Posts for PhenixFIN

Dream Finders Homes LLC: IPO Completed

Pandemic or no, Florida home builder Dream Finders Homes LLC found a way to go public, selling 9.6mn shares at $13 a share to the public and taking the ticker DFH. Jacksonville Daily Record contributing writer Mark Basch wrote “not only is Dream Finders selling its stock in a strong market for its industry, but IPOs in general have been surging. Major stock market indexes have reached record highs recently, but stocks of home builders are doing even better than the overall market.”

This is good news for the only BDC with exposure to Dream Finders: PhenixFIN (PFX) – the former Medley Capital – which holds $4.5mn of Preferred Series B, which is accruing at 8.0% per annum in Pay In Kind (PIK). (The BDC previously was also a senior lender to the company but a remaining $1.5mn senior term loan was repaid in the IQ 2020).

Till this IPO Dream Finders was underperforming from IVQ 2019, when the PFX discounted its preferred by -21%. We downgraded the company from CCR 2 to CCR 4 on our 5 point scale, but moved the rating up to CCR 3 in the IIIQ 2020 as the discount shrunk to 13%. We’ve now returned Dream Finders to performing status (CCR 2) . Reading through the company’s public filings, we expect the preferred will get repaid by 2022 in full, including all accrued dividends.

This is good news – albeit on a small scale – for PFX which has been beset for years by multiple credit trouble spots. The good news coming out of the home builder will not affect the BDC’s investment income but should result in a write-up of the preferred value by over $0.5mn in the IVQ 2020 results when published.

Black Angus Steakhouses: To Scale Down Operations

Restaurant chain Black Angus Steakhouses LLC has closed half of its eateries in response to the pandemic. This follows the earlier permanent closure of several locations in two states. According to the San Fernando Valley Business Journal the Sherman Oaks-based chain “now has 15 restaurants operating in California, Arizona, Washington and Hawaii. The company owns a total of 34 locations in five states“.

This is bad news for the two BDC lenders to the company: PhenixFIN (PFX) and non-traded Sierra Income. (Until recently PFX was managed by Medley Management which controls Sierra and was called Medley Capital or MCC). The two BDCs have advanced just short of $31mn in first lien debt to the company that was due 12/31/2020. However, the obligations have been on non accrual since the IQ 2020 and it’s unlikely the debt has been repaid since last we heard from PFX at the end of the IIIQ 2020. At that point, both BDCs were discounting their non income producing loans by (35%) – (38%).

Common sense suggests that things may go from worse to worser at Black Angus and a further reduction in the value of the debt investment will be forthcoming. We’re changing our outlook for ultimate resolution to a loss of (50%-75%) of cost. At the upper end of the range that might result in several million dollars of further write-downs in the BDC positions before this credit gets resolved in one way or another.

We’ll revert when we hear more from Black Angus or when Sierra and PFX report IVQ 2020 results.

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.

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 ?

Capstone Nutrition: Acquired By PE firm

The news – reported on September 24, 2019 – that PE firm Brightstar Capital had finalized its acquisition of Capstone Nutrition should have been music to the ears of its 3 BDC lenders, with an aggregate $117mn in exposure. That’s a pretty penny to have outstanding and to a contract manufacturer much of whose debt has been on non accrual since 2016 !

The BDCs involved are Medley Capital (MCC), Sierra Income and Business Development Corporation of America. Big discounts in excess of three-quarters of cost have been taken as of the latest IIQ 2019 results.

What we don’t know – and nobody is saying – is whether the purchase price was large enough to ensure the repayment in full of the lenders – including the afore mentioned 3 BDCs. If so, that will be a major gain (over $80mn) – and elicit a huge sigh of relief from the BDCs and their shareholders. If not, a realized loss of an undetermined amount will be crystallised as early as the third quarter 2019 BDC results.