Posts for Sierra Income

Petrochoice Holdings Inc.: Downgraded By S&P

The BDC Credit Reporter really tries to be comprehensive and catch wind of credit troubles brewing at every BDC-financed portfolio company, but we’re not perfect. Here’s a case in point. We missed PetroChoice Holdings Inc. : ” one of the largest distributors of lubricants and lubricant solutions in the United States“. This is a business that was highly leveraged before Covid-19 and is being impacted by lower demand for lubricants because we’re all driving less.

Back in the IQ 2020 – we can now see with the benefit of hindsight – the company began to underperform. The ratings groups were fast to act with Moody’s downgrading the company from B3 to Caa1. The first and second lien debt – more on that in a minute – also got downgraded.

Fast forward to this week and we hear PetroChoice was also downgraded by S&P Global Ratings to CCC+ from B- on concerns about the company’s liquidity in the face of a “challenging” economic environment. Ratings on the company’s borrowings were cut as well, with the first-lien credit facility dropped to B-, from B, and the second-lien loan to CCC-, from CCC. Both ratings groups are worried about debt coming due in 2022 and the currently low odds that the company will be able to refinance the obligations.

This is worrying for 5 BDCs with first and second lien debt exposure. The total amount outstanding at cost is $102mn – a Major borrower by our standards. There’s more than $9mn of investment income at risk of interruption and/or loss if PetroChoice defaults. You might think the company has plenty of time to deal with its challenges but S&P warned forebodingly that by mid-2021 “total liquidity sources to fall below $10 million.” That’s too little to run a business of this size so we expect to hearing more about PetroChoice in the weeks ahead.

The BDC with the biggest exposure is FS KKR Capital (FSK) with $65mn at cost – all in the more vulnerable second lien debt, and priced at LIBOR + 875 bps, plus a 1.0% floor. The income involved is equal to 1.0% of investment income and 2% of Net Investment Income at the giant BDC. FSK has only discounted its position by -11% – which represents about 2% of its net worth. Of course, if things go awry at PetroChoice both income and net assets could be materially impacted.

Also at risk of taking a knock if PetroChoice should stumble is Bain Capital Specialty Finance (BCSF) with just over $16mn invested, but all in the senior debt, leaving both less income and capital at risk of ultimate loss. Golub Capital (GBDC) has a small position and two non-traded BDCs have moderate sized exposure..

We are rating PetroChoice CCR 4 because the odds of a loss at this stage are higher than of full recovery. We are also placing the company on our Alerts list – a new feature of the BDC Credit Reporter coming shortly and which you’ll find in the Data Room section showing which troubled companies credit situation is reaching some sort of resolution in the short term. There are so many underperforming companies out there we need a way to point out which ones might be affecting BDC results – for good or ill – in the coming quarter or two.

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.

Iqor US, Inc.: Files Chapter 11

On September 10, 2020 IQor Holdings and each of its subsidiaries (including Iqor US) filed for voluntary Chapter 11 protection in Texas. The company has a restructuring plan in place and above-average support in situations of this kind from its creditors. Furthermore, debtor in possession facilities have been negotiated with a value of $130mn. No wonder the company is optimistic about being in and out of bankruptcy in 45 days.

There is only one BDC with exposure to the company: non-traded Sierra Income with $20.6mn advanced at cost in two loans. As of June 2020, the smallest of those loans was already on non accrual and the total FMV of debt outstanding was $12.7mn. Given that a restructuring has been in the cards for some time we imagine the latest value may be close to where the debt will be marked when the restructuring occurs in the next few weeks. As a result, by year’s end we should see Sierra book a realized loss of ($8mn) or more. We’re not certain how the balance sheet will be restructured but a loss of income – given that most of the debt was still current through June – is likely as well.

This is the second BDC-financed company bankruptcy in September to date. As is the case in most bankruptcies in recent months a restructuring agreement was in place when the filing occurs. This propensity has resulted in more companies going out than coming out of court protection lately. As for the reason for Iqor ending up in this situation ? As the press release itself discloses, an acquisition gone wrong is the culprit rather than the usual suspect: Covid-19.

Isagenix International, LLC: Capital Infusion By Owners

Did the cavalry arrive in the nick of time at Isagenix International LLC ? On almost the same day as Fitch Ratings suggested the company might default before year-end, a press release indicates the principals of the company have injected $35mn in new equity capital. Moreover – but with less specificity- we learn that the existing lenders to the troubled company “have reconfirmed their support for the business with an amendment to their credit agreement, which will give the company greater flexibility for growth“.

That’s just as well for the 6 BDCs with an aggregate of $35.6mn in first lien loans to the company. As of June 2020, the debt was being discounted by (60%) or more. The debt – priced at a moderate LIBOR + 575 bps – was poised to be added to the BDC Credit Reporter’s Weakest Links list. We’ll hold off for the moment. By the way, the principal debt holder amongst the BDCs involved is non-traded Cion Investment with $13.4mn at cost; followed by Crescent Capital (CCAP) with $6.3mn and then by sister funds Main Street Capital and HMS Income Fund, both with $5.7mn.

We will retain the current Corporate Credit Rating of 4 till further details are made available and we hear more about the financial performance of the closely-held weight loss company. Nonetheless, the news of the capital support must be a positive for everyone involved. Although we’re writing about Isagenix for the first time here, the company has been underperforming since the IIQ 2019, first with a CCR 3 rating and CCR 4 since IQ 2020. Maybe this capital infusion will be what it takes to return Isagenix to the ranks of normal performance.

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.

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.

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.

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 a specialist firm 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.