Borden Dairy: Seeks Merger With Dean Foods

We wrote extensively about Borden Dairy when the milk giant filed for bankruptcy back in December 2019. At the time there were many unresolved items as management chose to proceed with a filing without the agreement of its lenders, so there was no tidy restructuring package pre-agreed to light the way forward. In the interim there has been much maneuvering between the stakeholders in and out of court, but still no exit plan is in place. Now the bondholders of the company and those of Dean Foods – also in Chapter 11 – want to merge the two companies. This is occurring even as Dean is well on its way to merging – in a $433mn deal – with a dairy co-operative. As the Wall Street Journal reports, there are anti-trust issues still plaguing that transaction.

So, the Borden and Dean bondholders are promising – sort of – to invest $1.0bn in new capital in this tie-up of two bankrupt companies. We’re not here to handicap the chances of Dean’s current deal falling apart and Borden having the chance to step up. We’re writing to point out that IF that should happen BDC exposure is likely to grow from its current $171mn level to an even higher number if FS KKR Capital (FSK) and FS Investment II are part of that $1.0bn new financing.

Obviously, the BDC lenders will argue that it’s not good money after bad, and will keep them from writing off even more if the Dean deal slips away. How much that might be is unknowable after months of no resolution. Neither the BDC Credit Reporter nor anyone else can really handicap those odds. We should learn relatively soon,though, if this “hail mary pass” from the Borden/Dean bond holders will change the narrative as the judge will – presumably – want to adjudicate on the original transaction before long. We’ll be getting back to readers when any kind of decision is made.

Pure Fishing: Downgraded by Moody’s

Pure Fishing is a leading seller of “fishing tackle, lures, rods and reels with a portfolio of brands that includes Abu Garcia®, All Star®, Berkley®, Chub®, Fenwick®, Greys®, Hardy®, Hodgman®, Johnson™, JRC®, Mitchell®, Penn®, Pflueger®, Sebile®, Shakespeare®, SpiderWire®, Stren®, and Ugly Stik®”. On April 21, 2020 a trade publication reported that Moody’s had downgraded the company’s credit rating to Caa2. Some of the company’s metrics mentioned were truly worrying, including the projection that leverage might be headed north of 13.0x in fiscal 2020 and that the business is generating negative free cash flow. The main source of liquidity is drawing on a $125mn Revolver, but that can only go so far before something bad happens.

The BDC Credit Reporter had already added the company to its Underperformer list from the IIIQ 2019 with a Corporate Credit Rating of 3. This last downgrade, and the obvious impact on a business like this from Covid-19, are sufficient factors to downgrade the company further to CCR 4. At the same time, we’re adding Pure Fishing to the Weakest Links list, as a bankruptcy or restructuring look more likely than not in the short term. It’s not like market conditions will be materially improving any time soon…

For the two FS Investment KKR BDCs with second lien debt due in 2026 this could presage a painful credit reversal. At year end 2019 total exposure at cost was in our Major category (i.e. over $100mn), with FS KKR Capital (FSK) with $80.3mn at cost and FS Investment II with $45.5mn. At year end 2019 the discount at FMV from cost was only modest: (12%). We can’t say for sure, but we’d expect the current discount to be two to three times higher. In fact, in a worst case, we could readily see the junior debt fully wiped out in a bankruptcy or restructuring. Also gone would be about $7.0mn of investment income.

Given the size of the BDC exposure, we’ll be paying more than usual attention to what happens to Pure Fishing. Some idea may come from FSK’s May 2020 results and Conference Call. In any case, whatever valuation ascribed by the BDC – who can be unduly optimistic – this is a credit problem that could take some time to play out.

Academy, Ltd: Downgraded by Moody’s

We heard on April 19, 2020 that Moody’s had downgraded Academy, Ltd (dba Academy Sports) to a Caa2 rating from a Caa1. The outlook is Negative. Nothing very surprising given that the company is a retailer of sporting goods at a time when most of its customers are sheltering in place and sporting activities are greatly limited. Academy , in any case was already on the BDC Credit Reporter’s Underperforming list since IVQ 2018 and has a Corporate Credit Rating of 4. Our rating remains unchanged with this new rating step down by Moody’s but we’re reassured enough by word that the company has $649mn in cash as of February 2020 not to add its name to our Weakest Links list of soon-to-be defaulting borrowers. In this regard we may slightly less conservative than Moody’s, not a situation we’re accustomed to.

In any case, BDC exposure to Academy Ltd consists of just one non-listed player – Cion Investment – with $12.6mn at cost in the 2022 Term Loan. At year-end 2019 that was discounted only (7%). According to Advantage Data, this syndicated loan was trading at a (37%) discount on April 24. That suggests the BDC will be recognizing a material unrealized loss in the IQ 2020. There’s $0.7mn of investment income in play here but – as mentioned – no immediate sign that there’s a danger of interruption.

How companies like Academy perform going forward depends largely on that great unknown – the length and the breadth of the Covid-19 disruption. If we get back to something akin to normal by the summer, odds look good for no further deterioration. If we’re all hunkered down for months more, or there’s a second wave of closings, then matters could get worse.

Bellatrix Exploration: Assets Sold

The long and winding road for Canadian oil and gas company Bellatrix Exploration seems to have reached an end. In a press release on April 24, 2020 the company announced its sale to a subsidiary of Return Energy Inc. “for cash consideration of $87.4 million plus the assumption of certain liabilities at closing”.  This follows a sales process conducted under court supervision in Canada. The BDC Credit Reporter has been writing about Bellatrix since June 2019 when the company completed a restructuring. That didn’t take and Bellatrix was in bankruptcy from December 2019. For all our articles, click here.

You’ll see that since the last time we wrote BDC exposure – all in the FS KKR platform – has increased from $96mn to $111mn. We don’t have the details, but we expect that the incremental monies where a Canadian version of debtor in possession financing and the new monies will likely be repaid in full. Overall, we expect that the three related BDCs involved (which includes publicly traded FS KKR Capital or FSK for a modest amount ) will write off ($96mn). That’s the amount in junior debt and equity owned. However, we’ll need final confirmation when the BDCs involved (which also includes FS Energy and FS KKR Capital II– both non listed) report results, either in the IQ 2020 or the IIQ.

Time for a post mortem, although we may be getting ahead of ourselves and may be unfairly exaggerating the losses the FS KKR organization will be booking. Still, this unfortunate episode does underscore one of the BDC Credit Reporter’s favorite mantras which all BDCs should repeat to themselves regularly: don’t lend or invest in the oil and gas industry. It’s a simple enough dictum and one that many other lenders have learned the hard way in the last 50 years.

We’ve been around since the oil price first jumped up after the Arab oil embargo in 1973 and seen the devastation caused by non-specialized lenders trying to convince themselves that with enough collateral; hedges; field diversification etc. a “safe” loan structure can be arranged in what has proven to be the most cyclical industry one could possibly imagine. KKR will justly point out that this was a credit inherited from GSO Blackstone, which was very bullish on the energy sector before everything fell apart in 2014. Nonetheless, the damage to all 3 sets of shareholders KKR is now in co-captaincy of is severe and – from our perspective – unnecessary.

Whiting Petroleum: Restructuring Negotiated

Bankrupt Whiting Petroleum Corporation has negotiated a standard debt for equity swap. As spelled out in a press release, the company will be exchanging over $2.3 billion in debt for a 97% equity interest in the oil and gas explorer. Existing equity investors in the public company get to keep the remaining 3% and the opportunity to subscribe for more.

There is only one BDC with exposure, specialist non-traded BDC FS Energy & Power. The BDC has invested $5.2mn in the 2021 subordinated bond that is being swapped out. At 12/31/2019 the value of the position was discounted by only (2%). With this resolution, we expect FS Energy will take a realized loss of up to (90%), based on what the 2021 debt is trading for in the bond market. Lost is ($0.310mn) of investment income, but there may be some remote hope that whatever speck of a restructured Whiting Petroleum the BDC holds onto will be worth something one of these days. The company remains technically non Performing, until the bankruptcy court blesses the restructuring plan. However, given the certainty of that outcome, we’ve already upgraded the investment to performing status.

However, because the investment in Whiting is now non material by our standards, we’ll be discontinuing coverage once we see the final FS Energy & Power treatment in the IIQ 2020 results.

Hertz Corp: Restructuring Underway

We hear from Reuters on April 23, 2020, in an exclusive, that Hertz is in financial trouble because of Covid-19 and has hired restructuring advisers. All this from the ever reliable “people familiar with the matter”. The publicly traded car rental conglomerate has $17bn in debt, and the burden – given the market conditions – is “unsustainable. The stock price of Hertz has dropped from above $20 as of February 20 to $3.5, close to its low. We believe a bankruptcy filing is possible.

You might imagine that there would be no BDC exposure to a company as huge as Hertz, but the sector is very far from its roots lending to small companies with little access to the capital markets as the Congress first envisaged in 1980. The BDC involved here is Barings BDC (BBDC), which has $5.8mn in Hertz Corp’s 2023 Term Loan which is priced at just LIBOR + 275 bps. When this position was first booked in the IIIQ 2018, the idea was to invest in the safest companies in the leveraged debt markets. Like in the Great Recession what seemed as safe as houses in the expansion does not when the tide goes out.

At 12/31/2019 BBDC valued the investment at a slight premium to par. Now the loan trades at a (30%) discount, according to Advantage Data which tracks prices constantly. This could yet go lower. Moody’s is projecting the company could run out of cash by the end of the second quarter. That’s only 8 weeks away…We are leapfrogging the Hertz Corporate Credit Rating from CCR 2, which is “performing” to CCR 4, where we expect the odds of an eventual loss are greater than that of full recovery. We are also adding Hertz to the Weakest Links list of companies likely to drastically restructure or file Chapter 11 – essentially the same thing.

This is not a major exposure for BBDC and the income involved is modest thanks to the borrower favorable pricing but this story is a useful early reminder that a great deal of companies thought to be unimpeachably reliable sources of interest income may not be. If Hertz is making its way down this slippery hill, who is next ?

Broder Bros: Layoffs Announced

We learn from a list of layoffs in the Fresno area that Broder Bros (aka Alphabroder) had to let 253 people go due to Covid-19 closures. Another major shipping location in Pennsylvania has also been shut down since March. This is happening only a few weeks after the company was the target of a hacker ransomware attack and was forced to pay up. More fundamentally, the huge promotional products company must be facing sales and profits challenges in this period with most of its corporate clients closed down, and their own fulfillment centers shuttered. Out of an abundance of caution – that again – we are moving the BDC-financed company to the Underperforming list with a Corporate Credit Rating of 3.

This is a Major exposure for the BDC sector with $201.9mn invested at cost – all in the company’s 2022 Term Loan. The BDCs involved are headed by Prospect Capital (PSEC) with $172.8mn at cost; followed at a great distance by PennantPark Investment (PNNT) with $27.1mn. Non-traded Flat Rock Global has a minimal $1.9mn stake. There’s about $20mn of annual investment income at play here. To date, the debt has been valued at par through IVQ 2019 and interest has been paid on time. It goes without saying that an ultimate downgrade to non–performing would be disastrous for PSEC. Broder Bros is the BDC’s 4th largest single position in a portfolio filled with large exposures.

This is a private company, owned for years by LittleJohn & Co and public information is hard to find. PSEC has been lending to the company since 2013 but has not mentioned Broder by name throughout that time. PNNT has one reference in its conference call transcripts – back in 2016. Nonetheless, given the size of the exposure to PSEC (12% of the BDC’s market capitalization as of time of writing), this company’s progress is worth watching.

California Pizza Kitchen: Seeks To Restructure Debt

When we last wrote about California Pizza Kitchen (“CPK”) in December of last year, we said the following about the company and the sector in which it operates: “We will say that we’ve been concerned about negative trends in the restaurant sector since late 2018. We’re not yet at the “apocalypse” phase attached to anything in the retail sector, but there are several secular trends …that even the best and the brightest restaurant chains are having trouble working through. When you’ve got debt to EBITDA levels of 7x or more – as is the case with CPK and many others – the room for maneuver before a restructuring becomes necessary is limited“. We rated CPK a Corporate Credit Rating of 3.

Of course, in the interim we have moved into an “apocalypse” phase for eateries. Not surprisingly, an already weakened and highly leveraged CPK is not faring well. According to the Wall Street Journal on April 23, 2020 , the company has hired restructuring firm Alvarez & Marsal Holdings LLC, along with Guggenheim Partners, to facilitate deal talks with its lender. On the other side the lenders have hired FTI Consulting Inc. and Gibson, Dunn & Crutcher LLP to represent them legally. Now we know – at least – that big fees are going to get paid out by the company…

The situation is very serious, with the two Term loans in which $48.2mn of BDC exposure is invested – one maturing in 2022 and the other in 2023 – are trading in the syndicated markets at discounts of (65%) and (85%) respectively. Not to beat about the bush, we project that a drastic restructuring or a Chapter 11 filing is imminent. We are downgrading CPK to a CCR 4 rating and adding them to our Weakest Link list of companies we expect to shortly move to non accrual.

For the 6 BDCs involved that will mean – if not already happening – an interruption of over $4mn of annual investment income and potential realized losses of ($30mn-$40mn). Unfortunately, the challenges facing eat-in restaurants are not going away any time soon and the delivery business cannot make up for the switch up in how customers feed themselves.

The biggest BDC exposure in dollar terms is that of Main Street Capital (MAIN), with $14mn in the first lien 2022 Term Loan. Capital Southwest (CSWC) and Monroe Capital (MRCC) are also holders of the 2022 loan. However, likely to take it most on the chin from a write-off standpoint are Capitala Finance (CPTA) with $4.9mn invested at cost and Great Elm Corporation (GECC) ($4.0mn) , which are both in the 2023 second lien debt. If past is prolog, the chances are high a complete write-off is in the cards for the 2023 Term Loan holders. (GECC also holds a position in the first lien). We expect some sort of debt for equity swap will be the ultimate resolution as CPK continues to have a viable – albeit shrunken business model. We’re getting ahead of ourselves, though, and will wait to hear how the dueling advisers hash out a plan for the restaurant chain.

CityMD: Draws On Revolver

S&P Market Intelligence – bless them – are keeping track of when leveraged companies are drawing on their Revolvers, at a time when i) having a Revolver is a Good Thing ; ii) drawing down funds is both reassuring and worrying. Mostly the latter. Anyway CityMD, a healthcare company, has drawn $50mn on its $150mn Revolver line.

To date, the company has been rated CCR 2, but we’re using this opportunity to add CityMD to the Underperformers list out of an abundance of caution. (That’s a term we’ll be over-using the months ahead). The hospital – which undertook a mostly debt financed merger in the summer – must be in the line of fire given what’s happening to all health care companies, and especially due to its being located in New York. Reasons enough to worry and downgrade to a CCR 3. Still, the company was rated B- after the merger by S&P itself. (BTW, that’s a high corporate credit rating in our neck of the leveraged loan universe).

The only BDC with exposure is THL Credit (TCRD), which only booked its position in the 2026 Term Loan in the IVQ 2019. That seems to have been part of the BDC’s attempt to reposition itself in “safer” credits. This loan only pays LIBOR + 450 bps. We’ll have to see if that pays off in this situation.

Serta Simmons Bedding: Downgraded By S&P

Serta Simmons Bedding which is a major manufacturer of…beds, has been downgraded by S&P to CCC-. The outlook is Negative. The 2023 Term Loan that trades in the debt markets is discounted nearly 60%. The ratings group is worried about liquidity and weak operating results.

For our part, we have the well known company rated at a Corporate Credit Rating of 4, as discussed in our earlier articles dating all the way back to August 19, 2019. Obviously, we’d not anticipated the current situation at the time, but the likelihood of the company climbing back up the 5 point rating system to performing status seems ever less likely.

The only BDC with exposure remains Barings BDC (BBDC), which took on this apparently “safe” borrower back in the IIIQ 2018 as part of its “safety first” strategy on becoming a public BDC following the acquisition of Triangle Capital. That’s not working out as planned here, with the $3.9mn in debt exposure at cost in the 2023 loan was already written down by (19%) at year end 2019. If the value remains unchanged, the three quarter of a million dollar unrealized loss could triple, or worse. Not a huge position because – thankfully – BBDC also chose to build a very “granular” defensive portfolio which may yet serve them well. Serta Simmons, though, looks like an almost certain loss maker.

Le Tote: May File Bankruptcy

We only initiated coverage on Le Tote three days ago. The virtual retailer which acquired Lord & Taylor was laying off its employees en masse as is the fashion at the moment in retail. Now, “people familiar with the matter” indicate the company with the French name and the unusual strategy (getting back into brick and mortar) is considering filing for Chapter 11. There are other alternatives, such as raising additional capital. Nine times out of ten, though, when bankruptcy is mentioned as an option, you can be pretty sure it’s the likely outcome.

This might mean a big loss – or even a complete loss – for the 3 BDCs involved. See our prior article for more of the details. The potential Biggest Loser would be Carlyle’s non-traded BDC TCG BDC II, with 75% of the exposure. Next is the public Carlyle BDC with the ticker CGBD with the remainder, as the Horizon Technology (HRZN) equity stake is non material.

We are downgrading Le Tote from CCR 3 to CCR 4 as a loss of some magnitude is now all but certain. We are also adding the company to our “Weakest Links” – those companies where a bankruptcy filing or restructuring seems imminent. They don’t last long on this list:

If a Chapter 11 does occur, we will learn where the second lien lenders stand. Maybe the two Carlyle BDcs will end up with equity in a restructured Le Tote…

Horus Infrastructure: Downgraded To CCR 3

Given the unprecedented turmoil in the U.S. energy industry, the BDC Credit Reporter is pro-actively looking at all BDC-financed companies, including those still carried as “performing” from a valuation standpoint.

Horus Infrastructure (dba OilField Water Logistics or OWL) “is a leading provider of midstream water infrastructure and services to the energy industry in Texas, New Mexico, Colorado, Utah and Wyoming, with offices in Midland, Denver and Dallas. OWL is an established leader in the Permian Basin and owns and operates the largest commercial produced water gathering and transportation system in the Northern Delaware Basin. For more information about OWL:”

The company was acquired in October 2019 by InstarAGF Management. According to Investcorp Credit Management (ICMB) – the only BDC with exposure – the undisclosed purchase price was funded two-thirds with equity and only one-third by debt, as the new owner has future expansion plans. ICMB’s exposure at cost is $4.5mn in $5.0mn of debt and is valued at $4.5mn. Reflecting the perceived lower risk the 10/25/2022 Term Loan is only priced at LIBOR + 350 bps.

We’ve done some research and both the company and the sector in which OWL operates appear to be critical components in the energy industry and the low leverage of the transaction is encouraging. Nonetheless, given that trade publications and the Kansas City Fed are projecting a huge increase in the number of oil producers going bankrupt and a massive drop in oil production, we cannot believe a supplier like OWL will remain immune. We’ve found nothing in the public record about latest impact but are still downgrading the company to Underperforming, with a Corporate Credit Rating of 3.

We will learn more from the ICMB IQ 2020 results and in future periods. In line with our new approach – copied from the new “Current Expected Credit Losses” (CECL) policy being required of banks – we’re taking a provision of 20% or ($0.9mn) for potential losses for this credit. It’s just a swag at this point. We’ll adjust as better information comes in. To assume no losses – the favorable capital structure notwithstanding – would be unrealistic at this juncture.

Montreign Operating Company: Debt Repaid ?

A few months ago, the Montreign Operating Company, which owns and operates a major upstate New York casino called Resorts World Catskills, and which is an indirect subsidiary of Empire Resorts Inc, was on the verge of bankruptcy. We wrote about the liquidity challenges the business faced at the time. Since then, much has happened. First, one of the partners in Empire Resorts – a Malaysian gaming company called Genting Malaysiabought control of the portion of the business not owned for $129mn. Here is a synopsis of the complex transaction:

As of August 18, Kien Huat Realty III – the family trust of Lim Kok Thay, a businessman who is the controlling shareholder of the Genting group, a Malaysia-based casino and plantations conglomerate – held approximately 86 percent of the voting power of Empire Resorts’ capital stock, according to a filing by the American firm. Under the operation announced in August, affiliates of Kien Huat Realty III and Genting Malaysia additionally plan to acquire the outstanding shares held by Empire Resorts’ minority shareholders, for US$9.74 a share. The deal would lead to the privatisation of Nasdaq-listed Empire Resorts via a joint venture between Genting Malaysia and Kien Huat Realty III

Then Covid-19 came along and in March, the casino was closed. The new owner raised additional monies to support working capital needs. Now we understand that the company’s 1/24/2023 Term Loan has been repaid and Moody’s has withdrawn its CCC rating, based on a April 17, 2020 report by the ratings group. This – if correct – would be good news for the 4 BDCs with exposure to Montreign/Empire , all of which is in the said Term Loan. That debt was valued between 0% and a (15%) discount at year end 2019 by the BDCs involved and was rated CCR 4 by the BDC Credit Reporter.

At a time when BDCs are taking losses left right and center and are anxious to de-leverage their portfolios with borrower repayments, this could be good news for non-traded Business Development Corporation of America; PennantPark Floating (PFLT); Investcorp Credit (ICMB) and PennantPark (PNNT) – in descending order of the $74mn invested at cost. We’ve checked as closely as we can, but we’ll need final confirmation from the BDCs involved at some point. We won’t be removing the company from the Underperformers list till we’re certain but the odds look good that we’ve got some good news to report.

Neiman Marcus: May File Bankruptcy

“People familiar with the matter” are predicting this is the week retailer Neiman Marcus finally files for Chapter 11. Admittedly, this has been predicted before, as in our earlier article about the company on March 27. The difference this time is that the already beaten up luxury retailer has had to furlough essentially all its employees since March 30, and with no end in sight.

For BDC watchers the question then and now remains how the only player with exposure – TPG Specialty (TSLX) – is going to fare in an economic environment that must be worse than any worst case scenario considered when the BDC first invested in an asset-based financing to Neiman in the IIIQ 2019. Miraculously, TSLX has managed to extricate itself from some of the worst performing companies without a financial scratch in recent years. However, we’re increasingly worried that may not be the case this time given the almost shut-down of retail and the general consensus that only a further catastophe will follow the long playing retail apocalypse.

We have added Neiman and the $71.9mn invested by TSLX to the Underperformers list. It’s a testament to TSLX’s track record that we do so with trepidation even as Neiman teeters on the brink. We’ll have to wait now till the filing occurs and some dust settles before ascertaining how this turns out for the BDC which was still carrying its position at par at 12/31/2019. The TSLX conference call in May could be a time for revelations. Or not, if matters are not then settled.

Centric Brands Inc.: May File Bankruptcy

According to news reports, Centric Brands Inc. has hired restructuring advisers and is considering a Chapter 11 filing. As always, we know this “from people familiar with the matter”. That’s most likely the borrower, or the borrower’s many professional advisers, whispering down the phone line. Centric designs and manufactures apparel under licensing agreements from brands. A debt load of $1.4bn needs to be restructured. Public shareholders appear to have given up already. The stock trades at $0.77.

The BDC Credit Reporter initiated coverage with a CCR 3 rating back in late December 2019. As you’ll see from a quick reading, we’d reviewed the company’s filings and were already deeply worried before Covid-19 struck. Now a move down to CCR 5 – non performing – status seems all but inevitable. For the moment, we are downgrading Centric to CCR 4, but don’t expect that to be for long.

BDC exposure since we last wrote continues to be “Major”: i.e. over $100mn. At 12/31/2019 there was $123mn invested at cost by three BDCs and an FMV of $113.1mn. Most at risk of loss remains Ares Capital (ARCC) whose $24.6mn invested at cost in the company’s equity is looking fragile. The leading BDC also holds a $57.8mn position in the First Lien 2023 Term Loan, along with TCW Direct and Garrison Capital (GARS). In a bankruptcy we assume there’ll be some kind of debt for equity swap and a haircut will be taken. Judging by year end 2019 valuations from all three BDCs, any loss will be minor as the debt was still valued at par. We remain much more skeptical just by looking at the enterprise value of the business before Covid-19 came along, let alone now.

We will learn more shortly most likely and will come back with a better assessment of what ultimate BDC losses are likely to be.

OEM Group: Written Down By Lender

THL Credit (TCRD) is the only BDC lender, and a control investor in OEM Group Inc. On April 20, 2020 the BDC, in a Shareholder Letter mentioned that its investment in the company had been written down by ($0.30) per share, or approximately ($9.0mn) in the IQ 2020. Furthermore TCRD said: “We took aggressive action in the first quarter to manage the cost structure at OEM to position it well to preserve value at the current price“. OEM is a Phoenix, Arizona semiconductor capital equipment provider,

The BDC Credit Reporter already had the company on its Underperformer list since IQ 2018, with a Corporate Credit Rating of 3. Management of TCRD has been waxing optimistic about the OEM’s prospects for some time, and mentioning a possible disposition of the $52.7mn invested in debt and equity in 2020. We’ve had our doubts given a look at the company’s financial statements (included in the TCRD 10-K) and lower valuations of late. At December 31, 2019 the overall OEM investment was valued at a discount of (33%) already.

The Covid-19 crisis appears to have seriously affected the company, but detail;s – besides that writedown – are sparse. However, that’s enough to downgrade OEM Group one notch further to a CCR 4. We’re not placing the company on our Weakest Links list yet, awaiting the May 2020 earnings release update. That would be an ominous move for TCRD as the debt – priced at LIBOR + 950 bps – earns annual investment income of $4.8mn annually, more than any other company in the BDC’s portfolio. We will circle back after TCRD eleases earnings and holds its conference call on May 8.

DTI Holdco Inc: Downgraded To CCR 4

We’ve downgraded DTI Holdco Inc. (dba Epiq Global) to a Credit Corporate Rating of 4. The huge legal services company was first added to the Underperformers list in the IVQ 2019 with a CCR of 3. Since then, Moody’s downgraded the company in mid-March to Caa2 from B3. The ratings group was concerned about liquidity and worsening business conditions from a ransomware attack that later caused large layoffs. The traded debt of the company is now marked at a (25%) discount).

The company has over a billion dollars in debt outstanding. However, BDC exposure is modest. Ares Capital (ARCC) has invested $9.3mn, mostly in equity but also in debt. Carlyle’s TCG BDC (CGBD) and non-traded CGBD II are in the 2023 First Lien Term Loan that is being discounted by 25%. We don’t foresee any payment default any time soon, but will need watching. Should conditions in the economy – and in legal services normalize – the company is likely to recover.

Le Tote: Company-Wide Layoffs

Le Tote Inc. is an apparel rental company that, in an unusual twist, purchased brick & mortar Lord & Taylor late in 2019. The idea then was to have both a virtual and a physical presence, and possibly end up with an initial public offering. Covid-19 has now laid those plans low and on April 1st, 2020 the company decided to close down all its physical locations. As we hear from trade reports, this included large layoffs throughout the company. Exact numbers are not known. As a result, we are adding Le Tote to the Underperformers List with a Corporate Credit Rating of 3.

The only BDCs with exposure are the TCG BDC funds (CGBD and CGBD II), which have exposure to the second lien added in 2019 to fund the Lord & Taylor acquisition; as well as Horizon Technology Finance (HRZN), which has a tiny ($63,000 at cost !) equity investment, reflecting Le Tote’s venture-background. At year-end 2019, the Carlyle CGBD/CGBD II exposure of $28mn (mostly held by the latter) was valued at par. The equity was valued at a nice premium. All of that is likely to change with sales dropping and with the about face in strategy in what was already – reportedly – a company not yet profitable.

Given that the Carlyle positions are in second lien and that anything with the word retail attached is worrisome at this time, we could be shortly downgrading Le Tote further. However, there is very little public information about the company’s financial condition, so we’ll wait to see what CGBD – and to a lesser extent – HRZN do in terms of valuation or disclosure when reporting IQ 2020 results.

We do question why Carlyle jumped at the opportunity just a few months ago to invest in the retail sector and in a strategy that – apparently – was highly controversial. We understand the many BDCs which have or had retail exposure that dated back to before the internet triggered the “apocalypse” that we’ve been living with for several years. It was hard to imagine even a few years ago that much of the way we shop – and with whom – would alter drastically. In this case, though, Carlyle added these debt positions – and in a junior position too – only in the IVQ 2019. Now $2.5mn of investment income is at risk of being interrupted or being completely lost.

Barnes & Noble Inc. : Added To Underperformers

The BDC Credit Reporter is adding Barnes & Noble Inc. – the iconic bookseller – to the Underperformers list. We’ve noted that the company’s 2024 Term Loan is trading at around 80 cents on the dollar. Moreover, most bookstore locations are closed during Covid-19, which cannot be good for the bottom line and the ability to service debt. We are initiating the company at a Corporate Credit Rating of 3.

There are two related BDCs with exposure – recently booked – to the company: Carlyle’s TCG BDC (CGBD) and its non-traded twin CGBD II. (No one can accuse Carlyle of a fanciful BDC naming policy). As of year end 2019, total exposure – all in the 2024 Term Loan – was $34.4mn and valued at par and equally divided between the two BDCs. There is $3.1mn of investment income potentially at risk. We’ve not learned much, though, from the public record about Barnes & Noble’s financial condition, so we’ll revisit the CGBD valuation when IQ 2020 earnings are released in May.