BDC Credit Reporter Recap: Week Ended September 29, 2024

Busy

Since our last recap, we've kept active, updating 56 Company Files across all our databases . These are entities rated anywhere from 1 - outperforming - to 6 - removed from BDC investment. During this process, we add and subtract companies deemed as underperforming (rated 3, 4 or 5 on our 5 point scale and of any value). Currently, there are 303 underperforming names that we are tracking.

Big Boppers

Most importantly, we also update the list of those businesses most likely to cause damage to their BDC lenders (rated 4 or 5 only and with an overall BDC fair market value over $5mn) - the Important Underperformers. This week, the number of Important Underperformers has fallen to 118, from 123 last week. Moreover, the aggregate cost of the assets involved has fallen from $8.555bn to $8.079bn. Likewise, the fair market value has gone from $5.034bn to $4.671bn.

Reasons

These changes are mostly due to our getting around to removing SHO Holding I (Shoes For Crews) and 99 Cents Only Stores. Both are now rated 6. The former was the subject of a major debt-for-equity swap in the IIQ 2024, affecting Ares Capital (ARCC); SLR Investment (SLRC) and Golub Capital (GBDC). All fared poorly in the wipe out of this specialized shoe manufacturer - especially ARCC. The BDC recognized a ($119mn) realized loss in the IIQ 2024, 6x larger than any other loss in its portfolio the period. The original investment at cost was ($140mn), so the recovery was only 15%. SLRC and GBDC had only $6mn and $5mn invested respectively at cost and their losses - to the degree we can tell from their inadequate disclosures - were minimal.

Reborn/Renamed

All 3 BDCs are now lenders and owners in new entities called Shoes For Crews Global, LLC and Shoes For Crews Holdings, LLC as of the IIQ 2024. The total investment at cost is now only $32mn, two-thirds in first lien debt and one-thirds in newly received equity, and valued close to par. (The only exception is SLRC which has already discounted its equity stake by 26%). Again, ARCC is the dominant presence. We have rated this new entity given this new entity a rating of 2 for the moment given the massive debt forgiveness that has occurred.

Excess Of Caution

Back when we heard that 99 Cents Only Stores was headed into bankruptcy we briefly rated the $25mn in first lien debt advanced by Sixth Street Specialty Lending (TSLX) a 5, and added the company to the Important Underperformers. Yes, TSLX usually wriggles out of difficult credits like this one due to its control over critical collateral, but the BDC has stumbled recently with its Bed Bath & Beyond investment. A year and a half after the famous retailer went kaput, the Sixth Street BDCs involved are still owed over $100mn. You'd never know there was a problem based on management's statements or the very small discount applied - (6%) - on the debt as of the IIQ 2024. Nonetheless, we believe TSLX expected to be repaid many months ago and is now partly relying on the outcome of lawsuits - always dicey - for full repayment of its advances. Anyway, with that in mind, we were careful with our rating for 99 Cents Only stores.

Good News

Fortunately, there was no reason to worry and in the IIQ 2024 the debt owed by the retailer seems to have been repaid in full. As a result, we've dropped the name from the Important Underperformers list. No harm, no foul.

Another

Also getting off the Important Underperformers list this quarter was Transcendia. The company was restructured, as described by New Mountain Finance (NMFC) - its only public BDC lender:

Transcendia was recapitalized by a new sponsor during Q2, which led to a restructuring of our second lien position, but no meaningful change in fair value relative to Q1. We now own two tranches of preferred securities and common equity alongside the new owner of the business. We are optimistic about Transcendia's current trajectory and operational improvement plans and are hopeful the value of our new securities will increase over time.

The business is now called Eclipse Topco Holdings but continues to be known as Transcendia. NMFC's $17.5mn at cost of second lien debt is now - as mentioned above - transmuted into preferred with a cost of $5.6mn and paying a 15% pay-in-kind dividend. We have given Eclipse Topco a 3 rating, making the reshaped company no longer an Important Underperformer.

Halfway There

At this point, we've been able to bring up to date through the IIQ 2024, 67 of the 118 Underperformers in our database. We hope to complete the updating process by the time the IIIQ 2024 results begin to come out.

Multiple Fronts

Elsewhere, in a spreadsheet that we're keeping to ourselves for the moment, we've also been able to reconcile which companies were added and which were removed from 34 BDCs IIQ 2024 results. Unfortunately, many BDCs are unwilling to name names where non-accrual changes are concerned - preferring to just offer up dollar values and percentages of the portfolio instead. We like to know which specific companies are coming and going. This allows us to tell you that we've identified 23 new non-performing companies in the IIQ 2024 - the largest of which in dollar terms and held by many BDCs was the much over-discussed Pluralsight. On a more positive note, more than half of the 34 BDCs did not add any new non-accrual in the period. However, BlackRock TCP (TCPC) managed to add 6 new non-accruals - a quarter of the total and likely a key reason for the BDC's plummeting stock price.

Article

As you can see we were busy behind the scenes serving as our own credit data aggregator. That left us time to write only one article. We provided a IIQ 2024 update on Knowland Technology Holdings, a portfolio company of Saratoga Investment (SAR). The news there was positive: "there seems to be a possibility that SAR will dig itself out of this hole".

Not Too Bad

At the end of the article we summarized our estimate of future further losses at SAR - the next BDC to report IIIQ 2024 results through the quarter ended in August. We have identified 4 entities that might result in further losses, only 3 of which are significant:

We estimate SAR's likely further losses on these 4 investments will amount to ($16mn), probably spread over multiple quarters. That represents about (4%) of the BDC's net book value at the end of May 2024 - a pretty modest amount of prospective further loss. Those pro-forma losses might well get offset by realized gains on equity investments elsewhere in the portfolio - a regular feature at SAR till recently.

We Can But Dream

Our goal - over time - is to be able to estimate in real-time likely further losses for every BDC we track and for every Important Underperformer in their portfolio. If that data is in any way reliable it should give our readers a heads up they'll find nowhere else about the potential credit performance of their favorite BDCs in the quarters to come. So far, we've projected the likely further losses for 16 BDCs and compared them against their net book value. Here's a tidbit: The losses range from only (0.2%) to as much as (13%) - a reminder of how varied credit performance can be. We'll have a good deal more to say once we've worked up the numbers for every BDC in our coverage universe.