Rubio’s Restaurants Inc.: Files Chapter 11

On October 26, 2020 Mexican casual chain Rubio’s Restaurants Inc. filed for Chapter 11 bankruptcy protection in Delaware. However, the company has already negotiated a restructuring plan with its private equity sponsor Mill Road Capital and with its lender, funds managed by Golub Capital. A “debtor in possession facility” has already been negotiated and there is hope the chain will be in and out of bankruptcy within weeks. Still, 26 locations out of 150 are being permanently closed, which may explain why the trip through bankruptcy court was chosen.

The only BDC with exposure is Golub Capital BDC (GBDC), which holds close to $18mn in first lien debt and $0.45mn in preferred stock. In total Golub Capital related funds have $80mn plus in exposure to the pre-bankruptcy company and are advancing another $8mn in debt and equity going forward. Mill Road Capital is reportedly also making an equity contribution. This looks a partial debt for equity swap where Golub – through its funds – will increase its equity stake in Rubio’s in return for the additional funds and some debt forgiveness.

The debt outstanding at GBDC has been on non accrual since Covid-19 devastated the restaurant business in the IQ 2020. We downgraded the business from CCR 3 to CCR 5 at that time. Rubio’s is now added to the BDC Credit Reporter’s list of BDC-financed portfolio companies in bankruptcy, the fourth in October for those keeping score. GBDC has written down its debt by just shy of (50%) and the preferred is valued at zero. We expect that this presages what the realized loss might look like, which could be booked in the IVQ 2020: about ($10mn). There will be no impact on investment income as the debt has been non-performing. In fact, from early 2021 GBDC may begin to earn income on some $10mn of remaining debt and new proceeds.

As always in these situations where a BDC goes from lender to owner, how long the investment will last is unknowable. The BDC, though, has been involved with Rubio’s since 2010 when Mill Road fist bought the business. For all we know, the restaurant chain may yet be on the Golub books another decade from now.

This is an undeniable setback for GBDC and the amounts involved are material, although the final gain or loss will not be known for years. The BDC Credit Reporter would question why GBDC – or any other BDC lender -would invest in the restaurant business in the first place. Along with E&P production; energy services; bricks and mortar retail, eateries are a controversial choice from a credit standpoint as reflected on the many troubled companies we’ve mentioned on these places. In our day many lenders had the restaurant sector on their prohibited list.

Nonetheless, the ability and willingness of GBDC – along with the Golub organization – to step up to become an owner-lender might mitigate ultimate losses. Or make them worse once all the beans are counted. Time will tell us. In the interim, we expect to be writing about Rubio’s multiple more times in the years ahead as the proposed turnaround gets into gear.

Garden Fresh Restaurant Corp: Files Chapter 7

On May 15, 2020 Garden Fresh Restaurant Corp – which owns Souplantation filed for Chapter 7. We had written about the restaurant operator’s troubles on May 9th, and it was clear at the time that the owners had little hope of being to able to keep the doors open in the Covid-19 era. Thus, the Chapter 7 liquidation decision.

This leaves the only BDC with $20mn of term debt exposureAres Capital (ARCC) – facing a certain realized loss once the company’s $50mn-$100mn in assets are sold and its 10,000 (!) creditors dealt with. As of March 2020, ARCC had the loan on non accrual and marked down (45%). The BDC is losing out on about $1.9mn of annual investment income on a loan that was faring fine till the virus changed everything. We’ll stick our neck out and guess that even a (45%) discount might not be enough here to reflect the final loss. We’re guessing (75%)-(100%)… We should have a clearer picture when ARCC reports IIQ 2020 results in the early summer.

This credit is notable for three reasons. First, this is one of the earliest bankruptcies of a company that was performing well before Covid-19 came along. Most of the other filings or restructurings we’ve memorialized in recent weeks are of companies that were already in deep trouble before Covid-19 sealed the deal. Second, the fact that liquidation has been chosen because of the ongoing change to the world as we knew it underscores the BDC Credit Reporter’s contention that this recession might see lower recoveries than might otherwise have been expected. That’s ominous news for lenders everywhere.

Finally – and as mentioned in our prior article – this represents a black mark from a credit underwriting standpoint for well regarded ARCC. Lending into the restaurant business and into an entity which had failed before (Garden Fresh filed Chapter 11 in 2018) was a credit bridge too far.

We will retain the company’s CCR 5 rating till liquidation is complete, which should be complete by the end of the year or earlier.

Garden Fresh Restaurant Corp: May File Bankruptcy

Garden Fresh Restaurant Corp owns chains like Souplantation and Fresh Tomatoes and commisary kitchens. Most of the food offerings are in a buffet format and that’s a problem with Covid-19. As a result, the private equity owner of the company is preparing to file for bankruptcy, after losing $1mn a week trying – unsuccessfully – to make its model work. The company had $250mn in sales before the current crisis.

This is bad news for the only BDC with exposure: Ares Capital (ARCC). The BDC giant has $20.0mn invested in the first lien Term Loan of the company. That debt was on non accrual for the first time in the IQ 2020 results, and written down (45%). The quarter before the debt was valued at par and ARCC was collecting close to $2.0mn in annual investment income.

We’ve downgraded the company in one fell swoop from CCR 2 to CCR 5. We have little expectation that the company will be making a comeback or that ARCC – whose position is relatively small by its standards – would be interested in a debt-for-equity swap in this situation. The principal remaining question is what the company is worth – if anything. We won’t guess, but will circle back when a more tangible resolution has arrived.

We’re surprised that ARCC would have involved itself with either the sector (even before Covid-19) or the company, which has a history including filing for bankruptcy previously, resulting in major losses for other lenders. The restaurant business is famously difficult to lend to due to its narrow margins; changing consumer tastes; high fixed costs and – now – virus concerns. Nor is the first lien status of ARCC in the capital structure any protection against loss. A reminder that even the biggest – and in the mind of some one of the best credit underwriters out there – BDCs can make mistakes.

Craftworks Restaurant & Breweries: Arranges DIP Financing

The drama at bankrupt restaurant operator Craftworks Restaurant & Breweries continues thanks to the unendurable strains brought on by the necessity to close all locations and lay-off all employees. The company did finally manage to cobble together a tiny $4mn Debtor-In-Possession credit facility that does not even have the ability to pay rents.

The DIP loan from Fortress Credit Co. LLC will take the company through May 11 and will fund employees’ wages, benefits, and $1 million in health insurance claims. The budget doesn’t include rent amounting to $2.7 million per month on shuttered restaurants, CraftWorks’ attorney, Peter A. Siddiqui of Katten Muchin Rosenman LLP, told the court at a telephonic hearing Wednesday“.

This suggests to the BDC Credit Reporter that the subordinated debt held by the two BDCs with exposure: FS-KKR Capital (FSK) and non-listed FSIC II, will be fully written off.

That means the realized loss will be ($13.4mn), with FSK with a slightly larger portion of the total. All the debt was valued at $10.2mn at 12/31/2019 so that will represent a telling amount of loss at both mega-funds. Barring any unexpected news or a future post-mortem this might be the last time we cover the company. For our two prior articles, click here.

Craftworks Restaurant & Breweries: To Shutter All Locations.

Poor old restaurant chain group Craftworks Restaurant & Breweries. After filing for Chapter 11 on March 3, 2020 – shortly after our first and only article on the company so far on February 21, 2020. Then, we had predicted a bankruptcy or restructuring. Tick.

What we did not expect was the arrival on the scene of Covid-19, which has caused the company to lose its Debtor-In-Possession (“DIP”) financing and the decision to close all its locations. Craftworks hope the closures will be temporary – as does every restaurateur and diner in America – but cannot be sure.

One way or the other, the $13.4mn at cost lent to the company in the form of second lien debt – which only began a couple of quarters ago – seems to be in danger of being fully written off. At 12/31/2019, the 2024 debt was valued at a (25%) discount and was still current at a PIK rate of 12.0%, or $1.6mn a year of investment income. Chances are very high the BDC lenders will have to write down all the $10.2mn of FMV remaining in the next quarter, and lose all the income. FS-KKR (FSK) has invested $7.2mn and non-traded FS Investment II has $6.2mn.

Craftworks Restaurants & Breweries: To Restructure

According to the Wall Street Journal’s Bankruptcy publication, Craftworks Holdings (aka Craftworks Restaurants & Breweries) is considering a restructuring of its debt. Or filing Chapter 11. Craftworks is the owner of several well known restaurant chains, including Logan’s Roadhouse, acquired in 2018, after filing for bankruptcy in 2016. We looked around for any further information in the public record about this rumored restructuring, but found none.

BDC exposure to Craftworks – according to Advantage Data’s records – is very recent, starting in the IIIQ of 2019 and includes three FS-KKR BDCs: FS-KKR Capital (FSK) and the non-traded FSIC II and FSIC III. Total exposure at cost – and all in second lien debt due 2024 – is $13.4mn. However, that’s exactly the same amount that those three BDCs advanced to Logan’s Roadhouse, so we assume there’s been some reclassification and assumption of debt. The relationship with Logan – which has been fraught – dates back to 2010.

As the above shows, the BDC Credit Reporter knows very little but we’ll speculate that whatever happens – bankruptcy or restructuring – the junior nature of the BDCs status ensures that a complete write-down or write-off is more likely than not. We may learn more when FSK reports its latest results, scheduled for February 27, 2020.

Ambrosia Buyer: Debt Placed On Non Accrual

As we noted at the top of our earlier article on November 26, 2020 about Ambrosia Buyer Corp., there are actually three different names used by different BDCs for the same borrower. Here’s what we wrote:

Occasionally BDCs use different corporate names for portfolio companies, which is very confusing for the BDC Credit Reporter and requires much checking and double checking. In this case we are going to discuss Ambrosia Buyer Corp; Trimark USA LLC and TMK Hawk Parent Corp. Three names but one company and set of debt. As CreditRisk Monitor explains: “Ambrosia Buyer, Corp. was formed by Centerbridge Partners, L.P. to facilitate its acquisition of TMK Hawk Parent Corp. d/b/a TriMark USA, LLC (“TriMark”) from Warburg Pincus LLC. TriMark is a leading distributor of foodservice equipment and supplies in North America serving over 80,000 customers”. Several BDC lenders are involved in a first lien Term Loan due August 2024 and a second lien maturing one year later. Total BDC exposure is a material $63.5mn at cost, split between four firms: Apollo Investment (AINV); New Mountain Finance (NMFC); Audax Credit BDC and Cion Investment, which is related to AINV.”

We also predicted in that same article that a default was a likely outcome: “As half of Ambrosia/Trimark’s customers – according to Moody’s – are restaurants and that the group already has a Caa rating on the company, we are not optimistic. We don’t know enough to add the company to the Weakest Links list, so we’re not “calling” an imminent payment default. Would we be surprised if one occurred ? No, given the dire economic conditions and the 10X debt to EBITDA remarked on by Moody’s as far back as April 2020″.

Now – thanks to AINV IVQ 2020 results disclosure – and a brief comment on its conference call, we know that company is non performing: “We placed 1 new investment on nonaccrual status during the quarter: our second lien investment in Ambrosia Buyer, or TriMark, was placed on nonaccrual status. The company is the distributor of food service equipment and supplies in North America and has been struggling during the pandemic as its restaurant customers were forced to close. We continue to receive scheduled cash interest payments from the company, but we’ll be applying those proceeds to the amortized cost of our position“.

From an income standpoint, that’s ($1.9mn) forgone on an annual basis, or about 1.7% of the BDC’s latest Net Investment Income Per Share annualized. (The second lien has a principal value of $21.4mn and an interest rate of 9.0%). As of the IIIQ 2020, there were still 4 BDCs involved with the multi-named company, with $63mn invested in first and second lien debt. Only Cion – besides AINV – holds a second lien position ($13.4mn). The remainder are in the first lien debt and may, or may not, also be in default.

AINV dropped its value in Ambrosia 30 percentage points from $16.6mn to $10mn, so it’s likely other BDCs will – at least – discount their debt further. Last quarter the senior loan was already haircut by (33%). For our part, we are downgrading the company from CCR 4 to CCR 5 and will provide an additional update when we hear from NMFC.

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.

Black Angus Steakhouses: To Scale Down Operations

Restaurant chain Black Angus Steakhouses LLC has closed half of its eateries in response to the pandemic. This follows the earlier permanent closure of several locations in two states. According to the San Fernando Valley Business Journal the Sherman Oaks-based chain “now has 15 restaurants operating in California, Arizona, Washington and Hawaii. The company owns a total of 34 locations in five states“.

This is bad news for the two BDC lenders to the company: PhenixFIN (PFX) and non-traded Sierra Income. (Until recently PFX was managed by Medley Management which controls Sierra and was called Medley Capital or MCC). The two BDCs have advanced just short of $31mn in first lien debt to the company that was due 12/31/2020. However, the obligations have been on non accrual since the IQ 2020 and it’s unlikely the debt has been repaid since last we heard from PFX at the end of the IIIQ 2020. At that point, both BDCs were discounting their non income producing loans by (35%) – (38%).

Common sense suggests that things may go from worse to worser at Black Angus and a further reduction in the value of the debt investment will be forthcoming. We’re changing our outlook for ultimate resolution to a loss of (50%-75%) of cost. At the upper end of the range that might result in several million dollars of further write-downs in the BDC positions before this credit gets resolved in one way or another.

We’ll revert when we hear more from Black Angus or when Sierra and PFX report IVQ 2020 results.

Chief Fire Intermediate: IIIQ 2020 Update

We’re playing catch-up in discussing Chief Fire Intermediate Inc. (aka Chief Fire Prevention and Mechanical Corp). The kitchen contractor, which serves the north-east, has been non performing since the IQ 2020. That was only one quarter after Capitala Finance (CPTA) first invested in the business with a mix of first lien debt, preferred and common, supporting an acquisition by Trinity Private Equity.

Unfortunately for the company, CPTA and Trinity this was a case of uber- bad timing. The company principally services the restaurant business in New York City, and you know what’s happening there. Within weeks of booking a $8.1mn first lien loan yielding 8.7%, the debt became non performing. The preferred and equity were written to zero. The debt is currently discounted by (25%) as of September 30, 2020 but began at a more modest (12%).

CPTA has said nothing since issuing a press release when the investment was first booked a year ago. As a result, we’re relying on the public record – which tells us nothing – and the quarterly CPTA valuations. The current value given is $6.1mn, an overall (33%) unrealized loss from a total cost of $9.0mn. For our purposes, we wouldn’t be surprised to see the downward valuation trend continue and result in a potential realized loss of (50%). Or more.

Also unknown is whether some sort of resolution is in the cards in the short run. Until then, CPTA’s capital – and potential income – is frozen. For our part, we’ll provide an update when we hear anything new and notable.

Ambrosia Buyer Corp : Lender Dispute

Occasionally BDCs use different corporate names for portfolio companies, which is very confusing for the BDC Credit Reporter and requires much checking and double checking. In this case we are going to discuss Ambrosia Buyer Corp; Trimark USA LLC and TMK Hawk Parent Corp. Three names but one company and set of debt. As CreditRisk Monitor explains: “Ambrosia Buyer, Corp. was formed by Centerbridge Partners, L.P. to facilitate its acquisition of TMK Hawk Parent Corp. d/b/a TriMark USA, LLC (“TriMark”) from Warburg Pincus LLC. TriMark is a leading distributor of foodservice equipment and supplies in North America serving over 80,000 customers”. Several BDC lenders are involved in a first lien Term Loan due August 2024 and a second lien maturing one year later. Total BDC exposure is a material $63.5mn at cost, split between four firms: Apollo Investment (AINV); New Mountain Finance (NMFC); Audax Credit BDC and Cion Investment, which is related to AINV.

The debt was performing normally till Covid came along but was downgraded from CCR 2 to CCR 3 in the IQ 2020 and then to CCR 4 in the IIQ 2020. We were influenced by the ever lower BDC valuations and a major downgrade of Trimark by Moody’s in the spring. As of September 2020, the BDCs involved are discounting their exposure by anywhere from (21%) to (33%). The AINV/Cion combo are in the second lien debt and the other BDCs in the 2024 first lien. However, AINV/Cion have applied the more modest discounts, which seems counter-intuitive.

In any case, Ambrosia/Trimark is caught up in a major struggle between lenders that has ended up in court. Here is the dispute in a nutshell as spelled out by Institutional Investor: “

“…a group of lenders to TriMark USA, which provides equipment to the foodservice industry, sued their fellow private credit providers, alleging that they improperly amended the credit agreement.

TriMark has been struggling during the pandemic, as its customers — restaurants — had to close. The lenders changed the credit agreement in a bid to give the company more liquidity.  

Friday’s lawsuit claims that these changes devalued certain lenders’ debt and makes it less likely that they’ll get repaid if TriMark defaults. “This breach-of-contract case arises from a cannibalistic assault by one group of lenders in a syndicate against another,” the lawsuit said.” 

The plaintiffs include Audax, BlueMountain Capital Management, Golub Capital Partners, Intermediate Capital Group, New Mountain Finance Corp., Shenkman Capital Management, York CLO Managed Holdings, and Z Capital Credit Partners. 

..The list of asset managers and owners they are suing is long. Two of the defendants are TriMark’s private equity owners Centerbridge Partners and Blackstone, which holds a minority stake in the company. “Blackstone is a minority investor in the company and these claims are wholly without merit,” a spokesperson for the firm said via email. A spokesperson for Centerbridge declined to comment

The plaintiffs are also suing BlackRock, Ares Management, Oaktree, Sculptor Capital Management, Australia’s Future Fund, and the Canadian construction industry pension plan, among several others“.

We can’t hope to disentangle here which BDC is on which side and who might be doing what to whom. The attached FT article is a useful primer, but may get overtaken by events. Our purpose is simply to highlight that this is a contentious credit and may yet result in significant defaults occurring. Most at risk on paper is NMFC with $33mn invested at cost, but in first lien debt. Next is AINV with $21.1mn, followed by Cion with $13.2mn, both in the 2025 Term loan. Audax has a very modest, noin material exposure.

We are maintaining the CCR 4 rating assigned earlier in the year and will revert back when this dispute plays out in a way that allows us to determine what lasting damage might occur to the BDCs involved – if any. As half of Ambrosia/Trimark’s customers – according to Moody’s – are restaurants and that the group already has a Caa rating on the company, we are not optimistic. We don’t know enough to add the company to the Weakest Links list, so we’re not “calling” an imminent payment default. Would we be surprised if one occurred ? No, given the dire economic conditions and the 10X debt to EBITDA remarked on by Moody’s as far back as April 2020.

BarFly Ventures LLC: Assets Acquired Out Of Bankruptcy

After filing for Chapter 11 bankruptcy in June as a result of COVID-19 pandemic-related challenges, Grand Rapids, Mich.-based BarFly Ventures LLC sold its assets — including craft beer bar/restaurant HopCat, Stella’s Lounge, and Grand Rapids Brewing Co. — to Congruent Investment Partners and Main Street Capital for $17.5 million, the company announced on Tuesday. Longtime investors Congruent Investment and Main Street Capital formed a new operating company, Project BarFly LLC upon acquisition of the brands“. Nation’s Restaurant News

Apparently, the new owners want to revive the existing Michigan operations of the restaurant chain, and expand beyond the state.

Main Street Capital (MAIN) – as well its sister non traded HMS Income -have a long standing relationship with the predecessor company that dates back to 2015. From the IQ 2020, though, the two BDCs debt to the company was placed on non accrual and a Chapter 11 bankruptcy followed in June. As of the most recent results at mid year, the two BDCs had invested $15.0mn in debt and equity, but had written down the positions to just $1.7mn.

Back in June, the BDC Credit Reporter asked itself the following:

Will MAIN/HMS seek to take an ownership situation and – maybe – double down with some additional financing ? Or will the BDCs kick themselves for having invested in the restaurant business in the first place and with a growth strategy – as the CEO himself tells it – based on growth by debt-funded acquisitions. The model was already in trouble before Covid-19 came along but the impact of the virus was the equivalent of a body slam. You can’t win them all, but this investment seems to have been dubious from the start“.

Now we have our answer but just how this will flow from a realized loss point of view and how much new capital will be advanced by the BDCs remains unclear. Furthermore, years are likely to pass before we’ll be able to tell if this latest transaction was a genius move that might return all the monies invested and more, or will end up itself in bankruptcy court and a further loss. If nothing else, though, this transaction does underscore how some BDCs are serving as their own “distressed assets” investors and are willing to become owners in certain situations rather than just take a loss and walk away. For shareholders in these BDCs this requires a different set of lenses when evaluating a portfolio and its outlook.

California Pizza Kitchen: Reaches Agreement With Lenders

According to multiple reports, California Pizza Kitchen (“CPK”) – in Chapter 11 bankruptcy – has reached an agreement in principle in late September 2020 with its first lien lenders and unsecured creditors. That should shortly allow the restaurant chain – already making operational plans for post-bankruptcy operations – to make an exit shortly from the court’s protection.

With a bit of luck CPK should exit bankruptcy in the IVQ 2020 and we’ll get a clear picture of which of the now 6 BDC lenders involved ended up where. Total outstandings from the BDC lenders is $49.5mn in IIQ 2020, slightly higher than in the IQ 2020. (BTW, Prospect Flexible Income appears to be no longer a lender). We already know, though, that this will prove to have been a misstep for all the BDCs involved.

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.

TooJay’s Management LLC: Exits Chapter 11

Restaurant chain TooJay’s Management LLC is out of bankruptcy protection after seeking Chapter 11 in April in the middle of the pandemic. The company used the bankruptcy process to relinquish several leases and ends up with 21 locations from 30. All are now operating with dine-in capabilities, as well as takeout and delivery. As part of the restructuring, TooJay’s has shed all its debt.

The new owner is Monroe Capital, whose various funds including publicly traded the publicly traded BDC (MRCC) were the prior lenders to the company. As a result, we expect that MRCC’s $4.1mn in 2022 Term debt and Revolver has been converted to equity. No word yet if any new financing will be provided. The BDC continued to carry the debt as performing through the IIQ 2020 because of the existence of plenty of collateral. Should that debt be converted into common stock as the news suggests, the likely loss of investment income will be just over ($0.25mn) a year. The BDC had written down the debt by only (5%-7%) so no material loss in value is expected going forward now that the company’s near term future is known.

Presumably this means MRCC and its parent will be tied to the restaurant operator for some time. If a successful exit ever occurs, MRCC might make back some or all the write-down associated with the restructuring and any income that might be forgone going forward.

We are upgrading TooJay’s from CCR 5 to CCR 3, reflecting the under-leveraged nature of the post-bankruptcy structure but keeping in mind that the business remains in a thin margin, pandemic-sensitive sector. There are more details to learn but at first approach MRCC – and any other Monroe funds involved – appear to have fared well in what could have a liquidation situation.

California Pizza Kitchen: Files Chapter 11

On July 30, 2020 California Pizza Kitchen (aka CPK) filed for Chapter 11, as part of a broad restructuring plan (RSA) agreed with its first lien lenders. As readers will expect by now, the RSA envisages a “debt for equity swap” and additional financing to get the restaurant company through this difficult period, presumably financed by some or all those same lenders that are in the existing financing. CPK hopes to be in and out of bankruptcy in 3 months.

The BDC Credit Reporter has written about the company on three prior occasions. Our most recent contribution followed learning that several BDC lenders had placed their debt outstanding to the business on non accrual, but not all. In any case, bankruptcy has seemed like a forgone conclusion for some time. As a result, the seven BDCs involved (6 of whom are publicly traded) will have to face the consequences of their $48.1mn invested in the debt of CPK.

Common sense suggests the second lien debt holders : Great Elm Corporation (GECC) and Capitala Finance (CPTA) will have to write off the $4.1mn and $4.9mn respectively held. The rest of the debt is in first lien debt (including a tranche held by GECC) and will mostly become non income producing, when swapped for common shares. We expect the BDCs involved will write off 80% or more of their positions, but we’ll gather more details shortly. As usual in these situations, total exposure may increase as some of the lenders fund their share of the additional capital. For the record, the other BDCs involved are Main Street (MAIN); Capital Southwest (CSWC); Monroe Capital (MRCC) and Oaktree Specialty Lending (OCSL) ; as well as non traded TP Flexible Income with a tiny position.

CPK is – arguably an example of a “Second Wave” credit default. Admittedly, the company was already underperforming before Covid-19 but would likely not have had to file Chapter 11 if the virus had not occurred. As recently as the IIQ 2019 GECC – in a case of ill timing – bought into the second lien at a (5%) discount to par. Going forward, a much de-leveraged CPK should have a decent chance of survival, and may even thrive in the long run. This might allow the BDCs involved to recoup some of their capital but it’s going to be a long slog.

Currently, the BDC Reporter has rated CPK CCR 5 – or non performing – which remains unchanged. We’ll re-rate the company when the RSA – or some other outcome – is finalized. By the way, this is the ninth BDC-financed company to file for bankruptcy – all Chapter 11 – in the month of July, keeping up the blistering pace set in June.

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.

Barfly Ventures LLC: Files Chapter 11

According to a regional business publication, Barfly Ventures LLC – a bar and restaurant operator in the Midwest – has filed Chapter 11. As you’d imagine, Covid-19 has sabotaged the business and made sustaining its reported $30mn in debt untenable. Thus the bankruptcy filing and the hope that the company can survive and return after a time under court protection. In fact, re-opening of several shuttered locations is already on the cards, so patrons of HopCat – their flagship brand – will be pleased.

This was no great surprise to the BDC Credit Reporter which already had the company rated CCR 5non performing – following the IQ 2020 results from Main Street Capital (MAIN) and non-traded HMS Capital, which have invested $15mn in debt and equity in this ill fated company. The $1.2mn in equity has been written to nothing, and the debt – senior not – has been reduced to a value of $1.4mn. By our standards – as we seek to direct our energies towards the more impactful credits – that makes Barfly Ventures “non material” given that no income is being generated and the likely capital to be rescued at the end of the day will hardly move any needles.

Nonetheless, we’ll continue to follow the progress of the company and how the lenders relate going forward. Will MAIN/HMS seek to take an ownership situation and – maybe – double down with some additional financing ? Or will the BDCs kick themselves for having invested in the restaurant business in the first place and with a growth strategy – as the CEO himself tells it – based on growth by debt-funded acquisitions. The model was already in trouble before Covid-19 came along but the impact of the virus was the equivalent of a body slam. You can’t win them all, but this investment seems to have been dubious from the start. At worst, the two BDCs may end up writing off all ($15.0mn), which we’ll discover in the IIIQ 2020 most likely.

California Pizza Kitchen: Second Lien Debt On Non Accrual

We’ve written about California Pizza Kitchen (or “CPK” to the world) on two prior occasions. Most recently, on April 23, 2020 we discussed the restaurant chain’s ambition to restructure its debt as both secular declines in its business which began some time ago and Covid-19 have made business conditions very difficult. Frankly, we were expecting a bankruptcy filing at any moment, but that has not happened. (That does not mean a Chapter 11 filing could not yet occur).

Now that IQ 2020 BDC results have been published we can see how the 6 different BDCs with exposure have valued their loans. We found that CPK’s first and second lien debt has been placed on non accrual by two of the BDCs and not by four others. Apparently, based on comments made by Monroe Capital Corp (MRCC) – which has not chosen to list the debt as non performing – there is a difference of views between the players. Also choosing to leave the debt on accrual is Main Street (MAIN); Great Elm (GECC) and TP Flexible Income. By contrast, CPTA Finance (CPTA) and Oaktree Specialty Lending (OCSL) have their debt positions marked as non-performing.

Total BDC exposure – spread over first and second lien term loans due in 2022- amounts to $43.3mn at cost. The debt is mostly discounted just under (50%) at FMV, but GECC does have a second lien position written down (78%), while CPTA has discounted its own debt in the same loan by (46%)…

The CPK example speaks to a wider phenomenon that’s always underway where BDC valuations are concerned: discrepancies both about what should be treated as a non accrual and fair value marks. However, the Covid-19 crisis has frequently accentuated the variations and over a much wider number of companies due to the greater degree of uncertainty. This makes taking any one valuation or accrual vs non accrual status too seriously until the credit markets settle down. That could take several quarters as the ratings groups are projecting credit troubles continuing at a heightened level through to 2021.

For our part, we have downgraded CPK from CCR 4 to CCR 5. (We tend to take the most conservative credit position). The company has been removed from the Weakest Links list of companies expected to default given that – as least in two cases – that has already happened. We still believe the chances of a bankruptcy filing are high given that full service restaurants will be challenged for some time and take-out cannot fully make up for business lost.

Update 6/2/2020: CSWC reported IQ 2020 results and placed CPK on non accrual but indicated on the conference call being impressed by management and multiple sources of income to mitigate Covid-19 impact.

TooJay’s Mgmt LLC: Files Chapter 11

A South Florida restaurant chain – TooJay’s Deli LLC – has filed for Chapter 11. Not surprisingly, the principal reason given is the Covid-19 crisis and the impact of the stay at home orders on business. The company “reported assets between $50 million and $100 million and liabilities ranging from $10 million to $50 million. An affiliated company, TJ Acquisition LLC, is also filing for Chapter 11 bankruptcy“.

The only BDC lender to the company is Monroe Capital (MRCC) which has multiple loan facilities with a cost of $4.1mn to the parent (“TooJay’s Mgmt LLC” ), as of 12/31/2019. That debt was all valued at par. There’s $0.300mn of annual investment income that will no longer be coming in.

It’s too soon to determine what capital loss – if any – MRCC might endure because of the bankruptcy. We’ll learn more – presumably – when the BDC reports its results in May. In any case, this is a minor investment and will only have a modest impact – win, lose or draw- on MRCC’s balance sheet and income statement.

More disturbing is that the TooJay’s story presages what might happen much more frequently, and with a great deal more dollars involved: companies that were previously blameless and performing well suddenly filing for bankruptcy. We cannot do much more than bring these sudden credit disasters to your attention once they have occurred as we do not have the data to pick up the signs of distress early as is usually the case.