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.