Ivanti Software Inc.: Downgraded To CCR 4

Added To Important Underperformers

February 14, 2025

Since 2022 Ivanti Software Inc. has been on our Watch List - rated 3 on our 5 point scale - neither performing normally nor in serious trouble. Unfortunately, that may be about to change, which is bad news for the company and the 11 (!) BDCs - public and private - invested in the company's first lien and second lien debt to the tune of $105mn at cost.

The last we looked - early in 2024 - Ivanti's valuations were improving, so we turned to other matters, leaving its CCR 3 rating alone. In the interim - and as a reminder that all 400+ underperformers in our database need regular tending - the mood has darkened. The discounts on the value of the debt nearly tripled in the IIQ 2024 and were a little worse in the IIIQ 2024. None of the BDCs mentioned have yet reported in the IVQ 2024. We don't know if the discount will increase further, but we have reason to believe they probably should.

We've just heard that Fitch has placed - in a note released February 12, 2025 - "all the ratings on Ivanti Software" on "Credit Watch Negative". (We maintain a long list of Google searches for almost every under-performing company and receive a daily email with the latest news. Most of the results are not pertinent, but this one is).

There is bad news and less bad news in the Fitch report. Let's start with the former:

The RWN [Rating Watch Negative] reflects liquidity concerns, given the maturity of the company's RCF [Revolving Credit Facility] in Dec. 2025. Ivanti has limited cash and expected FCF [Free Cash Flow] in 2025 to cover the RCF balance and first lien term loan amortization. Ivanti's leverage and interest coverage currently exceed negative sensitivities.

The less bad news is that Fitch seems to believe Ivanti's business is strong enough to bounce back if the Revolver can be re-financed. Left alone - for the moment - is the Fitch BB- rating on the first lien debt and the CCC+ on the second lien. The BDCs are already discounting the second lien debt by a third.

The public BDCs involved are OFS Capital (OFS), Palmer Square Capital (PSBD), Portman Ridge (PTMN), Barings BDC (BBDC) and Logan Ridge Finance (LRFC). There are 6 non-traded BDCs involved as well.

We are most concerned about the fate of the second lien debt, in which PSBD, PTMN, BBDC and LRFC are involved. If things don't go well a default could occur or even a restructuring, which might result in the sale of the business or the now familiar debt-for-equity swap. After all, and as in most of those situations where lender becomes owner, there is nothing fundamentally wrong with Ivanti's business except too much leverage. According to Fitch "Ivanti's gross leverage [may] have exceeded 7x in 2024 due to reduced EBITDA and increased RCF utilization".

We are downgrading the company from CCR 3 to CCR 4. We don't so lightly because we've found that companies that are moved to a 4 or 5 rating on our 5 point scale very rarely make a return trip to a the relative safety of a 3 or higher designation without enduring some sort of "realization event", which typically involves a loss of capital for the BDCs involved. This situation might be one of the exceptions - we're clearly influenced by Fitch's optimism - but we prefer to take a conservative stance.

The other good news for the BDCs involved is that no one was greedy and the individual BDC exposures booked are what we consider non-material and unlikely to cause much damage even if a worst case scenario plays out. For example, BBDC has only $6mn invested at par in the second lien - which is paying SOFR + 725 basis points - and was already discounted (38%) in the IIIQ 2024. We've updated the Company File with each public BDC's exposure, only to have to change the numbers when the IVQ 2024 numbers roll in. We are projecting a range of possible loss of 0%-25% for the first lien debt and 75%-100% for second lien. (We should say that second lien debt has been acting much like equity when things go wrong of late in highly leveraged companies and often gets written off for little or no compensation).

We are also adding Ivanti to our Important Underperformers list, which will bring that total of the most troubled borrowers from 118 to 119.

We feel compelled to point out that 119 seriously troubled companies in a universe of 6,000-7,000 BDC-financed businesses is not that many. Even the dollars involved - $8bn at cost and $5bn at fair market value (i.e. with $3bn already written off BDC balance sheets) is modest in relation to the $388bn at cost and FMV of all BDC investments - as reported by Advantage Data/Solve. (Thanks to marked up equity investments, total BDC investment value are equal to their cost - which is a whole other story).

We concede that we may not have (yet) identified all Important Underperformers and some of the investments in the Solve numbers relate to BDCs involved only in equity investing and not in our coverage universe). Nonetheless, at a time when there is a lot of hand wringing about the relatively elevated level of bankruptcies and defaults in the leveraged loan market, the BDC data is relatively tame.

Even more importantly - and we're able to quantify this - the number of new Important Underperformers turning up in BDC portfolios is quite low.(Ivanti is an exception to this rule). More anecdotally, we also get the impression that the speed with which companies go from getting into trouble to being restructured and back to paying interest (typically rated rated 2 or 3) is accelerating. We put this down to how most failing companies get restructured in debt for equity swaps, as the lenders take control. The faster these restructurings can be fashioned the better the odds of the companies survival.

Despite all the negative talk in the financial press about how lenders are lumbered with weak or no covenants to protect their interests, they still have the tools to force these restructurings to happen, and in short order. Pluralsight was one huge example, but there have been many others in every segment of the market. Just look at "Control" and "Affiliate" investments in any BDC's portfolio - designations they are required to show - and most of the companies listed will have found their way there due to lenders becoming owners.

All of this to say - for anyone interested - is that BDC credit conditions continue a multi-year trend of being favorable. The volume of companies and assets becoming non-performing and the realized losses that (almost) inevitably follow are what lenders - and their investors - should expect for lending to highly leveraged, non-investment grade companies from every corner of the economy - and thus vulnerable to all the ructions that occur in a dynamic capitalist economy. Some BDCs have even argued - in a form of "talking their book" - that credit results are above their historical average. In general terms, we'd say that's true.

There are two "howevers" , though, to mention. First, even in the sunniest times some individual BDCs are capable of getting rained on and we can name 12 BDCs in our 46 BDC universe who have been poured on in recent quarters. That's why checking out the credit status of your favorite BDC is worthwhile and what we're here to help you assess.

The second "however" is that the credit picture - like the weather - can change very quickly, especially for companies leveraged to the hilt - as they all are in this hyper-efficient environment. In 2008, conditions went from fair to foul - as we remember well even without the benefit of publishing the BDC Credit Reporter - in one to two quarters.

We've been asked "when will we know that credit conditions are worsening across the board?". This is the question credit investors seem to ask themselves all the time to be ready to be among the first to exit the building. (Whether that's the right investment strategy is not for us to say, but you'll see mini-examples of this rush to the exits in the here and now every time a particular BDC books a larger than expected number of troubled loans).

There is a simple answer. Look out for a material increase - 10%-20% - in the number of Important Underperformers and Watch List companies in the BDC Credit Reporter. Yes, we know that we now also may seem guilty of "talking our book", but we have a reason for this advice beyond acquiring new subscribers.

The BDC sector is at the "tip of the spear" of the American economy - not the huge investment grade conglomerates which are the fodder of Bloomberg et.al. - and most of whom will tell you all is well as long as they can. It is among these smaller private and public businesses - most of which are not household names and do not have a PR department - that credit cracks will first begin to show. It is the BDCs - who receive monthly financial statements from these companies and are in constant dialogue with management - who will be alerted to the first signs of trouble. It is the BDCs - supported by a small army of "independent" valuation firms, who will be required to de-value their investments at the end of every quarter, lighting a beacon for those of us watching. There are a few BDCs who don't seem to play fair where valuations are concerned but most - even if reluctantly - can be counted on to report the financial deterioration their companies might be experiencing.

A Great Recession, or even a standard recession, will look like a tsunami - one long, continuous wave that looks small at first - not much different from every day waves - but grows ever larger and when it hits continues to push further and further inland. That's because the early corporate casualties begin to affect companies that otherwise might have gone on as usual and that eventually feeds into everybody else - including the famous U.S. consumer on whose backs 70% of the American economy is carried.

We hope all of us will be spared any form of credit tsunami, but that's unlikely if history is any guide. As you can imagine, the current re-making the global world order has raised the odds that the credit wheels might come off. In that regard, we are the most worried we've been since we heard word of a strange, deadly flu taking hold in China. However, these are the earliest days and although a dozen or more BDC managers have already been interrogated by anxious analysts in the last few days on their conference calls, none had anything much to report. We will remain vigilant and seek to alert our readers to any change on the credit horizon.