Mood Media: Company Sold

According to news reports Mood Media Corp. has been sold to Vector Capital for an unknown amount. Current lenders are to continue to provide debt financing under the new ownership. The BDC Reporter has written about the company on three prior occasions. Most recently, we wrote about Mood Media when the business re-structured and emerged from bankruptcy for a second time in recent years.

For the three BDCs with exposure – publicly traded FS KKR Capital (FSK) and FS KKR Capital II (FSKR) and non-traded Business Development Corporation Of America (“BDCA”) – this company has been a major disaster from a credit standpoint. As of June 2020, total exposure at cost – both in the form of senior debt and equity – totaled $122mn. Then came the most recent restructuring in August 2020 and huge realized losses had to be recognized. As far as we can tell (the BDCs themselves are coy in the filings about the specifics and on their conference calls) $110mn or more was permanently written off.

As of September – FSK and FSKR held an equity stake in restructured Mood Media but that had no cost or FMV attached. We assume the two sister BDCs permanently wrote off ($108mn) in August and do not seem to have participated in any post-restructuring debt facilities. By contrast, BDCA still has $12.4mn of debt and equity at cost and $14.4mn at FMV. (We have no explanation for these discrepancies as this is a privately-held company which does not disclose much in the way of information).

Now that Mood Media has been sold, we expect FSK and FSKR will just move on, but BDCA might continue as lender. We’ll be curious to see if the $4.4mn value of restructured equity will be reflected in the IVQ 2020 BDCA results.

For FSK and FSKR it’s been a long and winding road that begin in 2011 and 2012 respectively and quadrupled in size over time. Given that the two BDCs at the end of the day had to write off essentially every dollar advanced is a black mark. Even for BDCs of this size realized losses of ($50mn) plus are material.

Mood Media : Files Chapter 11

As the company promised back on June 26, 2020 when we last wrote, Mood Media Inc. has filed for Chapter 11 bankruptcy. Also as previously indicated, the company and its creditors appear to have worked out a restructuring agreement in advance, the details of which are spelt out in the prior article. In the most recent press release on July 30, 2020 Mood Media indicated the whole plan was submitted to a judge on July 31, with the hope of exiting from Chapter 11 status very quickly. No word yet on the outcome of that deliberation.

We continue to believe the $120mn invested by three BDCs (with most of the capital advanced by FS KKR Capital or FSK and FS KKR Capital II or FSKR) will be largely written off. Our current estimate is that two-thirds of the debt and equity will result in a realized loss. Also likely is that the BDCs will be involved in both the DIP financing and the $200mn in post-bankruptcy senior loans planned. That will result in some investment income coming in but will increase long term exposure. Many years may go by – even if the restructured Mood Media does well – before this investment gets exited, as the BDC lenders will now be owners and creditors.

The hard truth is that even a restructured Mood Media has no guarantee of success given the pandemic and the structural changes going on in retail. If more and more of us shop from home, and less and less in stores, the demand for the company’s piped-in music will necessarily drop. Currently we are maintaining a Corporate Credit Rating of 5, and adding the company to the BDC Bankruptcies list, an exclusive feature of our publication. This is the tenth BDC-financed company bankruptcy in July and the 40th for the year. (Remember to go to the BDC Credit Reporter’s “BDC Bankruptcies” table for the constantly updated list of every company that has filed for Chapter 7 or 11 in 2020). Currently Mood Media is at the top but – the way things are going – will soon be displaced by new entrants.

Mood Media : To File Chapter 11 In July.

On June 26, 2020 Mood Media announced that it has entered into a comprehensive Restructuring Support Agreement with certain of its lenders, noteholders and equity sponsors on the terms of a “prepackaged” financial restructuring plan that will reduce the Company’s debt by $404 million. The company also indicated that – after soliciting creditor approvals – a Chapter 11 filing would ensue in Texas in late July.

In connection with the expected court-supervised process, the Company has received a commitment for up to approximately $240 million in new financing, including $40 million of new capital, from HPS Investment Partners, LLC and other first lien term loan lenders. The new financing will be subject to Court approval and, together with cash generated from the Company’s ongoing operations, is expected to provide ample liquidity for the Company to continue operating in the ordinary course during and after the contemplated court-supervised process“.

Unfortunately, this is another major set-back for BDC lenders, with total outstandings at $120mn at cost divided over three BDCs: FS-KKR Capital (FSK); FS-KKR Capital II (FSKR) and non-listed Business Development Corporation of America.We expect more than ($100mn) will shortly be written off. Even at March 31, 2020, the aggregate value had been cut in half to $57.5mn and the 14.0% second lien PIK debt held by the FS-KKR BDCs had been placed on non accrual, and their equity positions (from an earlier restructuring) written down to zero. Only BDCA – mostly invested in the first lien debt – may salvage some capital. What’s impossible to tell as yet is whether one or more of the BDCs will be involved in the new financing, stretching out this long sad relationship with Mood Media, which dates back to 2011 for FSK.

Mood Media is part of the “First Wave” of credit defaults, already deeply in trouble before Covid-19 caused virtually all its customers to close and not need piped-in music. In fact, Moody’s has had the company rated “speculative” since 2018. More recently, the ratings group wrote this in June 2019 : “With only $18 million of cash on the balance sheet, no available external liquidity sources, and covenant cushion erosion owing to step downs in 2019 and 2020, a more fulsome balance sheet restructuring or other default is highly likely over the next 12 to 18 months“. All this way before Covid-19. In other words, the company was an accident waiting to happen.

Yet, the BDCs involved carried their debt outstandings at or above par and had only reduced the value of their equity holdings by (50%) as of IIQ 2019. This suggests – and is consistent with many prior examples – that BDC valuations can often seem wildly optimistic or a little foolish with the benefit of hindsight. This makes relying on stated asset values difficult. For our part, if we hear the word “speculative” from a ratings group we’re going to apply a CCR 4 rating right away.

In any case, where the BDC Credit Reporter is currently concerned Mood Media remains CCR 5 or non-performing. When an actual bankruptcy occurs we’ll add the name to that ever lengthening list, probably next month as scheduled. We expect to hear more about the details of the restructuring and the way forward from Mood Media shortly but are not optimistic that the substantial losses we’ve predicted versus the value at IQ 2020 will change much for the better.