As noted in an earlier post, coal miner Blackhawk Mining is preparing to file a pre-packaged Chapter 11. The BDC Credit Reporter’s main interest is estimating the impact on the two BDCs involved : FS-KKR Capital (FSK) and Solar Capital (SLRC), both with roughly equal shares in the first lien debt with an aggregate cost of $11.2mn. We’ve learned additional details about the plan going forward: “On the effective date of the plan, the company’s $639 million first lien term loan will be discharged and lenders will receive 71 percent of the company’s equity and a newly issued $375 million first lien term loan”. That suggests 40% of the first lien debt will be written off and swapped. That will reduce the nearly $1.5mn of investment income received by $0.600mn between the two BDCs. How the BDCs will value the equity is unknown, but a Realized Loss is probable. In addition, we have learned that: “To further strengthen the business, the company will receive $50 million of new money debtor in-possession financing from certain of its lenders that will be part of the exit facility for the company”. Chances are FSK and SLRC will be part of this financing as well, increasing their exposure to the troubled miner. The lenders will be reassuring themselves that after the restructuring is done that “based upon the company’s current projections, pro forma leverage will be less than 2.0x debt to EBITDA and in line with industry peers”. We would add that any industry where standard debt/EBITDA leverage is only 2.0x is highly risky and the lenders/investors involved are far from being out of the woods. One could argue – with greater capital potentially deployed and much of the exposure soon to be in equity, and with lower investment income forthcoming, FSK and SLRC have gone only deeper into those woods.
Good news and bad news for MVC Capital (MVC) as its portfolio company Crius Energy – in which the BDC held both equity units and debt – is sold to Vistra Energy, according to a press release issued by the buyer. Crius shareholders approved the deal months ago but only now have regulatory approvals come in from the Federal Energy Regulatory Commission. MVC holds units in Crius – received when selling its biggest portfolio investment US Gas & Electric – to the Canadian company a couple of years back. MVC had already valued those units at $21.3mn at the end of April 2019, and we expect little increase in value when this deal settles as the ultimate purchase price was mostly already locked in. Also to be received are some accrued distributions which, presumably, will be booked through the income statement. We’re not clear what will happen to MVC’s second lien loan in U.S. Gas & Electric – a subsidiary of Crius since the acquisition. If that debt – which is MVC’s largest income producing investment with an FMV of nearly $40mn – is repaid (priced at 9.50% and due in 2025), the bad news for the BDC will be redeploying the proceeds and the Crius units into new investments in a timely manner. That might leave a hole in MVC’s results for a quarter or two as $60mn (nearly 20% of the BDC’s assets) look for a new home. We’ll be waiting for the next quarterly results of MVC to try and work out the final numbers and determine whether the sale of US Gas & Electric to Crius and the subsequent sale of the acquiror by Vistra – after Crius unit prices began to head south – was a win, loss or draw for MVC and its shareholders. We know MVC had $65mn in assets when the original Crius deal was penned, and that has reduced only slightly from debt amortization. If MVC ends up with $63.5mn or more in FMV when all is said and done, MVC should be in the green.
According to news reports, UK-based Green Biologics, Inc., whose plant is based in Minnesota, is closing down its U.S. operations. (We’re not clear if there are operations elsewhere). Since 2015, the company – which produces acetone and 1-butanol via fermentation at a modified ethanol plant in Little Falls, Minnesota – has sought to become commercially viable. However, the board of the company has admitted to being unable to access additional funding to get the business to break-even and has chosen to close down, letting 50 staff go. Information in the public record is minimal but BlackRock TCP Capital (TCPC) appears to be the only BDC with exposure. The amount at risk at March 31 2019 was $20.5mn at cost ($34mn of face value) and valued at just $3.2mn. The exposure is all in equity, but till recently TCPC had both debt and equity exposure. We assume that debt was converted into equity in recent months as creditors and owners sought to find a way to stay afloat. We’re guessing TCPC will be taking a significant Realized Loss when the time comes – which might be in the IIIQ – and be possibly writing down at the end of June even the small amount of FMV on its books. Some other scenario is always possible but no word yet of any other alternative but liquidation of what was a major capital investment, reportedly beginning with $100mn committed in 2015. Technically speaking , till we hear otherwise, Green Biologics is not yet in Chapter 11, so we’re not adding the company to the BDC Reporter’s Bankruptcy List. If we did or do so in the future, that would bring the number of bankrupt BDC portfolio companies at 21.
Another BDC portfolio company prepares to file for Chapter 11. This time, the filer is Blackhawk Mining, LLC, which operates coal mines in two states. Given other bankruptcies going on in this sector, the news is not entirely unsurprising. Still, the two BDCs involved – FS-KKR Capital (FSK) and Solar Capital (SLRC) valued their $11.2mn in senior debt positions at 3/31/2019 at par. That’s unlikely to continue, even though management and creditors have a pre-packaged plan ready and expect to be operating normally in 60 days. The plan involves reducing debt by 60%, which may entail a debt for equity swap for senior lenders – including the two BDCs – and all the challenges of owning a “dirty fuel” company at the wrong point in history. Income – running at an annual pace of $1.2mn for FSK and SLRC – is likely to drop by more than half. Neither BDC will be greatly affected given the relatively small exposure each holds, but the setback does beg the question as to how both BDCs investment committees could have green lighted (as recently as 2018) such commodity loans. Blackhawk brings to 20 the number of BDC portfolio companies currently in bankruptcy and the total capital invested at cost to $578mn, according to the BDC Credit Reporter’s calculations.
We have found out – belatedly and thanks to an excellent article by Business Insider– that a BDC-funded company – Falcon Transport – closed down abruptly in late April. We had no idea because the company was carried at full value on Solar Capital’s (SLRC) books at 3/31/2019, with $12mn in first lien debt. This will be a hit to income, given that the debt was priced at closed to 11%, which will cost SLRC $1.3mn in annual investment income. Moreover, with the entire trucking industry going the way of the retail sector in the past two years and the energy sector back in 2014-2015, the chances of a resurrection seem slim. Now claims are being made of mismanagement by the private equity group which controlled the company. We’re guessing, but chances seem high for a very large write-off when the dust settles. We’ve added Falcon Transport – better late than never – to our list of bankrupt BDC portfolio companies. Despite the recent exits of Hexion Inc. (restructured and recapitalized) and Z Gallerie (assets acquired), there are still 19 names, with a cost of $565mn in the bankruptcy category.
Good news and bad news for the 6 BDCs with exposure to recently public U.S. Well Services (ticker: USWS). In May, the second lien debt left after the company went public was repaid in a major refinancing. We don’t know if any of the 3 Oaktree BDCs (OCSL, OCSI and its non traded sister firm) re-upped for the new financing. That will come out when the second quarter 2019 results are released. The bad news is that in mid July the public stock price dropped to an all-time low. That will impact the three other BDCs (CPTA, BKCC and PNNT) still holding stock at March 31, 2019 with a cost of $9.3mn and a value at IQ end in excess of $11.1mn. That’s likely to be (40%) lower as we write this and could go further.
According to Informa, Fusion Connect has filed its bankruptcy plan with the court and hopes to get a hearing by October 1st and – if all goes well – exit Chapter 11 shortly thereafter. The plan includes a very large debt swap/forgiveness that is said to cut total borrowings from $680mn to $380mn. Currently, the restructuring appears to have the first lien lenders gaining control of the business in return for writing off a goodly portion of their debt. The two BDCs involved – CM Finance (CMFN) and Garrison Capital (GARS) have $18mn invested at cost, but that liability may have increased as senior lenders provided DIP financing. That original debt is on non accrual and won’t – in any form – be paying interest till the IVQ 2019. That’s three quarters without LIBOR + 7.25%. Moreover, a write-off of some kind must be coming. We’ll learn more when CMFN and GARS report IIQ 2019 portfolios. The valuations are likely to be close to the final, if all goes to plan. See our prior posts on June 12, 2019 and April 17, 2019.
On July 9, 2019 news reports indicated troubled AAC Holdings (aka American Addiction Centers) had received a third warning from the New York Stock Exchange (NYSE) that its stock might be shortly de-listed. The reason: the company’s stock (ticker: AAC) has been trading under $1.0 for a thirty day period. The company is seeking a reprieve and has submitted a plan to the NYSE. According to a press release by the company, “submitting a plan to the stock exchange should allow the company to continue trading. The plan makes AAC eligible for an 18 month period to improve market capitalization and a six month period to improve share prices”. Notwithstanding management’s ambitious plans to re-position and turn around the business, the BDC Credit Reporter remains concerned about a possible bankruptcy filing or restructuring in 2019. Total exposure is $63.6mn in 2020 and 2023 Term debt still carried at high valuations as of March 2019. The key holders are New Mountain Finance (NMFC); Main Street Capital (MAIN); Capital Southwest (CSWC) and non-traded MAIN sister BDC HMS Income. Total investment income at risk should the company default is in excess of $7.0mn annually. We should say that the publicly traded debt does continue to trade at only a slight discount to par, suggesting our worries may be overblown. Time will tell.
On July 3, 2019 Pet Supplies Plus published a press release to the FDA website announcing a recall of its bulk ear products sold to dog owners as treats. The company was concerned that the treats might be infected with salmonella. As a trade publication explained “Salmonella can not only affect animals that eat the product, but also pose a risk to humans who handle, especially if they have not washed their hands”. To date no one has fallen ill from contact with the company’s products but 45 people in 13 states have been diagnosed with Salmonella-related illness from bulk ear products. Three different public and non-traded BDCS have $17mn in exposure to Pet Supplies Plus, in the form of both debt and equity, which began only in IVQ 2018, and is valued at cost. We cannot determine as yet what impact – if any – this recall might have on the company’s business and prospects.
Joerns Healthcare has filed for Chapter 11. “The company is seeking court approval of a restructuring plan that is supported by the majority of its lenders and noteholders. The plan will eliminate a substantial amount of debt and provide operating capital during the restructuring process and beyond. The company has requested that the plan be approved and the process complete within the next 30-45 days”. This is bad news for the three BDCs with $27.9mn in exposure in 2020 senior/unitranche debt – all publicly traded. Main Street Capital (MAIN) has the biggest share with $13.3mn, and sister non traded fund HMS Income ($11.0mn). Golub Capital (GBDC) comes in third with only $3.5mn, but we imagine the asset manager has exposure in other affiliated funds. Until a restructuring falls into place $0.200mn a month of interest income will be lost. The company was still carried as performing through IIIQ 2018, but the discount increased from the IVQ 2018 and closed the IQ 2019 at (15%). Chances look high that a Realized Loss will have to be booked, but we’ll postpone making any predictions till we review the restructuring plan that the company is so confident will be approved and implemented in short order.
Monitronics International – an alarm monitoring company that we’ve discussed on two prior occasions on March 23, 2019 and again on May 23, has filed for a pre-packaged Chapter 11. It’s fair to say that the restructuring plan – approved by most creditors but still requiring shareholder approval of the parent of the company – Ascent Capital – is highly complex. From what we understand Monitronics will be shedding about half of its existing debt load; raising a quarter billion dollars of debtor-in-possession debt financing to be followed by even more “exit financing”; as well as raising equity capital through a Rights Offering and receiving $23mn from Ascent as part of a scheme to have the parent absorbed by the subsidiary. At the end of all this Monitronics – despite having nearly $1bn in debt still on its books – will have “the strongest balance sheet in our industry”, according to the CEO. We’re still trying to determine what the impact of this restructuring plan will have on the 5 BDCs with $20.7mn of term debt exposure. At March 31, 2019 the debt was already discounted to varying degrees. A final accounting will have to wait till this bankruptcy process plays out. Management is predicting an exit within 75 days, or mid-September. Given the numerous moving parts, we are skeptical about the timetable, even though we’ve seen this pre-packaged Chapter 11 situations move through the courts in as little as one day ! For the moment at least, the most tangible impact is that investment income on the debt will be interrupted for some or all the third quarter of 2019. The biggest impact will be felt by Business Development Corporation of America (BDCA), which has half the total BDC exposure.
This can’t be good. A month after addiction treatment company AAC Holdings (ticker:AAC) announced an ambitious long term strategic plan to address its recent business woes, its President has resigned unexpectedly. He was with the company for only 18 months. Not surprisingly, AAC’s stock price dropped, and is now at $0.70 a share, not far from it’s all-time low. We continue to worry about a Chapter 11 filing or restructuring – see our earlier post from April 16, 2019. Currently, total BDC exposure is up to $63.6mn, spread over 4 BDCs.
On June 20, 2019, S&P Global Ratings downgraded “its long-term issuer credit rating and issue-level rating to CCC from CCC+, with a negative outlook. It’s also trimmed its rating on senior secured first- and second-lien debt to B- from B”, according to Seeking Alpha. The rating group went to say: “Notwithstanding its favorable near-term liquidity position,” the company will likely look at options “given the business’ downward trajectory and inability to refinance looming unsecured debt maturities in 2022, which are trading at deeply distressed levels,” S&P says. From the BDC Credit Reporter‘s standpoint, this only confirms our prior assessment that a bankruptcy or restructuring is more likely than not. We’ve had the company on our Worry List all year. The stock price is now $1.35, but was recently at an all time low of $1.21.
Trade publication Retail Dive – quoting Debtwire – says troubled women’s accessories retailer Charming Charlie has brought in a financial adviser. In addition, the nationwide chain, which was recently recapitalized by THL Credit (TCRD), is seeking new capital, in the form of debt or equity. All this sounds worrying from a credit standpoint. To date, TCRD – alongside non-traded Cion Investments and Sierra Income – have been funding the company with debt and equity in an ambitious attempt to bring the business back to performing status. At March 31, 2019, the three BDCs had advanced $37mn at cost to Charming Charlie, mostly in debt and mostly still on non accrual. The exposure is valued at roughly half of cost. We worry that Charming Charlie, which only exited Chapter 11 in late April 2018, might do a “Chapter 22” and need to file again. This time, though, that might mean liquidation and a potential significant write-off for the lenders involved.
As of June 19, 2019 the stock price of publicly traded refrigerants distributor Hudson Technologies (ticker: HDSN) has dropped below $1.00 and become a “penny stock”. The company – based on BDC valuations – has been under-performing since June 2018. As a public entity, we’ve been able to review quarterly filings and read the ever bullish Conference Call transcripts. We added Hudson first to our Watch List (CCR 3) and then – more recently – to our Worry List (CCR 4) and are concerned that the company may soon join our Bankruptcy List (CCR 5). Admittedly as of IQ 2019, the company was in compliance with much adjusted covenants on both its secured Revolver and its Term Loan. The business is admittedly seasonal but Operating Income was under a quarter million dollars and interest expense $2.4mn. Total debt, which includes the 2023 Term debt where all BDC exposure sits, is $131mn. All of which to say that the signs do not look good for the business and for its lenders. BDC exposure is $102mn, and generates $13mn of annual investment income. All the BDCs are part of the FS Investments-KKR complex and include publicly traded FSK ($39mn) and non-traded FSIC II, FSIC III and FSIC IV. At March 31, 2019 the Term debt had already been discounted (29%). The debt is publicly traded and that discount holds as of June 19, 2019 based on Advantage Data’s middle market loan real-time data. Unfortunately, the fundamentals of the industry in which the company operates are currently negative and we worry that if a Chapter 11 filing or out of court restructuring occurs there will be both income interruption and further losses both realized and unrealized. At worst, the BDC lenders might have to write off (or convert to equity) 50% of debt outstanding, or around $50mn, compared to ($30mn) already discounted. Given the size of the BDC exposure; the substantial investment income accruing; the very sharp drop in the stock price and the negative tilt in recent results, this is a credit worth paying close attention to.
On June 18, 2019, the famous TOMS Shoes LLC received a downgrade from S&P Global Ratings. The first sentence of the press release tells you enough: “[the company’s] turnaround effort is taking longer than expected and its adjusted leverage remains elevated at around 10x, which will make it difficult for the company to address its upcoming term loan maturity in 2020 without undertaking a subpar exchange”. If that’s not enough to worry you, then there’s this sentence from further on in S&P’s report:“The negative outlook also incorporates TOMS’ continued sales declines, eroding liquidity, and its fixed-charge coverage ratio, which is at or below covenant levels, due to the challenging retail environment and the company’s continued weak operating performance”.The ratings were dropped to CCC from CCC+ for both the company and the first lien debt.
The $9.3mn in aggregate BDC exposure (Main Street and HMS Income) is in the 2020 first lien debt and was already written down by (18%) in the last couple of quarters, even though income is still current. None of this is any surprise to the BDC Credit Reporter, which has had TOMS on its under-performing list since late 2015 and on our Worry List for about the same time. Our current Credit Corporate Credit Rating is 4, just one notch above non performing. Bankruptcy or a debt for equity swap seems almost inevitable despite the best efforts of PE owner Bain Capital to effect a turnaround. The BDC lenders involved seem at risk of absorbing $0.750mn of annualized investment income interruption for some period, and a Realized Loss at some point in the sub $5mn range. This may become yet another lender-owned company. Still, the amount of income and book value at risk are relatively modest for MAIN and its sister BDC.
On June 18, 2019 multi-unit retailer Bluestem Brands reported results for the quarter ended May 3, 2019. We reviewed the earnings press release, and the Conference Call transcript on Sentieo (not yet linkable). Notwithstanding lower sales in the period compared to a year earlier, the company reported progress in “turning around” the business in several areas. Adjusted EBITDA was barely positive but that’s an improvement over ($12.6mn) a year earlier. Most importantly, from a credit standpoint the company was nowhere near triggering the several key metrics imposed by its senior lenders. Nonetheless, the burden of total debt has remained unchanged over the past several quarters, and its principal Term debt becomes due in late 2020. We have a CCR 4 Credit Rating, which remains unchanged. There are 4 BDCs with $29mn in exposure – all in the 2020 Term debt. In the IQ 2019, the unrealized depreciation was reduced in the BDC valuations and may receive a modest boost in the IIQ, based on these results. Nonetheless, the retailer is far from being out of the woods.
On June 17, 2019 publicly traded gas exploration company Ultra Petroleum Corp (UPL) issued a press release announcing the extension of an offer to exchange the 7.125% Senior Notes due 2025 of its wholly owned subsidiary, Ultra Resources, Inc. for up to $90.0 million aggregate principal amount of new 9.00% Cash / 2.50% PIK Senior Secured Third Lien Notes due 2024, aka the Third Lien Notes. Unaffected directly is the only BDC with exposure – FS Energy & Power – whose investment of $45mn at face value is in the $975mn April 2024 senior secured Term Loan. That’s one of multiple debt facilities in this heavily leveraged company, with nearly $2.0bn in debt, even after shedding both Term loan and Revolver outstandings, as detailed in the latest 10-Q and on the IQ 2019 Conference Call. Thankfully, the BDC’s debt sits at the top of the capital structure, just under a Revolver, whose balance was only $38mn. Whether the exchange happens or not, though, the company will remain on our Watch List, given the large amount of debt and the fact that the price of Ultra’s common stock has dropped to an all-time low. The stock used to trade at over $15.0 a share, but is now at $0.35. There is close to $3.0mn of investment income at risk for FS Energy & Power.
Bloomberg published an excellent article about the different constituencies amongst Frontier Communications creditors, and the several alternatives being considered to cope with the telecom company’s mountain of debt. No change to the BDC Credit Reporter‘s views, as noted in the Company File.
On June 13, 2019 Restaurant Business published an article summarizing many of the financial and operational challenges facing Wendy’s and Pizza Hut franchisee NPC International. Based on what we read, other research undertaken (including reading Moody’s recent downgrade of the Company and its debt) and after reviewing on Advantage Data the latest prices quoted for the first lien and second lien loans, the BDC Credit Reporter downgraded our outlook from CCR 3 to CCR 4 on our 5 point scale. There are two BDCs with exposure, almost all held by Bain Capital Specialty Finance (BCSF), with $14mn of loans in both first and second lien Term Loans. Read the Company File for our analysis of investment income at risk and the potential for realized and unrealized credit losses.