Public IPO:  $15.00   NAV 6-30-2016: $21.11

Posts for Main Street Capital Corporation

Aptim Corp: S&P Global Ratings Update

According to a news report, S&P Global Ratings is feeling a little better about Aptim Corporation, an environmental consulting and remediation company. APTIM Corp. was “affirmed” on Feb. 11 2021 at CCC+ and its outlook revised to “stable” from “negative”. Apparently some receivables that had been of questionable collectibility have come in, improving liquidity.

The CCC+ rating on the company’s $515 million of 7.75% senior secured notes due 2025 was affirmed as well.S&P Global Ratings believes Aptim’s balance sheet cash will be sufficient to handle fixed charges over the next 12 months“. However, as you can see by the speculative rating, Aptim is hardly free and clear of trouble as leverage is high, operating profitability poor and the company’s capital structure as “unsustainable”.

Nonetheless, these developments – and the modestly positive signal from S&P – might result in shrinking the discount on the value of the 2025 debt – with a cost of $30.5mn and a IIIQ 2020 discount that ranges between -37% and -48%. We note that Main Street (MAIN); Great Elm (GECC); FS KKR Capital II (FSKR) and non-traded HMS Income all hold the same debt but their valuations differ. In fact, FSKR even carries the debt as non-performing.

The -$13mn in unrealized losses might shrink either in the IVQ 2020 valuation or in the IQ 2021 based on the improving situation at Aptim. We have rated the company as underperforming since the IVQ 2018; and further downgraded the business to a CCR 5 when we first saw the FSKR non-accrual in the IIQ 2020.

The BDC Credit Reporter will circle back as the IVQ 2020 results come in from the BDCs involved and see what we’ll learn. We have no view as to the likelihood of an eventual loss but that “unsustainable” capital structure remains cause for concern, especially as the BDC debt outstanding is in junior debt capital. Still, in the short term values might be going up rather than going down or getting written off.

UPDATE: We have added Aptim to our Alerts list of companies whose value is expected to materially change in the next 1-2 quarters.

American Teleconferencing Services: IVQ 2020 Update

We’ve written about American Teleconferencing Services before: back on August 21, 2020 when we provided a IIQ 2020 update. The company has been troubled since IVQ 2018 and is rated “speculative” by Moody’s. From a BDC perspective this is a “Major” underperformer because aggregate exposure at cost is over $100mn and involves no less than 7 BDCs. We have rated the company CCR 4.

Now Capital Southwest (CSWC) – one of the seven – has published IVQ 2020 results. No word on its conference call about American Teleconferencing. However, the BDC Credit Reporter notes that CSWC has increased its discount on the first lien and second lien held to record levels. The former debt – which matures in 2023 – is discounted -45% and the latter -60%. In the prior quarter, CSWC’s discounts were -33% and -48%.

This does not bode well for the company, or CSWC or the other BDC lenders who have yet to report. We did undertake a public search to get some color but found nothing recently. The downward trend is undeniable, though, and keeps the company rated CCR 4 on our five level scale. We don’t where CSWC rates the investment. Some $8.2mn of annual investment income is involved.

AAC Holdings: Completes Restructuring

The BDC Credit Reporter write about AAC Holdings, Inc (aka “American Addiction Centers”) a lot. This is our eleventh update and will not be the last. Last time we wrote – back on June 21, 2020 – we concluded in this way: “We get the feeling a debt for equity swap is in the cards and the BDCs on the books will be involved for many more years to come and the amounts of capital deployed will yet increase, possibly to over $80mn“.

That’s just what seems to have happened, based on a press release from the company on December 14, 2020. This announced the completion of “ a financial restructuring process” which involves a much lower debt load ($500mn !); a new CEO (picked from within the ranks of the company’s senior management) and a new Board. The Chairman of that new 7 person Board is Bowen Diehl, the CEO of Capital Southwest (CSWC). The BDC is one of four BDCs – both public and private – with what is now $82mn in exposure to the company.

Otherwise, the press release is un-generous in providing the details of what is clearly a debt for equity swap that will take the previously public business private. Perhaps we’ll have to wait till the IVQ 2020 BDC results are published in February 2021 to learn what realized loss might be booked and which lender owns what of AAC and what debt is left ? As of September 2020, the lenders-future owners had already taken ($24mn) in unrealized losses, or nearly 30% of funds advanced. Some of the lenders in the 2023 Term debt had booked discounts of (54%).

Clearly, from a credit standpoint and with some of the debt on non accrual for over a year (from IIIQ 2019) this has been a material setback for CSWC; Main Street Capital (MAIN); New Mountain Finance (NMFC) and non-traded HMS Income, which MAIN manages. We assume that the lenders have high hopes that the company – still facing plenty of pandemic-related operational challenges – can recoup some or all what has been lost in the years ahead with the lenders at the tiller. Before that begins, though, we need to know what the bill has been for the BDCs shareholders so far.

This is going to be an excellent test case of whether the BDCs involved can successfully rescue a portfolio company or whether good money (and managers time) is going after bad. CSWC is very familiar with this sector and Mr Diehl is a logical Chairman of a re-structured AAC. Still, that’s no guarantee that the business can be saved.

BarFly Ventures LLC: Assets Acquired Out Of Bankruptcy

After filing for Chapter 11 bankruptcy in June as a result of COVID-19 pandemic-related challenges, Grand Rapids, Mich.-based BarFly Ventures LLC sold its assets — including craft beer bar/restaurant HopCat, Stella’s Lounge, and Grand Rapids Brewing Co. — to Congruent Investment Partners and Main Street Capital for $17.5 million, the company announced on Tuesday. Longtime investors Congruent Investment and Main Street Capital formed a new operating company, Project BarFly LLC upon acquisition of the brands“. Nation’s Restaurant News

Apparently, the new owners want to revive the existing Michigan operations of the restaurant chain, and expand beyond the state.

Main Street Capital (MAIN) – as well its sister non traded HMS Income -have a long standing relationship with the predecessor company that dates back to 2015. From the IQ 2020, though, the two BDCs debt to the company was placed on non accrual and a Chapter 11 bankruptcy followed in June. As of the most recent results at mid year, the two BDCs had invested $15.0mn in debt and equity, but had written down the positions to just $1.7mn.

Back in June, the BDC Credit Reporter asked itself the following:

Will MAIN/HMS seek to take an ownership situation and – maybe – double down with some additional financing ? Or will the BDCs kick themselves for having invested in the restaurant business in the first place and with a growth strategy – as the CEO himself tells it – based on growth by debt-funded acquisitions. The model was already in trouble before Covid-19 came along but the impact of the virus was the equivalent of a body slam. You can’t win them all, but this investment seems to have been dubious from the start“.

Now we have our answer but just how this will flow from a realized loss point of view and how much new capital will be advanced by the BDCs remains unclear. Furthermore, years are likely to pass before we’ll be able to tell if this latest transaction was a genius move that might return all the monies invested and more, or will end up itself in bankruptcy court and a further loss. If nothing else, though, this transaction does underscore how some BDCs are serving as their own “distressed assets” investors and are willing to become owners in certain situations rather than just take a loss and walk away. For shareholders in these BDCs this requires a different set of lenses when evaluating a portfolio and its outlook.

California Pizza Kitchen: Reaches Agreement With Lenders

According to multiple reports, California Pizza Kitchen (“CPK”) – in Chapter 11 bankruptcy – has reached an agreement in principle in late September 2020 with its first lien lenders and unsecured creditors. That should shortly allow the restaurant chain – already making operational plans for post-bankruptcy operations – to make an exit shortly from the court’s protection.

With a bit of luck CPK should exit bankruptcy in the IVQ 2020 and we’ll get a clear picture of which of the now 6 BDC lenders involved ended up where. Total outstandings from the BDC lenders is $49.5mn in IIQ 2020, slightly higher than in the IQ 2020. (BTW, Prospect Flexible Income appears to be no longer a lender). We already know, though, that this will prove to have been a misstep for all the BDCs involved.

Cenveo Corp: Sells Businesses

Sometimes the BDC Credit Reporter has to read the tea leaves and come to some conclusions without all the salient facts because we’re dealing with private companies and disclosure is limited. This is the situation with BDC-portfolio company Cenveo Corporation, a global printing solutions company. We last wrote about Cenveo in May when a plant was closed, with Covid-19 blamed. At the time we downgraded the company to CCR 4 from CCR 3. Now we hear that in August Cenveo sold two printing plants and – on September 10 – a trade publication indicatesCenveo Publisher Services and Cenveo Learning were sold to a third party.

This seems to be a pattern of business divestment by Cenveo that might signal an improvement in its credit standing. As of June 2020, Main Street Capital (MAIN) and non-traded sister BDC HMS Capital valued the $9.7mn debt of Cenveo at a modest discount to book. The $9.5mn equity in the company – apparently received a few years ago in a restructuring – is discounted by (50%). For the lenders, Cenveo has been a troubled borrower/investment since inception in 2015. A look at the Advantage Data valuation table shows loan – and later – equity – values rising and dropping and rising and dropping again over the past 5 years.

We are presuming – based on the evidence above – that the asset sales will help the business. That’s a leap of faith and readers should make their own minds up. We are upgrading the company from CCR 4 to CCR 3. However, the debt on the books of the BDCs is not due till 2023 so much could yet happen for good or ill.

We will revert back after the IIIQ 2020 results are published by the BDCs involved to see if our presumption has proved correct.

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.

I-45 SLF LLC : IIQ 2020 Update

The “I-45 SLF LLC” is a joint venture set up between two public BDCs that have a history of working together: Main Street Capital (MAIN) and Capital Southwest (CSWC). The JV dates back to 2015 and was rated as performing through the end of 2019. However, the BDC Credit Reporter first downgraded the entity to CCR 3 in the IVQ 2019 as multiple portfolio companies experienced credit problems. The situation was only exacerbated by the pandemic and the rating was dropped to CCR 4 in IQ 2020, as the discount on the BDC’s junior capital in the entity reached (43%). In the second quarter 2020 the valuation increased modestly – along with market loan values. Nonetheless, we are retaining the CCR 4 rating.

In the most recent quarter income from the JV paid out to its sponsors was reduced due to the precipitous drop in LIBOR only marginally offset by the 80 basis point average “LIBOR floors”. Furthermore, MAIN and CSWC injected additional equity capital in the quarter while the JV’s lender reduced its debt commitment, as mentioned in CSWC’s 10-Q: “On April 30, 2020, the I-45 credit facility was amended to permanently reduce the I-45 credit facility amount through a prepayment of $15.0 million and to change the minimum utilization requirements”. 

A quick look down the portfolio list of I-45 SLF shows that several troubled companies already on CSWC and MAIN’s own books are here as well. We’ve reviewed the entire portfolio and identified several underperformers and noted that cost to FMV is only 85%, even after loan values generally increased in the June 2020 quarter. We’re pretty sure the BDC partners will not be getting back in full the capital deployed whenever the JV is eventually closed down. At this stage we expect the eventual realized loss will be ($15mn-$20mn), split 80/20 between CSWC and MAIN. In the interim, though, the JV should continue to pay out a dividend, so we’re not adding the name to the Weakest Links list.

American Teleconferencing Services: IIQ 2020 Update

Now that IIQ 2020 BDC results have been released, we can confirm that American Teleconferencing Services – a wholly owned subsidiary of communications company Premiere Global Services – remains rated CCR 4. We’re guided mostly by the latest valuations from multiple BDCs with first lien and second lien exposure. The former is discounted by wildly varying percentages : (6%) to (35%). The latter has been nearly cut by half in value. Moody’s has given the company a Caa2 rating as recently as August . The ratings group had this to say:

“The debt restructuring in October 2019, surge in audioconferencing volumes and virtual events during the pandemic and sponsor’s equity contributions have improved the liquidity position but it is uncertain how the business will perform when the crisis abates. The rating additionally considers execution risks in plans to cross-sell services and operate under shared services agreements with TPx Communications, which was acquired in February 2020 by affiliates of Siris Capital, which also owns the parent company of American Teleconferencing Services.”

There does not seem any reason to add the company to the Weakest Links list yet but the business has some considerable way to go before lenders are out of the woods in what is a Major position in aggregate: $109.4mn at cost and $88.8mn at FMV. Most at risk – but with modest exposure – is Capital Southwest (CSWC) with $2.1mn in the second lien, which is valued at $1.1mn. The outlook is favorable in the short run, as Moody’s suggests but the company will need monitoring.

California Pizza Kitchen: Files Chapter 11

On July 30, 2020 California Pizza Kitchen (aka CPK) filed for Chapter 11, as part of a broad restructuring plan (RSA) agreed with its first lien lenders. As readers will expect by now, the RSA envisages a “debt for equity swap” and additional financing to get the restaurant company through this difficult period, presumably financed by some or all those same lenders that are in the existing financing. CPK hopes to be in and out of bankruptcy in 3 months.

The BDC Credit Reporter has written about the company on three prior occasions. Our most recent contribution followed learning that several BDC lenders had placed their debt outstanding to the business on non accrual, but not all. In any case, bankruptcy has seemed like a forgone conclusion for some time. As a result, the seven BDCs involved (6 of whom are publicly traded) will have to face the consequences of their $48.1mn invested in the debt of CPK.

Common sense suggests the second lien debt holders : Great Elm Corporation (GECC) and Capitala Finance (CPTA) will have to write off the $4.1mn and $4.9mn respectively held. The rest of the debt is in first lien debt (including a tranche held by GECC) and will mostly become non income producing, when swapped for common shares. We expect the BDCs involved will write off 80% or more of their positions, but we’ll gather more details shortly. As usual in these situations, total exposure may increase as some of the lenders fund their share of the additional capital. For the record, the other BDCs involved are Main Street (MAIN); Capital Southwest (CSWC); Monroe Capital (MRCC) and Oaktree Specialty Lending (OCSL) ; as well as non traded TP Flexible Income with a tiny position.

CPK is – arguably an example of a “Second Wave” credit default. Admittedly, the company was already underperforming before Covid-19 but would likely not have had to file Chapter 11 if the virus had not occurred. As recently as the IIQ 2019 GECC – in a case of ill timing – bought into the second lien at a (5%) discount to par. Going forward, a much de-leveraged CPK should have a decent chance of survival, and may even thrive in the long run. This might allow the BDCs involved to recoup some of their capital but it’s going to be a long slog.

Currently, the BDC Reporter has rated CPK CCR 5 – or non performing – which remains unchanged. We’ll re-rate the company when the RSA – or some other outcome – is finalized. By the way, this is the ninth BDC-financed company to file for bankruptcy – all Chapter 11 – in the month of July, keeping up the blistering pace set in June.

Permian Holdco 1-3: File Chapter 11

On July 19, 2020 – according to news reportsPermian Tank & Manufacturing filed for Chapter 11. The filing seems to have included entities such as Permian Holdco 1, Permian Holdco 2 and Permian Holdco 3 – all of which have BDC debt involved. As you’d expect, the companies are pointing to Covid-19 as the culprit for this trip to bankruptcy court, but performance was on the fritz for some time. We have very few details at this time, so consider this but an early flash warning.

As far as we can tell so far there are three BDCs involved in one or all the “Permian Holdco” entities with a total cost of $48.2mn. Four-fifths of the exposure is held by New Mountain Finance (NMFC) but Main Street Capital (MAIN) and its sister fund HMS Income have exposure as well. The capital is invested in seemingly every layer of the balance sheet: senior debt, subordinated debt, preferred and equity.

As of March 31, 2020, NMFC had already sounded the alarm and placed some of its preferred and subordinated debt positions and written off a big chunk of accrued Pay In Kind income. Overall BDC capital had been discounted by one third, but there are huge variations between different facilities. The senior debt was mostly carried at par – as was the subordinated debt in some cases and written down by (32%) in others. The preferred and equity were fully written down.

We cannot tell how great the ultimate loss might be, but we do know that $20mn in the junior layers of the balance sheet must almost certainly be headed to a write-off. The remaining amount in senior debt, more likely than not, will face a haircut as well. We can’t tell exactly how much but several million dollars of investment income that was still being booked will be interrupted and probably not ever resume. Rightly or wrongly, NMFC – for example – was still booking into income some of the debt owed at rates of 14%-18% all the way through March and – maybe – through today.

The BDC Credit Reporter is downgrading the company/entities to CCR 5 from CCR 4. Perhaps unsurprisingly for a business with “Permian” in its name, this credit had been rated as “underperforming” since the IQ 2019.

We’ll learn more in the months ahead, but can say with some certainty that this looks like a material set-back for NMFC – both in terms of capital and income at risk. Less impacted, but hardly happy with the outcome are MAIN and HMS Income.

Bluestem Brands: Business Sold Out Of Bankruptcy

After much back and forth Bluestem Brands Inc. has been acquired out of bankruptcy by its lenders – led by Cerberus Capital Management. The centerpiece of the deal ? Forgiveness of $250mn in debt in return for control of the company in a “debt-for-equity” swap. These details are from a Wall Street Journal article on July 7, 2020. Haggling continued till the very end. At first the buying group offered $300mn, then $200mn and finally $250mn, as discussed in prior articles.

For the four BDCs involved with $34.0mn invested at cost – all in debt – this brings the day of resolution and restructuring closer. The BDCs have already written down their pre-petition positions by (31%)-(40%). We estimate that discount will increase to (55%) when all is said and done. The post-petition debt should get repaid in full or rolled into whatever new capital structure the new owners envisage. Expect to see significant realized losses booked in the third quarter 2020, in the order of ($12mn-$15mn).

Unknown – but not unlikely – is that Main Street (MAIN); HMS Capital; Capitala Finance (CPTA) and Monroe Capital (MRCC) will need to advance more capital going forward to give Bluestem a chance at success. Our readers may expect to be reading about the company – maybe under a new name – for some time to come. The good news ? Maybe some portion of the debt will start paying out its lenders again shortly.

However, the chances of a Chapter Twenty Two, i.e the business falling back into bankruptcy again remain high given the difficult market conditions. Also, much depends on how generously the new Cerberus-led group carves out a new capital structure. We’ve seen multiple examples of new, lender-led groups being shy about making the necessary sacrifices in writing off debt and not injecting new capital. Maybe it’s not in the DNA of lenders more intent on getting their money back than ensuring a business thrives. We need to dig deeper and find out what sort of plan Cerberus and its group has in mind.

Bluestem Brands: Stalking Horse Offer Reduced

As we last wrote on March 11, 2024, Bluestem Brands is in Chapter 11. Now we hear from the Wall Street Journal that the “stalking horse” offer by Cerberus and a group of lenders to the company has been reduced from $300mn to $200mn. Further details are as yet unavailable.

The implications for the 4 BDCs with exposure – which has now increased to $34mn as the lenders provide DIP financing which is performing – are not clear. We expect the BDCs are part of the Cerberus headed attempt to undertake a debt for equity swap. Clearly market conditions have deteriorated since the bankruptcy. This might result in each lender getting a bigger equity slice of a smaller pie or cause another buyer to swoop in or delay the exit from Chapter 11, which has the effect of depleting cash resources. (Bankruptcy is a very expensive process, and this one will shortly be entering its fourth month).

The BDCs involved in the original debt have already discounted their loans by (40%) as of March 31, 2020. Given the reduced perceived value of Bluestem, this might result in a yet bigger discount as of the June 30 valuation and a bigger realized loss when this phase is completed. The $6.3mn in DIP financing, though, should continue to be unaffected for the moment. We maintain the company’s CCR 5 rating.

This drop in the value of Bluestem is emblematic of what is likely to happen to recovery values going forward. Before Covid-19 struck, bankrupt companies were – by and large – retaining much of their value given plentiful capital in the market. Now buyers, investors and lenders are all pulling out their forensic microscopes and values are dropping. We’ll be interested to compare the final discount the lenders have to absorb against the March 31 value when this transaction plays out. It will be instructive both about Bluestem Brands and about recovery expectations more generally. The BDC Credit Reporter guesses we could see a substantial further drop. This is what happens in recessions. The days of a V recovery seem far off.

AAC Holdings: Files Chapter 11

On Saturday June 20, 2020 AAC Holdings (dba American Addiction Centers) filed for Chapter 11 bankruptcy protection, ending a year and a half long “will they ? won’t they ?”. AAC Holdings, according to news reports, listed $517.4mm of total debts against $449.4mm of total assets. The company is planning ahead for the next phase, having arranged $62.5mn of debtor-in-possession financing from its lenders. Other details are still sparse including any agreed amount of debt forgiveness. We’ll circle back later with those details later.

The BDC Credit Reporter has been skeptical of the company’s ability to remain a “going concern” for some time. We’ve written nearly a dozen articles about AAC dating back to early 2019. At the time of the filing, we already rated the company as non performing – CCR 5 – as several BDCs had already ceased booking any investment income from the first lien senior debt. Total exposure is currently $69.9mn (using IQ 2020 numbers), all in debt of one kind or another. Some debt tranches are recent – and were advanced to support the business and are carried as income generating. The original debt, though, has been non performing since the IIIQ 2019.

The BDCs involved include Main Street Capital (MAIN), its sister non-traded BDC HMS Income and Capital Southwest (CSWC), which has a strong relationship with the other two BDCs. The biggest individual position, though, is held by New Mountain Finance (NMFC). For some reason, NMFC’s $25mn 2022 Term Loan position was still accruing income through March 21, 2020, involving close to $2.5mn of investment income that must now be interrupted.

How much the BDCs might lose in this Chapter 11/restructuring and whether lenders will become owners and advance even more monies is not yet known. We can report that at 3/31/2020 the total unrealized write-down was (37%), or ($25.7mn). If the over-optimistic BDC valuations in the past are anything to go by, final losses could be even higher than what’s already booked and the impact on income (especially for NMFC) will be material.

For our part, AAC Holdings retains its CCR 5 rating, but the company is removed from our Weakest Links list after many months of our crying wolf, and is added to the BDC-financed company Bankruptcy list. This is the 9th BDC bankruptcy in June, and the 26th in 2020. By both cost and fair market value this is the 8th largest BDC bankruptcy in the year.

By no means do we believe this will be one of the last posts we’ll be writing about AAC. We get the feeling a debt for equity swap is in the cards and the BDCs on the books will be involved for many more years to come and the amounts of capital deployed will yet increase, possibly to over $80mn.

APTIM Corp.: Wins Federal Contract

A subsidiary of APTIM Corp – the engineering management company – has been awarded a $129mn Federal contract for Navy barge dismantlement, according to a June 10, 2020 report. This follows the recent addition of a new CEO at the troubled company whose debt trades at a severe discount. He joined April 20, 2020. Nonetheless, we note that the 2025 bond is trading 5% points up currently versus the end of the IQ 2020. At that point, the 4 BDCs with $30.9mn exposure to that debt had applied a FMV discount to cost of as much as (65%).

These are green shoots for APTIM, and make our last May 11, 2020 assessment of the company – which is on our Weakest Links list with a CCR 4 rating – possibly too harsh. For the moment we are not changing our corporate credit rating, but we are removing APTIM from the Weakest Links list.

Evergreen Skills Lux: Files Chapter 11

On June 15, 2020 multiple news sources reported that private-equity education company Skillsoft Corp. (aka as Evergreen Skills Lux) filed for Chapter 11 bankruptcy. From the first details we’ve learned, this is a pre-packaged arrangement and the company – which has about $2.0bn in debt – expects to be in and out of bankruptcy court protection in a short time. As is the fashion these days, this is a debt for equity swap which will see $410mn of debt extinguished in return for control of the business. No word on whether a Debtor In Possession financing is involved, only that Skillsoft expects to have $50mn of liquidity available. More details will follow and we’ll circle back if worthwhile.

Under two different borrower names (Skillsoft Corp and Evergreen Skills Lux SARL) there is $50.3mn invested at cost in the company by 5 different BDCs. These are non-traded BDCs Cion Investment, Business Development Corporation of America and HMS Income, and publicly traded Main Street Capital (MAIN) and Monroe Capital (MRCC). [In an earlier version of this article because of a confusion about the company’s multiple names only one BDC was identified and the amount was smaller].

Skillsoft had been underperforming for some time. From the IIQ 2018 the debt had been discounted more than (10%). As early as IVQ 2019 Cion had already placed its second lien position on non accrual. By the latest quarter – March 31 2020 – all the BDCs had their first and second lien loans rated as non performing. This is yet another large cap company whose debt was priced inexpensively (LIBOR + 475 bps) seeing their financial condition deteriorate more quickly than might otherwise have been the case due to Covid-19. We call these companies First Wave credit casualties.

This is the sixth BDC-financed company to file for bankruptcy protection in June and the second on this day.

Barfly Ventures LLC: Files Chapter 11

According to a regional business publication, Barfly Ventures LLC – a bar and restaurant operator in the Midwest – has filed Chapter 11. As you’d imagine, Covid-19 has sabotaged the business and made sustaining its reported $30mn in debt untenable. Thus the bankruptcy filing and the hope that the company can survive and return after a time under court protection. In fact, re-opening of several shuttered locations is already on the cards, so patrons of HopCat – their flagship brand – will be pleased.

This was no great surprise to the BDC Credit Reporter which already had the company rated CCR 5non performing – following the IQ 2020 results from Main Street Capital (MAIN) and non-traded HMS Capital, which have invested $15mn in debt and equity in this ill fated company. The $1.2mn in equity has been written to nothing, and the debt – senior not – has been reduced to a value of $1.4mn. By our standards – as we seek to direct our energies towards the more impactful credits – that makes Barfly Ventures “non material” given that no income is being generated and the likely capital to be rescued at the end of the day will hardly move any needles.

Nonetheless, we’ll continue to follow the progress of the company and how the lenders relate going forward. Will MAIN/HMS seek to take an ownership situation and – maybe – double down with some additional financing ? Or will the BDCs kick themselves for having invested in the restaurant business in the first place and with a growth strategy – as the CEO himself tells it – based on growth by debt-funded acquisitions. The model was already in trouble before Covid-19 came along but the impact of the virus was the equivalent of a body slam. You can’t win them all, but this investment seems to have been dubious from the start. At worst, the two BDCs may end up writing off all ($15.0mn), which we’ll discover in the IIIQ 2020 most likely.

California Pizza Kitchen: Second Lien Debt On Non Accrual

We’ve written about California Pizza Kitchen (or “CPK” to the world) on two prior occasions. Most recently, on April 23, 2020 we discussed the restaurant chain’s ambition to restructure its debt as both secular declines in its business which began some time ago and Covid-19 have made business conditions very difficult. Frankly, we were expecting a bankruptcy filing at any moment, but that has not happened. (That does not mean a Chapter 11 filing could not yet occur).

Now that IQ 2020 BDC results have been published we can see how the 6 different BDCs with exposure have valued their loans. We found that CPK’s first and second lien debt has been placed on non accrual by two of the BDCs and not by four others. Apparently, based on comments made by Monroe Capital Corp (MRCC) – which has not chosen to list the debt as non performing – there is a difference of views between the players. Also choosing to leave the debt on accrual is Main Street (MAIN); Great Elm (GECC) and TP Flexible Income. By contrast, CPTA Finance (CPTA) and Oaktree Specialty Lending (OCSL) have their debt positions marked as non-performing.

Total BDC exposure – spread over first and second lien term loans due in 2022- amounts to $43.3mn at cost. The debt is mostly discounted just under (50%) at FMV, but GECC does have a second lien position written down (78%), while CPTA has discounted its own debt in the same loan by (46%)…

The CPK example speaks to a wider phenomenon that’s always underway where BDC valuations are concerned: discrepancies both about what should be treated as a non accrual and fair value marks. However, the Covid-19 crisis has frequently accentuated the variations and over a much wider number of companies due to the greater degree of uncertainty. This makes taking any one valuation or accrual vs non accrual status too seriously until the credit markets settle down. That could take several quarters as the ratings groups are projecting credit troubles continuing at a heightened level through to 2021.

For our part, we have downgraded CPK from CCR 4 to CCR 5. (We tend to take the most conservative credit position). The company has been removed from the Weakest Links list of companies expected to default given that – as least in two cases – that has already happened. We still believe the chances of a bankruptcy filing are high given that full service restaurants will be challenged for some time and take-out cannot fully make up for business lost.

Update 6/2/2020: CSWC reported IQ 2020 results and placed CPK on non accrual but indicated on the conference call being impressed by management and multiple sources of income to mitigate Covid-19 impact.

Aptim Corp: Valuation Drops

Great Elm Corporation (GECC) announced IQ 2020 results on May 11, 2020. This included an update on the valuation of Aptim Corp, which we’ve discussed before. GECC wrote down its position in the 2025 Term Loan by (58%). That’s in line with Main Street Capital’s (MAIN) own valuation of the same security. Currently, the discount is even greater at (65%).

Previously we’d rated the company as CCR 4, and added the debt to the Weakest Links list. We affirm both our earlier views following these latest disclosures, and suggest the final value of the 2025 debt – held by 4 BDCs overall at an aggregate cost of $30.9mn – might end up being nil. The other BDCs involved are non-listed FS Investment II and HMS Income, which is managed by MAIN.

Cenveo Corp: Closes Printing Plant

According to news reports, Cenveo Corp announced on May 5, 2020 the closing of a major printing plant, and the loss of 184 jobs. Another sign that the Covid-19 crisis is causing a sharp drop in business. The company was not able to give the required 60 day notice.

Cenveo has been rated as underperforming since IIIQ 2017, with a Corporate Credit Rating of 3. We are downgrading the printer to a CCR 4 status. It’s impossible to tell if the company is at risk of defaulting on its debt.

There are two BDCs involved with $19.1mn of exposure in debt and equity at cost: Main Street Capital (MAIN) and sister BDC HMS Income. At IVQ 2019, the debt was carried at a premium to par but the equity was discounted (44%). We’ll learn more about how the BDCs measure their values shortly with the IQ 2010 results.