Fusion Connect Inc. has restructured itself – again. Last time, the “leading managed security service provider of cloud communications and secure network solutions” was re-organized was when coming out of Chapter 11 bankruptcy back in January 2020. The company, after making ill-fated serial acquisitions, had sought court protection, burdened by a reported $760mn in liabilities. When exiting Chapter 11, Fusion managed to “shed” $400mn in debt in a transaction which saw its lenders become owners. See the BDC Credit Reporter’s article on the subject from January 14, 2020 – one of six articles we wrote about the company before, during and just after its bankruptcy exit.
Unfortunately, in the last two years Fusion Connect has failed to thrive and has now needed to raise new capital; write-off even more debt and establish new debt financing. All this is spelled out in a press release by the company and its owners on January 19, 2022.
This equity issuance and recapitalization, led by funds affiliated with or managed by Morgan Stanley Private Credit, Ellington Management Group, and Investcorp Credit Management BDC, Inc., was supported by existing stakeholders, including 100% of the company’s creditors. Following receipt of required regulatory approvals, Morgan Stanley Private Credit, via its affiliated or managed funds, will become the majority shareholder in the company. Several members of the Fusion Connect management team also participated in the capital raise, demonstrating substantial support for the company.Fusion Connect Press Release – January 19, 2022
There are two BDCs with $12mn of exposure to Fusion Connect: Investcorp Credit Management (ICMB) and Portman Ridge Finance (PTMN). However, only the former’s exposure – in both debt and equity – is material, with PTMN only holding $0.866mn in equity at cost, which was last valued at $0.221mn. As of September 2021, ICMB was a lender in two different debt facilities – both due at different times in 2025. The so-called “Exit Term Loan” – with a cost of $3.2mn was current and valued at par. However, the “Take-Back Term Loan” , with a cost of $5.1mn was valued at $2.0mn and the PIK portion of its interest income (8% according to management) was non performing. ($2.8mn of equity held was already valued at essentially zero).
We’re guessing that the Exit Term Loan will be refinanced at par by the new $60mn credit facility. By the way, that facility is paying 11.5% as of last September. Most likely – but still an estimate – the Take-Back Term Loan will be written off, resulting in a realized loss. Ditto for the equity at both ICMB and PTMN.
Judging by the press release, ICMB will remain both lender and part owner – along with the above mentioned partners – in Fusion Connect. Whether ICMB’s total outstandings will increase even after the likely realized losses is unclear, but we wouldn’t be surprised if that proves to be the case. We currently rate the company CCR 5 due to the non accrual of the PIK on the Take Back loan, but will upgrade our rating to CCR 3 or CCR 4 once we hear the final details from ICMB. (We expect PTMN will have no further role).
This is proving a never-ending story for ICMB, but we imagine management is consoling itself that – one fine day – Fusion Connect will hit its stride and whatever equity stake the BDC has ended up with will be worth enough to recoup the losses incurred in 2020 and 2022. We’ll continue to monitor the company, but expect that the recapitalization won’t affect the BDCs books till the IQ 2022 results are published.