Another famous retailer – J.C. Penney – has been back in the news since Reuters announced on July 18, 2019 the hiring of restructuring advisors. We added the retailer to our Worry List on the news. Now Motley Fool has provided a useful summary of the company’s financial condition. Here are highlights: ”
“As of the end of last quarter, J.C. Penney had $3.9 billion of debt, plus another $1.2 billion of lease liabilities. Meanwhile, the company’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) has plunged in recent years due to strategic missteps and tough business conditions. This has driven J.C. Penney’s leverage to unsustainable levels. Adjusted EBITDA totaled $568 million in fiscal 2018 — down from $1 billion in fiscal 2016 — putting J.C. Penney’s leverage ratio at more than seven times EBITDA. For comparison, most investment-grade companies have debt that is no more than three times EBITDA”.
The real problem is looming farther out. J.C. Penney has about $2.5 billion of secured debt that will mature between 2023 and 2025. It also has $1.2 billion of unsecured debt maturing between 2036 and 2097. J.C. Penney needs to whittle down the principal balance of this debt while ensuring that it can extend the maturities of what remains.
J.C. Penney’s unsecured debt maturing in 2036 and beyond currently trades for between $0.23 and $0.26 on the dollar. Even some of its lower-priority secured debt trades for less than $0.50 on the dollar. Thus, the market is already factoring in a substantial likelihood that creditors won’t be repaid in full. This should motivate them to cooperate with the company’s efforts to restructure its debt. It might even make sense to write off some of the principal if J.C. Penney can offer more collateral in exchange (and perhaps some equity warrants to reward creditors if the company manages to turn itself around).
From a BDC perspective, the exposure is modest at $3.3mn, and spread over three FS KKR non-traded BDCs: FSIC II, FSIC III and FSIC IV in two different loans/notes, one maturing in 2020 and another in 2023. We expect lower valuations will be applied in future quarters than as of 3/31/2019 when FMV was close to par, but the impact on individual BDC balance sheets and income statements, even if Chapter 11 does eventually occur, should be modest.
We first wrote about the troubles at Bumble Bee Foods, LLC just yesterday (July 22, 2019). We added the tuna fisher/processor to our Worry List right away on the news that a turnaround firm had been hired to advise management. That’s never a good sign where credit is concerned. Now we learn from a trade publication that the company has been in ‘”technical default’ since March of 2019 and has breached a “financial covenant” on a $650 million loan. This only validates our decision to move the company – still valued by its two BDC senior lenders at a discount of less than 10% (our typical trigger level) to the Worry List. What we still don’t know is whether the senior debt that the BDCs are involved in can expect full recovery if Bumble Bee does stumble into bankruptcy or an out-of-court restructuring.
On July 15, 2019 publicly traded “integrated energy company” Vistra Energy (VST) announced – by way of a press release – the successful acquisition of Crius Energy Trust, also a public entity traded on a Canadian exchange. The deal had been contemplated since February and sweetened along the way. Here are highlights from the press release:
As a result of the closing today, Crius Energy unitholders are entitled to receive C$8.80 per trust unit upon the redemption of such units. In addition, Crius Energy unitholders that were holders of record on March 26, 2019 will receive C$0.209 per unit for the distribution previously declared by Crius Energy on Jan. 16, 2019. The combination of these amounts results in total cash payable to Crius Energy unitholders of C$9.009 per unit. Crius Energy expects that the distribution of C$0.209per unit will be payable today, with the transaction consideration of C$8.80 payable within three business days of today’s date. The units of Crius Energy are expected to be delisted from the Toronto Stock Exchange as of the close of markets on July 17, 2019, and Crius Energy is expected to be wound-up following the redemption of the trust units on July 18, 2019.
This is good news for the only BDC with exposure to Crius Energy: MVC Capital (MVC). A couple of years ago MVC sold its largest portfolio company – US Gas & Electric (USGE) – to Crius in return for units in the Trust. Moreover, MVC has a $37.5mn second lien debt position, yielding 9.5%, in USGE’s debt, held by a subsidiary. Admittedly, thanks to the dropping value of the Crius Energy trust units that occurred in the quarters preceding the buy-out offer – and which caused us to place the investment on our under-performing list – MVC will not receive back all its $25.9mn investment, as per the latest filing. (When interest is added to the principal balance received, the return is positive). However, Realized Loss likely to be booked in the fiscal quarter ended July 2019 should be modest: under $5mn by our estimate, and there may even be a write up on an unrealized basis, by comparison with the $21.3mn FMV valuation at the of April 2019. The USGE debt remains on the books, assumed by the new owner. However, the creditworthiness of Vistra is much greater than that of Crius, which allows us to return USGE’s debt to Performing status. All in all, a positive outcome for MVC (which is likely to be repaid in full by Vistra before long) on a credit that was headed south fast. Just before Vistra stepped in with its checkbook , the Crius trust units had been written down (49%) on the BDC’s books on an unrealized basis.
We heard from the Wall Street Journal on July 19, 2019 that famous Bumble Bee Foods “has hired turnaround firm AlixPartners LLP as the seafood purveyor seeks to recover after pleading guilty to fixing prices on canned tuna, according to people familiar with the matter”. In another news report, we also discovered that “Italy’s Bolton Group International is now seen as the frontrunner to acquire Bumble Bee Foods’ Canadian operation“. The company owns “Clover Leaf, Brunswick and Beach Cliff brands”. This process appears to be some way down the road as ‘one source close to the process said Bolton is now exclusive for Clover Leaf, while another told Undercurrent a deal is “close” and could emerge at the end of July or in early August“. We first heard reports of a prospective sale back in April. From a BDC perspective, there are two senior lenders to the U.S. parent and Canadian subsidiary with $61mn of exposure at cost. The BDCs involved are non-traded TCW Direct Lending and Apollo Investment (AINV) in a 2:1 ratio. At 3/31/2019 the debt was valued close to par: TCW had a (7%) discount and AINV (1%). Total income at risk is over $6.5mn. Both BDCs have been invested in the 2023 Term Loan since 2017. We have no idea how serious Bumble Bee’s troubles might be to be impelled to bring on a turnaround specialist, nor is it clear if the valuation from March end is out of date. The 2023 Term Loan, according to Advantage Data’s real-time loan pricing system, is discounted only (3%) at time of writing. Nonetheless, we’re placing Bumble Bee on our Worry List, skipping the Watch List category, moving down from Performing.
As expected, coal miner BlackHawk Mining has formally filed for Chapter 11. The company – thanks to a pre-agreed restructuring plan with most of its creditors – promises to exit bankruptcy within the next 60 days. For a full discussion, see our earlier article on the subject.
On July 18, 2019, 99 Cents Only Stores announced by press release the completion of a restructuring plan that the BDC Credit Reporter discussed more than a month ago. Basically, the second lien and third lien debt holders are undertaking a debt for a minority equity stake position in the troubled value retailer. In addition, the sponsors – Ares Management and a Canadian pension fund – and other players will be injecting new equity capital as well. Moody’s has already – back on June 12, 2019 – called the restructuring ” a distressed exchange” , and downgraded the company’s rating. We had previously believed that a $20mn portion of the $55mn at cost in BDC exposure owned by sister funds Oaktree Specialty Lending (OCSL) and Oaktree Specialty Income (OCSI) was going to convert to equity, as part of the restructuring. (We assumed the asset-based loan in which TPG Specialty – TSLX – has $32mn invested would either continue unchanged or be refinanced). On further review, and without any guidance on the subject from the BDCs involved or the company’s press release, we’ve changed our mind and assume the first lien debt will continue as before and not be involved in the conversion to equity. Both the OCSI/OCSL debt and the facility in which TSLX is involved in were trading at the close on July 19, 2019 at a (9%) discount to par, and were paying interest normally. (These are publicly traded debt issues, and we used Advantage Data’s real-time loan and bond pricing module). Given the new capital structure; the infusion of capital and reports that the operational turnaround underway at 99 Cents Only Stores that has been underway for months is bearing fruit, the short term credit outlook is up. We are upgrading the company from a CCR 4 Rating (what we call or Worry List) to a CCR 3 rating (aka Watch List). Much remains to be done following this second restructuring in so many years, and we do not forget that 99 Cents Only operates in the Bermuda Triangle industry of retail where other players have restructured or gone through Chapter 11 only to go bankrupt again. For the moment, though, we are cautiously optimistic and expect Moody’s may shortly upgrade the company and the remaining debt.
We knew that Riverside Company had exited Uinta Brewing Company in March 2019, based on a trade article on July 10, 2019. This was relevant as the unitranche lender to the craft brewer is Golub Capital (GBDC), which at year end 2018 had $5.9mn invested in debt and equity. In the IQ 2019, the exposure was reduced to $1.6mn. All debt was on non accrual since IIQ 2018. Golub now owns Uinta, and a new capital structure will emerge, which we may learn more about on the next Conference Call. That may involve the asset manager providing additional capital to boost the business. In the interim, we’ve learned more – thanks to a trade publication – what ails the brewer. The company, thanks to Riverside’s investment capital, grew very fast to become a national presence. Here’s an extract explaining what went wrong:
That expansion led to a wide but shallow market. Increased competition from an ever-growing number of breweries resulted in market penetration weaker than expected.
“Over the course of (the Riverside investment), the challenge of competing on a national scale without large marketing budgets and personnel became extraordinarily difficult for us to sustain,” Uinta president Jeremy Ragonese told Brewbound.
As a result, Uinta has been pulling back from a variety of markets in a reconfiguration of the footprint expected to last through the summer.
The question going forward is whether Golub can do any better.
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.