Maxus Carbon: IQ 2021 Update

With Apollo Investment’s (AINV) IQ 2021 filings, we can provide our fifth update on Maxus Carbon (aka Carbonfree Chemicals). The BDC valued the now all equity investment with a cost of $77.8mn at $25.4mn. That’s essentially unchanged from the prior two quarters and since AINV’s debt to the business was converted into equity.

The valuation might suggest that nothing much – good or bad – is happening at Maxus Carbon but what was said on the May 20, 2021 AINV conference call suggests otherwise. Here is what was said by AINV’s CEO Howard Widra:

[Maxus Carbon] has some really good developments there. And that’s an all equity debt investment that had been converted to our equity. But that’s all equity and is a carbon-efficient business that has a lot of demand, obviously, where the world is going right now. And so, we hope that over the next year can have some real significant positive things happen to it”.

We can’t tell if the above is something specific getting underway or just hopeful comments from the BDC. It’s about time something happened at Maxus Carbon – on the books since 2013, and non-income producing since IIIQ 2020.

We are retaining our CCR 4 rating and not adding Maxus to our Trending List given the unchanged nature of the recent valuations and the vague nature of management’s status update. In the current environment, though, where capital is loose, it’s not impossible that SOMETHING might happen of a positive nature where this long standing “zombie” investment is concerned. That’s at variance with our earlier thoughts that the most likely resolution would be a write-off of the project and a complete loss. At this stage, both good news or bad news are equally likely.

Maxus Carbon: Debt For Equity Swap

This is the fourth article we’ve written about Maxus Carbon’s, Apollo Investment’s (AINV) poorly performing project finance for a chemical plant that has been around for 7 years. Click here for the prior articles and to get caught up. After placing remaining debt on non accrual in the IIQ 2020, the BDC in the IIIQ 2020 has quietly restructured its position in the company. Again. We say “quietly” because management made no mention of the conversion of the $30.4mn in first lien debt – albeit non performing – into equity on its IIIQ 2020 conference call transcript. This removed Maxus from AINV’s long list of companies on non accrual but – arguably – further weakened the BDC’s position on the company’s balance sheet, which is now all equity for $77.9mn at cost. Of course, no income is being received.

AINV valued some of its earlier equity at $24.9mn at FMV and the just converted debt at zero. Counter-intutively, the latest valuation is slightly higher than last quarter, which was for $22.6mn. At this point AINV has written down 69% of invested capital and has no income coming in. When this investment started out AINV made a $60mn loan and charged 13%. That’s ($7.8mn) of annual income lost along the way.

We are “upgrading” Maxus from CCR 5 to CCR 4 because technically no longer non performing. Still, at best this is a lateral move.

Based on the ever lower valuation and the debt to equity conversion, the BDC Credit Reporter does not hold up much hope and would not be surprised if AINV – one day – would write off the entire project. The current FMV of the investment would amount to about 2.5% of net assets as of September 2020.

As always we are at the mercy of AINV in terms of updates on the chemical plant’s progress. We’ll provide the latest disclosure next quarter of what remains – even with two thirds of the value written down – a material “Legacy” investment for the BDC and an almost certain dud once the final bill comes due.

Maxus Carbon: Debt Placed On Non Accrual

Apollo Investment (AINV) has reported IIQ 2020 results, which included the news that two debt facilities associated with chemical plant Maxus Carbon were placed on non accrual in the quarter. These are two 2024 senior loans of $13.3mn and $17.1mn respectively. AINV – which owns the troubled business – had already been requiring only a reduced interest rate (5.0% and 3.0% respectively). Still, the income lost is substantial: ($1.2mn) annually.

We’ve written about the company before on two occasions. Every time we have a new look at the company business seems to have gotten worse and valuations are lower. Besides the non accruals AINV took two unrealized write-downs this quarter on debt and equity in Maxus Carbon and its affiliated company totaling of ($10.0mn). The current FMV is $22.6mn on investments with a cost of $76.5mn. That means (70%) has been discounted already.

The BDC Credit Reporter has downgraded Maxus Carbon to CCR 5, or non performing. We’d be surprised if AINV achieved any recovery on the entire amount invested, but with very limited disclosures as to what is going right or wrong at the plant it’s hard to point to more than hunches. Unfortunately, this is an example of a “zombie” portfolio company kept alive – seemingly – by the goodwill of its lender-owner but generating no return for the BDC’s shareholders. Apollo Global – which manages AINV – should be either closing down this operation; bringing in partners to validate the value, or – at the very least – provide a level of performance disclosure to allow its shareholders to determine what the eventual outcome might be. Instead, we are getting a slow death by multiple cuts in an information void.

Maxus Carbon: Valuation Decreased

Apollo Investment (AINV), the only lender that we know of to Maxus Carbon, a chemical plant with innovative technology, has just reported IQ 2020 results. The BDC has reduced the fair market value of its investment $76.5mn investment in Maxus by ($22.6mn), bringing the FMV of the debt and equity involved to $32.6mn. Income from the long standing investment remains very modest, just $0.318mn for the past 12 months. We last wrote about the company following a restructuring in February 2020.

Here’s what management explained on the latest conference call about Maxus Carbon:

So this is a petrochemical plant in Texas, referred to as carbon-free with a technology, think of it as a greener alternative to carbon capture and has experienced historical issues. In terms of ramp of — the facility has attracted significant equity capital over its life — it creates — it produces three separate outputs, one of which is hydrochloric acid, which itself is used heavily in fracking of wells and the prices for that have also — have obviously gone down significantly in the current market environment, offset to a certain extent by the other output or the other two outputs, and in particular, bleach and caustic soda, bleach being something that has seen demand relatively resilient and pricing relatively resilient. And so the — and then this is also an investment in which we undertook a restructuring whereby we would have a greater deal of our value with the value of the IP, which we do believe to be valuable and the company’s go-forward strategy is to find a partner for use of that that IP. And if you kind of think about in the context of the broader concerns and motivations and mandates to make more green such processes. We’re hopeful that, that will drive some value. So that’s that investment“.

The outlook remains poor for this 4th largest of AINV’s investments, which has been written down by ($32.4mn) in the past 12 months and incurred a realized loss. We are affirming our Corporate Credit Rating of 4. Should the company fail – although we’re in no position to tell if and when that might happen – we imagine most of the remaining value (which amounts to about $0.50 per share) will be lost. This is a “Legacy Investment” at AINV, and demonstrates that project finance is not an area that BDCs should be involved in.

Maxus Carbon: Restructured

There are numerous portfolio companies that BDCs finance which are privately-held and for which there is little or no public information. We are reliant on whatever the BDC involved is willing to divulge about what is going on. A prime example is Maxus Carbon (aka Carbonfree Chemicals), a chemical plant that was financed by Apollo Investment (AINV) starting back in 2013. The initial funding was a $60mn Term Loan, due in 2019, and with a 13.0% interest rate.

Something seems to have gone wrong with Maxus/Carbonfree (aka Skyonics) as AINV had to ante up a $6mn Subordinated Loan as well in late 2017 and more capital in 2018. As far as we can tell the obligations have been extended and or increased or repriced at least 4 times up until September 2019. At that point, AINV had $63mn in debt to the company and $9mn invested in equity. The debt had an interest rate of 5%, which was being paid in PIK form and had a 2021 maturity. The equity was written to zero. In round numbers, AINV had $72mn invested and an FMV of $56mn.

Now we learn – if only in a response to a question from an analyst on the latest AINV Conference Call – that Maxus has been restructured again. The debt has been extended to 2024 – still at the same rate- but has been reduced in amount to $30mn and valued at par. AINV now has equity in an affiliated company as well in Carbonfree Chemicals SA, with a cost of $14.3mn and an FMV of $10.2mn. Here’s how AINV’s CEO Howard Widra explained the various trade-offs associated with this Brave New World for Maxus:

Basically what was running this project both to produce profit as well as to build off an IP value of sort of a carbon-free technology. Our restructure basically changed our deal to sort of align us directly with that equity investor. So we had — we both had debt on our operating company, if you will, and we had ownership in the IP that is monetizable in other places, we believe, and has raise money at a good valuation. And so what we have done in terms of sort of the stability of the — so one, we’ve diversified our collateral, if you will. So we basically, the position now has both the previous collateral had before, which is this plant, and it also has this IP, which is separately — has separate value. That’s one. And two, because of that and because of allocating a portion of the value to that equity, the debt that the operating company is forced to carry is now much lower. So the cash flow profile of that entity is — it’s easy for it to service that debt. It’s still driven by a commodity price. So it can still have some variability on its ability but it now has less debt, so it has a much lower burden of debt. Also, no PIK, you don’t want to accrue anymore. So it’ll be — it’ll have something like $33 million of debt that will pace steadily that it could cover, which is far less than it had covered before. And then we have the separate pool of value. And so we view it as meaningfully de risked from where it was before. Obviously, we’re rolling down as well. So there’s let debt. There’s less debt to service and there’s more collateral”.

Evaluating whether the restructuring is fair or foul is impossible for us to do. Too complicated. We feel we’re on stronger ground with the following assertions of fact: First, interest income from Maxus will be greatly reduced going forward given the smaller amount of debt outstanding, costing the lender about ($1.6mn) of annual investment income. Second, AINV booked a Realized Loss of ($9mn) in the IVQ 2019 on this investment. The BDC also booked unrealized depreciation of ($2.9mn).

Notwithstanding all the above, it’s not clear that the underlying business is viable or capable of generating a return, so we are retaining Maxus on the Under Performers List – where it’s been since IVQ 2016 – and with a CCR rating of 4 (Worry List). With $55.2mn remaining in value, and $1.6mn of investment income still in doubt, this complex tale is far from over.When we learn more – and what – will probably be dependent on what AINV is willing to divulge.