Isagenix International: Lenders Agree To Forebear

A press release issued by “global wellbeing” company Isagenix International on September 23, 2022 did not provide many details but made clear that trouble was afoot:

Isagenix International (“Isagenix” or “the Company”), a leader in providing nutrition solutions for weight loss, performance, and healthy aging, announced today that it has entered into a forbearance agreement with an ad hoc group of the Company’s secured lenders. This forbearance agreement is an important first step as the Company works toward a holistic solution for its secured debt on terms that will ensure Isagenix’s continued market leadership and long-term growth. Isagenix is focused on operating business as usual — both during the forbearance period and well into the future.  

Isagenix International Press Release – September 23, 2022

No more substantive information was provided but that was sufficient to cause the BDC Credit Reporter to downgrade the company – which has been underperforming to varying degrees since IQ 2019 – to its lowest rung on our investment rating scale – CCR 5. The forbearance means the secured debt is non performing at the moment.

This is very similar to the situation back in 2019 and 2020, when the company’s performance deteriorated; ratings groups downgraded the debt and lenders started to worry. We last wrote about the company on August 28, 2020, just as Isagenix received an equity infusion along with more flexible terms from its senior lenders.

Almost exactly two years later, Isagenix is again in deep trouble; subject to downgrades from S&P and Moody’s and again needing concessions from its lenders. Back in 2020, there was $36mn at cost in BDC advances to Isagenix, discounted (60%). This time the exposure is not much different – $34mn. The first lien debt is mostly discounted (40%) at June 30, 2022 but that was before this need for “forbearance”, which just means “please don’t take any action on our defaults till we come up with a mutually agreeable solution”.

There are 7 BDCS with exposure to Isagenix, including 6 public players. Far and away the biggest exposure is held by Cion Investment (CION) with $14.7mn (and discounted the least), followed by Crescent Capital (CCAP) with $5.4mn. Main Street Capital (MAIN); Capital Southwest (CSWC); Barings BDC (BBDC) and First Eagle Alternative Credit (FCRD) – as well as non traded MSC Income Fund (not coincidentally managed by a MAIN affiliate) – all have relatively small positions in loans due 6/14/2025 and 6/30/2025. Most of the BDCs are discounting their debt by (40%) – a third quarter in a row of value depreciation. Until the forbearance we rated the company CCR 4.

We don’t know what ails this company – which some consider to be a multi level marketing business – but we are aware of lawsuits pending and speculative grade ratings from both S&P and Moody’s. The big discount applied even by supposedly “secured” first lien lenders hints at a possible significant realized loss down the road, and potential further write-downs on an unrealized basis in the short run. Income – with the “forbearance” has been interrupted and is unlikely to revert to the prior status quo.

For more of the history of the credit; the various downgrades we have applied and for background information read the Isagenix Company File below. For our part, we’ll be keeping tabs on what happens next and will update the Company File or write another article, or both.

For the public BDCs involved, the saving grace is that outside of CION – and maybe CCAP – the amounts involved are not needle moving, even if worst comes to worst.

See Company File.

American Achievement: Financial Performance Update

American Achievement has been renamed Balfour & Co but the old name is still used in two of its lenders 10-Q filings, so we’re sticking with the out of date nomenclature for these purposes. We have written about the company twice before, most recently on March 19, 2021 when an exit from bankruptcy occurred. Apparently a new buyer in the form of Cerberus Capital Management L.P. stepped up and kept all creditors unimpaired:

A recent large capital investment by its new owners has positioned Balfour & Co. for not only financial stability, but also a successful long-term growth strategy. This additional capital investment was in addition to its new line of credit from the new owners. Due to the recent strong performance, this capital is not currently being utilized but is available for key investments in the future such as its ongoing digital reinvention, production innovation, a new manufacturing facility, operational excellence, and strategic acquisitions to drive long-term growth. 

PR Newswire October 7, 2021

Just before the company went on non accrual and then went in and out of bankruptcy, there was one BDC lender: Sixth Street Specialty (TSLX), TSLX had advanced $24mn in first lien debt, with a value as of IIIQ 2020 of $22mn. All that debt went on non accrual for a quarter before the resolution. After the restructuring, the total TSLX investment increased slightly, but was split between two first lien loans, a subordinated loan and equity. Most of the advance was in first lien and performing with a small amount in the subordinated debt ($0.5mn) on non accrual. As of the IIQ 2022, total TSLX exposure was up to $27mn at cost. Both the subordinated debt and a small first lien loan – with a cost of $1.4mn – were non performing. The bulk of the debt, though, remained on accrual. The overall FMV was $19.6mn – not much changed since the bankruptcy.

Another BDC – New Mountain Finance (NMFC) – joined in the financing from the IQ 2021 – presumably helping out the new owner. The initial investment amounted to $28mn. As of the IIQ 2022, the total exposure amounted to $30mn in a variety of facilities and equity. The outstanding debt is carried as non performing.

Out of the blue, while going through the daily news update we undertake for all underperforming companies, there was good news worthy of reporting about American Achievement/Balfour. The company put out a press release on September 21, 2022 claiming:

“a nearly 100% fiscal year-over-year improvement in operating performance as well as the construction of its new, state-of-the-art printing facility…The company’s financial improvement was largely a reflection of strong sales and operating improvements across its core graduation products categories”

Press Release – September 21, 2022

The rest of the press release does not offer much more in the way of concrete numbers but a reading does suggest the business is rebounding as high schoolers graduate and seek the memorabilia that one does of that important time in life.

Operating under Balfour®, GradImages®, University Photo®, Gaspard®, ArtCarved®, KeepSake®, and Taylor Publishing Company®, the Company provides personalized products such as class jewelry and apparel, yearbooks, graduation cap and gowns, announcement products, and photography through digital marketing technology, personal in-school deliveries, and customized school assortments. The Company operates throughout North America with around 5,000 team members.

For TSLX, as well as New Mountain Finance (NMFC) and First Eagle Alternative Credit (FCRD), which has immaterial exposure in its JV – this sounds like good news. With over $50mn of BDC invested in the debt – much of which is not performing – there is a good chance for both an increase in income being received and a better fair market valuation. We hope to learn more – even if it’s just by looking at valuation numbers – when TSLX and NMFC reports IIIQ 2022 earnings in 7 weeks or so.

Monitronics International : Updated Company File

We are busy bringing up to date as many Company Files of underperforming BDC-financed businesses as we can. That involves – in part – circling back to our BDC Credit Reporter archives and seeing what has happened to companies we’ve written about in the past and filling in the multiple fields in the Company Files. It’s exhausting work, but is generating many interesting credit stories.

The latest is Monitronics International Inc. (aka Brinks Home), which has been on one BDCs books or another since 2012 according to Advantage Data’s records. Now the only lender is FS KKR Capital (FSK), but with what we call Major exposure of $119mn. (Anything over $100mn at cost gets the Major label). Admittedly, all the invested capital is in first lien debt and all performing.

Nonetheless, we have rated Monitronics CCR 3 – the first step down into being an underperformer on our 5 point scale. Please find attached the updated Company File – which includes the multiple BDC Credit Reporter articles we’ve written on this subject over the years, and much more data besides.

Here is what we wrote in our Credit Notes, where we summarize in the Company File our latest thoughts:

9/16/2022: There is a very long and complex history to the Monitronics/Brinks Home story and to the BDC involvement therein. Basically the company was highly leveraged, restructured itself in a pre-packaged bankruptcy which only increased its BDC exposure in late 2019. Since then valuations – at least – have recovered, until the last couple of quarters. The business needs new capital but failed to raise new high yield monies last year and is still on the hunt. This may become a problem credit again for FSK, which inherited this name from FSKR. The amounts involved are Major (over $100mn) so it’s worth paying attention.

Wahoo Fitness: Downgraded By S&P

We’ve not found the original article as yet, but a Twitter post on September 12, 2022 says Wahoo Fitness Acquisition LLC has been downgraded by S&P:

This is bad news for the two BDCs with exposure to the fitness company: Main Street Capital (MAIN) and Capital Southwest (CSWC). The former has invested $14.4mn in the company’s first lien senior loan due in August 2028. The latter is in the same loan in its I-45 joint venture with…MAIN for $4.8mn Both lenders have already discounted their positions by (12%) as of June 30, 2022, suggesting credit deterioration has been underway for a little while. Still, back at the end of the IQ 2022, the debt was valued at par.

We had already added Wahoo Fitness to the underperformers list as of the IIQ 2022 with a CCR 3 rating. This latest move – coming relatively recently after the company was acquired and with the Peloton story in mind – causes us to move Wahoo Fitness to CCR 4. We would be the first to admit we don’t yet know what’s going wrong, but a (75%) drop in EBITDA cannot be ignored. There’s the prospect here of several million dollars being lost – first lien standing notwithstanding.

We’ll be keeping an eye out for more and better information.

Delphi Behavioral Health: New CEO Appointed

This is not exactly breaking news: Delphi Behavioral Health Group, LLC (“Delphi”) has appointed a new CEO, according to an August 11, 2022 trade article. In fact, we’re not sure if that’s good news or bad news from a credit standpoint, but is a useful jumping off point to re-address the status of this mental health provider – last reviewed on August 20, 2020.

Back then, the business was quickly restructured, a realized loss of ($5.5mn) taken by its BDC lender Capital Southwest (CSWC), which then proceeded to double down to become both lender and part owner of the rejigged business. Unfortunately two years on we are not sure the company has gotten out of the credit woods.

In the IVQ 2021, CSWC suddenly sharply discounted its first lien debt by (15%) and its equity stake – previously written down only (5%) – by (31%). Furthermore, a “Protective Advance” was made at a very high rate, suggesting new monies were needed. As of IIQ 2022, that Protective Advance has grown in amount and the debt and equity discounts remain at the IVQ 2021 level.

All this validates our maintaining a CCR 3 rating on the company because uncertainty remains as to whether the BDC’s management will be able to “turn around” the company – involved in a difficult sector beset with reimbursement issues since Babylonian times and now facing the challenge of staff shortages and higher wage pressures. That similar business on CSWC’s books – which also went through a restructuring : AAC Holdco is also facing problems.

At the moment, CSWC has $7.9mn invested at cost in Delphi, and has valued its positions at $6.3mn. We will be curious to see if the new CEO is being brought in as a final gambit to save the company or to take the business to the next level. This is a credit that should be on every CSWC shareholder’s dance card to keep track of in the quarters ahead.

American Teleconferencing Services: IIQ 2022 Update

This is embarrassing: we still don’t really know what’s happening with American Teleconferencing Services Inc (AFS), a subsidiary of Premiere Global Services (PGi). We’ve written extensively about both companies in the past, and communicated on these pages that there was much trouble afoot. The BDC Credit Reporter has written 4 times about AFS alone – most recently on August 31, 2021.

What we do know from the valuations by the multiple BDCs that hold the AFS and PGi debt is that this has been a disaster for lenders. The outstandings at both related companies amounted as of June 30, 2022 to $125mn, but the value totals only $7mn. Despite most of the exposure being “first lien”, the ultimate outcome should be an almost complete loss – one of the worst in recent memory based on the dollars and the multiple BDCs involved.

As a reminder, the BDCs involved are Capital Southwest (CSWC); Cion Investment (CION); Oxford Square Capital (OXSQ); Main Street Capital (MAIN); PennantPark Floating Rate (PFLT); SLR Investment (SLRC) and two non-traded players.

We continue to rate the company CCR 5, given the non accruals that date back to 2019. Furthermore – and more than most troubled companies that we track – we expect there will be no meaningful recovery and – at some point – over ($100mn) of realized losses will be booked. The damage, though, has been done. As noted, the exposure has been all but written off and no income is being produced.

Cineworld Group PLC: Files Chapter 11

The BDC Credit Reporter’s headline of August 22, 2022 said “Cineworld Group PLC: May File Chapter 11″. Now you can scrap the “maybe” because the filing occurred on Wednesday September 7, 2022, as reported by the Wall Street Journal , amongst others. Here are some of the details:

London-based Cineworld has more than $5 billion in debt and faces a roughly $1 billion legal judgment stemming from a soured merger with Canadian cinema chain Cineplex Inc. The chapter 11 proceedings open a path for Cineworld to cut its liabilities through a possible asset sale or financial restructuring as it tries to retain moviegoers who are tempted to stream flicks at home.

Cineworld expects to deleverage its balance sheet while seeking concessions from landlords and continuing its theater operations uninterrupted. The company said Wednesday it has commitments from its lenders for a roughly $1.94 billion loan to carry it through the restructuring process and cover operating expenses.

Cineworld Files for Chapter 11 After Sluggish Ticket Sales- Wall Street Journal – September 7, 2022

We are downgrading Cineworld to CCR 5 from CCR 4. As made clear, though, in our prior article, given the modest amounts of exposure held by Barings BDC (BBDC) and non traded Barings Capital Investment Corp, losses should be minimal. Still, the bankruptcy is likely to result in a temporary interruption of interest received, which amounts to about ($0.400mn) on an annual basis. We doubt, though, that Cineworld will remain under court protection for very long.

Serta Simmons Bedding: Downgraded by Moody’s

Everything old is new again. Back in 2020 Serta Simmons Bedding, LLC was forced to recapitalize, in an effort to reduce its debt load. We wrote 7 articles (!) on the subject, beginning in 2019. Two years later and Serta seems to be in serious trouble again. According to news reports, Moody’s has just downgraded the company and its debt:

DORAVILLE, Ga. – Moody’s Investors Service has downgraded Serta Simmons Bedding’s corporate rating to Ca from Caa3 and said the outlook was negative for the bedding manufacturer based on $1.9 billion of debt it is facing next year and its declining cash reserves.

In addition to the corporate rating, Moody’s downgraded SSB’s probability of default to Ca-PD from Caa3-PD; first lien super-priority first-out term loan to B3 from B2; first lien super-priority term load to Ca from Caa2; and first lien term loan to C from Ca.

Sheila Long O’Mara Furniture Today September 7, 2022

Then as now, BDC exposure to Serta is limited. According to Advantage Data, there is only one BDC lender to the privately-held mattress company. That’s Barings BDC (BBDC), which is both a first lien and second lien lender. Judging by the IIQ 2022 BBDC valuations, the strain on the business has been recognized as the $3.4mn invested in the second lien lien was valued at $2.5mn – a (26%) discount. By contrast, the $7.2mn invested in a first lien loan – both of which come due in August 2023 – is carried close to par.

We have downgraded Serta Simmons to CCR 4 from CCR 3, just one quarter after adding the company back to the underperformers watchlist. We’ll continue to watch this developing story, but given the modest exposure by BBDC, no great impact is expected whatever happens. (We expect a Chapter 11 restructuring not dissimilar to th one that came before is the likeliest outcome).

Output Services Group: Files Chapter 11

We admit to being late in reporting a corporate bankruptcy that impacts multiple BDC lenders. In August 2022, Output Services Group Inc. (aka OSG Group and OSG Billing Services) filed for a pre-packaged bankruptcy. The company is seeking to reduce total debt by $134mn from $824mn at the time of the filing. The second lien lenders are to become part owners and the existing equity sponsor (Aquiline Capital Partners) will retain an interest because of loans advanced to the business being converted to equity. By the way, OSG – according to Reuters – “provides print, mail, digital communications and payment services to customers in a variety of industries and countries”.

Caught up in all this are 4 BDCs, 2 public and 2 private. The former are Goldman Sachs BDC (GSBD) and PennantPark Floating Rate (PFLT) and the latter are Nuveen Churchill and Audax Business Credit. Total exposure at cost is modest at $13.1mn and all invested in a 2024 first lien loan. Amusingly and instructively the valuations applied by the different BDCs as of June 30 2022 are all over the place from a (5%) discount to (27%) for the same risk.

Presumably those values will change and reflect whatever deal has been hammered out between the parties, but any realized loss – given the senior nature of the obligations – should be modest when we get all the details reflected in the IIIQ or IVQ 2022 disclosures. From what we have learned already there may no loss at all for the first lien lenders, just an extension of the debt maturity, a higher rate going forward and interest being optionally paid partly in PIK. Hey, the BDCs involved might actually get to write up their positions. The bankruptcy court appears to have already confirmed the plan.

Given the favorable resolution, the first lien standing and the modest outstandings involved none of the BDCs mentioned should be materially affected by OSG’s troubles and metamorphosis. We just wonder if the parties went far enough to ensure the company won’t fall back into the troubled zone in the years ahead.

Ansira Holdings/Ansira Partners: Bain Capital Places On Non Accrual

See prior articles Ansira Holdings: IQ 2021 Update (June 7, 2021) and Ansira Holdings/Ansira Partners: IIIQ 2021 Update November 27, 2021).

In the IIQ 2022, Bain Capital Specialty Finance (BCSF) placed its three different first lien loans to Ansira Holdings Inc. on non accrual. Much earlier – back in the IQ 2020 Crescent Capital (CCAP had placed its debt to related entity Ansira Partners, LLC on non accrual as well. All these loans, and those held by New Mountain Finance (NMFC) , Goldman Sachs BDC (GSBD)and non-traded Audax Capital mature in December 2024. Interestingly, the different lenders apply very different discounts to value their debt holdings, with CCAP discounting (21%) and BCSF (47%), and all sorts of variations in-between.

We had already rated Ansira CCR 5 because of CCAP, so there’s no change associated with BCSF’s decision. However, the move does confirm that the digital marketing agency continues to have serious problems even now that Covid has largely ceased to impact the economy. Total BDC exposure is Major (i.e. over $100mn) at a cost of $108mn. The current FMV totals $71mn – a serious write-down for senior debt. Total investment income at risk is around ($9mn), some of which is already not accruing according to BCSF and CCAP.

What ails Ansira ? You’re not going to get any “color” from the BDC lenders involved. Even when BCSF – on its IIQ 2022 conference call – admitted the debt had been placed on non accrual, the borrower was not even named. (We worked out who was involved by looking at the footnotes in the 10-Q).

The public record is not much use either. The only relevant item we’ve discovered is an encouraging press release from the company itself (what could be more objective ?), dated August 16, 2022. Here’s a highlight:

“In the first and second quarters the company welcomed more than 10 new brands to its client roster, hosted two client events to share thought leadership and connect cross-industry peers, began to roll out enhanced reporting for its website platform, and continued to receive third-party industry accolades for its work and technology.  

“Supply chain challenges and chip shortages, compounded by inflation, continue to impact many of our client verticals but our team has proven to thrive under this downward pressure, reacting by innovating and refining our solutions and services,” said Ansira President and Chief Revenue Officer Andy Arnold. “We are constantly finding ways, both big and small, to help clients at the enterprise level, and at the last mile of customer engagement, to drive demand and retention.”

Ansira Partners Press Release – August 16, 2022

How does this all end for Ansira and its BDC lenders ? Notwithstanding the non accruals and big discounts taken, we’re not ready to presume a realized loss is a given. This is a large business with a diversified book of business and a deep pocketed sponsor in Advent International. We will just have to keep track of developments as best we can.

See Company File

Carestream Health: Files For Chapter 11

There are fewer Chapter 11 bankruptcies these days, but there are some and even a few that impact the BDC sector. A case in point is Carestream Health (also known as Carestream Dental), a medical imaging company owned by Onex. On August 23, 2022 we heard that the company had filed for a pre-packaged bankruptcy with the goal of reducing its $1bn debt mountain, but with the goal of continuing to operate normally. We already know that lenders and owners have a tentative agreement to eliminate about half the debt outstanding.

Thanks to Advantage Data’s records, we’ve identified two BDCs with exposure to either Carestream Health or Dental. The good news is that the amount at risk is minuscule. The only public BDC with exposure is Portman Ridge Financial (PTMN) with $1.8mn in second lien debt at cost and with a no cost equity stake. Non traded BDC Steele Creek Capital holds an $0.7mn first lien loan to Carestream Dental. Chances are any losses incurred will be in the equity and in PTMN’s second lien position, already written down by (10%) as of the IIQ 2022. That could go lower, but we don’t have enough information to be sure.

We are rating Carestream CCR 5 because of the bankruptcy and expect PTMN will see about $175,000 of annual interest income interrupted and Steele Creek possibly have to contend with a temporary income loss of $35,000 on an annual basis. Any realized losses that might occur are likely to occur in the third or fourth quarter 2022, given that a restructuring seems close.

As to the reasons for Carestream’s problems – besides all that debt – Bloomberg summed up what the company said to the court:

The company blamed the increased use of digital images by doctors and dentists instead of film-based X-rays, as well as a push by governments to drive down the cost of health care. China, for example, created an agency that buys medical equipment in high volume in order to save money, Carestream said in court papers.

Steven Church -Bloomberg – August 23, 2022

These all seem like “idiosyncratic” causes for Carestream’s troubles and nothing related to the broader economic environment and concerns about supply chain problems; payroll cost increases and inability to pass on inflationary increases. We’re still not seeing many corporate victims of the very difficult environment that has been in play all year and which many expect to result in a recession.

Cineworld Group PLC: May File Chapter 11

All over the business news is that Cineworld Group PLC – the parent of Regal Cinemas – is considering filing for Chapter 11 protection. (Given how these things go “may file” really means “will file”). Times are tough in the movie exhibition business despite the post-pandemic re-opening, and the company is highly leveraged ($5bn in debt !). At the moment, though, there’s no talk of liquidation and some sort of restructuring is the most likely outcome.

“Cineworld would expect to maintain its operations in the ordinary course until and following any filing and ultimately to continue its business over the longer term with no significant impact upon its employees.”

Yahoo Finance: Quoting A Cineworld Press Release – August 22, 2022

From our parochial BDC sector perspective, the impact should be minimal. According to Advantage Data’s records, total exposure to Cineworld at cost is just $4.6mn held by two related players: Barings BDC (BBDC) and non-traded Barings Capital Investment Corp. Most of the exposure is in first lien debt – some in “super senior” status and unlikely to be much affected in terms of valuation in any restructuring. Admittedly, some of the debt comes with a very high cash and PIK yield, but given the small amounts involved this will not make a material difference if interest income is interrupted by a bankruptcy. A “realized loss” is likely on the small amounts of equity BBDC and its sister BDC hold in Cineworld, but the aggregate owned is less than $200K.

We are rating Cineworld CCR 4 on our 5 point scale and will continue to track this “developing story”. Overall, though, the BDC sector has very little exposure to the movie exhibition business – never a very large sector – so Cineworld’s troubles do not seem to augur more troubles elsewhere.

Vology Inc.: Company Sold

We hear from trade publications that Vology Inc. has been sold to a company called ATSG. Here’s the given rationale:

Vology’s portfolio complements ATSG’s existing digital workplace, digital infrastructure, and cybersecurity services offerings, according to the company. The deal will bolster ATSG’s security, cloud, and managed services, the company said. The acquisition also strengthens its presence in the Southeast United States, ATSG said.

Ty Trumbull Channel E To E – August 15, 2022

This acquisition is important to the BDC Credit Reporter’s readers because Logan Ridge Finance (LRFC) is a “control” investor, with debt, preferred and equity invested. For those of you interested in the history, Vology was initially a portfolio company of Capitala Finance, which advanced $9mn in the form of a subordinated loan in 2015. Years later, the company defaulted and Capitala and others stepped in to undertake a recapitalization. Very quickly the valuation of the “new” Vology dropped, while in the interim Capitala Finance was acquired by Logan Ridge Finance (LRFC).

As of the IIQ 2022, LRFC had $8.9mn invested at cost in Vology but the value was only $3.6mn – par value of the senior debt. Our credit rating was CCR 4 on the 5 point scale we use. We imagine the BDC’s manager must have been aware of the acquisition plan at that date, which suggests the company might be being sold for an enterprise value that will not result in any recovery beyond the senior debt. As a result, we’re guessing LRFC will be booking a realized loss of ($5.3mn) in the IIIQ 2022.

For the BDC there is no obvious good news here except for resolving a long term troubled investment, and being able to plow the proceeds from the debt repayment back into new investments of its own choosing.

For the BDC Credit Reporter, this illustrates our frequently made point that BDCs sometimes can successfully turnaround troubled portfolio companies, and sometimes not. Capitala/LRFC seem to have tried their best, but no cigar.

The Vology story – even though the business has found a home with a bigger player – is also a reminder that “technology” companies – broadly defined – are not necessarily immune from getting into trouble. With the BDC sector heavily invested in similar businesses, we should not be complacent. On the other hand, whatever challenges Vology has been facing, they do not appear to be of recent vintage – and cannot be called any sort of “canary in the coal mine” regarding current credit conditions. If anything, the fact that Vology has been acquired signals that new investment activity continues, even for less than perfect targets.

Outdoor Voices : Sale Of Company Being Explored

Women’s clothing company Outdoor Voices, Inc. might be sold, according to an August 15, 2022 Bloomberg story. Details are scarce and the process of exploring “strategic options” is at an early stage said “people with knowledge of the matter”.

There is only one BDC with exposure to Outdoor Voices and that’s TriplePoint Venture Growth (TPVG), which has been both lender and investor since 2019. We’ve had the company on our underperforming list since the beginning of the pandemic when TPVG began to write down the value of the $0.4mn invested in common equity. Since then, total exposure has reduced from $10mn to $6.8mn, as some debt was repaid during the IIQ 2022. The equity, though, is valued at next to nothing.

A sale may be a good thing and result in full recovery of all TPVG’s exposure, or crystallize a loss. We have no idea how the company – which has faced internal struggles in the past – is faring. It’s possible the prospect of lower consumer spending going forward might be a reason for the possible disposition.

In any case, the exposure and the potential loss is not material for TPVG and we continue to rate the company as CCR 3 and are UNDETERMINED as to whether a realized loss might occur. We’re more interested in Outdoor Voices as a possible example of BDC portfolio companies that are “consumer facing” beginning to show signs of financial stress. However, there’s not enough hard information here to draw any meaningful conclusion. We may learn more if and when a sale does occur and we see what happens to the BDC’s exposure.

Peloton Interactive: Cost Cutting Measures

(In)famous Peloton Interactive Inc., announced – as reported on CNBC – a number of cost cutting measures in a continuing effort to improve business performance and its stock price.

From a BDC perspective, four different players – including two public ones – have recently added exposure to the company. At cost, the aggregate at risk – all in senior debt due in May 2027 – is $10.4mn. The BDCs involved are BlackRock Capital (BKCC); BlackRock TCP Capital (TCPC(); BlackRock Direct Lending and Oaktree Strategic Income Fund.

The BDC Credit Reporter has added Peloton to its underperformers list as of the IIQ 2022, with a rating of CCR 3, due to concerns the company may not successfully implement its turnaround plans. Admittedly, the amount at risk are not significant – either in total or individually – but we’ll check back in regularly over what may be a long period to ascertain Peloton’s credit status.

K&N Engineering: In Restructuring Negotiations With Lenders

Bloomberg Law on July 29, 2022 ran a story for its subscribers indicating that K&N Engineering Inc. (aka K&N Parent) “began confidential negotiations with its lenders ahead of upcoming debt maturities, according to people with knowledge of the matter”. The sponsor is reportedly Goldman Sachs Asset Management and the object of the negotiations are first lien and second lien debt due in 2023 and 2024 respectively.

Here’s a brief lowdown on the company in the crosshairs, drawn from Wikipedia: “K&N Engineering, Inc. is a manufacturer of air filters, cold air intake systems, oil filters, performance parts, and other related products. K&N manufactures over 12,000 parts for various makes and models of cars, trucks, SUVs, motorcycles, ATVs, industrial applications and more.”

This is not a complete surprise to the BDC Credit Reporter because K&N was added to the underperformers list in the IQ 2022 when the BDCs holding the second lien debt increased their fair market discount to cost to as much as (30%). Even though the first lien remained mark near cost, we downgraded the company from CCR 2 to CCR3.

With this latest news, the odds of loss has greatly increased, and we are downgrading the company further to CCR 4. As of the IQ 2022, there were 4 BDCs with nearly $80mn of exposure: CION Investment (CION) is only in the first lien and Apollo Investment (AINV) only in the second lien. Barings BDC (BBDC) and Prospect Capital (PSEC) are in both layers of debt.

In the IIQ 2022, only AINV has published results, continuing to value its $23.6mn of junior debt at $19.5mn , only slightly less than in the prior quarter. Still, there’s a good chance the $51mn held by AINV, PSEC and BBDC (the latter has a very small exposure) in second lien debt could face ultimate losses of (20%) or more. Moreover, both the first and second lien debt is at risk of income interruption should a default occur.

What ails K&N ? We can’t make out what the challenges might be from a quick review of the public record and none of the BDCs involved are talking, but we’ll continue to root around. In the interim, we’ll be keeping an eye on how PSEC, BBDC and CION value their positions as IIQ 2022 results come out.

Teligent, Inc.: Liquidation Of Company Completed

On July 26, 2022 pharmaceutical company Teligent Inc. officially went out of business because its assets were ordered liquidated by a bankruptcy court earlier in the month.

We last wrote about the company back on April 12, 2022. At that time, we estimated that the only BDC with exposure to the company – Ares Capital (ARCC) might end up booking a realized loss of ($57mn). We did admit, though, that these are difficult numbers to get right.

Now, with the IIQ 2022 ARCC 10-Q at hand, the likely realized loss is likely to be lower than we anticipated. Some $68.8mn remains invested at cost and the FMV is $39.3mn, which suggests the BDC will need to take a realized loss of ($29.5mn)- likely to show up in the IIIQ 2022 numbers. This quarter’s FMV is slightly higher than the $39.1mn valuation at the end of the IQ 2022.

Through the first half of 2022, ARCC has booked $55mn in net realized gains. If this Teligent realized loss happens, most of that realized gain will be wiped out, but there should be no further impact on the BDC’s net asset value. Moreover, ARCC will have nearly $40mn to re-invest into new deals.

Teligent’s troubles – as far as we can tell – were self inflicted, and liability risk so substantial that liquidation was the only way out. For ARCC – which saw the company quickly go from performing normally to non performing in the IIQ 2020 – this has been a long and winding road. The BDC seems to have taken equity control of the business back when the defaults occurred in the hope of turning Teligent around. However, those ambitions did not last and the liquidation followed.

We continue to rate the company CCR 5, but expect to drop coverage going forward as the asset is written off the books once and for all. For ARCC, this is a material – but not huge reverse. The likely realized loss is equal to just 0.3% of ARCC’s net asset value at June 30, 2022. There has been no income being generated since 2020.

Phymed Management LLC: IIQ 2022 Update

We first wrote about Phymed Management, LLC back in April 2022 when Ares Capital (ARCC) – and later SLR Investment (SLRC) – placed their combined $94mn in secxond lien debt to the company on non accrual during the IQ 2022. At that point – without explaining why – both BDCs wrote the debt down: (74%) and (50%) respectively.

Roll forward to ARCC’s latest IIQ 2022 10-Q, and the discount on the still non performing debt increased further, to a value of only $1.2mn on a cost of $55.8mn. That means – as we suspected in our prior article – that a complete realized loss is the most likely outcome here. No explanation or “color” has been forthcoming from ARCC’s external manager and the public record does not provide any insights.

The most “actionable” news here is that SLRC – which has yet to report IIQ 2022 earnings – should be taking a further unrealized loss that might amount to ($18mn) if the BDC adopts the same discount percentage as ARCC has. If the entire $37.8mn SLRC investment at cost ends up a realized loss, that will be a material “hit” to the BDC. For a sense of context, total realized losses over the last three full fiscal years at SLRC were less than ($30mn).

We continue to rate Phymed CCR 5, but might switch the company to a non material status if the fair market value drops to a negligible value, which would end regular coverage. Still, both the BDC Credit Reporter and – we expect – our readers might want to understand what went wrong at the company, and so quickly. (As recently as the IVQ 2022 the company was performing, and rated CCR 2). For the moment, management at ARCC and SLRC are like Sergeant Schultz in Hogan’s Heroes: “I see nothing! I hear nothing! I know nothing!”

Cenveo Corporation: Sold In Management Buyout

We’re trying to piece together the full story at Cenveo Corporation (renamed Cenveo Worldwide Corporation since 2018) which just announced a successful “management buyout”, as reported by a trade publication on July 11, 2022. Two related BDCs – Main Street Capital (MAIN) and non-traded but MAIN managed – MSC Income Fund – have been involved with the business since 2015. Initially the two BDCs were just senior lenders with $17mn advanced in senior loans.

However, by the time Cenveo defaulted and eventually filed Chapter 11 in 2018, total exposure had increased to $42mn – still all in debt. (We believe the extra monies were advanced to make acquisitions, as the company sought to become a “provider of digital agency marketing services”). In bankruptcy, though, the company – besides changing its name – shed much of its debt, which was swapped for equity. (We believe MAIN booked a -$12.3mn realized loss in the IIIQ 2018 relating to the restructuring). More recently, Cenveo has been shedding assets to return to its envelope manufacturing roots, as we discussed on May 6, and September 11, 2020. This might have provided the resources for the company to repay $10mn of senior debt in the restructured entity in the IIQ 2021.

That left the two BDCs only with $11mn of equity outstanding (roughly 5% of the total). This was valued as of March 31, 2022 at a (38%) discount, implying an unrealized loss of about ($4mn), split 56/44 between MAIN and MSC. Presumably, at the time of valuation, the BDCs must have been aware of the management buyout plan, but maybe not. As a result, we don’t know if the BDCs will be recovering the remaining $6.8mn of value, or a little more. It’s also possible the BDCs are involved in the financing of the latest buy-out.

The only certainty here is that in either the IIQ or IIIQ 2022 results, the equity stakes will be realized and that a loss is likely – potentially ending a 7 year saga. The amounts involved at this stage are not very material , but it seems that MAIN and MSC will not be recouping whatever losses were booked back in 2018 when Cenveo filed for Chapter 11, but something is better than nothing.

We’ll update – and probably complete – the Cenveo story when MAIN reports its results this quarter or next.

Carestream Health: Debt For Equity Exchange Planned

We hear from Moody’s that medical film company Carestream Health, Inc plans to restructure its debt, including a debt for equity exchange. As a result, the rating agency has “downgraded Carestream Health Inc.’s (“Carestream”) Probability of Default Rating (PDR) to Caa3-PD from B3-PD“. This is considered a “distressed exchange”.

There is only one BDC with exposure to the company: Portman Ridge (PTMN), which has invested $1.7mn in second lien debt and owns no cost equity. As of March 202, the debt was valued at a slight premium and the equity at zero. The yield on the debt is high at 13.50% and will – presumably – go away if converted to equity as envisaged by the restructuring.

We don’t quite know what to make of this and the amounts involved are small. Still, we are adding Carestream to the underperformers list for the first time, with a rating of CCR 3. We might learn more when the BDC reports second or third quarter 2022 results.