On May 20, 2019, the wholly-owned subsidiary of publicly traded Ascent Capital Group (ASCMA) – Monitronics International Inc. – entered into a Restructuring Support Agreement (“RSA”) with its latest creditor. This is part of a major restructuring effort that will reduce Monitronics debt and see the parent company merge into the parent as part of a pre-packaged bankruptcy. BDC exposure aggregates $21mn, spread over 5 public and non- public funds.
David’s Bridal has just emerged from Chapter 11, but remains troubled, according to S&P Global. That’s bad news for the only BDC with exposure – Cion Investment – with $2.6mn of debt and equity.
USA Today reported on April 25, 2019 that S&P warned that the home goods retailer Pier 1 might be headed for Chapter 11 bankruptcy. That should be a surprise to no one as the company is caught up in the retail revolution; same store sales are dropping; a turnaround plan has failed to be effective and management has been changed, etc. S&P dropped its debt rating to CCC- from CCC+. Yes, the writing is all over the wall.There are two sister BDCs with $16.3mn in senior debt exposure to the beleaguered company which has already been written down by a quarter. Those are MAIN and non-traded HMS Income. Our assessment of potential income and realized losses remains the same as expressed in the Company File on April 17, 2019.
On April 29, 2019 USA Today published an in-depth article regarding disputes occurring between the majority shareholder of twice bankrupt Payless, Inc. (aka Payless Shoesource) and certain creditors and lenders. With the future of Payless very much in doubt, the full repayment of $21mn of secured debt held by two BDCs is also questionable. Just a year ago when Payless went bankrupt for the first time, secured lenders got out whole. This time some of those same BDC lenders who funded the Company post bankruptcy may have a harder time collecting 100 cents on the dollar. See the Company File for all the details and our view.
On April 26, 2019 troubled oil exploration company Templar Energy, LLC announced the resignation of its long time CEO and founder David D. Le Norman. He is to be replaced by Chief Operating Officer of Le Norman Operating, LLC Brian Simmons. Mr Le Norman remains Chairman of Templar Energy. That sounds like bad news for the $12.8mn still invested at cost by two non-traded BDCs owned by FS investment & KKR: FSIC II and FSIC III. The exposure appears to be in the form of preferred and equity received as part of a massive debt for equity swap entered into in 2016 that saw $128mn of BDC second lien debt converted. However, judging by the valuation of the BDC stakes at 12/31/2018 – discounted by as much as (93%) the company’s performance remains problematic. Mr Le Norman’s departure cannot help.
On April 23, 2019, Jennifer Lopez backed Fuse Media filed for a pre-packaged Chapter 11 bankruptcy, seeking to unload $200mn of debt of $242mn on books. For only BDC with exposure – TCPC – that likely means the realizing of the $0.300mn invested at cost and already written down to zero. We have no Company File as Fuse Media was not a material investment.
On April 17, 2019 Sequential Brands Group, Inc. sold two major brand lines to Marquee Brands LLC for $175mn and an earn-out. The Company plans to use a substantial portion of the proceeds from the transaction to pay down debt. The transaction is expected to close in the IIQ 2019. BDC exposure to the Company is high at $295mn, in first lien, second lien and equity. See the Company File for our updated View.
On April 18, 2019 two specialist lenders announced the closing of a $35.00mn asset-backed revolving line of credit for troubled mall retailer Charming Charlie, intended to finance working capital. The two lenders are White Oak Commercial Finance and Second Avenue Capital Partners. There are 3 BDCs with $37mn of debt and equity exposure to the Company, led by TCRD. At 12/31/2018, the 2023 Term Loan outstanding was on non-accrual. For what this financing might mean for the Company’s prospects see the Company File.
Another retailer is having serious problems: Pier 1 Imports. The Company reported very poor IQ 2019 results. We’ve updated the Company File. The two BDCs (MAIN & HMS Income) with $16mn at risk must be worried about further unrealized write-downs in the short run and – medium term – non accrual of interest and realized losses.
Publicly traded Fusion Connect has entered into a Forbearance Agreement with its Revolver lenders and 70%+ of first lien lenders. As the press release states : “Under the terms of the Forbearance Agreement, these first lien lenders have agreed not to exercise the remedies available to them related to Fusion’s decision not to make its scheduled principal payments due on April 1 and 2, 2019 and certain other defaults under the Company’s credit agreement. The Forbearance Agreement extends until April 29, 2019 unless certain specified events occur”. In the interim, the Company has hired turnaround advisers and appropriate legal counsel in an effort to restructure the balance sheet out of bankruptcy. However, the odds are stacked against the highly leveraged business. See the Company File for the BDC Credit Reporter’s View. The two BDCs with $18mn in exposure appear to be in a first lien loan due in 2023. The publicly traded debt – valued by the BDCs at close to par at 12/31/2018 – currently trades at a (25%) discount). That suggests CMFN and GARS are likely to have to write down their debt by close to $5mn or more in the IQ 2019 results and face the risk of additional Realized and Unrealized Losses. The most immediate impact is likely to be interruption of interest income: $1.1mn on an annual basis for CMFN and $0.7mn for GARS.
Publicly traded Canadian gas explorer Bellatrix Exploration is once again seeking to restructure its debt-heavy balance sheet. A Canadian court has allowed a meeting of debt and equity holders to be scheduled for May 15, 2019. At the meeting a complex arrangement of debt exchange, forgiveness and additional issuance, and the issuance of new stock, will be voted on by the different classes of stakeholders. The Company appears to have garnered broad – but not conclusive – support for its plans. If the recapitalization occurs any immediate leverage or cash flow concerns will be alleviated. If not approved, the potential outcome is hard to evaluate but is unlikely to be positive for most of the parties. BDC exposure is high at $105mn and all concentrated in the second lien 2023 Term Loan. For our View of the credit risks involved see the Company File.
AAC Holdings – aka American Addiction Centers – had a terrible IVQ 2018, with sales, EBITDA and earnings down. That’s reflected in the just published results and caused the Company to seek – as reported previously – additional debt financing to the tune of $30mn. On the Company’s Conference Call, management remained optimistic that a $30mn cost cutting program and a rebound in occupancy at its facilities would allow AAC to rebound. Still, with projected EBITDA for 2019 of $45mn-$55mn and $300mn in debt (97% due within 12 months), we have reasonable doubts. So do the public shareholders, who’ve brought the stock under $2.0 a share. The 4 BDCs with $60mn of senior debt exposure (at December 31 2018) must have their concerns as well, given that new debt has been added and real estate may be sold and leased back. If the other shoe drops at ACC, the BDC lenders may face material write-downs from the par valuation at year end 2018 and the risk of close to $6.0mn of income interruption if the debt goes on non-accrual.
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.
Caesars Entertainment, according to news reports, is being put up for sale. There are reportedly two potential suitors so far and the enterprise value is said to be $24bn. The only BDC with exposure to the company is BBDC, which only added its senior secured exposure in a Term Loan maturing in 2024 and paying LIBOR + 275 bps in the IIIQ 2018. If a deal does go through, this debt – which is Performing – is likely to be repaid before long.
Charlotte Russe is back. Or, at least, the name of the iconic women’s retailer is again in the marketplace with the promise of opening 100 new stores. However, the ultimate owner is now YM Inc., which bought the name and trademark from the former owners – a conglomerate of lenders who gained control of the company as part of its first bankruptcy two years ago. Those owners have been selling everything following the latest Chapter 11 filing to recoup what they can – even the right to use the Charlotte Russe name. YM Inc. appears to have no BDC lenders or investors. The former Charlotte Russe company, though, continues to have $42mn of remaining exposure – of both debt and equity – spread over 3 BDCs. Expect big realized losses when the affairs of the bankrupt entity are settled. Affected with be FSK, MAIN and sister non-traded BDC HMS Income.
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.
The troubled e-commerce retailer published quarterly and annual results for the period ended February 1 and 2, 2019. Despite closing down several brands and taking one-time losses, the Company’s Adjusted EBITDA and key bank covenants, as well as liquidity, all appear better. May stop the gradual erosion in BDC debt values underway since late 2016, which peaked in IVQ 2018. We updated the Company file and the BDC Credit Reporter’s views accordingly. For all the details, see the Company File.
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.