NPC International Inc: Company Sold

The long and winding road for NPC International Inc. appears to be reaching a final resolution. The franchisee of hundreds of fast food locations, which filed for bankruptcy back on July 1, 2020 has inked a $801mn deal to sell its assets to two different buyers. The company is likely to exit bankruptcy shortly. We won’t get into all the details or the history of the company’s failure, but refer readers to our five earlier articles.

For the only BDC with exposure –Bain Capital Specialty Finance (BCSF) – this will mean a final tallying up. As of June 2020, the BDC had $14.5mn showing in first and second lien debt to the company, which had been on non-accrual since IVQ 2019. As of September 2020, only the first lien debt shows up in BCSF’s investment list, suggesting a realized loss of ($9.2mn) has already been booked. We can’t be 100% certain as the BDC does not name names when these losses occur.

BCSF had $5.3mn at cost and $4.3mn at FMV left outstanding – all in first lien debt – as of September 2020. We believe – in the absence of harder numbers – that’s a pretty good picture of what to expect going forward in terms of proceeds to be received, all of which may show up in the IQ 2021 results. If we’re right, BCSF will have lost two-thirds of the maximum funds advanced to NPC, a relationship that began IQ 2017.

This transaction is close enough to its resolution for the BDC Credit Reporter to mention – again – that the restaurant business is a very difficult one for lenders. We searched our own archives with the word “restaurant” and were reminded of the large number of casualties we’ve seen over the years, even before Covid-19 raised the stakes further. The sector should probably be added to oil & gas exploration; energy services and brick and mortar retail as segments that BDCs – and their shareholders – should treat with extreme caution.

We undertook a search of Advantage Data’s database of all BDC investments and found 59 different restaurant-related companies listed. The BDC Credit Reporter’s own database shows 14 different restaurant companies underperforming. That’s a very rough way to assess such things but a quarter of all restaurant names in some sort of trouble seems high to us. Food for thought. Pun intended.

NPC International Inc : Bankruptcy Court Dispute

The Wall Street Journal and other publications are reporting that NPC International Inc. – the huge Pizza Hut franchisee which is in Chapter 11 – is in dispute with the franchisor in bankruptcy court. In a nutshell, Pizza Hut wants more say in who the potential buyer of the company’s assets might be and how they behave. The franchisor wants to ensure that the group who will be in charge of 1,200 restaurant locations bearing its name will follow all the rules involved with being a franchisee.

From the standpoint of the only BDC involved with NPC –Bain Capital Specialty Finance (BCSF) – this is potentially Bad News. The longer the bankruptcy endures, the more expenses pile up. Furthermore, the more Pizza Hut inserts itself into the sales process the greater the risk of the final price being received (currently pegged at $325mn) for the business being lower than originally hoped for.

The BDC Credit Reporter has the company rated CCR 5 and expects most of the $14.4mn invested in first lien and second lien debt to be written off. As of June 30, 2020, the FMV is only $3.3mn. If this drama continues, BCSF can expect to recover even less than that and a resolution may get pushed further out.

NPC International: Files Chapter 11

As had been signalled by the media a day before NPC International filed for Chapter 11 on July 1, 2020. The fast food franchisee is armed with a Restructuring Support Agreement (“RSA”) agreed with most of its creditors and the goal of substantially reducing its debt load. The company hopes to come through the bankruptcy process with a new balance sheet and stronger prospects.

This is a major bankruptcy in terms of size in the fast food sector but relatively minor from a BDC perspective. Only $14.5mn is invested at cost in NPC by one BDC: Bain Capital Specialty Finance (BCSF). The BDC is both a first lien and second lien lender, according to Advantage Data records. We get the impression the $9.2mn in second lien debt will be written off. BCSF has already written down that debt by almost (100%) as of March 31, 2020. The first lien debt may get fully or partly converted to equity and the BDC might be asked to contribute to DIP or post-bankruptcy financing. The amounts, though, should not be material for such a huge BDC. Even at the end of the first quarter the debt was already on non accrual (and had been since the IVQ 2019) and the FMV was only $2.7mn.

What’s notable is that NPC International – which we’ve written about multiple times before – is the first BDC-financed company bankruptcy of July and yet another setback in the restaurant sector. This is a First Wave credit: a company already in deep trouble (non performing) months before Covid-19 delivered the coup de grace. Nor is there any guarantee that the company will not be back here in Chapter 11 (or Chapter 7) in the near future as industry conditions continue to be difficult and constantly changing.

NPC International: In Forbearance Agreement With Lenders

This has been brewing for a long time (we’ve been writing about the company since June 2019) but NPC International has failed to make debt interest payments on its first and second lien debt; gone into default and been – temporarily – reprieved in the form of a “forbearance agreement” from its lenders. Furthermore, earlier in 2020, NPC received a new $35 million loan to improve liquidity. “The terms of the super-priority loan, which was provided by existing lenders, prevent the company from making payments on the second-lien term loan, the people said“.

As you’d expect Moody’s and S&P were not happy about what has happened and called a non-payment payment of interest what it is – even if the lenders chose to forebear : a default and sharply downgraded the company.

All the above comes from Bloomberg, which also reports that management and its PE sponsor are considering all options (who doesn’t ?); including a Chapter 11 filing. That would allow the company to push back against lease contracts, which would make sense.

For months, we’ve had NPC rated CCR 4 and placed on our list of companies that we expect will file bankruptcy or drastically restructure in 2020. Given the depths of the company’s troubles – very high debt; liquidity crunch; declining industry sector – there’s an aura of inevitability about this story.

For the only BDC with material exposure – Bain Capital or BCSF – that means the likely wipe-out of its second lien debt, which is currently trading at 5 cents on the dollar. BCSF also holds the first lien debt, which is trading at 48 cents on the dollar. If those discounts hold, BCSF will be taking a realized loss of ($11.5mn), out of the $14.2mn committed. Unfortunately, as of September 2019, the BDC had only reserved ($8.3mn), so there’s nearly another ($4mn) to go. Also, $1.2mn of investment income will be suspended, and most of that is unlikely to be coming back post-conclusion of any restructuring. For a huge BDC like BCSF not a major blow, but hardly immaterial either.

The collapse of NPC has happened over a relatively short period, according to Advantage Data records. BCSF signed up in the IQ of 2017. Until the IIIQ 2018, all the debt was carried at or above par. Since the IVQ 2018, though, every quarter has brought a further devaluation. We added the company to the under performers list when BCSF devalued some of its debt greater than (10%) in the IQ 2019, and has been CCR 4 – our Worry List – since the IIQ 2019. Our latest update on these pages was in August 2019 and by then the die was almost cast. In a more general sense, this chronology supports our view that we should start paying attention whenever a company’s previously stable valuation starts to erode. That may provide some false negatives, but also provide a little more lead time about credits going awry. By the time the actual default occurs – as in this case – most of the damage is done.

NPC International: Closer To Default

According to news reports, closely held NPC International – a major Pizza Hut franchisee – is getting ever closer to breaching a key financial covenant after reporting IIQ 2019 results.

“Total debt rose to 6.9 times a measure of earnings, just below the threshold that would trigger a default under the company’s revolver, according to a person with knowledge of the matter. The ratio stood at around 6.3 times in the first quarter”. 

The only BDC with exposure – both first lien and second lien – is Bain Capital Specialty Finance (BCSF). Total cost is $14.2mn. There’s $1.2mn of income at risk should NPC file for bankruptcy. We placed the company on the under-performing list from the first quarter of 2019, when the second lien debt was written down by (13%). The second quarter discount is (39%) and the current market price is discounted (57%). Judging by the challenges facing the industry; the trend of the valuation and the latest market price, chances of a further downgrade – currently CCR 4 – to CCR 5 (non accrual) is high.

NPC International: Trade Publication Article Describes Multiple Challenges

On June 13, 2019 Restaurant Business published an article summarizing many of the financial and operational challenges facing Wendy’s and Pizza Hut franchisee NPC International. Based on what we read, other research undertaken (including reading Moody’s recent downgrade of the Company and its debt) and after reviewing on Advantage Data the latest prices quoted for the first lien and second lien loans, the BDC Credit Reporter downgraded our outlook from CCR 3 to CCR 4 on our 5 point scale. There are two BDCs with exposure, almost all held by Bain Capital Specialty Finance (BCSF), with $14mn of loans in both first and second lien Term Loans. Read the Company File for our analysis of investment income at risk and the potential for realized and unrealized credit losses.

Bain Capital Specialty: IIIQ 2021 Credit Status

With the IVQ 2021 BDC earnings season right round the corner, the BDC Credit Reporter is updating the credit status of as many public BDCs as possible, using IIIQ 2021 data and any subsequent developments we are aware of.

Portfolio Metrics

In the case of Bain Capital Specialty Finance (BCSF), total investment assets at cost amount to $2.380bn, and the fair market value to $2.357bn, a slight discount of (1%). The BDC portfolio at fair value has shrunk (5%) in the first 9 months of 2021.

Investment Rating

There are 105 portfolio companies. The BDC rates the credit status of its portfolio quarterly. As of September 30, 2021 the value of under-performing assets was $244mn, or 10.3% of the entire portfolio. Both the amount and the percentage are largely unchanged from the quarter before.

Non Accruals

BCSF has no loans on non accrual, although two portfolio companies have some debt which is non -performing, as we’ll discuss shortly.


We have identified 7 underperforming portfolio companies, with an aggregate value of $181mn. However, 2 are not material and non income producing. These are NPC International (fast food), which we wrapped up in an article on January 14, 2021 and East BCC Coinvest II (capital equipment).

That leaves 5 companies, of which 2 are rated CCR 3. First there is GSP Holdings, LLC. The company has been underperforming since IIQ 2020 and its first lien debt held by BCSF is discounted up to (21%), but was at a (46%) at worst, suggesting some improvement recently. We have found very little public info on the company. The latest value is $34.1mn.

We also don’t know much about TLC Purchaser and TLC Holdco, with a value – mostly in debt – of $42mn. Of late, the valuation has been modestly trending down with the equity held discounted (57%) and the debt up to (15%). TLC has been underperforming since 2020.

Credit Focus

Of greater concern are Ansira Holdings, Direct Travel and Chase Industries, all of which we rate CCR 4, where the likelihood of an ultimate realized loss is greater than full recovery. We discussed Ansira, which has multiple BDC lenders, back in November 2021. One BDC has its unitranche loan exposure marked as non accruing but BCSF has its loan positions as performing. Total exposure by BCSF is $43.6mn, with much of the income already booked as pay-in-kind. Should the marketing services company default, BCSF has $3.7mn of annual investment income at risk of interruption.

Direct Travel is in a difficult business right now and has already been restructured earlier in the pandemic. Another BDC lender – TCG BDC – carries its exposure to the company’s 10/1/2023 loan as non-performing but BCSF’s 10/2/2023 term loan is still counted as performing, but discounted in value by up to (20%). Furthermore, all the income being booked is in PIK form…Some $6.5mn of annual interest income is in play here – 3.3% of the BDC’s total investment income, so what happens at Direct Travel will materially affect the BDC.

Finally, there’s Chase Industries. Again this specialty door manufacturer has multiple BDC lenders. Also again, BCSF’s income is at least partly being booked in PIK form. BCSF’s exposure is in the first lien debt, which is discounted only (17%). However, Goldman Sachs BDC is in second lien debt, which is non performing (63%). This is cause for concern for BCSF, and the main reason why we’ve applied a CCR 4 rating. The BDC’s debt has a value of $11.4mn and $0.900mn of annual interest income at risk.

Follow Up

We’ll be focused principally on Ansira, Direct Travel snd Chase Industries when BCSF publishes its IVQ 2021 results on February 23, 2022. Clearly, bad news is possible that may cause both further unrealized losses and material loss of interest income. On the other hand, with travel recovering; housing on an uptick and business conditions favorable all three companies financial performance could improve, boosting asset values and leaving income untouched. We’re also reassured that the $114mn of exposure at FMV is almost all in a first lien position. As they say, this could go either way in the short run where valuation and income is concerned but the ultimate outcome promises to be favorable for BCSF.