Dominion Diagnostics, LLC: Downgraded From CCR 3 to CCR 5

Added As Important Underperformer

April 2, 2025

We have a new Important Underperformer, which happens to be in the Healthcare sector, and held by only one BDC - Oaktree Specialty Lending (OCSL). Unfortunately, this is one of those situations where the company was on our Watch List - rated 3 on our 5 point scale since 2022 - but needed a two notch downgrade in the IVQ 2024. That's when OCSL - a lender since 2010 - placed 3 loans due in August 2025 on non-accrual. Moreover, a relatively mild discount of the debt - (18%) as of the IIIQ 2024 was increased to (72%). Here's what OCSL said on its most recent conference call:

The new addition to the non-accrual list this quarter is Dominion Diagnostics, a clinical toxicology testing company in which we hold a first lien term loan and a revolver. Although the company continued to pay cash interest in the December quarter and has struggled to grow EBITDA and faces liquidity challenges looking ahead, so we felt it was prudent to place it on non-accrual.We are working closely with management to address these matters.

Some sort of "realization event" seems likely - probably a debt-for-equity swap - seems likely in 2025. Given the already large discount applied by OCSL we're assuming a potential permanent loss in the 75%-100% range. The BDC is forgoing ($1.8mn) of annual interest income and may not recover much - or any - after a restructuring. Most of the damage has already occurred for OCSL and the value of the investment - currently $5.4mn on a cost of $34mn - might fall enough in the IQ 2025 for Dominion to not even meet our $5mn materiality limit.

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The addition of Dominion brings the total number of Important Underperformers to 123. Out of curiosity, we used the search and sort capabilities inherent in the database - which all our Premium subscribers have access to as well - and found that there are 18 Healthcare companies included. Dominion's FMV ranks the company lowest by FMV. This is not a very important addition to the ranks of Important Underperformers - even for OCSL. What is disappointing - once again - is the sudden deterioration in the valuation which only leaves us - and anyone using the quarterly BDC valuations as a measure of credit performance - concerned about future shoe drops.