Underperforming Company Table

Posts for Garrison Capital

Centric Brands Inc.: Exits Bankruptcy

The long line of companies that filed for bankruptcy as the pandemic took hold in the spring of 2020 is now headed in the other direction with cleaned up balance sheets, new owners and high hopes. Included in this group is Centric Brands, which exited Chapter 11 on October 9, 2020 following a “debt for equity swap” with its well known lenders, including Blackstone and Ares Management. Old debt is being forgiven in return for a controlling equity and new debt (including a securitisation facility) being provided by the owner/lenders.

The BDC Credit Reporter has been writing about Centric for some time, and with special interest, given the large amounts of BDC capital advanced to the company even before the restructuring : $129.9mn at cost. We’re guessing that the valuations by the 3 BDCs involved as of June 2020 must be close to the final deal struck, which has been in the works since the filing in May. Almost certainly written off is the $24.6mn invested in the equity of pre-bankruptcy Centric by Ares Capital (ARCC), which the BDC has written down to zero. That was carried at par back in early 2019.

Then there’s $98.5mn in first lien 2023 Term debt, held by ARCC, TCW Direct Lending VII and Garrison Capital (GARS), which has been discounted between (4%) and (16%) by the lenders involved. There are some “last out” arrangements in the debt which may explain the discrepancies.

Interestingly, and despite the bankruptcy, none of the BDCs carried any of their debt as non-performing as of June 2020. That may be because the 2023 debt was Pay-In-Kind anyway. Finally, there’s $6.7mn in 2021 DIP financing provided by the same trio, which is likely to be folded into the post-bankruptcy capital structure. In fact, we wouldn’t be surprised that after all is said and done the BDCs involved end up with more capital in Centric than ever before.

Exactly how large the realized losses will be is impossible to tell as each BDC might value its new equity stake differently. We’re guessing that total losses booked will be ($35mn-$40mn), or roughly a third of the capital invested at June 30. ARCC will be the biggest loser by far, followed by TCW Direct Lending and with GARS losing ($1mn-$2mn). Losses could have been much higher but the BDCs were positioned above $700mn+ in second lien debt held by Blackstone. That’s the debt being written off and which will reduce leverage by about half. For that Blackstone receives 70% of the equity of the new Centric and the other lenders 30%.

Of course, neither Centric Brands nor BDC exposure is going anywhere and success is not guaranteed. We are upgrading the company from CCR 5 to CCR 3, still on the underperformers list. Centric has had to lay off hundreds of employees and continues to be leveraged, so questions will remain for some time about its viability under its new lender ownership.

We will circle back with an update when IIIQ 2020 or IVQ 2020 BDC results are published and we can ascertain what realized losses were booked and what the revised outstandings look like for all three BDCs involved.

Travelport Worldwide: Upgraded By S&P

Good news for Travelport Worldwide and subsidiary Travelport Finance (Luxembourg) SARL. Both were upgraded on October 2, 2020 by S&P to CCC+, after completing a debt restructuring and exchange. As we’ve reported previously – and all over the financial press – Travelport was previously up in arms against its lenders and much huffing and puffing by lawyers on both sides was previously going on. That’s behind us now since a September 17 agreement where the company – and its sponsor Elliott Management – agreed not to spin off intellectual property rights and lenders agreed to advance more monies, and not call a default. Importantly – because all BDC exposure is concentrated therein – the company’s 2026 Term Loan has been given a rating of CCC-, up from D.

By no means is the business of the company – tied to the much suffering global travel and tourism industries – out of the woods yet. Liquidity has been bolstered by the restructuring and the immediate threat of lender foreclosure has passed but S&P is making forecasts about revenue levels and profits in the rest of 2020 and 2021 that must – under current conditions – be not much more than glorified guesses.

Nonetheless, the BDC Reporter is upgrading GSO Blackstone’s position to CCR 3 from CCR 4 , which is good news for the non-traded BDC which had written down its nearly $100mn debt by nearly ($30mn). Some positive reversal is likely in the IIIQ 2020. Likewise Garrison Capital (GARS) – which had placed its $2.6mn in the 2026 debt on non accrual and taken a (34%) haircut as of June – will be able to return the debt to accrual status. We’ve also removed Travelport from our Weakest Links category, as the prospect of a default now recedes, albeit after being very close to being forced into bankruptcy and a contentious dispute between the parties.

The BDC Credit Reporter, though, is not done with Travelport. We expect that we’ll be revisiting the status of the company and the substantial exposure (by Blackstone/GSO at least) for some time to come. After all, there are still 6 years left on the loan and S&P is only granting the position one of its weakest ratings. Over at Moody’s, which also adjusted its ratings on September 28, 2020, the view is that they “continue to perceive Travelport’s capital structure as unsustainable due to the continued operating performance weakness and the overall uncertainties around the extent of recovery“. Maybe a CCR 3 rating is too generous

Centric Brands Inc: Reorganization Plan Approved

Since May 2020 Centric Brands, Inc. has been under bankruptcy court protection. Now, though, the company is poised to exit that status by mid-October 2020 following court approval of a reorganization plan and some well placed settlement payments to disgruntled creditors. The deal seems like a debt-for-equity swap, with first lien and second lien lenders receiving equity in the restructured company while continuing as lenders in new, smaller, debt facilities.

After all conditions have been finalized, Centric Brands — whose owned brands include Zac Posen, Hudson and Swims — plans to exit Chapter 11 by the end of October with a “recapitalized” balance sheet, as well as new financing facilities, “significantly reduced” debt and interest payments, plus the full support of all of its lenders.

This is a Major BDC investment by BDC Credit Reporter’s standards: i.e. over $100mn at cost or $129.9mn in this case. There are three BDCs involved, headed by Ares Capital (ARCC), which is invested in both the debt and equity of Centric. Then there’s non-traded TCW Direct Lending VII and publicly traded Garrison Capital (GARS). The debt held by the BDCs matures in 2021 and 2023. The latter with a cost of close to $100mn is valued at roughly a (15%) discount and is likely to be partly written off when the company exits bankruptcy. That will result in about ($15mn) in realized losses along with nearly ($25mn) ARCC holds in the equity of the insolvent entity, or a total loss of about ($40mn). The 2021 debt is Debtor In Possession financing and is likely to be repaid in full. What we don’t know is if the lender-now-owners will have to inject incremental new capital or not. More details to follow.

This will be a significant – but not overwhelming loss, principally for ARCC, and to a much lesser degree for the other two. On the other hand, it looks like all the players will live to fight another day and – potentially – recoup proceeds lost from an eventual sale of the restructured Centric Brands another day.

We will be upgrading the company from CCR 5 to CCR 3 or CCR 4 when the exit from bankruptcy occurs. As we’ve written in earlier articles about Centric, much will depend on how generous the new lender owners have been in structuring the going forward balance sheet. The company continues to operate in an industry – lifestyle brands sold mostly at retail – that continues to be pandemic impacted. Furthermore, some debt for equity swaps in the past have been done with less than generous terms, rapidly returning the business to the bankruptcy court. We hope Centric won’t be a “Chapter 22” story.

BJ Services Company: Files Chapter 11

Reuters reports that oil field services company BJ Services Company has filed for Chapter 11 on July 20, 2020. The company reported assets and liabilities between $500mn and $1.0bn. Right away, management will be seeking to sell core assets – such as its cementing business – to pay down its debts. Not helping the situation for BJ Services is an admitted “cash crunch”.

Four BDCs have $25.3mn in exposure at cost in the company as of March 31, 2020: Crescent Capital (CCAP); Monroe Capital (MRCC); Garrison Capital (GARS) and non-traded Monroe Capital Income Plus. The BDCs were all in the same 2023 first lien term loan, and marked their positions at par or at a discount of only (4%). Given the industry which BJ operates in; the sizeable liabilities and the liquidity crisis, it seems unlikely that the current high valuation can be maintained in bankruptcy. However, we have no clear idea yet how this debt might fare once everything is settled. We can calculate, though, that ($1.8mn) of investment income on an annual basis will be suspended.

The BDC most at risk of loss is CCAP, which owns about half the outstandings and which is involved in a last out arrangement, which should result in a bigger eventual capital loss.

Frankly, the BDC Credit Reporter has been caught flat footed by BJ’s bankruptcy. The company was carried as performing (CCR 2) in our database because of the near-par valuation by all its lenders. In retrospect, the fact that a oil services firm like this one should stumble is no great surprise. In any case, we have leapfrogged the company’s rating down three levels to CCR 5, or non performing. We’ll be reverting with more details on how the bankruptcy might play out for the BDC lenders involved once we learn more about the company’s plans.

As a parting thought, we do wonder why any BDC would lend to an oil services company – even a giant one – given the well known wreckage of so many similar businesses since 2014. This debt was booked in 2019. Perhaps the recovery the BDC lenders will ultimately achieve will prove us wrong but – if past is prologue – expect that losses will be material and for a loan that was priced at a modest LIBOR + 7.00%.

Electronics For Imaging: Downgraded By Moody’s

According to S&P Global Market Intelligence Moody’s has downgraded Electronics for Imaging’s corporate credit rating to Caa1, from B3, and changed the outlook to negative from stable. The ratings group “expects the company’s adjusted leverage and liquidity will fall short of forecasts through 2022 as the company’s revenue recovers from an expected significant decline in 2020“. Thankfully, liquidity is “adequate” for the time being, but the business is facing economic headwinds, a not uncommon challenge going forward. BTW, Electronics for Imaging provides digital imaging and print management solutions for commercial and enterprise printing.

First lien debt has been downgraded to B3, from B2 and second lien to Caa3, from Caa2. Both loans are trading at wide discounts to par. Five BDC lenders – with an aggregate of $95mn at cost – are invested in both, so it’s worth noting. The public BDCs involved are (in order of investment size) FS-KKR Capital (FSK); FS KKR Capital II (FSKR); Bain Capital Specialty Finance (BCSF) and Garrison Capital (GARS). Non-listed GSO-Blackstone also has a big position in the first lien debt.

We first placed the company on the underperformers list in the IQ 2020, when the debt was up to (17%). [Each BDC has very different values]. Our initial rating was CCR 3. However, this latest development is causing us to downgrade the company further to CCR 4. Given the dollars involved, there’s a lot of investment income in play: nearly $6.5mn. Thankfully, we’re not placing the company on our Weakest Links register. Yet.

Still, of the four dozen companies we’ve dealt with this week in the BDC Credit Reporter, this is the largest in terms of FMV: $84.1mn so bears watching closely. This seems to be an example of a business that we would characterize as being part of the “second wave” of troubled credits: performing well enough before Covid-19 wreaked havoc on its growth prospects. The company undertook a major acquisition last year. Even though the synergies promised from that transaction have largely been realized that has not been enough to keep the company’s prior B3 rating.

Akorn Inc. : Files Chapter 11

On May 21, 2020 Akorn Inc. filed for Chapter 11. Last time we wrote about the pharmaceutical company on April 6, 2020 was to warn that a bankruptcy was coming up. The company appears to have agreed a plan with its lenders, which will involve both a debt-for-equity swap and the arrangement of debtor-in-possession financing. This ends a sorry period that included a failed sale; accusations of fraud and many other disturbing revelations. From a lender’s perspective, news that the company had “not made an annual profit in two years and generated $310 million in negative EBITDA in 2018” is the most disturbing of all. As always, we remind readers that filing Chapter 11 – especially when lenders become owners and sometimes have to ante up further funds to keep business ticking over – is just one more twist in the tale. We’ll be writing again about Akorn before long.

Thankfully, BDC exposure is limited to Garrison Capital (GARS) with only $2.0mn invested in the first lien debt as of March 31, 2020 and valued at $1.6mn. Still, the interest rate being charged was very high: over 15%, so GARS will be losing out on $0.3mn of annual investment income. A realized loss is likely to be booked in the next quarter or two once the company exits bankruptcy. We won’t even try to assess what the final results might be given the immaterial size of this position.

Otherwise, this bankruptcy falls into the category of the already walking wounded companies that existed before the Covid-19 crisis. The current conditions have not helped, but the possible wave of directly-related virus defaults has not yet hit. We are downgrading Akorn from CCR 4 to CCR 5; removing the name from the Weakest Links list now that non accrual has happened but added it to the ever longer list of bankrupt BDC-financed companies.

Centric Brands Inc.: Files Chapter 11, Restructures.

On May 18, 2020 Centric Brands Inc. announced a major restructuring. This includes the public company going private and a pre-negotiated trip through Chapter 11 bankruptcy. What’s more the company is getting $435mn in Debtor-In-Possession financing to smooth the way forward. $700mn of second lien debt is being written off. The existing first lien lenders – including three BDCs – will be staying on, but will be receiving equity in the new ownership.

Management blames Covid-19 for its troubles. However, back in December 2019 when first wrote about Centric Brands we were skeptical that the company could survive in its then-capital structure where interest expense matched EBITDA. By the time we posted again in April of 2020, the bankruptcy/restructuring die was seemingly cast with only the details to be worked out. Centric was on the BDC Reporter’s Weakest Links list. Like so many other names we’ve placed there, the company now moves to our non performers list until the bankruptcy judge approves this restructuring.

The BDC that will be most impacted in the short term will be Ares Capital (ARCC). At March 31, 2020 ARCC held $24.6mn at cost in Centric Brands public stock, which is now worthless. That will likely result in a ($3.2mn) write-down from the latest valuation and a ($24.6mn) realized loss. Less clear is whether ARCC’s first lien debt ($57.1mn at cost) as well as that of TCW Direct Lending VII and Garrison Capital (GARS) will be getting a haircut. If so, it’s unlikely to be much larger than the (10%) unrealized loss booked at quarter end by ARCC. Income, though, will likely be impacted during the bankruptcy period. We have no idea if accrued interest gets repaid in the new arrangement.

What is likely is that the existing first lien lenders are involved in that very large DIP financing, so BDC exposure – between debt and equity – is likely to increase rather than decrease when all the beans are counted once the restructuring is completed. Moreover, the BDCs relationship with Centric Brands may last a good deal longer now that lenders are becoming part owners. No word yet if any new capital is being injected and by whom.

We are downgrading the company’s credit rating from CCR 4 to CCR 5. After the restructuring occurs – assuming no blips – we will be maintaining the company on our underperformers list. The restructuring does not magically wave away the difficult retail environment Centric is likely to face. Moreover, no news of any new equity capital infusion worries us that the new owners, led by Blackstone, may be undertaking this turnaround too cheaply. Centric Brands would not be the first retail-oriented company that went through Chapter 11 twice… The BDC Credit Reporter will await more details about the transaction and the respective BDCs valuations of their post-recapitalization positions.

We will also be watching how this situation plays out in the context of evaluating how well BDCs like ARCC fare when they transition from lenders to owner-lenders. In this case the BDCs involved appear to have only a minor role to play in the new Centric Brands. Nonetheless, we shall evaluate the age old question of whether this is good money after bad or a masterful way to recoup some, all or more of capital advanced.

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.

Centric Brands Inc.: May File Bankruptcy

According to news reports, Centric Brands Inc. has hired restructuring advisers and is considering a Chapter 11 filing. As always, we know this “from people familiar with the matter”. That’s most likely the borrower, or the borrower’s many professional advisers, whispering down the phone line. Centric designs and manufactures apparel under licensing agreements from brands. A debt load of $1.4bn needs to be restructured. Public shareholders appear to have given up already. The stock trades at $0.77.

The BDC Credit Reporter initiated coverage with a CCR 3 rating back in late December 2019. As you’ll see from a quick reading, we’d reviewed the company’s filings and were already deeply worried before Covid-19 struck. Now a move down to CCR 5 – non performing – status seems all but inevitable. For the moment, we are downgrading Centric to CCR 4, but don’t expect that to be for long.

BDC exposure since we last wrote continues to be “Major”: i.e. over $100mn. At 12/31/2019 there was $123mn invested at cost by three BDCs and an FMV of $113.1mn. Most at risk of loss remains Ares Capital (ARCC) whose $24.6mn invested at cost in the company’s equity is looking fragile. The leading BDC also holds a $57.8mn position in the First Lien 2023 Term Loan, along with TCW Direct and Garrison Capital (GARS). In a bankruptcy we assume there’ll be some kind of debt for equity swap and a haircut will be taken. Judging by year end 2019 valuations from all three BDCs, any loss will be minor as the debt was still valued at par. We remain much more skeptical just by looking at the enterprise value of the business before Covid-19 came along, let alone now.

We will learn more shortly most likely and will come back with a better assessment of what ultimate BDC losses are likely to be.

Akorn Inc. : Prepares For Chapter 11

Back on December 18, 2019 we wrote our last article about Akorn Inc. with the title “May File Chapter 11“. Now, more than three months later – and longer than we anticipated – that’s about to happen, if news reports are to be believed. In the interim Akorn put itself on the block; found a buyer and then lost said buyer.

“”Unfortunately, our sale process has been negatively impacted by the broader market uncertainties related to the COVID-19 crisis. However, we are working closely with our lenders to determine the best path forward to ensure that the company is positioned for long-term success,” Doug Boothe, Akorn’s president and CEO, said in a news release.

Now the company is trying to negotiate a restructuring plan with its lenders that will, in all likelihood, include a trip to bankruptcy court once a mutually agreed deal is reached.

There’s only one BDC with skin in this game and that’s Garrison Capital (GARS), which has a modest $2.0mn position in the company’s 2021 First Lien debt. That’s currently trading at a (15%) discount. We expect that restructuring to get negotiated soon and that long delayed Chapter 11 filing to occur. GARS will be losing – for a time – $0.22mn of investment income, but the final damage – if any – should be minor.

VIP Cinema Holdings: Bankruptcy Plan In Doubt

Back on February 19, 2020 when we first wrote about VIP Cinema Holdings, the movie theater seat manufacturer was in bankruptcy but planning to exit with a plan that included the conversion of debt to equity and new capital. Since then, though, we’ve had the Covid-19 situation, which has been a disaster for so many businesses, including the company’s prospective movie house clients.

Now, thanks to a legal challenge from a disgruntled unsecured creditor (Regal Cinemas) and a full fledged article in Law360, we hear that there is some doubt that the company will be able to proceed and get bankruptcy court approval to exit Chapter 11. Admittedly, this is one sided information as the company has not responded to claims made as yet.

However, one has to wonder – even without Regal’s complaints – if the company can survive in any form the extreme market conditions that Covid-19 has wrought and which show no signs of abating. For the three BDCs involved, this is making a bad situation worse. At year end 2019 – with the debt owed already on non accrual but before the Chapter 11 bankruptcy – VIP’s 2023 Term Loan had been written down by approx (55%). The expectation was that the BDC lenders would become owners in a fully de-leveraged entity. Now a complete loss on $23.6mn invested is a possibility. The BDCs involved are (in descending order of importance) publicly traded Main Street (MAIN); non-traded sister BDC HMS Income and public Garrison Capital (GARS).

We will check back when the BDC Credit Reporter determines if the company successfully exited Chapter 11 or not. Even then – and even without any debt outstanding – VIP may not yet survive. We are in a whole new environment and what was possible only a month ago in terms of company rescue will be very different going forward.

Constellis Group Inc.: Update

We have written about Constellis Group on four prior occasions. With the publishing of IVQ 2019 BDC results, our most dire predictions appear to be coming true. That’s unfortunate because on January 4, 2020 the BDC Reporter was saying darkly: “We’ll probably be learning a lot about the company’s plans and the impact on its various lenders very soon and will be able to make a better assessment. At this point, though, with a potential loss range of $75mn-$100mn in a down case, this looks like a major credit reverse is on its way“.

Now we’ve just seen OFS Capital’s (OFS) latest valuation of the 4/1/2025 “First Lien” debt. The loan has been discounted by (96%) from cost versus (71%) at 9/30/2019. Worse, and according to Advantage Data, currently that loan trades at 1 cent on the dollar... Likewise, FS-KKR Capital II has also reported IVQ 2019 results and the value of its 4/15/2022 Term Loan. That was discounted by (14%) in September, but (33%) at year-end 2019. Currently that loan – also on non accrual – is discounted (87%).

Let’s tot up the damage. There’s $9mn of investment income already interrupted since November 2019 (according to OFS) and potential realized losses across several tranches of debt of ($96mn-$100mn) by our rough estimate. That’s ($30mn) in additional unrealized depreciation from the 9/30/2019 levels for which we have values for all BDCs involved. We don’t have the latest word about how the restructuring of the company is going but by the time we hear, the lenders involved appear set to recover very little. Even then, that might be in the form of equity rather than cash.

Frankly, this is an unmitigated disaster for this Apollo Group-led buyout and for the BDC lenders involved. To be specific, the biggest hit is being taken by the non-traded BDCs in the FS-KKR Capital construct (FS Investment II; FS Investment III; FS Investment IV and CCT II, all of which are being rolled into one entity). By our count 86% of the exposure is there, with OFS the second BDC group on the list with $9.8mn at cost. Far behind are Garrison Capital (GARS); followed by two non-traded players with small outstandings.

We’ll be checking back when the final decision about a bankruptcy-restructuring is finalized but – from a lenders standpoint – most of the damage has been done and material recovery of any kind seems unlikely from the information at hand.

Bass Pro Group, LLC: Loan Value Dropped

The BDC Credit Reporter added fishing and hunting specialty retailer Bass Pro Group LLC to the under performers list only in IVQ 2019. That was on the back of a worrisome note by Moody’s about the company, which we wrote about on October 1, 2019. The company is privately owned.

There’s been no new information from the ratings group that we’re aware of since, or anything material in the public record. However, when we checked Advantage Data’s records for the latest valuation of the company’s debt we noted a discount of (12%) on March 13, 2020, significantly higher than before the market melt-down.

Moreover, we couldn’t help surmising that a company still heavily reliant on walking around consumers – now stuck at home in some cases – might be impacted going forward. As Moody’s previously noted, the owners have had an “aggressive” financial stance. The loan in which the BDCS involved are funded was expanded in 2018 to allow for the repayment of junior capital, as Moody’s reported at the time. Also, EBITDA is at or above the levels we’d prefer for companies of this size. We are affirming our CCR 3 rating, but will be paying ever closer attention.

At the moment, though, BDC exposure is relatively modest: now just 2 players: publicly traded OFS Capital (OFS) and Garrison Capital (GARS), with $9.0mn invested at cost. (The latter has the bulk of the exposure). Non-traded GSO-Blackstone appears to have dropped out as lender late in 2019. In both remaining cases, the exposure is limited to involvement in the syndicated 2024 Term Loan, mentioned above. OFS actually valued the debt at a premium to par at 12/312/2019 (the GARS report is not available). That might even suggest the debt will shortly be repaid.

In our database, we’ve assumed some potential material credit losses in a worst case, but there’s no immediate reason to be concerned for the BDCs involved. Income at risk is just $0.6mn as the debt is priced at LIBOR + 500 bps.

VIP Cinema Holdings: Files Chapter 11

Well, that’s embarrassing. For the last few weeks we’ve prided ourselves on having identified all BDC-funded companies that are under-performing. However, we’ve now learned that cinema seat manufacturer VIP Cinema Holdings has just filed Chapter 11, and that there are 3 BDCs involved and $24mn invested at cost who are about to take a haircut. VIP Holdings was not on our under performers list. All BDC exposure is in a 2023 Term Loan. We should have placed the company on the under performers list in the IIIQ 2019 (the last one reported) when the debt was discounted up to (25%), versus (8%) the prior quarter. The BDCs involved are Garrison Capital (GARS); Main Street (MAIN) and non-traded HMS Income, which is managed by MAIN.

The company appears to have a plan in place to allow a fast exit from bankruptcy: a debt-for-equity swap with the existing lenders that will see $178mn in debt extinguished out of $210mn and new capital brought in by a PE group – H.I.G. Capital. Reuters reports that the company “hopes to emerge from bankruptcy by mid-April, while preserving 373 jobs”

For the record: VIP was founded in 2008 in New Albany, Mississippi, as a residential furniture maker and reportedly has a 70% share of the U.S. market for luxury movie theater seating.

Questions have to be asked about lenders underwriting a single product company which services an industry (movie houses) whose troubles are well known. Also, when a borrower has a 70% market share the most likely direction is usually down. Still, we don’t know exactly how the BDCs involved will fare and exactly what portion of their debt will be converted to equity and what kind of realized loss – if any – will be booked. That’s likely to become evident in the IQ or IIQ 2020 results.

This new non accrual/bankruptcy is notable – besides from the fact that we missed the name in our research- for the speed at which the company went from performing to non performing. This credit dates back to IQ 2017, according to Advantage Data. As mentioned above VIP’s debt was valued close to par through IIQ 2019. Just a few months later virtually all its debt has to be written off for the business to be viable. This begs questions about the valuation process of the BDCs involved as we can’t imagine the slowdown in VIP’s sales was a very recent phenomenon. We worry that BDC lenders – and the army of valuation experts that review their investments just about every quarter – are only recognizing problems when they are right in front of them and inescapable. That’s good for manager compensation levels and keeps investors from worrying for a while, but may keep matters that should be brought into the open in the dark.

Akorn, Inc.: Lenders Extend Standstill, Company To Be Sold

Akorn, Inc. has been in trouble ever since a proposed sale to a third party fell through last year for all the wrong reasons. Since mid-2019, the company has been operating under a “standstill agreement” with its lenders, and much negotiation has been happening behind the scenes. We last wrote about the company and its troubles back on December 18, 2019. At that point, we had a rating of CCR 4 on Akorn, suggesting we believed that a bankruptcy or restructuring, and some sort of realized loss, was more likely than not.

Now we hear – thanks to a February 12, 2020 press release – that certain lenders have agreed to an indefinite extension of the” standstill agreement”. More importantly – and the reason for the lenders apparent patience – is an agreement that the company will immediately seek a buyer. There’s even an agreed schedule and provisions for a “pre-packaged” Chapter 11. If no sale occurs then a default will occur and we’ll be potentially back in bankruptcy court, but under different conditions. The lenders goal: ensuring Akorn is sold to ensure their debt is paid in full. As of September 2019, Akorn reported $835mn in debt, all due the minute the borrower and the lenders cannot agree. All of the above suggests the Akorn story will come to a conclusion of some sort in 2020, and sooner rather than later if matters go well.

From a BDC perspective there’s only BDC with exposure – and not much at that. Garrison Capital (GARS) has $2.0mn invested in the 2021 Term Loan, marked at a modest (7%) discount. The BDC – and the market if we are to believe what the debt is trading for – seem to believe the lenders will “get out” without any material loss. Not so the shareholders of the company who have seen their stock price drop in the last two years from $33 a share to $1.36. That suggests there is not much room for any further decline in Akorn before lenders join common stockholders to share the financial pain. Still, with annual investment income at risk of only $0.166mn and a modest potential book value loss, GARS is unlikely to be much affected one way or another.

Frontier Communications: March Bankruptcy Targeted

We’ve written eight prior articles about the publicly traded telecom + cable giant Frontier Communications, dating all the way back to March 2019. In fact, the company was added to our Under Performer list following IVQ 2018 results with a CCR 3 (Watch List) rating and downgraded further to a CCR 4 (Worry List) back on June 13, 2019. More recently, we predicted the company might file Chapter 11 in the IVQ 2019, but that did not happen. In our last report before this one, though, we said a Chapter 11 filing was likely in the IQ 2020. With the latest news reports, that seems likely to turn out to be true.

People with knowledge of the matter” – and there are dozens of lenders, lawyers, insiders and regulators involved at this stage so journalists have plenty of sources – indicate the company is aiming to file a consensual, pre-packaged bankruptcy by March. On the horizon are $356mn of interest payments due in mid-March. As a result, Frontier’s new CEO and his team have been busy – according to these reports – meeting creditors and seeking to craft out a restructuring plan that would be blessed by the court. (The company itself has no comment).

From a BDC perspective, the question is now more about how each lender class will fare in the restructuring, and what impact there will be on interest income – running about $5mn a year. As we’ve noted before, the debt held by the BDC lenders remains valued at a premium to par, both in their own valuations and when we look at the market price of their secured debt on Advantage Data. Will Frontier restructure itself, go in and come out of Chapter 11 in a hurry and have no impact on the value or income of the $67.5mn in debt held by 8 BDCs ? We have our doubts, but that’s the state of play at the moment. We shall soon learn if those valuations are appropriate.

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.

Constellis Holdings: Restructuring Underway

We warned in an earlier article on October 9, 2019 that for Constellis Holdings “a day of reckoning is coming – and fast”. Judging from two major – and related – developments, the time is nigh. On January 3, 2020 the Wall Street Journal reported the troubled security company “is in talks with creditors on a deal to restructure its $1 billion of debt, according to people with knowledge of the discussions”. Darkly, unnamed sources, warned that if an out of court restructuring didn’t happen, a “pre-packaged” Chapter 11 filing was also on the table. (That’s all part of the negotiation process in these kind of deals as interested parties suddenly find their way to the phone to confide to journalists, who are themselves happy to be of service).

We also learned that the company failed to make a scheduled principal payment on December 31 and has received a short term forbearance from its lenders.

At the same time, Moody’s went and downgraded the company’s corporate rating to Ca, and re-rated several debt tranches outstanding. Most worrying of all is that Moody’s reports that the company’s finances suddenly deteriorated in the last quarter of the year, resulting in a “liquidity crunch”.

All of which suggests the Day of Reckoning is here for the 8 BDCs with nearly $107mn in debt exposure at various points in the company’s balance sheet. Just one month ago, one of those BDC lenders – OFS Capital or OFS – waxed relatively optimistic about the outlook for Constellis: ” I want to note that the company is current on its payments. And based on discussions with management, they have stressed that they have adequate liquidity to fund operations. The company has a growing backlog and expects sequential performance improvement. The sponsor has substantial amount of cash invested in this business, and we expect continued focus from the sponsor”.

We now know that at least some of those reassurances are no longer true. This is reflected in the public prices of the outstanding debt as provided by Advantage Data. The 2022 Term Loan is trading at a (57%) discount, versus (14%) at September 30, 2019. The second lien debt is worth only 10 cents on the dollar in the market, down from 25 cents. At 9/30/2019 FMV was still around $84mn, down ($23mn) from cost. Now, we wouldn’t be surprised to see further losses of ($30mn)-($40mn) more at FMV and ultimate Realized Losses – which could crystallize very soon – of nearly ($75mn). Add to that the loss of income and you’ve got the first bona fide major set-back for BDC lenders in 2020 , should there be no last minute rescue.

As we’ve noted before, the bulk of the exposure – and thus any damage – will be concentrated in the four non-listed FS-KKR BDCs – CCT II, FSIC II, FSIC III and FSIC IV. This was a borrower that the group jumped into under the KKR regime, bringing BDC exposure from modest ($12mn) to major, when they initiated exposure in the IVQ 2018. Maybe the far sighted folk at the jointly run asset manager have their eyes on becoming equity owners of Constellis, but we don’t think so as Advantage Data’s records show the debt was purchased at a cost very close to par, and before the current downturn in corporate fortunes.

We’ll probably be learning a lot about the company’s plans and the impact on its various lenders very soon and will be able to make a better assessment. At this point, though, with a potential loss range of $75mn-$100mn in a down case, this looks like a major credit reverse is on its way.

Centric Brands Inc: Credit Coverage Initiated

We are initiating our credit coverage of Centric Brands Inc. with a rating of CCR 3, dating back to the IIQ 2019. At that time, Ares Capital (ARCC) discounted the value of its $24.6mn equity stake in the company by (24%), from par in the prior period. Given that the company is publicly traded (ticker: CTRC) that reflects a declining stock price, which was as high as $5.33 a share in mid-March. By the end of June CTRC was at $4.11. As we write this on December 28, 2019, the stock price has halved since the summer to $2.15.

Admittedly, most of the substantial BDC exposure of $123.8mn at cost is in the form of Term debt due in 2023, held by the afore mentioned ARCC, TCW Direct Lending and Garrison Capital (GARS). That debt has been valued very close to par since first being booked and remains so in late December, according to Advantage Data’s records.

Nonetheless, even a quick glance at the company’s 10-Q is enough to elicit credit concern. The company is fast growing, thanks to acquisitions in 2018 and 2019, but debt levels are very high and getting higher. We note that Adjusted EBITDA, as reported in the latest 10-Q for the first 9 months of 2019, was given as $122mn. Interest expense – which admittedly includes Pay-In-Kind income – was $142mn…The ‘comprehensive loss” over the same 9 month period was ($171mn). Yes, we know investors are too clever to take GAAP accounting as the be-all in this brave new world of adjusted numbers but that’s still a lot to swallow.

Notwithstanding the apparent complacency of the debt markets, the BDC Credit Reporter is worried about the leverage levels. Our concern is heightened because the amount of total BDC exposure is so high, especially for ARCC and TCW Direct Lending. Any sort of stumble by the company could materially impact book value and investment income earned. Nor should debt holders take too much comfort from the “first lien senior secured” appellation of the $99mn in term debt held by the BDCs. Sitting above them in order of priority is a secured Revolver – led by ARCC as administrative agent – and many of the company’s trade receivables are being sold off in a different financing facility.

We expect that we’ll be updating readers multiple times in the year ahead given that Centric is a public company and every quarter brings a new snapshot of performance. We’ll also keep an eye on stock and debt price performance, even if we don’t fully trust the credit antennas of the latter in the current frothy and generous market conditions.