Global Jet Capital: Update

Aircraft leasing company Global Jet Capital published an article about its current business and prospects in a trade publication AIN Online. Highlights include the claim that  “in 2019 alone, Global Jet Capital is on pace for $800 million in new business” and it’s “seeing a 20 percent year-over-year jump in business aviation leasing and financing business“.

Global Jet Capital ..is paving the way for this growth by expanding its global presence, including the additions of fully functioning offices in Zurich and Hong Kong earlier this year. These offices joined existing facilities in Danbury, Connecticut; Boca Raton, Florida; and Mexico City.

Also propelling growth is its continued access to funding, including its third successful asset-backed security, bringing total assets securitized to over $2.1 billion.

The firm also continued to reinforce its leadership team, including the recent naming of financing veteran Stefan Abbruzzese as chief commercial officer. This enabled Dave Labrozzi to shift into the new role of vice chairman

Given that the company – established in 2014 – is privately owned, we rarely learn about such new developments. However, keeping an eye on Global Jet is important because BDC exposure is very, very high: $466mn. Yet back in 2014, when GSO Blackstone first brought FS Investment into the credit, outstandings were just $1mn ! (Subsequently KKR has replaced GSO Blackstone). What’s more, the investment is exclusively in junior capital (sub debt and preferred) and concentrated in 4 FS-KKR Capital BDCs – publicly traded FSK and FSIC II, FSIC III and FS Energy & Power. (FSIC II and FSIC III will shortly be publicly traded). All that capital is under a bigger mountain of senior secured debt from third parties. The junior debt held is all in PIK form and yields 15.0% annually, which means income at risk is very high: $53mn. Finally, the last time the BDC exposure was valued the Preferred was discounted (90%).

We’re glad to hear that Global Jet is performing well – if their press release is to be believed – but regular monitoring is required as there is so much at stake. We have had a CCR 3 (Watch List) rating since IIIQ 2018, which will likely remain, whatever the valuation, given the size of the risks involved.

Deluxe Entertainment: Additional Info About Credit Troubles

In a broader article by Bloomberg BusinessWeek about the CLO market, was a useful backgrounder on what happened to Deluxe Entertainment Group that caused the company to recently file for bankruptcy:

Deluxe Entertainment Services Group Inc. shows just how quickly liquidity in the leveraged loan market can evaporate. A postproduction media services company for the film industry, Deluxe has struggled with a changing digital media landscape in Hollywood and an increasingly burdensome debt load. But with tens of billions pouring into the leveraged loan market and a CLO machine cranking out deal after deal, Deluxe and its owner, Ronald Perelman’s MacAndrews & Forbes, had little trouble in recent years raising new debt to keep the company afloat.

Deluxe refinanced its debt in 2014, getting enough demand from investors that it was able to upsize its loan by $35 million, to $605 million, and cut its interest rate by a full percentage point. Two years later, the company returned to the market for an additional $75 million, and it tacked on $200 million more in 2017 to refinance some of its other debt.

But as Deluxe’s problems mounted, its cash thinned. After an unsuccessful effort to sell its creative services unit, it turned to its existing lenders, who agreed to back a $73 million loan in July. That’s when it got ugly. The news of the abandoned sale and new debt caused the value of Deluxe’s loan—with $768 million still outstanding—to plunge from 89¢ on the dollar to less than 40¢ in some 24 hours. Within about a week, S&P downgraded its rating by three notches, to CCC-. The downgrade blocked some existing CLO lenders, bound by the 7.5% limit, from fronting additional cash. On Oct. 3, the company filed for Chapter 11. The existing loan now trades at less than 10¢ on the dollar. Deluxe said in a statement that “We appreciate the support we have received from our lenders throughout this process and look forward to completing the refinancing shortly.”

With BDC earnings season coming round, we’ll shortly learn how Harvest Capital (HCAP), Cion Investment and TP Flexible Income Fund, with $20.7mn invested in the bankrupt company as of June have navigated this complex situation. We expect substantial losses to be booked this quarter or next and – possibly – an increase in invested capital.

Citgo Holdings: Possible Foreclosure of Shares

Here’s a “down the rabbit hole” credit story that’s just come to our attention, but which might have a happy ending for the BDCs involved. Citgo Holdings has pledged 50.1% of its stock to support its parent – Petroleos de Venezuela’s (PDVSA)- 2020 bonds. A billion dollar debt payment is due, and the funds are not available. Big debt holder of the PDVSA bonds Ashmore Group wants to be repaid and proposes to foreclose if not paid. However – and this where business and politics torn from the headlines intersects – the Trump Administration might intervene to prevent the seizure. That’s because PDVSA and Citgo are effectively controlled by Venezuela’s opposition leader and “self proclaimed President” Juan Guaido.

Guaido is a U.S. ally and an opponent of actual President Nicolas Maduro. That’s making the Trump administration consider an unusual intervention in the debt markets. This is ably described in a Bloomberg article by Ben Bartenstein published on October 22 about the subject:

While some U.S. officials are leery of interfering in the bond market or property rights, the White House also worries that it would be a political disaster for Guaido to lose Citgo, the Houston-based refining unit of Venezuela’s state-owned oil company, the people said. President Nicolas Maduro’s regime could blame that on Guaido, Trump and Wall Street, they said.

As a result, officials in Washington are acknowledging the increasing likelihood that the Treasury Department’s Office of Foreign Assets Control revokes General License 5, effectively putting transactions related to the PDVSA 2020 bonds on the same footing as other Venezuelan financial deals that are prohibited. There’s still some opposition to such a move, the people said, and talks continue. The U.S. has refrained from formally promising this to Guaido’s representatives because that may dissuade them from negotiating with creditors, the people said.

“If OFAC revokes GL5 and makes changes to the related FAQ guidance, the enforcement on the collateral securing the 2020 bonds will be unauthorized,” said Cecely Hugh, investment counsel in emerging-market debt at Aberdeen Standard Investments in London. “This means that the collateral would be effectively worthless while the sanctions are in place.”

At June 30, 2019 one BDC – Oaktree Specialty Lending (OCSL) had invested $21.8mn in Citgo Holdings debt due 2020. The debt was valued at par. Now the good news: on August 15, 2019 the 2020 debt seems to have been refinanced, according to a company press release. What we don’t know is if OCSL doubled down and invested in either of the two new facilities that “took out” the 2020 debt. Also both OCSL and sister BDC Oaktree Strategic Income (OCSI) have close to $30mn invested in the debt of Citgo Petroleum Corp, a subsidiary of Holdings. We don’t know if that debt will be affected now – or by the final maturity in 2024 – by what’s happening in the world of realpolitik. The good news is that all publicly traded Citgo Petroleum debt – as opposed to the PDVSA debt – is trading at or above par.

This is more complicated than our usual credits, but we’re adding Citgo – parent and subsidiary – to the under-performers list with a CCR rating of 3 (Watch List) till the smoke clears.

McDermott International: Arranges Additional Financing

Nominally on October 21, troubled oil services company McDermott International arranged $1.7bn of additional financing to meet an upcoming severe cash shortfall.  That sounded like very good news to the stock and bond markets worried about the solvency of the company for several weeks now. The stock price jumped. However, investors soon began to have second thoughts and the stock and bonds both dropped ! The Wall Street Journal reportedMcDermott’s bond rose as high as 33 cents on the dollar after the refinancing was announced, from about 29 cents on Friday, before falling to about 24 cents when the revised estimates were disclosed in a U.S. Securities and Exchange Commission filing. The company’s shares plotted a similar course, opening 21% higher at $2.84 before dropping to $2.04“.

The reasons include the fact that the “lifeline” debt cannot be accessed in one lump sum , or at will, but only in 4 tranches that relate to performance and require “sign-off” by other creditors, which is another word from concessions. Those were well spelled out in another article, this time from Bloomberg. Furthermore, the company paid out millions in retention bonuses to senior executives. Often when you’re paying your senior people a small fortune to do the work they’ve been doing for a healthy paycheck already, the chances of things going off the rails is high. Just as importantly, the company revised its earlier financial projections for 2019:

The company changed its estimate of earnings before interest, tax, depreciation and amortization, or Ebitda, to $474 million in 2019 from $725 million because of incremental charges on existing projects, according to the SEC filing. It also revised its free-cash-flow estimate for the year to negative $1.2 billion from negative $640 million.

This is far from resolving McDermott’s financial troubles and may – ironically enough – accelerate the need for a Chapter 11 filing or a full scale reorganization. We’ve been writing about the credit since September 19, 2019 when a restructuring firm was first hired, but the company has been rated CCR 4 – our Worry List – since July 30. We followed up with an update regarding this impending lifeline on September 25, 2019.  Now – as then – we remain skeptical that McDermott can dodge the bankruptcy/restructuring bullet.  Furthermore, we’re placing the company on our still-under-development Bankruptcy Imminent list, which means we believe there is a strong chance of a filing or re-organization occurring within the next 3 months. Judging by the market reactions by closing time, we may not be alone. This would cause – judging by the current valuation of the 2025 debt in the markets – a (35%) or greater loss for the two BDCs involved, or close to ($4mn) between the two, and the loss for some time of nearly $0.800mn of investment income. Not disastrous for either BDC but another reminder that the “oil patch” is a difficult place to play in.

Hilding Anders International: Hires CEO

Troubled Swedish mattress manufacturer Hilding Anders International (HA) has hired a new Chief Executive Officer, according to a press release. He will take his post at the beginning of 2020, transitioning with the help of the current CEO. The HA Group is one of the leading bedding and mattress companies globally, operating across the European, Russian and Asian markets.

HA is one of the largest non-performing companies that we track, with $158.7mn of debt and equity invested by FS-KKR Capital (FSK). One debt facility of the several held has been on non-accrual since the IVQ of 2014. More recently – as FSK noted in its most recent Conference Call transcript – another loan was added to three others already not paying their interest. That was notable given the loan’s size: $129mn at cost. FSK has written down its exposure to $75.2mn , a (42%) overall discount.

We don’t know the details of what’s wrong with the far flung business except that FSK referenced “headwinds in raw material input prices as well as competitor online offerings” in that most recent transcript. Nor can we say if the hiring of a new CEO will make a positive or a negative difference, or none at all. We just assume, though, that FSK – with so much at stake and reportedly “working intently” will be taking a great deal of interest given how much is at stake.

School Specialty, Inc: To Explore Strategic Alternatives

Publicly traded School Specialty Inc. announced on October 9, 2019 “has commenced a formal process to explore and evaluate potential strategic alternatives focused on maximizing shareholder value”. Previously, the company had announced the hiring of a financial adviser to assist with re-jigging its financial structure. Now the company aims to review “all options”.

We reviewed the latest quarterly financials, which showed the company generating just $10mn of EBITDA and a net income loss of ($6mn). Debt, though, was very high at close to $200mn, and trade payables are growing as sales are dropping. Trouble clearly lies ahead, and the stock price has dropped to $2.50, down from a high of $17.10 within the last 52 weeks.

This must be worrisome news for the only BDC lender: non-listed TCW Direct Lending, which has a material exposure of $43.1mn, all in the publicly traded 2022 Term Loan, which itself is structurally subordinated to an asset-based loan. At June 2019, TCW had discounted its position by as much as (8%). The current market value of the debt is slightly lower at time of writing. The possibility of an even greater write-down – and some sort of write-off – is growing by the day.

We are downgrading the debt from “performing” – or CCR 2 in our 5 point rating system – to CCR 4, or Worry List in a single bound. Given the high interest rate being charged (11.4%), the potential loss of income could be high: close to $5.0mn. We get the impression that School Specialty – only now arriving on our under-performer list – may be here for awhile.

Abaco Energy Technologies: Repays 2020 Term Loan

The BDC Credit Reporter tracks under-performing BDC-financed companies. However, any given company on our list may have debt or equity investments that are performing normally and some that are not. That’s just to explain that Abaco Energy Technologies – which is rated CCR 3 on our five point scale – repaid its 2020 Term Loan, but remains under-performing. The debt – which is publicly traded – had been valued at or close to par in recent years and has been now been called in as of mid-October 2019. (As usual, that’s a bitter-sweet proposition for the lenders, who’ve been involved since 2014. The sweet is getting repaid in full. The bitter is losing a high yielding first lien loan priced at LIBOR + 950 bps).

Notwithstanding the debt pay-off Abaco remains on our Under Performers List as the two non-listed BDCs which held the 2020 debt also have common stock and preferred invested in the company. To confuse matters more, the equity is valued – as of September 2019 – at a (62%) discount to cost. However, the BDCs also hold a preferred position, valued at 880% of cost. In fact, the fair market value of the common and preferred combined is greater than its cost. (The preferred was added in mid-2017 in some sort of restructuring and has obviously gained greatly in relative value).

Nonetheless, we continue to be worried about the future of Abaco for three reasons. First, the values of both common and preferred were marked lower in the latest period. That’s a two quarter “trend”. Second, S&P and Moody’s downgraded the company in the year, based on concerns about the ability to repay the Term Loan and a Revolver – both subsequently accomplished – but also about its fundamental performance. Now Moody’s has withdrawn its ratings with no debt to evaluate but that does not change the fact that Abaco remains a small company with a “narrow product scope”. Finally, just in case we need to be explicit, the company operates in an industry segment under considerable strain at the moment and with no reprieve in sight.

So we are maintaining a CCR rating of 3 for FS Energy & Power and FS Investment Corp II‘s $12mn of equity and preferred exposure at cost. Remember that FS Investment Corp II may shortly become a public company. Still, the amount of capital at risk is modest by comparison with the size of these two BDCs and given that no income is being generated, there is little to lose if Abaco’s future performance deteriorates.

Murray Energy: Forbearance Extended Two Weeks

On October 16, 2019 Murray Energy announced that its lenders “amended a forbearance agreement regarding debt payments until Oct. 28 at 11:59 p.m. The company originally had until Oct. 14 at 11:59 p.m., but the deal allowed the agreement to be extended. Lenders have agreed to not exercise available remedies related to payments due on Sept. 30“. We had previously discussed the initial forbearance in a post on October 3.

The coal company took the opportunity to also announce its intention not to pay debt service due on two other debt agreements.

This only means that the day of reckoning – which is unlikely to be favorable to the company and its lenders – has been slightly delayed. Given the continuing weakness in the coal sector, we are not optimistic. However, we should note that the bulk of $52.4mn in BDC exposure is in the 2021 Term Loan, which continues to trade at only a (2%) discount to par.

However, non-listed Business Development Corporation of America and Cion Investment with $12.5mn of exposure in the 2022 Term Loan may be less sanguine. According to Advantage Data, that debt is trading at a (66%) discount. Last time the position was valued the discount was (33%), suggesting further unrealized write-downs are coming in the third quarter. If we get a Chapter 11 filing there’s $5.6mn of investment income at risk. A little further down the road: material Realized Losses.

United Sporting Companies: Justice Department Objects

One step forward, one step back. A day after we heard that United Sporting Companies had repaid Prospect Capital (PSEC) a seventh of its loan, we hear that the Justice Department is not happy. According to Bloomberg Law:

…[the] bankruptcy watchdog division objected to firearms distributor United Sporting Companies’ proposed liquidation plan, concerned that it grants pre-bankruptcy lenders immunity from lawsuits related to the case.

The Chapter 11 plan’s exculpation provision goes too far, the U.S. Trustee said in its Oct. 15 objection filed at the U.S. Bankruptcy Court for the District of Delaware.

We don’t know how to evaluate this new spinnet. We’ll just have to wait and see if anything further develops.

United Sporting Companies: Prospect Capital Partly Repaid

Details are sparse but in an SEC filing Prospect Capital (PSEC) revealed receipt of “$19.5 million of our Second Lien Term Loan investment in USC [United Sporting Companies] using proceeds relating to their June Chapter 11 bankruptcy filing and ongoing asset liquidation“. That’s good news for the BDC, which is in the hook for a massive $127mn at cost invested in the debt of the bankrupt sports supply business. (We wrote about United Sporting – and PSEC’s predicament- back in June 2019 ). This is a sliver of good news (one seventh) for the BDC about to take a very big realized loss on what used to be one of its largest portfolio companies.

Ferrellgas Partners: In Default ?

On October 15, 2019 Ferrellgas Partners published its full year results. For the last quarter of the fiscal year, the giant propane distributor reported a net loss of ($72mn) and Adjusted EBITDA of $4mn, while interest expense and maintenance capital expenditures and the gains from minor assets sales were $41mn. Or, in other words, the company is performing very badly. The stock price dropped by a third, to close at $0.65.

If that wasn’t enough, the 10-K reveals a dispute between the company and its senior lender TPG Specialty Lending . The latter is claiming that by not delivering certain financial information within a prescribed period, the company is in default under its credit agreement – even though the said information was subsequently forwarded. Moreover TPG believes the auditor’s opinion contains language suggesting doubt about Ferrellgas remaining a “going concern”. The company reads the document differently. In any case the parties have not agreed and the lender is expected – both by Ferrellgas and us – to take further action. That might include attempting to force an involuntary bankruptcy.

The company has been headed south for some time, so we’re not surprised about the poor results – or the likely bankruptcy – but only about the manner in which the company and its secured lender have fallen apart, which will add to the complexity. Total BDC exposure is very high: $101mn. Of that $82mn at cost is held by TPG Specialty (TSLX) in the senior secured debt, nominally to mature in 2023 but which the company is now carrying as a short term liability. See pages 52-53 of the 10-K. FS Energy and Power Fund holds two junior tranches of the debt for the remainder. TSLX is very confident that its senior secured status will ensure no loss under most imaginable circumstances. Still, there’s $8.3mn of investment income in play. We hope that TSLS – which has a very good track record of financing troubled businesses in just the right way – knows what they’re doing where propane assets are concerned.

Roscoe Medical: Update

The medical supplies company Roscoe Medical has been in financial trouble since late 2018 and its debt on non accrual since the IVQ 2018. Back on May 9, 2019 one of the BDC lenders to the company – Saratoga Investment (SAR) – explained that Roscoe faced “both fundamental weakened performance as well as operational issues. While we believe the operational issues have been largely addressed, we expect the company to continue to face headwinds in a competitive industry“. At the time, SAR had written down its second lien debt by (40%). A second BDC – Portman Ridge (PTMN) discounted its position in the same loan by (57%).

On October 10, 2019 SAR discussed its latest results and increased the discount on the second lien loan to (56%). PTMN has not yet reported. An equity stake stake held by SAR has been long ago written down to nothing. However, the BDC did not have much news to report: “There is no real update since we last reported, these marks reflect both fundamental weakened performance as well as operational issues. We continue to work with the senior lenders and sponsors to pursue strategic alternatives in the near to medium term.

We’ve not found any other public information, but the SAR valuation and commentary is not encouraging. Should the company default, $1.25mn of investment income is at risk. Total BDC exposure at cost is $11.9mn, with PTMN having a slightly bigger share.

Sequential Brands: To Sell Brands

On October 14, 2019 Sequential Brands, Inc. announced its intention to explore various strategic options, including a sale of some of its brands. Other alternatives were also mooted including a stock buyback; making an acquisition and “others”, but the sale is the most likely. The Chairman of the company said the decision was triggered by interest expressed by third parties in acquiring some of the company’s retail lines.

We’ve been tracking Sequential for some time and get the impression the Board is putting a good face on a bad situation. As we reported back on May 29, 2019, the company is under-performing financially and highly leveraged – a deadly combination. As noted on April 19, 2019 Sequential already sold two brands, but with little lasting impact. More recently, in another ominous sign, its CEO has resigned and Stifel has been hired to help explore its options.

Something is going to happen here before long but exactly what is unclear, though our money in on an asset sale or a bankruptcy filing. The lenders involved – which includes 4 BDCs and exposure at cost of $292mn – will be very interested in the outcome. All but $13mn of the BDC exposure is held by one of three KS-KKR BDCs, including $61mn by publicly traded FSK. The only unrelated BDC is Apollo Investment (AINV). The $10mn invested in the equity of the company – all by FS-KKR entities – seems a lost cause as Sequential’s stock price continues to reach new all-time lows and currently is a penny stock with a value just $0.27.

More important will be how the 2024 Term debt in which all the remaining BDC exposure lies- currently trading at a modest (3%) discount – will fare. The lenders will be hoping that Sequential will sell assets sufficient to pay off some or all its debt. That could happen, but nothing is for certain in the retail sector these days, so we’ll be staying tuned to what is likely to be a major news story in the weeks ahead, given the size of BDC exposure, and the urgent tone of the proceedings.

ALM Media: Downgraded

On October 9, ALM Media was downgraded by S&P Global Ratings to CCC, from CCC+, on increased refinancing risk associated with upcoming debt maturities in July 2020 and 2021. The issuer’s most current maturity, its B term loan due July 2020 (L+450, 1% LIBOR floor) was downgraded to CCC+, from B–.  The downgrade reflects the increased potential for a liquidity event if there are delays in the refinancing of its debt. The first-lien term loan was quoted around a 94.25 bid today.

There is only one BDC with $22.7mn of exposure, but in both a first lien and second lien loan. That’s non-listed Cion Investment, whose $10mn in second lien debt was already discounted (35%) and remains there when we checked Advantage Data’s real-time market price records today. This company has been on the under-performing list since IIIQ 2017 and does not seem to be likely to return to performing status any time soon. We have a CCR 3 (Watch List) rating.

AAC Holdings: Directors Resign.

On October 1, 2019 4 of 7 directors at AAC Holdings (aka American Addiction Centers) resigned. Shortly afterwards, the SEC warned that the troubled public company was not in compliance with rules regarding the minimum number of audit committee members because of the departures. At the same time, the stock price of AAC continues to plumb new lows, dropping to $0.50 a share at time of writing.

In our minds this more evidence that AAC is close to filing Chapter 11 or restructuring out of court. We’ve added AAC to our Bankruptcy Imminent list (our version of Fitch Ratings Loans Of Concern), and the company is already rated CCR 4.

To be fair, the 2020 and 2023 debt in which several BDCs are invested are publicly traded – as reported by Advantage Data – and the former is trading almost at par and the latter at a (11%) discount, not that much worse than the valuations at June 2019. Nonetheless, if we are right and the markets are wrong ( a tall order admittedly) there is a lot at stake for the 4 BDCs involved with $66.3mn of exposure at cost and valued almost at full value, and with over $7.0mn of investment income involved.

Constellis Holdings: Hires Restructuring Firm

The Wall Street Journal reports on October 9 that defense contractor Constellis Holdingshas engaged PJT Partners Inc. to engineer a plan for restructuring the company’s debt-laden balance sheet, according to people familiar with the matter“. PJT Parners is an investment bank, often used in turnaround work.

Otherwise, the WSJ article has no new information, except a recap of some of the highlights from the most recent financial filings. Some of that data is admittedly dire. We noticed that even after a recent asset sale – the subject of our last post about Constellis – “the company’s liquidity remained tight, amounting to just $33 million of cash and $18 million of availability on a revolving credit facility as of June 30“. That alone should send chills down the spines of anyone concerned about the company.

Anyway, the advent of a restructuring firm and those slim liquidity numbers suggests a day of reckoning is coming – and fast.

We discussed BDC exposure before when we first added Constellis to the under-performing list back in August. Judging by the current market valuations (source: Advantage Data) of the three different loans outstanding in which BDC lenders are involved, the debt is discounted from (8%) to (70%), higher than in June. Thankfully, 90% of of BDC exposure is in the 2022 Term Loan, which is valued the highest even after the news of a prospective restructure. Nonetheless, at current levels – and things could get much worse – potential ultimate realized losses could reach $20mn on the $109mn invested at cost, most of which has not been recognized even on an unrealized basis as of June 2019. Not to mention the loss of investment income, which we’ve previously pegged at $9mn annually.

Unfortunately Constellis has the possibility of being one of the biggest credit hotspots of the fourth quarter (if that’s when the rubber meets the road) for the BDC sector. The prospective damage will be widespread. There are 4 FS-KKR related non-listed funds with $90mn at cost lent to Constellis. OFS Capital (OFS) and Garrison Capital (GARS) and – to a lesser degree – two non-listed BDCs are also exposed.

Elgin Fasteners: Loan Repaid

Once in a while, there’s an under-performing loan story with a happy ending. That’s (mostly) the case with Elgin Fasteners. OFS Capital (OFS) had a $3.5mn Senior Secured Loan to the company that was due in August 2018. That maturity debt came and went, without much feed-back from the BDC as to why. All we knew at the time was that a forbearance agreement was entered into between lenders (this was a syndicated loan) and borrower. We added the company to the under-performing list in the IIIQ 2018 because of the non resolution, and even though OFS valued its position at only a small discount to par.

Scroll forward to the BDC’s IIIQ 2019 10-Q, and we find a “Subsequent Development”: The debt was repaid on October 9, 2019 for proceeds of $3.361mn, resulting in a realized loss, but only a modest one: ($0.122mn). That was in line with the discount taken versus cost by the BDC.

We’ve removed Elgin Fasteners from the under-performers list and OFS shareholders should expect to see the nominal realized loss show up in the IVQ 2019 results. We have no idea what the whole back story that caused a fourteen month delay in getting OFS repaid, but the amount involved does not warrant a full fledged credit post mortem.

Fusion Connect: New CEO Appointed.

The BDC Credit Reporter has tracked Fusion Connect from under-performing to Chapter 11 filing and, most recently, to getting ready to exit bankruptcy, expected by the end of the year.

Now we hear that the existing CEO is departing and a new chief executive has been promoted internally to take that key position on an interim basis. The company will be head hunting for a permanent CEO once Chapter 11 is exited. The new interim CEO will be very busy as he has also been appointed President and COO as the individual wearing those two hats has also resigned.

Given that Fusion will shortly be owned by its lenders, which includes Garrison Capital (GARS) and Investcorp Credit Management BDC (ICMB) – formerly CM Finance – these changes – and those to come – deserve watching. We still rate Fusion Connect a CCR 5 because it’s non-performing but expect to maintain the company on our under-performing list with a rating of CCR 3 (Watch List) once operating normally again. We still have a lot to learn about the ultimate balance sheet of the restructured entity; its strategy going forward – and we see from this news – who will be at the helm long term.

Deluxe Entertainment: Files Pre-Packaged Chapter 11

On October 3, 2019 Deluxe Entertainment Group filed for a pre-packaged Chapter 11. As we had reported on September 4, 2019, the “debt burdened post-production company” had been considering a bankruptcy filing earlier but had chosen instead to undertake a debt for equity swap with its lenders out of the bankruptcy system.

A month later, Deluxe filed Chapter 11 anyway. As before, there will be debt for equity swap with its lenders which will reduce debt by half, and a further cash infusion by the new owners of $115mn. “All lenders will be offered the chance to participate“, say sources to Bloomberg. The decision to choose bankruptcy court after all was agreed to by both sides as a way to speed along the restructuring, which will see the lenders own 100% of the business. Chances are Deluxe won’t be under court protection for long. An October 24 confirmation hearing is being requested.

This means the day of reckoning is nigh for the three BDCs with exposure to the company: Cion Investment, Harvest Capital (HCAP) and TP Flexible Income Fund, with a combined $20.7mn of senior debt. Seems like half that amount will continue to be yield producing in some new loan and the rest written off or converted into equity. What we don’t know how much new capital will be forthcoming from these BDCs to fund the $115mn capital infusion.

For HCAP – the only public BDC in the group – their existing $4.7mn loan at cost, which was performing at June 30 2019 and valued at par, will end the September 30 period in non-performing status and -presumably – written down to some degree. We may have to wait till the end of the fourth quarter 2019 to ascertain HCAP’s total exposure, values and any realized loss.

Finally, we have to wonder why HCAP purchased the loan to Deluxe – as recently as March 4, 2019 – when some of the troubles facing the company must have been on the wall ? Was it a deliberate strategy or poor credit underwriting ? (The other two BDCs have been lenders for a much longer period).

Murray Energy: Lenders Agree To Forebear

On October 2, 2019 coal producer Murray Energy announced by press release its intention not to pay principal and interest payments due on September 30, 2019. However, the company was also able to announce a majority of lenders under its most senior loan agreements agreed to “forbear”, or hold back from acting on the upcoming payment default. This is not much to write home about as the forbearance only lasts till October 14. We assume – as we wrote in an earlier update – that Murray will be using the extra time on the clock to complete its ongoing negotiations with stakeholders in an effort to keep from falling into involuntary bankruptcy proceedings.

For the 6 BDCs with $52.4mn invested at risk, this development does not move the valuation needle but suggests that some sort of resolution will be coming shortly. Very shortly. Judging by what little we know that will mean some sort of Realized Loss is likely, which is why Murray Energy is rated CCR 4 (Worry List), and could be at CCR 5 (Non Performing) within a fortnight. Back on September 13 we wrote that we expected to hear more about Murray Energy “before long”. After the latest news, the same prediction continues to apply.