U.S. Well Services: Two New Developments

Good news and bad news for the 6 BDCs with exposure to recently public U.S. Well Services (ticker: USWS). In May, the second lien debt left after the company went public was repaid in a major refinancing. We don’t know if any of the 3 Oaktree BDCs (OCSL, OCSI and its non traded sister firm) re-upped for the new financing. That will come out when the second quarter 2019 results are released. The bad news is that in mid July the public stock price dropped to an all-time low. That will impact the three other BDCs (CPTA, BKCC and PNNT) still holding stock at March 31, 2019 with a cost of $9.3mn and a value at IQ end in excess of $11.1mn. That’s likely to be (40%) lower as we write this and could go further.

Fusion Connect: Schedule For Chapter 11 Exit

According to Informa, Fusion Connect has filed its bankruptcy plan with the court and hopes to get a hearing by October 1st and – if all goes well – exit Chapter 11 shortly thereafter. The plan includes a very large debt swap/forgiveness that is said to cut total borrowings from $680mn to $380mn. Currently, the restructuring appears to have the first lien lenders gaining control of the business in return for writing off a goodly portion of their debt. The two BDCs involved – CM Finance (CMFN) and Garrison Capital (GARS) have $18mn invested at cost, but that liability may have increased as senior lenders provided DIP financing. That original debt is on non accrual and won’t – in any form – be paying interest till the IVQ 2019. That’s three quarters without LIBOR + 7.25%. Moreover, a write-off of some kind must be coming.  We’ll learn more when CMFN and GARS report IIQ 2019 portfolios. The valuations are likely to be close to the final, if all goes to plan. See our prior posts on June 12, 2019  and April 17, 2019.

AAC Holdings: Receives Third Warning Of De-Listing From Exchange

On July 9, 2019 news reports indicated troubled AAC Holdings (aka American Addiction Centers) had received a third warning from the New York Stock Exchange (NYSE) that its stock might be shortly de-listed. The reason: the company’s stock (ticker: AAC) has been trading under $1.0 for a thirty day period. The company is seeking a reprieve and has submitted a plan to the NYSE. According to a press release by the company, “submitting a plan to the stock exchange should allow the company to continue trading. The plan makes AAC eligible for an 18 month period to improve market capitalization and a six month period to improve share prices”.  Notwithstanding management’s ambitious plans to re-position and turn around the business, the BDC Credit Reporter remains concerned about a possible bankruptcy filing or restructuring in 2019. Total exposure is $63.6mn in 2020 and 2023 Term debt still carried at high valuations as of March 2019. The key holders are New Mountain Finance (NMFC); Main Street Capital (MAIN); Capital Southwest (CSWC) and non-traded MAIN sister BDC HMS Income. Total investment income at risk should the company default is in excess of $7.0mn annually. We should say that the publicly traded debt does continue to trade at only a slight discount to par, suggesting our worries may be overblown. Time will tell.

Pet Supplies Plus: Recall

On July 3, 2019 Pet Supplies Plus published a press release to the FDA website announcing a recall of its bulk ear products sold to dog owners as treats. The company was concerned that the treats might be infected with salmonella. As a trade publication explained “Salmonella can not only affect animals that eat the product, but also pose a risk to humans who handle, especially if they have not washed their hands”. To date no one has fallen ill from contact with the company’s products but 45 people in 13 states have been diagnosed with Salmonella-related illness from bulk ear products. Three different public and non-traded BDCS have $17mn in exposure to Pet Supplies Plus, in the form of both debt and equity, which began only in IVQ 2018, and is valued at cost. We cannot determine as yet what impact – if any – this recall might have on the company’s business and prospects.

Joerns HealthCare: Files Chapter 11

Joerns Healthcare has filed for Chapter 11. “The company is seeking court approval of a restructuring plan that is supported by the majority of its lenders and noteholders. The plan will eliminate a substantial amount of debt and provide operating capital during the restructuring process and beyond. The company has requested that the plan be approved and the process complete within the next 30-45 days”. This is bad news for the three BDCs with $27.9mn in exposure in 2020 senior/unitranche debt – all publicly traded. Main Street Capital (MAIN) has the biggest share with $13.3mn, and sister non traded fund HMS Income ($11.0mn). Golub Capital (GBDC) comes in third with only $3.5mn, but we imagine the asset manager has exposure in other affiliated funds. Until a restructuring falls into place $0.200mn a month of interest income will be lost. The company was still carried as performing through IIIQ 2018, but the discount increased from the IVQ 2018 and closed the IQ 2019 at (15%).  Chances look high that a Realized Loss will have to be booked, but we’ll postpone making any predictions till we review the restructuring plan that the company is so confident will be approved and implemented in short order.

Monitronics: Files Chapter 11

Monitronics International – an alarm monitoring company that we’ve discussed on two prior occasions on March 23, 2019 and again on May 23, has filed for a pre-packaged Chapter 11. It’s fair to say that the restructuring plan – approved by most creditors but still requiring shareholder approval of the parent of the company – Ascent Capital – is highly complex. From what we understand Monitronics will be shedding about half of its existing debt load; raising a quarter billion dollars of debtor-in-possession debt financing to be followed by even more “exit financing”; as well as raising equity capital through a Rights Offering and receiving $23mn from Ascent as part of a scheme to have the parent absorbed by the subsidiary. At the end of all this Monitronics – despite having nearly $1bn in debt still on its books – will have “the strongest balance sheet in our industry”, according to the CEO.  We’re still trying to determine what the impact of this restructuring plan will have on the 5 BDCs with $20.7mn of term debt exposure. At March 31, 2019 the debt was already discounted to varying degrees. A final accounting will have to wait till this bankruptcy process plays out. Management is predicting an exit within 75 days, or mid-September. Given the numerous moving parts, we are skeptical about the timetable, even though we’ve seen this pre-packaged Chapter 11 situations move through the courts in as little as one day ! For the moment at least, the most tangible impact is that investment income on the debt will be interrupted for some or all the third quarter of 2019. The biggest impact will be felt by Business Development Corporation of America (BDCA), which has half the total BDC exposure.

AAC Holdings: Number Two Executive Steps Down

This can’t be good. A month after addiction treatment company AAC Holdings (ticker:AAC) announced an ambitious long term strategic plan to address its recent business woes, its President has resigned unexpectedly. He was with the company for only 18 months. Not surprisingly, AAC’s stock price dropped, and is now at $0.70 a share, not far from it’s all-time low. We continue to worry about a Chapter 11 filing or restructuring – see our earlier post from April 16, 2019. Currently, total BDC exposure is up to $63.6mn, spread over 4 BDCs.

Frontier Communications: S&P Downgrades Debt Rating

On June 20, 2019, S&P Global Ratings downgraded “its long-term issuer credit rating and issue-level rating to CCC from CCC+, with a negative outlook. It’s also trimmed its rating on senior secured first- and second-lien debt to B- from B”, according to Seeking Alpha. The rating group went to say: “Notwithstanding its favorable near-term liquidity position,” the company will likely look at options “given the business’ downward trajectory and inability to refinance looming unsecured debt maturities in 2022, which are trading at deeply distressed levels,” S&P says. From the BDC Credit Reporter‘s standpoint, this only confirms our prior assessment that a bankruptcy or restructuring is more likely than not. We’ve had the company on our Worry List all year. The stock price is now $1.35, but was recently at an all time low of $1.21.

Charming Charlie, LLC: Seeking Financial Adviser And New Capital

Trade publication Retail Dive – quoting Debtwire says troubled women’s accessories retailer Charming Charlie has brought in a financial adviser. In addition, the nationwide chain, which was recently recapitalized by THL Credit (TCRD), is seeking new capital, in the form of debt or equity. All this sounds worrying from a credit standpoint. To date, TCRD – alongside non-traded Cion Investments and Sierra Income – have been funding the company with debt and equity in an ambitious attempt to bring the business back to performing status. At March 31, 2019, the three BDCs had advanced $37mn at cost to Charming Charlie, mostly in debt and mostly still on non accrual. The exposure is valued at roughly half of cost. We worry that Charming Charlie, which only exited Chapter 11 in late April 2018, might do a “Chapter 22” and need to file again. This time, though, that might mean liquidation and a potential significant write-off for the lenders involved.

Hudson Technologies: Stock Price Drop

As of June 19, 2019 the stock price of publicly traded refrigerants distributor Hudson Technologies (ticker: HDSN) has dropped below $1.00 and become a “penny stock”. The company – based on BDC valuations – has been under-performing since June 2018. As a public entity, we’ve been able to review quarterly filings and read the ever bullish Conference Call transcripts. We added Hudson first to our Watch List (CCR 3) and then – more recently – to our Worry List (CCR 4) and are concerned that the company may soon join our Bankruptcy List (CCR 5). Admittedly as of IQ 2019, the company was in compliance with much adjusted covenants on both its secured Revolver and its Term Loan.  The business is admittedly seasonal but Operating Income was under a quarter million dollars and interest expense $2.4mn. Total debt, which includes the 2023 Term debt where all BDC exposure sits, is $131mn. All of which to say that the signs do not look good for the business and for its lenders. BDC exposure is $102mn, and generates $13mn of annual investment income. All the BDCs are part of the FS Investments-KKR complex and include publicly traded FSK ($39mn) and non-traded FSIC II, FSIC III and FSIC IV.  At March 31, 2019 the Term debt had already been discounted (29%).  The debt is publicly traded and that discount holds as of June 19, 2019 based on Advantage Data’s middle market loan real-time data. Unfortunately, the fundamentals of the industry in which the company operates are currently negative and we worry that if a Chapter 11 filing or out of court restructuring occurs there will be both income interruption and further losses both realized and unrealized. At worst, the BDC lenders might have to write off (or convert to equity) 50% of debt outstanding, or around $50mn, compared to ($30mn) already discounted. Given the size of the BDC exposure; the substantial investment income accruing; the very sharp drop in the stock price and the negative tilt in recent results, this is a credit worth paying close attention to.

TOMS Shoes LLC: Downgraded by S&P

On June 18, 2019, the famous TOMS Shoes LLC received a downgrade from S&P Global Ratings. The first sentence of the press release tells you enough: “[the company’s] turnaround effort is taking longer than expected and its adjusted leverage remains elevated at around 10x, which will make it difficult for the company to address its upcoming term loan maturity in 2020 without undertaking a subpar exchange”. If that’s not enough to worry you, then there’s this sentence from further on in S&P’s report:“The negative outlook also incorporates TOMS’ continued sales declines, eroding liquidity, and its fixed-charge coverage ratio, which is at or below covenant levels, due to the challenging retail environment and the company’s continued weak operating performance”.The ratings were dropped to CCC from CCC+ for both the company and the first lien debt.

The $9.3mn in aggregate BDC exposure (Main Street and HMS Income) is in the 2020 first lien debt and was already written down by (18%) in the last couple of quarters, even though income is still current. None of this is any surprise to the BDC Credit Reporter, which has had TOMS on its under-performing list since late 2015 and on our Worry List for about the same time. Our current Credit Corporate Credit Rating is 4, just one notch above non performing. Bankruptcy or a debt for equity swap seems almost inevitable despite the best efforts of PE owner Bain Capital to effect a turnaround. The BDC lenders involved seem at risk of absorbing $0.750mn of annualized investment income interruption for some period, and a Realized Loss at some point in the sub $5mn range. This may become yet another lender-owned company. Still, the amount of income and book value at risk are relatively modest for MAIN and its sister BDC.

Bluestem Brands: Reports Latest Results

On June 18, 2019 multi-unit retailer Bluestem Brands reported results for the quarter ended May 3, 2019. We reviewed the earnings press release, and the Conference Call transcript on Sentieo (not yet linkable).  Notwithstanding lower sales in the period compared to a year earlier, the company reported progress in “turning around” the business in several areas. Adjusted EBITDA was barely positive but that’s an improvement over ($12.6mn) a year earlier. Most importantly, from a credit standpoint the company was nowhere near triggering the several key metrics imposed by its senior lenders. Nonetheless, the burden of total debt has remained unchanged over the past several quarters, and its principal Term debt becomes due in late 2020. We have a CCR 4 Credit Rating, which remains unchanged. There are 4 BDCs with $29mn in exposure – all in the 2020 Term debt. In the IQ 2019, the unrealized depreciation was reduced in the BDC valuations and may receive a modest boost in the IIQ, based on these results. Nonetheless, the retailer is far from being out of the woods.

Ultra Resources: Offer To Exchange Junior Debt Extended

On June 17, 2019 publicly traded gas exploration company Ultra Petroleum Corp (UPL) issued a press release announcing the extension of an offer to exchange the 7.125% Senior Notes due 2025 of its wholly owned subsidiary, Ultra Resources, Inc. for up to $90.0 million aggregate principal amount of new 9.00% Cash / 2.50% PIK Senior Secured Third Lien Notes due 2024, aka the Third Lien Notes. Unaffected directly is the only BDC with exposure – FS Energy & Power – whose investment of $45mn at face value is in the $975mn April 2024 senior secured Term Loan. That’s one of multiple debt facilities in this heavily leveraged company, with nearly $2.0bn in debt, even after shedding both Term loan and Revolver outstandings, as detailed in the latest 10-Q and on the IQ 2019 Conference Call. Thankfully, the BDC’s debt sits at the top of the capital structure, just under a Revolver, whose balance was only $38mn. Whether the exchange happens or not, though, the company will remain on our Watch List, given the large amount of debt and the fact that the price of Ultra’s common stock has dropped to an all-time low. The stock used to trade at over $15.0 a share, but is now at $0.35. There is close to $3.0mn of investment income at risk for FS Energy & Power.

Frontier Communications: Restructuring And Chapter 11 Alternatives

Bloomberg published an excellent article about the different constituencies amongst Frontier Communications creditors, and the several alternatives being considered to cope with the telecom company’s mountain of debt. No change to the BDC Credit Reporter‘s views, as noted in the Company File.

NPC International: Trade Publication Article Describes Multiple Challenges

On June 13, 2019 Restaurant Business published an article summarizing many of the financial and operational challenges facing Wendy’s and Pizza Hut franchisee NPC International. Based on what we read, other research undertaken (including reading Moody’s recent downgrade of the Company and its debt) and after reviewing on Advantage Data the latest prices quoted for the first lien and second lien loans, the BDC Credit Reporter downgraded our outlook from CCR 3 to CCR 4 on our 5 point scale. There are two BDCs with exposure, almost all held by Bain Capital Specialty Finance (BCSF), with $14mn of loans in both first and second lien Term Loans. Read the Company File for our analysis of investment income at risk and the potential for realized and unrealized credit losses.

AG Kings Holdings: WhiteHorse Finance To Place On Non Accrual, Discount.

On June 13, 2019 WhiteHorse Finance (WHF) filed a Prospectus relating to the sale of its stock held by insiders. Included in the Prospectus was up to date information about the BDC’s first lien investment in grocery chain AG Kings Holdings. We also currently expect to place our first lien investment in AG Kings Holdings, Inc. on non-accrual status and determine the fair value of the investment to be marked between approximately 70% and 80% of face value as of June 30, 2019, compared to 85% as of March 31, 2019″. See page S-6. The only other BDC lender to the Company – Capital Southwest (CSWC) – had already booked its own investment in the same 2021 Term Loan as being on non accrual in the IQ 2019. However, CSWC had discounted the investment by only (9%). The (20%-30%) discount being applied by WHF suggests a further weakening of the Company’s performance in recent weeks, and the possibility of a default. For more about the Company, BDC exposure and our views, see the attached Company file.

Frontier Communications: JP Morgan Downgrades Some Bonds. Stock Falls.

Despite Frontier Communications recent asset sales, which will reduce its debt mountain, the regional telecom remains in trouble. On June 12, 2019 a JP Morgan analyst  downgraded some of the company’s bonds; and the stock price dropped as much as 13% in reaction. Also, a distressed fund manager predicted a Chapter 11 filing would happen in 2019. Currently, the publicly traded FTR trades below $1.50, close to it’s all-time low. This must be disturbing for the multiple BDC lenders – in 4 different debt facilities from senior to subordinated, and in maturities as long as 2027. As we’ve noted in prior articles, BDC exposure aggregates $44.2mn, with non-traded Business Development Corporation of America (BDCA) with the largest exposure by far (nearly $40mn), including some junior. The only public BDC lending to Frontier is OCSI, with $1.5mn in 2024 Senior Term Debt and under $100,000 a year of investment income at risk of interruption. Frontier has been moved to our Worry List , just one step away from bankruptcy or restructuring, along with 32 other troubled BDC borrowers.

Fusion Connect: Further Details On Post Bankruptcy Financing

The Company filed for Chapter 11 on June 3. On June 11, in an article from the Global Legal Chronicle we learned that “ad hoc group of lenders also backstopped Fusion’s debtor-in-possession financing facility in the aggregate principal amount of $59.5 million, which consists of $39.5 million of new money term loans”. This suggests that the two BDCs with $18mn in senior debt exposure  –  CMFN and GARS – have increased their exposure to what was till very recently a fast growing enterprise, cobbled together from multiple acquisitions. It’s still too early to determine how this will all play out. The business may yet be sold or the existing lenders may be involved in a debt for equity swap. In either case, income from the pre-petition debt is going to be interrupted for months, and some sort of realized loss is likely. At 3/31/2019, the discount to cost that the BDCs were using ranged between (12%) and (17%). However, any income and return from the DIP financing should be money good.

99 Cents Only Stores: Completes Debt For Equity Swap

The good news for 99 Cents Only Stores, LLC – which is owned by Ares Management and the Canada Pension Plan Investment Board ? Chapter 11 bankruptcy has been averted. Back on June 7, we warned on our Twitter feed that bankruptcy was a risk. Now the bad news: Ducking a trip to the bankruptcy court has been accomplished by a debt for equity swap and a fresh capital raise. According to Retail Dive:  “under the agreement, 99 Cents Only is to issue common and preferred stock in return for its outstanding $146 million second-lien term loan facility and $143 million secured notes”. From what we can tell, there are two BDCs in the secured notes : sister BDCs OCSL and OCSI, with aggregate exposure at cost of over $20mn, and generating over $1.5mn in annual investment income. (The bulk of the exposure is at OCSL). At March 31, 2019 the debt was still performing and written down only modestly (11-14%), although restructuring negotiations were already underway. This is not a transaction the “new” management at OCSL/OCSI can blame on Fifth Street. According to Advantage Data, the debt was added in late 2017 after Oaktree’s investiture as external manager.

Frankly, we’re a little surprised at how generously the BDCs have valued their exposure throughout. As late as IIIQ 2018, the debt was carried at par even though 99 Cents Only has been in trouble almost from day one, thanks to heavy leverage placed on the 2011 buyout. For a sense of proportion – and quoting Moody’s – debt to EBITDA was around 8x. In 2017, the company almost filed for Chapter 11 and was only saved by an earlier debt restructuring. It’s unclear if this second restructuring will do the trick, but OCSL and OCSI are now in for the long term in a non income producing position at the bottom of a still leveraged balance sheet. We’ll have to wait till the publication of the IIQ 2019 results to see how the BDCs value their new positions and whether any realized losses are booked. BDCs have great latitude in this area, so investors should pay attention to what is done as well as said.

Also with exposure is asset-based specialist TSLX, with $32.2mn in 2021 debt. The BDC has continued to mark the position at par, suggesting TSLX will be repaid in full on its FILO ABL facility when the time comes. We have no further details from the public record. We do know – from Advantage Data – that TSLX will be paid more than OCSL and OCSI and – as far as we can tell – have a better credit outcome thanks to their ABL approach. No wonder multiple other BDCs are eyeing getting into this specialized form of lending. By the way – outside of the public filings – none of the three BDCs involved appear to have discussed the challenges at the company since the debt was booked, either on a Conference Call or Investor Presentation. (We use Sentieo which searches all available filings for any input keywords).

By the way, we don’t have a Company File for the company, but will be adding one given that – this restructuring notwithstanding – BDC exposure continues and the final resolution of the greater than $50mn invested is some way off. After all, S&P has a rating of CC for the company…

United Sporting Companies: Files Chapter 11

On June 10, 2019, Sportco Holdings, the parent of United Sporting Companies – an intermediate holding entity with no assets of its own  – and all its subsidiaries Ellett Brothers, LLC,  (“Ellett”), and four of Ellett’s six wholly-owned subsidiaries: Evans Sports, Inc.,  ; Jerry’s Sports, Inc. , Outdoor Sports Headquarters, Inc ; and Simmons Gun, filed for Chapter 11 bankruptcy. The filing is attached.  From the report provided to the bankruptcy court, the financial difficulties of the group are of long standing, and both sales and EBITDA have declined precipitously. The owners – who include WellSpring Capital Partners IV and Prospect Capital (PSEC) – have been seeking a buyer since the beginning of the year, but Houlihan Lokey – who was in charge of the auction – found no buyers despite contacting 55 prospects. Liquidation of the companies assets seems to be the likeliest course of action in bankruptcy. 321 jobs are at risk of being lost.

From a BDC perspective, PSEC serves as both equity holder (21%) and a second lien lender. The BDC first became a lender in 2012 with a $100mn advance. Over the years, exposure reached $160mn, but was reduced by March 31 2019 to $127mn at cost. (We don’t know if the reduction in outstandings was due to repayments by the borrower, or the sharing of the debt with other PSEC entities or third parties). The debt has been on non accrual since IIQ 2017. The most recent value of the debt was $35.7mn. We expect that the entire second lien loan will be written down to zero, judging by the information in the filing. The company reports adjusted EBITDA of only $8mn, while there is an asset-based loan senior to PSEC’s debt with $23mn outstanding. In addition, the company reports $41mn in unsecured obligations outstanding which, arguably, rank pari passu with the second lien debt, which totals $250mn. There are also unpaid wages and ongoing payroll to contend with. A $30mn Debtor In Possession facility is being envisaged, but we’re not clear if PSEC will be providing that new debt capital in bankruptcy. If we are correct, the Realized Loss will amount to approx $0.35 a share and the incremental hit to net book value will be $0.10. There will be no impact on income as PSEC has been forgoing over $17mn in annual investment income for two years.  This is obviously a major credit reversal for PSEC, and another indirect casualty of the shake-out happening in retail, made worse by some managerial miscalculations (see pages 7-8 of the filing). Although the business – according to management’s admission in the filing – has faced “headwinds” since 2d015, PSEC did not materially write down its second lien position until the non accrual occurred in IIQ 2017. That discount has risen over the subsequent quarters from (41%) to (72%) most recently.