"Business Development Corporation of America (BDCA) is a non-listed BDC that was launched in May 2010 and started selling shares on January 25, 2011. The BDC is externally managed by BDCA Adviser, LLC, a subsidiary of Benefit Street Partners LLC, a leading credit-focused alternative asset management firm. BDCA invest primarily in senior secured loans, and to a lesser extent, mezzanine loans, unsecured loans and equity of predominantly private U.S. middle-market companies. Middle market companies are defined as those with annual revenues up to $1 billion. BDCA also purchase interests in loans or corporate bonds through secondary market transactions."

Posts for Business Development Corporation of America

Mood Media: Company Sold

According to news reports Mood Media Corp. has been sold to Vector Capital for an unknown amount. Current lenders are to continue to provide debt financing under the new ownership. The BDC Reporter has written about the company on three prior occasions. Most recently, we wrote about Mood Media when the business re-structured and emerged from bankruptcy for a second time in recent years.

For the three BDCs with exposure – publicly traded FS KKR Capital (FSK) and FS KKR Capital II (FSKR) and non-traded Business Development Corporation Of America (“BDCA”) – this company has been a major disaster from a credit standpoint. As of June 2020, total exposure at cost – both in the form of senior debt and equity – totaled $122mn. Then came the most recent restructuring in August 2020 and huge realized losses had to be recognized. As far as we can tell (the BDCs themselves are coy in the filings about the specifics and on their conference calls) $110mn or more was permanently written off.

As of September – FSK and FSKR held an equity stake in restructured Mood Media but that had no cost or FMV attached. We assume the two sister BDCs permanently wrote off ($108mn) in August and do not seem to have participated in any post-restructuring debt facilities. By contrast, BDCA still has $12.4mn of debt and equity at cost and $14.4mn at FMV. (We have no explanation for these discrepancies as this is a privately-held company which does not disclose much in the way of information).

Now that Mood Media has been sold, we expect FSK and FSKR will just move on, but BDCA might continue as lender. We’ll be curious to see if the $4.4mn value of restructured equity will be reflected in the IVQ 2020 BDCA results.

For FSK and FSKR it’s been a long and winding road that begin in 2011 and 2012 respectively and quadrupled in size over time. Given that the two BDCs at the end of the day had to write off essentially every dollar advanced is a black mark. Even for BDCs of this size realized losses of ($50mn) plus are material.

GK Holdings: To Be Acquired/Upgraded

A very complex transaction involving a SPAC (“special purpose acquisition company”) is happening that will involve its merger with Skillsoft and the concurrent acquisition of Global Knowledge Training LLC (aka GK Holdings Inc. in our records). Both Skillsoft and Global Knowledge/GK Holdings are BDC-financed companies and both are currently on non accrual. Given that the value of the transactions is said to be $1.5bn, chances are the two companies involved – and their lenders – are about to experience a change of fortune.

As of June 2020, Global Knowledge/GK Holdings was financed to the tune of $15mn by three BDCs led by publicly traded Goldman Sachs BDC (GSBD). The BDC has both a first lien and second lien debt position. The latter has been on non accrual since IQ 2020, as the pandemic impacted the education business. Also with outstandings – both in the second lien – are public BDC Harvest Capital (HCAP) with $3.0mn at cost and non traded Audax Credit BDC with $1.0mn. Then there’s non traded Business Development Corporation of America (BDCA for short) which has invested $14.5mn in Skillsoft’s debt, most of which is also on non accrual since the IIQ 2020.

Most likely – as far as we can tell – all this troubled debt will be repaid as part of the envisaged two part transaction and some ($11mn) of unrealized losses reversed by the lenders to the two companies involved. The BDC with the most to gain is BDCA, with GSBD close behind. HCAP’s exposure is small but so is the BDC, which means any improvement in the value of their second lien debt, written down by (40%), will be gratefully accepted.

We’ll be digging deeper and learning more but, at first blush, this all seems to be good news in a situation that was previously headed ever southwards, as detailed in our prior article on April 27, 2020, written before either company’s debt was known to be on non accrual. Based on what we currently understand, the BDC Credit Reporter will be upgrading Skillsoft and Global Knowledge/GK Holdings from CCR 5 all the way back to CCR 2 if and when the deal closes in January 2021. Of course, at that time BDC exposure might be nil if the debt is repaid, making the rating CCR 6 (no further exposure). We will update readers when matters become clearer.

California Resources Corp: Restructuring Plan Approved

A bankruptcy judge has approved the restructuring plan agreed between California Resources Corp and its creditors. Now the troubled and highly leveraged energy company is set to exit from bankruptcy protection shortly, only months after filing in July. As previously announced, the restructuring involves a $5bn debt forgiveness in return for equity control of the business by the lenders. Existing public shareholders are wiped out.

For the only BDC involved – non traded Business Development Corporation of America (BDCA) – this means their relationship with the company – which dates back to 2017 – is likely to go on for years to come but in a new form. As of June 2020, the BDC had written down its $10.3mn term loan position by (64%). We expect that whatever realized loss BDCA might book – probably in the IVQ 2020 – will be in the ($6mn-$7mn) range. Any DIP monies advanced in July might be converted to long term financing or repaid.

This is not over for California Resources or BDCA, but the future remains cloudy. We expect that – the restructuring and exit notwithstanding – the investment will remain on the underperforming list for some time yet.

Mood Media : Files Chapter 11

As the company promised back on June 26, 2020 when we last wrote, Mood Media Inc. has filed for Chapter 11 bankruptcy. Also as previously indicated, the company and its creditors appear to have worked out a restructuring agreement in advance, the details of which are spelt out in the prior article. In the most recent press release on July 30, 2020 Mood Media indicated the whole plan was submitted to a judge on July 31, with the hope of exiting from Chapter 11 status very quickly. No word yet on the outcome of that deliberation.

We continue to believe the $120mn invested by three BDCs (with most of the capital advanced by FS KKR Capital or FSK and FS KKR Capital II or FSKR) will be largely written off. Our current estimate is that two-thirds of the debt and equity will result in a realized loss. Also likely is that the BDCs will be involved in both the DIP financing and the $200mn in post-bankruptcy senior loans planned. That will result in some investment income coming in but will increase long term exposure. Many years may go by – even if the restructured Mood Media does well – before this investment gets exited, as the BDC lenders will now be owners and creditors.

The hard truth is that even a restructured Mood Media has no guarantee of success given the pandemic and the structural changes going on in retail. If more and more of us shop from home, and less and less in stores, the demand for the company’s piped-in music will necessarily drop. Currently we are maintaining a Corporate Credit Rating of 5, and adding the company to the BDC Bankruptcies list, an exclusive feature of our publication. This is the tenth BDC-financed company bankruptcy in July and the 40th for the year. (Remember to go to the BDC Credit Reporter’s “BDC Bankruptcies” table for the constantly updated list of every company that has filed for Chapter 7 or 11 in 2020). Currently Mood Media is at the top but – the way things are going – will soon be displaced by new entrants.

Lakeland Tours LLC: Files Chapter 11

Student travel company Lakeland Tours LLC filed for Chapter 11 on July 20, 2020. The company – whose dba is Worldstrides – was in the wrong business in the time of Covid-19: arranging student travel programs. However, the company was performing well before the current crisis so management, shareholders and “certain lenders” have managed to cobble together a restructuring plan, which is expected to be blessed by the bankruptcy judge. Details in the company’s press release announcing the Chapter 11 filing are short on details, but some kind of “debt for equity swap”, accompanied – as per the usual – by the addition of new capital is planned.

BDC exposure is limited so we won’t be undertaking any deep dives with so many other troubled companies to worry about. The only BDC involved is non-traded Business Development Corporation Of America (BDCA for short), which has invested $11.9mn at cost in the company’s first lien term loan that matures at the end of 2024, according to Advantage Data. At March 31, 2020 – the first quarter the company joined the ranks of the underperforming – the discount was only (15%). We rated Lakeland CCR 3.

With the bankruptcy filing the credit rating drops to non performing, i.e. CCR 5. BDCA will be losing just short of ($0.6mn) of annual investment income. We’re guessing that the final realized loss the BDC will have to absorb will be bigger than (15%) as well. We don’t know at this time whether BDCA is participating in the new capital being advanced or in the “debt for equity” trade. We’ll circle back as details come out but the impact on the BDC in any case should be modest.

California Resources: Files Chapter 11

Yet another BDC-financed portfolio company in the energy sector has filed for Chapter 11. As long expected, California Resources Corp is using bankruptcy as part of a restructuring process that will see $5bn of “of debt and mezzanine equity interest ” eliminated; a $1bn Debtor In Possession facility put into place; a $450mn Rights Offering made and a new $200mn post-bankruptcy loan arranged, according to the Wall Street Journal. The huge numbers involved underscore that this is a very large bankruptcy.

From a BDC perspective, though, this is a minor item. Only one BDC is involved with the company: non-traded Business Development Corporation of America (BDCA for short) with $10.6mn invested at cost in first lien debt due in 2022. This was supposed to be a “safer” investment when booked in the IVQ 2017 and is priced at LIBOR + 475bps. The position is already discounted (38%) as of March 31, 2020. We expect BDCA might be involved in the next phase so capital at risk may increase. First, though, the BDC will likely need to book a realized loss and lose out on half a million dollar of annual investment income. We wouldn’t be surprised if the final loss is greater than what’s been reserved for so far.

As for the BDC Credit Reporter, we are downgrading the company from CCR 4 to CCR 5. California Resources comes off our Weakest Links list now the projected default has occurred. This is the third BDC-financed company bankruptcy in July.

Mood Media : To File Chapter 11 In July.

On June 26, 2020 Mood Media announced that it has entered into a comprehensive Restructuring Support Agreement with certain of its lenders, noteholders and equity sponsors on the terms of a “prepackaged” financial restructuring plan that will reduce the Company’s debt by $404 million. The company also indicated that – after soliciting creditor approvals – a Chapter 11 filing would ensue in Texas in late July.

In connection with the expected court-supervised process, the Company has received a commitment for up to approximately $240 million in new financing, including $40 million of new capital, from HPS Investment Partners, LLC and other first lien term loan lenders. The new financing will be subject to Court approval and, together with cash generated from the Company’s ongoing operations, is expected to provide ample liquidity for the Company to continue operating in the ordinary course during and after the contemplated court-supervised process“.

Unfortunately, this is another major set-back for BDC lenders, with total outstandings at $120mn at cost divided over three BDCs: FS-KKR Capital (FSK); FS-KKR Capital II (FSKR) and non-listed Business Development Corporation of America.We expect more than ($100mn) will shortly be written off. Even at March 31, 2020, the aggregate value had been cut in half to $57.5mn and the 14.0% second lien PIK debt held by the FS-KKR BDCs had been placed on non accrual, and their equity positions (from an earlier restructuring) written down to zero. Only BDCA – mostly invested in the first lien debt – may salvage some capital. What’s impossible to tell as yet is whether one or more of the BDCs will be involved in the new financing, stretching out this long sad relationship with Mood Media, which dates back to 2011 for FSK.

Mood Media is part of the “First Wave” of credit defaults, already deeply in trouble before Covid-19 caused virtually all its customers to close and not need piped-in music. In fact, Moody’s has had the company rated “speculative” since 2018. More recently, the ratings group wrote this in June 2019 : “With only $18 million of cash on the balance sheet, no available external liquidity sources, and covenant cushion erosion owing to step downs in 2019 and 2020, a more fulsome balance sheet restructuring or other default is highly likely over the next 12 to 18 months“. All this way before Covid-19. In other words, the company was an accident waiting to happen.

Yet, the BDCs involved carried their debt outstandings at or above par and had only reduced the value of their equity holdings by (50%) as of IIQ 2019. This suggests – and is consistent with many prior examples – that BDC valuations can often seem wildly optimistic or a little foolish with the benefit of hindsight. This makes relying on stated asset values difficult. For our part, if we hear the word “speculative” from a ratings group we’re going to apply a CCR 4 rating right away.

In any case, where the BDC Credit Reporter is currently concerned Mood Media remains CCR 5 or non-performing. When an actual bankruptcy occurs we’ll add the name to that ever lengthening list, probably next month as scheduled. We expect to hear more about the details of the restructuring and the way forward from Mood Media shortly but are not optimistic that the substantial losses we’ve predicted versus the value at IQ 2020 will change much for the better.

Foresight Energy: To Exit Bankruptcy

All bad things must come to an end, and that includes a stay under court protection for coal producer Foresight Energy, which has just received approval by the judge of its exit plan from Chapter 11 on June 24, 2020.

The Plan provides for the reduction of over $1 billion of Foresight’s existing indebtedness…Additionally, pursuant to the Plan, Foresight will emerge from chapter 11 with $225 million in secured exit facility loans (the “Exit Facility”), $75 million of which will convert to equity 60 days following the closing of the Exit Facility, and will have approximately $60 million in cash liquidity”.

As of March 31, 2020 only one BDC still had any exposure: non-traded Business Development Corporation of America (BDCA for short). The BDC has $6.4mn invested in debt, the largest portion of which was on non accrual and discounted (65%). We assume that unrealized loss will be crystallized and may be higher or lower now the final numbers are known. We also expect – but cannot confirm – BDCA will be participating in the add-on facilities, increasing its total capital committed. If so, that will leave BDCA both lender and investor in the recast company in what remains a very tough industry.

Even with any extra funds added, this is a relatively modest investment for the BDC. (The FS-KKR organization which had much more exposure through three of its funds got out shortly after Foresight filed for bankruptcy, greatly reducing BDC sector outstandings, but taking a realized loss).

The disappointing part is that “first lien secured debt” in what was a substantial enterprise has resulted in such a large percentage of capital loss. Like with oil & gas producers and energy services companies we have severe doubts about the appropriateness of lending into the coal space, a declining industry wrapped in an unfriendly regulatory environment. What could possibly go wrong ? Thankfully our data suggests BDC exposure is now limited to a handful of names and well under $50mn at cost. Maybe the word is getting out ?

ASP MCS Acquisition: Downgraded by S&P

On June 18, 2020 S&P downgraded ASP MCS Acquisition (dba Mortgage Contracting Services) to D from CCC, after the company failed to make a scheduled interest payment. Furthermore, the rating group grimly projects that the company is unlikely to make that payment within the allowed 5 day grace period, despite having the resources to do so. Also downgraded to D is the company’s 2024 Term Loan with a face value of $390mn.

This is all very bad – but not unexpected – news for the two BDCs with a total of $19.1mn at cost of exposure in that same 2024 Term Loan. The biggest exposure ($13.9mn) is held by non-traded Business Development Corporation of America and $5.2mn by publicly traded Crescent Capital (CCAP). Both BDCs had already greatly written down the value of their positions – by (61%) and (64%) respectively as of March 31, 2020.

The BDC Credit Reporter had already applied a CCR 4 credit rating to the company from IIQ 2019, and has been underperforming since the IIIQ 2018. However, we are now adding the company to our Weakest Links list given that non accrual seems to be inevitable. Just over $1.1mn of annual investment income will be suspended should that default occur.

We will circle back with an update shortly.

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.

Murray Energy: Defaults On Bankruptcy Financing

The Wall Street Journal – which has been meticulously covering the troubles at bankrupt coal miner Murray Energyprovided another update on May 21, 2020. The company apparently has managed to default on its financial package assembled following its Chapter 11 filing to assist in preparing for an eventual exit. There’s $440mn of post filing financing involved that’s in default. Now the embattled company wants its lenders, who are seeking to become its owners, to roll over the new monies into whatever the exit financing package will look like. For our part, we believe that a liquidation is more likely than an orderly return to business as usual at this stage but much will depend in the days ahead on what the bankruptcy judge and the lenders decide.

This is yet another concern for the two BDCs with $16.1mn of exposure: Business Development Corporation of America and Cion Investment. The two non-traded BDCs are lenders in the pre-bankruptcy Murray Energy first lien debt and in the new financing to the tune of $2.8mn between them. This most recent debt was supposed to be bulletproof but as of March 31, 2020 the BDCs had discounted their loans by as much as (9%). Both the earlier debt (discounted 88%) and the newer facility are in danger of losing more value by the next time the BDCs report and resulting in a realized loss if a liquidation does occurs.

For neither BDC is the total exposure very high and the income being received on the new debt is very modest. This story is more important as a warning that, in the current economic conditions, even debtor-in-possession financings are not necessarily safe from loss. That could cause some lenders in some bankruptcy situations to throw up their hands and not provide essential financing. This would increase the number of liquidations and the value of realized losses. Maybe Murray Energy is just an outlier, but we’ll be watching.

Montreign Operating Company: Debt Repaid ?

A few months ago, the Montreign Operating Company, which owns and operates a major upstate New York casino called Resorts World Catskills, and which is an indirect subsidiary of Empire Resorts Inc, was on the verge of bankruptcy. We wrote about the liquidity challenges the business faced at the time. Since then, much has happened. First, one of the partners in Empire Resorts – a Malaysian gaming company called Genting Malaysiabought control of the portion of the business not owned for $129mn. Here is a synopsis of the complex transaction:

As of August 18, Kien Huat Realty III – the family trust of Lim Kok Thay, a businessman who is the controlling shareholder of the Genting group, a Malaysia-based casino and plantations conglomerate – held approximately 86 percent of the voting power of Empire Resorts’ capital stock, according to a filing by the American firm. Under the operation announced in August, affiliates of Kien Huat Realty III and Genting Malaysia additionally plan to acquire the outstanding shares held by Empire Resorts’ minority shareholders, for US$9.74 a share. The deal would lead to the privatisation of Nasdaq-listed Empire Resorts via a joint venture between Genting Malaysia and Kien Huat Realty III

Then Covid-19 came along and in March, the casino was closed. The new owner raised additional monies to support working capital needs. Now we understand that the company’s 1/24/2023 Term Loan has been repaid and Moody’s has withdrawn its CCC rating, based on a April 17, 2020 report by the ratings group. This – if correct – would be good news for the 4 BDCs with exposure to Montreign/Empire , all of which is in the said Term Loan. That debt was valued between 0% and a (15%) discount at year end 2019 by the BDCs involved and was rated CCR 4 by the BDC Credit Reporter.

At a time when BDCs are taking losses left right and center and are anxious to de-leverage their portfolios with borrower repayments, this could be good news for non-traded Business Development Corporation of America; PennantPark Floating (PFLT); Investcorp Credit (ICMB) and PennantPark (PNNT) – in descending order of the $74mn invested at cost. We’ve checked as closely as we can, but we’ll need final confirmation from the BDCs involved at some point. We won’t be removing the company from the Underperformers list till we’re certain but the odds look good that we’ve got some good news to report.

Murray Energy: At Odds With Lenders

The drama never ends where coal miner Murray Energy is concerned. The company – in the middle of a bankruptcy process – has fallen out with its lenders and been cut out from all financing at this critical time. That’s what company advisers explained to the bankruptcy judge on a teleconference. The company hopes to borrow $100mn with which to successfully exit from a bankruptcy that dates back to October and which has been made more problematic by the coronavirus situation. For all the BDC Credit Reporter’s prior articles, click here.

The WSJ reported ” Murray described its precarious financial position in an effort to suspend monthly payments it is making to cover retirees’ medical costs. Judge John E. Hoffman Jr., the bankruptcy judge hearing the case, granted Murray’s request, transferring these costs to government-backstopped funds that cover benefits for retired coal miners and their dependents.Murray said the change would save it $6 million to $8 million in cash every month. The company had said it might be forced to liquidate if required to continue making the retiree payments”.

None of this is good news for the BDC lenders who remain exposed to the troubled miner. At December 31, 2010 non-traded Cion Investments and Business Development Corporation of America (BDCA) are on the record as having $15mn in debt positions. That consisted of Debtor-In-Possession (DIP) and pre-bankruptcy debt positions. The latter were non-performing and deeply discounted and the former performing and valued above par at 2019 year-end.

Now, with even the DIP in danger; lenders and borrowers at each other’s throats and with the economic backdrop deteriorating, we have no idea what that debt might be worth, including the DIP. There is a scenario where almost none of the monies ever get returned. At this stage we don’t understand why lenders would consider a debt for equity swap or advance new funds. Given the general unrest maybe creditors will just throw up their hands and take the loss… We will provide an update when appropriate but consider the amounts that could yet be saved too small to make BDC exposure material any more.

Internap Network Services: Files Chapter 11

On March 17, 2020 – according to news sourcesInternap Network Services Corp (“Internap”) – filed for Chapter 11. The publicly traded “colocation company” reported assets of $724m and debts of $785m. A restructuring agreement is already in place and – as usual – a debt for equity swap planned. Lenders holding at least 77% of the company’s debt have agreed to supply an additional $75mn in capital and greatly reduce debt outstanding in return for an unstated amount of equity.

We don’t know exactly where that leaves the only BDC with exposure, non-traded Business Development Corporation of America (BDCA). Total investment at cost is $11.8mn in the 2022 Term Loan. At 12/31/2019 that was already valued at (36%) discount. Now – according to Advantage Data – the market value is only 25% – a (75%) discount. This debt might be converting entirely into equity or partly. BDCA may be part of the new $75mn capital infusion, or not. What does seem certain, though, is that the BDC will be writing off about ($8mn) of its capital very shortly, given that the restructuring could be resolved shortly.

Envision Healthcare Corp: Seeks To Restructure Debt

According to Reuters, on April 10, 2020 PE-owned Envision Healthcare Corp has begun hiring outside financial advisers to assist in restructuring its balance sheet due to falling sales and earnings brought on by the Covid-19 epidemic. The company’s revenues have “collapsed” as more elective medical care is postponed, sharply dropping demand for its services.

The only BDC with exposure is non-traded Business Development Corporation of America (BDCA), which has a $3.8mn at cost investment in the company’s 2025 Term Loan. There’s $0.22mn of annual investment income at risk. The debt was valued at a (11%) discount at year-end 2019 but was trading at a (43%) discount, according to Advantage Data, as of the latest available price. We have downgraded the company from CCR 3 to CCR 4 but do not yet have an estimate of prospective ultimate losses.

We’ll have more on this developing story in the weeks ahead. This is a microcosm of what is happening in the healthcare industry generally as the necessary focus on the Covid-19 situation impacts all other types of care and the companies involved. Given that healthcare represents a very large proportion of most BDCs portfolio, the implications are ominous.

Foresight Energy: Files Chapter 11- Updated

In a not unexpected development, Foresight Energy filed for voluntary Chapter 11 on Tuesday March 10, 2020 after patching together an agreement amongst  an ad hoc group “holding more than 73% of the approximately $1.4 billion in claims under each of the Partnership’s first lien credit agreement and second lien notes”.  As part of the package a $100mn DIP facility and cash on hand will finance the business while in bankruptcy and a new $250mn debt facility repay the $100mn and the business going forward once an exit occurs from the protection of the bankruptcy court. Moreover, the company’s CEO will remain in place as lenders become owners in yet another debt for equity swap with an uncertain eventual income. (Foresight, after all,  “is a leading producer and marketer of thermal coal).

[FYI: Foresight is an affiliate of Murray Energy Corp. – another BDC portfolio company – the nation’s largest privately owned coal company, which itself filed for chapter 11 in October 2019 and which owns a stake in Foresight. The company has been in deep trouble for many months but blamed the coronavirus – clearly Covid-19 is not catch on as a term – for causing a global recession and triggering the bankruptcy. No mention of the leper-like unpopularity of its sole business activity: coal mining ]. 

From a BDC perspective, this is a relatively small size exposure at cost: $26.6mn and all in the company’s 2022 debt, which was discounted by just under (50%) at September 30, 2019 – the last quarter we have data for. Also, all the BDCs involved are non-traded: Business Development Corporation of America; FS Investment II and FS Investment III and CCT II. The last 3 BDCs are all controlled by KKR-FS Investments.  The debt was already on non accrual as of the IIIQ 2019, costing the BDC lenders just over ($2.0mn) a year of investment income.

Consider this just a placeholder article till we learn more about what role – if any – these BDC lenders are playing in the new Foresight. Whatever happens, though, some sort of loss in the short term is likely to be booked in the IQ or IIQ 2020. Longer term, skeptical observers have to wonder if coal businesses can survive in any corporate wrapper over the long term and whether any new monies the BDCs might invest to become owners is like grabbing that great table on the Titanic on the night of the iceberg.

Update 4/11/2020: Not unexpectedly, the lenders to the bankrupt company have agreed to a “debt for equity swap” to assist in the restructuring. Who exactly is involved and how much equity a lender receives for a troubled company in a troubled sector remains to be determined.

California Resources: Considering Chapter 11

This should not really be a surprise: California Resources is considering filing Chapter 11. So says Bloomberg in an article on March 27, 2020. The company itself does not rule out the possibility after an attempt to restructure the oil company’s $5bn in debt failed and given oil prices dropping to next to nothing.

For the only BDC with exposure – in the 2022 First Lien debt – the chances are a restructuring and/or realized loss is coming. That BDC is non-listed Business Development Corporation of America (BDCA) which has advanced $12.1mn at cost and last valued its position at a (11%) discount. That debt is currently trading – according to Advantage Data’s Syndicated Loan module – at a (70%) discount. The stock price of the public company is trading at an all-time low. After all, this is the Worst Of Times for energy producers from almost every perspective. BDCA’s loss could range from ($7mn) to a complete ($12.1mn)

This may prove another reminder that BDCs have no business lending – at almost any level or in any form – to oil and gas producers given the huge volatility in the price of oil and gas. The former has swung from over $100 a barely to a projected sub-$10 level. How can any lender be safe (and this BDCA loan is only priced at L + 475bps) with that backdrop ?

Frontier Communications: Bankruptcy Plan & Date Set

After many months of delay – and ten prior articles from the BDC Credit Reporter – Frontier Communications (ticker: FTR) is going to file for Chapter 11 and that’s a Good Thing for the three BDCs and the $35.1mn in debt they have outstanding to the telecom company. We’ve reviewed the various restructuring plans that management and creditors are hashing out. All include provisions for the secured debt of Frontier to be repaid with….more secured debt. This debt will have new maturities but seemingly identical pricing. All BDC exposure is in the secured debt in various forms.

Below the current secured lenders there is $10bn of unsecured debt. At a stroke, that debt is going to be swapped into equity and lenders will become owners while the current public shareholders will be wiped out, or pretty much so.

For the BDCs involved – who’ve continued to value their positions at a premium through the seemingly endless restructuring negotiations this should be a positive outcome as the restructured and relaunched Frontier Communications – when the telecom emerges from Chapter 11 – will be much less leveraged: two-thirds off (see page 34 of the slide deck).

Down the road, we may even be able to remove the company from the under performers list, but we’re not getting ahead of ourselves. First, FTR has to actually file Chapter 11 (tentatively set for April 14). Then, Frontier has to emerge therefrom which – even with a pre-agreed plan in place- is not so straightforward in the current environment. Most difficult of all, the company has to successfully re-invent itself. We won’t get into everything Frontier has been and will need to become, but look at the company’s slides 15-17 for an idea of the strategic challenge involved.

All in all, though, for the BDCs involved – our principal concern – this is a likely positive outcome when those are in short supply right now. This is hardly the end of the Frontier Communications story on these pages, but maybe – to quote Winston Churchill – “the end of the beginning” ?

Frontier Communications: To Skip Interest Payments

On March 16, 2020 Bloomberg reported that troubled telecom giant Frontier Communications plans to skip making interest payments on some of its bonds, starting a 60 day countdown to a payment default. We’ve written nine times (!) about Frontier before, given the twists and turns of what promises to be “one of the biggest telecom reorganizations since Worldcom Inc. in 2002″.

None of that is surprising as news reports and the BDC Credit Reporter have been predicting a Chapter 11 filing and a massive re-organization for months, but does indicate the day of reckoning is coming ever closer. The bankruptcy – which we expected in the IVQ 2019 – looks likely to land in the IIQ 2020.

Since our last report a couple of the many BDCs that hold the company’s debt have reported IVQ results and their latest valuations on their Frontier positions. Oaktree Strategic Income (OCSI) and non-traded sister BDC Oaktree Strategic Income II hold the 6/15/2024 senior Term debt and – in the case of latter BDC – the 2026 Senior Note. All we can report – without comment because we don’t understand the capitalization of Frontier well enough to differ – is that the debt is still carried at a premium. Obviously, Oaktree – which must be familiar with whatever plans for a restructure are underway – believes that there will be no loss booked if and when the seemingly inevitable bankruptcy happens.

We’ve not yet heard from all the other BDCs that have a position in Frontier, most of whom are part of the FS Investments-KKR group. However, publicly traded FS KKR Capital (FSK) has reported its IVQ 2019 portfolio and we see that Frontier has dropped out since September 2019. No comment was made on the latest conference call, but we imagine management may have decided caution was the better part of valor and sold out its position. For all we know that may be true for its 4 sister non-listed BDCs. If that’s true, BDC exposure to this upcoming massive bankruptcy might be very small.

We’ll continue to track this company and expect to be discussing the Chapter 11 filing and its implications before long.