C2 Educational Systems: Valuation Update

Saratoga Investment (SAR) has just reported quarterly results one month ahead of the BDC pack, which has provided a number of updates on where underperforming companies stand, based on valuations as of August 2020. This includes C2 Educational Systems – which was added to the underperformers list as of the IIQ 2020 by SAR – its only BDC lender – and downgraded from CCR 2 to CCR 3 by the BDC Credit Reporter.

As of August 2020, SAR’s valuation remains essentially unchanged with a (19%) discount to cost applied. SAR – as usual – had little to say about any specifics. Research in the public record, though, shows that the company received a significant PPP loan in April, which should have helped the business. We also expect that C2 – which is in the face to face business of tutoring K-12th grade students – is also making necessary changes to its business model by increasing the emphasis on “virtual tutoring”. The business was performing normally – based on SAR’s valuations at the time – before Covid-19 and should be a survivor. The involvement of lower middle market group PE group Serent Capital as owner is also a plus, even though we don’t know if any new capital has been added or will be.

We are maintaining our CCR 3 rating on the company and do not currently expect a loss of any kind down the road. SAR has $16.0mn invested in first lien debt at cost. Should the company return to performing status SAR could book a $3.0mn increase in value.

We’ll continue to track the company’s valuation quarterly via SAR and report back to our readers.

Travelport Worldwide: Upgraded By S&P

Good news for Travelport Worldwide and subsidiary Travelport Finance (Luxembourg) SARL. Both were upgraded on October 2, 2020 by S&P to CCC+, after completing a debt restructuring and exchange. As we’ve reported previously – and all over the financial press – Travelport was previously up in arms against its lenders and much huffing and puffing by lawyers on both sides was previously going on. That’s behind us now since a September 17 agreement where the company – and its sponsor Elliott Management – agreed not to spin off intellectual property rights and lenders agreed to advance more monies, and not call a default. Importantly – because all BDC exposure is concentrated therein – the company’s 2026 Term Loan has been given a rating of CCC-, up from D.

By no means is the business of the company – tied to the much suffering global travel and tourism industries – out of the woods yet. Liquidity has been bolstered by the restructuring and the immediate threat of lender foreclosure has passed but S&P is making forecasts about revenue levels and profits in the rest of 2020 and 2021 that must – under current conditions – be not much more than glorified guesses.

Nonetheless, the BDC Reporter is upgrading GSO Blackstone’s position to CCR 3 from CCR 4 , which is good news for the non-traded BDC which had written down its nearly $100mn debt by nearly ($30mn). Some positive reversal is likely in the IIIQ 2020. Likewise Garrison Capital (GARS) – which had placed its $2.6mn in the 2026 debt on non accrual and taken a (34%) haircut as of June – will be able to return the debt to accrual status. We’ve also removed Travelport from our Weakest Links category, as the prospect of a default now recedes, albeit after being very close to being forced into bankruptcy and a contentious dispute between the parties.

The BDC Credit Reporter, though, is not done with Travelport. We expect that we’ll be revisiting the status of the company and the substantial exposure (by Blackstone/GSO at least) for some time to come. After all, there are still 6 years left on the loan and S&P is only granting the position one of its weakest ratings. Over at Moody’s, which also adjusted its ratings on September 28, 2020, the view is that they “continue to perceive Travelport’s capital structure as unsustainable due to the continued operating performance weakness and the overall uncertainties around the extent of recovery“. Maybe a CCR 3 rating is too generous

Kenan Advantage Group: Acquires Bulk Transporter

According to a news report on October 2, 2020 , Kenan Advantage Group has acquired Paul’s Hauling Ltd.

The North Canton, Ohio-based tank truck transportation and logistics provider said the acquisition, announced Oct. 2, was completed through its Canadian subsidiary, KAG Canada/RTL Westcan. Paul’s Hauling provides bulk transport services in western Canada“.

The BDC Credit Reporter thought this was a good sign for the financial health of Kenan, which was recently added in the IQ 2020 to the underperformers list with a CCR 3 rating, due to its first and second lien debt discounted as much as (19%). Even in the IIQ 2020, the first lien – held by Barings BDC (BBDC) – was still discounted (10%) and thus remains just within the boundary of underperforming. However, we are going to be bold and – based on this latest news – suppose the trucking company is back to performing as expected.

As a result, we are upgrading Kenan to CCR 2 from CCR 3, one of many companies that made a quick cameo on the underperforming list and can now be removed for the right reason. Besides BBDC, the other BDC lender is FS KKR Capital (FSK), which has $17.30mn in Kenan’s subordinated debt. Don’t expect to see much of a pick up in value at FSK when IIIQ results are published. Already in the IIQ 2020 FSK reduced its discount to (1%) from (16%) in the IQ. The principal beneficiary – if they still hold the position – is BBDC, whose $4.3mn senior debt position was discounted by a tenth and should be valued back to par. That’s worth a few hundred thousands of unrealized appreciation, but unlikely to move any needles.

Lonestar Resources: Files Chapter 11

Energy company Lonestar Resources kicks off October as the first BDC-financed company to file. However, the Chapter 11 was expected, and discussed in a prior article on September 15, 2020. In effect, the company is using the bankruptcy process to get a “debt for equity swap” deal done that was agreed on several weeks ago with most of its creditors. Under the plan, bondholders would receive 96% of the company’s new common stock.

We won’t dwell too much on the details because the only BDC lender with exposure – $23.2mn from FS Energy & Power – is in second lien debt and has already written down the fair value of its position (as of June 2020) to just $2.4mn. We won’t know till all the dust has settled what final value the BDC ascribes to any equity stake possibly received, but we’re not expecting much movement up or down.

Obviously, this is yet another BDC credit disaster from lending into the energy arena. However, that’s what FS Energy & Power was created to lend into, giving the manager little in way of attractive options,. Still, investing in the junior debt has almost always resulted in big or complete write-offs in this sector when things go wrong. In this case, the secured revolver lenders, though, are being paid out in full, with interest. What a difference a points of yield and a different position on the balance sheet can make…

We are downgrading – as long expected – Lonestar from CCR 4 to CCR 5. Shortly, we expect to see the company exit Chapter 11 and may re-rate the business to CCR 3. However, if FS Energy has no material stake, which we’ll find out shortly, we may drop further coverage.

Neiman Marcus: Exits Bankruptcy

After many disputes, Neiman Marcus has emerged from Chapter 11 protection on September 25, 2020. According to news reports, the iconic retailer has shed $4.0bn of its $5.5bn in debt. That’s $200mn a year of debt service saved. The new ownership “which include PIMCO, Davidson Kempner Capital Management, and Sixth Street” have  arranged $750mn in new exit financing that will repay the Debtor-In-Possession borrowings outstanding. There’s also a $125mn FILO secured facility and

.. “liquidity provided by $900 million in asset-based lending (ABL) led by Bank of America and a consortium of commercial banks. With the support of its new shareholders and funds available from the exit financing, FILO facility, and ABL facility, the company expects to be able to execute on strategic initiatives to help ensure long-term operations for Neiman Marcus“.

As you can see there a lot of comings and goings where the debt is concerned. This is important because all BDC exposure is held by Sixth Street Specialty Lending (TSLX) in three debt facilities. The fate of one of those debt facilities is straightforward – the $11.2mn 2020 DIP loan – which is about to be repaid, fees and all. That’s why TSLX carries the debt at a premium. Less clear is what happens to 2021 Term Loan, with a cost of $71.4mn. However, we expect that gets paid off as well and TSLX has valued the position very close to par. There’s a tiny 2023 Term Loan with a cost of only $0.8mn, which is likely to be written off.

We don’t know if TSLX will be signing up for a new tour of duty or whether the presence of the Sixth Street organization amongst the buyers makes that problematic. Chances are TSLX will receive its proceeds and as early as the end of the IIIQ 2020 (and may have already) and will exit Neiman with very little in the way of collateral damage. If so, that will be another feather in the cap of TSLX. By getting out whole from a credit where others have lost billions, the BDC validates its unique strategy of running towards – rather than away – from some of the worst bankruptcy prone companies in recent American history.

We will be upgrading Neiman from CCR 5 to CCR 3 if any BDC exposure remains, which we’ll learn more about when IIIQ 2020 results are published.

Online Tech Stores: Update

We are updating the BDC Credit Reporter’s file on Online Tech Stores, a wholesaler of computer printing products, as of June 30, 2020. The company went on non accrual in the IQ 2020. Given that the company was performing as planned before the pandemic – based on valuation levels anyway – we expect the reason for the non-performance was the slowdown in business activity. On the other hand, we heard from a trade report that the CEO was let go in April and a new executive appointed in May by the PE group that controls the company, so the troubles at Online Tech Stores might have been going on for some time.

In any case, the only two BDCs with exposure are publicly-traded OFS Capital (OFS), which has advanced $16.1mn and non-traded Hancock Park Corporate Income with a modest $1.0mn. Both lenders are involved in a 2023 Subordinated Loan that was first launched in 2018, shortly after Blackford Capital acquired the company. As mentioned, the debt became non-performing from the IQ 2020 – resulting in ($1.8mn) of annual investment income being impacted. The discount taken by both BDCs was (54%) and that remains almost the same as of June 2020: (56%).

OFS has not been forthcoming about what the plans are to turn the company around or what the PE group might be doing. We’re not reassured by the nature of the business at this stage, nor about the junior nature of the capital advanced by the BDCs. We downgraded the company from CCR 2 to CCR 5 in one fell swoop in the IQ 2020, and that rating still obtains.

Hopefully, OFS will let us know more about what’s happening when IIIQ 2020 results are announced in late October or early November 2020. The BDC still has plenty to lose: over ($0.50) a share in book value if that Subordinated debt gets fully written off. On the other hand, if a recovery is possible, the BDC has both an increase in fair market value and in income forthcoming. Hancock Park has a much smaller upside and downside.

Mallinckrodt Intl Finance SA: To File Chapter 11 ?

We are seeing almost daily “revelations” that Mallinckrodt PLC is preparing to file for Chapter 11 “within weeks” and is feverishly negotiating a restructuring agreement with its lenders and creditors. The latest such article is from the Wall Street Journal on September 25, 2020 in its premium Pro Bankruptcy publication. While we don’t doubt the veracity of the carefully placed rumor – this is the WSJ after all – the BDC Credit Reporter has been quoting experts warning of an imminent bankruptcy filing for the pharmaceutical giant as far back as September 2019 and as recently as February 2020.

If and when a bankruptcy occurs, it’s going to be big news given the size of the business and the billions of dollars lent to the Ireland-headquartered company. Thankfully, the BDC sector will be almost completely unimpacted. Only one BDC – publicly-traded Barings BDC (BBDC) – has any Mallinckrodt exposure. As of June 30, 2020, BBDC had advanced $3.2mn to the company in a Term Loan due 9/1/2024. The BDC had discounted the debt by (25%) already, to $2.4mn. It’s even possible that BBDC – based on what we’ve seen in other troubled large company loans – has already divested itself of the Mallinckrodt position. We’ll learn if that’s the case when IIIQ 2020 results come out. Either way, the loss is likely to be modest for BBDC. The investment income at risk is less than ($0.100mn).

We have already rated the company CCR 4 and placed the name on the Weakest Links list since May 2020. The likelihood that the company will move to CCR 5 has grown a little stronger with the WSJ report, even if these reports seem carefully timed by participants in the process seeking some advantage.

3rd Rock Gaming Holdings LLC: Debt On Non Accrual

We heard from publicly traded BDC OFS Capital (OFS) in a comment on their most recent conference call made on July 31, 2020 that software company 3rd Rock Gaming Holdings LLC has become non performing as of the IIQ 2020:

” 3rd Rock Gaming is a first lien, senior secured investment. We have rescheduled 3rd Rock Gaming’s June 30 principal on interest payment. The impact of COVID on its customers, which include gaming venues, has been substantial due to social distancing needs. The delays in reopening the venues and the timing associated with the return of significant customer traffic is unknown. The fair value as a percentage of cost was taken down to 61.5% this quarter from 81.4% last quarter”. 

In total, including a $2.5mn equity investment at cost that was written down to zero, OFS has $23.5mn in exposure to the company, now with a FMV of just $12.9mn. Some ($1.6mn) of annual investment interest income has been suspended.

We have downgraded the company from CCR 3 to CCR 5. See our update on March 14, 2020 for some background reading. It’s hard with what little we know to handicap the ultimate outcome. We’d venture to say the equity stake is probably a complete loss but the potential realized hit to the first lien debt – if any – is unknowable. For OFS, this is a relatively large position remaining, leaving material downside and potential further book value loss. However, if one is a glass half full sort of person, the income and value recovery could yet be substantial if the company can be returned to performing status. We will learn more when the BDC reports third quarter 2020 results. No date has yet been set.

California Pizza Kitchen: Reaches Agreement With Lenders

According to multiple reports, California Pizza Kitchen (“CPK”) – in Chapter 11 bankruptcy – has reached an agreement in principle in late September 2020 with its first lien lenders and unsecured creditors. That should shortly allow the restaurant chain – already making operational plans for post-bankruptcy operations – to make an exit shortly from the court’s protection.

With a bit of luck CPK should exit bankruptcy in the IVQ 2020 and we’ll get a clear picture of which of the now 6 BDC lenders involved ended up where. Total outstandings from the BDC lenders is $49.5mn in IIQ 2020, slightly higher than in the IQ 2020. (BTW, Prospect Flexible Income appears to be no longer a lender). We already know, though, that this will prove to have been a misstep for all the BDCs involved.

NPC International Inc : Bankruptcy Court Dispute

The Wall Street Journal and other publications are reporting that NPC International Inc. – the huge Pizza Hut franchisee which is in Chapter 11 – is in dispute with the franchisor in bankruptcy court. In a nutshell, Pizza Hut wants more say in who the potential buyer of the company’s assets might be and how they behave. The franchisor wants to ensure that the group who will be in charge of 1,200 restaurant locations bearing its name will follow all the rules involved with being a franchisee.

From the standpoint of the only BDC involved with NPC –Bain Capital Specialty Finance (BCSF) – this is potentially Bad News. The longer the bankruptcy endures, the more expenses pile up. Furthermore, the more Pizza Hut inserts itself into the sales process the greater the risk of the final price being received (currently pegged at $325mn) for the business being lower than originally hoped for.

The BDC Credit Reporter has the company rated CCR 5 and expects most of the $14.4mn invested in first lien and second lien debt to be written off. As of June 30, 2020, the FMV is only $3.3mn. If this drama continues, BCSF can expect to recover even less than that and a resolution may get pushed further out.

GlassPoint Solar Inc: In Liquidation

As the BDC Credit Reporter works its way through the hundreds of underperforming companies showing up in the IIQ 2020 BDC portfolios we’ve identified – a little late in the day – a liquidation. According to a trade journal GlassPoint Solar Inc. was liquidated by its owners in May 2020.

The Omani government—GlassPoint’s largest investor—issued a statement on Sunday (17 May) confirming that it liquidated its 31% stake in the company. The move effectively shuttered the Silicon Valley company that has received an estimated $130 million in funding since it was founded in 2008. The liquidation decision of GlassPoint Solar comes after the steep fall in oil and gas prices caused by the global economic slowdown in the wake of the coronavirus pandemic and its negative impact on business across the globe, especially on hydrocarbon producers, travel, and hospitality businesses,” read a statement issued by the Omani Ministry of Finance which oversees the state’s strategic investment portfolio. The statement added that some of the current investors have expressed interest in purchasing GlassPoint’s intellectual property. Other major shareholders included the national oil company Petroleum Development Oman (PDO) and Shell which has been a minority investor since 2012″.

The only BDC involved is BlackRock TCP Capital (TCPC), which is both lender and investor in Glasspoint, dating back to IQ 2027, with $7.4mn in aggregate advanced, mostly in first lien debt. As of the IIQ 2020, the debt was placed on non-accrual. The debt was discounted by more than half and the equity written to zero. Still, the BDC’s managers remain hopeful – as expressed on their conference call – that even in liquidation some value can be found because of the interesting technology the company owns. This is what was said on the call:

GlassPoint had been in the late stages of obtaining equity financing but the process was pulled as a result of COVID. Our team is working with the equity owner to find an alternative solution which may include a monetization of the business, assets in IP”.

That leaves hope for $3.2mn of the investment – as of June 2020 . The BDC Credit Reporter is a little more skeptical as we know – also from press reports – that the company had been having troubles long before Covid-19 came along and had been on the underperformers list since IIQ 2018. We expect most – if not all – the $7.4mn invested is likely to be written off. In the short term, TCPC will be missing out on about ($0.600mn) of investment income. We are maintaining our CCR 5 rating on Glasspoint until a final resolution is announced, and – belatedly – adding the company to our Bankruptcy list, found in the Data Room.

Even without knowing the final outcome, the BDC Credit Reporter points out that this was more of a project finance deal than a typical leveraged loan and in the energy services field to boot, added to the BDC’s books after the oil price drop of 2014-2016. Admittedly, the technology involved is intriguing: “The company was going to use concentrated solar arrays housed in glass greenhouses to produce steam at gigawatt scale instead of using natural gas“. That sounds very “green energy”, but also outside the normal ambit of what BDCs consider normal risk. The good news from TCPC’s perspective: even at worst the amount of capital involved was modest. We expect some final resolution in the months ahead, including a realized loss and – possibly – a further write down.

General Nutrition Inc: Company To Be Sold In Bankruptcy

A judge has cleared the acquisition of General Nutrition Holdings (including General Nutrition Inc.) out of Chapter 11 bankruptcy for $770mn by China-based Harbin Pharmaceutical Group. The transaction should close by year end 2020. The company had filed for bankruptcy in June.

For the only BDC involved – publicly traded Harvest Capital (HCAP) – this is both good news and bad news. Let’s start with the latter: the first lien lender may be paid less than full value from the sale proceeds. The available trade articles are not clear. As of June 2020, the BDC had bought $5.0mn of debt for $4.9mn and had valued its position at just $2.447mn. (We are including here a $1.0mn Debtor In Possession loan funded after bankruptcy, which we expect to be repaid in full). If that holds up, HCAP – whose debt is on non accrual – will write off close to ($2.5mn), probably in the IVQ 2020.

The good news is i) the proceeds may be higher than initially anticipated; ii) any amount recovered will flow back to the BDC, much in the need of liquidity at the moment. However, we will probably not be told the final numbers till the IVQ 2020 results are published.

For HCAP – based on valuation – this was a performing business that we only added to the underperformers in IQ 2020 at CCR 3; dropped to CCR 4 and then CCR 5 in the course of the IIQ 2020 and should be off the books by the end of 2020. HCAP has lost ($0.350mn) in annual investment income, but may gain some of that back in the future from the recovery.

The BDC Credit Reporter, playing armchair credit quarterback, would question why years into the “retail apocalypse” HCAP decided to lend to a brick and mortar seller of nutritional supplements ? To be fair, though, and thanks to the fact that GNC was a public company, we can see that adjusted EBITDA was doing well in the quarter in which HCAP began lending. A year later Adjusted EBITDA had dropped by more than half thanks to Covid-19. Chalk this one up – mostly – to bad luck. After all HCAP was willing to step in with other lenders and become the owner but was beaten out by Harbin.

Centric Brands Inc: Reorganization Plan Approved

Since May 2020 Centric Brands, Inc. has been under bankruptcy court protection. Now, though, the company is poised to exit that status by mid-October 2020 following court approval of a reorganization plan and some well placed settlement payments to disgruntled creditors. The deal seems like a debt-for-equity swap, with first lien and second lien lenders receiving equity in the restructured company while continuing as lenders in new, smaller, debt facilities.

After all conditions have been finalized, Centric Brands — whose owned brands include Zac Posen, Hudson and Swims — plans to exit Chapter 11 by the end of October with a “recapitalized” balance sheet, as well as new financing facilities, “significantly reduced” debt and interest payments, plus the full support of all of its lenders.

This is a Major BDC investment by BDC Credit Reporter’s standards: i.e. over $100mn at cost or $129.9mn in this case. There are three BDCs involved, headed by Ares Capital (ARCC), which is invested in both the debt and equity of Centric. Then there’s non-traded TCW Direct Lending VII and publicly traded Garrison Capital (GARS). The debt held by the BDCs matures in 2021 and 2023. The latter with a cost of close to $100mn is valued at roughly a (15%) discount and is likely to be partly written off when the company exits bankruptcy. That will result in about ($15mn) in realized losses along with nearly ($25mn) ARCC holds in the equity of the insolvent entity, or a total loss of about ($40mn). The 2021 debt is Debtor In Possession financing and is likely to be repaid in full. What we don’t know is if the lender-now-owners will have to inject incremental new capital or not. More details to follow.

This will be a significant – but not overwhelming loss, principally for ARCC, and to a much lesser degree for the other two. On the other hand, it looks like all the players will live to fight another day and – potentially – recoup proceeds lost from an eventual sale of the restructured Centric Brands another day.

We will be upgrading the company from CCR 5 to CCR 3 or CCR 4 when the exit from bankruptcy occurs. As we’ve written in earlier articles about Centric, much will depend on how generous the new lender owners have been in structuring the going forward balance sheet. The company continues to operate in an industry – lifestyle brands sold mostly at retail – that continues to be pandemic impacted. Furthermore, some debt for equity swaps in the past have been done with less than generous terms, rapidly returning the business to the bankruptcy court. We hope Centric won’t be a “Chapter 22” story.

Roli, Ltd: IIQ 2020 Update

On August 6, 2020, TriplePoint Venture Growth (TPVG) offered up an update on troubled portfolio company Roli, Ltd on its IIQ 2020 conference call:

We have one company rated 4 on our watch list, Roli, a music technology company. During the quarter, we further marked down our loans on Roli, reflecting the impact of COVID on some of our recovery assumptions associated with the ongoing turnaround of the company. Here in Q3, the company has made good progress, and we expect to see some favorable trends over the next couple of quarters“.

The BDC Reporter wrote the following in its review of TPVG’s Conference Call where Roli was discussed: “TPVG has advanced $29mn to Roli Ltd, which has been on non accrual since IIQ 2019. The current value is just $15.0mn. By the way, just before Roli became non performing, the debt and equity outstanding was valued almost at par” The company is rated CCR 5 and we expect the ultimate outcome is likely to be some sort of realized loss, but concede that – except for these occasional updates from the lender – we have little inside information about the company’s fortunes.

School Specialty, Inc. : Restructured

On September 15, 2020 we heard from School Specialty, Inc. that essentially all its assets had been acquired by a group led by TCW Asset Management and a couple of other partners. The company will now operate as School Specialty, LLC. The company’s Chief Operating Officer has been named Chief Executive Officer.

We’ve been following the School Specialty story for some time and divine – given that the company’s lenders included non-traded BDC TWC Direct Lending – that this is a restructuring, rather than a sale to a third party. The restructuring has been on the cards for some time, as discussed in our earlier article published on April 13,2020.

What we don’t know, though, is how the company was restructured and what the implications will be for different creditors, including TCW Direct Lending. As of the IIQ 2020, the original debt was trading at a discount of only (13%) and $8mn in new debt advanced more recently to tide the business over was carried at par. This suggests the BDC does not expect to take any great write-offs. However, we won’t know anything tangible till when the IIIQ 2020 TCW Direct Lending results are published, when we expect to work out the impact on income and FMV.

The BDC Credit Reporter had rated the company CCR 4, but is now upgrading the rating to CCR 3. We can’t in good conscience place the company back on “performing normally” status (CCR 2) till we see how generous the capital restructure was, and we learn more about the outlook for the school supplies business. We can’t even be sure whether the BDC will be writing off any interest unpaid during a long forbearance period. We believe the odds are high that some income – at the very least – will have been lost.

School Specialty was having trouble even before Covid-19 came along and made matters much worse. Given that TCW now seems to be both lender and investor, this company could be in the database – if not the underperformers list – for many more years to come, rather than being paid off in 2020 as previously anticipated. From what little we know, though, the damage on is a large position for the BDC appears to be modest.

Lonestar Resources: Restructuring Agreed

According to Debtwire, E&P company Lonestar Resources has agreed upon a restructuring agreement between the various creditors of the company in which the unsecured debt holders will gain “the bulk” of the equity going forward. The WSJ says $390mn in debt and preferred will be written off in the arrangement. The BDC Credit Reporter last wrote about Lonestar Resources on July 6, 2020 when the company missed an interest payment.

The only BDC with exposure remains FS Energy & Power, with $23.2mn invested in the junior debt, which was valued at $2.4mn as of June 2020. The debt was still accruing income at that point. We expect the debt is now on non-accrual and will be converted into non-income producing equity in return for a small stake. Some ($2.5mn) of annual investment income will be lost. It’s hard to estimate what the final value of the capital will be, but is likely to be close to the June number, which means FS Energy will b e booking a ($20mn) realized loss.

FS Energy has been involved with Lonestar since 2014, according to Advantage Data. Values have fluctuated all over the place all over those six years but the latest drop in value began pre-Covid in the IIIQ 2019 and has just gotten worse and worse with every quarter. If nothing else this restructuring creates some hope that the business can continue operating and – at some time – the BDC might recoup some of its capital. That day, though, could be many years away.

TooJay’s Management LLC: Exits Chapter 11

Restaurant chain TooJay’s Management LLC is out of bankruptcy protection after seeking Chapter 11 in April in the middle of the pandemic. The company used the bankruptcy process to relinquish several leases and ends up with 21 locations from 30. All are now operating with dine-in capabilities, as well as takeout and delivery. As part of the restructuring, TooJay’s has shed all its debt.

The new owner is Monroe Capital, whose various funds including publicly traded the publicly traded BDC (MRCC) were the prior lenders to the company. As a result, we expect that MRCC’s $4.1mn in 2022 Term debt and Revolver has been converted to equity. No word yet if any new financing will be provided. The BDC continued to carry the debt as performing through the IIQ 2020 because of the existence of plenty of collateral. Should that debt be converted into common stock as the news suggests, the likely loss of investment income will be just over ($0.25mn) a year. The BDC had written down the debt by only (5%-7%) so no material loss in value is expected going forward now that the company’s near term future is known.

Presumably this means MRCC and its parent will be tied to the restaurant operator for some time. If a successful exit ever occurs, MRCC might make back some or all the write-down associated with the restructuring and any income that might be forgone going forward.

We are upgrading TooJay’s from CCR 5 to CCR 3, reflecting the under-leveraged nature of the post-bankruptcy structure but keeping in mind that the business remains in a thin margin, pandemic-sensitive sector. There are more details to learn but at first approach MRCC – and any other Monroe funds involved – appear to have fared well in what could have a liquidation situation.

Iqor US, Inc.: Files Chapter 11

On September 10, 2020 IQor Holdings and each of its subsidiaries (including Iqor US) filed for voluntary Chapter 11 protection in Texas. The company has a restructuring plan in place and above-average support in situations of this kind from its creditors. Furthermore, debtor in possession facilities have been negotiated with a value of $130mn. No wonder the company is optimistic about being in and out of bankruptcy in 45 days.

There is only one BDC with exposure to the company: non-traded Sierra Income with $20.6mn advanced at cost in two loans. As of June 2020, the smallest of those loans was already on non accrual and the total FMV of debt outstanding was $12.7mn. Given that a restructuring has been in the cards for some time we imagine the latest value may be close to where the debt will be marked when the restructuring occurs in the next few weeks. As a result, by year’s end we should see Sierra book a realized loss of ($8mn) or more. We’re not certain how the balance sheet will be restructured but a loss of income – given that most of the debt was still current through June – is likely as well.

This is the second BDC-financed company bankruptcy in September to date. As is the case in most bankruptcies in recent months a restructuring agreement was in place when the filing occurs. This propensity has resulted in more companies going out than coming out of court protection lately. As for the reason for Iqor ending up in this situation ? As the press release itself discloses, an acquisition gone wrong is the culprit rather than the usual suspect: Covid-19.

Cenveo Corp: Sells Businesses

Sometimes the BDC Credit Reporter has to read the tea leaves and come to some conclusions without all the salient facts because we’re dealing with private companies and disclosure is limited. This is the situation with BDC-portfolio company Cenveo Corporation, a global printing solutions company. We last wrote about Cenveo in May when a plant was closed, with Covid-19 blamed. At the time we downgraded the company to CCR 4 from CCR 3. Now we hear that in August Cenveo sold two printing plants and – on September 10 – a trade publication indicatesCenveo Publisher Services and Cenveo Learning were sold to a third party.

This seems to be a pattern of business divestment by Cenveo that might signal an improvement in its credit standing. As of June 2020, Main Street Capital (MAIN) and non-traded sister BDC HMS Capital valued the $9.7mn debt of Cenveo at a modest discount to book. The $9.5mn equity in the company – apparently received a few years ago in a restructuring – is discounted by (50%). For the lenders, Cenveo has been a troubled borrower/investment since inception in 2015. A look at the Advantage Data valuation table shows loan – and later – equity – values rising and dropping and rising and dropping again over the past 5 years.

We are presuming – based on the evidence above – that the asset sales will help the business. That’s a leap of faith and readers should make their own minds up. We are upgrading the company from CCR 4 to CCR 3. However, the debt on the books of the BDCs is not due till 2023 so much could yet happen for good or ill.

We will revert back after the IIIQ 2020 results are published by the BDCs involved to see if our presumption has proved correct.