Teligent, Inc.: To Liquidate, Part Repay Lenders

Good news (of a sort): Teligent, Inc. is being liquidated. We wrote about the troubled pharmaceutical manufacturer twice previously. Bankruptcy was filed back in 2021 and has now become a liquidation after assets were sold to a third party. From the very sparse public record, we learn on April 11, 2022 from Bloomberg Law that the company will be paying its lender $33mn out of the $90mn owed. (Unsecured creditors – who’ve been battling in court with the lender – will receive 11 cents on the dollar).

The lender in this case is Ares Capital (ARCC) or “its affiliates”. Previously, given the serious troubles at Teligent that we won’t regurgitate here, we were concerned that ARCC might have to write off 100% of its $77mn of exposure reported as of December 31, 2021. We’re not sure what the difference is between the IVQ 2021 stated exposure and the $90mn mentioned by Bloomberg Law. Most likely, the difference consists of post-bankruptcy monies advanced by ARCC not on the books at year-end and which kept Teligent afloat long enough to achieve the asset sale.

The numbers being thrown around imply that ARCC will end up booking a realized loss of ($57mn) on Teligent when all is said and done. To put that into context ARCC has booked $17mn in annual realized gains over the last 3 years (ARCC had a very good 2021, but losses in 2019-2020). Net assets at 2021 year end were in excess of $20bn, so this loss – while notable – may not move the needle much and any income once earned on this investment has not been received since IQ 2020.

As of the IVQ 2021, ARCC had already written down its exposure by ($38mn). If we’re right about the final bill, the BDC will be ultimately booking another ($19mn) in losses. This probably means a further unrealized drop in the upcoming IQ 2022 results and a final realized loss in the IIQ 2022 numbers.

Although we were overly-conservative about ARCC’s prospective loss, the BDC itself seems to have been somewhat over optimistic about its recovery, based on the numbers at year end. As always, these are very hard outcomes to handicap once the courts – and other parties get involved.

Teligent, Inc.: Drugs Recalled

This can’t be good. Teligent Inc. has announced the recall of two of its drugs. These consisted of:

two lots of topical lidocaine solution after companies testing the drug received superpotent (sic) results at the nine-month and 18-month stability time points. The company faced similar problems in September, and it had a number of run-ins with the FDA prior to that.

Fierce Pharma – December 8, 2021

For a company already in bankruptcy – as discussed in our prior article when we initiated coverage – this is yet another setback. For the only BDC with exposure – Ares Capital (ARCC) – this means the prospect of even higher losses when the company’s future fortunes are settled. We “cut to the chase” in our earlier post and suggested that a complete write-off was a possibility, meaning that ARCC might take a further ($34.5mn) write-down and a realized loss of ($73.8mn). For the BDC, which is trying to buy the company out of bankruptcy and has just funded $12mn in new financing, this news could not come at a worst time, we imagine.

We continue to carry Teligent as CCR 5 and Trending in that we expect the next valuation in the IVQ 2021 could be materially lower than as of September 30, 2021.

Teligent, Inc: Files Chapter 11

Let’s not bury the lead here: Ares Capital (ARCC) has a big problem with its investment in generic pharmaceutical manufacturer Teligent,Inc. As Reuters – and many other sources report – the company filed for bankruptcy on October 14, 2021. Vladimir Kasparov, managing director at Portage Point Partners – an interim management firm – has been appointed chief restructuring officer.

In a court filing, Kasparov said the company, which manufactured topical pharmaceutical products and other generic drugs, pointed to a 2019 warning letter by the FDA as an initial event leading to the bankruptcy. The letter, which stemmed from an inspection of Teligent’s plant in Buena, New Jersey, identified several violations of good manufacturing practice regulations and required the company to take steps to come into compliance.

Nate Raymond in Reuters – October 14, 2021

Optimistically Mr Kasparov hopes to find a buyer for the troubled business, and has lined up a $12mn Debtor In Possession (“DIP”) line of credit to provide interim liquidity. The company is public, so there’s plenty of information for anyone who wants to read more.

However, our focus is on the impact of underperforming companies on the BDCs involved. In this case, the only exposure is that held by ARCC, which amounted at June 2021 to $73.8mn at cost. (That may go higher if the BDC supplies the DIP, as we’re assuming). All that exposure is in second lien debt, which is already non performing for over a year and which is discounted (44%-45%). The BDC also owns 91% of the equity, but there’s no cost involved as this was received in an earlier restructuring.

Cutting to the chase – after reviewing the stated financial condition of the borrower; the amount of debt involved; the position on the balance sheet the ongoing problems with the FDA, and the very short leash in terms of DIP financing made available, the BDC Credit Reporter believes a complete write-off is possible for ARCC. That would be just over an additional ($40mn) to write down and off – assuming the DIP monies get out intact. Overall – as noted above – ARCC holds $73.8mn -all of which could turn into a realized loss.

In the short term, we expect ARCC to book an additional unrealized loss of unknown amount in the IIIQ 2021. Given the company’s limited cash availability, we’re guessing a final resolution will occur by the IQ 2022, and we’ll be able to assess if we’re being too conservative. Given the regulatory problems, we don’t think so.

Teligent retains a CCR 5 rating. For a sense of context ARCC’s total equity at 6/30/2021 was just over $8bn and total net realized losses in all of 2020 – the worst year in a long time – were ($166mn). Or, in other words, if ARCC’s investment does go to the wall, this will be a significant loss for the well regarded BDC. Income, though, will not be affected as all the debt is already non performing.