On August 24, 2020 AG Kings Holdings, a grocery chain that includes regional names like Balducci’s and King’s Food Market, filed Chapter 11. According to a trade publication, the company – which has been troubled for some time -has a “stalking horse” buyer willing to pay $75mn for most of the stores in the chains. Furthermore, other buyers will be solicited under court protection. We learned that the company has “nearly $115mn in debts”. Of late the company has performed better than in the past thanks to Covid-19. Ironically, though, this recent success only encouraged management to strike while market conditions were as favorable as possible. The goal – despite unresolved issues with the company’s unions – is to be in and out of bankruptcy before the end of 2020.
Readers will know we have written about the company multiple times before, most recently on August 21, 2020. There are two BDCs with exposure of $26.9mn at June 30, 2020: Capital Southwest (CSWC) and WhiteHorse Finance (WHF). The latter recently added to its position in the first lien debt by buying an expanded position at a substantial discount. As a result, the aggregate FMV of the positions held is greater than the cost. WHF has two-thirds of the debt – including the most recent addition – and CSWC the rest.
The debt has been on non accrual since the IVQ 2018, so some sort of resolution was expected. From what we’ve learned from the Chapter 11 filing, and with the possibility of other buyers joining in, the BDCs have a good chance to get repaid in full or in part and in short order. From what we can tell, CSWC and WHF are not part of the buying group. We do know that the company’s “existing secured lender” is providing a $20.0mn Debtor In Possession facility, but we don’t know if that includes the BDCs who are principally in the Term Loan that nominally matures August 8, 2021. (CSWC does show an undrawn Revolver in its portfolio list).
We are retaining the CCR 5 rating for the moment and project the ultimate realized loss will be no greater than what CSWC – which invested close to par value – has booked : (30%) of its cost. If we’re right, CSWC will absorb a realized loss of just over ($3.0mn) and WHF – thanks to boldly buying more debt at a discount – may get away without a net loss. That could occur by the IVQ 2020 results. We expect both lenders will be happy with such an outcome and even more delighted if the company attracts more generous buyers. Much can happen in bankruptcy, but this may be the best outcome available after a year and a half of waiting around and no income coming in.
The BDC Credit Reporter will revisit this story as we learn what the final outcome looks like and we can estimate with greater accuracy what the ultimate economics might look like.
We’ve now heard from the two BDCs with first lien debt exposure to “troubled” retailer AG Kings Holdings. The debt has been on non-accrual since 2019 and remains so after IIQ 2020. However, Capital Southwest (CSWC) discounts it’s $9.5mn invested at cost by (35%). WhiteHorse Finance (WHF), by contrast, values the same debt ($17.3mn at cost) at a 20% premium…That discrepancy seems to be due to the fact that WHF doubled down in the period and bought more of the company’s debt in the secondary market at a discount that management was not willing to share on its conference call, but which an analyst placed at (63%).
Both BDCs have admitted that the retailer has been performing better thanks to the changed market conditions brought on by Covid-19. Nationally supermarkets have benefited from more people eating at home and AG Kings is no exception.
Given the company is still restructuring and still on non accrual , the BDC Credit Reporter is maintaining the CCR 5 (Non Performing) rating. that dates back to IVQ 2018. However, the outlook for recovery of some sort – perhaps even in full – is looking good. That’s positive news for CSWC and even more for WHF, which has made a bold move in buying non-performing debt. This might be to take advantage of the discounted price and/or as part of its restructuring strategy, but we’re just guessing.
We’ll be keeping as close tabs as we can on this private company and the BDC valuations involved. In an exception to the rule, we may see an upgrade before a liquidation or further write-down.
Judging by the write-downs taken by its two BDC lenders in the IIQ 2019 results, troubled supermarket chain AG Kings Holdings continues to deteriorate. Somewhat late in the day – as reported previously – White Horse Finance (WHF) placed the senior debt owned on non accrual and discounted the value by (14%), versus (9%) previously. Capital Southwest (CSWC), which had the debt on non accrual since the end of 2018, admitted on its Conference Call that the company was now rated 4 on its -14 internal scale:
“We did reduce AG Kings to a 4 this quarter, making it the only investment rated a 4 in the credit portfolio. The investment is our first and only non accrual among the investments made since launching our credit strategy 4.5 years ago“.
That’s pretty much all we learned that’s new but with this descending trend, the $17.7mn of remaining FMV (cost $20.2mn) may be in for further cuts unless we hear good news to the contrary. The company is rated CCR 5, but not yet in Chapter 11. That could change.
On June 13, 2019 WhiteHorse Finance (WHF) filed a Prospectus relating to the sale of its stock held by insiders. Included in the Prospectus was up to date information about the BDC’s first lien investment in grocery chain AG Kings Holdings. “We also currently expect to place our first lien investment in AG Kings Holdings, Inc. on non-accrual status and determine the fair value of the investment to be marked between approximately 70% and 80% of face value as of June 30, 2019, compared to 85% as of March 31, 2019″. See page S-6. The only other BDC lender to the Company – Capital Southwest (CSWC) – had already booked its own investment in the same 2021 Term Loan as being on non accrual in the IQ 2019. However, CSWC had discounted the investment by only (9%). The (20%-30%) discount being applied by WHF suggests a further weakening of the Company’s performance in recent weeks, and the possibility of a default. For more about the Company, BDC exposure and our views, see the attached Company file.
Canadian energy company Prairie Provident issued a press release about “the results of an updated independent reserves evaluation of the Company’s interests in respect to specific reserve entities within three future undeveloped waterflood expansion areas in Evi “.
From our unlearned reading of the release, the company is suggesting “an incremental 2.1 MMboe of proved plus probable (“P+P”) undeveloped reserves (97% oil and liquids) have been assigned to future waterflood expansions, comprised of approximately 1.6 MMboe of proved undeveloped reserves and approximately 0.5 MMboe of probable undeveloped reserves. Relative to year-end reserves bookings for specific reserves entities within the three Evi Waterflood areas, the undeveloped reserves additions attributed to the future expansions represent an increase of nearly 40% in original recoverable reserves estimates on a proved (“1P”) basis for those areas. As a result of the increased reserves assignments at Evi, PPR’s total estimated corporate reserves volumes grow by 7.1% on a 1P basis and by 6.1% on a P+P basis, relative to year-end estimates“.
That all sounds favorable – and given we spend most of the time reporting bad news – that’s a plus. However, as we noted the prior time we wrote about Prarie Provident BDC exposure at cost (Goldman Sachs BDC or GSBD) is $9.2mn and the FMV is only $0.2mn – all invested in non income producing equity. As of June 2019, the latest valuation was even lower than the quarter before. This type of news may boost future valuations, but Prairie has a long way to go in a tough industry. Either way, income to GSBD is not affected.