BFC Solmetex LLC: Added To Underperformers

Privately-held filtration company BFC Solmetex LLC has been added to the BDC Credit Reporter’s underperforming list in the IIQ 2020 with a Corporate Credit Rating of 3.

Stellus Capital (SCM) – one of two BDCs with exposure alongside Crescent Capital (CCAP) – has discounted the 9/26/2023 first lien Term Loan to the company by (15%), from close to par in the prior period. No explanation was given. CCAP, which is involved in the same tranche, will probably follow suit when IIQ 2020 results are published. Total BDC exposure at cost is $21mn or so, and investment income involved about $1.8mn.

California Pizza Kitchen: Files Chapter 11

On July 30, 2020 California Pizza Kitchen (aka CPK) filed for Chapter 11, as part of a broad restructuring plan (RSA) agreed with its first lien lenders. As readers will expect by now, the RSA envisages a “debt for equity swap” and additional financing to get the restaurant company through this difficult period, presumably financed by some or all those same lenders that are in the existing financing. CPK hopes to be in and out of bankruptcy in 3 months.

The BDC Credit Reporter has written about the company on three prior occasions. Our most recent contribution followed learning that several BDC lenders had placed their debt outstanding to the business on non accrual, but not all. In any case, bankruptcy has seemed like a forgone conclusion for some time. As a result, the seven BDCs involved (6 of whom are publicly traded) will have to face the consequences of their $48.1mn invested in the debt of CPK.

Common sense suggests the second lien debt holders : Great Elm Corporation (GECC) and Capitala Finance (CPTA) will have to write off the $4.1mn and $4.9mn respectively held. The rest of the debt is in first lien debt (including a tranche held by GECC) and will mostly become non income producing, when swapped for common shares. We expect the BDCs involved will write off 80% or more of their positions, but we’ll gather more details shortly. As usual in these situations, total exposure may increase as some of the lenders fund their share of the additional capital. For the record, the other BDCs involved are Main Street (MAIN); Capital Southwest (CSWC); Monroe Capital (MRCC) and Oaktree Specialty Lending (OCSL) ; as well as non traded TP Flexible Income with a tiny position.

CPK is – arguably an example of a “Second Wave” credit default. Admittedly, the company was already underperforming before Covid-19 but would likely not have had to file Chapter 11 if the virus had not occurred. As recently as the IIQ 2019 GECC – in a case of ill timing – bought into the second lien at a (5%) discount to par. Going forward, a much de-leveraged CPK should have a decent chance of survival, and may even thrive in the long run. This might allow the BDCs involved to recoup some of their capital but it’s going to be a long slog.

Currently, the BDC Reporter has rated CPK CCR 5 – or non performing – which remains unchanged. We’ll re-rate the company when the RSA – or some other outcome – is finalized. By the way, this is the ninth BDC-financed company to file for bankruptcy – all Chapter 11 – in the month of July, keeping up the blistering pace set in June.

APC Automotive Technologies: Reorganization Confirmed

We first wrote about APC Automotive Technologies when the company first filed for Chapter 11 protection back on June 3, 2020. Relatively quickly – thanks to an agreement with its creditors – the company is exiting bankruptcy, having received court approval of their restructuring plan:

As part of the restructuring, the company has reduced the debt on its balance sheet by more than $290 million and secured a new $50 million senior secured term loan to finance its go-forward operations. The current management team, including Chief Executive Officer Tribby Warfield, will continue to lead the company forward and advance its strategic, operational, and growth transformation initiatives”. The Brake Report

At this stage we don’t know what role Cion investment and Crescent Capital (CCAP) will play in the restructured APC Automotive, if any. However, both BDCs are likely to be booking their losses in the IIIQ 2020.

We are upgrading the company from CCR 5 to CCR 3, and are awaiting further intelligence on the future business outlook.

Lakeland Tours LLC: Files Chapter 11

Student travel company Lakeland Tours LLC filed for Chapter 11 on July 20, 2020. The company – whose dba is Worldstrides – was in the wrong business in the time of Covid-19: arranging student travel programs. However, the company was performing well before the current crisis so management, shareholders and “certain lenders” have managed to cobble together a restructuring plan, which is expected to be blessed by the bankruptcy judge. Details in the company’s press release announcing the Chapter 11 filing are short on details, but some kind of “debt for equity swap”, accompanied – as per the usual – by the addition of new capital is planned.

BDC exposure is limited so we won’t be undertaking any deep dives with so many other troubled companies to worry about. The only BDC involved is non-traded Business Development Corporation Of America (BDCA for short), which has invested $11.9mn at cost in the company’s first lien term loan that matures at the end of 2024, according to Advantage Data. At March 31, 2020 – the first quarter the company joined the ranks of the underperforming – the discount was only (15%). We rated Lakeland CCR 3.

With the bankruptcy filing the credit rating drops to non performing, i.e. CCR 5. BDCA will be losing just short of ($0.6mn) of annual investment income. We’re guessing that the final realized loss the BDC will have to absorb will be bigger than (15%) as well. We don’t know at this time whether BDCA is participating in the new capital being advanced or in the “debt for equity” trade. We’ll circle back as details come out but the impact on the BDC in any case should be modest.

Rosehill Resources: Files Chapter 11

As projected by the company back in early July – and covered by the BDC Credit Reporter on July 6 – shale driller Rosehill Resources has filed for Chapter 11 on July 27, 2020 in Texas. At the time, Rosehill believed the filing would come by mid-July but has delayed till now.

In the absence of any new information, we’ll just re-purpose what we wrote on July 6 about BDC involvement in the company: “There is only one BDC involved with Rosehill – non-traded BDC FS Energy & Power – which has $4.2mn advanced in the form of second lien and preferred, a tiny fraction of the company’s half a billion dollars in debt. The BDC’s exposure has already been written down by (66%) in the preferred but is valued close to par in the second lien. We expect a further loss will be forthcoming and conversion of the full amounts into new common equity. FS Energy may also contribute to the convertible DIP and/or the new debt facility envisaged after bankruptcy. The amount of income likely to be lost is under ($0.2mn) a year.Given FS Energy & Power’s side, this RSA and planned bankruptcy will not be material“. 

With Rosehill, the number of BDC-financed company bankruptcies increases to seven in the month of July to date. Five have been in the energy sector broadly defined.

Borden Dairy: Exits Bankruptcy

These days the BDC Credit Reporter is busy writing about BDC-financed companies filing for bankruptcy, or on the verge of doing so. This article, though, is about a company exiting the bankruptcy process and still BDC-financed : Borden Dairy. Capitol Peak Partners and FS Investments- KKR Capital funds purchased the business for $340mn and have “appropriately capitalized” the new business which – operationally – will continue much as before the filing.

This has been a 6 month process which we’ve written about extensively. As was clear early on, the lenders – headed by the FS Investment- KKR organization – were intent on being part of a “debt for equity swap” and that has come to pass, wiping out the equity interest of the prior owners. However, just the financial details of the new company and how much old and new capital FS-KKR has in play – and in what form – is unclear. We expect to learn more and will report back.

In the interim, we remind readers that two BDCs – FS KKR Capital (FSK) and KS KKR Capital II (FSKR) have advanced $171mn in first lien debt to the old Borden and have already written down ($95.1mn). Presumably – but not necessarily – this amount or thereabouts will become a realized loss now the transaction has been closed and will show up in the IIIQ 2020 financials. Total exposure may actually grow if the lenders have advanced more monies.

Not to be Grinchy, the future of Borden is far from assured. Milk demand in the U.S. has been on the decline for years, and the Covid-19 situation is not helping. Moreover, competition remains fierce with Dean Foods and others and regulation can be difficult as well. Furthermore, we don’t know yet how much elbow room the new owners have left themselves and what amount of debt the new Borden will have to contend with.

For the moment, we are upgrading the company from non performing, or CCR 5, to CCR 3, until we learn more about what Borden will look like in the future and how much debt will be carried. We hope to learn more when FSK and FSKR report IIQ 2020 results, which could cause a revaluation up or down. The bottom line: both BDCs – and their shareholders – will be involved in the business of milk for a very long time, having started out in IIIQ 2017 as lenders.

Rhino Energy LLC: Files Chapter 11

On July 22, 2020 Rhino Resource Partners, and its wholly owned subsidiary Rhino Energy, filed voluntarily for Chapter 11. According to a press release: “.. Rhino has obtained $11.75 million of post-petition financing and the support from a stalking horse bidder to acquire the company. Rhino intends to use the bankruptcy process to implement an orderly sale of substantially all of its assets in an effort to maximize value for all stakeholders and allow for the prospect of continued employment and business opportunities at its operating locations“. Rhino Energy is a publicly traded coal company.

There is only one BDC with exposure that dates back to 2017 and which has been underperforming almost since the beginning. The BDC in question is Cion Investment which has invested $9.8mn in first lien debt and $0.280mn in equity. As of March 31, 2020 the debt was still valued at a modest discount of just (6%), but the equity was written down (95%). We doubt that the first lien lenders will get away without a material loss but don’t have the numbers at hand to be sure. However, we know that Cion will not be collecting about $1.0mn of annual investment income from the debt until this is resolved.

We are downgrading Rhino from CCR 3 to CCR 5. This is the sixth BDC-financed company to file for bankruptcy protection in July to date, and the fourth in a row from the energy sector broadly defined. Fossil fuels are having a very hard time.

Travelport Worldwide: Interim Deal Close With Lenders

The Wall Street Journal reports the lenders to Travelport Worldwide Inc. are close to a deal with the company and sponsor Elliott Management wherein the former would agree not to trigger a default under their debt agreements till September 15, 2020. Bankers and borrower are arguing about how the sponsor allegedly transferred assets that should have been maintained in the company to serve as collateral for another entity’s loan. The owners of Travelport Worldwide have argued that if a default occurs, the company would be forced into bankruptcy.

Very much involved – and worried- is one non-traded BDC : GSO-Blackstone which has $97.9mn invested at cost in the company’s first lien debt due in 2026. As of March 31, 2020, the debt was discounted (31%) to $67.9mn. Some ($6mn) of annual investment income is at risk of interruption if a default does occur.

The BDC Credit Reporter downgraded the company to CCR 4 from CCR 2 after the IQ 2020 results came out, and has added the name to the Weakest Links list, as a default still seems likely to these skeptical eyes. This one credit alone has increased the aggregate cost all Watch List assets by nearly a tenth.

There will be likely be many more twists and turns where Travelport Worldwide is concerned as all the parties are taking a hard line approach and there are billions of dollars at risk. We’ll check back when the next dramatic development occurs.

Permian Holdco 1-3: File Chapter 11

On July 19, 2020 – according to news reportsPermian Tank & Manufacturing filed for Chapter 11. The filing seems to have included entities such as Permian Holdco 1, Permian Holdco 2 and Permian Holdco 3 – all of which have BDC debt involved. As you’d expect, the companies are pointing to Covid-19 as the culprit for this trip to bankruptcy court, but performance was on the fritz for some time. We have very few details at this time, so consider this but an early flash warning.

As far as we can tell so far there are three BDCs involved in one or all the “Permian Holdco” entities with a total cost of $48.2mn. Four-fifths of the exposure is held by New Mountain Finance (NMFC) but Main Street Capital (MAIN) and its sister fund HMS Income have exposure as well. The capital is invested in seemingly every layer of the balance sheet: senior debt, subordinated debt, preferred and equity.

As of March 31, 2020, NMFC had already sounded the alarm and placed some of its preferred and subordinated debt positions and written off a big chunk of accrued Pay In Kind income. Overall BDC capital had been discounted by one third, but there are huge variations between different facilities. The senior debt was mostly carried at par – as was the subordinated debt in some cases and written down by (32%) in others. The preferred and equity were fully written down.

We cannot tell how great the ultimate loss might be, but we do know that $20mn in the junior layers of the balance sheet must almost certainly be headed to a write-off. The remaining amount in senior debt, more likely than not, will face a haircut as well. We can’t tell exactly how much but several million dollars of investment income that was still being booked will be interrupted and probably not ever resume. Rightly or wrongly, NMFC – for example – was still booking into income some of the debt owed at rates of 14%-18% all the way through March and – maybe – through today.

The BDC Credit Reporter is downgrading the company/entities to CCR 5 from CCR 4. Perhaps unsurprisingly for a business with “Permian” in its name, this credit had been rated as “underperforming” since the IQ 2019.

We’ll learn more in the months ahead, but can say with some certainty that this looks like a material set-back for NMFC – both in terms of capital and income at risk. Less impacted, but hardly happy with the outcome are MAIN and HMS Income.

BJ Services Company: Files Chapter 11

Reuters reports that oil field services company BJ Services Company has filed for Chapter 11 on July 20, 2020. The company reported assets and liabilities between $500mn and $1.0bn. Right away, management will be seeking to sell core assets – such as its cementing business – to pay down its debts. Not helping the situation for BJ Services is an admitted “cash crunch”.

Four BDCs have $25.3mn in exposure at cost in the company as of March 31, 2020: Crescent Capital (CCAP); Monroe Capital (MRCC); Garrison Capital (GARS) and non-traded Monroe Capital Income Plus. The BDCs were all in the same 2023 first lien term loan, and marked their positions at par or at a discount of only (4%). Given the industry which BJ operates in; the sizeable liabilities and the liquidity crisis, it seems unlikely that the current high valuation can be maintained in bankruptcy. However, we have no clear idea yet how this debt might fare once everything is settled. We can calculate, though, that ($1.8mn) of investment income on an annual basis will be suspended.

The BDC most at risk of loss is CCAP, which owns about half the outstandings and which is involved in a last out arrangement, which should result in a bigger eventual capital loss.

Frankly, the BDC Credit Reporter has been caught flat footed by BJ’s bankruptcy. The company was carried as performing (CCR 2) in our database because of the near-par valuation by all its lenders. In retrospect, the fact that a oil services firm like this one should stumble is no great surprise. In any case, we have leapfrogged the company’s rating down three levels to CCR 5, or non performing. We’ll be reverting with more details on how the bankruptcy might play out for the BDC lenders involved once we learn more about the company’s plans.

As a parting thought, we do wonder why any BDC would lend to an oil services company – even a giant one – given the well known wreckage of so many similar businesses since 2014. This debt was booked in 2019. Perhaps the recovery the BDC lenders will ultimately achieve will prove us wrong but – if past is prologue – expect that losses will be material and for a loan that was priced at a modest LIBOR + 7.00%.

Alcami Holdings LLC: Downgraded By Moody’s

Moody’s has downgraded pharmaceutical preparation company Alcami Corporation (“Alcami Holdings” in Advantage Data) to a corporate credit rating of Caa2 from Caa1. The ratings group believe the underlying industry is strong, but worries about high leverage (adjusted debt/EBITDA over 10x) ; worsening liquidity and the chances the company might seek a “distressed” exchange in the near future.

There are two BDCs with “Major” exposure to the company – i.e. any aggregate amount at cost over $100mn, but 99% is held by Ares Capital (ARCC), with $145.6mn. The other BDC involved but with less than a $1mn outstanding is non-traded Audax Credit BDC. We’ll focus most of what follows on ARCC. As of March 31, 2020 ARCC held positions in two first lien term loans due in 2023 and 2025, a second lien loan and equity in Alcami. Only the last two had been materially discounted by ARCC’s valuation group: (15%) and (61%) respectively.

The BDC Credit Reporter has rated the company as underperforming with a CCR 3 handle since IVQ 2018 but only because of the discounted equity, written down (20%) at that time. Even the second lien loan was discounted only (9%) through the end of 2019. Now we are downgrading Alcami to CCR 4, as the chances of an ultimate loss seem higher than full recovery. Moreover, we’re adding the company to the Weakest Links list, based on the tight liquidity at the business and Moody’s view about a possible “distressed exchange” – something that is getting to be very common these days.

Given the size of the overall exposure, and with $112mn of exposure in the equity and second lien debt, Alcami represents a significant problem for ARCC. Total investment income at risk is close to ($9.0mn) on an annual basis. That’s roughly equal to 1% of the BDC’s annualized Net Investment Income Per Share. In the short run – unless ARCC ignores Moody’s – we expect to see a lower valuation in the second and/or third quarter valuations. Should the worse happen, a write-off of the second lien and equity is not impossible, which would drop value by ($78.6mn) from the value at the end of March. (Ironically, ARCC made a huge gain of $324mn on the sale of Alcami – inherited from American Capital – back in 2018).

In terms of investment size, this is the biggest Weakest Link added to our list – currently 28 companies long – since May 2020. We’ll be paying close attention to what’s happen next at Alcami, including peeping at how the BDC valued its positions at June 30, 2020 when those results come out shortly.

California Resources: Files Chapter 11

Yet another BDC-financed portfolio company in the energy sector has filed for Chapter 11. As long expected, California Resources Corp is using bankruptcy as part of a restructuring process that will see $5bn of “of debt and mezzanine equity interest ” eliminated; a $1bn Debtor In Possession facility put into place; a $450mn Rights Offering made and a new $200mn post-bankruptcy loan arranged, according to the Wall Street Journal. The huge numbers involved underscore that this is a very large bankruptcy.

From a BDC perspective, though, this is a minor item. Only one BDC is involved with the company: non-traded Business Development Corporation of America (BDCA for short) with $10.6mn invested at cost in first lien debt due in 2022. This was supposed to be a “safer” investment when booked in the IVQ 2017 and is priced at LIBOR + 475bps. The position is already discounted (38%) as of March 31, 2020. We expect BDCA might be involved in the next phase so capital at risk may increase. First, though, the BDC will likely need to book a realized loss and lose out on half a million dollar of annual investment income. We wouldn’t be surprised if the final loss is greater than what’s been reserved for so far.

As for the BDC Credit Reporter, we are downgrading the company from CCR 4 to CCR 5. California Resources comes off our Weakest Links list now the projected default has occurred. This is the third BDC-financed company bankruptcy in July.

CIBT Global: Placed On Non Accrual

Owl Rock Capital (ORCC) on July 13, 2020 announced preliminary results for the IIQ 2020, including the news that portfolio company CIBT Global, Inc. had been placed on non accrual. The company is a “leading global provider of immigration and visa services with the required reach, agility and client commitment to enable corporations and individuals to more easily navigate complex regulations so they can legally work, live and visit around the world“. As you would expect business activity is very low. In fact, back on March 20, 2020 Moody’s downgraded the company to Caa1 and its second lien debt (where BDC exposure lies) to Caa2, with a Negative outlook.

There are two BDCs with $68.7mn in exposure at cost, which had already been discounted (15%) at March 31, 2020. Both the BDCs are part of the Owl Rock construct: publicly traded Owl Rock Capital (ORCC) and non-traded Owl Rock Capital II. 85% of the debt – all second lien by the way – is held by the former. The income lost amounts to ($5.4mn). We can only imagine that the value will drop even further when IIQ results are released. A doubling or tripling of the unrealized loss is possible. Given that the company is highly leveraged (7.6x EBITDA at year end and God only knows what now) a complete write-off for the Owl Rock lenders is not impossible given the junior nature of the debt held. However, we’re getting ahead of ourselves and will revert when we receive an update from the ratings groups and/or the BDC lenders.

The BDC Credit Reporter initially downgraded the company from CCR 2 to CCR 4, based on Moody’s rating the second lien deep in its “speculative” grade. With this latest news, CIBT Global has been reduced to CCR 5. This could prove an expensive mistake for ORCC, with $58.3mn invested at cost, equal to 1% of the huge BDC’s net assets.

Geodigm Corporation: Placed On Non Accrual

On July 13, 2020 Owl Rock Corporation (ORCC) in an 8-K filing announced in advance of the full and formal publication of its IIQ 2020 results, certain preliminary statistics and developments. This included the news that portfolio company Geodigm Corporation was placed on non-accrual in the IIQ 2020. No details as to what was happening at the dental imaging company, but we can guess given the hard times caused by Covid-19.

There are two BDCs with $142mn in exposure at cost to the company: Owl Rock Capital (ORCC) and non-traded Owl Rock Capital II. This is what we call a Major exposure, i.e. over $100mn in aggregate. Through March 31, 2020 the two BDCs had discounted their first lien debt position by (15%). We do not know what haircut has been taken now the loan is non performing. We calculate, though, that income forgone is equal to ($10.0mn) on an annual basis, with ORCC accounting for 86% of the exposure and the income missing.

We had placed Geodigm on the underperforming list for the first time in IQ 2020, leapfrogging from a CCR 2 to a CCR 4 status. Now we are downgrading the company again – to CCR 5. With the benefit of hindsight, the company should have been on our Weakest Links list given this non accrual but we did not have the information to make that call. Geodigm is an example of a Second Wave troubled credit. Through year end 2019 the company was still valued at par and seemingly in no danger. Now in less than 6 months the company has made the full trip from CCR 2 to CCR 5. We blame Covid-19 and the almost complete shut-down of the dental sector because of concerns about transmission.

We’ll learn a great deal more about what Geodigm is currently valued at and – possibly – its outlook when ORCC reports results in early August. Chances are strong the debt will be discounted further than in the IQ 2020.

Bluestem Brands: Business Sold Out Of Bankruptcy

After much back and forth Bluestem Brands Inc. has been acquired out of bankruptcy by its lenders – led by Cerberus Capital Management. The centerpiece of the deal ? Forgiveness of $250mn in debt in return for control of the company in a “debt-for-equity” swap. These details are from a Wall Street Journal article on July 7, 2020. Haggling continued till the very end. At first the buying group offered $300mn, then $200mn and finally $250mn, as discussed in prior articles.

For the four BDCs involved with $34.0mn invested at cost – all in debt – this brings the day of resolution and restructuring closer. The BDCs have already written down their pre-petition positions by (31%)-(40%). We estimate that discount will increase to (55%) when all is said and done. The post-petition debt should get repaid in full or rolled into whatever new capital structure the new owners envisage. Expect to see significant realized losses booked in the third quarter 2020, in the order of ($12mn-$15mn).

Unknown – but not unlikely – is that Main Street (MAIN); HMS Capital; Capitala Finance (CPTA) and Monroe Capital (MRCC) will need to advance more capital going forward to give Bluestem a chance at success. Our readers may expect to be reading about the company – maybe under a new name – for some time to come. The good news ? Maybe some portion of the debt will start paying out its lenders again shortly.

However, the chances of a Chapter Twenty Two, i.e the business falling back into bankruptcy again remain high given the difficult market conditions. Also, much depends on how generously the new Cerberus-led group carves out a new capital structure. We’ve seen multiple examples of new, lender-led groups being shy about making the necessary sacrifices in writing off debt and not injecting new capital. Maybe it’s not in the DNA of lenders more intent on getting their money back than ensuring a business thrives. We need to dig deeper and find out what sort of plan Cerberus and its group has in mind.

Sur La Table: Files Chapter 11

The BDC Credit Reporter – and everyone else – saw this coming weeks ago: Sur La Table filed Chapter 11 on July 8 2020. Also not surprising is that the company comes to bankruptcy court with a plan to be bought out by a “stalking horse” bidder- Fortress Investment, which is working with the existing lenders. The lenders are offering debtor-in-possession (“DIP”) financing to bridge this difficult period. (The amount involved is what seems like a paltry $3.0mn, according to court filings). The company itself – which had already reduced corporate staff – will be closing up to 51 of its stores.

From a lender standpoint, this was a borrower already on non accrual since IQ 2020. What is unclear is how the two BDCs with $31.5mn exposure in the company’s first lien debt will fare. Capitala Finance (CPTA) has already discounted its position by (41%) and Blackrock Capital (BKCC) by (34%) – typical of the fluid world of BDC valuations. We’re assuming the two BDCs are involved in the DIP facility and are part of the buying group. More capital – besides writing off debt – may be required in some form. We’re waiting for further filings to get a clearer picture.

What we did learn from the CEO’s first day filings with the bankruptcy court is that he was hired back in August 2019 to turn around the business. Also new to us was that Sur La Table was in default under its debt agreements and raised $15.0mn from its investors on June 12, 2019 to pay down some of the debt and get back in compliance. However, Advantage Data records show that in neither that quarter, nor the quarter before nor the quarter after the default and loan reduction did either CPTA or BKCC discount their positions to reflect the strained situation. The debt, though, did drop from $45mn to $31.5mn.

In an earlier article on June 29, 2020 we mentioned that we were disappointed by the values at which Sur La Table was carried on both BDCs books. This latest revelation in a court filing indicates without a doubt that the company was in deep trouble more than a year ago. Yet, the debt was not discounted on either BDC’s books by a material percentage till IQ 2020. That’s the same quarter as the Term Loan was placed on non accrual. This does not speak well to the valuation methodologies of either BDC involved.

For the moment, the BDC Credit Reporter’s rating remains CCR 5. We’ll provide an update on likely recovery once further details come in.

GEE Group: Recapitalizes Balance Sheet

Publicly traded recruiting firm GEE Group (ticker GEE) has negotiated a major balance sheet restructuring: “Approximately $47.4 million, which is comprised of approximately $19.7 million of subordinated debt and approximately $27.7 million of preferred stock mezzanine financing, was eliminated from the Company’s balance sheet as of June 30, 2020, at a substantial discount in exchange for cash of approximately $5.1 million inclusive of accrued interest and the issuance of approximately 1.8 million of GEE Group Inc. restricted common shares“.

As far as we can tell that leaves the troubled business – which just recently received a PPP loan/grant, with a $41mn Term Loan, judging from the latest 10-Q. Most importantly at this time of much reduced business activity, the company claims to have $16.4mn in cash.

To date, the BDC Credit Reporter has rated the company CCR 3, a rating we maintain post-restructuring. Even $16.4mn in cash is no great protection in these difficult times and the business is far from being out of the woods. Don’t expect a great increase in the company’s fair market value which had been barely discounted in the IQ 2020 results from a cost of $11.1mn to a FMV of $10.2mn. The only lender involved is Investcorp Credit Management (ICMB), which holds a quarter of the Term Loan.

We get the impression that there will be more twists and turns in the GEE Group corporate history and before the 3/21/2021 Term Loan due date, but for a brief moment here the news was good thanks to this restructuring. Given this is a public company, we’ll be learning a lot more in the months ahead about GEE Group’s attempt to return to normal “performing” status in the months ahead.

Lonestar Resources: Misses Interest Payment

According to the Wall Street Journal, energy company Lonestar Resources Ltd. has failed to make an interest payment on one of its bonds: “The Fort Worth, Texas-based shale driller said the payment was due on $250 million in 11.25% senior bonds due in 2023. The missed payment starts a 30-day grace period before the company is considered to be in default”. Naturally enough, this has resulted in speculation as to whether the company will file for bankruptcy protection or take some other form of evasive action to remain a “going concern”. The company has over half a billion dollars in debt.

This is bad news – albeit not unexpected – for the only BDC with exposure: FS Energy & Power, which has $33.2mn invested at cost in subordinated debt, already written down to $7.6mn as of March 31, 2020. The company has been underperforming since IIIQ 2019, but has been on the BDC’s books since 2014.

The company was initially rated CCR 3 by the BDC Credit Reporter but was downgraded – due to the write-down of one third of its debt value – to CCR 4 in the IVQ 2019. With the latest news, we’ve added Lonestar to the Weakest Links list because some sort of blow up seems inevitable in the short run.

Having had a look at the company’s financial results through the first quarter 2020 we expect that the capital invested by FS Energy is likely to be almost completely written off when the dust settles. Also likely to be interrupted – probably forever – is the $3.8mn of annual investment income currently forthcoming. That will be a significant loss for the BDC, already facing multiple similar credit setbacks.

Rosehill Resources: To File Chapter 11 By July 15

Energy company Rosehill Resources has revealed in its 10-Q filing dated July 2, 2020 its intention to file for Chapter 11 bankruptcy by July 15, 2020. This follows the entering into a Restructuring Support Agreement (“RSA”) on June 30 with certain of its lenders, creditors and preferred debt holders. As usual a “debt for equity swap” is the centerpiece of the RSA except that preferred stock will share in a tiny piece of the new equity and – in an unusual move – the Debtor In Possession (“DIP”) financing will convert into a major share of the common stock of the post-bankruptcy company. Liquidity is clearly very tight and should this gambit fail, the company could face a cash squeeze and be unable to fund its business.

There is only one BDC involved with Rosehill – non-traded BDC FS Energy & Power – which has $4.2mn advanced in the form of second lien and preferred, a tiny fraction of the company’s half a billion dollars in debt. The BDC’s exposure has already been written down by (66%) in the preferred but is valued close to par in the second lien. We expect a further loss will be forthcoming and conversion of the full amounts into new common equity. FS Energy may also contribute to the convertible DIP and/or the new debt facility envisaged after bankruptcy. The amount of income likely to be lost is under ($0.2mn) a year.

Given FS Energy & Power’s side, this RSA and planned bankruptcy will not be material. However, the transaction is a reminder of how great the percentage of loss can be on energy transactions and how new capital is constantly needed from the very same creditors who are being affected by the company’s business failure. As a result, it’s possible that Rosehill will remain in some form on the BDC’s books for years to come and the actual total dollar exposure increase.

The BDC Credit Reporter had already rated Rosehill Resources CCR 4 and added the name to our Weakest Links list, so no change there. We’ll circle back when bankruptcy actually occurs or when IIQ 2020 results are published.

Denbury Resources: May File Chapter 11

According to a Seeking Alpha article by Elephant Analytics on July 4, 2020 energy company Denbury Resources Inc. is likely to file for Chapter 11 after working out a restructuring plan. The author points to a skipped interest payment on June 30 and the drawing down of the company’s revolver, thus loading up on cash. The SA author believes that a restructuring will result in second lien lenders receiving essentially the entire ownership of the company, with more junior debt and equity holders being wiped out.

There is only one BDC lender in Denbury: non-traded, specialist fund FS Energy & Power. The BDC holds two different tranches of second lien debt, one maturing in 2022 and the other in 2024, with an aggregate cost of $54.1mn. The writing about Denbury has been on the wall for some time and the debt has already been discounted to $12.3mn, a (77%) drop. Now the BDC seems likely to lose ($4.8mn) of investment income and end up with common stock in a largely de-leveraged Denbury.

The BDC Credit Reporter was already rating the company CCR 4. However, we’ve now added the company to the Weakest Links list given that a payment default seems almost certain. We wouldn’t be surprised if we find the BDC has already placed Denbury on non accrual in the quarter ended June 2020. If not, that should occur in the current quarter (IIIQ 2020).

This promises to be yet another significant loss for the $2.5bn FS Energy & Power Fund, which has accumulated total losses both realized and unrealized of ($2.0bn) as of March 31 2020. We’ll circle back if and when a bankruptcy occurs or we hear more from the BDC.