Posts for Goldman Sachs BDC

Country Fresh Holdings LLC: Files Chapter 11

On February 16, 2021 fresh food distributor Country Fresh Holdings LLC filed for Chapter 11 in Texas.

Pandemic-related supply chain and business disruptions have affected Country Fresh and our customers dramatically over the past year,” said Bill Andersen, Country Fresh President and CEO. “Despite efforts to improve company results before and during COVID, we believe that this sale transaction will result in a better capitalized company and positions our customers, suppliers, employees, and all other stakeholders for maximum success going forward.”

The company already has a “stalking horse” bidder in place in the form of PE group Stellex Group and has arranged debtor-in-possession financing with certain of its existing lenders, who were not named. Country Fresh hopes to go through the bankruptcy process in 60 days.

BDC exposure to Country Fresh is significant and includes 4 public and non-traded funds. Leading the group – and the earliest lender – is PennantPark Floating Rate Capital (PFLT) which has $23mn invested in the form of “super senior” term debt; a second lien loan and equity. Only PFLT has reported IVQ 2020 results so far and placed its $5.9mn second lien loan on non accrual for the first time. The other loans were still performing at the end of 2020, but are likely now on non accrual as well. PFLT also has $10.5mn of equity in the company which has been written to zero for the past 3 quarters and is likely to stay there.

Also with substantial exposure is non-traded Cion Investment while Goldman Sachs BDC (GSBD) and Goldman Sachs Private Middle Market Fund have tiny equity stakes left over from a 2019 restructuring and written off already on an unrealized basis.

At first approach, we’d guess PFLT and Cion might be involved in the DIP financing and are likely to receive back their “super senior term loan advances”. Still, realized losses are likely to be substantial: over ($25mn) , or 77% of all capital advanced because mostly concentrated in the second lien and equity. If the “super senior” don’t pay interest investment income will be forgone from the IQ 2021 forward, but may get recouped when the business is sold.

This is second time not the charm for PFLT and Cion, both who were involved in Country Fresh’s earlier restructuring in 2019, which resulted in ($7.1mn) in realized losses at the time for PFLT.

Also notable is that Country Fresh – by our count – is just the fourth BDC-financed company to file for Chapter 11 in 2021. Whether the BDCs involved will convert debt to equity and/or advance new monies in the form of loans or equity is not yet clear. We’ll circle back when we learn more.

GK Holdings: To Be Acquired/Upgraded

A very complex transaction involving a SPAC (“special purpose acquisition company”) is happening that will involve its merger with Skillsoft and the concurrent acquisition of Global Knowledge Training LLC (aka GK Holdings Inc. in our records). Both Skillsoft and Global Knowledge/GK Holdings are BDC-financed companies and both are currently on non accrual. Given that the value of the transactions is said to be $1.5bn, chances are the two companies involved – and their lenders – are about to experience a change of fortune.

As of June 2020, Global Knowledge/GK Holdings was financed to the tune of $15mn by three BDCs led by publicly traded Goldman Sachs BDC (GSBD). The BDC has both a first lien and second lien debt position. The latter has been on non accrual since IQ 2020, as the pandemic impacted the education business. Also with outstandings – both in the second lien – are public BDC Harvest Capital (HCAP) with $3.0mn at cost and non traded Audax Credit BDC with $1.0mn. Then there’s non traded Business Development Corporation of America (BDCA for short) which has invested $14.5mn in Skillsoft’s debt, most of which is also on non accrual since the IIQ 2020.

Most likely – as far as we can tell – all this troubled debt will be repaid as part of the envisaged two part transaction and some ($11mn) of unrealized losses reversed by the lenders to the two companies involved. The BDC with the most to gain is BDCA, with GSBD close behind. HCAP’s exposure is small but so is the BDC, which means any improvement in the value of their second lien debt, written down by (40%), will be gratefully accepted.

We’ll be digging deeper and learning more but, at first blush, this all seems to be good news in a situation that was previously headed ever southwards, as detailed in our prior article on April 27, 2020, written before either company’s debt was known to be on non accrual. Based on what we currently understand, the BDC Credit Reporter will be upgrading Skillsoft and Global Knowledge/GK Holdings from CCR 5 all the way back to CCR 2 if and when the deal closes in January 2021. Of course, at that time BDC exposure might be nil if the debt is repaid, making the rating CCR 6 (no further exposure). We will update readers when matters become clearer.

Zep Inc.: Upgraded By Moody’s

On August 17, 2020 Moody’s upgraded the corporate and debt ratings of Zep Inc., a producer of “chemical based products including cleaners, degreasers, deodorizers, disinfectants, floor finishes and sanitizers, primarily for business and industrial use“. The “Corporate Family Rating” was increased to Caa1 from Caa2 . Moody’s also upgraded Zep’s first lien senior secured credit facilities to B3 from Caa1 and its second lien term loan to Caa3 from Ca. The outlook is stable.

Apparently, the company has benefited from “the significant increase in demand for its products as customers across its food & beverage and industrial end markets enhanced standard operating procedures and protocols around cleaning, sanitation and maintenance in their facilities in response to the coronavirus pandemic“. Liquidity, too, is getting better and Moody’s expects these trends to continue.

For the 6 BDCs with $126mn in “Major” exposure to Zep, this is good news. In the IQ 2020, the second lien debt held was discounted (59%) and the first lien (30%), but was already being valued higher in the second quarter, reflecting the same trends as caused the Moody’s upgrade. Most impacted will be the Goldman Sachs organization whose 3 public and private BDC funds each have a major position in Zep to the tune of $88.4mn or two-thirds of the total. Oaktree Specialty Lending (OCSL) is also a significant lender with $31.6mn, mostly in second lien. Also involved are Oaktree Strategic Income (OCSI) as well as non-traded Audax Credit, but for only small amounts.

The BDC Reporter is upgrading Zep to a Corporate Credit Rating of 3 from CCR 4 given that the odds of full recovery are greater than that of eventual loss. Nonetheless, before setting off the fireworks and having a parade at this good news, we should remember most BDC exposure is in the second lien debt which still has a speculative rating (Caa3). Furthermore, the debt does not mature till 2025. Much can happen in the five years ahead, which is why we are retaining Zep on the underperformers list.

Still, in the short term – and the IIQ upward valuation notwithstanding – we may see a lower discount (i.e. unrealized appreciation) in the BDC IIIQ 2020 results.

IHS Intermediate Inc.: Files Chapter 7

On June 15, 2020 IHS Intermediate Inc. (also Interactive Health Solutions) filed for Chapter 7 bankruptcy. According to news reports, the company “collects employee healthcare data for companies” but “has faced more competition in recent months, according to Bloomberg Law“. Private equity firm FFL Partners is the company’s largest shareholder. The company filed in Delaware federal court claiming between 1,000 and 5,000 creditors and between $100 million and $500 million in assets. Any type of recovery for lenders is unlikely.

There are three BDCs involved with the company: publicly traded Solar Capital (SLRC); Goldman Sachs BDC (GSBD) and non-traded Sierra Income. SLRC has a long standing relationship with the company dating back to 2011. When the company was acquired in 2015, SLRC re-upped for another tour of duty in the 2022 second lien Term Loan, and was joined by the other two BDC lenders. (Interestingly, Pennant Park Investment – PNNT- which had been involved as well, bowed out for reasons unknown). For years the company performed well, only becoming underperforming by our standards in IQ 2019 when Sierra discounted the debt by (15%). By IIIQ 2019 Sierra and SLRC had the debt on non accrual. At that point, we rated the company CCR 5. GSBD only followed suit the next quarter. In fact quarterly valuations varied widely between the three BDC players but by the IQ 2020 the entire $59.6mn in outstandings had been written down to nothing.

Judging by the pricing (L +850) and the second lien status in a middle market company, this was always a higher risk transaction. The lenders have lost ($6.3mn) in annual investment income and will be recovering zilch. We have few clues about why the business failed except comments by SLRC along the way about the loss of key customers. This is one of those rare recent bankruptcies where Covid-19 is not being blamed as the company was essentially in deep trouble more than nine months ago.

For each of the three BDCs involved this is a material loss. SLRC is writing off ($24.7mn). To put that into perspective total aggregate net realized losses in the past 3 years have been only half that amount. For GSBD aggregate realized losses have been higher in the past 3 full years but this ($10mn) write-off is still equal to one-tenth of the total. For Sierra Income, whose realized losses exceed ($110mn) in this 3 year period, the ($25mn) loss is a serious additional blow.

Losses are going to happen in leveraged lending, especially when you’re charging a double digit yield. For this size company and at this pricing the capital involved is as much “equity risk” as debt and frequently when there’s a business reverse – as has happened here – results in a complete loss. That explains the understandable ambivalence investors, the BDCs own lenders and the managers themselves have about second lien lending. Both GSBD and SLRC have been boasting repeatedly for several years about the diminishing proportion of second lien debt on their books. This loss illustrates the downside involved.

We doubt second lien loans are going away in the future but unitranche debt – which wraps up into one facility both first and second lien loan risk – has already taken much of its market share and will continue to. This will not in any way reduce the risk of loss but will change the wrapper and make harder to distinguish the debt capital at most risk.

IHS Intermediate represents the 7th BDC-financed bankruptcy of the month of June (aggregate cost of those investments : $314mn) and the 23rd we’ve recorded this year. It’s the first Chapter 7 in June. Generally speaking Chapter 7 liquidations are rare. There have only been a couple of others in 2020 to date and most of the time result in little or no recovery for the BDC lenders involved. By the time asset-based lenders are repaid and the costs of the bankruptcy process absorbed, most lenders and unsecured creditors are left without a sou. In this case, we don’t know who the first lien lender was and what recovery they might or might not expect.

For our purposes, we will leave IHS rated CCR 5 till the BDCs involve book a realized loss, which should occur in the second or third quarter 2020.

Jill Acquisition LLC: Hiring Restructuring Advisers

Women’s clothing retailer Jill Acquisition LLC (dba J Jill) is hiring advisers to help restructure its debt, “according to people familiar with the matter“, says the Wall Street Journal on May 1, 2020. The company joins a long line of companies seeking a way out of its Covid-19 caused troubles. “J. Jill is aiming to obtain relief from lenders on certain of its loan agreements, as well as to potentially obtain some additional liquidity to tide it over until its business can reopen, the people said“. As a result, we have downgraded J Jill from CCR 3 to CCR 4 as the chances of some sort of loss appear to be rising. Furthermore – given that we’ve seen this movie before – we’re adding J Jill to the BDC Credit Reporter‘s ever growing Weakest Links list of companies we expect to become non-performing in short order.

BDC exposure is modest and limited to Goldman Sachs BDC (GSBD), which bought $6.8mn of the 2022 Term Loan as recently as IIQ 2019, when the investment was trading very close to par. Even at year end 2019, the discount taken by the BDC was just (18%). Now the same debt trades at a (29%) discount, according to the WSJ. The company’s stock is trading at $0.42 and its market capitalization is tiny. This is a credit hurtling towards some kind of resolution, with the principal question being how much lenders like GSBD will lose if J Jill restructures. Or liquidates. With the de-retailing of America that’s also on the cards. For GSBD, the likely income interruption is ($0.5mn) per annum and we’re estimating the probable realized loss at 50% or ($3.4mn).

Last word: We’re a little surprised GSBD would put money to work in a women’s retailer so recently. In mid- 2019 J.Jill’s stock had lost 90% of its market capitalization and the writing was on the retailer’s walls that all was not well. Not a huge black mark credit-wise, but certainly a question mark.

GK Holdings: Downgraded To CCR 4

On March 23, 2020 Moody’s downgraded GK Hldng Inc. to Ca from Caa2. More recently Fitch has added the company to its Loans Of Concern list for April. For our part, we had initially added the global training company to our Underperformers list way back in IVQ 2017, but only at CCR 3. There the rating remained even through an earlier Moody’s downgrade in 2019 and a valuation drop of the second lien to as low as (30%) at year-end 2019 and before the Covid-19 crisis.

Now – and a little late – we are downgrading the global training company to CCR 4 AND adding the name to our own list of potential defaults that might occur in the short term to BDC-financed companies. Like the other groups, we are concerned about current market conditions impact on the training business; matched with already high leverage; debt coming due and liquidity challenges ahead. There’s no denying that companies such as GK Holdings with debt to EBITDA north of 8.0x are especially vulnerable to difficult conditions like the one we face. This is another example of a company that was already in some trouble before Covid-19 facing an accelerated decline brought on by the current crisis.

In Advantage Data’s records, BDC exposure is under two names – GK Hldng Inc. and Global Knowledge Training LLC, and is also referred to by BDCs as GK Holdings Inc. but all speak to the same risk. At cost $25.7mn is at risk, spread over 5 BDCs including Goldman Sachs BDC (GSBD); Harvest Capital (HCAP), as well as non-traded Audax Credit; TP Flexible Income and Sierra Income. GSBD is the largest debt holder, with $11.5mn in first and second lien exposure. (HCAP, by contrast, has lent only $3mn). Total investment income in play is nearing $3.0mn, as this was a riskier credit from the outset.

We’ll be keeping an even closer eye on the company going forward as some sort of resolution seems to be appearing on the horizon. In the past, the company’s private equity owner has put in new capital. Maybe that will happen again. Till we have reason to believe otherwise, we are worried.

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.