AAC Holdings, Inc.

About

“American Addiction Centers, Inc., together with its subsidiaries, operates substance abuse treatment facilities for individuals with drug and alcohol addiction in the United States. The company also offers treatment services for men and women struggling with behavioral health disorders, including disorders associated with obesity. It operates six substance abuse treatment facilities located in Texas, California, Florida, and Nevada; and an obesity-related behavioral treatment facility in Tennessee. The company was incorporated in 2007 and is headquartered in Brentwood, Tennessee. American Addiction Centers, Inc. operates as a subsidiary of AAC Holdings, Inc”.

Corporate Highlights

4/9/2019:  NYSE may delist Company’s shares due to non filing of financial statements.

3/29/2019: Company revises prior financial statements.

3/13/2019:  Company reports IVQ 2018 results, but delays holding its Conference Call.

12/7/2018: Company announces cost reduction program.

7/29/2018: Highlights from IIQ 2018 Results: Adjusted EBITDA was $14.8 million or 70% of revenue and adjusted earnings per diluted share was $0.09 for the second quarter of 2018.

“We have been improving our infrastructure in getting right talent on board to launch the next phase of growth. These initiatives led in part to approximately $1.1 million of additional salaries and professional fees that negatively impacted our adjusted EBITDA in the second quarter that are not expected to recur in the second half of 2018”.

3/1/2018: AAC acquired AdCare, Inc. and its subsidiaries. AdCare offers treatment for drug and alcohol addiction and includes, among other things, a 114-bed hospital and 5 outpatient centers in Massachusetts, as well as a 59-bed residential inpatient treatment center and 2 outpatient centers in Rhode Island. AdCare was purchased for total consideration of $85.0 million, subject to adjustments.

BDC Credit Reporter View

6/8/2019: We’ve read the latest AAC results and heard an update from CSWC. There’s a major disconnect between ourselves, S&P and the Company management and its lenders. AAC has had to get waiver defaults to remain operating but has another high hurdle of Adjusted EBITDA to hit in the IIQ ($11mn versus -$6mn achieved in the IQ). Maybe the lenders involved are taking comfort from the underlying real estate. Still AAC has $342mn in debt to carry and is making neither a profit nor positive EBITDA. The stock price has dropped from over $10 to under $1 a share. For AAC to avoid restructuring or bankruptcy one of the great turnarounds of the year will have to occur.

4/11/2019: Notwithstanding the cost reduction program initiated by AAC Holdings, the chances of a restructuring and/or bankruptcy seema very high. We have a Corporate Credit Rating of 4 and would not be surprised if some sort of credit action occurred in the next few months. The latest S&P downgrade is not encouraging either. The 4 BDCs with $59mn in exposure are all in the senior secured 2020 and 2023 debt. However, with the Company selling off potential real estate assets to stave off bankruptcy and taking on new senior debt, odds of full recovery are low, and getting lower. Confirming our premonition is a stock price at $2.0 a share, not far off its 52 week low.

10/25/2018: NMFC has been a senior lender to this public company since 2015, providing a term debt maturing in 2010. From IIQ 2017, three additional BDCs have been providing senior term debt as well, but in a facility that matures in 2023. Despite many troubles in the industry at large, the exposure has been valued at or close to par throughout. Nonetheless- given that the Company is public, we have access to financial statements which show the Company is making losses, and is highly indebted with debt to Adjusted EBITDA well over 5x. The stock price has dropped from nearly $45 a share in 2015, to under $7.0 currently. Although pricing on the senior debt is relatively low by leveraged loan standards (LIBOR + 675% on the 2023 Term Loan), this is a borrower which deserves keeping an eye on from a credit perspective, and due to the fact that BDC exposure totals over $60mn.

Highlights

6/11/2019: Common stock (AAC) hits all-time low of $0.71.

6/3/2019: CSWC discussed the Company on its IQ 2019 year end Conference Call.

Our upper middle market portfolio consisted of 10 companies with an average hold size of $8.5 million, a weighted average EBITDA of $66.5 million, a weighted average yield of 9.7% and a leverage ratio through our security of 4.8x, which was up from 3.8x in the prior quarter, driven almost solely by the underperformance of the American Addiction, which increased its debt-to-EBITDA leverage ratio significantly quarter-over-quarter. Excluding this company’s underperformance, the leverage ratio through our security for the upper middle market portfolio would have been flat to last quarter at 3.8x. Despite its underperformance, we continue to feel reasonably confident about our first lien position in the company due to the value of its National Substance Abuse Treatment franchise, management operational efficiency initiatives, the tremendous demand for drug addiction treatment in the U.S. and the company’s large real estate portfolio associated with its treatment facilities.

March 15, 2019: S&P downgraded the Company’s corporate rating to CCC from B-, with a negative outlook.

According to the rating agency, AAC faces significant operational uncertainties as the company works to improve its census. Another main constraint for AAC was weak free cash flow, which could be further impacted by litigation risk.S&P Global Ratings said the negative outlook reflects the potential for a downgrade if the company restructures its debt or defaults over the next 12 months.

March 13, 2019: The Company has arranged a new Term Loan.

The Company has closed a $30 million incremental term loan with its existing lenders. In addition, the Company amended its existing secured credit facility to, among other items, provide increased flexibility with respect to certain financial covenants.