Lonestar Resources: Files Chapter 11

Energy company Lonestar Resources kicks off October as the first BDC-financed company to file. However, the Chapter 11 was expected, and discussed in a prior article on September 15, 2020. In effect, the company is using the bankruptcy process to get a “debt for equity swap” deal done that was agreed on several weeks ago with most of its creditors. Under the plan, bondholders would receive 96% of the company’s new common stock.

We won’t dwell too much on the details because the only BDC lender with exposure – $23.2mn from FS Energy & Power – is in second lien debt and has already written down the fair value of its position (as of June 2020) to just $2.4mn. We won’t know till all the dust has settled what final value the BDC ascribes to any equity stake possibly received, but we’re not expecting much movement up or down.

Obviously, this is yet another BDC credit disaster from lending into the energy arena. However, that’s what FS Energy & Power was created to lend into, giving the manager little in way of attractive options,. Still, investing in the junior debt has almost always resulted in big or complete write-offs in this sector when things go wrong. In this case, the secured revolver lenders, though, are being paid out in full, with interest. What a difference a points of yield and a different position on the balance sheet can make…

We are downgrading – as long expected – Lonestar from CCR 4 to CCR 5. Shortly, we expect to see the company exit Chapter 11 and may re-rate the business to CCR 3. However, if FS Energy has no material stake, which we’ll find out shortly, we may drop further coverage.

Neiman Marcus: Exits Bankruptcy

After many disputes, Neiman Marcus has emerged from Chapter 11 protection on September 25, 2020. According to news reports, the iconic retailer has shed $4.0bn of its $5.5bn in debt. That’s $200mn a year of debt service saved. The new ownership “which include PIMCO, Davidson Kempner Capital Management, and Sixth Street” have  arranged $750mn in new exit financing that will repay the Debtor-In-Possession borrowings outstanding. There’s also a $125mn FILO secured facility and

.. “liquidity provided by $900 million in asset-based lending (ABL) led by Bank of America and a consortium of commercial banks. With the support of its new shareholders and funds available from the exit financing, FILO facility, and ABL facility, the company expects to be able to execute on strategic initiatives to help ensure long-term operations for Neiman Marcus“.

As you can see there a lot of comings and goings where the debt is concerned. This is important because all BDC exposure is held by Sixth Street Specialty Lending (TSLX) in three debt facilities. The fate of one of those debt facilities is straightforward – the $11.2mn 2020 DIP loan – which is about to be repaid, fees and all. That’s why TSLX carries the debt at a premium. Less clear is what happens to 2021 Term Loan, with a cost of $71.4mn. However, we expect that gets paid off as well and TSLX has valued the position very close to par. There’s a tiny 2023 Term Loan with a cost of only $0.8mn, which is likely to be written off.

We don’t know if TSLX will be signing up for a new tour of duty or whether the presence of the Sixth Street organization amongst the buyers makes that problematic. Chances are TSLX will receive its proceeds and as early as the end of the IIIQ 2020 (and may have already) and will exit Neiman with very little in the way of collateral damage. If so, that will be another feather in the cap of TSLX. By getting out whole from a credit where others have lost billions, the BDC validates its unique strategy of running towards – rather than away – from some of the worst bankruptcy prone companies in recent American history.

We will be upgrading Neiman from CCR 5 to CCR 3 if any BDC exposure remains, which we’ll learn more about when IIIQ 2020 results are published.

Online Tech Stores: Update

We are updating the BDC Credit Reporter’s file on Online Tech Stores, a wholesaler of computer printing products, as of June 30, 2020. The company went on non accrual in the IQ 2020. Given that the company was performing as planned before the pandemic – based on valuation levels anyway – we expect the reason for the non-performance was the slowdown in business activity. On the other hand, we heard from a trade report that the CEO was let go in April and a new executive appointed in May by the PE group that controls the company, so the troubles at Online Tech Stores might have been going on for some time.

In any case, the only two BDCs with exposure are publicly-traded OFS Capital (OFS), which has advanced $16.1mn and non-traded Hancock Park Corporate Income with a modest $1.0mn. Both lenders are involved in a 2023 Subordinated Loan that was first launched in 2018, shortly after Blackford Capital acquired the company. As mentioned, the debt became non-performing from the IQ 2020 – resulting in ($1.8mn) of annual investment income being impacted. The discount taken by both BDCs was (54%) and that remains almost the same as of June 2020: (56%).

OFS has not been forthcoming about what the plans are to turn the company around or what the PE group might be doing. We’re not reassured by the nature of the business at this stage, nor about the junior nature of the capital advanced by the BDCs. We downgraded the company from CCR 2 to CCR 5 in one fell swoop in the IQ 2020, and that rating still obtains.

Hopefully, OFS will let us know more about what’s happening when IIIQ 2020 results are announced in late October or early November 2020. The BDC still has plenty to lose: over ($0.50) a share in book value if that Subordinated debt gets fully written off. On the other hand, if a recovery is possible, the BDC has both an increase in fair market value and in income forthcoming. Hancock Park has a much smaller upside and downside.

Mallinckrodt Intl Finance SA: To File Chapter 11 ?

We are seeing almost daily “revelations” that Mallinckrodt PLC is preparing to file for Chapter 11 “within weeks” and is feverishly negotiating a restructuring agreement with its lenders and creditors. The latest such article is from the Wall Street Journal on September 25, 2020 in its premium Pro Bankruptcy publication. While we don’t doubt the veracity of the carefully placed rumor – this is the WSJ after all – the BDC Credit Reporter has been quoting experts warning of an imminent bankruptcy filing for the pharmaceutical giant as far back as September 2019 and as recently as February 2020.

If and when a bankruptcy occurs, it’s going to be big news given the size of the business and the billions of dollars lent to the Ireland-headquartered company. Thankfully, the BDC sector will be almost completely unimpacted. Only one BDC – publicly-traded Barings BDC (BBDC) – has any Mallinckrodt exposure. As of June 30, 2020, BBDC had advanced $3.2mn to the company in a Term Loan due 9/1/2024. The BDC had discounted the debt by (25%) already, to $2.4mn. It’s even possible that BBDC – based on what we’ve seen in other troubled large company loans – has already divested itself of the Mallinckrodt position. We’ll learn if that’s the case when IIIQ 2020 results come out. Either way, the loss is likely to be modest for BBDC. The investment income at risk is less than ($0.100mn).

We have already rated the company CCR 4 and placed the name on the Weakest Links list since May 2020. The likelihood that the company will move to CCR 5 has grown a little stronger with the WSJ report, even if these reports seem carefully timed by participants in the process seeking some advantage.

3rd Rock Gaming Holdings LLC: Debt On Non Accrual

We heard from publicly traded BDC OFS Capital (OFS) in a comment on their most recent conference call made on July 31, 2020 that software company 3rd Rock Gaming Holdings LLC has become non performing as of the IIQ 2020:

” 3rd Rock Gaming is a first lien, senior secured investment. We have rescheduled 3rd Rock Gaming’s June 30 principal on interest payment. The impact of COVID on its customers, which include gaming venues, has been substantial due to social distancing needs. The delays in reopening the venues and the timing associated with the return of significant customer traffic is unknown. The fair value as a percentage of cost was taken down to 61.5% this quarter from 81.4% last quarter”. 

In total, including a $2.5mn equity investment at cost that was written down to zero, OFS has $23.5mn in exposure to the company, now with a FMV of just $12.9mn. Some ($1.6mn) of annual investment interest income has been suspended.

We have downgraded the company from CCR 3 to CCR 5. See our update on March 14, 2020 for some background reading. It’s hard with what little we know to handicap the ultimate outcome. We’d venture to say the equity stake is probably a complete loss but the potential realized hit to the first lien debt – if any – is unknowable. For OFS, this is a relatively large position remaining, leaving material downside and potential further book value loss. However, if one is a glass half full sort of person, the income and value recovery could yet be substantial if the company can be returned to performing status. We will learn more when the BDC reports third quarter 2020 results. No date has yet been set.

California Pizza Kitchen: Reaches Agreement With Lenders

According to multiple reports, California Pizza Kitchen (“CPK”) – in Chapter 11 bankruptcy – has reached an agreement in principle in late September 2020 with its first lien lenders and unsecured creditors. That should shortly allow the restaurant chain – already making operational plans for post-bankruptcy operations – to make an exit shortly from the court’s protection.

With a bit of luck CPK should exit bankruptcy in the IVQ 2020 and we’ll get a clear picture of which of the now 6 BDC lenders involved ended up where. Total outstandings from the BDC lenders is $49.5mn in IIQ 2020, slightly higher than in the IQ 2020. (BTW, Prospect Flexible Income appears to be no longer a lender). We already know, though, that this will prove to have been a misstep for all the BDCs involved.

NPC International Inc : Bankruptcy Court Dispute

The Wall Street Journal and other publications are reporting that NPC International Inc. – the huge Pizza Hut franchisee which is in Chapter 11 – is in dispute with the franchisor in bankruptcy court. In a nutshell, Pizza Hut wants more say in who the potential buyer of the company’s assets might be and how they behave. The franchisor wants to ensure that the group who will be in charge of 1,200 restaurant locations bearing its name will follow all the rules involved with being a franchisee.

From the standpoint of the only BDC involved with NPC –Bain Capital Specialty Finance (BCSF) – this is potentially Bad News. The longer the bankruptcy endures, the more expenses pile up. Furthermore, the more Pizza Hut inserts itself into the sales process the greater the risk of the final price being received (currently pegged at $325mn) for the business being lower than originally hoped for.

The BDC Credit Reporter has the company rated CCR 5 and expects most of the $14.4mn invested in first lien and second lien debt to be written off. As of June 30, 2020, the FMV is only $3.3mn. If this drama continues, BCSF can expect to recover even less than that and a resolution may get pushed further out.

GlassPoint Solar Inc: In Liquidation

As the BDC Credit Reporter works its way through the hundreds of underperforming companies showing up in the IIQ 2020 BDC portfolios we’ve identified – a little late in the day – a liquidation. According to a trade journal GlassPoint Solar Inc. was liquidated by its owners in May 2020.

The Omani government—GlassPoint’s largest investor—issued a statement on Sunday (17 May) confirming that it liquidated its 31% stake in the company. The move effectively shuttered the Silicon Valley company that has received an estimated $130 million in funding since it was founded in 2008. The liquidation decision of GlassPoint Solar comes after the steep fall in oil and gas prices caused by the global economic slowdown in the wake of the coronavirus pandemic and its negative impact on business across the globe, especially on hydrocarbon producers, travel, and hospitality businesses,” read a statement issued by the Omani Ministry of Finance which oversees the state’s strategic investment portfolio. The statement added that some of the current investors have expressed interest in purchasing GlassPoint’s intellectual property. Other major shareholders included the national oil company Petroleum Development Oman (PDO) and Shell which has been a minority investor since 2012″.

The only BDC involved is BlackRock TCP Capital (TCPC), which is both lender and investor in Glasspoint, dating back to IQ 2027, with $7.4mn in aggregate advanced, mostly in first lien debt. As of the IIQ 2020, the debt was placed on non-accrual. The debt was discounted by more than half and the equity written to zero. Still, the BDC’s managers remain hopeful – as expressed on their conference call – that even in liquidation some value can be found because of the interesting technology the company owns. This is what was said on the call:

GlassPoint had been in the late stages of obtaining equity financing but the process was pulled as a result of COVID. Our team is working with the equity owner to find an alternative solution which may include a monetization of the business, assets in IP”.

That leaves hope for $3.2mn of the investment – as of June 2020 . The BDC Credit Reporter is a little more skeptical as we know – also from press reports – that the company had been having troubles long before Covid-19 came along and had been on the underperformers list since IIQ 2018. We expect most – if not all – the $7.4mn invested is likely to be written off. In the short term, TCPC will be missing out on about ($0.600mn) of investment income. We are maintaining our CCR 5 rating on Glasspoint until a final resolution is announced, and – belatedly – adding the company to our Bankruptcy list, found in the Data Room.

Even without knowing the final outcome, the BDC Credit Reporter points out that this was more of a project finance deal than a typical leveraged loan and in the energy services field to boot, added to the BDC’s books after the oil price drop of 2014-2016. Admittedly, the technology involved is intriguing: “The company was going to use concentrated solar arrays housed in glass greenhouses to produce steam at gigawatt scale instead of using natural gas“. That sounds very “green energy”, but also outside the normal ambit of what BDCs consider normal risk. The good news from TCPC’s perspective: even at worst the amount of capital involved was modest. We expect some final resolution in the months ahead, including a realized loss and – possibly – a further write down.

General Nutrition Inc: Company To Be Sold In Bankruptcy

A judge has cleared the acquisition of General Nutrition Holdings (including General Nutrition Inc.) out of Chapter 11 bankruptcy for $770mn by China-based Harbin Pharmaceutical Group. The transaction should close by year end 2020. The company had filed for bankruptcy in June.

For the only BDC involved – publicly traded Harvest Capital (HCAP) – this is both good news and bad news. Let’s start with the latter: the first lien lender may be paid less than full value from the sale proceeds. The available trade articles are not clear. As of June 2020, the BDC had bought $5.0mn of debt for $4.9mn and had valued its position at just $2.447mn. (We are including here a $1.0mn Debtor In Possession loan funded after bankruptcy, which we expect to be repaid in full). If that holds up, HCAP – whose debt is on non accrual – will write off close to ($2.5mn), probably in the IVQ 2020.

The good news is i) the proceeds may be higher than initially anticipated; ii) any amount recovered will flow back to the BDC, much in the need of liquidity at the moment. However, we will probably not be told the final numbers till the IVQ 2020 results are published.

For HCAP – based on valuation – this was a performing business that we only added to the underperformers in IQ 2020 at CCR 3; dropped to CCR 4 and then CCR 5 in the course of the IIQ 2020 and should be off the books by the end of 2020. HCAP has lost ($0.350mn) in annual investment income, but may gain some of that back in the future from the recovery.

The BDC Credit Reporter, playing armchair credit quarterback, would question why years into the “retail apocalypse” HCAP decided to lend to a brick and mortar seller of nutritional supplements ? To be fair, though, and thanks to the fact that GNC was a public company, we can see that adjusted EBITDA was doing well in the quarter in which HCAP began lending. A year later Adjusted EBITDA had dropped by more than half thanks to Covid-19. Chalk this one up – mostly – to bad luck. After all HCAP was willing to step in with other lenders and become the owner but was beaten out by Harbin.

Centric Brands Inc: Reorganization Plan Approved

Since May 2020 Centric Brands, Inc. has been under bankruptcy court protection. Now, though, the company is poised to exit that status by mid-October 2020 following court approval of a reorganization plan and some well placed settlement payments to disgruntled creditors. The deal seems like a debt-for-equity swap, with first lien and second lien lenders receiving equity in the restructured company while continuing as lenders in new, smaller, debt facilities.

After all conditions have been finalized, Centric Brands — whose owned brands include Zac Posen, Hudson and Swims — plans to exit Chapter 11 by the end of October with a “recapitalized” balance sheet, as well as new financing facilities, “significantly reduced” debt and interest payments, plus the full support of all of its lenders.

This is a Major BDC investment by BDC Credit Reporter’s standards: i.e. over $100mn at cost or $129.9mn in this case. There are three BDCs involved, headed by Ares Capital (ARCC), which is invested in both the debt and equity of Centric. Then there’s non-traded TCW Direct Lending VII and publicly traded Garrison Capital (GARS). The debt held by the BDCs matures in 2021 and 2023. The latter with a cost of close to $100mn is valued at roughly a (15%) discount and is likely to be partly written off when the company exits bankruptcy. That will result in about ($15mn) in realized losses along with nearly ($25mn) ARCC holds in the equity of the insolvent entity, or a total loss of about ($40mn). The 2021 debt is Debtor In Possession financing and is likely to be repaid in full. What we don’t know is if the lender-now-owners will have to inject incremental new capital or not. More details to follow.

This will be a significant – but not overwhelming loss, principally for ARCC, and to a much lesser degree for the other two. On the other hand, it looks like all the players will live to fight another day and – potentially – recoup proceeds lost from an eventual sale of the restructured Centric Brands another day.

We will be upgrading the company from CCR 5 to CCR 3 or CCR 4 when the exit from bankruptcy occurs. As we’ve written in earlier articles about Centric, much will depend on how generous the new lender owners have been in structuring the going forward balance sheet. The company continues to operate in an industry – lifestyle brands sold mostly at retail – that continues to be pandemic impacted. Furthermore, some debt for equity swaps in the past have been done with less than generous terms, rapidly returning the business to the bankruptcy court. We hope Centric won’t be a “Chapter 22” story.

Roli, Ltd: IIQ 2020 Update

On August 6, 2020, TriplePoint Venture Growth (TPVG) offered up an update on troubled portfolio company Roli, Ltd on its IIQ 2020 conference call:

We have one company rated 4 on our watch list, Roli, a music technology company. During the quarter, we further marked down our loans on Roli, reflecting the impact of COVID on some of our recovery assumptions associated with the ongoing turnaround of the company. Here in Q3, the company has made good progress, and we expect to see some favorable trends over the next couple of quarters“.

The BDC Reporter wrote the following in its review of TPVG’s Conference Call where Roli was discussed: “TPVG has advanced $29mn to Roli Ltd, which has been on non accrual since IIQ 2019. The current value is just $15.0mn. By the way, just before Roli became non performing, the debt and equity outstanding was valued almost at par” The company is rated CCR 5 and we expect the ultimate outcome is likely to be some sort of realized loss, but concede that – except for these occasional updates from the lender – we have little inside information about the company’s fortunes.

School Specialty, Inc. : Restructured

On September 15, 2020 we heard from School Specialty, Inc. that essentially all its assets had been acquired by a group led by TCW Asset Management and a couple of other partners. The company will now operate as School Specialty, LLC. The company’s Chief Operating Officer has been named Chief Executive Officer.

We’ve been following the School Specialty story for some time and divine – given that the company’s lenders included non-traded BDC TWC Direct Lending – that this is a restructuring, rather than a sale to a third party. The restructuring has been on the cards for some time, as discussed in our earlier article published on April 13,2020.

What we don’t know, though, is how the company was restructured and what the implications will be for different creditors, including TCW Direct Lending. As of the IIQ 2020, the original debt was trading at a discount of only (13%) and $8mn in new debt advanced more recently to tide the business over was carried at par. This suggests the BDC does not expect to take any great write-offs. However, we won’t know anything tangible till when the IIIQ 2020 TCW Direct Lending results are published, when we expect to work out the impact on income and FMV.

The BDC Credit Reporter had rated the company CCR 4, but is now upgrading the rating to CCR 3. We can’t in good conscience place the company back on “performing normally” status (CCR 2) till we see how generous the capital restructure was, and we learn more about the outlook for the school supplies business. We can’t even be sure whether the BDC will be writing off any interest unpaid during a long forbearance period. We believe the odds are high that some income – at the very least – will have been lost.

School Specialty was having trouble even before Covid-19 came along and made matters much worse. Given that TCW now seems to be both lender and investor, this company could be in the database – if not the underperformers list – for many more years to come, rather than being paid off in 2020 as previously anticipated. From what little we know, though, the damage on is a large position for the BDC appears to be modest.

Lonestar Resources: Restructuring Agreed

According to Debtwire, E&P company Lonestar Resources has agreed upon a restructuring agreement between the various creditors of the company in which the unsecured debt holders will gain “the bulk” of the equity going forward. The WSJ says $390mn in debt and preferred will be written off in the arrangement. The BDC Credit Reporter last wrote about Lonestar Resources on July 6, 2020 when the company missed an interest payment.

The only BDC with exposure remains FS Energy & Power, with $23.2mn invested in the junior debt, which was valued at $2.4mn as of June 2020. The debt was still accruing income at that point. We expect the debt is now on non-accrual and will be converted into non-income producing equity in return for a small stake. Some ($2.5mn) of annual investment income will be lost. It’s hard to estimate what the final value of the capital will be, but is likely to be close to the June number, which means FS Energy will b e booking a ($20mn) realized loss.

FS Energy has been involved with Lonestar since 2014, according to Advantage Data. Values have fluctuated all over the place all over those six years but the latest drop in value began pre-Covid in the IIIQ 2019 and has just gotten worse and worse with every quarter. If nothing else this restructuring creates some hope that the business can continue operating and – at some time – the BDC might recoup some of its capital. That day, though, could be many years away.

TooJay’s Management LLC: Exits Chapter 11

Restaurant chain TooJay’s Management LLC is out of bankruptcy protection after seeking Chapter 11 in April in the middle of the pandemic. The company used the bankruptcy process to relinquish several leases and ends up with 21 locations from 30. All are now operating with dine-in capabilities, as well as takeout and delivery. As part of the restructuring, TooJay’s has shed all its debt.

The new owner is Monroe Capital, whose various funds including publicly traded the publicly traded BDC (MRCC) were the prior lenders to the company. As a result, we expect that MRCC’s $4.1mn in 2022 Term debt and Revolver has been converted to equity. No word yet if any new financing will be provided. The BDC continued to carry the debt as performing through the IIQ 2020 because of the existence of plenty of collateral. Should that debt be converted into common stock as the news suggests, the likely loss of investment income will be just over ($0.25mn) a year. The BDC had written down the debt by only (5%-7%) so no material loss in value is expected going forward now that the company’s near term future is known.

Presumably this means MRCC and its parent will be tied to the restaurant operator for some time. If a successful exit ever occurs, MRCC might make back some or all the write-down associated with the restructuring and any income that might be forgone going forward.

We are upgrading TooJay’s from CCR 5 to CCR 3, reflecting the under-leveraged nature of the post-bankruptcy structure but keeping in mind that the business remains in a thin margin, pandemic-sensitive sector. There are more details to learn but at first approach MRCC – and any other Monroe funds involved – appear to have fared well in what could have a liquidation situation.

Iqor US, Inc.: Files Chapter 11

On September 10, 2020 IQor Holdings and each of its subsidiaries (including Iqor US) filed for voluntary Chapter 11 protection in Texas. The company has a restructuring plan in place and above-average support in situations of this kind from its creditors. Furthermore, debtor in possession facilities have been negotiated with a value of $130mn. No wonder the company is optimistic about being in and out of bankruptcy in 45 days.

There is only one BDC with exposure to the company: non-traded Sierra Income with $20.6mn advanced at cost in two loans. As of June 2020, the smallest of those loans was already on non accrual and the total FMV of debt outstanding was $12.7mn. Given that a restructuring has been in the cards for some time we imagine the latest value may be close to where the debt will be marked when the restructuring occurs in the next few weeks. As a result, by year’s end we should see Sierra book a realized loss of ($8mn) or more. We’re not certain how the balance sheet will be restructured but a loss of income – given that most of the debt was still current through June – is likely as well.

This is the second BDC-financed company bankruptcy in September to date. As is the case in most bankruptcies in recent months a restructuring agreement was in place when the filing occurs. This propensity has resulted in more companies going out than coming out of court protection lately. As for the reason for Iqor ending up in this situation ? As the press release itself discloses, an acquisition gone wrong is the culprit rather than the usual suspect: Covid-19.

Cenveo Corp: Sells Businesses

Sometimes the BDC Credit Reporter has to read the tea leaves and come to some conclusions without all the salient facts because we’re dealing with private companies and disclosure is limited. This is the situation with BDC-portfolio company Cenveo Corporation, a global printing solutions company. We last wrote about Cenveo in May when a plant was closed, with Covid-19 blamed. At the time we downgraded the company to CCR 4 from CCR 3. Now we hear that in August Cenveo sold two printing plants and – on September 10 – a trade publication indicatesCenveo Publisher Services and Cenveo Learning were sold to a third party.

This seems to be a pattern of business divestment by Cenveo that might signal an improvement in its credit standing. As of June 2020, Main Street Capital (MAIN) and non-traded sister BDC HMS Capital valued the $9.7mn debt of Cenveo at a modest discount to book. The $9.5mn equity in the company – apparently received a few years ago in a restructuring – is discounted by (50%). For the lenders, Cenveo has been a troubled borrower/investment since inception in 2015. A look at the Advantage Data valuation table shows loan – and later – equity – values rising and dropping and rising and dropping again over the past 5 years.

We are presuming – based on the evidence above – that the asset sales will help the business. That’s a leap of faith and readers should make their own minds up. We are upgrading the company from CCR 4 to CCR 3. However, the debt on the books of the BDCs is not due till 2023 so much could yet happen for good or ill.

We will revert back after the IIIQ 2020 results are published by the BDCs involved to see if our presumption has proved correct.

Energy Alloys, LLC: Files Chapter 11

According to multiple news reports, Energy Alloys, LLC filed for Chapter 11 on September 9, 2020. The company bills itself as “the only 100% oil and gas focused supplier of specialty metals to the global oilfield industry“, so you can imagine how the business ended up in Chapter 11. Energy Alloys has operations both in North America and around the world, but in its bankruptcy filing claimed just $10mn- $50mn in assets and $100mn-$500mn in liabilities. Curiously GSO Blackstone – the credit arm of Blackstone- has been the owner since 2011.

What this all means for the only BDC lender to the company – Sixth Street Specialty Lending (TSLX) – is not clear. As of June 30, 2020, the BDC had $18.3mn lent at cost in an asset-based Term Loan to the company, which was valued at par. TSLX had made the following disclosure in an earnings press release dated July 23, 2020: “As a result of the challenging commodity price environment, Energy Alloys, our second largest energy exposure at quarter end, is pursuing an out-of-court wind-down of the business through a liquidation of its assets. Post quarter end, we received a paydown on half of our principal position on Energy Alloys and expect to be fully repaid by Q4“.

No mention there of a bankruptcy filing which leads is to believe conditions may have worsened since July. Or – possibly – this was all part of the unwinding plan for the troubled business. Up in the air is whether TSLX will receive that last $9mn or so in outstandings in the IVQ 2020 or not. This might impact both income – which was still being accrued through the IIQ 2020 – and the expected repayment in full. We should learn more when TSLX reports IIIQ 2020 results in October, but a final settling of accounts may take till the end of the year or longer if the company lingers in bankruptcy.

As is often the case TSLX zigged when most other lenders would have zagged, booking the debt to Energy Alloys as recently as III 2019, but before the oil price meltdown and everything that has followed. The BDC points to its highly collateralized status as the reason for its comfort, carrying its position at par through its short history. The ultimate outcome of this transaction will tell us whether the uber confidence TSLX demonstrates in these difficult credit situations are justified. However, even if a loss does get booked at the final hurdle, the amount is modest by comparison with the BDC’s billion dollar net worth and should not materially impact future results.

We are downgrading the company from CCR 4 to CCR 5. Energy Alloys was on our Weakest Links list previously.

J.C. Penney: Non Binding Purchase Agreement Finalized

Despite what you may have heard in the headlines, J.C. Penney has not yet been purchased by mall owners Simon Property Group and Brookfield Property Partners. The reality is more complicated and more interesting. The parties have only agreed on a non-binding letter of intention to acquire certain assets of the bankrupt retailer and are far from being in charge as yet. Furthermore, the existing first lien lenders will become owners of two new REITs that will own stores and distribution centers respectively. The lenders would also receive $500mn in “take back” debt and new financing is being arranged as well. With a bit of luck, a very restructured J.C. Penney – in name – would be back and running out of bankruptcy by year’s end. (All the above learned from an excellent synopsis by WYCO Researcher on Seeking Alpha).

This is important news for the only BDC with exposure to Penney’s: Sixth Street Specialty Lending (TSLX). The picture here is complex as well. The current Debtor In Possession (DIP) financing, with a cost of $5.781mn and yielding 13.0% is most likely to get repaid in full. This is what TSLX anticipates, given the premium valuation at June 2020. More difficult to suss out is what the value will be of the two first lien debt positions owned – due in 2023 – and both already on non accrual. We expect TSLX will gain a small non income producing equity stake in the two REITs and some performing debt paper. From an income standpoint that can’t be any worse than the $20.0mn at cost in non-DIP debt held which is being carried as non performing. From a valuation standpoint it’s impossible to tell – even for TSLX at this stage – whether the new arrangement is more valuable than the $8.7mn in FMV as of June 2020.

Most of all, TSLX will probably be glad to have the Penney situation resolved – even if only for a while. This looks like one of the rare instances where the crafty BDC – whose non-DIP debt was bought at a discount in mid-2019 – will not come out of a bankruptcy situation smelling like roses. TSLX has admitted as much in its last 10-Q: “Given expectations for less-than-par recoveries, the Company has applied the regularly scheduled cash interest payments it received to the amortized cost of these positions, all of which were acquired at prices less than par“. Based on the latest values, TSLX could be booking a realized loss of anywhere from ($6mn-$9mn) in the IVQ 2020. Painful but manageable for a BDC with a net book value in excess of a billion dollars.

Boardriders Inc.: Restructured

We hear from S&P that Boardriders Inc. has recently been significantly restructured by its sponsor Oaktree and with the support of some of its lenders and other parties:

“S&P noted that Boardrider recently issued $155 million of new money debt, including:

  • $65 million contributed by Boardriders’ financial sponsor owner, Oaktree, consisting of a $45 million initial term loan and a $20 million delayed draw term loan (currently undrawn);
  • $45 million contributed by other existing lenders; and
  • $45 million via a facility backed by a European government.

The transaction provides needed liquidity and fund an operational turnaround

S&P considers the new debt “distressed” and has lowered its rating to SD or Selective Default, but may raise it back to CCC shortly. (This is part of the complex mechanics of rating groups). S&P is not optimistic about the medium term outlook given “[Boardriders] still-unsustainable debt leverage, high debt service commitments, and our view that the company will likely have difficulty generating consistently positive free cash flow before its next significant debt maturity in 2023].

Great Elm Corporation (GECC) remains the only BDC with exposure. What we don’t know is whether the BDC participated in the restructuring and advanced new monies or did not and became structurally subordinated to the new debt in what sounds like a controversial move by the principals. We are retaining the CCR 4 rating on the company that dates back to May and are not choosing to add Boardriders to the Weakest Links list as all the new cash will temporarily help liquidity and ensure debt service. Nonetheless, the outlook for GECC – one way or another – remains highly uncertain. The BDC has discounted its 2024 Term Loan position by (28%) at the end of June, but current market indicators shown by Advantage Data suggest – not surprisingly – that the discount might be (40%).

We’ll be checking the IIIQ 2020 GECC results to learn more about how the BDC acted when asked for more funds and what that has done to total exposure and valuation. In any case, this is a credit whose tribulations are likely to continue for some time to come so – unless GECC sells out its position – expect to hear more. Attached, though, are our prior two articles.

Accent Food Services: IIQ 2020 Update

We’ve learned a little more – sufficient to put pen to paper for an update – regarding Accent Food Services. This vending machine company has been on non accrual since IVQ 2019, and performance appears to be deteriorating. Everything we know comes from Fidus Investment (FDUS), the only BDC lender to the Texas-based company and which recently published its IIQ 2020 valuation and commented briefly on an ensuing conference call. The BDC has written down its second lien and equity stake – with a cost of $35.3mn to $16.1mn. Two quarters ago when the debt first became non performing, the FMV was twice as high. In the most recent quarter the FMV dropped ($9.6)mn.

As to what is happening or not happening at the company, details are scarce. We know that management is implementing operational improvements, a process that began before the pandemic. We imagine business conditions – with so many companies closed or working at part capacity – has only compounded Accent’s problems. This is what FDUS said: “And quite frankly, the company has been impacted by the shelter-in-place orders and also its geographic locations, in particular, its biggest locations in Texas“.

We know too little – even the identity of the first lien lender and its payment status – so we can’t estimate whether Accent will pull out of this valuation dive or not. Given the second lien status, though, a complete write-off is possible. That’s why lenders like FDUS get paid a 10.0% yield: to take those junior capital risks. This is a material position for the BDC, representing over 5% of the entire portfolio at cost and about 4% of its pre-default investment income. It’s too early to tell, though, if this is going to be a significant credit setback or just a bump along the way. FDUS speaks highly of the business and the management but that’s no guarantee that all will end well.

Accent, which FDUS added to its books in 2016, has been underperforming since IIQ 2017 and was rated CCR 3 until – as mentioned – it went on non accrual at the end of 2019. We are retaining our rating of CCR 5 and an outlook of Significant Loss until we hear otherwise.