Aimbridge Hospitality LLC: Restructuring Agreed Upon

Downgraded From CCR 2 to CCR 5. Added to Important Underperformers

January 28, 2025

The first significant credit setback of 2025 affecting a BDC-financed company has occurred. Hotel management company Aimbridge Hospitality, LLC has just completed a Restructuring Support Agreement (RSA) with its first and second lien lenders. The scale of the restructuring is huge:

Aimbridge's total debt outstanding would be significantly reduced to a maximum of $210 million at close from $1.3 billion today, and Aimbridge would have one of the healthiest balance sheets in the industry. This transaction would be facilitated by the Company's current first lien lenders, which would provide a $100 million capital injection.

The quid pro-quo for this slashing of the debt owed is that the first lien lenders will become owners in one of those debt-for-equity swaps that have become commonplace in private credit.

There are several BDCs involved with Aimbridge, with $106mn advanced at cost - all in the first and second lien debt. Stunningly - and inexplicably - none of the BDCs involved as of the IIIQ 2024 had materially marked down their loans, which explains why we're writing about the company for the first time and we've just had to hastily assemble a Company File for Aimbridge. However, given the very large debt write-off/exchange involved, we should expect to see a big increase in unrealized depreciation and - eventually - a substantial realized loss. [More on this nettlesome subject below].

For example, Ares Capital (ARCC) has advanced $25mn in second lien debt which was yielding 12.8% in September 2024. We expect the likely realized loss might be in the 75%-100% range, and all the interest income previously being received will not continue. Also in the second lien for lesser amounts are Bain Capital Specialty Finance (BCSF) and Carlyle Secured Lending (CGBD). The former holds debt both on its balance sheet and in one of its joint ventures. The only public BDC with a first lien position - and a relatively small one at $8mn - is Palmer Square (PSBD).

From what we know, we could see the BDCs booking ($80mn) or more in realized losses in aggregate, depending on how aggressively they value the equity they might receive in this restructuring.

We are downgrading the company from a credit corporate rating of 2 to a 5, on the assumption that no interest is being paid currently. Following the restructuring - which as been agreed but not completed - we expect to upgrade whatever the new outstandings look like to a credit rating of 2 or 3, or even 4. We can't say till we see if the restructuring has really done the trick, or is too modest to ensure Aimbridge's future success. On that score, we're relatively optimistic. Still, the company is being added to the Important Underperformers list.

By our count, the addition of Aimbridge brings the total number of Important Underperformers to 117. We won't state a total cost or total fair market value for this still relatively small number of companies because we're still updating some of the Company Files with their IIIQ 2024 data. That's happening as we get ever closer to learning of the IVQ 2024 numbers, to be released as part of BDC earnings season. So far, only Saratoga Investment (SAR) has reported its up to date results (albeit through November 2024) and we've updated the database and written a credit review. We're a little behind in our database filling in the IIIQ 2024 fields, buy we hope to catch up in the nick of time.

On an unrelated subject, we're disappointed that the multiple valuation firms engaged by the BDCs involved with Aimbridge - and the management of those BDCs - valued their debt so high, just three weeks before the company engaged an investment banker - Evercore - to help in re-negotiating its debt. Was there absolutely no writing on the wall? (S&P had already rated the company CCC+ at the end of the IIIQ 2024). Our guess is that the debt - which seems to have been publicly traded - was (unreasonably) priced in the secondary market at only a small discount to par. The valuation people may have taken that small discount as proof that all was well but "the market" is not all-knowing, whatever else you've heard. Maybe there should have been a little more digging undertaken before ARCC valued its second lien loan at a discount of only (0.45%) on September 30, 2024. Of course, we don't know all the details, so we won't say anything more.