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Black Diamond Rentals: Restructured And Upgraded

Black Diamond Oilfield Rentals was on our Watch List through IIIQ 2018. However, following the release of Alcentra Capital’s (ABDC) IVQ 2018 results we’ve returned the company to Performing status. Details are sparse, but ABDC indicated on its Conference Call that  the private equity sponsor of the privately-held entity injected additional capital into the business. Moreover, the BDC’s debt, which consisted of first lien and second lien, was redirected into a first lien position in the quarter. ABDC accepted lower pricing (L+ 650) versus as high as 14.0% previously. That tool the company off non-accrual and off ABDC’s Watch Lis – and ours too. We also note that MVC Capital (MVC) has also had both a second lien debt and equity in Black Diamond for a year which has remained current and valued at par or above. That debt matures in 2022, two years after the ABDC debt. At 1/31/2019, the small equity stake was valued at a premium to cost, which also figured in our assessment.

Nine West Holdings: Exits Bankruptcy

On March 20, 2019 Nine West Holdings, Inc. (“Nine West” and some of its affiliated entities announced in a press release their exit from Chapter 11 bankruptcy. The company – which has been renamed Premier Brands Group Holdings, LLC is under the  ” majority equity ownership of CVC Credit Partners and Brigade Capital”. The press release describes the company in this way:  “a leading jeanswear, women’s apparel, accessories and licensing company with a portfolio of brands that includes Anne Klein, Gloria Vanderbilt, Kasper, and Napier. The Company is a wholesale partner to major U.S. and international retailers”. Nine West filed Chapter 11 in April 2018, sold off certain subsidiaries and – after a number of delays as the parties argued over terms – were able to reduce pre-petition debt levels by $1.0bn.

The only BDC with exposure is FS KKR Capital (FSK), which inherited the investments from Corporate Capital Trust (CCT), which merged into the BDC in December 2018. CCT had been an equity investor and senior secured lender to Nine West since 2014. Moreover, CCT participated in the Debtor-In-Possession (“DIP”) financing necessary to maintain operations following the filing. CCT’s exposure was part of a much bigger exposure by the combined FS Investment – KKR group, but we believe the initial deal was booked when FS Investment was aligned with GSO Blackstone.  At cost, FSK’s exposure totaled $14.7mn at 12/31/2018. According to Advantage Data records, maximum exposure was $23.2mn in the IIQ of 2018 but much of the original Term Loan, due 3/31/2019 was repaid, possibly from the sale of the assets mentioned above. Currently, the 3/31/2019 Term Loan has a cost of $2.5mn and a FMV and par value  of $2.6mn. The DIP financing has a cost of $5.7mn, a par value of $6.2mn and a FMV of $6.0mn. The valuation may be increased to par now the Chapter 11 exit has occurred and is likely to be reflected in the IQ 2019 FSK results. We are unclear if the Term Loan and the DIP debt will be rolled into the new company and on what terms. The DIP financing is currently only earning L + 375%, below FSK’s target earnings. Finally, FSK has $6.5mn invested in the equity of Nine West Holdings, dating back several years and written down to zero since IIQ 2016. We expect FSK will have to book a Realized Loss for the entire amount now the bankruptcy has ended. However, that should not affect net book value given the investment has already been written down. Not exactly a recovery for FSK, but the giant BDC gets to place this deal in the Resolved column and move on to larger, still ongoing under-performing credits.

Frontier Communications: Refinancing Debt

On March 12, 2019 publicly traded telecom company Frontier Communications (FTR) announced its intention to raise $1.65 billion in “First Lien Secured Notes”,  due in 2027. The proceeds from the new debt will be used – amongst other purposes – to refinance “all outstanding indebtedness under its senior secured term loan A facility, which matures in March 2021”.  Oaktree Strategic Income (OCSI) is the only public BDC with exposure to Frontier Communications, all in the 3/31/2021 term loan A facility. Total outstandings at cost are $2.859mn and were valued at December 31, 2019 at $2.780mn. No date for the closing of the refinancing has been set, which could occur in the IQ of 2019 or the IIQ. OCSI should book an immaterial increase in value and lose an asset earning only LIBOR + 2.75%, or slightly over 5% per annum. This is a recent loan for OCSI, which only began lending in the IIIQ of 2018 under the new Oaktree management.