Began operations in 2012 as CM Finance ( "CMFN"), a publicly listed BDC. In August 2019, the BDC changed its name to Investcorp Credit Management BDC and its ticker symbol to ICMB. Seeks to invest primarily in middle-market companies that have annual revenues of at least $50 million and EBITDA of at least $15 million. Investments typically range in size from $5 million to $25 million.

LATEST: At September 2019, ICMB had total assets at cost of $322mn and at FMV of $301mn. There are 33 companies in the portfolio. We have identified 7 that are under-performing, and 26 that are performing.

There is one company - Fusion Connect - with a loan on non accrual and which is in bankruptcy. A debtor-in-possession loan to Fusion is current.

There are 4 companies rated CCR 4 (Worry List) including 1888 Industrial Services, 4L Technologies, Inc, Exela Intermediate and Premiere Global Services.

There are two companies rated CCR 3 (Watch List) Deluxe Toronto, Ltd. and Montreign Operating Company. (We also include the DIP loan to Fusion Connect in this category).

The BDC's own internal rating system places underperforming assets at $74mn or 25% of the entire portfolio at FMV. The BDC Credit Reporter's equivalent number is $71mn.

Posts for Investcorp Credit Management BDC

Fusion Connect: To Exit Chapter 11

The BDC Credit Reporter has written on four prior occasions about Fusion Connect Inc. ever since the “leading provider of integrated technology solutions” failed to make an interest payment on its debt back in April 2019. Subsequently the company agreed to a debt for equity swap with its senior lenders and filed for Chapter 11 back on June 4, 2019. Those senior lenders were owed $574mn. From today’s announcement, we know $400mn of debt has been written off. Furthermore, some existing lenders have agreed to provide $115mn in an “exit financing loan”. We’re not sure if that rolls up the D.I.P. financing in place or is a new facility.

Back in July we’d anticipated the Chapter 11 exit momentarily, so there’s been some delay. In the interim, the company has appointed a new CEO from within.

With the exit, we are upgrading our credit rating to CCR 3 (Watch List) from CCR 5 (Non Performing). We’ll be keeping Fusion in our BDC portfolio company Under Performers database until we learn a good deal more about the company’s long term prospects with its new manager and balance sheet. For the two BDCs involved Garrison Capital (GARS) and Investcorp Credit Management (ICMB), with at least $20.3mn in exposure, a day of reckoning is now nigh. The BDCs should be writing off a portion of the 2023 Term Loan they hold in the IQ 2020 results. Based on the current market value of that debt, we expect a third of the position may be written off. The small DIP positions the two BDCs have is likely to be repaid or continue in the unspecified “exit” facility.

Even at this interim stage, this is a material blow to both BDCs, with ICMB with the greatest exposure on the 2023 Term Loan-turned equity, with $11.4mn at cost and a likely Realized Loss of over ($3mn). GARS has $7.4mn invested at cost in the 2023 debt, but had not taken as big a discount as ICMB last quarter in valuation terms (27% versus 34%). As a result, GARS might have to take an incremental unrealized loss before booking its realized loss of over ($2mn). All the above is just speculation because BDCs have wide latitude on how to value these investments gone wrong and converted into different security types. Undeniably, though, both BDCs will permanently lose much of the $1.8mn of investment income being generated before everything went wrong.

A final word. As Advantage Data’s records show both BDCs got involved in lending to the fast growing (i.e. risky) technology company only in the second half of 2018. ICMB joined the lending group in the IIIQ 2018 and GARS started a quarter earlier. By the IQ 2019, the company was in trouble due to its inability to successfully integrate two major acquisitions and the debt went on non accrual. That’s a very brief period to go from performing credit to non performing. Hopefully for both BDCs the company’s future performance – and the stock that they now own – will offset these early reverses.

GEE Group: IIIQ 2019 Results Published

On occasion, there are credit evaluations where the BDC Credit Reporter differs in its assessment materially from the BDC’s internal evaluation and even from that of the market. This is the case of public recruitment company GEE Group (ticker: JOB). The only BDC with exposure is Investcorp Credit Management (ICMB), which has $11.3mn invested in the company’s 2021 Term Loan. ICMB at September 30, 2019 valued the debt at par. The loan is itself publicly traded and is priced currently at or above par.

The BDC Credit Reporter, though, does not share the complacency about the value of the debt and its repayment in fifteen months. Given that GEE is a public company, we’ve been reading the quarterly filings regularly, which indicate a slow, but definite, downward business performance. We’ve just reviewed the latest 10-K for the year ended September 30, 2019, which only confirmed our earlier concerns. Sales were down, Adjusted EBITDA was down and the latter was insufficient in the last quarter of the fiscal year to even cover interest expense. Net Losses on a GAAP basis were ($17.8mn), higher than ($7.7mn) the year before.

To add fuel to our concern, the company has many layers of debt and in the 10-K admitted to having needed to amend its debt facilities 6 times to avoid defaults. Here is the disclosure from the 10-K about the latest concession by lenders: “On May 15, 2019, the Company and its subsidiaries, as Borrowers, entered into a fifth amendment and waiver (the “Fifth Amendment”) to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”). Under the Fifth Amendment, the Company and its Lenders have negotiated and agreed to a waiver for non-compliance with the financial covenants under the Credit Agreement as of March 31, 2019, and amendments to the financial covenants and to the remaining scheduled principal payments“.

The company has just $4.1mn of cash and $0.5mn available under the Revolver but needs to pay $6.5mn in the 2020 fiscal year in principal payments. An even bigger hill to climb will be refinancing the Revolver and Term Loan in March 2021. Remarkably, GEE Group is paying yields of 17%-19% on the Revolver and close to 20.0% on the Term Loan. We won’t even discuss the more junior debt. As to the value of the company’s stock : it’s dropped to $0.40 a share, down (52%) in the last year.

For ICMB, a stumble here would be expensive as the loan pays out interest equal to 15% of the BDC’s annual net investment income and the amount outstanding is equal to 8% of book value. That’s why a proper evaluation of the credit risk here – which we’ve rated CCR 3 but probably should be moved to CCR 4 – is so important. We hope we’re wrong but everything points to a liquidity crunch in calendar 2020 and – possibly – a move to non accrual. We hope we are wrong and ICMB and the market is right, but there are just so many red flags…

Clover Technologies/4L Holdings: To File For Bankruptcy

Clover Technologies Group LLC, which does business as 4L Holdings (the “world’s largest collector of used printer cartridges”) is filing for a pre-packaged Chapter 11 bankruptcy, but not before selling one of its subsidiaries – Clover Imaging – to its management and Norwest Group, according to a trade publication.

According to a December 11, 2019 press release from the company, the envisaged restructuring is radical. Essentially all outstanding long term debt will be converted into equity in a classic “debt for equity” swap; eliminating a reported $644mn of borrowings. There’s more to the deal including that Clover Imaging sale and the concurrent acquisition on December 4 by a Clover Technologies subsidiary of a company called Teleplan.

Given that the bankruptcy is pre-packaged and apparently non-controversial, the company expects only a brief stay under court protection and to continue operating normally. Some international subsidiaries of this large business with 18,000 employees won’t even be included in the bankruptcy. Chances are Clover Technologies will be back operating normally – but with a very different balance sheet – in a few weeks. We’ve seen some very fast bankruptcy resolutions, so that’s just an estimate taking into account the holiday season.

Kirkland & Ellis LLP is serving as 4L’s legal counsel, Jefferies LLC is serving as its financial advisor and Alvarez & Marsal is serving as restructuring advisor.  Gibson, Dunn & Crutcher LLP is acting as legal counsel for the ad hoc group of term loan lenders and Greenhill & Co. is acting as its financial advisor”.

There are two BDCs with $22.3mn of debt exposure to the company: non-listed Business Development Corporation of America and Investcorp Credit Management (ICMB) in a roughly 55/45 split. Advantage Data records show exposure dating back to 2012-2013. At the moment both BDCs own the company’s 2020 Term Loan, which is publicly traded. From a valuation standpoint, the company did not appear on our under-performing list till the IIQ 2019. As of the IIIQ 2019 ICMB was discounting its position by (38%), BDCA by (46%). Currently, the debt trades at (46%) off, suggesting ICMB will have to write down its position slightly. Going forward, the most impactful element will be the permanent loss of investment income that amounts to about $1.4mn annually. There will be a realized loss involved as well which should show up in the IVQ 2019 or the first quarter of 2020.

The good news is that – given the absence of leverage – Clover Technologies may drop off the under-performing list in 2020 if the radical balance sheet changes causes the equity to trade at par or higher.

1888 Industrial Services, LLC: Update

Frankly, we learn more from the public record about what’s going on inside the North Korean politburo than what’s happening in many private companies that are financed by BDCs. Oil patch services company 1888 Industrial Services, LLC was no exception to that rule till the latest conference call by Investcorp Credit Management (ICMB), which provided a substantial update. Here are the highlights:

As we know from Advantage Data‘s records, and other sources, the company was previously known as AAR Intermediate Holdings, and ICMB, Medley Capital (MCC) and Sierra Income were lenders since the IIIQ 2014. As you can imagine that was just about the worst time to be in anything energy-related and the debt and equity investments made, which began at $88mn, quickly deteriorated in value and eventually – in 2015 – went on non accrual. Long story short (because that’s all we know) the company was restructured and renamed 1888 Industrial Services on October 1, 2017. We know that ICMB – and probably the other lenders – booked substantial Realized Losses around the time of the restructuring in 2027.

Under its new identity the value of some of the company’s debt began to deteriorate – according to Sierra Income and MCC’s valuations. In the IQ 2019, some of the debt was placed on non-accrual. ICMB, though, values its debt at cost or at a premium. The BDC’s manager made this explanation on its latest CC, which might explain the discrepancy: ” 1888 made an acquisition to enable the company to grow outside its historic exclusive focus on the DJ Basin, diversifying into the Permian and Wyoming. Our newest debt to term loan D is structured senior to the term loan B, which was created during the restructuring, which is why you’ll see a significant difference in the marks on the 2 tranches

ICMB also indicated that it had been actively involved in the operations of the contractor, hiring both a new CEO and CFO. Moreover, ICMB has provided new working capital debt to fund operations and has agreed to accept “payment-in-kind” on some of its debt facilities outstanding. This was explained as follows:

We have temporarily gone to PIK. We will evaluate that over the next 3 to 6 months. And it is really driven by a lot of the working capital needs. And there’s a huge ramp-up right now around Permian, and so we’ve got to make sure that we don’t starve the capital of cash for our benefit and not facilitate that growth because we all want more cash flow“.

ICMB hopes all these measures will help the company and lead to an exit in as little as 2 years. The BDC Credit Reporter – as is our mandate – is not as optimistic. It’s no secret that the oil field services sector is not performing well. Moreover, the advancing of new monies and going from cash to PIK are usually (albeit not always, we’ll concede) signs of financial weakness. Then there’s the discounts being applied by other BDCs to some of the Term debt. For example a year ago Sierra Income was valuing one debt tranche at a premium to cost. As of September 2019, the debt was on non-accrual and being written down by (72%).

We have placed 1888 Industrial Services on both our Worry List – CCR 4– and Non Performing List – CCR 5. Total BDC exposure appears to be (we’re waiting on MCC’s results) just under $60mn, all of the cost in one form of debt or another. This is ICMB’s largest single exposure, and material for both MCC and Sierra so piercing the veil and keeping up with developments at the company – as best we can – is worth doing. Is this a laudable turnaround in waiting or a can kicked down the road that might eventually end up a credit disaster ?

Montreign Operating Company: Updated Company File

Since the BDC Credit Reporter first warned of a possible Chapter 11 at Empire Resorts, owned by Montreign Operating Company, we’ve learned more. One of its BDC lenders – PennantPark Floating Rate (PFLT) – simultaneously wrote its senior debt down and predicted no loss would occur on its IIQ 2019 Conference Call. We also read a news article from a trade publication providing further information about the roughly $0.5bn in debt outstanding that might be in need of a haircut or restructuring. All this was included in the Company File we keep on every under-performing business, which we’ve updated. Our view of the likelihood of loss – PFLT’s optimism notwithstanding – has increased.

Montreign Operating Company: May File Chapter 11

Resorts World Catskills is owned and operated by Montreign Operating Company, LLC, an indirect wholly-owned subsidiary of Empire Resorts, Inc., a gaming and entertainment corporation which has operated in the Catskills since 1993. On August 9, Empire Resorts, stung by heavy losses from under-performance at its facility, raised the possibility of a voluntary Chapter 11 filing.

As a result, we’ve reduced the company’s Corporate Credit Rating from CCR 3 to CCR 4- Worry List. There are 3 BDCs – all in the senior debt with $67mn at cost outstanding: PennantPark Floating Rate (PFLT), CM Finance (CMFN) and Business Development Corporation of America (BDCA). Most recently PFLT discounted its debt by (18%), but that may prove too conservative if Chapter 11 occurs. The other two BDCs- whose valuations dates back to March – have discounts of (8%) and (9%), and are likely to be taking bigger reserves for loss when their second quarter results come out.

Fusion Connect: Schedule For Chapter 11 Exit

According to Informa, Fusion Connect has filed its bankruptcy plan with the court and hopes to get a hearing by October 1st and – if all goes well – exit Chapter 11 shortly thereafter. The plan includes a very large debt swap/forgiveness that is said to cut total borrowings from $680mn to $380mn. Currently, the restructuring appears to have the first lien lenders gaining control of the business in return for writing off a goodly portion of their debt. The two BDCs involved – CM Finance (CMFN) and Garrison Capital (GARS) have $18mn invested at cost, but that liability may have increased as senior lenders provided DIP financing. That original debt is on non accrual and won’t – in any form – be paying interest till the IVQ 2019. That’s three quarters without LIBOR + 7.25%. Moreover, a write-off of some kind must be coming.  We’ll learn more when CMFN and GARS report IIQ 2019 portfolios. The valuations are likely to be close to the final, if all goes to plan. See our prior posts on June 12, 2019  and April 17, 2019.

Fusion Connect: Further Details On Post Bankruptcy Financing

The Company filed for Chapter 11 on June 3. On June 11, in an article from the Global Legal Chronicle we learned that “ad hoc group of lenders also backstopped Fusion’s debtor-in-possession financing facility in the aggregate principal amount of $59.5 million, which consists of $39.5 million of new money term loans”. This suggests that the two BDCs with $18mn in senior debt exposure  –  CMFN and GARS – have increased their exposure to what was till very recently a fast growing enterprise, cobbled together from multiple acquisitions. It’s still too early to determine how this will all play out. The business may yet be sold or the existing lenders may be involved in a debt for equity swap. In either case, income from the pre-petition debt is going to be interrupted for months, and some sort of realized loss is likely. At 3/31/2019, the discount to cost that the BDCs were using ranged between (12%) and (17%). However, any income and return from the DIP financing should be money good.

Fusion Connect: Lenders Agree To Standstill Agreement

Publicly traded Fusion Connect has entered into a Forbearance Agreement with its Revolver lenders and 70%+ of first lien lenders. As the press release states : “Under the terms of the Forbearance Agreement, these first lien lenders have agreed not to exercise the remedies available to them related to Fusion’s decision not to make its scheduled principal payments due on April 1 and 2, 2019 and certain other defaults under the Company’s credit agreement. The Forbearance Agreement extends until April 29, 2019 unless certain specified events occur”.  In the interim, the Company has hired turnaround advisers and appropriate legal counsel in an effort to restructure the balance sheet out of bankruptcy. However, the odds are stacked against the highly leveraged business. See the Company File for the BDC Credit Reporter’s View. The two BDCs with $18mn in exposure appear to be in a first lien loan due in 2023. The publicly traded debt – valued by the BDCs at close to par at 12/31/2018 – currently trades at a (25%) discount). That suggests CMFN and GARS are likely to have to write down their debt by close to $5mn or more in the IQ 2019 results and face the risk of additional Realized and Unrealized Losses. The most immediate impact is likely to be interruption of interest income: $1.1mn on an annual basis for CMFN and $0.7mn for GARS.

Lionbridge Technologies: Sued By Rival Company For $700mn

On April 11, 2019,TransPerfect – the world’s largest language provider by revenue – filed a complaint in the Southern District of New York against rival Lionbridge Technologies and its owner, private equity firm HIG. TransPerfect is seeking at least  $700m in damages and compensation. For all the details, see the press release. We have no way to determine who will win the lawsuit or any terms that might be involved. Nonetheless, the amount is sufficiently large – and with recent experience of companies losing major cases in court and being financially crippled thereby in mind – we’ve decided to add Lionbridge Technologies to our Watch List, with a CCR 3 rating.  Till this news – and using IVQ 2018 values – there are three BDCs with $31mn in first lien and second lien debt exposure, all carried at par. We’ve also opened a Company File, which we’ll keep updated as this issue wends its way through the courts.