AAC Holdings: Forbearance Extended

Back on January 30, 2020 we wrote that troubled publicly traded AAC Holdings (aka American Addiction Centers) had negotiated an extension to its forbearance agreement with its lenders after a prior falling out. That provided some hope that borrower and lenders – who’ve been going back and forth for many months – would eventually come to some sort of modus vivendi, as opposed to ending up in court arguing.

Now we hear from a company press release that the parties “have reached an agreement to extend the deadline to enter into a restructuring support agreement with its senior secured lenders from February 21, 2020 to March 20, 2020“. Such an extension had been contemplated back in January, as we discussed at the time after reading the legal agreement:

“Even that date is not fixed, as the parties have agreed the forbearance is “subject to extension in the discretion of the Forbearing Lenders if the Company shall not have entered into agreements embodying the material terms of a consensual financial restructuring among the Company and the parties to the Credit Facilities“.

This new extension of the extension allows the company to draw another $2mn from funds committed by the lenders.

We’re not sure if the fact that this negotiation keeps going on and on is a good sign or not. Rather than draw any conclusions from what little information we have, we’ll just wait for the next chapter in this long saga. We’ve now written over 10 articles about AAC Holdings ! We can say,though, that the total amount advanced – based on Capital Southwest’s (CSWC) IVQ 2019 financials – has increased from the $66.2mn balance as of September 30, 2019. The lenders are anteing up funds to keep the business solvent. By the time all 4 BDCs involved report their exposure, the cost could be over $70mn and potentially subject to further increases. Sometimes you’ve got to spend money to save money seems to be the philosophy here.

AAC Holdings: Reaches Agreement With Lenders

AAC Holdings (aka American Addiction Centers) has been in contentious negotiations with its lenders. Back in October 2019 – after the company defaulted on its loan – lenders agreed to forebear for a period while negotiations continued. Then- just a few days ago – the lenders terminated that forbearance. At the same time, the CEO quit if the bankers would not advance additional monies. See our nine prior articles dating back to April 25 2019, but especially the last two posts.

Now, borrower and lenders have agreed that the latter will advance $12mn in new monies after all. $10mn was funded at the close on January 24, 2019 and $2mn will be drawn later, if needed The forbearance period has now been extended to February 21. Even that date is not fixed, as the parties have agreed the forbearance is “subject to extension in the discretion of the Forbearing Lenders if the Company shall not have entered into agreements embodying the material terms of a consensual financial restructuring among the Company and the parties to the Credit Facilities“. That’s when the last $2mn can be accessed. No word as to the employment status of the CEO.

This a good sign that lenders and management in the public company still have some hope of agreeing on a restructuring agreement for the highly troubled business. Whether an agreement is reached or not, a bankruptcy filing is still the most likely outcome. However, there’s a big difference between a pre-packaged Chapter 11 and an involuntary or the company seeking protection from its creditors. AAC Holdings remains on our Bankruptcy Imminent list, but the parties may have – very literally – bought themselves more time.

As unclear as before is what will happen to the different BDC debt tranches involved. About half of BDC exposure, held by Capital Southwest (CSWC), Main Street (MAIN) and non-traded HMS Income is in the more junior 2023 Term Loan, which is currently valued at a (25%) discount in the market and is on non-accrual. Sitting higher on the balance sheet is 2020 Term debt, still fully valued by sanguine holders. With so many twists and turns in the narrative, the BDC Reporter can’t be anything but a little worried that losses could be higher than already anticipated.

AAC Holdings: Lenders Terminate Forbearance

In an 8-K on January 16, 2020 treatment center operator AAC Holdings Inc. announced that its banks had terminated a Forbearance Agreement that had been in place since October of 2019, and were exploring all options regarding defaults under their credit agreement. In fact, the break-up occurred on January 9, with the delivery of a notice by the lenders, headed by Credit Suisse.

The BDC Credit Reporter has written about the troubles at AAC – also known as American Addiction Centers – eight times, starting in April 2019 and – most recently- on October 25, 2019 when the forbearance was agreed upon. Throughout, based upon our review of the company’s publicly available financial statements and due to the ever lower stock price, we’ve been pessimistic about the likelihood of AAC Holdings being able to right its own ship without a restructuring or bankruptcy. With this move by the lenders, our thesis seems ever more likely to be realized.

Not helping is that the falling out with the lenders was – if this latest filing is to be believed – triggered by ” the failure of the Company under the Forbearance Agreements to have provided the Forbearing Lenders with a three-year business plan for the Company“. There’s more going on because the company also announced – in a highly unusual or even bizarre move – the “conditional resignation” of its CEO. We’ll quote from the release to leave no doubts as to the situation:

On January 8, 2020, Michael T. Cartwright, Chairman of the Board of Directors (the “Board”) and Chief Executive Officer of AAC
Holdings, Inc., a Nevada corporation (the “Company”), delivered to the Board his conditional resignation as Chief Executive Officer.
Mr. Cartwright’s resignation as Chief Executive Officer will become effective only upon (i) the Company entering into amendments to its two
previously reported forbearance agreements, each dated October 30, 2019, entered into between the Company and the lenders under the
Company’s two primary credit facilities and (ii) the Company receiving $10.0 million of incremental funding under the Company’s previously
disclosed credit facility entered into by the Company in March 2019. Mr. Cartwright currently intends to remain as Chairman of the Board.
Also on January 8, 2020, the Board appointed Andrew W. McWilliams, the Company’s Chief Financial Officer, to serve as Chief Executive
Officer, commencing upon the effectiveness of Mr. Cartwright’s resignation, as described above.

As the AAC Holdings credit story becomes more confused, we remind readers that BDC exposure is material: $66mn at cost spread over 4 BDCs, three public and one non-listed. The public BDCs are Capital Southwest (CSWC); Main Street Capital (MAIN) and New Mountain Finance (NMFC). The private BDC is HMS Income, which is managed by MAIN. The debt is in the company’s 2020 and 2023 Term Loans and three BDCs marked their positions as being on non accrual from the IIIQ 2019. The FMV totals $56mn, leaving plenty of room for further valuation losses.

This is publicly traded debt and we’ve checked Advantage Data’s Middle Market Loan marketplace and found the 2020 Term Loan still valued at par by the market and the 2023 discounted (25%), only slightly lower than at 9/30/2019. Nonetheless – re-iterating the position we’ve held for some time – we have little hope that the company can avoid bankruptcy/restructure for much longer, and we expect ultimate recoveries to be lower than current valuations. Most immediately at risk for the BDC lenders is receiving any investment income. In total, there’s nearly $10mn of annual interest in play over all facilities. According to Advantage Data records, the BDC with the greatest dollar exposure is NMFC with nearly $25mn at cost, but all in the 2020 debt. Tied for most at risk in the 2023 Term Loan is MAIN and HMS Income, with CSWC in third place.

We expect to be reporting back shortly on what is becoming a strange credit story and a potentially material set-back for several well regarded BDC lenders. On the other hand, we’d be the first to admit that it’s not over till it’s over.

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.