BDC Portfolio Company News

Add 24 Hour Fitness Worldwide, the well known gym, to the list of companies considering a bankruptcy filing. That’s the familiar “people familiar with the matter” are divulging. Moreover, Moody’s has downgraded the company and its debt ratings; the gyms are still closed and 24 Hour Fitness has only $1mn in cash. Frankly, Chapter 11 seems inevitable. In fact, looking back to our initial post on the company’s troubles in November 2019, we were projecting Chapter 11 back then, way before Covid-19 came along. The company is on our “Weakest Links” list.

For Barings BDC (BBDC) – the only BDC with exposure – the likely loss will be 70 cents or more on the dollar on the $4.7mn invested at cost in the company back in IIIQ 2018, or ($3.3mn). At that time, 24 Hour Fitness seemed a safe bet, as reflected in pricing of LIBOR + 350bps, and for which BBDC paid a premium.

We wouldn’t be surprised if the company actually pulls the trigger this week as there does not seem to be any support coming from either the government, its lenders or moneyed sponsor AEA Investors, whose slogan is “Relationships Matter”. Until they don’t.

ASC Ortho Management Company, which also does business as Washington Spine Institute and OrthoBethesda is a health-care provider of musculoskeletal care to patients in the greater Washington, DC market. Based on a website search, we’ve noted that the company’s clinics – due to Covid-19 – have been discouraging office visits since mid-March and – in all likelihood – postponing all but the most essential surgeries. The company is owned by PE group Atlantic Partners and financed by three different BDCs who have provided a total of $25.7mn of a mix of first lien debt , second lien debt (all in PIK) and equity. At year end 2019 an unused Revolver was also available. The BDCs involved are Capital Southwest (CSWC), as well as Main Street (MAIN) and non-traded HMS Income.

Without much more information than we’ve shared above, we’re adding the company to the Underperformers list on the common sense assumption that revenues will be greatly impacted by the indirect impact of Covid-19. Given that the company is highly leveraged and the BDCs involved have significant amount of junior capital at risk, this might result in a lower valuation at March 31, 2020. We are initiating coverage at a CCR of 3, down from CCR 2. As of IVQ 2019, all the debt was valued at par, but the equity stake was discounted by (24%) for a second quarter in a row.

We will be focused especially on CSWC, which has half the overall exposure, including the riskier second lien ($3.6mn and all paid with PIK) and a sliver of common equity. Reassuring is that the company does have access to the Revolver and the support of a well known equity partner and that there is nothing fundamentally wrong with the business or its long term prospects because of Covid-19. This might well return to performing status in the second or third quarter. We shall see.

Frankly, the BDC Credit Reporter does not want to wait around passively till the next round of BDC results comes out or a development occurs in the public record that causes us to add a BDC portfolio company to our database of underperforming companies. Instead – where we can – we’re pro-actively reviewing companies that were previously performing and sought to determine – even in the absence of tangible information – whether their credit status is likely to have changed with the new Covid-19 situation.

Alliance Sports Group “designs and markets a broad range of branded consumer products known for their innovative designs, unique features, and high quality across multiple product categories in the outdoor enthusiast and active lifestyle market. The Company distributes these products through six different brands: NEBO (flashlights and lighting tools), iProtec (lighting and firearm accessories), True Utility (utility and everyday carry tools), Bollinger (fitness accessories) and WeatherRite and Quarrow (outdoor lighting and fishing accessories)“.

We’re surmising business activity must be greatly curtailed at the current time. Capital Southwest (CSWC) is the only BDC with $12.5mn of exposure to the company, which consists of Subordinated debt and a 3.88% equity interest, both of which were valued very close to par at 12/31/2019. Thankfully, there is a private equity group involved: LKCM Headwater Investments, which bought the company in 2017, which was when CSWC got involved.

Out of an abundance of caution, because of the economic situation; the industries in which the company operates and its reliance on retail customers; as well as the junior nature of the CSWC capital at risk, we’re downgrading Alliance to a Corporate Credit Rating of 3, from a CCR of 2 – Performing. We’ll re-assess when CSWC reports IQ 2020 results and we’ll begin to see if we were unduly conservative or (slightly) ahead of the curve.

S&P downgraded CPM Holdings to CCC+, with a negative outlook. The company ” designs and produces process systems and equipment”. The ratings group is worried about the coming recession (which, apparently, is now a given) and high leverage. Demand is expected to drop and leverage is expected to reach 9x in 2020 and 2021. There’s a first lien term loan and a second lien loan due in 2026.

BDC exposure is tiny, so we won’t be spending too much time on this credit. The only BDC involved is Gladstone Capital (GLAD), which is involved in the $200mn second lien. At December 31, 2019 the company was rated as performing with a Corporate Credit Rating of 2. The position was valued at par. That syndicated loan – according to Advantage Data – is currently trading at a (27%) discount, and continues to move down since March 31, 2020 quarter end. $100,000 of annual investment income is at risk for GLAD. We are adding the company to our Underperformers list, with a CCR 4 rating. CPM is what we’re beginning to call a “leapfrog” credit, jumping down two notches from CCR 2 to CCR 4. At another time we might have moved more slowly to assume a loss is more likely than full repayment, but these are not ordinary times.

Restaurant operator Portillo Holdings has been struggling with huge sales declines associated with you know what. Now, the company has to contend with (justified) downgrades from the rating agencies. S&P has given Portillo a CCC rating with a “negative outlook”. That’s down from B-. Moody’s has arrived at a similar conclusion in late March. Liquidity is a problem along with high leverage and the outlook for sales, even after re-opening, is weak. A restructuring is likely and an “ad hoc” group of lenders is already in negotiations with the company.

There is just one BDC lender to the company: Ares Capital (ARCC). Worryingly, the $32.9mn at cost in the 2024 loan is second lien. At year end 2019, the BDC was carrying the loan at a premium to par, shortly after initiating a relationship in the IVQ 2019. That’s likely to change next time we see a valuation from the BDC. We expect a (10%)-(20%) discount, but these are early days. A second lien loan in a company on the front lines of the current crisis – and which is talking restructuring already – implies we could see an ultimate much bigger loss, and possibly a debt-for-equity swap. There is about $3.5mn of investment income in play, as well.

Expect to see an update sooner rather than later given the fast moving situation and the company’s pressured liquidity. We have added the company to our underperformers list and leapfrogged the credit rating from CCR 2 to CCR 4. We expect to see many more leapfrog credits in the weeks ahead. We’re not yet ready to add Portillo to our Weakest Links list of companies likely to go on non accrual soon, but that could change.

Leading crane company North American Lifting Holdings (aka TNT Crane & Rigging) is seriously impacted by the economic environment spawned by Covid-19. The company missed making an interest payment on its second-lien term loan, but did pay the first-lien debt interest. On April 7, 2020 the second-lien lenders agreed to a forbearance agreement , as this situation continues to play out. Both S&P and Moody’s downgraded the company on the news and reminded us of its poor liquidity; high leverage and multiple business challenges. S&P now rates the first-lien term loan CC. The second lien goes to D, reflecting the default. Given that the company is largely focused on the energy sector, a restructuring and/or bankruptcy seems inevitable.

There are two BDCs with $13.3mn of exposure: Main Street Capital (MAIN) and its non-traded sister BDC: HMS Income Fund. Both seem to be in the syndicated first lien debt, which appears – according to Advantage Data – to be trading at a (43%) discount. That’s much below the pre-Covid discount of (12%). In any restructuring, the BDC lenders could lose two-thirds of their capital advanced and close to $0.900mn of annual investment income. We have downgraded the company from CCR 3, which was applied following the IVQ 2019 result, to CCR 4. A CCR 5 may not be far behind.

We expect to be hearing more shortly as the forbearance cannot last long and – we imagine – the owners and the lenders are in negotiations across the capital structure. Just one more company affected by the Covid-19 crisis and the depression developing in the oil patch. It’s not all oil and gas exploers feeling the pain but all their suppliers as well.

Back in late March 2020 when the debt of Lignetics Inc. – a major wood pellet manufacturer – was trading at a (20%) discount to par, we downgraded the company to underperforming from performing: i.e. from CCR 2 to CCR 3. Since then the debt discount has narrowed, but we are maintaining the 3 rating.

The company has recently raised $70mn in new senior debt financing from Fifth Third Business Capital and from its only BDC lender – Gladstone Capital (GLAD) – to fund a major acquisition that was on the cards before the Covid-19 crisis developed. Shortly after that, the enlarged company had to make entreaties to state authorities in Pennsylvania to be deemed an “essential business”. That eventually occurred and allows the business to operate “normally”, according to recent news reports.

“Now back manufacturing pellet heating fuel for homes and businesses, Energex Inc.—recently acquired by Lignetics, the largest residential wood pellet manufacturer in the U.S.—and all other facilities owned by Lignetics are taking extensive COVID-19 precautions”

This will be reassuring for GLAD which is both a second lien lender and equity investor in the company, with $24mn invested at cost as of December 31, 2019. In January 2020 GLAD advanced $5.5mn more in a mixture of debt and equity. Total annual investment income – given a 12.0% interest rate on the second lien debt – is substantial at approx. $3.0mn. With many mills closing in recent days, Lignetics may not be safe yet. We shall learn more when GLAD reports IQ 2020 results in early May.

We hear that Covia Corp. – “a minerals and materials supplier for industrial and energy markets” – has been engaged in drastic cost cutting in the wake of the Covid-19 crisis “designed to reduce overhead expenses by about $25 million from 2019 levels”. The company had been struggling even before Covid-19 – and lower oil prices came along – due to its status as a supplier to the energy sector.

We initiated the company on the Underperformers list back on January 1, 2020, with an initial Corporate Credit Rating of 3. With the latest news and with the 2025 Term Loan trading at a (55%) discount compared to (22%) at year end 2019, we have downgraded the outlook to CCR 4 from CCR 3. We’re not yet placing the company on our Weakest Links list – companies deemed highly likely to become non performers shortly – but it’s early days yet. The stock it at risk of being delisted from the NYSE and trades at just $0.45. A year ago that was $6.25…

The only BDC with exposure to publicly traded Covia remains Oaktree Specialty Lending (OCSL) with a cost of $7.9mn and a current value probably close to $3.5mn. That means an unrealized loss of ($2.6mn) is likely to be booked at the end of the IQ 2020. Income at risk – should Covia default – is about $0.400mn a year. We’ll check back after OCSL reports IQ 2020 results or earlier if anything new transpires.

Ultra Resources, which owns Ultra Petroleum, appears about to file Chapter 11. The oil & gas explorer announced IVQ 2019 results that included that death knell to solvency: a “going concern” question mark. Also, the company admitted to not having delivered financial results to its lenders and being in default under its financing arrangements. Worse, the press release included the following:

“We expect that we will be precluded from making additional draws on the Credit Agreement unless a waiver is obtained. If we do not obtain a waiver or other suitable relief from the lenders under the Credit Agreement and the Term Loan Agreement before the expiration of a 30-day grace period, an event of default under each of the Credit Agreement and Term Loan Agreement would occur, which would allow the lenders to accelerate the loans outstanding under the Credit Agreement and Term Loan Agreement. At this time, we do not expect to obtain a waiver of this requirement and we do not currently have sufficient liquidity to repay such indebtedness were it to be accelerated”.

There is just one BDC with exposure to publicly traded Ultra Resources, whose stock trades for less than a dime, as we discussed in our prior article: FS Energy & Power. The non-traded BDC has $57.1mn invested in the 2024 Term Loan, with a fair market value of $40.5mn at year-end 2019. The investment has been on the underperformers list since IIQ 2019, with a Corporate Credit Rating of 3. We are downgrading Ultra to a CCR 4 rating, and adding the name to a growing list of (very) likely names to become non-performing. That would cost the BDC $2.9mn in annual investment income. However, some recovery is possible given the senior nature of the debt. The dire state of the oil market, though, does not make us hopeful. We’ll defer any estimate of recovery till we get the dire details from an actual filing.

The drama never ends where coal miner Murray Energy is concerned. The company – in the middle of a bankruptcy process – has fallen out with its lenders and been cut out from all financing at this critical time. That’s what company advisers explained to the bankruptcy judge on a teleconference. The company hopes to borrow $100mn with which to successfully exit from a bankruptcy that dates back to October and which has been made more problematic by the coronavirus situation. For all the BDC Credit Reporter’s prior articles, click here.

The WSJ reported ” Murray described its precarious financial position in an effort to suspend monthly payments it is making to cover retirees’ medical costs. Judge John E. Hoffman Jr., the bankruptcy judge hearing the case, granted Murray’s request, transferring these costs to government-backstopped funds that cover benefits for retired coal miners and their dependents.Murray said the change would save it $6 million to $8 million in cash every month. The company had said it might be forced to liquidate if required to continue making the retiree payments”.

None of this is good news for the BDC lenders who remain exposed to the troubled miner. At December 31, 2010 non-traded Cion Investments and Business Development Corporation of America (BDCA) are on the record as having $15mn in debt positions. That consisted of Debtor-In-Possession (DIP) and pre-bankruptcy debt positions. The latter were non-performing and deeply discounted and the former performing and valued above par at 2019 year-end.

Now, with even the DIP in danger; lenders and borrowers at each other’s throats and with the economic backdrop deteriorating, we have no idea what that debt might be worth, including the DIP. There is a scenario where almost none of the monies ever get returned. At this stage we don’t understand why lenders would consider a debt for equity swap or advance new funds. Given the general unrest maybe creditors will just throw up their hands and take the loss… We will provide an update when appropriate but consider the amounts that could yet be saved too small to make BDC exposure material any more.

E&P company Fieldwood Energy was downgraded by Fitch Ratings from B- to CCC. “Fitch also downgraded the first-lien secured term loan to ‘B’/’RR1’ from ‘BB-‘/’RR1’ and the second-lien term loan to ‘CCC-‘/’RR5’ from ‘B+’/’RR2’. The Rating Outlook was revised to Negative from Stable“. The ratings group is worrying about the company’s liquidity, as its debt facilities are fully drawn, and much else besides.

We’ve not written about Fieldwood before on these pages but have had the name on our Underperformers list since IQ 2019 with a CCR 3 rating. As of year-end 2019, the first lien Term Loan was already discounted (17%) and the second lien by (40%). As of April 15, 2020 the first lien is trading at a (70%) discount and the second at (92%). This does not bode well with the company needing a restructuring or capital infusion.

There are two BDCs with exposure, but nothing too great. The biggest lender is Barings BDC (BBDC) with $10mn invested in the first lien. With both first and second lien is non-traded NexPoint with $2.4mn. In total that $12.46mn at risk. We expect a debt for equity swap is the most likely short term outcome. That would result in the likely write-off of the second lien debt and – using the latest numbers – a two-thirds or greater realized loss for the first lien debt. That will impact the $0.9mn of income being generated here. BBDC will probably have to write-off ($7mn) or more and wait around for some time to see if Fieldwood Energy can find a long term way out of this situation.

We’ve not done a lot of analysis given i) the relatively small amounts involved; ii) the very fluid situation so we offer those predictions only as a rough estimate. There will be a restructuring of some sort soon and we will have an opportunity to take a closer look. At the moment, though, we’ve downgraded Fieldwood to CCR 4 from CCR 3 and we’ve added the name to our growing list of companies we expect to become non performing in the future.

According to a news report Frontier Communications – as long expected – has filed for Chapter 11, after agreeing to a restructuring agreement with its creditors.

For our prior articles about the company click here.

The die is cast for Pace Industries. The PE-owned company which manufactures die-cast parts filed Chapter 11 on April 13, 2020. As in so many other situations, the lenders to the business are standing – cheque book in hand – to undertake a debt for equity swap. According to what we’ve learned, the debt holders will get essentially all the equity in the restructured company for forgiving their loans and will commit $175mn for a debtor-in-possession (“DIP”) financing. A de-leveraged and reorganized Pace Industries hopes to be out of bankruptcy and operating normally by May.

This is likely to be a major disappointment for the only BDC with exposure to Pace: TCW Direct Lending. At year end 2019, TCW had $92mn invested in the 2020 Term Loan to the company and had only applied a modest discount. We had a Performing rating of CCR 2. We now have a rating of CCR 5 – Non Performing. That means TCW is not receiving some $8.6mn of investment income. Furthermore, more capital will need to be advanced if TCW participates in the DIP.

Advantage Data’s Syndicated Loan market price modules quotes the 2020 Term Loan trading at 83 cents on the dollar, suggesting a realized loss of nearly ($16mn) is possible, or even more depending on final terms.

As in so many other situations we’re seeing, Pace was in a weakened state even before the Covid-19 situation came along. The supply chain disruptions from the virus were too great for the company to handle, despite closing plants and laying off 70% of its employees. Faced with a liquidity crunch, the company – despite having high profile owners like Antares and Macquarie – had no alternative but to throw in the towel. Pace – in its recast form – will remain on our Under Performers list for the foreseeable future, but the nature of the investment will be radically different and require a much longer timeline till the final outcome of TCW’s investment – which began in 2015 – can be ascertained.

On April 6, 2020 , publicly traded School Specialty Inc. (ticker: SCOO) reported results for the year ended 2019. Sales were down, big losses to the bottom line were recorded for yet another reason. And that was before Covid-19 hit its school supplies business like a ton of bricks. Now the company is throwing up its hands and negotiating a “debt for equity” swap with its lenders, according to the company’s CEO. Here is what was revealed:

“With the additional complexities of the COVID-19 situation, our process to address our capital structure is exclusively focused on discussions with our current senior secured lenders.  We have recently executed amendments and forbearance extensions that enable those discussions to continue.  While we do not expect those discussions to result in a transaction that provides meaningful value to our shareholders, we do currently expect we will arrive a transaction that will improve our liquidity position and allow our Company to continue as a going concern.”

The only BDC with exposure at 12/31/2019 was TCW Direct Lending, with $33.8mn invested almost completely in the company’s only senior debt which matures late in 2020 (except for a now small asset-based loan). At year’s end that was valued at a small discount and we carried the company as performing with a Corporate Credit Rating of 2.

All of that has now changed. We’re downgrading School Specialty to CCR 4, and shortly to CCR 5. Only a forbearance agreement is keeping the debt from being non-performing. Remarkably, according to Advantage Data market records, the 2020 term debt is trading at 80 cents on the dollar. A glance at the company’s 10-K makes that questionable, so a bigger loss might be coming once all the dust has settled and the company is restructured. Or liquidated. With school in so many places postponed till the summer or autumn, the company may not be able to recover in any format.

This threatens to be a big hit to income for TCW, especially as some of the debt was priced towards the end at 16.75%. If we’ve calculated right, the BDC might have been booking $4.8mn of annual investment income from this position. In any case, we’ll swivel back if and when a final deal is agreed between the company and its lenders.

On March 17, 2020 – according to news sources – Internap Network Services Corp (“Internap”) – filed for Chapter 11. The publicly traded “colocation company” reported assets of $724m and debts of $785m. A restructuring agreement is already in place and – as usual – a debt for equity swap planned. Lenders holding at least 77% of the company’s debt have agreed to supply an additional $75mn in capital and greatly reduce debt outstanding in return for an unstated amount of equity.

We don’t know exactly where that leaves the only BDC with exposure, non-traded Business Development Corporation of America (BDCA). Total investment at cost is $11.8mn in the 2022 Term Loan. At 12/31/2019 that was already valued at (36%) discount. Now – according to Advantage Data – the market value is only 25% – a (75%) discount. This debt might be converting entirely into equity or partly. BDCA may be part of the new $75mn capital infusion, or not. What does seem certain, though, is that the BDC will be writing off about ($8mn) of its capital very shortly, given that the restructuring could be resolved shortly.

On February 13, 2020, we heard that APTIM Corp – an engineering services – company was “slapped” with two new lawsuits. The company is accused of not paying for the work of sub-contractors related to the clean-up after two recent hurricane disasters. The BDC Credit Reporter does not typically write an article every time a BDC portfolio company is sued because we would be posting constantly. However, this is a good opportunity to review our concerns about APTIM and its possible impact on the 5 BDCs involved. The public funds are Main Street Capital (MAIN) and Great Elm Corporation (GECC) and non-listed FS Investment III and IV and HMS Income Fund, which is managed by a MAIN subsidiary. Total exposure – all in the 6/1/2025 Term Loan – is $30.8mn at cost. The latest valuation was at September 30, 2019, and the FMV was just under $25mn. Income involved is approximately $2.7mn annually.

We’ve noticed that the value of the 2025 Term Loan has been declining. According to Advantage Data’s records, the debt was most recently discounted by (43%), suggesting the BDC values of last September will shortly be adjusted downward when year end 2019 results are published. Moreover, it’s worth remembering that the debt has been rated Caa2 by Moody’s since mid-2018.

At this stage we don’t have enough information to predict the company might file for Chapter 11 or restructure or default, but given the above context we would hardly be surprised. We will circle back – if need be – after MAIN reports on February 28, 2020. (GECC does not have an earnings release date yet).

UPDATE: (February 20, 2020) We’ve since heard S&P Global Ratings affirmed its CCC+ rating on the company, but revised its outlook to “Negative” from “Stable”. Seems to confirm that we were right to flag APTIM at this time.

UPDATE: New CEO appointed.

The 2025 Term Loan currently discounted (52%).

Till recently, Calceus Acquisition (aka Cole Haan) was that rarity: a retailer performing well and closing in on an IPO. Now, with Covid-19, the IPO is off and the ratings groups are worrying about declining financial performance as stores are closed and debt to EBITDA shoots up. Moody’s projects EBITDA to drop as much as (40%-60%)  in “FYE May 2020 from the LTM period ended November 30, 2019”. EBITA coverage of interest due could drop to 1.1x. Both Moody’s and S&P have changed the company’s outlook to negative. Still, Moody’s has affirmed the company’s B1 “corporate family rating”. Nonetheless, this is still a moving target given the economic uncertainty.

There is only one BDC with exposure to Cole Haan: Bain Capital Specialty Finance (BCSF), which holds $7mn of the company’s 2025 Term Loan and which was valued at par at year end 2019 before this brouhaha started. Now the debt is trading – according to Advantage Data – at 88 cents on the dollar. Given that and the downgrades and the obvious stresses on the company, we’ve added Calceus Acquisition to the Under Performers list with an initial rating of CCR 3. That means we’re still more hopeful than not no ultimate loss will occur. This may change in the days ahead. A lot can happen in a few weeks when little or no income is coming in. Ask…everyone.