BDC Credit Reporter

BDC Credit Reporter Recap: Week Ended September 20, 2024

Nicholas Marshi -

Introduction

God knows we're busy enough trying to identify every underperforming BDC portfolio company and bringing their company files up to date. There are somewhere between 4,000 and 7,000 companies getting the benefit of BDC capital from 42 public players and a host of non-traded peers. (We focus only on the former). Shortly, we'll be adding several new public BDCs into the mix - not least of all MSC Income Fund - a Main Street Capital (MAIN) managed BDC about to come public. Then there's Nuveen Churchill Direct Lending (NCDL) and Morgan Stanley Direct Lending (MSDL). We're leaving off Blue Owl Capital Corporation III (OBDE) only because the BDC is planning to merge into Owl Rock Capital (OBDC), a process that should be completed in 2025.

Reminder

The above attests to the increasing size and importance of the BDCs in the greater "Private Credit" universe but also makes our cornerstone goal of providing comprehensive coverage of all seriously underperforming companies all the more difficult - albeit as important as ever. Nowhere else - to the best of our knowledge - can you find the independent analysis of troubled companies that the BDC Credit Reporter provides and the accompanying assessments of ultimate losses that the BDCs - and their shareholders might incur. Moreover, we present the information in a searchable database - a treasure trove from which an endless amount of credit data can be extracted that suits the user's needs - and write innumerable articles explaining what is going wrong and what might happen next.

Sharing

However, we'd be the first to admit - given the size of the project - we're in a constant state of catch up as we track daily any developments at the companies on our Watch List (there are several hundred names we search for daily) and de-construct every quarter the filings of every BDC as they pertain to their troubled companies. So we've decided to write a weekly "recap" article to keep our readers abreast of what we've been working on and what we plan to do in the days ahead. We hope to share some of our more salient discoveries about the state of BDC credit and keep everyone apprised of the progress we're making of comprehensive coverage.

Database

First, here's a quick survey of what our database is telling us. As of Saturday September 21, 2024, the BDC Credit Reporter has identified 123 "Important Underperformers". These are companies rated 4 or 5 on our rating scale and whose aggregate FMV is $5mn or higher. (We don't want to waste time with the minnows and zombies in many BDCs portfolios). However, we've only updated through the IIQ 2024, 57 of the Company Files. We hope to bring all the Company Files up to date within a couple of weeks.

Snapshot

The total cost of all Important Underperformer assets at cost comes to $8,555bn and the fair market value to $5.034bn - indicating a (41%) discount has already been applied. Or, put another way, recovery is projected at (59%). At the end of the day, chances are high, the actual recovery will be significantly lower. 37 companies are rated CCR 4 and 86 were rated CCR 5. Of course, in many cases some loans can be on non-accrual - triggering a CCR 5 rating - but other debt may still be performing. It's important to read the Company File to get all the details.

Latest

In the last 7 days, we updated 21 Company Files. In some cases we've input the most recent numbers for aggregate and individual BDC outstandings - cost and fair market value. At other times, we've added a news development picked up in the public record or revealed by a BDC. Wherever appropriate, we've written an article. There were 5 this week.

Highlights

  • Hot off the presses was the sale of Zipari (also known as Zodiac Intermediate), a Goldman Sachs BDC (GSBD) portfolio company. We estimate the BDC will likely have to book a loss of up to ($42mn) in the IIIQ 2024 on this realization event.
That's a sizable loss - amounting to about ($0.37) per share - and almost equal by itself to all realized losses booked in 2024 so far. Our estimate of annual interest income to be forgone - net of the hypothetical 25% recovery - is in excess of ($6mn). The glass half full crowd may take comfort from the potential receipt of sale proceeds that can be re-deployed into new loans elsewhere.
  • Another up to date development was the restructuring of Constellis Holdings. Because the transaction has just happened, we're not sure of how the chips will fall, but FS-KKR Capital (FSK) and to a much lesser degree OFS Capital (OFS) are impacted. The results will show up in the IIIQ 2024 results. Here is our best estimate is what might happen in the debt-for-equity swap anticipated:
For the moment - to be transparent - we are assuming the equity FSK holds - a residue from Restructuring I - will be written off and the second lien debt will be converted to equity. That would leave $15.2mn of first lien debt, currently maturing in 2025, to carry on. However, this is all guesswork but does account for our estimate that realized losses will amount to 50%-75% of exposure.
  • The BDC Credit Reporter also has good news to report - very occasionally. Notably, this week German food delivery company Flink SE (yes, BDCs have a global reach these days) appears to have nabbed yet another "round" of capital. This may allow TriplePoint Venture Growth (TPVG) - some of whose loans are on non-accrual - to get paid again. Or - at least - no longer write down their investment, already discounted by (30%).
  • While we're on the subject of German companies, we also heard this week that SellerX - an e-commerce aggregator that was going to be auctioned off by its lenders - is back in negotiations with its creditors. The latter include BlackRock TCP (TCPC) which has a substantive $58mn invested at cost with a IIQ 2024 value of $26mn. The company is rated CCR 5. Here's what we wrote in the Company File about the back-and-forth underway:
There is some brinkmanship going on. First SellerX is sent to auction - a common practice in Germany apparently - then returns to the negotiating table with its lenders days later. We believe a debt-for-equity swap will come out of this but the original investors may be fighting to retain some sort of interest.
  • Not everything we write about has just happened. There's sometimes a delay as information seeps out from the paries involved. That is the case with Transcendia - a company we wrote about in June 2024 and which had been restructured in May. At the time, we upgraded the company from CCR 5 to CCR 3 and removed Transcendia as an Important Underperformer. This week, we were able to quantify the damage to the only public BDC involved - New Mountain Finance (NMFC):
Now that we have access to the IIIQ 2024 results of NMFC we can close the loop on this story. Yes, NMFC did write off its $14.5mn second lien loan - which had been generating $2.0mn in annual interest income before going on non-accrual. Instead, the BDC received preferred and ordinary shares in a new entity called Eclipse Topco Holdings, with a value of $5.6mn. The difference between the cost of the loan in Transcandia and the equity in Eclipse was booked as a realized loss. We had estimated any realized loss would be in the 50%-75% range and ended up being (62%).
  • While we're on the subject of NMFC, we updated the value of the BDC's investment in energy company PPVA Black Elk. The $15mn in subordinated debt involved - rated 4 - dropped in value by (10%) and is now worth only $6.5mn. This investment is part of a complex legal battle between NMFC and a hedge fund that goes back a decade and the amount owed is essentially non-performing. NMFC has not received any monies since 2018. We are assuming an ultimate (75%-100%) loss and this quarter's write down brought that a little closer.
  • While writing this article we realized that we had failed to properly update one of the biggest positive credit developments of the latest quarter. We're talking about Global Jet Capital - a FS-KKR Capital portfolio company - which we've now upgraded from CCR 5 to CCR 3, removing the name from the Important Underperformers list. Read the article here.
  • Also worth reading are the latest updates in the company files of Singer Sewing Company; and Emergency Communications Network - which has been sold.

Looking Forward

In the week ahead, we'll continue to update all the Important Underperformer Company Files while also working on a related project : reconciling for every BDC the non-accruals added and removed in the IIQ 2024 and identifying what material realized losses were booked. As always, the goal is to provide as clear a picture as possible about credit developments at every BDC and across the public BDC universe. To not know what's happening is to be mightily surprised when the next set of results are published.