24 Hour Fitness Worldwide: Downgraded by Moody’s

On November 12, 2019, Moody’s downgraded 24 Hour Fitness Worldwide,Inc. to a corporate family rating of Caa1 from B2. There were a series of downgrades as well of individual debt tranches on the company’s balance sheet, from secured to unsecured debt and involving $1.5bn of debt securities. We won’t get into too much detail about the reasons for the downgrade, which relate to business under-performance. This sentence from the Moody’s report speaks volumes by itself: “The Caa1 CFR reflects Moody’s forecasts that 24 Hour Fitness’ EBITDA will decline further resulting in funded debt/EBITDA (excluding operating leases) peaking at 8.2x while EBITA/interest expense (excluding operating leases) will erode to 0.3x“.

That adds a new company to the BDC Credit Reporter’s list of under-performing companies. However, exposure is thankfully limited to one BDC – Barings BDC (BBDC) with a $9.5mn at cost in the company’s 2025 debt. That was booked in the IIIQ 2018 before these current weaknesses became apparent (BBDC may have paid a premium for a loan that pays LIBOR + 350 bps) and was still valued at only a (4%) discount to cost as of September 2019.

This same debt appears to be currently trading – after the downgrade and after an unproductive investor meeting – at a substantial discount. We have rated 24 Hour Fitness right off the bat CCR 4 (Worry List) from CCR 2 (Performing). To be direct, given the level of debt versus EBITDA and the nature of the business, which is unlikely to see a surge in growth at this stage in its development, we expect to see a Chapter 11 or major restructuring occur. The company has no immediate liquidity pressure and no debt due till 2022, so there is unlikely to be a sudden rush to the courthouse steps. On the other hand, an operational improvement sufficient to change the outlook is highly unlikely. We imagine that we’ll be revistting this subject in the months ahead.

Bumble Bee Foods: Files Chapter 11

As long expected, Bumble Bee Foods filed for Chapter 11 on November 21, 2019. The BDC Credit Reporter had first reported on the tuna manufacturer’s business and legal woes on July 22, 2019, when we placed Bumble Bee on our CCR 4 (Worry List). On two subsequent occasions we’ve mentioned the prospect of bankruptcy on August 10 and – most recently – on November 19, 2019.

With the filing, we’ve learned that the company has assets and liabilities of as much as $1 billion each, according to court papers. Furthermore “It has arranged an $80 million term loan from its current lenders and a $200 million revolving credit facility to keep operating while in bankruptcy, the documents showed“.

Bumble Bee is in litigation with the Department of Justice and has been pleading poverty to reduce fines owed, according to news reports: “The company flagged its financial distress at the time of sentencing, arguing the $81.5 million fine initially levied could push it into insolvency. The U.S. Department of Justice agreed, cutting the amount to $25 million and giving Bumble Bee an installment plan over several years that required no more than $2 million upfront“. Now that’s a deal.

Most importantly to the company’s lenders, Taiwan-based FCF Fishery has offered $925mn for the company as a “stalking horse” bidder. We don’t have a complete picture of Bumble Bee’s finances, and a full sales process will be required to ensure creditors get top dollar, but it’s an encouraging sign for the two BDCs (Apollo Investment or AINV and TCW Direct Lending) with $48mn lent to the company via its 2023 Term loan. That debt was valued at only a (7%) discount as of September 2019 by AINV. That’s the discount which the traded debt continues to be valued at when we just checked Advantage Data’s records. The FCF proposal “calls for paying down part of Bumble Bee’s existing first-lien debt“, according to the Wall Street Journal. In fact, we might see the lenders getting back 100 cents on the dollar once negotiations are complete. In either case, if the current valuation for Bumble Bee holds and other legal issues are resolved the lenders – notwithstanding this bankruptcy – might dodge a major credit bullet.

KLO Acquisition: Further Details On Credit Problems

We first wrote about KLO Acquisition (aka Hemisphere Design Works) back on November 3, 2019, although the company has been on non-accrual since the IIQ 2019. Then – and now – we were concerned about the future of the world’s largest kayak manufacturer. With Apollo Investment’s (AINV) IIIQ 2019 Conference Call, we have learned a little more about what ails the company and what to expect next, albeit in that shorthand that BDCs use when conveying bad news about a portfolio company. Here is what was said:

Regarding KLO, our investment was placed on non accrual status last quarter due to the underperformance from lower customer demand, consolidation challenges and higher costs. The company’s liquidity position has continued to weaken. The company expects to complete a comprehensive restructuring in the coming months“.

The credit is already rated CCR 5 (Non Accrual), but AINV reduced its fair market value to $4.8mn from $11.8mn at the end of June. That suggests the BDC expects – despite its first lien secured status – a major haircut from the $13.9mn at cost. We also have a Bankruptcy Imminent rating on the company, which would include any kind of major restructuring that would occur. Given what little AINV grudgingly revealed that seems on the cards at any moment.

Vari-Form: Written Down In IIIQ 2019

We learned from Apollo Investment’s (AINV) IIIQ 2019 10-Q filing (see page 5) that its investment in troubled Vari-Form (Crowne Group) was partially written off. The $8mn at cost of first lien 2023 Term debt outstanding at June 2019 was written down to $1.3mn. The debt is valued at cost, but the par value is $8.3mn. No explanation was given for the realized loss taken. The loan continues to be on non-accrual and is rated CCR 5.

Monitronics International: Reports IIIQ 2019 Results

Last time we discussed Monitronics International (dba Brinks Home Security), the company was filing for Chapter 11. Even then, management was aiming to be back operating normally once a major restructuring was effected. We were skeptical – wrongfully so – that this could be accomplished by September 2019 given the many moving parts. Our apologies to the many professionals involved because Monitronics was up and running again out of bankruptcy as a public company (ticker: SCTY) by the end of August.

The company did manage to shed a great deal of debt, as reinforced on the latest Conference Call: “Restructuring resulted in the elimination of over $800 million of debt, including $585 million of bond, and $250 million of the company’s term loans“.

Funnily enough, though, BDC exposure to Monitronics has substantially increased following the voluntary Chapter 11 and restructuring. From $51mn at cost in June 2019, BDC advances have nearly tripled to $148mn. The BDCs involved today are those who were present before, but generally speaking their exposure has greatly increased. That’s because of the nature of the restructuring which saw prior debt partly paid off in cash, equity in SCTY and new Term debt due in 2024. To that was added $295mn in new Term debt and a Revolver. Regarding the latter, $124mn has yet to be drawn.

This is all a wonder of financial engineering, but from what we can tell term debt has only been decreased by just under $100mn, and the revolving debt – if fully drawn – will be greater than the prior balance outstanding. The big change is the write-off of $585mn in 2020 Senior Notes, which received a little cash and 18% of the equity. For all the turgid details see pages 16-18 of the 10-Q.

This leaves Monitronics less leveraged, but not necessarily out of the woods. The company reported its latest results on November 13, which are a mix of before and after bankruptcy and not very instructive from an earnings standpoint. Management did not brave any questions and is still working on its 2020 Plan. As a result neither the BDC Credit Reporter, nor anyone else, has any meaningful metrics to work with. We do note, though, that debt to Adjusted EBITDA (annualizing the IIIQ) remains close to 5:1, and that’s before we get into any mandatory capex.

In any case, Monitronics/Brinks is facing a changing industry, and real challenges with customer attrition that lower debt will not change. Management is promising to make major improvements in how the business is run, promising a “best-in-class” customer experience, including transforming the “sales process from hiring to training, to performance management” and much more in that vein. We wish Monitronics well, but there’s a lot to do in what remains a highly leveraged business with myriad competitors.

This is a classic example of stakeholders – including BDC lenders – “doubling down” on a failing business through a restructuring process. Historically security companies like this one have been cash cows and Brinks has a well known and respected name. So we understand the impetus to try again with a new capital structure and strategic approach. There are no regulators to wag their fingers at the lenders involved and if this does not work out failure is likely to be some time off given the Revolver availability. Regardless, we are rating the “new” Monitronics CCR 4 (WorryList) till we get more tangible news about post-bankruptcy performance, but expect we’ll be reporting back periodically for some time.

Sequential Brands: Reports IIIQ 2019 Results

In early November 2019, Sequential Brands Group , Inc. (SQBG) reported earnings, held a Conference Call and filed a 10-Q. As usual, and despite widening losses and the absence of a permanent CEO and the recent announcement by the Board of its intention to explore strategic options, the tone of management remained upbeat. Here’s an extract of what acting CEO and Chairman William Seedler said on the CC:

While we’re in the final stages of our CEO search, I’m pleased to fill in and join today’s call with Peter. The executive team has been hard at work executing on the plan to best position Sequential for long-term success…

First, the management team remains focused on driving revenue growth across the portfolio. …Second, we are well underway to rightsizing the cost structure of the business post the sale of Martha Stewart, which includes a significant reduction of our expenses. As management previously outlined, we expect an operating expense base of approximately $30 million before minority interest starting next year. This new optimized operating expense base reflects a significant reduction to the company’s current overhead, including corporate head count, SG&A and headquarter-related expenses. To that end, we’ve made significant progress on the sublease front. … We expect these savings to drive a significant and immediate margin improvement as we head into 2020. Third, we recently amended our lending agreement with KKR, which further improves our liquidity and cash flow and demonstrates the continued support of our lenders. With no upcoming debt maturities, we believe that the company has ample runway to focus on driving the business forward”.

We remain concerned nonetheless as Adjusted EBITDA in the latest quarter was $13.2mn, just covering interest of $13.0mn. Debt to EBITDA annualized was 8.3x… In fact, even debt to REVENUES is 4.4x ! Most importantly, liquidity, as per the 10-Q, includes just $5mn in cash and $24mn of availability under the company’s Revolver. Yet, last quarter Sequential registered ($18mn) in negative cash flow from continuing operations.

Frankly, we’ve been expecting “something to happen” at Sequential for months, since our first report in April of this year. We continue to rate the company CCR 4 (Worry List) and BDC exposure (concentrated in the FS-KKR group) huge at $292mn. Our jaundiced view is that the proverbial can is getting kicked down the road, judging by a second amendment to the lenders loan agreement in so many years. A bankruptcy filing could affect a whopping $281mn of BDC debt from 4 funds (one of which is Apollo Investment or AINV). That’s about $30mn of annual investment income at risk of – at least – interruption. We’re loath to add the credit to our Bankruptcy Imminent List given both that Sequential has survived for longer than we expected and the optimistic tone of the Chairman and the fact that there are only 6 weeks left in the current quarter. We’ll shortly see if we have become too lax in our assessment. In any case, it’s hard to imagine Sequential getting through another year without a bankruptcy or major restructuring event. As we are talking about the retail sector here – in an indirect way – it’s hard to see how the company or its lenders (who also own its almost worthless stock) come out of this undamaged. Unfortunately, neither AINV nor FSK even mentioned the company in their most recent Conference Calls, according to our review of the transcripts.

J.C. Penney: Mixed Results in IIIQ 2019 Results

Troubled J.C. Penney raised its 2019 projected results, according to a news report on November 15, 2019. At the same time, same store sales continue to trend downward, and were even worse than expected. Glass half full or glass half empty ?

Interestingly, BDC exposure has increased in the IIIQ 2019 to $18.4mn, from $6.8mn. As so often happens in these troubled retail situations TPG Specialty (TSLX) has stepped up to lend more money in an asset-based loan to the company. TSLX has advanced $15.0mn and the rest is spread – in different facilities – over 3 FS-KKR non-traded BDCs: FSIC II, FSIC II and FSIC IV. All the BDCs involved mark their debt at or above par.

We’ll see in 2020 – following the critical 2019 Christmas season – whether this optimism is warranted.

Bumble Bee Foods, LLC: Preparing To File Chapter 11

For weeks rumors have swirled around about a soon-to-occur Chapter 11 filing by Bumble Bee Foods, LLC. The latest comes from the Wall Street Journal on November 15, 2019, relying on “unidentified people familiar with the matter” (lawyers ? bankers ? the janitor ?). This may be posturing by one of the parties involved as part of the gamesmanship that comes with the territory. Still, we’ve been warning about bad things likely to happen since July 22, 2019, with a follow-up on July 23. We explicitly reported that a Chapter 11 was likely back in August, and noted BDC exposure at that time.

This time is different only in that the WSJ is a pretty reliable source and we have the IIIQ 2019 BDC exposure numbers to update readers on. TCW Direct Lending has two thirds of the exposure at $32.6mn at cost but has chosen to write the position down only by (3%) at FMV. Apollo Investment (AINV) has $15.2mn, and has marginally increased its fair market discount to (7%). Both lenders are in the publicly traded 2023 Term loan, which trades at that same (7%) discount at time of writing.

It seems like both lenders expect to be able to ride out any bankruptcy or restructuring with minimal damage, and we have no alternative data to suggest otherwise. Still, an interruption of investment income is likely – which may or may not be ultimately recouped. We have added Bumble Bee to our Bankruptcy Imminent List, which we’re now limiting to credits that we expect to take such action in the current (IVQ) quarter. Also, let’s not forget Bumble Bee’s Canadian subsidiary Connor Brothers Clover Leaf Seafoods, where AINV and TCW have an additional exposure at cost of $13.6mn. We’re not sure of the Canadian company would be included in the American parent’s bankruptcy, but it’s worth keeping an eye on to judge full exposure.

Red Apple Stores: IIIQ 2019 Valuation

Canadian retailer Red Apple Stores has been under-performing since 2014, according to the BDC Credit Reporter’s way of marking these things. At September 30, 2019, the only BDC with exposure is BlackRock Capital (BKCC) with $29.7mn in second lien debt, preferred and equity. The last two are valued at zero and the debt at a (24%) discount, up from a (29%) discount in June.

However, when we checked on November 3, 2019 the bid-ask for the debt – which is institutionally traded and available on Advantage Data’s Middle Market Loans module, we found the discount unchanged from June, so we’re not sure why there was this modest increase in valuation between the second and third quarters.

We are continuing to rate Red Apple CCR 4 (Worry List). That means we believe the ultimate resolution is more likely to be a loss than full repayment. $2.3mn in annual investment income remains at risk of interruption and – given its junior nature – the entire investment could yet be lost. Once again BKCC provided no color on the company’s performance in its Conference Call and public information is sparse. (The last time BKCC provided any insights into this major portfolio company’s performance was in the IIIQ of 2017, when the BDC was “working with” management to cut marketing expenses to boost EBITDA). We don’t expect any immediate developments at Red Apple, but we could be surprised given the thin amount of public information and the BDC’s reticence to discuss.

KLO Acquisition: Laying Off Employees

A news report on October 29, 2019 indicated Hemisphere Design Works (the new name of KLO Acquisition, also known as KLO Intermediate Acquisition or KLO) is laying off employees and shutting down operations in Muskegon,MI.

Phones were turned off at the company’s headquarters in downtown Muskegon and doors were locked at the Muskegon Lake-front headquarters.

According to a notice of the facility’s closing obtained by Muskegon Chronicle/MLive.com from a Hemisphere employee, the company plans to close its operations at 1790 and 1880 Sun Dolphin Drive in Muskegon, but did not specify when the closure would become permanent.

There was more damning information in the article which suggests that the manufacturer’s problems involve more than work force reduction, but might result in Chapter 11 or Chapter 7 liquidation.

 The company admitted in a letter to experiencing “challenging business circumstances” and that they had been working to secure additional funding sources, but had failed.

Although we anticipated receiving additional capital as we worked through these circumstances, we have now learned that the term lender will not provide additional funding,” the letter reads.

One employee said workers were told Dicks Sporting Goods had canceled a major contract for kayaks, leading to financial troubles and a bank taking control of the company. There have been other layoffs and work slow-downs leading up to Tuesday’s announcement, he said.

There are two BDCs with exposure, which totals $16.1mn, both in the 2022 Term Loan and which has been on non-accrual at the end of the IIQ 2019. Apollo Investment (AINV) has a $5mn position, with the rest held by non-listed Cion Investment. The debt is priced at LIBOR + 775 bps. and valued at a (14%) discount as of mid-year. More recently, the debt – which is institutionally traded – was valued a little lower but we don’t know if that reflects real market value. From what we’ve learned to date, including this damning expose, things could go from bad to worse. Here’s an extract to give you a sense:

After the company moved employees into a facility behind Pizza Ranch in East Muskegon, Kolberg [a former employee] said there were significant issues, from little heat to plumbing problems (things got so bad that Kolberg said employees would often use the portable toilet outside their office).

People actually started to go to the bathroom on the floor in the building,” Kolberg said. “After that happened, human resources came over and said one day a month, each person would have to clean the bathroom. When someone said they wouldn’t, she [the human resources employee] said, ‘You will or there will be disciplinary action.

We are adding the company – the world’s largest kayak manufacturer – to our Bankruptcy Imminent List (our version of Loans Of Concern that the rating groups publish).

Basic Energy: IIIQ 2019 Results

On October 30, 2019 oil services company Basic Energy Services reported third quarter 2019 results. The company is public, so we were able to review a press release, 10-Q, Investor Presentation and Conference Call transcript. We also had a look at Basic Energy’s stock price – ticker BAS – which is not encouraging. Finally, we used Advantage Data’s real-time records to see how the company’s 2023 debt – the only instrument held by a BDC and its largest debt piece – is performing. Also, not encouraging. Last time we checked back in September, the 2023 debt was trading at a (27%) discount. Now the discount has risen to (30%).

We are writing this post because the recent financial performance, where Adjusted EBITDA does not even cover interest and mandatory capex, and the weak outlook for the sector as a whole, lead us to the conclusion that the chances of a default and loss and greater than that of full recovery. As a result, we are downgrading our internal credit rating to a CCR 4 (Worry List) from CCR 3 (Watch List). Luckily for Guggenheim Credit Income Fund – a non listed BDC – the amount at risk is modest at $2.0mn in a portfolio of $376mn.

US Green Fiber, LLC: Restructured

On November 1, 2019 Fidus Investment (FDUS) reported IIIQ 2019 results and updated the status of portfolio company GreenFiber, LLC. We learned that “in early September, we took control of the company via a recapitalization transaction, investing $2.8 million, primarily in second lien debt, alongside the previous control investor and a new investor. This recapitalization is intended to provide the company with sufficient liquidity to execute its strategic plan“.

In response to questioning from an analyst FDUS gave some additional color: “It was… in the works for quite a while. We were in a situation where … the private equity group did not have a lot of capital left in the fund that they invested out of, and we worked through this over a period of time. It took longer than it should have, unfortunately, but that’s what happened.They did invest a small dollar amount in this, so they’re still involved with the company. But we did invest the majority of the capital and did take control of the business on a go-forward basis.And you’re right, the company has had numerous, and I’m not going to get into them just exogenous events, if you will, that impacted the performance. Having said that, it’s a niche leader. It has real presence in its marketplace, and it’s a company that we think has some staying power. And that’s why we invested in it. And our hope is that there are better times ahead, but it remains a fluid situation. And obviously, we’ve kept it on nonaccrual. It did pay our cash portion of our interest this quarter, but we’ve kept it on nonaccrual for obvious reasons. And so our hope is that we see good improvement here over time“.

At the end of the quarter, the existing FDUS second lien loan of $14.9mn was still discounted at (69%); while its $0.6mn in equity is – understandably – marked to zero. The new debt added in the period – also second lien – which adds up to $4.6mn – is carried at par, Both loans are on non accrual even though – as FDUS mentioned above – interest was actually paid in the period. (On paper, $1.4mn of investment income annually is non accruing).

FDUS has been invested in the company since 2014, but matters only began to go sideways from the IIIQ of 2018 when we added the name to our under-performing list. Non accrual occurred one quarter later and now we have a full restructuring and FDUS taking control. This is not unusual either for the BDC or companies in this segment of the market. However, we have insufficient information to determine whether FDUS is doing the age old “throwing of good money after bad” or potentially rescuing a worthy business and all the capital invested to date and more.

AGY Holding: Second Lien Placed On Non Accrual

During the BlackRock Capital (BKCC) IIIQ 2019 Conference Call on October 31, 2019 , we learned that the $24.2mn second lien loan in AGY Holdings, subsidiary of KAGY Holdings, has been placed on non accrual. No date was given. The reason for the move was given by BKCC as the need to “fund various initiatives at the business at this time. And so it does reflect sort of things going on in the business that are generally operational things that we wanted to do“.  BKCC is both investor and lender, with another $24.8mn in first lien debt still current.

With this move BKCC reduces the FMV of its second lien debt at one fell swoop from a discount of (1%) to (29%) and loses ($2.9mn) of annual investment income. That’s a material impact on BKCC: 3.7% of Investment Income and almost 8% of Net Investment Income. Should the first lien debt go the way of the second lien and the $11mn of equity and Preferred, written to zero, the loss of income would be even worse. Overall, BKCC has invested $60mn in KAGY/AGY, and still values the investment at $42mn.

We have found very little information about the glass yarn manufacturer but Advantage Data records and the occasional word from BKCC management indicates this has been a troubled credit since 2012 and has been restructured before with only limited results so far. We have to at least consider the possibility that this could yet turn out to be a complete write-off given that the common stock and Preferred have no value and the second lien has just been discounted.

The other BDC with exposure is sister fund BlackRock TCP Capital (TCPC) with $16mn invested at cost. Included therein is $8.6mn at cost in a $10.3mn second lien tranche identical to that of BKCC. If that’s placed on non accrual as well, $1.1mn of annualized investment income will be affected. The investment was carried at a big premium last quarter so the unrealized depreciation involved could be material.

For our part, we had carried KAGY Holdings in the under-performing group at CCR 5, due to the non-accrual on the Preferred. However, we’d left AGY as “performing” and a CCR 2 rating. In the absence of third party information, we were led by the high valuations given the company for both its first and second lien debt. That was too generous. We’ve now rated the second lien as CCR 5 (Non Performing) and the first lien at CCR 4 (Worry List). Fool me once, etc.

TridentUSA Health Services: Written Off

Ares Capital (ARCC) – the largest BDC lender to TridentUSA Health Services (also known as New Trident Holdcorp and Trident Health Services) – has taken a 100% realized loss on its non-performing debt outstanding to the company, which filed for bankruptcy back in February, and which we discussed in a post on September 30, 2019. The loss was realized in the IIIQ 2019. This has a resulted in a major loss for the BDC: $96mn. Moreover, that means 3 other BDCs with another $12mn of exposure are likely to be taking similar write-offs when their results are published: Gladstone Capital (GLAD), Solar Senior Capital (SUNS) and Oaktree Strategic Income (OCSI).

What’s more, back in IVQ 2017 when the company first went on non-accrual other BDCs, such as PennantPark Floating (PFLT) and Investcorp Credit Management BDC (ICMB) had positions as well. In fact, total BDC exposure was $157mn at its peak but only $108mn as of June 2019 when the debt had all been effectively written down on an unrealized basis to zero. We expect those departed BDCs took some sort of realized loss to depart the scene early. If the other BDCs lenders still involved follow ARCC’s path, SUNS will be losing ($7.7mn), GLAD ($4.4mn) and OCSI well under ($1mn). About $12mn of investment income that was being charged will be lost.

This is a credit that dates back to 2013 for ARCC (and other involved) when the BDC giant made a $80mn second lien investment. The debt was added to the under-performing list in the IIQ 2016. The valuation went up and down from there, including rising at one point on the hope of a sale. However, by IVQ 2017, the second lien debt was placed on non accrual. ARCC advanced $16mn in additional debt, on a first lien basis. In the spring of 2018 new debt was advanced and existing debt renegotiated, which Moody’s deemed to be “a distressed exchange” and downgraded the company. Finally, in February 2019 the New Trident filed for Chapter 11. By then most BDCs had written down their exposure 100% or close to.

What went wrong ? You’d be hard pressed to find out from ARCC – which prides itself on its transparency – from the latest Conference Call transcript. Management only discussed the company in response to a question, describing the investment as “unsuccessful” and the amount lost as “pretty substantial”. We’d agree with that last assessment: $96mn is equal to 1.3% of ARCC’s equity capital at par and is equivalent to 45% of this quarter’s Net Investment Income.

We know that the company and its subsidiaries is owned by private equity sponsors Formation Capital, Audax Group, and Revelstoke Capital Partners and that annual revenues are approximately $500 million, according to Moody’s. A couple of BDCs have been quick to say the health care company’s problems were “idiosyncratic” but the bankruptcy has occurred at a time when both the BDC Credit Reporter and rating groups have noticed a deterioration in the sector more generally – a grave concern considering the ubiquity of health care related credits in leveraged lending.

Audacy Corporation: Update

On October 29, 2019 we reviewed the public record about HRZN’s only under-performing company that we’ve identified, in advance of IIIQ 2019 earnings season: Audacy Corporation. According to its website, Audacy was launched in 2015 by a team of Stanford graduates, a SpaceX veteran, and NASA award winners. Their mission is “to deliver anytime, highly operable connectivity that advances humankind to an unparalleled age of space exploration and discovery“. Audacy is a “space communications service provider enabling continuous satellite and launch vehicle connectivity from the launchpad to the Moon. Our ground-based services are now operational and our space-based data relay network will launch in 2021″.

The BDC has $3.8mn advanced in debt and equity to the satellite communications provider at June 30, 2019. HRZN initiated exposure recently, as announced by press release on June 12, 2018, which included a 2022 Term Loan. In the IIQ 2019, HRZN increased its exposure by $0.6mn in the form of a 2020 loan. Both loans are priced at LIBOR + 790 bps, and both are on non-accrual. HRZN values the investment at $1.5mn, but we placed the company on our under-performing list in the IQ 2019, when the investment was first written down.

Unfortunately, we found very little public information about the company’s performance, or the reasons for the non-accrual ,in the public record. However, both the 2020 and 2022 loans are institutionally traded and priced at a (60%) discount to cost, only slightly below the June 2019 valuation. This suggests there will be little change in the credit when HRZN reports third quarter 2019 results. We’ll be looking for a little more color as to what has gone wrong and what to expect.

Update: Following the HRZN IIIQ 2019 earnings release on October 30, 2019, no change in the value of Audacy.

Murray Energy: Files For Chapter 11

Back on September 13, we wrote when first posting about Murray Energy: “We don’t want to bury the lead: Murray Energy is likely to file for bankruptcy or re-organize and the BDC lenders involved are going to absorb some rather large losses“. On October 29, 2019 the coal company filed for Chapter 11 protection.

Given that we have already quoted ourselves once, here is what we said about BDC exposure at the time, which remains the most up to date picture we have:

BDC exposure totals $52.4mn, spread over 6 BDCs. These include publicly traded FS-KKR Capital (FSK) and three sister non-traded BDCs funds (FSIC IIFSIC III and FSIC IV but not – surprisingly – FS Energy). Then there are two others: Cion Investment and Business Development Corporation Of America.The exposure is in two different loans, one which matures in 2021 and the other in 2022. The debt has been on our under-performing list since IVQ 2018 and is currently rated CCR 4 (Worry List), where the chances of an eventual loss are greater than a full recovery.

As of June 2019, the 2021 debt was carried at par but the 2022 debt was discounted by a third. Currently, though, the 2022 debt trades at twice that discount, suggesting holders are not optimistic. We wouldn’t be surprised to see the 2022 debt fully written off once the dust settles, which would result in ($8.5mn) of further losses and ($12.5mn) in Realized Losses, to be absorbed by Cion and BDCA. Less clear is what might happen to the 2021 debt, which still trades at par. We won’t speculate at this point but will point out that – overall – $5.5mn of annual investment income is at risk.

This was a useful first test of our Bankruptcy Imminent list, on which Murray Energy had been placed since October 4, 2019, when we were told the company’s banks were in forbearance. Like snow in May, loan forbearances rarely stays around for long – unless you’re Greece.

We won’t speculate too much about the way forward at this stage or try to evaluate how much more capital the existing BDC lenders might advance and what ultimate credit and investment income losses might look like. We’ll wait till more is heard about Murray’s exit plans and just how bad its financial position is. Even if the coal giant does successfully leave Chapter 11, with coal industry fundamentals headed ever further downwards, any remaining BDC exposure post-bankruptcy will remain on the under-performing list.

Frontier Communications: Hedge Fund Recommends Bankruptcy

The Frontier Communications saga continues with hedge fund and investor Robert Citrone recommending the company file for Chapter 11 bankruptcy sooner rather later. As the attached article reminds us, there’s an ongoing debate amongst “stakeholders” as to what the communications company should do to deal with its heavy debt load and uncertain future.

“Normally haste makes waste, but in this instance we believe haste limits waste,” Ormond said in the letter. “The further the delays in addressing the balance sheet and state of the business in a court-supervised process, the greater the risk to the corporation, operating assets, employees and surrounding Norwalk.”

Increasing subscriber losses and turnover, combined with limited financial guidance, will only lead to further deterioration in the business, according to the letter.

We have no view on whether to file or not is better, but the pressure does increase the chances of the former. We are adding Frontier to our Bankruptcy Imminent list. The company is already rated CCR 4 (Worry List). As a reminder BDC exposure is substantial at $61.7mn and valued close to par. A bankruptcy could have detrimental effects – but to varying degrees – on the 9 BDCs involved.

AAC Holdings: To Receive Forbearance From Lenders

On October 22, 2019 AAC Holdings issued a press release indicating that the company was just about to arrive at a mutually satisfactory arrangement with its lenders, following events of default under the debt. This was carefully worded – because nothing has been signed – as follows: “The Company expects to enter into an agreement securing additional liquidity and receiving a forbearance from its senior secured lenders regarding certain previous events of default. The Company expects to finalize the agreement with its senior secured lenders next week, although no assurance can be made that an agreement will result from these discussions within that time frame or that an agreement consistent with these discussions will be reached at all“.

The company also expects to finalize the appointment of three new directors, after losing that many in a mass resignation, which was the subject of our last post. That will allow AAC to remain a public entity.

If all the above happens, AAC Holdings will cheat the hangman a little while longer. That gives the company time to improve fundamentals at its addiction centers and sell off real estate to reduce debt, as has been the plan for some time. Nonetheless, even if the forbearance is formally approved, we continue to keep AAC Holdings rated CCR 4 (Worry List) and on our Bankruptcy Imminent list. BDC exposure is high at $66mn. Click here for all our prior articles. Like Game Of Thrones, the story makes more sense if you begin at the beginning.

Prairie Provident Resources: All Time Low Stock Price

Publicly traded Prairie Provident Resources has been reaching its very lowest stock price in the last few days, continuing an ineluctable descent, as this chart shows.

We’ve not been digging too deeply into the company’s finances and prospects because the only BDC exposure is that of Goldman Sachs BDC (GSBD). Admittedly, the amount invested is material – $9.2mn – but all in the form of equity. That equity was valued at only $0.25mn as of June 2019, and will drop even further when the third and fourth quarter results come out.

The investment has been sitting around on GSBD’s books since 2016, not earning any income and in perpetual decline. If something happens to Prairie Provident – not unlikely given market conditions – a 100% Realized Loss is more likely than not. We’ll chalk it up to another misguided attempt by a BDC – and GSBD has much company from its peers – to invest in a capital hungry and highly cyclical industry which is best left to specialist groups. We’re adding – just based on that stock price – Prairie Provident to our Bankruptcy Imminent list.

McDermott International: SA Article

On October 23, 2019 Seeking Alpha author Henrik Alex wrote an article about McDermott International entitled: “The ‘One McDermott Way’ Might Still End In Bankruptcy Court“. The article lays out in useful detail the various options available to the company and the obstacles faced in taking advantage of the supposed “financial lifeline” offered by certain secured lenders. Any one interested in the subject will find the article helpful. For our own earliest posts about McDermott, click here.

Mr Alex’s conclusion is as follows:

Even after Monday’s bridge loan announcement, the much-touted “One McDermott Way” might still end in bankruptcy court if the company fails to arrange a quick sale of the Lummus Technology business given the dealbraker requirement to exchange at least 95% of the company’s senior unsecured notes into new PIK notes. While secured lenders would likely waive a minor consent shortfall (e.g. 90%), I do not expect them to approve a material amount of holdouts. But even if the condition will be waived, McDermott will face a reduction in borrowing capacity and letters of credit.

Judging by this week’s trading pattern so far, both unsecured bond- and equityholders seem to have very little conviction in the company avoiding a bankruptcy filing and so do I.

That said, the company still has until January 31, 2020 to enter into a firm purchase agreement for Lummus Technology “in form and substance satisfactory to the Supermajority Lenders and the Administrative Agents” as required by the terms of the credit agreement.

Should McDermott indeed have to seek bankruptcy protection, common equityholders will almost certainly end up with nothing. Even unsecured noteholders might see very little or even no recovery as already implied by the very low trading price.

That conclusion largely coincides with our own thoughts, except that we are more skeptical about the chances of selling Lummus Technology, which has been for sale for some time. This validates our decision to add McDermott to our Bankruptcy Imminent list. Thankfully, BDC exposure is small: limited to two BDCs. Business Development Corporation of America has the biggest chunk: $9.8mn and Oaktree Strategic Income (OCSI) just $1.3mn.