Fusion Connect: Completes Recapitalization

Fusion Connect Inc. has restructured itself – again. Last time, the “leading managed security service provider of cloud communications and secure network solutions” was re-organized was when coming out of Chapter 11 bankruptcy back in January 2020. The company, after making ill-fated serial acquisitions, had sought court protection, burdened by a reported $760mn in liabilities. When exiting Chapter 11, Fusion managed to “shed” $400mn in debt in a transaction which saw its lenders become owners. See the BDC Credit Reporter’s article on the subject from January 14, 2020 – one of six articles we wrote about the company before, during and just after its bankruptcy exit.

Unfortunately, in the last two years Fusion Connect has failed to thrive and has now needed to raise new capital; write-off even more debt and establish new debt financing. All this is spelled out in a press release by the company and its owners on January 19, 2022.

This equity issuance and recapitalization, led by funds affiliated with or managed by Morgan Stanley Private Credit, Ellington Management Group, and Investcorp Credit Management BDC, Inc., was supported by existing stakeholders, including 100% of the company’s creditors. Following receipt of required regulatory approvals, Morgan Stanley Private Credit, via its affiliated or managed funds, will become the majority shareholder in the company. Several members of the Fusion Connect management team also participated in the capital raise, demonstrating substantial support for the company. 

Fusion Connect Press Release – January 19, 2022

There are two BDCs with $12mn of exposure to Fusion Connect: Investcorp Credit Management (ICMB) and Portman Ridge Finance (PTMN). However, only the former’s exposure – in both debt and equity – is material, with PTMN only holding $0.866mn in equity at cost, which was last valued at $0.221mn. As of September 2021, ICMB was a lender in two different debt facilities – both due at different times in 2025. The so-called “Exit Term Loan” – with a cost of $3.2mn was current and valued at par. However, the “Take-Back Term Loan” , with a cost of $5.1mn was valued at $2.0mn and the PIK portion of its interest income (8% according to management) was non performing. ($2.8mn of equity held was already valued at essentially zero).

We’re guessing that the Exit Term Loan will be refinanced at par by the new $60mn credit facility. By the way, that facility is paying 11.5% as of last September. Most likely – but still an estimate – the Take-Back Term Loan will be written off, resulting in a realized loss. Ditto for the equity at both ICMB and PTMN.

Judging by the press release, ICMB will remain both lender and part owner – along with the above mentioned partners – in Fusion Connect. Whether ICMB’s total outstandings will increase even after the likely realized losses is unclear, but we wouldn’t be surprised if that proves to be the case. We currently rate the company CCR 5 due to the non accrual of the PIK on the Take Back loan, but will upgrade our rating to CCR 3 or CCR 4 once we hear the final details from ICMB. (We expect PTMN will have no further role).

This is proving a never-ending story for ICMB, but we imagine management is consoling itself that – one fine day – Fusion Connect will hit its stride and whatever equity stake the BDC has ended up with will be worth enough to recoup the losses incurred in 2020 and 2022. We’ll continue to monitor the company, but expect that the recapitalization won’t affect the BDCs books till the IQ 2022 results are published.

Roscoe Medical: IVQ 2021 Update

Roscoe Medical is a medical equipment company, part of a constellation of such companies owned by Compass Health Brands. Roscoe itself has been a BDC portfolio entity since 2014, and has been underperforming to various degrees since 2018. From the IQ 2019, the company’s debt went on non-accrual and was written down by as much as (55%). An equity stake went to zero in value. Then matters began to turn around in late 2020. Both debt and equity began to revive in value. From early 202, the debt went back to performing status, the equity gained some value. (All this data drawn from Advantage Data’s records).

However, this is a still unfolding story with an uncertain outcome. In recent months, the valuations given by the two BDCs with exposure – Saratoga Investment (SAR) and Portman Ridge (PTMN) – have weakened again. As of November 2021, SAR valued its $5.1mn of second lien debt at par but wrote down the value of its equity by (83%) from (59%) the quarter before. PTMN is only in the second lien debt, which is discounted only (3%). The cost is $8.2mn.

Given the uneven performance in the past, and the recent (modest) downward valuation trend, the BDC Credit Reporter rates Roscoe CCR 3. Unfortunately, the public record (including the BDCs own disclosures) do not make clear what ails the company, and what the outlook might be. The only time a BDC piped up on the subject was SAR in May 2019:

I would say that the challenges that they’re facing at Roscoe have a lot less to do with the fact that they operate in and around the healthcare space, and more to do with the fact that they’re a highly competitive market. So the portion of their business that has faced the more extreme challenges really is the portion where they’re distributing to the broader retail environment. And so it’s been less indicative of a larger trend that would be natural to ask about. But we haven’t seen or experienced in our portfolio relative to health care in general.

Saratoga Investment Conference Call May 9, 2019

Given the high interest on the second lien debt (11.25%), the amount of income that could possibly be forgone is material : ($1.5mn). However, we’re not there yet, based on the relatively mild discounts being applied. The second lien debt does expire in March 2022 so either a refinancing or an extension is likely in the cards. We’ll circle back – whatever the status – when PTMN and then SAR report their next quarterly results.

Knowland Technology Holdings: IVQ 2021 Update

Knowland Technology Holdings (as per Advantage Data but named Knowland Group by its only BDC lender – Saratoga Investment or SAR ) “is a web-based software company that provides business development products and services to the hospitality industry”. The company has its own Wikipedia page. The company, which bills itself as “the world’s leading provider of data-as-a-service insights on meetings and events for hospitality” waxes optimistically about a rebound in corporate gatherings, as this article from hospitality.net suggests.

Judging, though by SAR’s recent valuations of its second lien debt to this privately held company with nearly 200 employees, the investment made seems to be underperforming. According to Advantage Data’s records, the company has been underperforming – not surprisingly – since the IIQ 2020. As of November 2021, the debt – which matures in 2024 and yields 11.0% including a 1% PIK element – has a cost of $15.8mn and a FMV of $10.4mn. That’s a (34%) discount, and given both the nature of the business in these pandemic affected times and the amount of the discount, worrying. By the way, the August 2021 valuation was $10.8mn, so the valuation trend is down as the little red arrow accompanying this article indicates.

We rate the company CCR 4, with the possibility that $1.7mn of annual investment income might be interrupted. Much more info we cannot offer as SAR has not said anything about the company and the public record is not eye opening either. We have no reason at this time to expect any great change coming in SAR’s next valuation, except that the onset of omicron might be a depressant. We’ll circle back when we get any news or at the next SAR earnings release in April 2022.

Footprint Acquisition LLC: IIIQ 2021 Update

Footprint Acquisition LLC (doing business as Footprint Retail Services) was founded in 1990 and “performs best-in-class sales, merchandising, installation, logistics and remodel services in retail stores across the United States”. That does not sound like a business that would perform well under current conditions, with so many retailers impacted by the pandemic. We’re guessing that’s why the only BDC with exposure – PhenixFIN (PFX) – placed its preferred investment in the company on non accrual from the IVQ 2020 and discounted the $4.0mn in exposure by 50%.

As of September 30, 2021, Footprint remains non performing, but the value has increased to $3.0mn, and the trend is improving. Besides the ($1mn) unrealized loss in value, PFX is missing out on $0.350mn in annual income from the preferred position, which yields 8.75%.

The public record and PFX’s filings are very short on information, but the improving valuation gives us some comfort. For the moment, though, Footprint is rated CCR 5. However, we’re hopeful that when IVQ 2021 results are published, we may see an increase in valuation. Or even – though unlikely – a return to performing status, even if in PIK form.

Prairie Provident Resources: Renews Debt Facilities

In a press release on December 29, 2021 Canadian oil & gas outfit Prairie Provident Resources announced a one year renewal of its secured revolver and of subordinated notes owed. Furthermore, the agreement between the company and its borrowers requires all subordinated interest payments to be paid in kind. As a result, Prairie Provident will have a modest amount of borrowing capacity under its revolver and more time to turn around the ailing business. The company is publicly traded but it’s stock trades at just $0.07 Canadian per share.

Not to be unkind, this is another classic case of kicking the can down the road, presumably on the hope that higher oil prices may rescue the business. We’ve read the latest quarterly results, and are not very optimistic that the business can ultimately be saved, but we’re not oil & gas experts.

The only BDC with exposure – and also not expecting much – is Goldman Sachs BDC (GSBD). Since 2016 (!), the BDC has had $9.2mn invested in the company’s equity. The fair market value of its position has been negligible for years, making this one of those “zombie” investments that generate no income, has little hope for recovery but takes up space in the BDC’s portfolio company list. At its nadir in the IQ 2020, GSBD valued its investment at $38,000. Since then, though, the value has increased – as of September 2021 – to $244,000. That’s 6x higher but still means the position has been discounted (97%)…

At the moment the position is immaterial to GSBD but – given that anything can happen – that could change for the better down that can laden road. We’re tracking what happens to the publicly traded stock and will report back if and when a significant valuation increase occurs. Or a final write-off. Prairie Provident is rated CCR 4 in our 5 point rating system.

1888 Industrial Services: IIIQ 2021 Update

We’d like let you know what’s happening at oil field services company 1888 Industrial Services, but we can’t as the public record is sparse. Please read our earlier articles in December 2019 and May 2020. However, the valuations of the three BDCs that have an aggregate $62.3mn advanced at cost to the company tell the story. Back when we last reviewed the company the fair market value of the investments came to $19mn. As of the IIIQ 2021, the value has dropped to $7.3mn. That’s a discount from cost of (88%).

PhenixFin (PFX) – which used to be Medley Capital – has the biggest single position: a revolver of $3.5mn at cost valued at par. Still, and underlining the liquidity crunch the company must face, the 6.0% interest is paid in kind, not cash. Curiously, Investcorp Credit Management BDC (ICMB) allows has a Revolver with a cost of $2.0mn and a FMV of $0.5mn. No mention in the BDC’s footnotes as to whether the interest is paid in cash or in kind. Sierra Income – soon to be acquired by Barings BDC (BBDC) – is also funding the same Revolver. There the cost is given as $1.2mn and the FMV $1.1mn. No word of being paid in kind. A couple of the term loan tranches held have been given nominal value as of September, but the bulk of any remaining value is in the Revolver.

In our last report of a year and a half ago, we rather optimistically projected that the BDCs involved might lose 50% of their $62mn invested. Obviously – judging by the latest numbers – we were well off the mark. In the interim, we’ve had a revival in oil prices and some greater level of business activity in oil field services. None of that, though, seems to have helped the company nor has the huge influx of capital into the economy post pandemic. At this stage, we’re waxing more pessimistic and assume very little – if any – of the capital advanced will be recovered.

Most at risk of further write-downs is PFX, with a current FMV of $3.6mn, followed by ICMB ($2.6mn) and Sierra, with just $1.0mn of value left. We continue to rate the company CCR 5 and will provide an update when the IVQ 2021 results come out. We are keeping our expectations low.

Teligent, Inc.: Drugs Recalled

This can’t be good. Teligent Inc. has announced the recall of two of its drugs. These consisted of:

two lots of topical lidocaine solution after companies testing the drug received superpotent (sic) results at the nine-month and 18-month stability time points. The company faced similar problems in September, and it had a number of run-ins with the FDA prior to that.

Fierce Pharma – December 8, 2021

For a company already in bankruptcy – as discussed in our prior article when we initiated coverage – this is yet another setback. For the only BDC with exposure – Ares Capital (ARCC) – this means the prospect of even higher losses when the company’s future fortunes are settled. We “cut to the chase” in our earlier post and suggested that a complete write-off was a possibility, meaning that ARCC might take a further ($34.5mn) write-down and a realized loss of ($73.8mn). For the BDC, which is trying to buy the company out of bankruptcy and has just funded $12mn in new financing, this news could not come at a worst time, we imagine.

We continue to carry Teligent as CCR 5 and Trending in that we expect the next valuation in the IVQ 2021 could be materially lower than as of September 30, 2021.

Hoffmaster Group: Loan Values Decline

We hear from bankruptcy monitoring publication Petition that Hoffmaster Group may be in some distress. The “specialty disposable tabletop products” manufacturer has several publicly traded loans in the market. Those loans – especially a second lien one – are trading down in value. A first lien Term Loan due in 2023 is discounted by (8%) and the aforementioned second lien by (25%). This is a private company owned by private equity shop Wellspring Capital Management LLC so any color as to why this might be happening is not available.

BDC exposure to Hoffmaster dates back to 2010. As of the IIIQ 2021, there were three BDCs with exposure to the first and second lien debt, including two public players: Barings BDC (BBDC) and Portman Ridge Finance (PTMN). Audax is the non-traded BDC involved. Total aggregate BDC exposure at cost is modest at $7.4mn. BBDC is in the first lien debt with $2.2mn which , most recently, was marked at a premium to par. PTMN, though, is exclusively invested with $1.5mn in the second lien loan, and had discounted that (14%) already. Interestingly, in recent quarters BDC valuations had been improving.

We’ve rated Hoffmaster CCR 3 since the IIQ 2020. Back in April 2020 Moody’s downgraded the company to Caa1 based on pandemic-related concerns for the business. Furthermore, Advantage Data showed certain of the loan valuations dropping. However, this is our first article on the company. The CCR 3 rating is being maintained as its too early to presume that an eventual loss is in the offing, despite the big discount being applied to the second lien debt. That may change as more formation filters in from Moody’s; the BDCs involved or elsewhere.

We’ve also added Hoffmaster to our Trending list, which means that we expect the next BDC valuations to be possibly materially different than the current one. By the time IVQ 2021 values roll around at the BDCs, the exposure held could drop by several hundred thousand dollars or more.

As always, we’ll circle back as new information occurs. The good news, though, for all the BDCs involved is that the amounts at risk of loss – and the income therefrom – are of marginal relative importance.

Ansira Holdings/Ansira Partners: IIIQ 2021 Update

We understand very little about what’s happening at Ansira Holdings (aka Ansira Partners) except that the marketing services company seems to be underperforming. Most everything we’ve divined is from the valuations of 6 BDCs with exposure of $106mn at cost – all in a unitranche loan maturing in 2024, and discounted (18%) at fair value. As of September 2021, Crescent Capital (CCAP) is carrying the debt as non performing and has been since IQ 2020. Just over $0.6mn of annual investment income is being forgone by CCAP.

Confusingly, all the other BDCs – using a similar valuation discount – count their unitranche loan to Ansira as performing. Pricing on the debt is LIBOR + 6.50% with a 1.00% floor, or 7.50% in total. The valuation has been stable since the unitranche loan was minted in IIQ 2020.

It’s possible that CCAP is being more conservative than the other BDCs, or there are undisclosed “last out” arrangements involved, none of which show up in the BDC’s footnotes. Unfortunately, none of the public BDCs with exposure have provided any color on this credit so investors will have to contend with uncertainty.

We rate Ansira CCR 5, even if only one BDC has the debt as non performing. Given that we hear of new developments at the business and the valuation is stable, Ansira is not Trending. We’ll just wait and see what we hear from its lenders or from the public record.

BJ Services Company: IIIQ 2021 Update

Last time we wrote about oil field services company BJ Services Company, the business had just filed for Chapter 11, and without a pre-packaged plan. Subsequently – as we’ve gleaned from the public record – at least some of BJ’s assets were sold to other entities such as American Cementing. More recently, BJ’s former headquarter’s building was sold for $40mn.

Where does this leave the 4 BDCs previously with $25.2mn invested in the company’s unitranche debt when bankruptcy occurred ? As of September 30, 2021, total exposure at cost was down to $10.6mn and only Crescent Capital (CCAP) and Portman Ridge (PTMN) – who acquired the loan from now defunct Garrison Capital – are still involved. PTMN is carrying its modest $1.4mn position at par. The BDC has a “first out” status in the unitranche loan and that might explain the valuation and why the debt is carried as performing.

Over at CCAP – which has most of the exposure – one tranche of debt with a cost of $8.0mn is valued at $5.5mn, down (35%), just slightly off the prior quarter and the lowest value given since the bankruptcy occurred. The debt remains on non-accrual, and is a “last out” structure. (Confusingly, there’s also a $1.2mn senior loan from CCAP that is carried as current and valued at cost.)

We’re surmising – because neither PTMN or CCAP are explaining anything – that the BDCs are waiting for the asset sales to be complete to tot up their losses – if any – on BJ Services and close out these loans. With the sale of the HQ, we’d guess this process is almost complete and the BJ Services book will shortly be closed.

The only loss that will ensue – if we’re right – is a realized one by CCAP for ($2.5mn) or so, offset by receiving some proceeds to be re-invested. If that’s the case, CCAP will probably be mildly pleased as the BDC had nearly $13mn invested when BJ Services – seemingly out of the blue – filed for Chapter 11 back in 2020.

All this should be confirmed shortly, possibly when the IVQ 2021 results BDC results are published. For the moment, we’re retaining BJ Services as a CCR 5 – i.e. non performing – credit and Trending, because we expect something material to occur.

Casper Sleep: Company To Be Sold

Casper Sleep is a mixed e-commerce and brick and mortar retailer of “sleep products” – i.e. mattresses. Through the dint of good marketing, the company gained a celebrity following and became a growth story in a highly competitive, non glamorous corner of retail. In February 2020, the company went public but already the bloom was off the rose as the final price was half the initial target. Since then, matters have gotten worse as the company has been burning through cash to fuel its growth, and its stock price has dropped sharply. A few days ago, though, the Board agreed to a take-private buyout offer by Durational Management, whose offer is supported by debt from KKR Credit and Callodine Commercial Finance. $30mn in bridge finance is being made immediately available and has been agreed to by the existing lenders.

Right in the middle of all this is publicly-traded BDC TriplePoint Venture Growth (TPVG), a subordinated lender and investor in Casper since 2017. (Wells Fargo administers a secured, asset based revolver, senior to TPVG). As of the IIIQ 2021, the venture-debt BDC had invested $32.0mn to the company, mostly in the form of two subordinated term loans due in 2022 and 2023. The debt is valued at par. Also, the BDC has invested $1.2mn of preferred and equity, which has been almost completely written down. (By the way, Casper in its official filings says TriplePoint has invested $50mn. The discrepancy might be a related TriplePoint fund being also involved).

We imagine that upon hearing of the buy-out offer TPVG sighed in relief. In recent months, Casper’s liquidity has greatly tightened and management has taken a hacksaw to costs to survive. Lenders have had to waive defaults while a solution was found by the stakeholders. In any case, both Wells Fargo and TPVG quickly agreed to the $30mn of additional “bridge financing” involved.

Based on what we’ve heard, TPVG is likely to get out of this sticky situation with nary a credit scratch, with even its equity stake valued a little higher than just before the LBO announcement. However, the transaction has not yet been consummated, so neither TPVG, nor the BDC Credit Reporter, can count its chickens as yet.

For the moment, we’re rating the company CCR 3, where the likelihood of full repayment is greater than of loss. That could change in a New York minute should something go wrong. We are tagging this company as Trending for obvious reasons. We will provide an update whenever a material new development occurs. We expect the company – even in the best of circumstances – will remain on TPVG’s books through the end of 2021.

Custom Alloy Corporation: IIIQ 2021 Update

Now that Barings BDC (BBDC) has reported IIIQ 2021 results, we see that Custom Alloy Corporation‘s debt outstanding has been discounted by as much as (17%). Overall, BBDC has invested $40.8mn at cost, but the FMV has dropped to $36.0mn. As a result we’ve added the company back to the underperformers list, with a CCR 3 rating.

Previously, the company was added to the underperformers in IQ 2020 but was returned to performing status (CCR 2) in the IVQ 2020, as valuation returned to par. We’re not sure why BBDC has discounted the debt again, but note that the rate charged is very high (15.0%) and pay-in-kind, suggesting this is a troubled borrower.

This is a credit worth tracking as Custom Alloy accounts for 7% of BBDC’s total investment, and even more of its NII because of the high rates being charged. We have added the company to the Trending List and will be monitoring BBDC’s IVQ 2021 results with great interest for signs of any further weakening. We were encouraged, though, by a recent October 2021 news item that indicated the company is investing $8.1mn in a new facility to service a Navy contract. Maybe Custom Alloy’s troubles – whatever they are – are just a passing phase and – once again – the company will be removed from the underperformers list.

Legal Solutions Holdings: Placed On Non Accrual

Frankly we don’t know much about Legal Solutions Holdings. The public record does not offer much information. However, we do know that the company used to be financed by MVC Capital, which was acquired by Barings BDC (BBDC) in late 2020. We also know that in the IIIQ 2021, BBDC placed its senior subordinated loan to the company, which was yielding 16.0%, on non -accrual for the first time.

This debt has a par value of $11.4mn, a cost of $10.1mn and – surprisingly given the above – a fair market valuation of $11.0mn. Judging by the valuation at least, BBDC expects to be repaid in full and more on this debt nominally due in March 2022.

This investment dates back to 2014 and was valued by MVC just before the BBDC acquisition at $9.3mn. Why the value has increased in a one year period despite becoming non performing is not clear to us. We’ll reach out to BBDC and see if we can find an explanation. This may have something to do with the blanket “Credit Support Agreement” Barings offered when acquiring MVC’s assets for BBDC.

In the interim, the company is being rated CCR 5, downgraded from CCR 2 in the IIQ 2021 when the valuation was roughly equal to cost. We assume BBDC is – at least temporarily- deprived of $1.8mn of annual investment income from Legal Solutions, most of which was already in pay-in-kind form.

The valuation seems to suggest BBDC should get out of this non performing credit scott free, or better. However, till we learn more from the BDC’s managers or in the next earnings release, this remains a question mark.

Chief Fire Intermediate: IIIQ 2021 Update

We’ve got nothing positive to report about Chief Fire Intermediate, which we’ve discussed previously. After reviewing Logan Ridge Finance’s (LRFC) IIIQ 2021 results, the debt remains on non accrual and the entire investment has been written to zero, and has been for the last two quarters.

The company is rated CCR 5, and we expect a 100% realized loss will be booked at some point on the $9.0mn of debt, preferred and equity invested at cost. Given the non accrual and the 100% discount, this should not impact LRFC.

Carlson Travel: Files Chapter 11

On November 11, 2021 Carlson Travel Inc. filed for Chapter 11 bankruptcy protection, as part of a pre-packaged plan. A month earlier, the key components of the plan agreed between the owners and most of the lenders was spelled out:

Through the plan, the debtors seek to implement a restructuring that deleverages the debtors’ balance sheet from $1.6 billion prepetition to $625 million in exit notes as well as a $150 million exit revolving credit facility that is presumed to be undrawn at emergence. $500 million of the exit notes will provide new money to the estate (either via a marketed offering or a backstopped rights offering to existing creditors). The plan also provides for $350 million of new equity financing, split between a rights offering to the plan’s Class 5 and “direct allocations” to supporting parties…“.

From Reorg.com 10/6/2021

The key creditor is Barings, Inc. As a result, two of the asset manager’s BDCs are involved – non traded Barings Capital Investment and publicly traded Barings BDC (BBDC) with an aggregate exposure at cost as of September 2021 of $13.6mn. The exposure consists of first lien debt and “super senior secured debt” and a sliver of equity. Barings has been involved with the company since at least IIIQ 2020 as a BDC lender.

Despite the big debt haircut reported BBDC and Barings Capital don’t seem to be at risk of any loss, judging by the IIIQ 2021 valuation. Both debt tranches are valued at a premium. The only loss should come in the immaterial $0.13mn of equity invested.

We have downgraded Carlson from CCR 3 to CCR 5 on the news of the bankruptcy but are optimistic – on the basis of the public record that this is a bullet that the Barings BDC lenders can duck. What we don’t know, though, is whether these lenders will receive equity in the post-bankruptcy entity. We’ll update readers after the IVQ 2021 BBDC results are published, which should address the issue if the company formally emerges from court protection by that date.

Dynamic Product Tankers: IIIQ 2021 Update

Last time we wrote about Dynamic Product Tankers – in June 2021 – we were optimistic that valuations might improve going forward. In fact, we were wrong. As of the IQ 2021, Apollo Investment (AINV) valued its debt and equity position – with a cost of $71.8mn – at $47.5mn. Two quarters later and the value has dropped to $38.1mn. All the deterioration came in the equity stake AINV owns in its 85% of the business. The $22mn unsecured Term Loan remains valued at par and continues to charge a subsidized 5.16% rate to the shipper. The equity has dropped from $25.5mn to $16.1mn.

This is a closely held company with no useful public information found, so we’re reliant on disclosures from AINV. Unfortunately, the BDC has said nothing on its conference calls since 2018. We’re left to speculate – due to the valuation numbers – that the business is softening.

It’s impossible to determine if this “non core” asset will get sold any time soon. However, even at this lower valuation a considerable amount of pro-forma income is involved. Assuming a FMV of $38.1mn invested at 9%, AINV could generate $3.4mn of annual investment income, as opposed to $1.1mn currently. That’s nearly $0.04 a share of hypothetical incremental investment income.

On the other hand, should AINV be forced to write off just the remaining equity, the loss of NAV Per Share would be ($0.25). We have no view either way given the absence of information, but the ultimate resolution of Dynamic will be important to AINV.

For the moment, the company is rated CCR 4, and is possibly trending as the unrealized loss last quarter was substantial and could be repeated. We’ll probably report again when the IVQ 2021 AINV results are released in 2022.

Spotted Hawk Development: IIIQ 2021 Update

The BDC Credit Reporter has written three times before about Bakken oil and gas operator Spotted Hawk Development. Since our last article in June, the company has been restructured yet again. This has required the only BDC with debt exposure (and a 38% equity interest) – Apollo Investment (AINV) – to convert one of its debt tranches to equity and another tranche was written off. This resulted in a ($44.4mn) realized loss, or roughly one third of the amount the BDC had invested in the company.

Currently, AINV has one debt tranche of $24.7mn valued slightly above par and current on its 12% interest. The debt matures at the end of June 2022. Two tranches of equity with a cost of $45.5mn is valued at $6.7mn. The total FMV of AINV’s position is $32.2mn. (At its peak in 2020 AINV had $116mn invested at cost in the business).

We get the impression from AINV’s latest conference call that some sort of liquidity event for Spotted Hawk is planned in the next 12 months. Here’s a quote from AINV’s IIQ 2021 conference call that is relatively explicit on the BDC’s motivations.

“And we are — sort of now that oil prices have picked up, and there’s some sense of — there’s some — visibility is too strong a word. There’s some possibility of sort of constructive transactions. We’re going to be as aggressive as we can there to sort of exit that, but we don’t have anything”.

AINV Conference Call – May 20, 2021

This latest restructuring may have been arranged to facilitate that purpose. How this plays out will be important for the BDC’s net asset value and income.

If AINV receives $32mn – as per the latest valuation – the income generated from re-investing the proceeds will not make any difference as AINV’s new investments yield about 9% (or lower), which would generate the same income as currently from the 12% Spotted Hawk Term Loan. NAV would not change either. However, if this turns out to be a write-off, AINV will lose ($2.9mn) of annual investment income and take a further ($0.5) per share hit to net asset value per share. Given that something is LIKELY to happen in the next few quarters, we have the company as Trending. However, whether the trend will be positive or negative is hard to handicap. Oil prices are high, but that did not help in prior periods, so the outcome is unclear.

For the moment, Spotted Hawk remains rated CCR 5. We’ll report back if we hear any news or when the IVQ 2021 AINV results are published.

Solarplicity Group: IIIQ 2021 Update

Given the small amounts involved, the BDC Credit Reporter’s coverage of Solarplicity Group Limited (aka AMP Solar UK and Solarplicity UK Holdings) will be limited. As of the IIIQ 2021, the only BDC with exposure is Apollo Investment (AINV) which has $13.0mn in debt, preferred and equity invested in Solarplicity UK and a value of only $2.2mn.

The BDC has a long history with Solarplicity dating back to 2015. In FY 2018, AINV booked a realized loss of ($27.1mn) and the total investment at cost – which used to be one of the BDC’s biggest portfolio companies – was reduced from $155mn to $19mn, following a sale of the business. In FY 2020, AINV booked a further ($4.7mn) realized loss on some of the first lien debt left in the company.

As of now, there is $7.4mn in remaining debt at cost that has been non performing since IQ 2020 and has a value of just $2.2mn, down from $2.5mn in the prior quarter. The preferred and common have no value.

We rate the company CCR 5 because of the non performing debt and have no expectation – based on what we can glean – that any recovery is plausible. (Management of AINV has not provided an update on what’s happening at the solar company since 2018).

Given that we don’t cover any investment with a value below $2mn, we’ll probably be dropping Solarplicity to Not Material status shortly.

Renew Financial LLC: IIIQ 2021 Update

We have only a flimsy understanding of Apollo Investment’s (AINV) Renew Financial LLC position, which also includes an affiliate called AIC SPV Holdings II, LLC, and also goes by the name Renewable Funding, LLC. If that wasn’t enough, there’s also a Renew JV LLC stake. Taking these businesses together, AINV has invested $16.9mn – all in preferred or common. As of September 30, 2021, the FMV was given as $6.1mn – a (64%) discount, and no income was being generated. This finance company for alternative energy investments dates back to as 2014 when alternative energy was a core investment target for the BDC , and its parent the Apollo Group.

That’s all changed and Renew is now counted as “non-core”, but we get very little to nothing in terms of updates from AINV’s management as to any exit strategy that might be involved. All we know is that these related companies have been underperforming since IQ 2020, and just reached a valuation low point.

The Renew entities are rated CCR 4, as an eventual loss seems more likely than a recovery. In fact – given the trend and the junior nature of the capital – a full write-off might be in the cards one day. Given the absence of any income therefrom and the low cost (0.6% of total cost) and FMV this is a minor exposure for AINV. (If the investment gets written down below $2mn we will drop coverage). The investment is not Trending as recent write-downs were modest – under ($1mn). This is just another example amongst many of AINV investments gone wrong that just sit in the BDC’s portfolio ad infinitum, and with no clear raison d’etre or exit strategy as far as we have been told.