Glacier Oil & Gas: IQ 2021 Update

We last wrote about Glacier Oil & Gas back on August 18, 2020 shortly after Apollo Investment (AINV) placed its debt on non accrual. At the time the BDC had invested $67mn at cost in the Alaskan oil & gas company and valued its investment at $14.7mn. Not much has changed in the interim. The debt remains on non accrual and the value of the BDC’s investment has been reduced somewhat to $8.1mn. That’s unchanged from the IVQ 2020 value.

With no income being generated, and little in the way of remaining value, we were tempted to categorize Glacier as non material and not bother with providing a written update. (This is a long standing “legacy investment” of Apollo that was previously known as Miller Energy, and which was restructured back in 2016 with no success). However, with the price of oil above $70 hope springs eternal that the company may escape its CCR 5 (non performing) status.

Unfortunately AINV has not discussed the company since April 2020, so we don’t have any updates to offer. The BDC does own 47% of Glacier’s equity, as well as holding that non accruing debt and could well benefit if the economics of the industry finally turn in its favor. We’re not taking anything for granted, but are adding the company to our Trending List because the value of Glacier may increase when the IIQ 2021 results are published. In the past, we’ve assumed the final value of Apollo’s misguided foray into oil and gas investing might be zero once AINV finally settles its account. At least now there is a glimmer of hope for AINV – and its long suffering shareholders – that some recovery might be possible. We’ll provide an update after the IIQ 2021 AINV results are published.

Golden Bear 2016-R: Update

Apollo Investment (AINV) has been invested in Golden Bear 2016-R since IVQ 2016, and the investment has been underperforming – by our standards – since IQ 2018. However, we’ve refrained from writing about Golden Bear before because we were – and remain – somewhat unclear what the investment consists of. We know Golden Bear is some sort of securitization – presumably the equity portion – and that AINV is a 100% owner. We also know that the BDC booked $1.2mn of dividend income from that source in the IQ 2021, which is consistent with the payout in the last three years. What we don’t know is what assets Golden Bear is securitizing, and why AINV has reduced by a third the value of the $16.8mn invested at cost in the vehicle.

We have rated Golden Bear CCR 4 because it seems unlikely the BDC will recoup its capital invested. The latest valuation is slightly better than the prior quarter, and improved on the worst discount of 45% reached in the IIIQ 2020.

We’ll continue to provide occasional updates, but neither the amount of FMV nor the income involved is of great importance to AINV.

Paper Source: Sold To Elliott Management

Last time we wrote about Paper Source Inc., the stationery retailer was bankrupt and Mid Cap Financial – an affiliate of Apollo Global Group – was preparing to acquire the company in a “stalking horse bid”. This would have made Apollo Investment (AINV) – a lender and investor to the company – a part owner (and also likely a lender) to the post-bankruptcy business. AINV as of March 31, 2021 had $16.4mn in debt at cost to Paper Source (its equity stake had no dollars attached) and a value of $13.4mn. For some reason, AINV carried the debt as performing, notwithstanding the bankruptcy.

Anyway, scrub all the above. In the interim, Elliott Management – owner of Barnes and Noble – has swooped in and acquired Paper Source out of bankruptcy for $91.5mn. Here is a link to a trade publication article on the subject, and an extract which explains the appeal of Paper Source to the buyer:

In a presentation, Elliott described the businesses of Barnes & Noble and Paper Source as “highly complementary, with shared product ranges and a common commitment to excellent customer service.” The investment firm noted that Paper Source will continue to operate independently and keep to its core product offering of greeting cards, stationery,office supplies, gifts and other products. At the same time, Elliott noted that “considerable opportunities exist for mutually beneficial retail partnerships.”  

Although Mid Cap/AINV lost the opportunity to acquire Paper Source – something of a mixed blessing given brick and mortar’s endemic challenges regardless of the pandemic – this is probably good news for the BDC. We get the impression the first lien debt – as well as DIP financing recently provided – will be repaid in full. That should allow AINV to post a several million dollar increase in value from the ultimate proceeds, which should show up in the IIQ 2021 results, or by the third quarter at the latest, as the transaction closes.

We may be jumping the gun, but expect to take Paper Source off our underperformers list. Given the potential increase in value, we are adding the company to our Trending List for the IIQ 2021 given the likely upside to be booked. This was never going to be a major setback for AINV and now looks likely to be a minor success. As has been the case on multiple occasions of late, thanks are due to a frothy financial environment and the fast recovery from the pandemic conditions that initially brought the company low.

Maxus Carbon: IQ 2021 Update

With Apollo Investment’s (AINV) IQ 2021 filings, we can provide our fifth update on Maxus Carbon (aka Carbonfree Chemicals). The BDC valued the now all equity investment with a cost of $77.8mn at $25.4mn. That’s essentially unchanged from the prior two quarters and since AINV’s debt to the business was converted into equity.

The valuation might suggest that nothing much – good or bad – is happening at Maxus Carbon but what was said on the May 20, 2021 AINV conference call suggests otherwise. Here is what was said by AINV’s CEO Howard Widra:

[Maxus Carbon] has some really good developments there. And that’s an all equity debt investment that had been converted to our equity. But that’s all equity and is a carbon-efficient business that has a lot of demand, obviously, where the world is going right now. And so, we hope that over the next year can have some real significant positive things happen to it”.

We can’t tell if the above is something specific getting underway or just hopeful comments from the BDC. It’s about time something happened at Maxus Carbon – on the books since 2013, and non-income producing since IIIQ 2020.

We are retaining our CCR 4 rating and not adding Maxus to our Trending List given the unchanged nature of the recent valuations and the vague nature of management’s status update. In the current environment, though, where capital is loose, it’s not impossible that SOMETHING might happen of a positive nature where this long standing “zombie” investment is concerned. That’s at variance with our earlier thoughts that the most likely resolution would be a write-off of the project and a complete loss. At this stage, both good news or bad news are equally likely.

Merx Aviation: IQ 2021 Update

Apollo Investment (AINV) has reported its full year and fiscal IVQ 2021 results through March 31, 2021. To management’s credit, much was said about the BDC’s largest investment – aircraft lessor and maintenance company Merx Aviation Finance LLC. We’ve written about Merx before on three occasions. The BDC Credit Reporter has been skeptical of the – let’s say – “generous” valuations AINV has placed on its debt and equity investments in Merx, despite the severe impact of the pandemic on flying and the value of aircraft and their leases. Both in the IVQ 2020 and in the IQ 2021 results, AINV has increased the value of its investment in Merx after a modest unrealized write-down earlier in 2020. As of now, the $190.5mn of first lien debt is carried at par, as was the case before the pandemic. The value of the now $120.3mn in equity is given as $125.1mn, up $0.5mn in the period.

On the latest conference call AINV sought to explain how Merx could be re-leasing planes at lower rates than before the pandemic or having to sell them off and still see an increase in the value of the equity stake. (Previously the BDC pointed to increases in their aircraft maintenance activities for its higher valuation, but this was not mentioned in the most recent conference call). Much as we’d like to, we don’t follow how AINV maintains such a high equity valuation despite the undeniably tough conditions. We rate the company CCR 4 despite the fact that AINV values its overall investment modestly over cost. However, we encourage readers to review the conference call transcript and decide for themselves.

With all that said, industry trends seem to be on the mend for Merx and total capital at risk – thanks to a large principal repayment – has dropped from $321mn as of March 2020 to $311mn a year later. The debt is performing at a 10% yield (down from 12% previously). The equity is non-income producing. The overall annual return on assets invested – both debt and equity – is 6.4% versus something closer to 15% pre-Covid when the loan yield was higher and dividends were being paid. AINV’s management does not envisage a return to those halcyon days but hopes for a ROA somewhere in-between.

This is very much a work in progress, but if industry conditions improve as expected, AINV should be able to avoid any further reduction in its debt yield from Merx. Once securitizations of aircraft are sufficiently paid down – which are senior to where AINV sits – we may even see a resumption of some dividend payouts. However, we cannot estimate when that might occur. We are maintaining our CCR 4 rating till we get more substantive good news and the credit remains Trending because we would not be surprised to see values and income change materially again – probably for the better – in IIQ 2021.

Even if AINV extricates itself from Merx without a realized loss (even though the loss of investment income has been substantial in recent quarters), the question remains why a BDC supposedly committed to portfolio diversification would invest 30% of its capital (using the IQ 2021 numbers) in a single company ?

Ambrosia Buyer Corp: IQ 2021 Update

We’ve discussed Ambrosia Buyer Corp, which also goes by the name Trimark USA LLC and TMK Hawk Parent Corp on BDC books twice in the past. The first article was on November 26, 2020 when we discussed a major dispute between different lender groups. On February 5, 2021, we confirmed that second lien debt outstanding had been placed on non accrual by Apollo Investment (AINV). However, several other BDC lenders – involved in both the first and second lien debt – had discounted the value of their positions but had not placed the obligations on non performing status. AINV admitted to continuing to receive contractual interest, but applying the proceeds to reducing the cost basis of their investment.

Neither AINV nor the other public BDC with exposure (first lien) New Mountain Finance (NMFC) addressed what is happening at the company on their IQ 2021 conference calls. Last we heard, the dispute between different lender groups was before a judge but we’ve not been able to determine an outcome, if any has occurred. Still, in the IQ 2021 both AINV and NMFC reduced the discount applied to their debt positions. The former’ discount is now (38%) versus (52%) in the prior quarter but remains on non accrual and the cost is still being reduced from interest proceeds. NMFC has reduced its own discount by 10%.

From what we can gather the disputed rescue package has provided the company with much needed liquidity and – presumably – market conditions are improving as lockdowns end and people are eating out again. Moody’s still rates the company Caa2 – or did in January 2021. We’d like to offer more clarity but with the BDC lenders mum, we can only suggest that the company is on the mend and a major financial crisis does not seem likely.

We continue to rate Ambrosia CCR 5, even if NMFC and two other BDCs still have the debt as performing. The company is still Trending, because it’s likely that the valuation will change again – probably for the better – in the IIQ 2021 results when they come out. Moreover, the lawsuit between lenders may get resolved.

Sequential Brands: Loan Waiver Extended

Common stock shareholders were excited to hear that lenders to Sequential Brands had extended a waiver of loan defaults from May 10 to June 7, 2021. At the time – according to Seeking Alpha – the stock price jumped 30%. However, for the lenders to the troubled company this means no resolution has yet been found to troubles that date many months back. We’ve written about Sequential Brands seven times before, so we won’t rehash the whole backstory.

However, we’ll note that BDC exposure – in both debt and equity – to the company remains huge: $277.1mn at cost. The debt at March 31, 2021 has been discounted by (16%) and the equity by (100%). The BDC lenders are FS KKR Capital (FSK) and FS KKR Capital II (FSKR), as well as Apollo Investment (AINV). However, given that FSKR is to be merged into the outstandings can rightfully be allocated all to FSK. Over a quarter of a billion dollars is a Major exposure for the KKR-managed BDC. (AINV has invested $12.8mn at cost).

We have no idea how this is going to play out, although some sort of resolution must be the horizon. We retain a Trending rating for Sequential as chances are good valuations or income derived therefrom could change shortly. We’re also affirming our CCR 4 credit rating which suggests we believe some sort of realized loss will eventually occur. However, whether that will be a few tens of millions or hundreds of millions – an important distinction – remains unclear.

Basic Energy Services: To File For Bankruptcy

According to the Wall Street Journal, oil services company Basic Energy Services Inc. is about to file for bankruptcy protection for a second time, the infamous Chapter 22. Details are sparse but more will be forthcoming once the filing is published.

The only BDC with exposure is non-traded BDC Guggenheim Credit Income Fund, which apparently did not get the memo about the risks of energy lending. Total exposure at cost is $2.2mn and the FMV $0.8mn. The first lien debt involved has been on non accrual for two quarters, so the impact on income should be nil and on market value only minimal, given the big discount already in place. Exposure dates back to IIIQ 2018.

In our database, Basic Energy remains rated as non-performing, or CCR 5.

Isagenix Intl LLC: S&P Rates D

S&P is not happy that Isagenix Intl LLC has bought back $65mn of its $375mn term loan at a discount, and given the company a D rating. The discount was said to be substantial.

We know less than we’d like to: such as which term loan is involved and which lenders were involved ? Nonetheless, this is a reminder that 5 BDCs have $34.5mn in exposure to the company – all in the 2025 term loan. At year-end 2020, the positions were valued at discounts that ranged from (28%) to (45%).

Isagenix is rated CCR 4, and some $2.3mn of investment income is involved. We last wrote about the company on August 28, 2020 when the principals of the business injected new capital. At the time, we concluded: “Maybe this capital infusion will be what it takes to return Isagenix to the ranks of normal performance“. Based on the latest valuation discount that does not seem to have been the case and material losses – of both capital and income – seem likely.

We’ll learn more in the days and weeks ahead – and whether some BDCs have crystallized some or all of their losses. The BDC Credit Reporter will return to Isagenix once we have more information.

My Alarm Center: Files Chapter 11

You might have expected in this period of easy money and hot markets, that leveraged companies had become immune from failure. That’s not the case, as proven by My Alarm Center, LLC, which has just filed for Chapter 11 bankruptcy protection, as discussed in trade publication SecurityInfoWatch:

“In a statement provided to SecurityInfoWatch.com, My Alarm Center said that its lenders and other key stakeholder have agreed to support its reorganization plan, which provides for the elimination of approximately $235 million in legacy debt obligations, strengthens its financial structure and supports its long-term growth plans“. 

We won’t spend a great deal of time on the company’s restructuring plans because the three BDCs with exposure are all currently in the equity and preferred. Chances are high the $8.0mn invested at cost – and with an aggregate FMV of $0.4mn at year-end 2020 – will all be written off. The BDCs involved are Saratoga Investment (SAR); Crescent Capital (CCAP), which inherited the investment from Alcentra Capital, and OFS Capital (OFS). SAR has the biggest exposure at just under $5mn at cost, but a FMV of just $0.3mn. The BDC already booked a realized loss of ($7.7mn) back in 2017 when the company was previously restructured. At that point SAR – and others – fronted more capital, which is now likely to be lost as well.

We had already rated the company CCR 5 due to SAR carrying one of its preferred positions as non performing. The rating remains unchanged. We expect to see realized losses booked by the BDCs involved in the second or third quarter 2021, probably the former. From a fair market value standpoint, the impact on the BDCs will be minimal.

All in all, a sorry episode for all the BDCs involved and in an industry famous for its allegedly high, stable cash flows where companies are sold for multiples of revenue. However, technological change and competition have resulted in a number of setbacks in the alarm monitoring business. For the BDC sector a rare new bankruptcy in 2021.

Instituto De Banca Y Comercio Inc: IVQ 2020 Status

Instituto De Banca Y Comercio is a trade school for bank personnel in Puerto Rico, which we’ve been tracking for years. The only BDC with exposure is Ares Capital (ARCC), dating back to 2007 when the for-profit business was bought out by a PE group: Leeds Equity Partners. At one point, ARCC held a position via its joint venture with GE Capital but bought back its position – following some complex accounting – in 2016 when the company was non performing and the BDC was breaking up with its JV partner. At the end of 2020, this now 13 year relationship consisted of total exposure of $121mn in the form of debt and preferred, with a FMV of $32.3mn. $17.3mn in first lien debt is accruing at 10.5%, and there is $103.7mn in preferred. We’re not sure if ARCC is booking any income on the preferred, which only has a value of $15.0mn.

We don’t know how the business is performing but the valuation trend is unchanged between IVQ and IIIQ 2020. ARCC does not mention the company much anymore since the buyout of the GE position from the JV in 2016. Understandably, given the near ($90mn) written down already, the BDC Reporter has a CCR 4 rating on the company. Should the debt go on non accrual ARCC would forgo ($1.8mn) of annual interest income. A full realized loss of the preferred would reduce net assets by ($15.0mn). These are sizeable numbers but not especially material for a BDC of ARCC’s size.

We have no reason to believe anything is going to happen soon as the debt is not due till 2022, and the public record is bare on any details on how the company is performing, so we don’t have Instituto as Trending, but it is a Major exposure being over $100mn at cost. We’ll check back periodically to see how outstandings and valuations change on this “zombie” investment that just keeps going and going without much in the way of resolution. ARCC has extended the debt at least 4 times since 2007.

ADG, LLC: IVQ 2020 Update

ADG, LLC (dba Great Expressions Dental Centers) is a BDC portfolio company we should have written about ages ago for a number of reasons. First, BDC exposure is Major: $106mn at cost, almost all held by Ares Capital (ARCC), with New Mountain Finance (NMFC) holding a $5.9mn second lien position. Second, the company was underperforming by our standards even before the pandemic and since everyone’s been sheltering in place, has been on non accrual since IQ 2020. Finally, we’re projecting the company is Trending, i.e. likely to materially change in value in early 2021. More on that at the end. Although we’ve not written about ADG, LLC before we’ve been tracking the business in our Company Files and in our daily search for new developments.

Here’s the lie of the land: At year-end 2020, ARCC had a small first lien debt position of $7mn, half the size of the quarter before and performing, valued at a (10%) discount to par. The BDC also holds an $89mn second lien debt position due 3/1/2024 that is on non accrual but discounted only (12%). NMFC also holds a second lien debt position – maturing at the end of March 2024 – and discounted (24%). However NMFC’s debt – which may or may not be in the same facility – is not carried as non performing but its 11.0% yield is all Pay-In-Kind. Then there’s $3.0mn in equity held by ARCC (which has a very long standing relationship with the company that predates its current PE owner) , valued at zero. The total FMV for all positions and both BDCs is $89mn. ARCC is forgoing about ($7.5mn) of annual investment income due to the non accrual.

There’s no up to the minute news in the public record but the BDC valuations have been greatly improving in the last three quarters. That suggests the business is turning around. We do know that the whole dentistry sector is on the upswing after some dark months last year when dental chairs were off limits in many states due to Covid-infection fears. Sadly, neither ARCC or NMFC has mentioned ADG on their conference calls. Nonetheless, we’ll go out on a limb and suggest there’s better news ahead. That’s why we have ADG, LLC “Trending”, with the prospect of higher debt or even equity valuations and the possibility the second lien debt might return to performing status.

For the moment ADG, LLC remains rated CCR 5 but we’ll be looking out for ARCC’s disclosure about the company on April 28, 2021 when its IQ 2021 results get published.

Mississippi Resources LLC: Major Realized Loss Booked

Understandably enough BDCs are loath to discuss with their shareholders losses taken on portfolio investments gone wrong. Managers prefer to spend time on their successes; latest deployments and just about anything but setbacks. However, from the BDC Credit Reporter’s perspective investors should want to know about what did not work – and why – to better evaluate a BDC’s chosen strategy and implementation. So we’re going to spotlight the announced the ($32.2mn) realized loss booked in the IVQ 2020 by Sixth Street Specialty Lending (TSLX) on its investment in independent oil and gas producer Mississippi Resources LLC.

This investment – which began in 2014 with $44.2mn of debt and equity invested – has been an abject disaster for TSLX – far and away the worst in its history. As is so often the case in these E&P investments ,TSLX does not seem to have been willing to accept the initial reverse on its investment when oil prices crattered in the latter half of 2014. As a result the company has been restructured and essentially taken over by the Sixth Street organization (then TPG Specialty Lending) and more funds advanced.

Over the years – starting in 2017 – the BDC has been forced to book realized losses on the investment. The first write-off was ($21.8mn); the next year ($9.6mn) and ($4.2mn) in 2019. This culminated in 2020 with the ($32.2mn) realized loss. That a total of ($67.8mn). Currently, Mississippi Resources remains on the books with a $1.5mn Term loan due in 2021, which is on non accrual and has been written to zero. (In fact, none of the debt outstanding to the company has been accruing for the past 4 quarters).

The total realized loss is half as much again as the initial amount committed back in 2014 and equal to 6% of all the equity capital TSLX has raised in its history and the equivalent of 42% of its 2020 Net Investment Income. Fortunately for TSLX’s management the 2020 write-off was overshadowed by slightly larger realized losses elsewhere, which kept total net realized losses at ($2.6mn) for the year just passed.

We’d say there are three lessons learned from the Mississippi Resources story. One is a recurring theme of ours: lending/investing in commodity-driven industries like energy is highly risky and better left to speculators or specialists. Second is that TSLX – like every other lender – is at great risk when “doubling down“, continuing to advance monies when initial amounts put into play get into trouble. The flexibility BDCs have to invest in almost anything and without regulators looking over their shoulders might be a boon at times. However, at other times, such as in this instance, bad money follows bad – to coin a phrase. Third, even well regarded BDC management teams – with an excellent credit track record over long periods – like TSLX’s – are not immune from making occasional MAJOR mistakes. It’s the nature of the business. We’re only sorry the management team could not – figuratively speaking – look their shareholders and analysts in the eye and de-construct for everyone’s sake what went wrong and how any lessons learned might help future outcomes.

Sequential Brands: Lender Appoints Board Members

Sequential Brands is the BDC Credit Reporter’s Godot. We’ve written multiple articles over the past two years breathlessly warning that something bad – a bankruptcy or a forced sale – was close to happening. Then: nothing. The company and their lenders always seem to arrive at a temporary modus vivendi, but no permanent resolution. (We’re desperately trying not to use the kicking of cans down the road analogy again). At times – given the high valuations the BDC lenders have maintained – we’ve doubted ourselves and the urgency of the situation.

However, the latest developments suggest – once again – that SOMETHING is going to occur at Sequential in the near future and that there is a possibility the BDCs – with $290.5mn outstanding in debt and equity to the company – may be materially impacted. Here’s what we know: According to a March 31, 2021 regulatory filing the company and one of its lender groups – led by Wilmington Trust – extended “a waiver of existing defaults under the Credit Agreement through April 19, 2021“. Furthermore, the lender “shall have the right to appoint an independent majority of the Board of Directors of the Company“. So gone is Martha Stewart and three other less famous Board members, probably letting out a sign of relief. Also a red flag: the company has not yet filed its IVQ 2020 and full year results.

The short extension period by Wilmington suggests that whatever “strategic alternatives” the company has been exploring since December 2020 is reaching some sort of conclusion. That might involve a sale of the business – in whole or in parts – or some pre-agreed Chapter 11 filing. The public shareholders seem to be bullish about this likely outcome, with Sequential trading at $22.22 as of the close on Thursday April 1, 2021. We are less optimistic – as is our self appointed mandate.

At risk for the BDCs involved is the prospect of ($28mn) of annual investment income from their 2024 Term debt outstanding being interrupted. Then there’s a good chance – based on the most recent quarterly valuations which discounts the equity owned by (99%) – a realized loss of up to ($10mn) will be incurred. However, the most important question mark is how the second lien debt will fare in the half billion dollar of borrowings Sequential owes. FS KKR Capital (FSK) and FS KKR Capital II (FSKR) and Apollo Investment (AINV) have advanced $280.5mn– more than half the total debt outstanding.

Currently, FSK and FSKR discount their debt by only (12%) and AINV by just (4%). If we apply the more conservative discount, that would still result in ($34mn) of realized losses on the debt and ($44mn) in total. The loss could be higher, but even ($44mn) is material given the big bets placed by the FS- KKR organization and which will shortly all be held by FSK, as FSKR is about to merge into its sister BDC. (AINV’s exposure is – clearly – much more modest even adjusting for the respective BDC sizes).

We should say – to be fair and recognizing that the stock market seems to believe that there is considerable market value left in Sequential – that this could all pass as quickly and harmlessly as a summer storm. Some deep pocketed buyer could be finalizing a generous deal as we write this or some hard working lawyers could be arranging a favorable “debt for equity swap” which will leave creditors undiminished. Maybe there’s a SPAC out there who wants to own a group of consumer brands…We don’t know, but we are as confident as we’ve been in two years that a change of status is in the cards for the company in the near future.

We are maintaining our CCR 4 rating on the company – as an eventual loss seems more likely than repayment in full. We are also adding Sequential to our Trending list because of the expectation that whatever is in the company’s future in the weeks ahead will be reflected in the BDC valuations and income – most probably in the IIQ 2021. For FSK especially this could either be a body blow, or not. We’ll be tracking the situation daily and will report back when something material occurs.

Currency Capital LLC: Placed On Non-Accrual

Over at the BDC Reporter we’ve been undertaking systematic reviews of several public BDCs following the end of IVQ 2020 BDC earnings season. Most recently we tackled Capitala Finance (CPTA) which happens to be the sole BDC lender to Currency Capital, LLC. The company bills itself on its website as “an exciting FinTech company specializing in transaction enablement“. As far as we can tell, this involves providing equipment financing.

Till the IIIQ 2020, the $16.3mn invested at cost in the company’s first lien debt was carried at only a (1%) discount, although a small preferred stake was valued at half its cost. In the IVQ 2020, though, CPTA placed the debt on non-accrual, resulting in the interruption of over $2.0mn of annual interest income. The debt was written down to just $3.75mn. The preferred was written to zero. We have downgraded Currency Capital (now known as Currency Finance apparently) from CCR 2 to CCR 5 in one fell swoop.

What’s gone wrong ? CPTA did not say on its most recent earnings conference call and the public record is moot on the company’s troubles, so we won’t speculate. However, this is clearly a major reverse for CPTA, and we’ll continue to monitor both publicly available information and any update that CPTA offers.

Integro Parent Inc: Downgraded By Moody’s

Integro Parent Inc. (aka Tyser’s) is a London-based specialty insurance broker and has just seen its corporate credit rating and debt tranches downgraded by Moody’s. The outlook is “Negative”. Apparently, the pandemic has impacted business conditions in many markets, leaving the company in a classic highly leveraged state, with weak liquidity and cash flow. The company rating has been lowered to a speculative Caa1.

That was enough for the BDC Credit Reporter to add the company to our underperformers list – the first addition in some time – with an initial rating of CCR 3. There are two BDCs with material exposure up and down the company’s capital structure : New Mountain Finance (NMFC) and Crescent Capital (CCAP). Total exposure at cost was $48.5mn at year-end 2020, most of which is held by NMFC, as this table from Advantage Data shows:

Both BDCs are valuing both first and second lien debt at or above par. The first lien is priced at 6.75% and the second lien at 10.25%. (CCAP holds a non-material equity position as well). We have also added Integro to our Trending list because it’s possible that with the Moody’s downgrade, the BDCs involved might reduce the value of their positions in the upcoming IQ 2021 results. Just a 20% overall discount could reduce the FMV by ($10mn) or so. We’ll check back when we hear from CCAP and NMFC in the next few weeks.

Bioplan USA Inc. : Moody’s Downgrades

On March 24, 2021 Moody’s downgraded BioPlan USA Inc. (also known as Arcade Beauty) to “D-PD from Caa2-PD, following the recent restructuring of the company’s first-lien and second-lien credit facilities“. By its standards, Moody’s considers the just completed restructuring at the company as a “distressed exchange and thus a default“. Here’s a link to a Moody’s press release with much more information.

The basic issue is that the lenders to the company appear to have “kicked the can down the road“, extending the maturity of all outstanding debt, and adding a payment-in-kind (“PIK”) requirement which will effectively increase the balance owed. Although the sponsor – Oaktree Capital Management – kicked in another $20mn of equity capital, Moody’s still believe the company’s capital structure is “unsustainable“. As the press release makes clear BioPlan has plenty of challenges including negative free cash flow; a slow return to “normal conditions“; very high leverage and much more.Still, the lenders and the sponsor seem to believe there’s a way out given enough time

There are two BDCs with exposure to the beauty products company: publicly traded Investcorp Credit Management (ICMB) and non-traded Guggenheim Credit, with total exposure at cost – all in the just restructured first lien 2021 Term Loan – of $18.2mn. The former BDC is on the record on its conference calls as being optimistic about the company’s prospects and has discounted its debt by (22%). Guggenheim is more conservative and has a (37%) discount.

We have had a CCR 4 rating for the company since the IQ 2020 when the onset pandemic sharply cut foot traffic at malls and the demand for fragrance sprays. We are adding Bioplan to our Trending list because we expect that with the restructuring there might be a change – probably upward – in the debt’s valuation. This should show up in the IQ or IIQ 2021 results of the two BDCs involved and – for the moment – reduces the risk of the debt going on non accrual. We cannot say whether in the long run this will result in a loss for the BDCs involved. Most at risk – but only modestly so – is ICMB, which could see nearly $0.7mn of annual investment income interrupted should the debt go on non accrual. Ironically, in the short term, the BDC’s income (and Guggenheim’s ) could increase thanks to the new PIK pricing…

We’ll circle back when ICMB and Guggenheim report 2021 results.

American Achievement Corp: Exits Chapter 11

We hear from S&P Global Market Intelligence that “the bankruptcy court overseeing the involuntary bankruptcy petition filed against American Achievement Group Holding Corp. on March 16 has dismissed the case, according to a court order, ending the company’s brief encounter with Chapter 11“. The BDC Credit Reporter had written about the involuntary bankruptcy (which occurred January 14, 2021) back on February 20, 2021. We won’t go back into the whys and wherefores that caused the bankruptcy filing. However, we don’t know the full details of how matters have been patched up except that the parties have agreed to an out-of-court restructuring which will “would leave all creditors unimpaired“. Another $35mn Revolver is contemplated to provide the company with liquidity.

We can’t say when all this will come together but the news seems to be good for the only BDC with exposure: Sixth Street Specialty Lending (TSLX). The BDC had placed its $23.8mn in senior debt to the company on non accrual in the IVQ 2020 and discounted its position by ($2.2mn), or (9%). Presumably the debt will shortly return to accrual status and – we assume – accrued interest will be collected.

The company is rated CCR 5 and remains there for the moment. However we are adding American Achievement to our Trending list because we expect in the IQ or IIQ 2021 for a significant change in status (from non performing to performing) and the resumption of interest income, which amounts to $2.2mn a year, not to mention a rating upgrade. We will circle back when we receive confirmation from TSLX that all is well.

Avanti Communications: IVQ 2020 Update

We’ve just heard from Great Elm (GECC) regarding its IVQ and full year 2020 results. This includes an update on the BDC’s valuation of its largest investment : Avanti Communications. According to the BDC, the values attached were depressed by the then-uncertainties regarding the refinancing of the satellite company’s debt, which has been subsequently extended for a year. The total investment in debt and equity by GECC is now $105.6mn and the FMV $29.3mn. This compares to $103.0 at cost in the prior quarter and FMV of $39.3mn. That’s a (25%) decrease in the FMV of the BDC’s investment in the IVQ 2020.

The BDC Credit Reporter continues to believe that a complete loss is possible where Avanti is concerned, and that’s increasingly reflected in the valuation. All the debt instruments the BDC holds are accruing interest on a non-cash basis while the other BDC with exposure – BlackRock TCP Capital (TCPC) – has its loans showing as non performing. Effectively, despite $118mn invested at cost between the two BDCs – of which $62.4mn is in the form of debt – no cash income is being received already.

We maintain our CCR 5 rating and have Avanti on our Trending List. Next quarter we expect to see the total amount invested increase due to the previously mentioned refinancing. GECC will be adding $3.7mn to one of the debt facilities – as disclosed in its 10-K. TCPC may also invest further funds, but on a smaller scale. The valuation may increase as a result of the refinancing achieved but that will not necessarily continue in future quarters. We will revert back when the IQ 2021 results come out for GECC and TCPC or if something new transpires at Avanti.