Pace Industries – an aluminum, zinc and magnesium die casting company – entered into and exited Chapter 11 bankruptcy last year. How the private company is performing since the exit is unclear. We do know that the company sold a 22,000 office building in Arkansas recently and is said to be re-locating its HQ to suburban Detroit where it has existing space. For our two prior articles about the company, click here.
There is only one BDC with exposure : TCW Direct Lending. A review of the valuation of the $133.3mn advanced by the BDC to Pace does not clarify the picture. TCW has increased its exposure from $96mn at cost – all in senior debt, just before the bankruptcy. Now, TCW has “doubled down” and has $133mn invested in first lien, subordinated debt and equity. The equity is written to zero, the subordinated debt is discounted only (7%) – BUT is carried as non performing – and the first lien debt is valued at par.
This is a Major exposure for TCW given the amounts involved. At first, when the company exited bankruptcy we upgraded its rating from CCR 5 to CCR 3 but are now returning to CCR 5 – i.e. non performing – given that the subordinated debt is on non accrual. By the way, the senior debt is paying a sub-market rate of 3.5% – all paid in kind. This all seems to suggest – despite the generous debt valuations – that Pace is not out of the woods yet. Given that TCW’s total exposure is equal to more than a fifth of its capital this should be a worry to its manager and shareholders. To date – from what we can tell – the BDC has not booked any realized loss on this investment and much could yet go wrong.
It’s good to have a plan: a restructuring plan that is. Pace Industries entered Chapter 11 back on April 13, 2020 with a pre-agreed restructuring agreement worked out with its lenders. Just six weeks later, the manufacturer of die casts, is out of bankruptcy and with “a new go-forward growth strategy, focused on building its position in key industries and expanding in growth markets”. This speedy exit has been possible by both the conversion of 100% of secured debt (!) into equity and the provision of Debtor In Possession (“DIP”) financing by those same creditors, now owners.
For the only BDC with exposure – non-traded TCW Direct Lending – this will be a bittersweet resolution. The lender has advanced $96.2mn in senior debt, discounted (19%) at March 31, 2020, just before the filing. We can only guess – but we won’t – at what the ultimate write-down might be. The debt will turn into equity in Pace. We’re not clear if the DIP financing will be converted into longer term debt financing or will be extinguished. If that’s the case, total invested capital by TCW might yet increase.
We will circle back to the BDC when IIQ 2020 results are published to get all the details straight. This is definitely a set-back for the lenders – and for TCW – but hope springs eternal that – over time – the company will prosper and what has been lost will be recouped. As a result, we expect to be covering the company for some time yet. We’re currently upgrading Pace from CCR 5 to CCR 3, still underperforming, till we get all the perinent details.
The die is cast for Pace Industries. The PE-owned company which manufactures die-cast parts filed Chapter 11 on April 13, 2020. As in so many other situations, the lenders to the business are standing – cheque book in hand – to undertake a debt for equity swap. According to what we’ve learned, the debt holders will get essentially all the equity in the restructured company for forgiving their loans and will commit $175mn for a debtor-in-possession (“DIP”) financing. A de-leveraged and reorganized Pace Industries hopes to be out of bankruptcy and operating normally by May.
This is likely to be a major disappointment for the only BDC with exposure to Pace: TCW Direct Lending. At year end 2019, TCW had $92mn invested in the 2020 Term Loan to the company and had only applied a modest discount. We had a Performing rating of CCR 2. We now have a rating of CCR 5 – Non Performing. That means TCW is not receiving some $8.6mn of investment income. Furthermore, more capital will need to be advanced if TCW participates in the DIP.
Advantage Data’s Syndicated Loan market price modules quotes the 2020 Term Loan trading at 83 cents on the dollar, suggesting a realized loss of nearly ($16mn) is possible, or even more depending on final terms.
As in so many other situations we’re seeing, Pace was in a weakened state even before the Covid-19 situation came along. The supply chain disruptions from the virus were too great for the company to handle, despite closing plants and laying off 70% of its employees. Faced with a liquidity crunch, the company – despite having high profile owners like Antares and Macquarie – had no alternative but to throw in the towel. Pace – in its recast form – will remain on our Under Performers list for the foreseeable future, but the nature of the investment will be radically different and require a much longer timeline till the final outcome of TCW’s investment – which began in 2015 – can be ascertained.