BDC Portfolio Company News

According to an article published on Seeking Alpha and in charges brought by the State Of Connecticut, Lannett Company (LCI)  and ” many other generic pharmaceutical firms have been conspiring for years to drive prices of generics up”. The author of the SA article continues :

…there is no clear path for LCI to remain solvent if they receive a fine roughly equivalent to their market cap (high end of the proposed range). In a previous report I highlighted how little free cash flow was projected given the current guidance. With a run rate of ~$107m in EBITDA, $68m in interest expense and $32.5m in CapEx (mid-range of the guidance) the company will be producing ~$7m in FCF.

$7m in FCF isn’t going to be very helpful in paying off the $650m in net debt, but in a situation where the government tacks on a few hundred million of additional liabilities – that probably spells bankruptcy protection”.

Admittedly, the author is short the stock. Nonetheless, there is cause for concern. There are 3 BDCs with $16.4mn in senior secured exposure to the highly leveraged company: OCSI, Cion Investment and OCSL with a smaller position. In the IIIQ 2018, the debt was written down sufficiently to cause us to place the Company on our Watch List. In the IVQ 2018 the discounts increased t0 a range of (6%) to (18%). More write-downs might be ahead or even non-accrual. About $1.25mn of investment income is at risk.

On April 11, 2019,TransPerfect – the world’s largest language provider by revenue – filed a complaint in the Southern District of New York against rival Lionbridge Technologies and its owner, private equity firm HIG. TransPerfect is seeking at least  $700m in damages and compensation. For all the details, see the press release. We have no way to determine who will win the lawsuit or any terms that might be involved. Nonetheless, the amount is sufficiently large – and with recent experience of companies losing major cases in court and being financially crippled thereby in mind – we’ve decided to add Lionbridge Technologies to our Watch List, with a CCR 3 rating.  Till this news – and using IVQ 2018 values – there are three BDCs with $31mn in first lien and second lien debt exposure, all carried at par. We’ve also opened a Company File, which we’ll keep updated as this issue wends its way through the courts.

AAC Holdings, Inc. that does business as American Addiction Centers has been on our Watch List for some time. We’ve just updated the Company file with various recent developments and renewed our view that some sort of “credit event” is likely in the short term.

Affinion Group Holdings, and several of its subsidiaries, have completed yet another recapitalization of the highly leveraged company. We’ve used the opportunity to update the Company Profile page which provides a summary of all prior restructurings and evolving BDC exposure. Speaking of the latter, the only remaining exposure is by Pennant Park (PNNT) and PennantPark Floating (PFLT), which has $46mn invested in the equity at cost and which was valued at $18mn at year end 2018. The BDCs relationship with the Company goes back more than a decade and – as the Company Profile page shows – there have been many twists and turns along the way. This is unlikely to be the last. In the short run, we expect the recapitalization will reduce the BDCs investment valuation, but the trend may reverse in the future depending on the performance of the Company. On the other hand, the equity could be fully written off one day. This is just a snapshot.

We added a new Seeking Alpha article to the Prairie Provident Company File. The conclusions were not very encouraging, including the following:

The net debt to TTM adjusted funds flow ratio is very high at 14.6x. Also, due to the disastrous Q4, the company is about to breach its financial covenants.

Not good news for the only BDC with exposure: GSBD. However, the current value of the investment is so small – all in equity – as to be immaterial.

Sungard Availability Services “has officially confirmed that the company will enter a ‘pre-packaged’ Chapter 11 bankruptcy filing on or around May 1st 2019”, according to a news report.  The IT company has already negotiated a restructuring agreement with secured and unsecured creditors and expects to exiting bankruptcy shortly. The restructuring involves a debt for equity swap, which is reportedly going to reduce total debt “by over two-thirds”. In the interim, a $100mn Debtor In Possession financing has been arranged, and business continues as usual.

BDC exposure to the Company is substantial: $79mn, according to Advantage Data records. There are three tranches involved: two are senior debt maturing in 2021 and 2022 and subordinated debt due 4/1/2022. The BDCs involved are principally from the FS KKR Group: FSK, FSIC II and FSIC III and also GECC. $26mn at cost is in the subordinated debt, which was the tranche most written down at 12/31/2018, discounted by over &0%). Valuations on the senior tranches are generally much closer to par, varying between a discount of (2%) to (14%). Based on what we’ve heard of the size of the debt forgiveness, we’re surprised at how relatively modest the unrealized depreciation is. That’s complicated by the fact that the BDCs involved are likely to have been aware of the restructuring proposals when setting the valuation level. Will there be further write-downs of the senior and subordinated debt value now the bankruptcy cat is out of the bag or are we done ? Frankly, we don’t know, but will put a pin in the subject until the next portfolio filing.  Till then, we’ll limit ourselves to projecting Realized Losses will range between $20mn-$26mn, and income will be interrupted as the Company moves through the bankruptcy process, affected IIQ 2019 investment income.

UPDATED: The BDC Reporter was contacted following the origination of this post by GECC which noted that its Sungard position was closed in January at a net gain. Here is what the 10-K said in “Subsequent Developments”: 

In January 2019, we sold $4.8 million of par value of Sungard Availability Services Capital, Inc. first lien senior secured loan at a price of approximately 78% of par value. [Page 62]

By our calculation, 78% of par equals proceeds of $3.750mn.

Advantage Data records shows GECC’s exposure to the Company’s debt began in IVQ 2017 (12/2/2017), with $6.0mn of par purchased for $5.7mn. This exposure reached as high as $11.380mn at par, and a cost of $11.049mn in the IIIQ 2018. A portion was sold in IVQ 2018 and the rest – as mentioned above- in January 2019.

According to GECC’s Investor Presentation for the IVQ 2018 – which includes a section  detailing “Individual Realized Investments”, a slide indicated : “GECC sold the entirety of its investment at approximately $0.92 in IVQ 2018 / IQ 2019, resulting in an IRR of 6.7% and a cash-on-cash return of 1.05x, net of accrued interest & amortization”. See page 12.