Posts for Sierra Income

Tensar Corp: Added To Under Performers

On March 25, 2020, we added Tensar Corp. – previously rated as performing and CCR 2 – as under-performing and CCR 3, our Watch List. The global engineering’ company’s downgrade was due principally to what has happened to the value of its 2021 Term Loan, which has been discounted by (30%) in the market and a 2022 Term Loan which is off by (40%). Otherwise, we have very little new information about the company except that its plant in Wuhan (!) has recently reopened after being closed because of you-know-what.

There are 4 BDCs with exposure that totals $49.8mn and all in the 2021 Term Loan. The larger exposure is publicly traded Pennant Park Floating Rate (PFLT) with $22.5mn. Also a lender is Great Elm (GECC), which has been adding to its position of late, and non-traded Sierra Income and Cion Investment. At year end 2019, the debt was only modestly discounted by the BDCs involved. In years past Tensar had some difficulties and had a speculative rating from Moody’s but since IVQ 2016 has been valued closer to par and given a B- rating by S&P.

Frankly, we understand very little about the company’s most recent performance and how much Covid-19 has affected its business, although its website admits management is taking all precautions. Apparently, all the company’s factories are open but that does not tell us much. The drop in the debt value – which only accelerated in the last few days – might be a knee-jerk market reaction, or something else. We’re not ready yet to assume a realized loss will occur down the road, but we’ll be looking out for news from the company, the press or the rating groups. At the moment, though, we expect this credit will return to performing status when the world gets back to work, but you never know in these unprecedented conditions for leveraged companies.

Holland Intermediate Acquisition: In Default

THL Credit (TCRD) reported IVQ 2019 results on March 6, 2020, which included the revelation that portfolio energy company Holland Intermediate Company had defaulted on its $21.3mn Term Loan. There goes ($2.3mn) in annual income for the BDC. (Sierra Income – which has not reported – also has $4.3mn of debt exposure in the same facility). TCRD wrote down the investment to a (68%) discount from (32%) in the prior quarter. Sierra had already applied a (68%) discount as of September 2019.

None of the above is any great surprise to the BDC Credit Reporter. As we wrote in our prior post on December 15, 2019, we had long ago rated the company CCR 4, where we believe the chance of an eventual loss is greater than a full recovery.

The question now is whether if there’s any chance of recovery. We don’t know because the company is closely held and TCRD is close-lipped about the operations and financial performance of the business. To be realistic, though, with the oil price in freefall thanks to the global impact of Covid-19, which happened subsequent to the default and the IVQ 2019 valuation, we’re estimating this might be – at worst- a complete write-off. At best – barring a massive change in market conditions – this will be a non performing and devalued investment for some time to come.

What we also don’t know is whether the lenders might be asked to put more money up to support/save the business which might result in greater exposure. This will be a theme across the energy space and a conundrum many more BDCs than TCRD and and Sierra Income will face.

Holland Intermediate Acquisition: IIIQ 2019 Update

Holland Intermediate Acquisition Corp. is a closely-held energy company which has been funded by THL Credit (TCRD) since IIQ 2013. TCRD is one of only two BDCs with exposure and essentially the only source of news about how the business is performing given that non-traded Sierra Income rarely discusses portfolio issues. Total exposure at cost is $25.6mn, 80% of which is held by TCRD. As you’d expect for a company in the energy sector, Holland Intermediate has been on the under-performing list for some time: since IIIQ 2015; based on the first lien debt being written down by more than (10%) by one of the BDC lenders.

At June 2019, TCRD was discounting its first lien debt to the company – which is the same facility as Sierra owns – by (15%). The non-traded BDC was using a materially more conservative discount of (31%). We had already assigned the company a Corporate Credit Rating of 4 (Worry List); alarmed by both Sierra’s valuation and the negative trends in the sector. At the time TCRD offered this pint-sized assessment of the company’s status: “The business continues to make progress, albeit at a slower-than-expected pace, and we’ve adjusted the value of our holdings this quarter to reflect this

In the third quarter 2019 results, both BDCs doubled the discount on their positions, with Sierra Income writing down the debt by (68%), the highest ever in any quarter judging from the Advantage Data records. TCRD increased its discount to (35%). From TCRD’s Conference Call on November 5, 2019 we learned that the BDC is “closely monitoring” the company. The color offered on the call was as follows: “The business continued to face market headwinds this quarter due to overall reduced M&A activity in the energy space, and was marked down accordingly“.

Obviously, these are clear signals to be concerned about, even if the underlying business reason is not clear. We also worry about whether the debt – which is coming up to its maturity in May 2020 will get repaid. The loan is priced at an expensive – but not inordinate – LIBOR + 900 bps. AD’s records show, though, that this loan just refinanced the lenders original loan booked in 2013, which had a 5 year maturity, in 2018. When lenders refinance a medium term loan with a much shorter time period that’s usually sign of stress. We may see another short term loan with the same lenders occur in the first half of 2020. However, if things go awry and a default occurs, there is a material $2.8mn of investment income at risk. We’ll be updating the Holland Intermediate story every quarter when we hear from TCRD, or if we learn something from the public record which – to date – has offered no clues.

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.

Charming Charlie: Intellectual Property Sold

This will probably be the last post we write about Charming Charlie, the women’s accessories retailer which went bankrupt twice in a short period and is being liquidated. We wrote a major article on bankruptcy number one back in December 2017 in the BDC Reporter. In the second round, multiple BDCs with $37.4mn of debt and equity invested at cost lost (almost) everything. At June 2019 two BDCs were still holding out for $0.9mn in FMV, presumably from any net proceeds from the Chapter 7 liquidation.

In this regard, a trade publication reported that the founder of the company had acquired the intellectual property associated with Charming Charlie for $1.1mn. That will be little succor to lenders after all other expenses are paid, but brings closer the date of the ultimate Realized Loss crystallization and the end of this sad attempt to keep what was not so long ago a prosperous and fast growing business alive.

Charming Charlie: Selling Intellectual Property

On August 26, 2019 the Wall Street Journal reported that the bankrupt company is seeking court approval to hire Hilco IP Services to sell items of its intellectual property. That may help paying some of the bills associated with the liquidation of the business but is unlikely to end up in the pockets of its three BDC lenders (THL Credit, Cion Investments and Sierra Income) with $37.4mn invested at cost.

As of June 2019, the FMV of the investments – probably based on the hope of some recovery like this – is at $0.800mn, or 2% of capital invested. Notwithstanding the prospective intellectual property sale, we expect all BDC investments to be effectively wiped out. A resolution should occur before year end.

Charming Charlie, LLC: Seeking Financial Adviser And New Capital

Trade publication Retail Dive – quoting Debtwire says troubled women’s accessories retailer Charming Charlie has brought in a financial adviser. In addition, the nationwide chain, which was recently recapitalized by THL Credit (TCRD), is seeking new capital, in the form of debt or equity. All this sounds worrying from a credit standpoint. To date, TCRD – alongside non-traded Cion Investments and Sierra Income – have been funding the company with debt and equity in an ambitious attempt to bring the business back to performing status. At March 31, 2019, the three BDCs had advanced $37mn at cost to Charming Charlie, mostly in debt and mostly still on non accrual. The exposure is valued at roughly half of cost. We worry that Charming Charlie, which only exited Chapter 11 in late April 2018, might do a “Chapter 22” and need to file again. This time, though, that might mean liquidation and a potential significant write-off for the lenders involved.

Z Gallerie: Sold At Bankruptcy Auction

According to the Wall Street Journal, online furniture and appliance seller DirectBuy Home Improvement Inc., a subsidiary of e-commerce business CSC Generation, has won a bankruptcy auction for home-decor retailer Z Gallerie LLC with a bid valued at $20.3 million. DirectBuy’s bid comprises $7.7 million cash and $12.6 million in debt provided by KKR Credit Advisors and B. Riley Financial Inc, according to papers filed in the U.S. Bankruptcy Court in Wilmington, Del. Further details are sparse. The bottom line, though, from a BDC standpoint is that FSK ($30.2mn) and non-traded Sierra Income ($4.4mn) are likely to have to book an almost complete Realized Loss. At March 31, 2019 the respective values were a;ready down to $4.8mn and $1.4mn. The final discount could be higher. We note that KKR Credit Advisors is providing some of the financing, but don’t yet know how that relates to FSK , which is a JV between KKR and FS Investments. In any case, this is a reverse for both companies, albeit one that has been on non accrual for several quarters.

 

Charming Charlie: Arranges Revolver Financing

On April 18, 2019 two specialist  lenders announced the closing of a $35.00mn asset-backed revolving line of credit for troubled mall retailer Charming Charlie, intended to finance working capital. The two lenders are White Oak Commercial Finance and Second Avenue Capital Partners. There are 3 BDCs with $37mn of debt and equity exposure to the Company, led by TCRD. At 12/31/2018, the 2023 Term Loan outstanding was on non-accrual. For what this financing might mean for the Company’s prospects see the Company File.