AAC Holdings: To Receive Forbearance From Lenders

On October 22, 2019 AAC Holdings issued a press release indicating that the company was just about to arrive at a mutually satisfactory arrangement with its lenders, following events of default under the debt. This was carefully worded – because nothing has been signed – as follows: “The Company expects to enter into an agreement securing additional liquidity and receiving a forbearance from its senior secured lenders regarding certain previous events of default. The Company expects to finalize the agreement with its senior secured lenders next week, although no assurance can be made that an agreement will result from these discussions within that time frame or that an agreement consistent with these discussions will be reached at all“.

The company also expects to finalize the appointment of three new directors, after losing that many in a mass resignation, which was the subject of our last post. That will allow AAC to remain a public entity.

If all the above happens, AAC Holdings will cheat the hangman a little while longer. That gives the company time to improve fundamentals at its addiction centers and sell off real estate to reduce debt, as has been the plan for some time. Nonetheless, even if the forbearance is formally approved, we continue to keep AAC Holdings rated CCR 4 (Worry List) and on our Bankruptcy Imminent list. BDC exposure is high at $66mn. Click here for all our prior articles. Like Game Of Thrones, the story makes more sense if you begin at the beginning.

AAC Holdings: Directors Resign.

On October 1, 2019 4 of 7 directors at AAC Holdings (aka American Addiction Centers) resigned. Shortly afterwards, the SEC warned that the troubled public company was not in compliance with rules regarding the minimum number of audit committee members because of the departures. At the same time, the stock price of AAC continues to plumb new lows, dropping to $0.50 a share at time of writing.

In our minds this more evidence that AAC is close to filing Chapter 11 or restructuring out of court. We’ve added AAC to our Bankruptcy Imminent list (our version of Fitch Ratings Loans Of Concern), and the company is already rated CCR 4.

To be fair, the 2020 and 2023 debt in which several BDCs are invested are publicly traded – as reported by Advantage Data – and the former is trading almost at par and the latter at a (11%) discount, not that much worse than the valuations at June 2019. Nonetheless, if we are right and the markets are wrong ( a tall order admittedly) there is a lot at stake for the 4 BDCs involved with $66.3mn of exposure at cost and valued almost at full value, and with over $7.0mn of investment income involved.

AAC Holdings: Reports IIQ Results, Addresses Debt Defaults

We have written about AAC Holdings (aka American Addiction Centers) 5 times already since April 2019. That’s for two reasons. First, this is a public company (ticker:AAC), which means there’s plenty of information available to relay. Second, the $66mn of BDC exposure – mostly carried at a small discount or even at a premium to cost by 4 funds – means the stakes are high.

Anyway, on September 1, 2019 AAC Holdings held its IIQ 2019 Conference Call; summarizing its latest results and (sort of ) addressing some of its problems with its lenders. Here’s what’s happening with EBITDA:

“On a sequential basis, adjusted EBITDA went from a loss of $12 million in the fourth quarter of 2018 to a loss of $6.5 million in the first quarter of 2019 to positive adjusted EBITDA of $3 million in the second quarter of 2019. This represents a $15 million or 125% improvement in quarterly adjusted EBITDA since the fourth quarter of 2018. Overall, as Michael mentioned earlier on the call, while we still have a lot of work to do, I’m pleased with the sequential momentum so far in 2019.

Turning to our 2019 guidance, our full year guidance has revenue in the range of $255 million to $275 million and adjusted EBITDA in the range of $16 million to $21 million. Taking into account actual results through the first half of 2019, this implies revenue of $137 million to $157 million and adjusted EBITDA of $20 million to $25 million in the second half of 2019″.

As to the company’s relationship with its lenders:

We remain committed to our strategic initiatives to improve the balance sheet and enhance value to all stakeholders by the end of the year. Our goal is to utilize our existing assets to reduce our senior debt by at least $100 million by the end of the year in order to reduce the cost [of] capital.

Finally, we remain engaged in active discussions with our lenders on our credit agreement and are making progress on reaching an agreement that will resolve our covenant obligations in the near term.

I’m confident that we will reach an agreement that is favorable to all stakeholders”.

Later in the CC this was said in response to a question: “I mean I think our banks have been extremely supportive. They see the trajectory that we’re making. I think we see the trajectory we’re making, there’s both sides of it. Part of it hinges on us unlocking some of the value of the real estate, which we’ve been actively working on. We’re looking at all proposals, and so we certainly want to get this resolved as soon as possible“.

The BDC Credit Reporter continues to be more conservative/skeptical than either AAC’s management or lenders about the ultimate outcome, which is only appropriate. We have a CCR 4 rating on our 1-5 scale. Much of the turnaround required remains to come, especially the sale of real estate to pay down debt. How that turns out will be critical, both to AAC and its stake holders and as a validation or otherwise of the lenders – which include Capital Southwest (CSWC), New Mountain Finance (NMFC) and Main Street (MAIN) – credit underwriting. Expect to see many more updates before this file gets closed.

AAC Holdings: Major Investors Selling Out

An August 26, 2019 article indicates several of the largest institutional investors in AAC Holdings (aka American Addiction Centers) have been dumping their shares in the troubled public company.

Deerfield Management, the company’s largest shareholder in March and a major investor since 2015, sold all of its holdings in AAC during the second quarter. Similarly, TimesSquare Capital Management — another of the largest shareholders early this year — and Apollo Management also had sold all of their shares by the end of June. And Morgan Stanley’s stake in the company fell from 1.4 million shares in June 2018 to about 1,600 shares in June 2019“.

So what ? The defections suggest some of the most knowledgeable investors are not buying in to management’s oft repeated plans of a turnaround plan. At $0.58 a share, the stock trades only $0.08 off its all-time low and supports the BDC Reporter’s fears that AAC will eventually file for Chapter 11 or undertake a wide ranging restructuring. Debt holders should probably pay attention.

At June 30, 2019, there were 4 BDCs with $66mn of exposure – all first lien – in the company and more than $7mn in annual income at risk. To date, discounts taken on cost have been very modest, which will make the potential impact on BDC net assets all that more telling should AAC stumble.

AAC Holdings: Receives Third Warning Of De-Listing From Exchange

On July 9, 2019 news reports indicated troubled AAC Holdings (aka American Addiction Centers) had received a third warning from the New York Stock Exchange (NYSE) that its stock might be shortly de-listed. The reason: the company’s stock (ticker: AAC) has been trading under $1.0 for a thirty day period. The company is seeking a reprieve and has submitted a plan to the NYSE. According to a press release by the company, “submitting a plan to the stock exchange should allow the company to continue trading. The plan makes AAC eligible for an 18 month period to improve market capitalization and a six month period to improve share prices”.  Notwithstanding management’s ambitious plans to re-position and turn around the business, the BDC Credit Reporter remains concerned about a possible bankruptcy filing or restructuring in 2019. Total exposure is $63.6mn in 2020 and 2023 Term debt still carried at high valuations as of March 2019. The key holders are New Mountain Finance (NMFC); Main Street Capital (MAIN); Capital Southwest (CSWC) and non-traded MAIN sister BDC HMS Income. Total investment income at risk should the company default is in excess of $7.0mn annually. We should say that the publicly traded debt does continue to trade at only a slight discount to par, suggesting our worries may be overblown. Time will tell.

AAC Holdings: Number Two Executive Steps Down

This can’t be good. A month after addiction treatment company AAC Holdings (ticker:AAC) announced an ambitious long term strategic plan to address its recent business woes, its President has resigned unexpectedly. He was with the company for only 18 months. Not surprisingly, AAC’s stock price dropped, and is now at $0.70 a share, not far from it’s all-time low. We continue to worry about a Chapter 11 filing or restructuring – see our earlier post from April 16, 2019. Currently, total BDC exposure is up to $63.6mn, spread over 4 BDCs.

AAC Holdings: Reports IVQ 2018 Results

AAC Holdings – aka American Addiction Centers – had a terrible IVQ 2018, with sales, EBITDA and earnings down. That’s reflected in the just published results and caused the Company to seek – as reported previously – additional debt financing to the tune of $30mn. On the Company’s Conference Call, management remained optimistic that a $30mn cost cutting program and a rebound in occupancy at its facilities would allow AAC to rebound. Still, with projected EBITDA for 2019 of $45mn-$55mn and $300mn in debt (97% due within 12 months), we have reasonable doubts. So do the public shareholders, who’ve brought the stock under $2.0 a share. The 4 BDCs with $60mn of senior debt exposure (at December 31 2018) must have their concerns as well, given that new debt has been added and real estate may be sold and leased back. If the other shoe drops at ACC, the BDC lenders may face material write-downs from the par valuation at year end 2018 and the risk of close to $6.0mn of income interruption if the debt goes on non-accrual.

AAC Holdings: Updated Company File

AAC Holdings, Inc. that does business as American Addiction Centers has been on our Watch List for some time. We’ve just updated the Company file with various recent developments and renewed our view that some sort of “credit event” is likely in the short term.