Dynamic Product Tankers: Downgraded To CCR 4

Based on the August 7, 2020 Apollo Investment (AINV) 10-Q filing, which saw the value of its equity stake in Dynamic Product Tankers get reduced by (45%), from (27%) in the prior quarter, we’ve chosen to downgrade the tanker company to CCR 4 from CCR 3. We know very little about what’s happening at this tanker company 85% owned by AINV for 5 years now. The more a BDC controls a company the less the outside world – including its shareholders are told. However, we’re aware that the shipping business is – by and large – in poor shape and in danger of getting worse if we get an ever deepening recession. We thought the most conservative approach would be to downgrade the company to one notch above non performing.

AINV is the only BDC lender to the company, as well as its principal owner, with $42mn invested at cost in first lien debt and another $50mn in the equity. That’s nearly three times as much AINV initially advanced. The investment income involved is high: $3.5mn. Any interruption or reduction in the interest income would have a material impact on the BDC. Furthermore, the remaining FMV of debt and equity is $69.3mn, also material: 7% of AINV’s net assets. We doubt that even in a worst case much more than half the total exposure at cost is at risk of being written off, but that’s still a notable number.

We’ll probably hear about Dynamic Product Tankers only next time AINV reports its results, and we’ll dutifully report back.

A-L Parent: Downgraded To CCR 4

After a review of the IIQ 2020 BDC results, the BDC Credit Reporter decided to downgrade Learfield Communications, LLC (owned by A-L Parent, LLC) to CCR 4 from CCR 3. We noted that the two BDCs holding the company’s second lien debt sharply discounted their positions as of June 30, 2020. Furthermore, on May 20, 2020, Moody’s downgraded the company to Caa1 and the second lien debt – the only BDC exposure – to Caa3. We are mostly concerned that the media company which depends on college sports broadcasting is said to have very weak liquidity. Furthermore, leverage was said to be very high at year-end 2019 (10x !) and is likely only to have gotten worse. As a result, we are also adding the company to the Weakest Links list.

Apollo Investment (AINV) has $5.5mn invested at cost and Bain Capital Specialty Finance (BCSF) $.0mn and total investment income at risk is nearly $0.8mn. For neither BDC is the amount at risk highly material to future results. However, given the second lien status and the long dry spell ahead for college sports an eventual complete write-off is a distinct possibility.

We’ll be keeping track of developments at the company in the public record and next time the BDCs involved report, but there’s a chance a bankruptcy or restructuring may have happened before then. Learfield is a clear Second Wave credit casualty. Admittedly, Moody’s had downgraded the company previously in 2019 and at the end of the year the BDCs involved had discounted their debt by (10%), causing us to add the name to the underperformers list. However, the interruption in business brought on by Covid-19 has accelerated the company’s troubles. Of course, all that leverage piled up before the crisis happened didn’t help…

Fieldwood Energy: Files Chapter 11

With all the sense of inevitability of an ancient Greek drama, yet another energy company has filed for bankruptcy protection. This time it’s Fieldwood Energy, LLCa premier independent E&P company in the Gulf of Mexico“.  Based on the company’s press release, the company already has a formal restructuring plan to submit to the bankruptcy court, agreed to by two-thirds of its senior lenders. Once again a company and its creditors are looking to the “debt for equity swap” as the solution for what ails the business. Also – as per the usual – Fieldwood has arranged a Debtor-In-Possession (“DIP”) facility and is using cash on hand to fund liquidity needs while going through the bankruptcy process. The amount of the DIP, though, is not given.

There are three BDCs with exposure – all in the first lien debt – to Fieldwood: $13.3mn. The only public BDC is Barings BDC (BBDC), which also has the only material exposure: $10.1mn. The rest is held by non traded Monroe Capital Income Plus and NexPoint Capital. The loan – now on non accrual -is priced at just LIBOR + 525 bps, suggesting lenders believed this was a “safe” energy loan (to our minds a clear oxymoron) when first booked back in 2018.

However, the investment has been in trouble for some time, rated as underperforming as far back as IQ 2020, long before Covid-19 drastically reduced market demand for fossil fuels. The BDC Credit Reporter has been writing about the company since April 15, 2020 and had already downgraded Fieldwood to a CCR 4 rating, and placed the name on our Weakest Links list. Now the company has been downgraded to CCR 5 and added to the Bankruptcy list.

For BBDC this is a telling reminder that no energy loan is safe in a world where oil can trade at $100 a barrel one day and at next to nothing a few years later. These single focus businesses cannot handle almost any amount of debt when their main product is subject to such drastic fluctuations. In this case BBDC, and the other lenders, look likely to be left with equity of dubious value and may have to stump up more funds with no great confidence that this time the right capital structure has been found.

We’ll circle back to Fieldwood once we hear about whether the court is in agreement with the proposed plan and when we can evaluate what the company’s balance sheet – and business prospects – might look like going forward.

Benevis Holdings : Files Chapter 11

On August 3, 2020 dental support business Benevis Holdings filed voluntary Chapter 11. The Georgia-based mid-market company blamed Covid-19 for the need to close clinics across the country, and the resulting need to seek court protection. No official Restructuring Support Agreement was filed by the company but management indicated that its lenders were supportive of a restructuring of its balance sheet and sale of the business. Benevis has already arranged $30mn in Debtor In Possession (“DIP”) financing, to be provided by its existing bank group, headed by New Mountain Finance. We’re not yet clear if the parties intend to undertake a “debt for equity swap” or are preparing Benevis to be sold to a third party, but we believe the former is most likely. The company indicated assets and liabilities are between $100mn-$500mn.

The only BDC lender to Benevis is publicly traded New Mountain Finance (NMFC), but we imagine other funds managed by its eponymous parent are involved in the current loan and in the DIP financing. NMFC has invested $85.6mn at cost, all in first lien Benevis debt and discounted by (25%) as of March 31, 2020. We cannot tell whether that value remains reasonable or not. However, something under ($6.0mn) in annual investment income is at risk of temporary or permanent interruption from the filing. Moreover, total exposure is likely to increase with the new DIP loan and – potentially – any new capital that might be required.

We get the impression from the company’s press release that management believes the loss of income is a temporary phenomenon and the business will bounce back shortly. After all, Benevis was performing normally – judging by NMFC’s year end 2019 valuation of its debt – which was at par. However, if we get a second wave of business closings, management’s optimism may prove to be misplaced.

The BDC Credit Reporter is leapfrogging our credit rating down from CCR 3 to CCR 5, and adding Benevis to the list of BDC-financed bankrupt companies. We’re only at August 3, and this is the fourth bankruptcy of the month and the 43rd of the year…

This is a material investment for NMFC: 5.8% of net book value as of March 31, 2020. We would expect to see that value drop further in the IIQ 2020 when results are announced shortly. However, what the final outcome might be is impossible to speculate about, but we’ll be keeping close tabs on the company’s progress through bankruptcy court and will be listening out to whatever NMFC chooses to share about its plans.

Le Tote: Files Chapter 11

The hits just keep on coming to retailers. On August 2, 2020 Le Tote Inc. , which owns Lord & Taylor , filed for Chapter 11. As in most cases these days, this was not a surprise. Back in April the BDC Credit Reporter wrote two articles about the upstart company that had acquired the venerable but failing Lord & Taylor and tried to create a hybrid online bricks and mortar retail concept. Already then Le Tote was rated CCR 4 and was on our Weakest Links list.

To get out of its current predicament the company “will simultaneously solicit bids for a going concern sale of both its Le Tote and Lord + Taylor businesses, and conduct targeted store closing sales to maximize the value of its business“. No word on any Debtor In Possession (DIP) financing, which is worrying. There does not seem to be any “stalking horse buyer” either. The company has agreed with its lenders to use cash collateral to fund operations going forward.

From a BDC perspective, nothing has changed in terms of exposure from our earlier posts. This is likely to be a material setback for the Carlyle organization as its public and private BDCs TCG BDC (CGBD) and TCG BDC II are major lenders to the company. According to news report, Le Tote’s total debt is just $137mn and the Carlyle exposure is $27.9mn. (75% is held by the non-traded BDC). Furthermore, we’d guess the BDcs will have to recognize a substantial devaluation of their debt which was only discounted (7%), even though the debt is second lien in a business clearly headed to disaster. Judging by market conditions for retailers of every stripe and the junior position in the debt stack, this could result in a complete write-off for the two Carlyle entities. Investment income at risk is ($2.0mn) per annum.

Unless we’re much mistaken – which happens – this will be a black eye for the Carlyle Group’s BDC lending. It’s not just the amounts involved, which are relatively modest given the size of the two funds, but the very fact of choosing to lend as recently as IVQ 2019 in an industry where the word “apocalypse” is constantly being used. There’s been no discussion of this credit on CGBD’s past conference calls but the subject may get addressed when IIQ 2020 results are reviewed.

In the interim, we’ve downgraded Le Tote to CCR 5 and removed the name from our Weakest Links list (which is shrinking for all the wrong reasons). This is the second BDC-financed company to file for bankruptcy in August already and the 42nd for the year. See the BDC Credit Reporter’s Bankruptcy list.

Men’s Wearhouse Inc. Files Chapter 11

On August 2, 2020 Tailored Brands – the parent of Men Wearhouse Inc. – filed Chapter 11. The BDC Credit Reporter has been writing about the troubled men’s clothes retailer since September 2019. In our most recent post on May 9, 2020 we predicted the company was likely to file for bankruptcy protection. In the last few days, the financial press has been abuzz with similar predictions. So, in two words: no surprise.

As per the new normal in leveraged lending, the company has agreed a restructuring plan with its senior lenders for a “debt to equity swap”, which will see $630mn of debt written off in return for a controlling interest in the business. In addition – and critically important from both a borrower and lender perspective because liquidity is tight and the future of all retail uncertain – the lenders are offering up $500mn in Debtor-In-Possession (“DIP”) financing. $400mn of that debt – unlike your bog standard DIP loan – will convert into longer term financing when the partly de-leveraged company exits bankruptcy. For more information, Tailored Brands has its own website on the subject.

Thankfully, BDC exposure – as we’ve noted previously – is modest, with only Barings BDC (BBDC) involved, with a $9.9mn position in the first lien debt and already written down by two-thirds. For a while income will be lost on the debt – we presume – to the tune of under ($0.35mn) a year. More importantly, the BDC will be booking in the IIIQ 2020 a Realized Loss of ($6mn-$7mn). Chances are high, though, that BBDC will be required to ante up for the DIP /long term financing. Along with the equity, BBDC will be tied to this men’s clothing business for many years to come. However, the amount at risk – even after their portion of the DIP is funded – should barely be material.

Nonetheless, this is a setback for a “first lien secured loan” that was thought of when first booked by BBDC in the IIIQ 2018 to be low risk, given the pricing was LIBOR + 325 bps. The likely recovery of one-third or less is also a reminder that sitting high on the capital structure is no guarantee in and of itself of low losses.

For our part, we’ve downgraded the company to CCR 5 (non performing) from CCR 4, and added the business to the Bankruptcies list we maintain, the first of August. The company has been removed from the Weakest Links list. We’ll circle back at the earlier of hearing from BBDC or learning more about whether the court approves the prepackaged restructuring plan. We expect to eventually upgrade Men’s Wearhouse when out of bankruptcy to CCR 3. That’s still on the underperforming list because the company will still be substantially leveraged and still in retail and still selling business wear when most everybody is wearing pajamas.

By the way, by our estimate, is still a First Wave bankruptcy: a company that was in deep trouble due to shifts in retail and consumer taste even before Covid-19. The business would have likely ended up in a similar place in the months ahead anyway even without the impact of the virus. The damage,though, to the company and to its lenders is that much worse because of what has been happening since March and the recovery therefrom that much more difficult.

Mood Media : Files Chapter 11

As the company promised back on June 26, 2020 when we last wrote, Mood Media Inc. has filed for Chapter 11 bankruptcy. Also as previously indicated, the company and its creditors appear to have worked out a restructuring agreement in advance, the details of which are spelt out in the prior article. In the most recent press release on July 30, 2020 Mood Media indicated the whole plan was submitted to a judge on July 31, with the hope of exiting from Chapter 11 status very quickly. No word yet on the outcome of that deliberation.

We continue to believe the $120mn invested by three BDCs (with most of the capital advanced by FS KKR Capital or FSK and FS KKR Capital II or FSKR) will be largely written off. Our current estimate is that two-thirds of the debt and equity will result in a realized loss. Also likely is that the BDCs will be involved in both the DIP financing and the $200mn in post-bankruptcy senior loans planned. That will result in some investment income coming in but will increase long term exposure. Many years may go by – even if the restructured Mood Media does well – before this investment gets exited, as the BDC lenders will now be owners and creditors.

The hard truth is that even a restructured Mood Media has no guarantee of success given the pandemic and the structural changes going on in retail. If more and more of us shop from home, and less and less in stores, the demand for the company’s piped-in music will necessarily drop. Currently we are maintaining a Corporate Credit Rating of 5, and adding the company to the BDC Bankruptcies list, an exclusive feature of our publication. This is the tenth BDC-financed company bankruptcy in July and the 40th for the year. (Remember to go to the BDC Credit Reporter’s “BDC Bankruptcies” table for the constantly updated list of every company that has filed for Chapter 7 or 11 in 2020). Currently Mood Media is at the top but – the way things are going – will soon be displaced by new entrants.

Furniture Factory Outlet: Business Update

Furniture retailer Furniture Factory Outlet Inc. was placed on non accrual by its lenders during the IIQ 2020, and rated CCR 5 by the BDC Credit Reporter. On the Stellus Capital (SCM) Conference Call on July 30, 2020, we heard the briefest of updates from the BDC: “As you know, we don’t talk specifically about companies for privacy reasons, but this is a business that’s involved in the furniture retailing aspect in the central and Southeast part of the United States, and certainly been impacted initially by what happened due to COVID. And so this is just a reflection of our current view. If it’s helpful, the business has picked up as we’ve gone further along since the COVID really hit initially”.

In our own research in the public record, we’ve discovered FFO (as its known) has closed many stores temporarily, but some have been permanently shuttered. The company continues to have dozens of store locations across the south-east and had sales – according to one report – of over $100mn before the crisis. From what little information is available, FFO has a fighting chance of staying in operation, but we know nothing about its balance sheet. We take some comfort from the opening of a new store in Kentucky as recently as May.

SCM – the only BDC with exposure – has invested $13.5mn in first lien, subordinated and equity in the company, and values the most senior capital at $4.4mn and the rest at zero as of June 30, 2020. The company was on the underperformers list from the IIIQ 2019 but Covid-19 precipitated the non accrual and substantial valuation write-downs.

We will continue to monitor the company’s progress from the public record and from whatever SCM lets us know. At this stage, with the investment written down by two-thirds and with no income coming in, SCM has more to gain than to lose.

BFC Solmetex LLC: Added To Underperformers

Privately-held filtration company BFC Solmetex LLC has been added to the BDC Credit Reporter’s underperforming list in the IIQ 2020 with a Corporate Credit Rating of 3.

Stellus Capital (SCM) – one of two BDCs with exposure alongside Crescent Capital (CCAP) – has discounted the 9/26/2023 first lien Term Loan to the company by (15%), from close to par in the prior period. No explanation was given. CCAP, which is involved in the same tranche, will probably follow suit when IIQ 2020 results are published. Total BDC exposure at cost is $21mn or so, and investment income involved about $1.8mn.

California Pizza Kitchen: Files Chapter 11

On July 30, 2020 California Pizza Kitchen (aka CPK) filed for Chapter 11, as part of a broad restructuring plan (RSA) agreed with its first lien lenders. As readers will expect by now, the RSA envisages a “debt for equity swap” and additional financing to get the restaurant company through this difficult period, presumably financed by some or all those same lenders that are in the existing financing. CPK hopes to be in and out of bankruptcy in 3 months.

The BDC Credit Reporter has written about the company on three prior occasions. Our most recent contribution followed learning that several BDC lenders had placed their debt outstanding to the business on non accrual, but not all. In any case, bankruptcy has seemed like a forgone conclusion for some time. As a result, the seven BDCs involved (6 of whom are publicly traded) will have to face the consequences of their $48.1mn invested in the debt of CPK.

Common sense suggests the second lien debt holders : Great Elm Corporation (GECC) and Capitala Finance (CPTA) will have to write off the $4.1mn and $4.9mn respectively held. The rest of the debt is in first lien debt (including a tranche held by GECC) and will mostly become non income producing, when swapped for common shares. We expect the BDCs involved will write off 80% or more of their positions, but we’ll gather more details shortly. As usual in these situations, total exposure may increase as some of the lenders fund their share of the additional capital. For the record, the other BDCs involved are Main Street (MAIN); Capital Southwest (CSWC); Monroe Capital (MRCC) and Oaktree Specialty Lending (OCSL) ; as well as non traded TP Flexible Income with a tiny position.

CPK is – arguably an example of a “Second Wave” credit default. Admittedly, the company was already underperforming before Covid-19 but would likely not have had to file Chapter 11 if the virus had not occurred. As recently as the IIQ 2019 GECC – in a case of ill timing – bought into the second lien at a (5%) discount to par. Going forward, a much de-leveraged CPK should have a decent chance of survival, and may even thrive in the long run. This might allow the BDCs involved to recoup some of their capital but it’s going to be a long slog.

Currently, the BDC Reporter has rated CPK CCR 5 – or non performing – which remains unchanged. We’ll re-rate the company when the RSA – or some other outcome – is finalized. By the way, this is the ninth BDC-financed company to file for bankruptcy – all Chapter 11 – in the month of July, keeping up the blistering pace set in June.

APC Automotive Technologies: Reorganization Confirmed

We first wrote about APC Automotive Technologies when the company first filed for Chapter 11 protection back on June 3, 2020. Relatively quickly – thanks to an agreement with its creditors – the company is exiting bankruptcy, having received court approval of their restructuring plan:

As part of the restructuring, the company has reduced the debt on its balance sheet by more than $290 million and secured a new $50 million senior secured term loan to finance its go-forward operations. The current management team, including Chief Executive Officer Tribby Warfield, will continue to lead the company forward and advance its strategic, operational, and growth transformation initiatives”. The Brake Report

At this stage we don’t know what role Cion investment and Crescent Capital (CCAP) will play in the restructured APC Automotive, if any. However, both BDCs are likely to be booking their losses in the IIIQ 2020.

We are upgrading the company from CCR 5 to CCR 3, and are awaiting further intelligence on the future business outlook.

Lakeland Tours LLC: Files Chapter 11

Student travel company Lakeland Tours LLC filed for Chapter 11 on July 20, 2020. The company – whose dba is Worldstrides – was in the wrong business in the time of Covid-19: arranging student travel programs. However, the company was performing well before the current crisis so management, shareholders and “certain lenders” have managed to cobble together a restructuring plan, which is expected to be blessed by the bankruptcy judge. Details in the company’s press release announcing the Chapter 11 filing are short on details, but some kind of “debt for equity swap”, accompanied – as per the usual – by the addition of new capital is planned.

BDC exposure is limited so we won’t be undertaking any deep dives with so many other troubled companies to worry about. The only BDC involved is non-traded Business Development Corporation Of America (BDCA for short), which has invested $11.9mn at cost in the company’s first lien term loan that matures at the end of 2024, according to Advantage Data. At March 31, 2020 – the first quarter the company joined the ranks of the underperforming – the discount was only (15%). We rated Lakeland CCR 3.

With the bankruptcy filing the credit rating drops to non performing, i.e. CCR 5. BDCA will be losing just short of ($0.6mn) of annual investment income. We’re guessing that the final realized loss the BDC will have to absorb will be bigger than (15%) as well. We don’t know at this time whether BDCA is participating in the new capital being advanced or in the “debt for equity” trade. We’ll circle back as details come out but the impact on the BDC in any case should be modest.

Rosehill Resources: Files Chapter 11

As projected by the company back in early July – and covered by the BDC Credit Reporter on July 6 – shale driller Rosehill Resources has filed for Chapter 11 on July 27, 2020 in Texas. At the time, Rosehill believed the filing would come by mid-July but has delayed till now.

In the absence of any new information, we’ll just re-purpose what we wrote on July 6 about BDC involvement in the company: “There is only one BDC involved with Rosehill – non-traded BDC FS Energy & Power – which has $4.2mn advanced in the form of second lien and preferred, a tiny fraction of the company’s half a billion dollars in debt. The BDC’s exposure has already been written down by (66%) in the preferred but is valued close to par in the second lien. We expect a further loss will be forthcoming and conversion of the full amounts into new common equity. FS Energy may also contribute to the convertible DIP and/or the new debt facility envisaged after bankruptcy. The amount of income likely to be lost is under ($0.2mn) a year.Given FS Energy & Power’s side, this RSA and planned bankruptcy will not be material“. 

With Rosehill, the number of BDC-financed company bankruptcies increases to seven in the month of July to date. Five have been in the energy sector broadly defined.

Borden Dairy: Exits Bankruptcy

These days the BDC Credit Reporter is busy writing about BDC-financed companies filing for bankruptcy, or on the verge of doing so. This article, though, is about a company exiting the bankruptcy process and still BDC-financed : Borden Dairy. Capitol Peak Partners and FS Investments- KKR Capital funds purchased the business for $340mn and have “appropriately capitalized” the new business which – operationally – will continue much as before the filing.

This has been a 6 month process which we’ve written about extensively. As was clear early on, the lenders – headed by the FS Investment- KKR organization – were intent on being part of a “debt for equity swap” and that has come to pass, wiping out the equity interest of the prior owners. However, just the financial details of the new company and how much old and new capital FS-KKR has in play – and in what form – is unclear. We expect to learn more and will report back.

In the interim, we remind readers that two BDCs – FS KKR Capital (FSK) and KS KKR Capital II (FSKR) have advanced $171mn in first lien debt to the old Borden and have already written down ($95.1mn). Presumably – but not necessarily – this amount or thereabouts will become a realized loss now the transaction has been closed and will show up in the IIIQ 2020 financials. Total exposure may actually grow if the lenders have advanced more monies.

Not to be Grinchy, the future of Borden is far from assured. Milk demand in the U.S. has been on the decline for years, and the Covid-19 situation is not helping. Moreover, competition remains fierce with Dean Foods and others and regulation can be difficult as well. Furthermore, we don’t know yet how much elbow room the new owners have left themselves and what amount of debt the new Borden will have to contend with.

For the moment, we are upgrading the company from non performing, or CCR 5, to CCR 3, until we learn more about what Borden will look like in the future and how much debt will be carried. We hope to learn more when FSK and FSKR report IIQ 2020 results, which could cause a revaluation up or down. The bottom line: both BDCs – and their shareholders – will be involved in the business of milk for a very long time, having started out in IIIQ 2017 as lenders.

Rhino Energy LLC: Files Chapter 11

On July 22, 2020 Rhino Resource Partners, and its wholly owned subsidiary Rhino Energy, filed voluntarily for Chapter 11. According to a press release: “.. Rhino has obtained $11.75 million of post-petition financing and the support from a stalking horse bidder to acquire the company. Rhino intends to use the bankruptcy process to implement an orderly sale of substantially all of its assets in an effort to maximize value for all stakeholders and allow for the prospect of continued employment and business opportunities at its operating locations“. Rhino Energy is a publicly traded coal company.

There is only one BDC with exposure that dates back to 2017 and which has been underperforming almost since the beginning. The BDC in question is Cion Investment which has invested $9.8mn in first lien debt and $0.280mn in equity. As of March 31, 2020 the debt was still valued at a modest discount of just (6%), but the equity was written down (95%). We doubt that the first lien lenders will get away without a material loss but don’t have the numbers at hand to be sure. However, we know that Cion will not be collecting about $1.0mn of annual investment income from the debt until this is resolved.

We are downgrading Rhino from CCR 3 to CCR 5. This is the sixth BDC-financed company to file for bankruptcy protection in July to date, and the fourth in a row from the energy sector broadly defined. Fossil fuels are having a very hard time.

Travelport Worldwide: Interim Deal Close With Lenders

The Wall Street Journal reports the lenders to Travelport Worldwide Inc. are close to a deal with the company and sponsor Elliott Management wherein the former would agree not to trigger a default under their debt agreements till September 15, 2020. Bankers and borrower are arguing about how the sponsor allegedly transferred assets that should have been maintained in the company to serve as collateral for another entity’s loan. The owners of Travelport Worldwide have argued that if a default occurs, the company would be forced into bankruptcy.

Very much involved – and worried- is one non-traded BDC : GSO-Blackstone which has $97.9mn invested at cost in the company’s first lien debt due in 2026. As of March 31, 2020, the debt was discounted (31%) to $67.9mn. Some ($6mn) of annual investment income is at risk of interruption if a default does occur.

The BDC Credit Reporter downgraded the company to CCR 4 from CCR 2 after the IQ 2020 results came out, and has added the name to the Weakest Links list, as a default still seems likely to these skeptical eyes. This one credit alone has increased the aggregate cost all Watch List assets by nearly a tenth.

There will be likely be many more twists and turns where Travelport Worldwide is concerned as all the parties are taking a hard line approach and there are billions of dollars at risk. We’ll check back when the next dramatic development occurs.

Permian Holdco 1-3: File Chapter 11

On July 19, 2020 – according to news reportsPermian Tank & Manufacturing filed for Chapter 11. The filing seems to have included entities such as Permian Holdco 1, Permian Holdco 2 and Permian Holdco 3 – all of which have BDC debt involved. As you’d expect, the companies are pointing to Covid-19 as the culprit for this trip to bankruptcy court, but performance was on the fritz for some time. We have very few details at this time, so consider this but an early flash warning.

As far as we can tell so far there are three BDCs involved in one or all the “Permian Holdco” entities with a total cost of $48.2mn. Four-fifths of the exposure is held by New Mountain Finance (NMFC) but Main Street Capital (MAIN) and its sister fund HMS Income have exposure as well. The capital is invested in seemingly every layer of the balance sheet: senior debt, subordinated debt, preferred and equity.

As of March 31, 2020, NMFC had already sounded the alarm and placed some of its preferred and subordinated debt positions and written off a big chunk of accrued Pay In Kind income. Overall BDC capital had been discounted by one third, but there are huge variations between different facilities. The senior debt was mostly carried at par – as was the subordinated debt in some cases and written down by (32%) in others. The preferred and equity were fully written down.

We cannot tell how great the ultimate loss might be, but we do know that $20mn in the junior layers of the balance sheet must almost certainly be headed to a write-off. The remaining amount in senior debt, more likely than not, will face a haircut as well. We can’t tell exactly how much but several million dollars of investment income that was still being booked will be interrupted and probably not ever resume. Rightly or wrongly, NMFC – for example – was still booking into income some of the debt owed at rates of 14%-18% all the way through March and – maybe – through today.

The BDC Credit Reporter is downgrading the company/entities to CCR 5 from CCR 4. Perhaps unsurprisingly for a business with “Permian” in its name, this credit had been rated as “underperforming” since the IQ 2019.

We’ll learn more in the months ahead, but can say with some certainty that this looks like a material set-back for NMFC – both in terms of capital and income at risk. Less impacted, but hardly happy with the outcome are MAIN and HMS Income.

BJ Services Company: Files Chapter 11

Reuters reports that oil field services company BJ Services Company has filed for Chapter 11 on July 20, 2020. The company reported assets and liabilities between $500mn and $1.0bn. Right away, management will be seeking to sell core assets – such as its cementing business – to pay down its debts. Not helping the situation for BJ Services is an admitted “cash crunch”.

Four BDCs have $25.3mn in exposure at cost in the company as of March 31, 2020: Crescent Capital (CCAP); Monroe Capital (MRCC); Garrison Capital (GARS) and non-traded Monroe Capital Income Plus. The BDCs were all in the same 2023 first lien term loan, and marked their positions at par or at a discount of only (4%). Given the industry which BJ operates in; the sizeable liabilities and the liquidity crisis, it seems unlikely that the current high valuation can be maintained in bankruptcy. However, we have no clear idea yet how this debt might fare once everything is settled. We can calculate, though, that ($1.8mn) of investment income on an annual basis will be suspended.

The BDC most at risk of loss is CCAP, which owns about half the outstandings and which is involved in a last out arrangement, which should result in a bigger eventual capital loss.

Frankly, the BDC Credit Reporter has been caught flat footed by BJ’s bankruptcy. The company was carried as performing (CCR 2) in our database because of the near-par valuation by all its lenders. In retrospect, the fact that a oil services firm like this one should stumble is no great surprise. In any case, we have leapfrogged the company’s rating down three levels to CCR 5, or non performing. We’ll be reverting with more details on how the bankruptcy might play out for the BDC lenders involved once we learn more about the company’s plans.

As a parting thought, we do wonder why any BDC would lend to an oil services company – even a giant one – given the well known wreckage of so many similar businesses since 2014. This debt was booked in 2019. Perhaps the recovery the BDC lenders will ultimately achieve will prove us wrong but – if past is prologue – expect that losses will be material and for a loan that was priced at a modest LIBOR + 7.00%.

Alcami Holdings LLC: Downgraded By Moody’s

Moody’s has downgraded pharmaceutical preparation company Alcami Corporation (“Alcami Holdings” in Advantage Data) to a corporate credit rating of Caa2 from Caa1. The ratings group believe the underlying industry is strong, but worries about high leverage (adjusted debt/EBITDA over 10x) ; worsening liquidity and the chances the company might seek a “distressed” exchange in the near future.

There are two BDCs with “Major” exposure to the company – i.e. any aggregate amount at cost over $100mn, but 99% is held by Ares Capital (ARCC), with $145.6mn. The other BDC involved but with less than a $1mn outstanding is non-traded Audax Credit BDC. We’ll focus most of what follows on ARCC. As of March 31, 2020 ARCC held positions in two first lien term loans due in 2023 and 2025, a second lien loan and equity in Alcami. Only the last two had been materially discounted by ARCC’s valuation group: (15%) and (61%) respectively.

The BDC Credit Reporter has rated the company as underperforming with a CCR 3 handle since IVQ 2018 but only because of the discounted equity, written down (20%) at that time. Even the second lien loan was discounted only (9%) through the end of 2019. Now we are downgrading Alcami to CCR 4, as the chances of an ultimate loss seem higher than full recovery. Moreover, we’re adding the company to the Weakest Links list, based on the tight liquidity at the business and Moody’s view about a possible “distressed exchange” – something that is getting to be very common these days.

Given the size of the overall exposure, and with $112mn of exposure in the equity and second lien debt, Alcami represents a significant problem for ARCC. Total investment income at risk is close to ($9.0mn) on an annual basis. That’s roughly equal to 1% of the BDC’s annualized Net Investment Income Per Share. In the short run – unless ARCC ignores Moody’s – we expect to see a lower valuation in the second and/or third quarter valuations. Should the worse happen, a write-off of the second lien and equity is not impossible, which would drop value by ($78.6mn) from the value at the end of March. (Ironically, ARCC made a huge gain of $324mn on the sale of Alcami – inherited from American Capital – back in 2018).

In terms of investment size, this is the biggest Weakest Link added to our list – currently 28 companies long – since May 2020. We’ll be paying close attention to what’s happen next at Alcami, including peeping at how the BDC valued its positions at June 30, 2020 when those results come out shortly.

California Resources: Files Chapter 11

Yet another BDC-financed portfolio company in the energy sector has filed for Chapter 11. As long expected, California Resources Corp is using bankruptcy as part of a restructuring process that will see $5bn of “of debt and mezzanine equity interest ” eliminated; a $1bn Debtor In Possession facility put into place; a $450mn Rights Offering made and a new $200mn post-bankruptcy loan arranged, according to the Wall Street Journal. The huge numbers involved underscore that this is a very large bankruptcy.

From a BDC perspective, though, this is a minor item. Only one BDC is involved with the company: non-traded Business Development Corporation of America (BDCA for short) with $10.6mn invested at cost in first lien debt due in 2022. This was supposed to be a “safer” investment when booked in the IVQ 2017 and is priced at LIBOR + 475bps. The position is already discounted (38%) as of March 31, 2020. We expect BDCA might be involved in the next phase so capital at risk may increase. First, though, the BDC will likely need to book a realized loss and lose out on half a million dollar of annual investment income. We wouldn’t be surprised if the final loss is greater than what’s been reserved for so far.

As for the BDC Credit Reporter, we are downgrading the company from CCR 4 to CCR 5. California Resources comes off our Weakest Links list now the projected default has occurred. This is the third BDC-financed company bankruptcy in July.