgrading our credit rating to CCR 3 (Watch List) from CCR 5 (Non Performing). We’ll be keeping Fusion in our BDC portfolio company Under Performers database until we learn a good deal more about the company’s long term prospects with its new manager and balance sheet. For the two BDCs involved Garrison Capital (GARS) and Investcorp Credit Management (ICMB), with at least $20.3mn in exposure, a day of reckoning is now nigh. The BDCs should be writing off a portion of the 2023 Term Loan they hold in the IQ 2020 results. Based on the current market value of that debt, we expect a third of the position may be written off. The small DIP positions the two BDCs have is likely to be repaid or continue in the unspecified “exit” facility.
Even at this interim stage, this is a material blow to both BDCs, with ICMB with the greatest exposure on the 2023 Term Loan-turned equity, with $11.4mn at cost and a likely Realized Loss of over ($3mn). GARS has $7.4mn invested at cost in the 2023 debt, but had not taken as big a discount as ICMB last quarter in valuation terms (27% versus 34%). As a result, GARS might have to take an incremental unrealized loss before booking its realized loss of over ($2mn). All the above is just speculation because BDCs have wide latitude on how to value these investments gone wrong and converted into different security types. Undeniably, though, both BDCs will permanently lose much of the $1.8mn of investment income being generated before everything went wrong.
A final word. As Advantage Data’s records show both BDCs got involved in lending to the fast growing (i.e. risky) technology company only in the second half of 2018. ICMB joined the lending group in the IIIQ 2018 and GARS started a quarter earlier. By the IQ 2019, the company was in trouble due to its inability to successfully integrate two major acquisitions and the debt went on non accrual. That’s a very brief period to go from performing credit to non performing. Hopefully for both BDCs the company’s future performance – and the stock that they now own – will offset these early reverses.
The BDC Credit Reporter has tracked Fusion Connect from under-performing to Chapter 11 filing and, most recently, to getting ready to exit bankruptcy, expected by the end of the year.
Now we hear that the existing CEO is departing and a new chief executive has been promoted internally to take that key position on an interim basis. The company will be head hunting for a permanent CEO once Chapter 11 is exited. The new interim CEO will be very busy as he has also been appointed President and COO as the individual wearing those two hats has also resigned.
Given that Fusion will shortly be owned by its lenders, which includes Garrison Capital (GARS) and Investcorp Credit Management BDC (ICMB) – formerly CM Finance – these changes – and those to come – deserve watching. We still rate Fusion Connect a CCR 5 because it’s non-performing but expect to maintain the company on our under-performing list with a rating of CCR 3 (Watch List) once operating normally again. We still have a lot to learn about the ultimate balance sheet of the restructured entity; its strategy going forward – and we see from this news – who will be at the helm long term.
According to Informa, Fusion Connect has filed its bankruptcy plan with the court and hopes to get a hearing by October 1st and – if all goes well – exit Chapter 11 shortly thereafter. The plan includes a very large debt swap/forgiveness that is said to cut total borrowings from $680mn to $380mn. Currently, the restructuring appears to have the first lien lenders gaining control of the business in return for writing off a goodly portion of their debt. The two BDCs involved – CM Finance (CMFN) and Garrison Capital (GARS) have $18mn invested at cost, but that liability may have increased as senior lenders provided DIP financing. That original debt is on non accrual and won’t – in any form – be paying interest till the IVQ 2019. That’s three quarters without LIBOR + 7.25%. Moreover, a write-off of some kind must be coming. We’ll learn more when CMFN and GARS report IIQ 2019 portfolios. The valuations are likely to be close to the final, if all goes to plan. See our prior posts on June 12, 2019 and April 17, 2019.
The Company filed for Chapter 11 on June 3. On June 11, in an article from the Global Legal Chronicle we learned that “ad hoc group of lenders also backstopped Fusion’s debtor-in-possession financing facility in the aggregate principal amount of $59.5 million, which consists of $39.5 million of new money term loans”. This suggests that the two BDCs with $18mn in senior debt exposure – CMFN and GARS – have increased their exposure to what was till very recently a fast growing enterprise, cobbled together from multiple acquisitions. It’s still too early to determine how this will all play out. The business may yet be sold or the existing lenders may be involved in a debt for equity swap. In either case, income from the pre-petition debt is going to be interrupted for months, and some sort of realized loss is likely. At 3/31/2019, the discount to cost that the BDCs were using ranged between (12%) and (17%). However, any income and return from the DIP financing should be money good.
Publicly traded Fusion Connect has entered into a Forbearance Agreement with its Revolver lenders and 70%+ of first lien lenders. As the press release states : “Under the terms of the Forbearance Agreement, these first lien lenders have agreed not to exercise the remedies available to them related to Fusion’s decision not to make its scheduled principal payments due on April 1 and 2, 2019 and certain other defaults under the Company’s credit agreement. The Forbearance Agreement extends until April 29, 2019 unless certain specified events occur”. In the interim, the Company has hired turnaround advisers and appropriate legal counsel in an effort to restructure the balance sheet out of bankruptcy. However, the odds are stacked against the highly leveraged business. See the Company File for the BDC Credit Reporter’s View. The two BDCs with $18mn in exposure appear to be in a first lien loan due in 2023. The publicly traded debt – valued by the BDCs at close to par at 12/31/2018 – currently trades at a (25%) discount). That suggests CMFN and GARS are likely to have to write down their debt by close to $5mn or more in the IQ 2019 results and face the risk of additional Realized and Unrealized Losses. The most immediate impact is likely to be interruption of interest income: $1.1mn on an annual basis for CMFN and $0.7mn for GARS.