BDC Credit Reporter Recap: Week Ended October 25, 2024

Written October 27, 2024

Quiet

For the BDC Credit Reporter, this week was one of the quietest on record. There were no significant developments affecting the 117 Important Underperformers in our database. The total cost of investments held by these companies amounted to $8.297bn and the fair market value to $4.849bn. That's a discount of (42%). Unusually, we didn't even have reason to write any articles. Every day we read dozens of news items relating to companies we track but nothing this week was sufficiently important to write about.

Heads Up

However, we were not sitting on our hands. With IIIQ 2024 BDC earnings season just days away - Capital Southwest (CSWC) will be reporting October 28, 2024 after the close - we drilled into the mountain of data we've collected to alert the subscribers of our sister publication - the BDC Reporter - about which companies might feature prominently this quarter.

Top Two

We began with the two biggest Important Underperformers: Pluralsight and Emergency Communications Network. Together, these two companies have absorbed $1.147bn at cost of BDC capital - 14% of the total. At FMV, the investments in the companies come to $608mn - 13% of the $4.869bn mentioned above. All this BDC exposure is in first lien debt but is already written down (47%) - a reminder that sitting sat the top of a leveraged balance sheet is no guarantee against loss. Moreover - and coincidentally - the debt of both companies only became non-accruing in the IIQ 2024. As recently as the IIIQ 2023 virtually all the debt involved was valued at par, or close enough. Or, put another way, both these companies valuations have dropped only very recently, impacting no less than 6 public BDCs and several non-traded BDCs.

Not Done Yet

As we discussed in the BDC Reporter, the impact of these recent credit setbacks will continue to be felt in the IIIQ 2024. Let's begin with Pluralsight, which we've written about 3 times in the Credit Reporter:

In the IIIQ 2024, we are likely to see all that debt [$803mn at cost] either written off or converted to equity. Given that the enterprise value of Pluralsight has dropped substantially, there should be a great deal of the former as the lenders take control of the business. Apparently, $1.3bn of the $1.5bn of debt previously on the books of Pluralsight will be forgiven. (Moreover, the new lender-owners have advanced, or committed to, $250mn new monies as well). This suggests that over ($90mn) of annual interest income being collected before the default will be permanently forgone. That’s a chunk of change even if spread out over many BDCs, both public and private.

Known Unknown

A key question is how much will the BDCs write off and how much will go into equity. Looking at the matter with an objective eye we’d say a further write down beyond the 50% already booked would be appropriate, but the BDCs involved – and their armies of “independent” valuation groups – may be more generous to themselves.

Next

We then turned to Emergency Communications Network - which now likes to be known as Onsolve - which we wrote about in the Credit Reporter on August 5, 2024. Here's a brief recap:

One of the largest defaults in the IIQ 2024 was by this “leading global providers of advanced critical communications and emergency notification systems“. Total BDC exposure at cost – all in first lien senior debt – came to $345mn. Two public BDCs were involved – most notably Ares Capital (ARCC). The market leading BDC had a position on its own balance sheet and another in its joint venture. Also involved for a much smaller amount is Carlyle Secured Lending (CGBD). Also a lender is non-traded Varagon Capital, the other partner in the joint venture, and with far away the biggest exposure: over a quarter of a billion dollars.

Not Going Well

In the IIQ 2024, the debt was placed on non-accrual and written down by ($42mn) in the period. As of June 2024, the total unrealized loss amounted to ($123mn). That means more than a third of the value has already been lost. In our BDC Reporter article we asked and answered the obvious question:

So what’s next in the IIIQ? We happen to know the company was sold in late July to Garda World for a price of $318mn. Unfortunately for the lenders involved – including the BDCs mentioned who seem to hold the bulk of the debt owed by Onsolve – the purchase price is not sufficient by a long shot to repay in full the obligations.

We're Done Here

Unlike at Pluralsight where there may be further losses to be booked, at Onsolve the final settlement seems to approximate the value as of June 2024, according. to one of the BDCs involved - OCSL. This is a Good News - Bad News situation. The good part is that no more red ink will flow at ARCC and OCSL. The bad is that what unrealized losses there were at mid-year 2024 will now be crystallized.

More Than Half

We only had time to discuss these two Important Underperformers on the pages of the BDC Reporter last week. However, Credit Reporter readers will know that we're busy trying to identify other troubled companies that might rock the boat of any BDCs involved in the IIIQ 2024 - i.e. are Trending. In our database, we've identified 61 companies so far, with a cost of $4.996bn and an FMV of $2.836bn. To state the obvious that's a lot of investment value in play, most of which is likely to head even further downward than has been recorded so far. Of course, top of the table are Pluralsight and Onsolve, but also likely to be in your BDC credit news feed shortly are companies like department store Belk's (FSK); Accuride Corp (FSK again); Securus Technologies, that we wrote about earlier in October, held by multiple BDCs; Honors Holdings (WHF) and USES Corp (PSEC) - to name a few.

Practical Use

There's a great deal of data here. We suggest readers interested in how one or another of their favorite BDCs might perform in the IIIQ 2024 and beyond, use the sorting feature to determine how many Important Underperformers are on their books. Then, drill down further to see which of those companies are potentially going to be Trending in the IIIQ 2024. Those businesses are likely to be the ones - if our analysis is correct - most likely to impact a BDC's net book value, realized and unrealized losses and number of non-accrual.

Prime Example

For example, CSWC has 5 Important Underperformers, 3 of which we believe may be materially impacted in the IIIQ: Gauge American Nuts; Research Now Group and StatinMed. Most of the prospective damage will be in shifting unrealized write-downs to realized losses and potentially taking all 3 entities off CSWC's 5 company non-accrual list. (Research Now is almost certainly going as the business has been restructured in a debt for equity swap. The other two are more speculative).

Coming Up

Next week alone we're going to hear from 8 BDCs and get updates on many under-performing companies in our database. We're very interested to learn as much as we can about every one and reflect that information in the database. There are also likely to be both additions and deletions from the Important Underperformers list. The quiet days of last week will shortly be gone and we expect to be kept very busy.