"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".

Posts for Investcorp Credit Management BDC

American Teleconferencing Services: Ratings Downgraded, Withdrawn.

On June 4, 2021 S&P announced that conference audio and video provider Premier Global Services Inc., (dba PGi), whose wholly owned subsidiary is American Teleconferencing Services, was downgraded to CCC-, from CCC+, with a negative outlook, with the rating agency citing “significantly” deteriorating operating performance over the past quarter. Also downgraded was the company’s senior secured debt to CCC-, from CCC+. S&P noted that the company’s declining operating performance “increases the likelihood that [PGi] will default or undertake a distressed exchange” in the next six months unless the company’s private equity sponsor injects equity. Just the day before, Moody’s was more radical and just withdrew its ratings altogether, citing “insufficient information”.

This is obviously not good for the company or for the 10 BDCs with $171mn in first lien and second lien debt exposure to PGi or its subsidiary. At March 31, 2021, a couple of lenders were already carrying their exposure as non performing but most had not yet made the move. Aggregate FMV was already down to $117mn, a (32%) discount.

Our last update on these pages dates back to August 26, 2020 when the business was already struggling, and we applied a CCR 4 rating. Now, PGi/American Teleconferencing might slip into non performing – CCR 5 – status shortly judging by the rating agency hullabaloo. Most at risk are likely to be BDC lenders holding the second lien debt, which can often get written to zero in these situations. There is currently nearly $24mn in second lien debt at FMV. Then there are wide variations in how first lien debt is discounted: from (6%) to (46%). We calculate that after netting out already non performing loans, some $12mn of investment income is still at risk of interruption temporarily, or forever should the company fail.

We expect we’ll be circling back to PGi/American Teleconferencing again shortly as the situation clarifies. At the moment, the chances of further unrealized losses seems the likeliest short term outcome, which could show up in the IIQ 2021 BDC valuations.

Bioplan USA Inc. : Moody’s Downgrades

On March 24, 2021 Moody’s downgraded BioPlan USA Inc. (also known as Arcade Beauty) to “D-PD from Caa2-PD, following the recent restructuring of the company’s first-lien and second-lien credit facilities“. By its standards, Moody’s considers the just completed restructuring at the company as a “distressed exchange and thus a default“. Here’s a link to a Moody’s press release with much more information.

The basic issue is that the lenders to the company appear to have “kicked the can down the road“, extending the maturity of all outstanding debt, and adding a payment-in-kind (“PIK”) requirement which will effectively increase the balance owed. Although the sponsor – Oaktree Capital Management – kicked in another $20mn of equity capital, Moody’s still believe the company’s capital structure is “unsustainable“. As the press release makes clear BioPlan has plenty of challenges including negative free cash flow; a slow return to “normal conditions“; very high leverage and much more.Still, the lenders and the sponsor seem to believe there’s a way out given enough time

There are two BDCs with exposure to the beauty products company: publicly traded Investcorp Credit Management (ICMB) and non-traded Guggenheim Credit, with total exposure at cost – all in the just restructured first lien 2021 Term Loan – of $18.2mn. The former BDC is on the record on its conference calls as being optimistic about the company’s prospects and has discounted its debt by (22%). Guggenheim is more conservative and has a (37%) discount.

We have had a CCR 4 rating for the company since the IQ 2020 when the onset pandemic sharply cut foot traffic at malls and the demand for fragrance sprays. We are adding Bioplan to our Trending list because we expect that with the restructuring there might be a change – probably upward – in the debt’s valuation. This should show up in the IQ or IIQ 2021 results of the two BDCs involved and – for the moment – reduces the risk of the debt going on non accrual. We cannot say whether in the long run this will result in a loss for the BDCs involved. Most at risk – but only modestly so – is ICMB, which could see nearly $0.7mn of annual investment income interrupted should the debt go on non accrual. Ironically, in the short term, the BDC’s income (and Guggenheim’s ) could increase thanks to the new PIK pricing…

We’ll circle back when ICMB and Guggenheim report 2021 results.

GEE Group: Recapitalizes Balance Sheet

Publicly traded recruiting firm GEE Group (ticker GEE) has negotiated a major balance sheet restructuring: “Approximately $47.4 million, which is comprised of approximately $19.7 million of subordinated debt and approximately $27.7 million of preferred stock mezzanine financing, was eliminated from the Company’s balance sheet as of June 30, 2020, at a substantial discount in exchange for cash of approximately $5.1 million inclusive of accrued interest and the issuance of approximately 1.8 million of GEE Group Inc. restricted common shares“.

As far as we can tell that leaves the troubled business – which just recently received a PPP loan/grant, with a $41mn Term Loan, judging from the latest 10-Q. Most importantly at this time of much reduced business activity, the company claims to have $16.4mn in cash.

To date, the BDC Credit Reporter has rated the company CCR 3, a rating we maintain post-restructuring. Even $16.4mn in cash is no great protection in these difficult times and the business is far from being out of the woods. Don’t expect a great increase in the company’s fair market value which had been barely discounted in the IQ 2020 results from a cost of $11.1mn to a FMV of $10.2mn. The only lender involved is Investcorp Credit Management (ICMB), which holds a quarter of the Term Loan.

We get the impression that there will be more twists and turns in the GEE Group corporate history and before the 3/21/2021 Term Loan due date, but for a brief moment here the news was good thanks to this restructuring. Given this is a public company, we’ll be learning a lot more in the months ahead about GEE Group’s attempt to return to normal “performing” status in the months ahead.

Fusion Connect : Court Dispute Underway

Telecom company –Fusion Connect — which just exited Chapter 11- is arguing in bankruptcy court that a $2.1mn fine imposed by the Federal Government on the company prior to its filing should not need to be paid. That’s all we know but created a reason to have a new look at the company in its new status.

We know that Fusion, according to Investcorp Credit Management (ICMB), that the company – which previously had been on non-accrual – exited Chapter 11 in January 2020. (ICMB got repaid on a DIP Loan at the time). All this from the BDC’s May 12, 2020 conference call. There are 2 BDCs with $18.6mn of exposure in the restructured company: besides ICMB there’s also Garrison Capital (GARS). The first lien debt was already discounted by (20%) and the second lien by (44%) at 3/31/2020. The equity owned is also greatly discounted by ICMB but not by GARS. We don’t understand why.

1888 Industrial Services: IQ 2020 Valuation Update

We’ve discussed oil services company 1888 Industrial Services before and the opaque nature of the business reporting and valuation we get from the BDCs involved. Now IQ 2020 results have partially been filed, we can now compare how Medley Capital (MCC) and Investcorp Credit Management (ICMB) are treating their debt exposure to the highly troubled company, caught up in the drastic drop in energy related activity. MCC has written to zero two tranches of 9/30/2021 Term debt, and both are on non accrual. To confuse matters another tranche is still accruing income and is fully valued. By contrast, ICMB has 4 tranches of the same debt (or seems to on paper) and none are carried on non accrual and all but one are fully valued. One tranche, though, has been written down to $4.1mn from $8.0mn in this most recent quarter.

ICMB’s manager did discuss the latest performance at the company in general terms, maintaining an optimistic tone:

1888 is operating in the same challenging environment as Liberty and ProFrac [two other oil services portfolio companies], driven primarily by decrease in the rig count. With activity in the Permian Basin essentially coming to a halt, they have been focused on cutting costs and maintaining the most important relationships. They are also the beneficiary of funds under the PPP loan program, which will help offset some of the operating costs.1888’s forecast currently shows this company will have adequate liquidity through 2020 at the current oil price levels. We believe the company is doing all the right things to ward this storm“.

The BDC still values its mix of different debt tranche and equity exposure at $12.5mn on $16.3mn invested at cost That’s a discount of less than a quarter overall. By contrast MCC’s discount of its exposure is three times as high. Furthermore, we note that all the income ICMB is booking is in Pay-In-Kind form, given the company’s underlying cash needs, but not a reassuring factor.

The BDC Credit Reporter has already downgraded the company in our rating system as much as we can. However, we’re now reducing our estimate of likely proceeds that will occur at the end of this long and winding road. At the moment we expect only 50% of the $62mn invested at cost by 3 BDCs (non-traded Sierra Income is also invested) to be recovered. This suggests that ICMB still has further write-downs coming whether realized or unrealized. Even receiving PPP monies can only be a temporary relief. In fact, most of the benefit from that move will have faded by the end of the IIQ. There’s nothing in the most recent industry trends that provides any encouragement either. Even at a 50% final loss we may prove to be too sanguine…

We hope we are wrong, but the company – and the capital invested at all levels of the capital structure – seem headed to a seemingly inevitable bankruptcy, which could be Chapter 11 or 7. Most at risk at this point is ICMB for whom 1888 Industrial Services is one of their single largest company exposures. Understandably, that may explain an optimism that seems unfounded to those of us on the outside looking in.

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: www.oilfieldwaterlogistics.com.”

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.

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.