Posts for Goldman Sachs BDC

MPI Products: Company Sold

On January 15, 2020 private equity group Turnspire Capital Partners announced its acquisition of MPI Holdings, LLC, parent of MPI Products, for an undisclosed amount. MPI is a portfolio company of Goldman Sachs BDC (GSBD), which holds $20.0mn of the principal of the January 2020 second lien secured debt. At September 30, 2019, the debt was on non-accrual, and discounted ($5.5mn) from cost. Just under $0.600mn of investment income was not being received.

The debt had been placed on non-performing status only in the third quarter of 2019 and GSBD had revealed on its conference call that a “sales process” was underway. At that point, the BDC was very non committal about the likely outcome.: “…It’s a fluid situation right now. The company is in a sale process. As I mentioned, when you look at the mark today, I think what we’re looking at is industry valuations there, in particular, coming down quite dramatically. So in terms of the range of outcomes, it could be a full repayment, it could be a partial repayment, it could be a variety of different outcomes“.

Now we know the sale has occurred but not the price and cannot say if this is Good News, Bad News or Not-So Bad News. What we do know is that some kind of resolution has occurred, which means the IVQ 2019 valuation that will be published shortly should be very accurate and that some sort of realized loss or full repayment (including interest) will occur in IQ 2020. If the latter occurs, that might give a one time boost to GSBD’s earnings as previously unpaid interest income is collected. If the former happens – this is a second lien position after all – GSBD will be losing both some capital and some earnings power.

GSBD – according to Advantage Data records – had a long history with MPI dating back to 2014 in this same 2020 loan, which performed normally till only the IIQ 2019, when the debt was discounted (9%). The next quarter the non-accrual occurred and for reasons that are not yet clear. GSBD were not very forthcoming when discussing the company for the one and only time in six years on the most recent conference call, claiming the decrease in the value of the investment in the quarter was due to lower sector values:

So I think when we look at that business, what’s impacting the mark in this go around is pretty significant valuation changes taking place in that specific industry. So I wouldn’t read anything sort of that would impact other parts of the investment. It’s very much a function of the specific industry that, that company sits within“.

We can’t quite reconcile that level of sudden write-down and the shift to non accrual and this subsequent sale of the company to a “special situations” focused PE group to just a technical change in auto industry valuations. The apparent opaqueness of GSBD’s disclosures – in answer to a direct question from an analyst – is a little disconcerting, but we might be misreading the transcript. In any case, we hope to get a clearer picture from GSBD’s management when the IVQ 2019 or IQ 2020 results are published and discussed and MPI gets placed in either the win or loss column.

Prairie Provident Resources: All Time Low Stock Price

Publicly traded Prairie Provident Resources has been reaching its very lowest stock price in the last few days, continuing an ineluctable descent, as this chart shows.

We’ve not been digging too deeply into the company’s finances and prospects because the only BDC exposure is that of Goldman Sachs BDC (GSBD). Admittedly, the amount invested is material – $9.2mn – but all in the form of equity. That equity was valued at only $0.25mn as of June 2019, and will drop even further when the third and fourth quarter results come out.

The investment has been sitting around on GSBD’s books since 2016, not earning any income and in perpetual decline. If something happens to Prairie Provident – not unlikely given market conditions – a 100% Realized Loss is more likely than not. We’ll chalk it up to another misguided attempt by a BDC – and GSBD has much company from its peers – to invest in a capital hungry and highly cyclical industry which is best left to specialist groups. We’re adding – just based on that stock price – Prairie Provident to our Bankruptcy Imminent list.

Prairie Provident: Additional Reserves Identified

Canadian energy company Prairie Provident issued a press release about “the results of an updated independent reserves evaluation of the Company’s interests in respect to specific reserve entities within three future undeveloped waterflood expansion areas in Evi “.

From our unlearned reading of the release, the company is suggesting “an incremental 2.1 MMboe of proved plus probable (“P+P”) undeveloped reserves (97% oil and liquids) have been assigned to future waterflood expansions, comprised of approximately 1.6 MMboe of proved undeveloped reserves and approximately 0.5 MMboe of probable undeveloped reserves. Relative to year-end reserves bookings for specific reserves entities within the three Evi Waterflood areas, the undeveloped reserves additions attributed to the future expansions represent an increase of nearly 40% in original recoverable reserves estimates on a proved (“1P”) basis for those areas. As a result of the increased reserves assignments at Evi, PPR’s total estimated corporate reserves volumes grow by 7.1% on a 1P basis and by 6.1% on a P+P basis, relative to year-end estimates“. 

That all sounds favorable – and given we spend most of the time reporting bad news – that’s a plus. However, as we noted the prior time we wrote about Prarie Provident BDC exposure at cost (Goldman Sachs BDC or GSBD) is $9.2mn and the FMV is only $0.2mn – all invested in non income producing equity. As of June 2019, the latest valuation was even lower than the quarter before. This type of news may boost future valuations, but Prairie has a long way to go in a tough industry. Either way, income to GSBD is not affected.

Zep, Inc: New CEO Hired

On August 20, 2019 Zep Inc., an industrial cleanings product developer, announced the hiring of a new CEO: Dan Smytka.

That’s notable from a BDC standpoint, both because of the substantial exposure to the company ($126.6mn at June 2019) from 6 public and non-traded BDCs and because the business has been under-performing of late. That caused the second lien debt in the latest quarter to be written down by as much as (30%) and first lien debt by (19%), according to Advantage Data‘s records. (As usual there’s much variation in values between BDCs). By comparison, a year ago the debt was valued, in all cases, close to par. We checked the latest prices on Advantage Data for both tranches of debt and found discounts of (25%) and (30%), suggesting the markets have been getting more pessimistic since mid-year.

What’s more, Moody’s downgraded the company to speculative status back in April, including the first lien secured debt. The rating group is concerned about debt to EBITDA that exceeds 10x ! A saving grace is that the earliest debt maturity is 2022.

Clearly Mr Smytka has a big challenge ahead and the BDCs involved – especially three Goldman Sachs funds with the bulk of the exposure – will be watching with great interest if a turnaround can be achieved. With over $12mn of annual investment income at risk, this is one of the largest BDC trouble spots. We have the company on our Worry List or CCR 4.

Avenue Stores: To Close All Stores

On August 13, 2019 news reports indicate plus-size women’s clothes retailer Avenue Stores is about to close all its locations. Employees were reportedly told by conference call. Apparently, according to an article in Retail Dive “The New York Post reported earlier in August that Avenue had 60 days to find a buyer or it would have to shut down its 260 stores. (The company’s website currently says it has about 300 stores.) Sourcing Journal also reported the retailer planned to close some stores. In recent months, local media outlets have reported on individual closures. State filings last week confirmed more than 150 layoffs in New Jersey“.

The only BDC exposure through the IQ 2019 was from Goldman Sachs BDC (GSBD). The BDC has reported IIQ 2019 results already and there’s no Avenue Stores exposure listed. We don’t know if the BDC sold the investment at a loss or at par in the last few months.

Prairie Provident : New Article

We added a new Seeking Alpha article to the Prairie Provident Company File. The conclusions were not very encouraging, including the following:

The net debt to TTM adjusted funds flow ratio is very high at 14.6x. Also, due to the disastrous Q4, the company is about to breach its financial covenants.

Not good news for the only BDC with exposure: GSBD. However, the current value of the investment is so small – all in equity – as to be immaterial.