I-45 SLF LLC : IIQ 2020 Update

The “I-45 SLF LLC” is a joint venture set up between two public BDCs that have a history of working together: Main Street Capital (MAIN) and Capital Southwest (CSWC). The JV dates back to 2015 and was rated as performing through the end of 2019. However, the BDC Credit Reporter first downgraded the entity to CCR 3 in the IVQ 2019 as multiple portfolio companies experienced credit problems. The situation was only exacerbated by the pandemic and the rating was dropped to CCR 4 in IQ 2020, as the discount on the BDC’s junior capital in the entity reached (43%). In the second quarter 2020 the valuation increased modestly – along with market loan values. Nonetheless, we are retaining the CCR 4 rating.

In the most recent quarter income from the JV paid out to its sponsors was reduced due to the precipitous drop in LIBOR only marginally offset by the 80 basis point average “LIBOR floors”. Furthermore, MAIN and CSWC injected additional equity capital in the quarter while the JV’s lender reduced its debt commitment, as mentioned in CSWC’s 10-Q: “On April 30, 2020, the I-45 credit facility was amended to permanently reduce the I-45 credit facility amount through a prepayment of $15.0 million and to change the minimum utilization requirements”. 

A quick look down the portfolio list of I-45 SLF shows that several troubled companies already on CSWC and MAIN’s own books are here as well. We’ve reviewed the entire portfolio and identified several underperformers and noted that cost to FMV is only 85%, even after loan values generally increased in the June 2020 quarter. We’re pretty sure the BDC partners will not be getting back in full the capital deployed whenever the JV is eventually closed down. At this stage we expect the eventual realized loss will be ($15mn-$20mn), split 80/20 between CSWC and MAIN. In the interim, though, the JV should continue to pay out a dividend, so we’re not adding the name to the Weakest Links list.

American Teleconferencing Services: IIQ 2020 Update

Now that IIQ 2020 BDC results have been released, we can confirm that American Teleconferencing Services – a wholly owned subsidiary of communications company Premiere Global Services – remains rated CCR 4. We’re guided mostly by the latest valuations from multiple BDCs with first lien and second lien exposure. The former is discounted by wildly varying percentages : (6%) to (35%). The latter has been nearly cut by half in value. Moody’s has given the company a Caa2 rating as recently as August . The ratings group had this to say:

“The debt restructuring in October 2019, surge in audioconferencing volumes and virtual events during the pandemic and sponsor’s equity contributions have improved the liquidity position but it is uncertain how the business will perform when the crisis abates. The rating additionally considers execution risks in plans to cross-sell services and operate under shared services agreements with TPx Communications, which was acquired in February 2020 by affiliates of Siris Capital, which also owns the parent company of American Teleconferencing Services.”

There does not seem any reason to add the company to the Weakest Links list yet but the business has some considerable way to go before lenders are out of the woods in what is a Major position in aggregate: $109.4mn at cost and $88.8mn at FMV. Most at risk – but with modest exposure – is Capital Southwest (CSWC) with $2.1mn in the second lien, which is valued at $1.1mn. The outlook is favorable in the short run, as Moody’s suggests but the company will need monitoring.

AG Kings Holdings: Files Chapter 11

On August 24, 2020 AG Kings Holdings, a grocery chain that includes regional names like Balducci’s and King’s Food Market, filed Chapter 11. According to a trade publication, the company – which has been troubled for some time -has a “stalking horse” buyer willing to pay $75mn for most of the stores in the chains. Furthermore, other buyers will be solicited under court protection. We learned that the company has “nearly $115mn in debts”. Of late the company has performed better than in the past thanks to Covid-19. Ironically, though, this recent success only encouraged management to strike while market conditions were as favorable as possible. The goal – despite unresolved issues with the company’s unions – is to be in and out of bankruptcy before the end of 2020.

Readers will know we have written about the company multiple times before, most recently on August 21, 2020. There are two BDCs with exposure of $26.9mn at June 30, 2020: Capital Southwest (CSWC) and WhiteHorse Finance (WHF). The latter recently added to its position in the first lien debt by buying an expanded position at a substantial discount. As a result, the aggregate FMV of the positions held is greater than the cost. WHF has two-thirds of the debt – including the most recent addition – and CSWC the rest.

The debt has been on non accrual since the IVQ 2018, so some sort of resolution was expected. From what we’ve learned from the Chapter 11 filing, and with the possibility of other buyers joining in, the BDCs have a good chance to get repaid in full or in part and in short order. From what we can tell, CSWC and WHF are not part of the buying group. We do know that the company’s “existing secured lender” is providing a $20.0mn Debtor In Possession facility, but we don’t know if that includes the BDCs who are principally in the Term Loan that nominally matures August 8, 2021. (CSWC does show an undrawn Revolver in its portfolio list).

We are retaining the CCR 5 rating for the moment and project the ultimate realized loss will be no greater than what CSWC – which invested close to par value – has booked : (30%) of its cost. If we’re right, CSWC will absorb a realized loss of just over ($3.0mn) and WHF – thanks to boldly buying more debt at a discount – may get away without a net loss. That could occur by the IVQ 2020 results. We expect both lenders will be happy with such an outcome and even more delighted if the company attracts more generous buyers. Much can happen in bankruptcy, but this may be the best outcome available after a year and a half of waiting around and no income coming in.

The BDC Credit Reporter will revisit this story as we learn what the final outcome looks like and we can estimate with greater accuracy what the ultimate economics might look like.

Arena Energy: Files Chapter 11

Naturally enough, a few days after we remarked that BDC-financed company bankruptcies had slowed to a seeming halt, a major Chapter 11 filing occurs. In this case, Arena Energy L.P. filed for bankruptcy protection on August 21, 2020. According to the Wall Street Journal, the company has already agreed on a sale to PE-group Lime Rock Partners and management. The existing lenders have mostly signed off on the sale. Apparently, the term loan lenders, who are junior to the reserve-based secured lenders, will receiving a mere 2% of their $439mn in debt back.

This is sad, but not unexpected news, for the three BDCs involved- all part of the FS-KKR Capital organization: non-traded FS Energy & Power and twin public entities FS-KKR Capital (FSK) and FS-KKR Capital II (FSKR). In total, the BDCs funded $179.5mn, all in second lien debt, and which used to be priced at LIBOR + 12.00%. The debt has underperforming and on non accrual since the IQ 2020, reflecting a very sharp drop in fortunes in a brief period. This is debt that dates back to 2015, and when GSO Blackstone was managing these BDCs. Unfortunately, new external manager KKR has not been able to rescue this unfortunate investment in the years since taking over.

If the 2% recovery rate is correct, the BDCs will have to take a further unrealized loss in the next quarter because the existing position was written down (86%). Either in the IIIQ or IVQ 2020 we expect the lenders will have to book a final realized loss of approx ($175mn) ! Also lost is the near ($22mn) of annual investment income being booked through the IVQ 2019. This is a significant reverse by any measure, with FS Energy absorbing about two-thirds; then FSKR with $54mn at cost and finally FSK at $9mn. The almost 100% loss is deeply disconcerting and suggests the lenders – whether they recognized it or not – were investing more like a PE group than a lender but with a capped return and an unlimited downside. Finally, this proves the BDC Credit Reporter’s oft-made point that energy lending is an oxymoron and an inappropriate asset for an industry with a predominantly retail investor base.

We had already rated the company a CCR 5, and expect to see the name removed from the books of all the BDCs involved by year-end.

AG Kings Holdings: Valuation Differences

We’ve now heard from the two BDCs with first lien debt exposure to “troubled” retailer AG Kings Holdings. The debt has been on non-accrual since 2019 and remains so after IIQ 2020. However, Capital Southwest (CSWC) discounts it’s $9.5mn invested at cost by (35%). WhiteHorse Finance (WHF), by contrast, values the same debt ($17.3mn at cost) at a 20% premium…That discrepancy seems to be due to the fact that WHF doubled down in the period and bought more of the company’s debt in the secondary market at a discount that management was not willing to share on its conference call, but which an analyst placed at (63%).

Both BDCs have admitted that the retailer has been performing better thanks to the changed market conditions brought on by Covid-19. Nationally supermarkets have benefited from more people eating at home and AG Kings is no exception.

Given the company is still restructuring and still on non accrual , the BDC Credit Reporter is maintaining the CCR 5 (Non Performing) rating. that dates back to IVQ 2018. However, the outlook for recovery of some sort – perhaps even in full – is looking good. That’s positive news for CSWC and even more for WHF, which has made a bold move in buying non-performing debt. This might be to take advantage of the discounted price and/or as part of its restructuring strategy, but we’re just guessing.

We’ll be keeping as close tabs as we can on this private company and the BDC valuations involved. In an exception to the rule, we may see an upgrade before a liquidation or further write-down.

Delphi Behavioral Health: Restructured

We learned from Capital Southwest (CSWC) – the only BDC lender to what was called Delphi Intermediate Healthco – that the troubled mental health company was restructured out of court. As a result the debt – which was on non accrual -has been returned to performing status from the IIQ 2020 but with a new capital structure, and after CSWC absorbed a significant realized loss. (See below). Furthermore, the company’s name was changed on CSWC’s books to Delphi Behavioral Health Group LLC. The BDC owns a significant – but undetermined stake in the restructured business and sits on the Board.

The realized loss booked by CSWC in the second quarter on Delphi was ($5.5mn) or nearly half the $11.7mn invested in debt just prior to the restructuring. According to Advantage Data, this was a portfolio company on the BDC’s books since IVQ 2017 and in an industry which CSWC feels it understands given its exposure to similar entities in its portfolio. Delphi performed normally – judging by CSWC’s portfolio valuations and absence of conference call commentary – right up to the IVQ 2019 when the debt was placed on non accrual. The initial discount on the defaulted first lien loan was (40%), but ended up to be higher by the time the realized loss was booked.

Given the timing, the problems at Delphi clearly pre-dated the Covid-19 crisis but the pandemic must have made the situation worse. We call these failures First Wave credit problems.

The new debt on a restructured/renamed Delphi is more expensive than before, but currently paid in PIK form and the debt matures in 2023 versus 2022 previously. We know little about which other lenders are involved or the overall capital structure. We do know that CSWC has increased its internal rating from a 4 to 2 on their internal rating scale. The BDC Credit Reporter has also upgraded the company from a CCR 5 to CCR 3. That’s still in our underperforming category and on our Watch List. Like CSWC, though, we are hopeful that the business will recover and the BDC – and its shareholders – might regain some or all their capital loss from an eventual sale. Still, it’s early days and a business needs more than a restructured and de-leveraged balance sheet to be successful.

Delphi will also be a test of CSWC’s skill at “turning around” unprofitable companies; taking equity positions and sticking around for the long haul. These debt-for-equity swaps take up management time; often result in more capital being advanced and typically result in lower current income. If all those sacrifices result in an eventual repayment of all debt and interest and an equity gain, kudos to the BDC manager. If not – and over a number of transactions – one has to question the approach. For the record, CSWC has 9 companies – including Delphi – which are marked as “affiliated” and in which the BDC has some sort of equity interest. Of those 3 are “underperforming” to various degrees. [We’re not counting CSWC’s investment in its I-45 JV with Main Street, also underperforming].

Zep Inc.: Upgraded By Moody’s

On August 17, 2020 Moody’s upgraded the corporate and debt ratings of Zep Inc., a producer of “chemical based products including cleaners, degreasers, deodorizers, disinfectants, floor finishes and sanitizers, primarily for business and industrial use“. The “Corporate Family Rating” was increased to Caa1 from Caa2 . Moody’s also upgraded Zep’s first lien senior secured credit facilities to B3 from Caa1 and its second lien term loan to Caa3 from Ca. The outlook is stable.

Apparently, the company has benefited from “the significant increase in demand for its products as customers across its food & beverage and industrial end markets enhanced standard operating procedures and protocols around cleaning, sanitation and maintenance in their facilities in response to the coronavirus pandemic“. Liquidity, too, is getting better and Moody’s expects these trends to continue.

For the 6 BDCs with $126mn in “Major” exposure to Zep, this is good news. In the IQ 2020, the second lien debt held was discounted (59%) and the first lien (30%), but was already being valued higher in the second quarter, reflecting the same trends as caused the Moody’s upgrade. Most impacted will be the Goldman Sachs organization whose 3 public and private BDC funds each have a major position in Zep to the tune of $88.4mn or two-thirds of the total. Oaktree Specialty Lending (OCSL) is also a significant lender with $31.6mn, mostly in second lien. Also involved are Oaktree Strategic Income (OCSI) as well as non-traded Audax Credit, but for only small amounts.

The BDC Reporter is upgrading Zep to a Corporate Credit Rating of 3 from CCR 4 given that the odds of full recovery are greater than that of eventual loss. Nonetheless, before setting off the fireworks and having a parade at this good news, we should remember most BDC exposure is in the second lien debt which still has a speculative rating (Caa3). Furthermore, the debt does not mature till 2025. Much can happen in the five years ahead, which is why we are retaining Zep on the underperformers list.

Still, in the short term – and the IIQ upward valuation notwithstanding – we may see a lower discount (i.e. unrealized appreciation) in the BDC IIIQ 2020 results.

Merx Aviation: Restructured

Apollo Investment (AINV) reported that its largest investment – Merx Aviation – was restructured in a couple of ways in the second quarter 2020. The aircraft leasing and servicing company, which AINV owns 100% of the stock of, saw $105mn of its $305mn in Revolver debt outstanding from AINV converted to debt. Second, the remaining debt saw its interest rate drop to 10.0% from 12.0%. Management of the BDC were circumspect in discussing the company’s performance, even though Merx’s FMV represents one-third of net book value at June 30, 2020. On the conference call AINV executive spoke in general terms, like this: “The pandemic has caused an unprecedented decline in global air traffic, which has led to a widespread lease deferrals throughout the industry. Although aircraft — air traffic trends have improved slightly more recently, it remains significantly below pre-pandemic levels“.

Despite the huge strains on aircraft lessors and the loss of substantial income because of the above, AINV wrote down its equity stake in Merx – which just increased by 800% at cost – by only ($4.2mn).

BDC portfolio company valuations are always a riddle wrapped in an enigma, initially prepared by internal staff, often reviewed by an outside appraisal firm and the final responsibility of the directors. To our minds – given what we do know about market conditions; the high leverage involved and the restructuring, this write-down is wholly inadequate and inexplicable. At this stage, AINV’s Merx investment taken overall is still valued above cost and would not show up on the BDC’s own underperforming company list.

For our part, we reaffirm the BDC Credit Reporters Corporate Credit Rating of 4, which we instituted last quarter. We do not have Merx on our Weakest Links list only because AINV has such latitude to continue paying interest even if the business is insolvent, which may be the case from what little we know. The fact that one third of debt is no longer accruing income is a negative sign, as is the need to lower the rate. These are the actions of an owner rather than a lender and make the entire valuation questionable.

This is a very serious challenge for AINV. In a short time, the BDC has lost ($16.6mn) in annual investment income. That’s just over 10% of IQ 2020 Net Investment Income. If the entire debt goes on non accrual another ($20.0mn) in annual Investment Income would be lost and AINV would have lost (25%) of its earlier Net Investment Income. We’ve already mentioned the size of the Merx investment on the balance sheet and in relation to net book value.

We will continue to update readers about Merx, but may not have anything to report till AINV does so given the closely held nature of the investment and management’s closed lips. There is a danger of an “October surprise” when AINV reports IIIQ 2020 results, especially as the global aviation business continues to face dire circumstances. Unfortunately, AINV shareholders may not find out till it’s too late that the current valuation was unrealistic. For everybody concerned, we hope otherwise.

Glacier Oil & Gas: Debt Placed On Non-Accrual – Updated

Glacier Oil & Gas is an Alaskan oil & gas exploration company. We learn from Apollo Investment’s (AINV) IQ 2020 conference call that – not surprisingly – the company is performing poorly. As a result, the BDC’s $37.2mn of second lien debt has been placed on non accrual. That will result in $3.7mn of investment income not being received. (We believe the income was being paid in PIK form before so the cash impact on AINV will be nil).

We are downgrading Glacier from CCR 4 to CCR 5, or non performing. We did not have the company on our Weakest Links list given that AINV – with a 98% ownership position – has great flexibility about when to choose to be paid interest or not. That makes prognostication difficult. With the benefit of hindsight considering the current market conditions moving to non accrual makes sense.

The overall investment in Glacier, which has a cost of $67.0mn is now valued at just $14.7mn. For our purposes, we are assuming AINV will eventually have to write the entire investment off, ending a journey that began in 2012 when Glacier was called Miller Energy with $40mn committed. Since then, the BDC restructured and renamed the business (in 2016) which now faces an existential challenge. We expect a further write-down will occur in AINV’s IIQ 2020 results. [Written My 23, 2020]

IIQ 2020 Update: AINV continued to write down its position in Glacier Oil & Gas by ($3.2mn). The hit was taken on the already non performing second lien loan. That leaves a FMV – all in the debt as the equity has been written down to zero already – of $11.5mn. We continue to believe that the entire investment will be written off but have little confidence of getting a full and frank update from management which said nothing about the company this last quarter. We do know that “production is hedged through 2020”. 2021 may be the year of reckoning if there’s no huge uptick in oil prices. We maintain a CCR 5 rating.

Maxus Carbon: Debt Placed On Non Accrual

Apollo Investment (AINV) has reported IIQ 2020 results, which included the news that two debt facilities associated with chemical plant Maxus Carbon were placed on non accrual in the quarter. These are two 2024 senior loans of $13.3mn and $17.1mn respectively. AINV – which owns the troubled business – had already been requiring only a reduced interest rate (5.0% and 3.0% respectively). Still, the income lost is substantial: ($1.2mn) annually.

We’ve written about the company before on two occasions. Every time we have a new look at the company business seems to have gotten worse and valuations are lower. Besides the non accruals AINV took two unrealized write-downs this quarter on debt and equity in Maxus Carbon and its affiliated company totaling of ($10.0mn). The current FMV is $22.6mn on investments with a cost of $76.5mn. That means (70%) has been discounted already.

The BDC Credit Reporter has downgraded Maxus Carbon to CCR 5, or non performing. We’d be surprised if AINV achieved any recovery on the entire amount invested, but with very limited disclosures as to what is going right or wrong at the plant it’s hard to point to more than hunches. Unfortunately, this is an example of a “zombie” portfolio company kept alive – seemingly – by the goodwill of its lender-owner but generating no return for the BDC’s shareholders. Apollo Global – which manages AINV – should be either closing down this operation; bringing in partners to validate the value, or – at the very least – provide a level of performance disclosure to allow its shareholders to determine what the eventual outcome might be. Instead, we are getting a slow death by multiple cuts in an information void.

Rent The Runway: To Close All Stores

On August 14, 2020 CNBC reported that Rent The Runway announced its intention to permanently close its 5 retail locations, all in major U.S. cities. As you can imagine, this is the result of Covid-19 that had already forced the temporary closure of these “brick and mortar” stores. The company, though, plans to continue operating its e-commerce capability and improve its network of drop boxes.

There are two venture oriented BDCs with exposure to the company: SuRo Capital (SSSS) and public BDC TriplePoint Venture Growth (TPVG), with total exposure of $6.4mn at cost. SSSS added $5.0mn in the IIQ 2020, presumably to bolster the company’s finances. TPVG’s investment is in preferred and equity, and valued at a premium to cost. That’s likely to change given the retail location closure but the amounts involved are unlikely to have a material impact, and there is no investment income involved.

We are adding the company to the underperformers list, with a Corporate Credit Rating of 3.

Denbury Resources: Files Chapter 11

On July 30, 2020 energy company Denbury Resources filed Chapter 11. The move was expected as we had added Denbury to the Weakest Links list earlier in the month. As is so often the case these days, the company had negotiated a restructuring plan in advance with most of its creditors and expects a quick exit from Chapter 11, with a much de-leveraged balance sheet.

BDC exposure continues to be limited to FS Energy & Power – the non traded, energy specialist BDC that has been taking it on the chin time after time during this most difficult period for its chosen sector. As of June 2020, the BDC’s exposure has dropped from the prior quarter. Off the books – and presumably written off – is $12.0mn in second lien debt due in 2024. What remains is $42.1mn in Term debt due 2022 and already written down by (59%). Between the two facilities, the BDC will be losing ($4.8mn_ of annual investment income. Going forward, we expect the debt will be converted to common stock, which means the loss of income could be permanent, but leaves a potential long term equity upside.

We have downgraded the company to CCR 5 from CCR 4; removed Denbury from the Weakest Links list and added an outcome expectation of a debt for equity swap, all of which is reflected in the BDC Credit Reporter’s database.

Dynamic Product Tankers: Downgraded To CCR 4

Based on the August 7, 2020 Apollo Investment (AINV) 10-Q filing, which saw the value of its equity stake in Dynamic Product Tankers get reduced by (45%), from (27%) in the prior quarter, we’ve chosen to downgrade the tanker company to CCR 4 from CCR 3. We know very little about what’s happening at this tanker company 85% owned by AINV for 5 years now. The more a BDC controls a company the less the outside world – including its shareholders are told. However, we’re aware that the shipping business is – by and large – in poor shape and in danger of getting worse if we get an ever deepening recession. We thought the most conservative approach would be to downgrade the company to one notch above non performing.

AINV is the only BDC lender to the company, as well as its principal owner, with $42mn invested at cost in first lien debt and another $50mn in the equity. That’s nearly three times as much AINV initially advanced. The investment income involved is high: $3.5mn. Any interruption or reduction in the interest income would have a material impact on the BDC. Furthermore, the remaining FMV of debt and equity is $69.3mn, also material: 7% of AINV’s net assets. We doubt that even in a worst case much more than half the total exposure at cost is at risk of being written off, but that’s still a notable number.

We’ll probably hear about Dynamic Product Tankers only next time AINV reports its results, and we’ll dutifully report back.

A-L Parent: Downgraded To CCR 4

After a review of the IIQ 2020 BDC results, the BDC Credit Reporter decided to downgrade Learfield Communications, LLC (owned by A-L Parent, LLC) to CCR 4 from CCR 3. We noted that the two BDCs holding the company’s second lien debt sharply discounted their positions as of June 30, 2020. Furthermore, on May 20, 2020, Moody’s downgraded the company to Caa1 and the second lien debt – the only BDC exposure – to Caa3. We are mostly concerned that the media company which depends on college sports broadcasting is said to have very weak liquidity. Furthermore, leverage was said to be very high at year-end 2019 (10x !) and is likely only to have gotten worse. As a result, we are also adding the company to the Weakest Links list.

Apollo Investment (AINV) has $5.5mn invested at cost and Bain Capital Specialty Finance (BCSF) $.0mn and total investment income at risk is nearly $0.8mn. For neither BDC is the amount at risk highly material to future results. However, given the second lien status and the long dry spell ahead for college sports an eventual complete write-off is a distinct possibility.

We’ll be keeping track of developments at the company in the public record and next time the BDCs involved report, but there’s a chance a bankruptcy or restructuring may have happened before then. Learfield is a clear Second Wave credit casualty. Admittedly, Moody’s had downgraded the company previously in 2019 and at the end of the year the BDCs involved had discounted their debt by (10%), causing us to add the name to the underperformers list. However, the interruption in business brought on by Covid-19 has accelerated the company’s troubles. Of course, all that leverage piled up before the crisis happened didn’t help…

Fieldwood Energy: Files Chapter 11

With all the sense of inevitability of an ancient Greek drama, yet another energy company has filed for bankruptcy protection. This time it’s Fieldwood Energy, LLCa premier independent E&P company in the Gulf of Mexico“.  Based on the company’s press release, the company already has a formal restructuring plan to submit to the bankruptcy court, agreed to by two-thirds of its senior lenders. Once again a company and its creditors are looking to the “debt for equity swap” as the solution for what ails the business. Also – as per the usual – Fieldwood has arranged a Debtor-In-Possession (“DIP”) facility and is using cash on hand to fund liquidity needs while going through the bankruptcy process. The amount of the DIP, though, is not given.

There are three BDCs with exposure – all in the first lien debt – to Fieldwood: $13.3mn. The only public BDC is Barings BDC (BBDC), which also has the only material exposure: $10.1mn. The rest is held by non traded Monroe Capital Income Plus and NexPoint Capital. The loan – now on non accrual -is priced at just LIBOR + 525 bps, suggesting lenders believed this was a “safe” energy loan (to our minds a clear oxymoron) when first booked back in 2018.

However, the investment has been in trouble for some time, rated as underperforming as far back as IQ 2020, long before Covid-19 drastically reduced market demand for fossil fuels. The BDC Credit Reporter has been writing about the company since April 15, 2020 and had already downgraded Fieldwood to a CCR 4 rating, and placed the name on our Weakest Links list. Now the company has been downgraded to CCR 5 and added to the Bankruptcy list.

For BBDC this is a telling reminder that no energy loan is safe in a world where oil can trade at $100 a barrel one day and at next to nothing a few years later. These single focus businesses cannot handle almost any amount of debt when their main product is subject to such drastic fluctuations. In this case BBDC, and the other lenders, look likely to be left with equity of dubious value and may have to stump up more funds with no great confidence that this time the right capital structure has been found.

We’ll circle back to Fieldwood once we hear about whether the court is in agreement with the proposed plan and when we can evaluate what the company’s balance sheet – and business prospects – might look like going forward.

Benevis Holdings : Files Chapter 11

On August 3, 2020 dental support business Benevis Holdings filed voluntary Chapter 11. The Georgia-based mid-market company blamed Covid-19 for the need to close clinics across the country, and the resulting need to seek court protection. No official Restructuring Support Agreement was filed by the company but management indicated that its lenders were supportive of a restructuring of its balance sheet and sale of the business. Benevis has already arranged $30mn in Debtor In Possession (“DIP”) financing, to be provided by its existing bank group, headed by New Mountain Finance. We’re not yet clear if the parties intend to undertake a “debt for equity swap” or are preparing Benevis to be sold to a third party, but we believe the former is most likely. The company indicated assets and liabilities are between $100mn-$500mn.

The only BDC lender to Benevis is publicly traded New Mountain Finance (NMFC), but we imagine other funds managed by its eponymous parent are involved in the current loan and in the DIP financing. NMFC has invested $85.6mn at cost, all in first lien Benevis debt and discounted by (25%) as of March 31, 2020. We cannot tell whether that value remains reasonable or not. However, something under ($6.0mn) in annual investment income is at risk of temporary or permanent interruption from the filing. Moreover, total exposure is likely to increase with the new DIP loan and – potentially – any new capital that might be required.

We get the impression from the company’s press release that management believes the loss of income is a temporary phenomenon and the business will bounce back shortly. After all, Benevis was performing normally – judging by NMFC’s year end 2019 valuation of its debt – which was at par. However, if we get a second wave of business closings, management’s optimism may prove to be misplaced.

The BDC Credit Reporter is leapfrogging our credit rating down from CCR 3 to CCR 5, and adding Benevis to the list of BDC-financed bankrupt companies. We’re only at August 3, and this is the fourth bankruptcy of the month and the 43rd of the year…

This is a material investment for NMFC: 5.8% of net book value as of March 31, 2020. We would expect to see that value drop further in the IIQ 2020 when results are announced shortly. However, what the final outcome might be is impossible to speculate about, but we’ll be keeping close tabs on the company’s progress through bankruptcy court and will be listening out to whatever NMFC chooses to share about its plans.

Le Tote: Files Chapter 11

The hits just keep on coming to retailers. On August 2, 2020 Le Tote Inc. , which owns Lord & Taylor , filed for Chapter 11. As in most cases these days, this was not a surprise. Back in April the BDC Credit Reporter wrote two articles about the upstart company that had acquired the venerable but failing Lord & Taylor and tried to create a hybrid online bricks and mortar retail concept. Already then Le Tote was rated CCR 4 and was on our Weakest Links list.

To get out of its current predicament the company “will simultaneously solicit bids for a going concern sale of both its Le Tote and Lord + Taylor businesses, and conduct targeted store closing sales to maximize the value of its business“. No word on any Debtor In Possession (DIP) financing, which is worrying. There does not seem to be any “stalking horse buyer” either. The company has agreed with its lenders to use cash collateral to fund operations going forward.

From a BDC perspective, nothing has changed in terms of exposure from our earlier posts. This is likely to be a material setback for the Carlyle organization as its public and private BDCs TCG BDC (CGBD) and TCG BDC II are major lenders to the company. According to news report, Le Tote’s total debt is just $137mn and the Carlyle exposure is $27.9mn. (75% is held by the non-traded BDC). Furthermore, we’d guess the BDcs will have to recognize a substantial devaluation of their debt which was only discounted (7%), even though the debt is second lien in a business clearly headed to disaster. Judging by market conditions for retailers of every stripe and the junior position in the debt stack, this could result in a complete write-off for the two Carlyle entities. Investment income at risk is ($2.0mn) per annum.

Unless we’re much mistaken – which happens – this will be a black eye for the Carlyle Group’s BDC lending. It’s not just the amounts involved, which are relatively modest given the size of the two funds, but the very fact of choosing to lend as recently as IVQ 2019 in an industry where the word “apocalypse” is constantly being used. There’s been no discussion of this credit on CGBD’s past conference calls but the subject may get addressed when IIQ 2020 results are reviewed.

In the interim, we’ve downgraded Le Tote to CCR 5 and removed the name from our Weakest Links list (which is shrinking for all the wrong reasons). This is the second BDC-financed company to file for bankruptcy in August already and the 42nd for the year. See the BDC Credit Reporter’s Bankruptcy list.

Men’s Wearhouse Inc. Files Chapter 11

On August 2, 2020 Tailored Brands – the parent of Men Wearhouse Inc. – filed Chapter 11. The BDC Credit Reporter has been writing about the troubled men’s clothes retailer since September 2019. In our most recent post on May 9, 2020 we predicted the company was likely to file for bankruptcy protection. In the last few days, the financial press has been abuzz with similar predictions. So, in two words: no surprise.

As per the new normal in leveraged lending, the company has agreed a restructuring plan with its senior lenders for a “debt to equity swap”, which will see $630mn of debt written off in return for a controlling interest in the business. In addition – and critically important from both a borrower and lender perspective because liquidity is tight and the future of all retail uncertain – the lenders are offering up $500mn in Debtor-In-Possession (“DIP”) financing. $400mn of that debt – unlike your bog standard DIP loan – will convert into longer term financing when the partly de-leveraged company exits bankruptcy. For more information, Tailored Brands has its own website on the subject.

Thankfully, BDC exposure – as we’ve noted previously – is modest, with only Barings BDC (BBDC) involved, with a $9.9mn position in the first lien debt and already written down by two-thirds. For a while income will be lost on the debt – we presume – to the tune of under ($0.35mn) a year. More importantly, the BDC will be booking in the IIIQ 2020 a Realized Loss of ($6mn-$7mn). Chances are high, though, that BBDC will be required to ante up for the DIP /long term financing. Along with the equity, BBDC will be tied to this men’s clothing business for many years to come. However, the amount at risk – even after their portion of the DIP is funded – should barely be material.

Nonetheless, this is a setback for a “first lien secured loan” that was thought of when first booked by BBDC in the IIIQ 2018 to be low risk, given the pricing was LIBOR + 325 bps. The likely recovery of one-third or less is also a reminder that sitting high on the capital structure is no guarantee in and of itself of low losses.

For our part, we’ve downgraded the company to CCR 5 (non performing) from CCR 4, and added the business to the Bankruptcies list we maintain, the first of August. The company has been removed from the Weakest Links list. We’ll circle back at the earlier of hearing from BBDC or learning more about whether the court approves the prepackaged restructuring plan. We expect to eventually upgrade Men’s Wearhouse when out of bankruptcy to CCR 3. That’s still on the underperforming list because the company will still be substantially leveraged and still in retail and still selling business wear when most everybody is wearing pajamas.

By the way, by our estimate, is still a First Wave bankruptcy: a company that was in deep trouble due to shifts in retail and consumer taste even before Covid-19. The business would have likely ended up in a similar place in the months ahead anyway even without the impact of the virus. The damage,though, to the company and to its lenders is that much worse because of what has been happening since March and the recovery therefrom that much more difficult.

Mood Media : Files Chapter 11

As the company promised back on June 26, 2020 when we last wrote, Mood Media Inc. has filed for Chapter 11 bankruptcy. Also as previously indicated, the company and its creditors appear to have worked out a restructuring agreement in advance, the details of which are spelt out in the prior article. In the most recent press release on July 30, 2020 Mood Media indicated the whole plan was submitted to a judge on July 31, with the hope of exiting from Chapter 11 status very quickly. No word yet on the outcome of that deliberation.

We continue to believe the $120mn invested by three BDCs (with most of the capital advanced by FS KKR Capital or FSK and FS KKR Capital II or FSKR) will be largely written off. Our current estimate is that two-thirds of the debt and equity will result in a realized loss. Also likely is that the BDCs will be involved in both the DIP financing and the $200mn in post-bankruptcy senior loans planned. That will result in some investment income coming in but will increase long term exposure. Many years may go by – even if the restructured Mood Media does well – before this investment gets exited, as the BDC lenders will now be owners and creditors.

The hard truth is that even a restructured Mood Media has no guarantee of success given the pandemic and the structural changes going on in retail. If more and more of us shop from home, and less and less in stores, the demand for the company’s piped-in music will necessarily drop. Currently we are maintaining a Corporate Credit Rating of 5, and adding the company to the BDC Bankruptcies list, an exclusive feature of our publication. This is the tenth BDC-financed company bankruptcy in July and the 40th for the year. (Remember to go to the BDC Credit Reporter’s “BDC Bankruptcies” table for the constantly updated list of every company that has filed for Chapter 7 or 11 in 2020). Currently Mood Media is at the top but – the way things are going – will soon be displaced by new entrants.