Anju Software: Company Sold

Re-Rated From CCR 5 to CCR 6

August 31, 2024

We've written about Anju Software twice before, first when the company went on non-accrual and - later - when the value of the investment had fallen so much as to no longer being an Important Underperformer. Now we hear that Anju has been sold and we are writing a third - and last time.

MONTREAL, QC / ACCESSWIRE / August 29, 2024 / Valsoft Corporation Inc. ("Valsoft"), a Canadian company specializing in the acquisition and development of vertical market software businesses, is pleased to announce the acquisition of Anju Software ("Anju"), the global pioneer in tailored life science solutions for clinical research, medical affairs, and data science. Anju is a customer-focused organization providing adaptable solutions that offer clients an excellent experience in simplifying the intricacies of life science information management.

This credit story has gone all the way. The company was first financed by Barings - both through its public BDC - Barings BDC or BBDC - and a non-traded sister fund - back in 2019. The first trouble showed up in IIIQ 2022 when the first lien debt involved - with a total cost of $14.7mn was written down by (14%). (Any discount over (10%) triggers a rating of underperformer and - in this case a 3 rating on our 5 point scale from 2 previously).

By the IIIQ 2023, the debt was placed on non-accrual and the discount increased to (26%). At that point, Barings seems to have advanced new monies - presumably to support the business. By the IQ 2024, the investment had been written down so much as to no longer be an Important Underperformer. At the end of the IIQ 2024, total debt advanced was $15.7mn at cost and BBDC valued its two loans at less than $2mn.

We presume that's the amount the company was sold for as far as BBDC was concerned. If so, the public BDC's realized loss - likely to show up in the IIIQ 2024 - will be ($12.4mn). At a 12% yield, that puts annual investment income permanently forgone at ($1.5mn). To put that into perspective, the BDC's total investment income in calendar 2023 came to $289mn. This would represent (0.5%).

We are re-rating the company from CCR 5 to CCR 6 - which means no longer a BDC portfolio company in our arcane system. We had projected in the Company File that the ultimate loss would come to 75%-100%, and ended up as 89% of the cost of BBDC's capital advanced. (Earlier in the process we'd been less conservative and assumed "only " a 50%-75% loss.

The Anju Software story is instructive in a couple of ways. First, how this played out illustrates how the BDC Credit Reporter is invaluable - in our opinion - for BDC investors. Both through our Company File and our articles our readers were alerted to the degree of credit weakness and the risk of future loss 8 quarters ahead of what has just happened. That's an early "heads up". Through our continual monitoring one could readily assess how the credit was playing out - not well in this case. The company was never mentioned on any conference call but we've written 3 articles on the subject and provided much other information to anyone interested.

The second lesson here is that the way the Anju credit unfolded is pretty typical, and is a model for many other underperforming investments. We learn relatively early on - thanks to the quarterly valuation process - that some sort of trouble is afoot. The situation - i.e. the value - gets progressively worse and begins to impact the BDC's NAVPS. When the non-accrual follows, income is impacted and the BDC's earnings power. Finally - a realization event occurs and we can finally assess the ultimate impact of this setback. The low recovery rate - if there is one at all - is unfortunately not uncommon even for "first lien" debt.

The hard truth from having looked at thousands of credit stories like this one is that most companies that are added to the ranks of the underperforming with a corporate credit rating of 3 will never be returned to a rating of 2 or better. Moreover, virtually all the companies rated 4 or 5 will end up resulting in a permanent loss that can range from very little (as rare as hens teeth) to a complete wipe-out (quite frequent). We focus principally on credits rated 4 and 5 because their likely impact is sooner, greater and can be estimated with greater accuracy. However, we also keep an eye on - as much as we can - on those companies taking that initial step down from performing as planned to failing to do so.

By looking at all the underperformers from 3 to 5 an investor in the BDCs involved can get a pretty clear picture of where credit performance is likely to be headed and how much that will impact book value and earnings. To our minds, this is much better than being shocked and surprised when a BDC seriously slips up at the end of its journey. In MOST cases, the proverbial writing was on the wall - half disguised in the quarterly valuations; occasional cryptic comments from BDC management and whatever can be found in the public record.