Ambrosia Buyer Corp: IIIQ 2021 Update

We’ve written about Ambrosia Buyer Corp (aka Trimark USA) three times before, with the most recent update after the IQ 2021. We wish we could tell what’s going on of late at the restaurant supply company from the public record, but we can’t. However, we can report that as of the IIIQ 2021 Apollo Investment (AINV), which holds second lien debt with a cost of $19.6mn continues to carry the debt as non performing. The amount invested at cost is reducing from quarter to quarter, suggesting that the BDC might still be receiving debt service but is paying down the principal with the proceeds.

At 9/30/2021 the AINV FMV in Ambrosia is $9.3mn, a (53%) discount from cost. The par value given is $21.4mn. The discount in the IIQ 2021 was substantially the same. This is an increased discount from the IQ 2021, which was (38%). We’re guessing that the disputes between the lenders to Ambrosia is still being fought out in court.

We continue to rate Ambrosia as CCR 5, with some ($1.3mn) of annual income forgone since the IVQ 2020. We can’t estimate what the final outcome might be as the company – and the debt – remains in flux.

Kadmon Holdings: Company Sold

Kadmon Holdings is a publicly traded biopharmaceutical company (ticker: KDMN) that has just been sold to Sanofi, a much larger biopharmaceutical concern with a global footprint and 100,000 employees. The equity holders of Kadmon are receiving $9.50 a share or $1.9bn in total.

We believe this is good news for the only BDC with exposure to Kadmon: PennantPark Investment (PNNT). The company has been on PNNT’s books in some form since 2010. Of late, though, the BDC only had a small equity stake with a cost of $2.3mn in 252,014 shares. The FMV as of June 2021 was $1.0mn. Now that’s worth $2.4mn, a $1.4mn increase and cash proceeds that can be rolled from a non-income producing to a yielding status.

We had Kadmon rated as underperforming since 2016 (!) with a CCR 3 rating but Non Material giving the sub-$2.0mn valuation. We’ve upgraded the investment to CCR 1 because of the sale and added to the Trending list. That’s because the BDC should book a final realized gain in IVQ 2021 and a higher value than the latest number we have as of June 2021. A small, but satisfying gain for PNNT given that KDMN’s stock price was as low as $3.36 in the last 52 weeks.

Hylan Datacom & Electrical: Placed On Non Accrual.

Hylan Datacom & Electrical is a “leading provider of full-service turnkey communications solutions, electrical infrastructure design and construction services for wireline, wireless and smart city municipal services across the United States”. According to one of its BDC lenders – BlackRock TCP Capital (TCPC) – the company is facing difficulties for the following reasons:

…”[the] nature of implementing and carrying out their service wasn’t run as well as it could have been. And in the meantime, the impact of that with the level of debt they’ve had, put challenges on them in terms of liquidity”

Extract from BlackRock TCP Capital conference call, dated November 4, 2021

As a result, the company – already underperforming has seen two of its three loans with TCPC placed on non accrual. The first lien debt has a total cost of $18.1mn and an FMV of $12.1mn. Non-traded BDC Sierra Income had a $15.5mn debt exposure to Hylan as of the IIQ 2021 and that’s probably on non accrual and further written down. TCPC is facing ($1.2mn) of currently forgone investment income from becoming non performing. Given that the BDC has in excess of $160mn of annual investment income, the impact is minimal.

TCPC – in its comments about the situation – sounds hopeful that Hylan can be turned around:

“So those seem to be resolvable issues, obviously, is going to be a longer tail process to get to the right outcome. We feel like we know what we’re doing there, and we have a good asset with which to start with. But I think we’ll just provide updates as we can quarter-over-quarter”.

Extract from BlackRock TCP Capital conference call, dated November 4, 2021

The BDC Credit Reporter has downgraded Hylan from CCR III – which dates back to IIIQ 2019 – to CCR 5. For the moment, we project the ultimate loss – the first lien debt status notwithstanding – might be between 25%-50% of the investment involved, which totaled $33.1mn in June 2021 with both BDCs reporting.

TCPC went out of its way to indicate Hylan’s problems are “idiosyncratic” and not related to the current theme of supply chain disruption or other Covid-related issues.

Sequential Brands: Auction Cancelled

Bankrupt Sequential Brands was going to hold an auction for its multi-brand assets, but ended up cancelling. Some of the company’s brands – like Jessica Simpson which was sold back to the celebrity herself for $65mn – were disposed of previously. The principal transaction, though, was a $330mn bid by Galaxy Capital Partners, a portfolio of Gainline Capital Partners – a PE group. Earlier this year, Galaxy bought Apex Global Brands including, Hi-Tec, Magnum and Tony Hawk and has licensing deals with top brands such as Justice, London Fog and many others.

This transaction is being financed with $55mn in cash and the assumption of debt. That debt is held – amongst others – by the two BDC lenders involved – FS KKR Capital (FSK) and Apollo Investment (AINV) to the tune of at least $231mn. As far as we can understand, Galaxy will be the new borrower and FSK – and to a much lesser degree – AINV, will also hold an equity stake in the business.

How all this gets reflected in the two BDCs schedule of investments is impossible to tell in advance. We’d guess that the $3.0mn in equity FSK invested in Sequential might be written off. AINV’s debt was valued at a discount of (12%) as of June 30, 2021 and might result in a haircut but total exposure at cost was only $12.6mn, so any impact will be minimal.

The most intriguing question is how FSK – with $216mn invested at cost in debt treats that investment. We expect no loss will be recognized but some portion of the debt may be converted into equity in Galaxy. Also unknown is whether the new facility will be priced as attractively as the advance to Sequential: LIBOR + 875%. When we get those sort of details we’ll be able to tell what the impact on FSK’s investment income – seemingly running at $24mn per annum before the bankruptcy – will look like. There’s some financial sleight of hand going on here, but the bottom line is that FSK – and seemingly AINV – are undertaking a mixture of a debt refinancing and debt for equity swap.

Sequential remains rated CCR 5 until the bankruptcy judge approves the many moving parts of this transaction and Galaxy gains control. We’ll report back when we hear more from the BDC lenders involved.

Horizon Technology Finance: IIIQ 2021 Underperformers

Horizon Technology Finance (HRZN) has reported its IIIQ 2021 results. Total portfolio assets amount to $452.3mn (including $21mn in equity and warrants) spread over 74 companies.

According to HRZN’s own investment rating system – see below – there are only 3 underperforming investments, including 1 in its lowest rating. The total fair market value of these investments is $13.941mn, or 3.2% of the BDC’s total debt investments. That’s down from 4 investments and $14.612mn at December 31, 2021, or 4.4% of total debt.

 September 30, 2021   December 31, 2020   
  Debt Percentage  Debt Percentage 
 Number of Investments at of Debt Number of Investments at of Debt 
 Investments Fair Value Investments Investments Fair Value Investments 
 (Dollars in thousands)      
Credit Rating      
 4 5 $                       56,337 13.1% 6 $                       77,950 23.4%
 3 35 359,658 83.7 24 240,933 72.2
 2 2 11,141 2.6 3 12,875 3.9
 1 1 2,800 0.6 1 1,737 0.5
Total 43 $                    429,936 100.0% 34 $                    333,495 100.0%
HRZN: Investment Rating Table -IIIQ 2021

The three investments/companies – the BDC Credit Reporter believes – are MacuLogix, Inc. – a medical device manufacturer; Betrabrand Corporation, a technology driven women’s clothing company and MVI (ABDC) LLC, aka Stereo Vision, Inc – a software company.

We rate the first two companies CCR 3 in the BDC Credit Reporter’s system, where the likelihood of full recovery is greater than of loss. However, Stereo Vision – which went on non accrual in the IIIQ 2021 – is rated CCR 5.

MacuLogix is an investment that dates back to 2018 from HRZN. As of September 2021, HRZN has advanced $7.2mn at cost, mostly in the form of first lien term debt due in 2023. The preferred is discounted (59%) and the first lien debt (4%), from par in the prior quarter. The company was added to the underperformers list from the IIIQ 2021.

The company develops equipment for the treatment of macular degeneration. We have no idea – from the public record what might be going on at the company. We calculate that investment income potentially at risk is $1.25mn annually.

Betraband Corporationdesigns amazingly comfortable clothing for women who like to stay active all day long“. HRZN has invested $7.9mn in the business, dating back to IQ 2019. The name was added to the underperformers list from the IVQ 2020 but has been improving in valuation of late. The first lien debt is being discounted only (1%) and the preferred has been written to zero. On paper, $0.8mn of investment income annually is at risk, but this name might be returned to performing status shortly.

The only seriously troubled underperformer is Stereo Vision, which manufactures facial recognition technology for the army. However, HRZN’s exposure is modest: $3.8mn, of which $3.0mn is in debt. The BDC is foregoing (0.240mn) of investment income as a result of being on non accrual. The debt has been discounted between (7%) and (11%). The company was added to the underperformers in the IIQ 2021 and became non performing in the IIIQ 2021. We have no information as to why the investment has been written down.

We’ll be tracking all 3 companies in our daily searches of the public record, but only Stereo Vision – currently – in seriously enough impacted to warrant full length updates.

Limetree Bay Ventures LLC: Refinery May Not Reopen

We last wrote about Limetree Bay Ventures LLC, which owns a much troubled refinery in St Croix back on July 31, 2021, shortly after its bankruptcy filing, which we’d also covered in an earlier article. Since then, the only BDC with exposure – FS Energy & Power – has faced the inevitable and taken a huge realized loss on the investment, which we estimate at ($283mn) on $300mn invested. As of the IIQ 2021, the BDC had only $13mn advanced in first lien, debtor-in-possession debt and $19.1mn in equity, valued at par.

The DIP debt, though, was already discounted by (28%) to $10mn. That’s because – as becomes clearer with every day – the risk of the refinery not re-opening increases with every day. This is confirmed by a WSJ article describing what is being said by the company and potential buyers at a bankruptcy court hearing . What the EPA will or will not agree to where the re-opening of the refinery is concerned is critical.

If that wasn’t enough, one of the refinery’s post-bankruptcy lenders has not been paid in full and could trigger a default, as we heard a week ago in another WSJ article.

All of this makes the prospects of FS Energy – which has already taken a beating – recovering any monies very bleak. We expect this will all resolve itself relatively quickly if the EPA gives a flat no answer to the re-opening of the refinery, regardless of who might be the owner. This looks like FS Energy & Power is saddled with one of the largest credit losses in recent BDC history.

Teligent, Inc: Files Chapter 11

Let’s not bury the lead here: Ares Capital (ARCC) has a big problem with its investment in generic pharmaceutical manufacturer Teligent,Inc. As Reuters – and many other sources report – the company filed for bankruptcy on October 14, 2021. Vladimir Kasparov, managing director at Portage Point Partners – an interim management firm – has been appointed chief restructuring officer.

In a court filing, Kasparov said the company, which manufactured topical pharmaceutical products and other generic drugs, pointed to a 2019 warning letter by the FDA as an initial event leading to the bankruptcy. The letter, which stemmed from an inspection of Teligent’s plant in Buena, New Jersey, identified several violations of good manufacturing practice regulations and required the company to take steps to come into compliance.

Nate Raymond in Reuters – October 14, 2021

Optimistically Mr Kasparov hopes to find a buyer for the troubled business, and has lined up a $12mn Debtor In Possession (“DIP”) line of credit to provide interim liquidity. The company is public, so there’s plenty of information for anyone who wants to read more.

However, our focus is on the impact of underperforming companies on the BDCs involved. In this case, the only exposure is that held by ARCC, which amounted at June 2021 to $73.8mn at cost. (That may go higher if the BDC supplies the DIP, as we’re assuming). All that exposure is in second lien debt, which is already non performing for over a year and which is discounted (44%-45%). The BDC also owns 91% of the equity, but there’s no cost involved as this was received in an earlier restructuring.

Cutting to the chase – after reviewing the stated financial condition of the borrower; the amount of debt involved; the position on the balance sheet the ongoing problems with the FDA, and the very short leash in terms of DIP financing made available, the BDC Credit Reporter believes a complete write-off is possible for ARCC. That would be just over an additional ($40mn) to write down and off – assuming the DIP monies get out intact. Overall – as noted above – ARCC holds $73.8mn -all of which could turn into a realized loss.

In the short term, we expect ARCC to book an additional unrealized loss of unknown amount in the IIIQ 2021. Given the company’s limited cash availability, we’re guessing a final resolution will occur by the IQ 2022, and we’ll be able to assess if we’re being too conservative. Given the regulatory problems, we don’t think so.

Teligent retains a CCR 5 rating. For a sense of context ARCC’s total equity at 6/30/2021 was just over $8bn and total net realized losses in all of 2020 – the worst year in a long time – were ($166mn). Or, in other words, if ARCC’s investment does go to the wall, this will be a significant loss for the well regarded BDC. Income, though, will not be affected as all the debt is already non performing.

Yak Access LLC: Restructuring Underway

Yak Access LLC – as is not obvious from the name – is a manufacturer of mats for heavy equipment, including for the oil services business. As multiple sources have been reporting, the company had a weak IIQ 2021, and its lenders are beginning to worry about the sustainable servicing of its near $1bn in debt. On October 5, we heard that those same lenders were working with investment bank Evercore to bolster the company’s liquidity and viability. Here’s what Bloomberg said:

“A group of first-lien lenders to Yak Access are working with investment bank Evercore to help navigate the mat supplier’s weak earnings and liquidity pressures, according to people with knowledge of the situation…The lenders’ mobilization came after Yak reported double-digit declines in its profit and revenue for the second quarter. The Platinum Equity-backed company, which mainly serves midstream pipeline and utility clients, suffered from delays and loss of projects. Yak also burned cash during the second quarter, reversing previous trends. Its liquidity includes $23.7 million of revolver availability and $3.4 million in cash.” 

Bloomberg quoted by Petition on October 17, 2021

For three BDC lenders with exposure, this is hardly breaking news. The debt has been underperforming (i.e. valued at a greater than 10% discount to cost) since IQ 2020. As of IIQ 2021, Guggenheim Credit Income Fund had $4.7mn invested, and discounted (13%). Both First Eagle Alternative Credit (FCRD) and FS KKR Capital (FSK) had modest amounts advanced in the company’s 2026 Term Loan. The former has discounted its position by (6%) and FSK – for reasons unclear – is valuing the debt at a 33% premium. (Both positions – for what it’s worth – are owned through their respective joint ventures and don’t get talked about on conference calls).

In any case, that’s all in the rear view mirror given the latest developments, so we expect to see different valuations applied in the IIIQ 2021 and – possibly – going forward. Exposure here is modest, even by Guggenheim and FSK holds less than a million dollars so we won’t spend much time on digging into the case and its outlook as yet. For the moment, we’ll limit ourselves to bringing the matter to our readers attention and initiating Yak Access at a corporate credit rating of 4. As far as we know, interest payments remain current.

Incipio, LLC: Assets Sold

Incipio, LLC (also carried as Incipio Technologies) “designs and manufactures mobile device accessories. The Company produces and markets travel bags, nylon cases, sleeves, universal travel kits, headphones, audio visual solutions, and power solutions for personal computers and mobile devices“. According to a press release on August 30, 2021, investment group Armor Acquisitionannounced the acquisition of the Incipio, Incase, Survivor and Griffin brands, along with select licensed category brands, from Incipio, LLC”. No terms were announced in that press release.

For the only BDC lender – Monroe Capital (MRCC) – with exposure to Incipio, this seems to mark the end of a long and twisted journey. The BDC first advanced funds to Incipio in the IVQ 2014 in the form of a $5.4mn unitranche loan. Quickly exposure increased to reach $14.7mn within a couple of years, still in unitranche debt. (Here’s an article regarding the initial acquisition of the company, which indicates that Monroe Capital LLC – the advisor of the BDC – was advancing $55mn to the business. This suggests MRCC has been sharing exposure with other Monroe funds).

By IQ 2018, MRCC had two unitranche loans – maturing in 2019 – with a cost of $15.8mn to Incipio, valued close to par. Out of the blue, in the IIQ 2018 the debt was restructured, additional capital advanced and two PIK instruments added with a par value of $10.960mn but involving no cost. Those instruments – which represent some sort of exit fee arranged as part of the restructuring – were placed on non accrual.

In subsequent quarters, MRCC continued to advance more funds to Incipio, peaking at $24.8mn at cost. From the IQ 2020 – probably due to the pandemic – one of the tranches of unitranche debt advanced also became non performing. By IIQ 2021 MRCC had 6 unitranche loans outstanding – all of which (along with that exit fee/PIK) – were on non accrual and maturing in 2022. The aggregate fair value of these investments was $7.0mn, slightly down from the prior quarter. That’s a (72%) discount from cost and some $2.2mn of annual investment income not being received from the loans.

We did find the public filing that indicated Armor Acquisition was designated the “stalking horse” bidder for Incipio’s assets in a transaction that occurred July 26, 2021. That filing gave the amount to be paid in the form of “cash or non-cash proceeds” as $155.8 mn, split between $135,816,379 term debt owed to Monroe and $20.0mn to secured Revolver lenders. This suggests the unitranche debt was repaid in full. Chances are the exit fee/PIK instruments and no cost equity MRCC owns will have no value. None of this can be confirmed as we’ve not been able to find the confirmatory filing of the asset sale.

As of June 2021, MRCC had 12 non performing portfolio companies, including Incipio. Management has been optimistic about getting satisfactory credit resolutions as has occurred at times in the past. In this case, the odds are looking good that MRCC has been repaid pretty much in full. If so, MRCC will be able to recoup over $17mn of value, and redeploy proceeds into new income generating assets shortly. We’ll know for sure when the BDC reports IIIQ 2021 results.

GTT Communications: Planning To File Chapter 11

According to Virginia Business:

McLean-based telecommunications company GTT Communications Inc. is planning to file a prepackaged chapter 11 case after it closes the previously announced sale of its infrastructure division to Miami-based I Squared Capital, it announced Thursday.

After the completion of the $2.15 billion sale, GTT and some subsidiaries will file their cases in the U.S. Bankruptcy Court for the Southern District of New York. A Chapter 11 filing, or “reorganization” bankruptcy, allows the company to continue to operate its business. GTT’s operations outside the U.S. will be unaffected.

The company said it expected to continue operating without interruption. The restructuring support agreement it signed with stakeholders, including I Squared Capital, provides for payment of vendors, employees and other partners for costs incurred in the ordinary course of business. GTT stated it has sufficient liquidity to operate, and with the support of its lenders, will retain money from the infrastructure division sale“.

BDC exposure to GTT Communications is VERY modest: $0.577mn at cost in first lien debt. The FMV was $0.583mn as of June 2021. The BDC lender involved is non-traded Steele Creek Capital Corp. We normally wouldn’t bother with a post given such a modest exposure, even for a BDC with only $208mn in portfolio assets. However, with so few bankruptcies of BDC-financed companies of late, GTT seems to deserve mention – even if briefly.

On Marketwatch, we learned that GTT has just sold its infrastructure division for $2.8bn, the proceeds of which will reduce existing debt. There’s also a restructuring agreement in place in advance of the bankruptcy between the company and its lenders. Everything seems to point to a full repayment of Steele Creek – which only added this debt in the IQ 2021 – or a very modest loss.

Sequential Brands: Files Chapter 11

At long last, highly leveraged, publicly traded Sequential Brands Inc. (ticker: SQBG) has filed for voluntary Chapter 11. Reportedly, the company – in co-operation with certain of its lenders – is seeking to sell off its multiple brands (presumably in combination or individually) in order to repay nearly half a billion dollars in debt outstanding. A debtor-in-possession (DIP) loan of $150mn has already been arranged with its so-called “Term B Lenders”:

The Company expects this new financing, together with cash generated from ongoing operations, to provide ample liquidity to support its operations during the sale process. The proposed transactions will be implemented pursuant to the terms of a Restructuring Support Agreement reached between the Company and its Term B Lenders.

From press release

The BDC Credit Reporter has been warning of trouble at the company as early as the spring of 2019, and with even more urgency with the impact of the pandemic on retail. We’ve written nine prior articles on the subject, including the most recent post in July when a bankruptcy filing had all the inevitability of an ancient Greek drama.

Here’s what we wrote last time:

Sequential has been shedding assets but the proceeds are too modest to ameliorate the overall picture by much and will only add to the income decline. Everything seems to point to the lenders taking over in some sort of bankruptcy filing before long.

BDC Credit Reporter, July 27, 2021

What we’ve found intriguing is how the two BDC lenders to Sequential – FS KKR Capital (FSK) and Apollo Investment (AINV) have marked their respective investments in anticipation in the debt due 2/7/2024 as of June 2021. Admittedly, AINV’s exposure is much more modest than FSK’s : $12.6mn versus $218.7mn. However, AINV rates the loan as second lien and FSK as first lien. AINV has applied an (18%) discount to its investment. FSK values the $215.9mn invested at a slight premium. Note, though, that the face amount of the debt is $266.8mn. We’re guessing that the gap between cost and par value has something to do with FSK acquiring the assets of its sister BDC FS KKR Capital II (previously FSKR) at a discount. The $2.8mn FSK has invested in Sequential’s stock, though, is valued at zero.

We’re pretty much certain FSK and AINV are both involved with the “Term B lenders”. FSK – at least – seems to believe that when all is said and done no loss will be incurred. This is supported by the fact that even after filing for bankruptcy Sequential’s stock still trades at over $6 as we write this. Investors and lenders seem to believe that the value of the assets will exceed all debt and leave something for the common shareholders. We are skeptical, but are keeping an open mind. In the next few weeks we’ll find out if FSK’s optimism will bear out, and any material loss will be averted.

Also interesting will be whether AINV and FSK place their debt on non accrual, which will materially affect the latter’s interest income in the IIIQ 2021 and beyond. We calculate that FSK has been booking over $23mn of annual investment income from Sequential, equal to just under 3% of the BDC’s total revenues.

How accurate the valuations of FSK and AINV prove to be in this slow moving train wreck, where both lenders have had full access to what is going on, will be an interesting test of management’s credibility in this critical area. To date, both sets of managers have avoided discussing Sequential on their conference calls. Maybe the IIIQ 2021 call will be different and Sequential Brands – and its ultimate disposition – will be addressed. We imagine we’ll be reporting back even before the third quarter results come out as the bankruptcy process unwinds.

Given that this is one of the biggest bankruptcies of a BDC-financed company ever, this is a story worth watching both for investors in FSK and AINV, and anyone interested in the BDC sector more generally.

American Teleconferencing Services: Debt Defaults

Now that we’ve heard IIQ 2021 results, multiple BDCs have reported that American Teleconferencing Services (AFS) and parent Premiere Global Services Inc. (dba PGi) have defaulted on a tranche of their debt: one that matures 6/8/2023. We’ve written about AFS before, warning that a default was likely back on June 4, 2021. A second lien loan to PGi that matures in 2024 has been non performing for several quarters.

As many as 8 BDCs – both public and non traded are involved with the two related borrowers with a total cost of $135mn. At this point, the $13mn in the second lien debt – all held by Oxford Square (OXSQ) has been written down by as much as (98%). Odds of recovery seem low. The remainder of the debt is first lien – mostly in the 6/8/2023 debt. The discounts applied by different BDCs in the same tranche vary widely: from (14%) to (56%). However, all the lenders involved increased their discount over the prior period, as per this data from Advantage Data.

Although PGi and AFS are clearly deteriorating, we’ve had no luck finding any direct discussion of the subject by the BDCs involved or in the public record. In the interim, though, we’ve downgraded AFS to CCR 5 from CCR 4 (PGi was already CCR 5).

We’ll be posting again when we find a credible update about what is happening at AFS/PGi.

Limetree Bay Ventures LLC: Update

We hear that Limetree Bay Ventures LLC , the owner of the troubled refinery in St Croix – which is bankruptcy – will be seeking to sell the operation. Jeffries haves been engaged and a target date for a closing has been – optimistically – set for mid-October.

The BDC Credit Reporter noted this quote: “According to Bloomberg, existing creditors have the option of using the debt owed to them to make a bid on the refinery business”. Of course, lenders always have that option and many bankruptcies these days use that process. In this case we can’t imagine who else but the existing lenders might be interested in taking on this highly polluting, highly controversial hot potato.

This is important because the only BDC lender to Limetree – FS Energy & Power – already has $300mn invested in the company. Should the BDC – and other lenders involved – seek to become the owners of the refinery that could result in the likelihood of having to advance substantial more funds just to get the business operational again. Furthermore, there’s the risk of litigation from the U.S. government and others to contend with.

On the other hand, if the existing lenders are a last resort and decline to step up, a complete write-down of FS Energy’s investment is likely. Plus, there’s no certainty that there might not be litigation anyway. This places the BDC in a difficult position, but one management must have been preparing for. We’ll be interested to see in the weeks ahead if the existing lenders do actually fashion a bid to purchase the refinery.

Sequential Brands: July 2021 Update

We’ve written extensively about publicly traded Sequential Brands (ticker: SQBG) , beginning in the spring of 2019. In a nutshell, the company has a huge amount of debt but only modest revenues and EBITDA – both of which are in decline – to service their obligations. The debt has required multiple waivers from lenders, which continue at present. On July 26, 2021 Sequential filed an 8-K discussing the non-filing of its financial statements as required by NASDAQ. Making matters more complicated, the Board of the company has now recognized that the 10-K and its IIIQ 2020 10-Q require restatement and can no longer be relied on. The company has a plan to deal with these inadequacies but admits that nothing is yet resolved with its lenders despite months of negotiations:

The Company cannot assure you that its lenders would be willing to negotiate further changes to its financial covenants when necessary and the Company cannot obtain further waivers of the defaults under the Credit Agreements without the consent of the respective lenders thereunder. If the Company is unable to obtain additional waivers of ongoing defaults, or otherwise is unable to comply with its debt arrangements, the obligations under the indebtedness may be accelerated. If an acceleration were to occur, the Company does not have sufficient liquidity to satisfy the loan, and the Company would potentially need to seek protection under the federal bankruptcy code“.

For a time common stock investors – apparently believing in the fundamental value of the many brands Sequential licenses – were looking beyond these difficulties, pushing the stock price to nearly $40 a share in March. However, the mood is darker now, with the stock price under $10 a share. Likewise, back in 2019 and 2020 we were surprised by the full valuations the BDC lenders to Sequential were continuing to book, despite the very obvious challenges.

However, that has changed of late and may change again once a resolution is reached. As of March 31, 2021 BDC exposure to Sequential remained huge: $290mn. All but $10mn (which is in equity) consists of debt due in 2024, split between FS KKR Capital (FSK) and Apollo Investment (AINV). (95% of the debt and all the equity is held by FSK). Currently, the equity has been written to zero – the stock price notwithstanding. The debt is discounted as much as (18%), but seems to be current. (We have to wonder if Sequential is actually paying its interest bill in cash or the lenders are just adding the amount due to the principal, and what might happen when a settlement occurs. FSK and AINV might have to unwind income previously booked).

Anyway, trying to handicap how this transaction might end up for the BDCs is well nigh impossible. Sequential has been shedding assets but the proceeds are too modest to ameliorate the overall picture by much and will only add to the income decline. Everything seems to point to the lenders taking over in some sort of bankruptcy filing before long. However, whether this will be just a modest setback – especially for FSK – or a major realized loss, remains unclear. We will continue to watch this unfolding story and will be interested to see how FSK and AINV value their investments at June 30, 2021 and whether they speak to the subject on their upcoming conference calls. (AINV reports 8/5/2021 and FSK 4 days later).

C2 Educational Systems: IIQ 2021 Update

C2 Educational Systems is a K-12 test preparation company. As you might expect, with schools closed and face-to-face tutoring banned in many places, the company did not fare well during the pandemic. In fact, we just learned from the public record that the company received a $10.0mn PPP loan to tide matters over. (Also disclosed is that the company employs around 500). We hear from the corporate website that “We’re Back In Person”, which must be good news both for the company and its students.

The only BDC with exposure is Saratoga Investment (SAR), which has been a lender since 2017. For years, the investment was valued at par. However, during the pandemic – and as recently as the quarter ended November 2020 – SAR wrote down its first lien $16mn loan by a fifth. In the quarter ended February 2021, the term debt that was due 5/31/2021 was extended to 5/31/2023, and the pricing increased by 2% to LIBOR + 8.50%, presumably reflecting additional risk. In the most recent quarter ended May 2021, total debt increased by $2.5mn and SAR invested half a million dollars in preferred stock. The discount on the debt has been reduced – but remains in underperforming territory at (13%).

All the above suggests that C2 has needed substantial financial support, but is pulling through. Interest – which amounts to 10.0% in absolute terms – is current and the preferred is valued at a (very) slight premium. We have rated the company CCR 3 since the second calendar quarter of 2020. If the debt investment ultimately returns to par, SAR could see a $2.5mn increase in asset value, plus whatever the preferred becomes worth.

We are adding C2 to our Trending List because the next time the BDC reports earnings – for the quarter ended August 2021 – we may see a material improvement in valuation. However, the recent upsurge in Covid cases could delay this turn around. Given the size of this investment to SAR , this is a company worth tracking regularly for both good and bad news.

Limetree Bay Ventures LLC: Bankruptcy Filing Expected

Limetree Bay Ventures LLC is the holding company for a refinery and terminals owned by EIG Global Equity Partners. The businesses are held in separate subsidiary companies. On July 12, 2021, Limetree Bay Refining LLC filed for bankruptcy protection in the State of Texas, although the business operates out of the U.S. Virgin Islands. As this attached article makes clear, the terminals business has not (yet ?) filed for bankruptcy protection.

All BDC exposure – which totals $301mn – is to Limetree Bay Ventures LLC – and consists of first lien debt, subordinated debt, preferred and equity. At March 31, 2021 – weeks before the refinery was closed by the EPA and before liquidity ran out – all the equity, preferred and subordinated had been written to zero. The senior debt had a fair market value of $151mn. However, given what we’ve read from multiple sources about the financial and ecological disaster engendered by Limetree, we’d be very surprised if this does not end up being a complete write-off.

The only BDC with exposure is FS Energy & Power Fund, which began advancing $75mn in 2018 and has managed to quadruple its exposure in the intervening period. At March 31, 2021, all the debt was already on non accrual. As a result, the likely greatest impact on the BDC might be a further ($151mn) unrealized loss – which will likely be booked in the IIQ 2021. The realized loss that we expect will have to await the resolution of this bankruptcy and others that may occur. (The company is rated CCR 5 – due to the non accrual – and added to our Trending List because we expect the next set of FS Energy’s results to reflect drastic change in value).

This is obviously a major exposure for FS Energy. The $151mn of value remaining is equal to 10% of the non-traded BDC’s net book value, and continues a long list of energy faux pas that has resulted in half its equity capital being written down or off. A quick look down the BDC’s portfolio company list suggests, though, that Limetree is the biggest single exposure at cost remaining on its books.

We’ll circle back as we learn more in the weeks ahead, but at this stage “disaster” is writ large for both Limetree and FS Energy.

U.S. Well Services: Loses Lawsuit

Poor old publicly traded U.S. Well Services (USWS) is spending more time in court these days than in its business of providing drills for the oil and gas business. A Delaware judge has ruled recently against the company in a contract dispute with Smart Sand Inc. (ticker: SND) and required USWS to pay $48mn in damages. That’s a major blow for an oil services company that is going through a major transition – dropping diesel pumps for electric ones and letting go of 171 employees as part of the transition. In a filing, USWS has indicated it’s likely to appeal the judge’s decision so this legal drama will play out a little longer.

All this is bad news for the two remaining BDCs with exposure: Capitala Finance (CPTA) and PennantPark Investment (PNNT). Both own over 1mn shares each in the company. (In the past, BlackRock Investment has as much as $46mn invested at cost in the stock, but that’s been sold, leaving only CPTA and PNNT). At March 31, 2021, when the last valuation was fixed, USWS was valued at $1.040. That price has dropped to $0.9593, an (8%) drop. The total value was $2.6mn in March and should move materially lower by the end of the second quarter. Thankfully, the amounts are not significant for either BDC.

We are retaining a CCR 4 rating for USWS and adding the company to our Trending list, given the likely (modest) change in fair market value to occur in the IIQ 2021.

GK Holdings: Company Acquired

As we reported all the way back in October 2020 , Global Knowledge or GK Holdings has been acquired by a special purpose acquisition company (“SPAC”) , which itself is going public on June 14, 2021. The new company is being called Skillsoft Corp, under the ticker SKIL. Skillsoft – of course – is a leading training company, which was also gobbled up by the new public entity, which has put its name on the new public business.

Where the BDC lenders to GK Holdings are concerned, this must be good news. According to Advantage Data, there are nominally 6 lenders to the company, with a total cost of $31.1mn. However, these include Harvest Capital and Portman Ridge (PTMN). The former has just been acquired by the latter, so there are only 5 BDCs involved. (Then there’s non-traded Audax Credit whose exposure to the company is carried under the name Global Knowledge Training LLC, albeit the amount advanced at cost is minimal at $0.9mn).

The FMV of all this BDC exposure at March 31, 2021 was $20.9mn. The roughly ($10mn) discounted was from both first lien and second lien debt held, all of which was on non accrual at March 31, 2021. Unless we are very mistaken, all that debt should be repaid in full with the IPO of Skillsoft and the unrealized loss reversed. All the BDCs involved – led by Goldman Sachs BDC (GSBD); non traded Sierra Income and Stellus Capital (SCM) – should be able to record material unrealized gains and re-deploy the proceeds into new investments.

All the above is based on surmise rather than an explicit acknowledgment by any of the BDCs involved, so we’ll wait till the IIQ 2021 results come out before changing the credit rating from CCR 5 – non performing – to CCR 6, or “repaid”. (The exception to that statement is GSBD, which went on the record months ago about its expectation of not incurring any loss on GK Holdings thanks to the SPAC deal, and is the principal basis for our optimism in this regard for all the lenders involved). However, we’re certainly adding the company to our Trending list as we expect both value and income to drastically change in the IIQ 2021 results.

Pace Industries: IQ 2021 Update

Pace Industries – an aluminum, zinc and magnesium die casting company – entered into and exited Chapter 11 bankruptcy last year. How the private company is performing since the exit is unclear. We do know that the company sold a 22,000 office building in Arkansas recently and is said to be re-locating its HQ to suburban Detroit where it has existing space. For our two prior articles about the company, click here.

There is only one BDC with exposure : TCW Direct Lending. A review of the valuation of the $133.3mn advanced by the BDC to Pace does not clarify the picture. TCW has increased its exposure from $96mn at cost – all in senior debt, just before the bankruptcy. Now, TCW has “doubled down” and has $133mn invested in first lien, subordinated debt and equity. The equity is written to zero, the subordinated debt is discounted only (7%) – BUT is carried as non performing – and the first lien debt is valued at par.

This is a Major exposure for TCW given the amounts involved. At first, when the company exited bankruptcy we upgraded its rating from CCR 5 to CCR 3 but are now returning to CCR 5 – i.e. non performing – given that the subordinated debt is on non accrual. By the way, the senior debt is paying a sub-market rate of 3.5% – all paid in kind. This all seems to suggest – despite the generous debt valuations – that Pace is not out of the woods yet. Given that TCW’s total exposure is equal to more than a fifth of its capital this should be a worry to its manager and shareholders. To date – from what we can tell – the BDC has not booked any realized loss on this investment and much could yet go wrong.

Direct Travel Inc.: IQ 2021 Update

As you might expect a company with a name like “Direct Travel Inc.” – “a leading provider of corporate travel management services” – has been impacted by the pandemic. Apparently – according to a brief mention on a BDC’s conference call – the company was restructured in October 2020 with term loans due 12/1/2021 being extended to 10/1/2023, and re-priced to allow most interest to be paid in PIK. Furthermore, lenders took a majority percentage of the company’s equity as well. At March 31, 2021, total BDC exposure was $105.4mn, and the FMV $83.2. In this second quarter after the restructuring the valuations were unchanged from IVQ 2020.

There are two BDCs involved with Direct Travel: Bain Capital Specialty Finance (BCSF) and TCG BDC (CGBD). The former has two-thirds of the exposure mentioned above, and the latter the rest. Of the pre-restructuring debt, CGBD is more “conservative” in its valuation at (20%), while BCSF applies a (30%) haircut. More importantly, CGBD carries its legacy debt as non performing while BCSF does not.

Our policy in these situations is to rate the company with the most “conservative” approach – or CCR 5 in this case, which has been the case since IIQ 2020. (As recently as IVQ 2019, the company was carried as “performing”).

How is Direct Travel Inc. doing under its new owners and with a new capital structure that includes new debt ? From the public record, we can’t really tell. Common sense – and the number of people we’ve seen rubbed elbows on planes with recently – would suggest that business should be improving. If so, the BDCs involved might well benefit above and beyond getting repaid on their loans if their equity gets “in the money”. However, we’re getting ahead of ourselves and will need to see what future valuations might look like before any upgrade is possible.