American Achievement: Financial Performance Update

American Achievement has been renamed Balfour & Co but the old name is still used in two of its lenders 10-Q filings, so we’re sticking with the out of date nomenclature for these purposes. We have written about the company twice before, most recently on March 19, 2021 when an exit from bankruptcy occurred. Apparently a new buyer in the form of Cerberus Capital Management L.P. stepped up and kept all creditors unimpaired:

A recent large capital investment by its new owners has positioned Balfour & Co. for not only financial stability, but also a successful long-term growth strategy. This additional capital investment was in addition to its new line of credit from the new owners. Due to the recent strong performance, this capital is not currently being utilized but is available for key investments in the future such as its ongoing digital reinvention, production innovation, a new manufacturing facility, operational excellence, and strategic acquisitions to drive long-term growth. 

PR Newswire October 7, 2021

Just before the company went on non accrual and then went in and out of bankruptcy, there was one BDC lender: Sixth Street Specialty (TSLX), TSLX had advanced $24mn in first lien debt, with a value as of IIIQ 2020 of $22mn. All that debt went on non accrual for a quarter before the resolution. After the restructuring, the total TSLX investment increased slightly, but was split between two first lien loans, a subordinated loan and equity. Most of the advance was in first lien and performing with a small amount in the subordinated debt ($0.5mn) on non accrual. As of the IIQ 2022, total TSLX exposure was up to $27mn at cost. Both the subordinated debt and a small first lien loan – with a cost of $1.4mn – were non performing. The bulk of the debt, though, remained on accrual. The overall FMV was $19.6mn – not much changed since the bankruptcy.

Another BDC – New Mountain Finance (NMFC) – joined in the financing from the IQ 2021 – presumably helping out the new owner. The initial investment amounted to $28mn. As of the IIQ 2022, the total exposure amounted to $30mn in a variety of facilities and equity. The outstanding debt is carried as non performing.

Out of the blue, while going through the daily news update we undertake for all underperforming companies, there was good news worthy of reporting about American Achievement/Balfour. The company put out a press release on September 21, 2022 claiming:

“a nearly 100% fiscal year-over-year improvement in operating performance as well as the construction of its new, state-of-the-art printing facility…The company’s financial improvement was largely a reflection of strong sales and operating improvements across its core graduation products categories”

Press Release – September 21, 2022

The rest of the press release does not offer much more in the way of concrete numbers but a reading does suggest the business is rebounding as high schoolers graduate and seek the memorabilia that one does of that important time in life.

Operating under Balfour®, GradImages®, University Photo®, Gaspard®, ArtCarved®, KeepSake®, and Taylor Publishing Company®, the Company provides personalized products such as class jewelry and apparel, yearbooks, graduation cap and gowns, announcement products, and photography through digital marketing technology, personal in-school deliveries, and customized school assortments. The Company operates throughout North America with around 5,000 team members.

For TSLX, as well as New Mountain Finance (NMFC) and First Eagle Alternative Credit (FCRD), which has immaterial exposure in its JV – this sounds like good news. With over $50mn of BDC invested in the debt – much of which is not performing – there is a good chance for both an increase in income being received and a better fair market valuation. We hope to learn more – even if it’s just by looking at valuation numbers – when TSLX and NMFC reports IIIQ 2022 earnings in 7 weeks or so.

American Achievement Corp: Exits Chapter 11

We hear from S&P Global Market Intelligence that “the bankruptcy court overseeing the involuntary bankruptcy petition filed against American Achievement Group Holding Corp. on March 16 has dismissed the case, according to a court order, ending the company’s brief encounter with Chapter 11“. The BDC Credit Reporter had written about the involuntary bankruptcy (which occurred January 14, 2021) back on February 20, 2021. We won’t go back into the whys and wherefores that caused the bankruptcy filing. However, we don’t know the full details of how matters have been patched up except that the parties have agreed to an out-of-court restructuring which will “would leave all creditors unimpaired“. Another $35mn Revolver is contemplated to provide the company with liquidity.

We can’t say when all this will come together but the news seems to be good for the only BDC with exposure: Sixth Street Specialty Lending (TSLX). The BDC had placed its $23.8mn in senior debt to the company on non accrual in the IVQ 2020 and discounted its position by ($2.2mn), or (9%). Presumably the debt will shortly return to accrual status and – we assume – accrued interest will be collected.

The company is rated CCR 5 and remains there for the moment. However we are adding American Achievement to our Trending list because we expect in the IQ or IIQ 2021 for a significant change in status (from non performing to performing) and the resumption of interest income, which amounts to $2.2mn a year, not to mention a rating upgrade. We will circle back when we receive confirmation from TSLX that all is well.

American Achievement Corp: Debt On Non Accrual

We learn from Sixth Street Specialty Lending (TSLX), following IVQ 2020 results, that a new portfolio company has been placed on non-accrual: American Achievement Corp. The company “manufactures and supplies yearbooks, class rings and graduation products, and as a result of COVID, underperformed for the 2020 sales season“. TSLX added: “We are currently working with the company on a potential restructuring to keep our term loan outstanding and to receive a majority of the equity in the business as a lender group. We expect to reach resolution on this in the near term“.

What TSLX failed to say is that the company “filed for involuntary Chapter 11 bankruptcy protection January 14, 2021, in the Northern District of Texas“, according to public records. In addition, TSLX did not mention that the near half a billion dollar in debt owed by the company is the subject of heated disputes, which adds an element of uncertainty to the outcome. This article by S&P describes some of the maneuverings underway.

TSLX seems to be (unduly ?) optimistic, writing down its $23.8mn first lien loan by only (9%). Furthermore, if a debt for equity swap – as mentioned above – seems the likeliest resolution, it seems unlikely that the debt will not be subject to a major haircut, which will impact long term income. At the moment, with the non-accrual TSLX has temporarily lost ($2.2mn) of annual investment income.

We have downgraded the company from CCR 2 to CCR 5 in one fell swoop. (As of the IIIQ 2020 TSLX valued its investment at a modest discount of (7%) and no mention was made by TSLX – the only BDC lender – of any challenges at the company). We are also adding AAC – as its known – to our Alerts list because it’s likely that the income, value and outstandings involved will be subject to substantial change in the next couple of quarters.

Frankly, we’re a little disappointed by the transparency of TSLX at this stage. Maybe with so much ill feeling between the parties involved with the company, the BDC did not want to stir up the pot on its February 18, 2021 conference call, but investors are left with an incomplete picture. This a company that bears watching and which we’ve added to our daily review for any new developments.