“Capstone Nutrition is a pure-play, turnkey developer and manufacturer of high-quality nutrition and OTC products that can take your product from concept to reality with attention to detail every step of the way. We are a one-stop-shop for innovators in nutrition, bringing to bear the resources of Cornerstone Research and Development. Since 1992, Capstone companies have been conceiving, developing, producing, and packaging a wide range of capsule, tablet, powder and OTC products for a variety of customers in the United States and internationally.” From the Website.
BDC Credit Reporter View
The Capstone Nutrition story has been a remarkable tale , packed into just two and a half years. The contract manufacturer of nutritional products was established in 2014. Initially Medley Capital and its sister non-traded BDC Sierra Income provided $35mn in Senior debt and a small, minority equity position for a cost of $700,000. Till the IIIQ of 2015, the Company and the investments performed as expected. However, the Company’s financial performance deteriorated in the second half of 2015 as a major customer (MusclePharm) purchased less than expected after the Company had expanded manufacturing capacity in anticipation of more activity. Moreover, a nrew CEO was brought in mid-way through 2015. From the IVQ 2015 Capstone went on Watch List as the equity was written down to zero and the debt was written down by 26%. In the IQ of 2016, the lenders-led by Medley Capital-bought the Company, and added additional capital to help the Company with cash flow shortfalls caused by the ever worsening dispute with MusclePharm. However, the debt went on non-accrual from the IQ 2016, even as aggregate BDC exposure doubled from $45mn to $97mn, almost all in the form of Senior loans. Under yet a new CEO, the BDC-owned Company has consolidated manufacturing at its Utah HQ (after letting 125 employees go at another location), sued MusclePharm for $65mn in unpaid trade payables and other charges, and added new customers. MusclePharm counter-sued in June, but has just agreed to a settlement on November 8th, but the amount is not known. As a result, the debt oustanding, which was written down by 31%-38% as of June 2016 was see an increase in its value when the BDCs involved report IIIQ 2016 values. The settlement notwithstanding, the debt has been non-performing for 2 quarters already. From the availabl;e information, there is no reasonable certainty the newly recapitalized and re-focused Company will be successful in the long run. However, BDC exposure-which now includes Business Development Corporation of America-has greatly increased. We continue to rate Capstone Nutrition as Non-Performing with a 5 Credit Rating. Because of the settlement, the valuation trend is up. However, this story is far from over…