AAC Holdings, Inc. that does business as American Addiction Centers has been on our Watch List for some time. We’ve just updated the Company file with various recent developments and renewed our view that some sort of “credit event” is likely in the short term.
Affinion Group Holdings, and several of its subsidiaries, have completed yet another recapitalization of the highly leveraged company. We’ve used the opportunity to update the Company Profile page which provides a summary of all prior restructurings and evolving BDC exposure. Speaking of the latter, the only remaining exposure is by Pennant Park (PNNT) and PennantPark Floating (PFLT), which has $46mn invested in the equity at cost and which was valued at $18mn at year end 2018. The BDCs relationship with the Company goes back more than a decade and – as the Company Profile page shows – there have been many twists and turns along the way. This is unlikely to be the last. In the short run, we expect the recapitalization will reduce the BDCs investment valuation, but the trend may reverse in the future depending on the performance of the Company. On the other hand, the equity could be fully written off one day. This is just a snapshot.
We added a new Seeking Alpha article to the Prairie Provident Company File. The conclusions were not very encouraging, including the following:
The net debt to TTM adjusted funds flow ratio is very high at 14.6x. Also, due to the disastrous Q4, the company is about to breach its financial covenants.
Not good news for the only BDC with exposure: GSBD. However, the current value of the investment is so small – all in equity – as to be immaterial.
Sungard Availability Services “has officially confirmed that the company will enter a ‘pre-packaged’ Chapter 11 bankruptcy filing on or around May 1st 2019”, according to a news report. The IT company has already negotiated a restructuring agreement with secured and unsecured creditors and expects to exiting bankruptcy shortly. The restructuring involves a debt for equity swap, which is reportedly going to reduce total debt “by over two-thirds”. In the interim, a $100mn Debtor In Possession financing has been arranged, and business continues as usual.
BDC exposure to the Company is substantial: $79mn, according to Advantage Data records. There are three tranches involved: two are senior debt maturing in 2021 and 2022 and subordinated debt due 4/1/2022. The BDCs involved are principally from the FS KKR Group: FSK, FSIC II and FSIC III and also GECC. $26mn at cost is in the subordinated debt, which was the tranche most written down at 12/31/2018, discounted by over &0%). Valuations on the senior tranches are generally much closer to par, varying between a discount of (2%) to (14%). Based on what we’ve heard of the size of the debt forgiveness, we’re surprised at how relatively modest the unrealized depreciation is. That’s complicated by the fact that the BDCs involved are likely to have been aware of the restructuring proposals when setting the valuation level. Will there be further write-downs of the senior and subordinated debt value now the bankruptcy cat is out of the bag or are we done ? Frankly, we don’t know, but will put a pin in the subject until the next portfolio filing. Till then, we’ll limit ourselves to projecting Realized Losses will range between $20mn-$26mn, and income will be interrupted as the Company moves through the bankruptcy process, affected IIQ 2019 investment income.
UPDATED: The BDC Reporter was contacted following the origination of this post by GECC which noted that its Sungard position was closed in January at a net gain. Here is what the 10-K said in “Subsequent Developments”:
In January 2019, we sold $4.8 million of par value of Sungard Availability Services Capital, Inc. first lien senior secured loan at a price of approximately 78% of par value. [Page 62]
By our calculation, 78% of par equals proceeds of $3.750mn.
Advantage Data records shows GECC’s exposure to the Company’s debt began in IVQ 2017 (12/2/2017), with $6.0mn of par purchased for $5.7mn. This exposure reached as high as $11.380mn at par, and a cost of $11.049mn in the IIIQ 2018. A portion was sold in IVQ 2018 and the rest – as mentioned above- in January 2019.
According to GECC’s Investor Presentation for the IVQ 2018 – which includes a section detailing “Individual Realized Investments”, a slide indicated : “GECC sold the entirety of its investment at approximately $0.92 in IVQ 2018 / IQ 2019, resulting in an IRR of 6.7% and a cash-on-cash return of 1.05x, net of accrued interest & amortization”. See page 12.
Monitronics, which does business as Brinks Home Security, is a wholly owned subsidiary of Ascent Capital Group, a public company with the ticker ASCMA. The business is very highly leveraged, with debt of $1.8bn and adjusted EBITDA at Brink’s for nine months annualizing at under $300mn. The auditor of ASCMA has raised “Going Concern” doubts in its IIIQ 2018 statements . In January 2019, the parent hired Moelis to help them consider “strategic alternatives” , which include “an investment in the Company or its operating subsidiary Brinks Home Security by a third party”. Amidst of all this, ASCMA has been attempting to restructure its debt mountain and – controversially – has been seeking to redeem Convertible Notes due 2020. This has been going on for months, but the latest press release on March 22, 2019 suggests the transaction has been achieved by raising the tender price offered. In the greater scheme of things, though, the problems of Monitronics and its parent appear far from over. ASCMA has become a penny stock, closing at $0.65, down hugely in the past year from over $ a share. Surprisingly, the 4 BDCs with $12mn of aggregate exposure to Monitronics have continued to mark their investment at close to par value through September 2018. All the BDCs – which include Oaktree Strategic (OCSI), FS Investment non-traded funds II & III and non-traded CCT II (the last 3 all part of the FS KKR construct) – are invested in the 2022 Term Loan. The senior nature of the obligation may have justified the generous values ascribed. However, in the IVQ 2018 valuations OCSI discounted the debt by (10%) for the first time and the other BDCs also applied lower valuations than in the past. Looking at the numbers, the huge amount of debt and the little liquidity available – not to mention the auditor’s Going Concern doubts – has kept this credit on our Watch List for some time, regardless of the BDCs numbers. We don’t know if the Convertible Debt repurchase is a win, or a loss or neutral, but before long we still expect a credit event – such as a default or non-payment – to occur. About $1mn of investment income is at risk spread roughly evenly over the BDCs mentioned. Furthermore, barring a well heeled buyer coming along, full repayment of the 2022 Term Loan also has to be questionable.
On March 20, 2019 Nine West Holdings, Inc. (“Nine West”) and some of its affiliated entities announced in a press release their exit from Chapter 11 bankruptcy. The company – which has been renamed Premier Brands Group Holdings, LLC is under the ” majority equity ownership of CVC Credit Partners and Brigade Capital”. The press release describes the company in this way: “a leading jeanswear, women’s apparel, accessories and licensing company with a portfolio of brands that includes Anne Klein, Gloria Vanderbilt, Kasper, and Napier. The Company is a wholesale partner to major U.S. and international retailers”. Nine West filed Chapter 11 in April 2018, sold off certain subsidiaries and – after a number of delays as the parties argued over terms – were able to reduce pre-petition debt levels by $1.0bn.
The only BDC with exposure is FS KKR Capital (FSK), which inherited the investments from Corporate Capital Trust (CCT), which merged into the BDC in December 2018. CCT had been an equity investor and senior secured lender to Nine West since 2014. Moreover, CCT participated in the Debtor-In-Possession (“DIP”) financing necessary to maintain operations following the filing. CCT’s exposure was part of a much bigger exposure by the combined FS Investment – KKR group, but we believe the initial deal was booked when FS Investment was aligned with GSO Blackstone. At cost, FSK’s exposure totaled $14.7mn at 12/31/2018. According to Advantage Data records, maximum exposure was $23.2mn in the IIQ of 2018 but much of the original Term Loan, due 3/31/2019 was repaid, possibly from the sale of the assets mentioned above. Currently, the 3/31/2019 Term Loan has a cost of $2.5mn and a FMV and par value of $2.6mn. The DIP financing has a cost of $5.7mn, a par value of $6.2mn and a FMV of $6.0mn. The valuation may be increased to par now the Chapter 11 exit has occurred and is likely to be reflected in the IQ 2019 FSK results. We are unclear if the Term Loan and the DIP debt will be rolled into the new company and on what terms. The DIP financing is currently only earning L + 375%, below FSK’s target earnings. Finally, FSK has $6.5mn invested in the equity of Nine West Holdings, dating back several years and written down to zero since IIQ 2016. We expect FSK will have to book a Realized Loss for the entire amount now the bankruptcy has ended. However, that should not affect net book value given the investment has already been written down. Not exactly a recovery for FSK, but the giant BDC gets to place this deal in the Resolved column and move on to larger, still ongoing under-performing credits.
On March 12, 2019 publicly traded telecom company Frontier Communications (FTR) announced its intention to raise $1.65 billion in “First Lien Secured Notes”, due in 2027. The proceeds from the new debt will be used – amongst other purposes – to refinance “all outstanding indebtedness under its senior secured term loan A facility, which matures in March 2021”. Oaktree Strategic Income (OCSI) is the only public BDC with exposure to Frontier Communications, all in the 3/31/2021 term loan A facility. Total outstandings at cost are $2.859mn and were valued at December 31, 2019 at $2.780mn. No date for the closing of the refinancing has been set, which could occur in the IQ of 2019 or the IIQ. OCSI should book an immaterial increase in value and lose an asset earning only LIBOR + 2.75%, or slightly over 5% per annum. This is a recent loan for OCSI, which only began lending in the IIIQ of 2018 under the new Oaktree management.
Closely-held Envocore Holding, LLC – about which very little is known from the public record – saw its preferred stock written down by both of its BDC lenders: Alcentra Capital (ABDC) and OFS Capital (OFS). Moreover, on its March 12, 2019 Conference Call, ABDC explained that the unrealized loss was due to the company “missing earnings for a variety of reasons”. The lenders are said to be working closely with the sponsor and management. ABDC added Envocore to its recently established Watch List.
We have also added the company to the BDC company under-performer list as of the IVQ 2018, based on the equity write-down and that sliver of an update from ABDC and the sector in which the company operates (see below). Our rating is CCR 3, or Watch List. Total exposure at cost as of the end of 2018 is $37.1mn and consists of first lien debt, preferred and common, about equally divided. The potential income at risk is $4.2mn.
By the way: “Founded in 1991, Envocore Energy Solutions is the leading provider of custom energy (lighting & water) efficiency services to Energy Service Companies and utility clients. The Company acts as a sub-contractor to the Energy Service Companies and utility companies and will perform design, engineering and installation. The Company is based in Gambrills, MD“.