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.

LATEST: At September 2019, total assets at cost were $2,688mn and $2,577mn at FMV. There were 232 portfolio companies.

Under-performing companies include Anchor Glass; Constellis Holdings; Foresight Energy; Medical Depot Holdings; McDermott International; Monitronics; and Murray Energy.

Posts for Business Development Corporation of America

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.

Community Intervention Services: IVQ 2019 Update

Community Intervention Services is a PE-owned dependency treatment center chain that has attracted BDC financing as far back as 2015. The two BDCs involved were Triangle Capital, whose loan was acquired by Business Development Corporation of America (BDCA) some time ago when all its assets were sold to the non-traded BDC; and OFS Capital (OFS).

The initial subordinated loan facility was led by Triangle Capital and OFS was a participant, according to the latter. At the height, the two BDCs had $25.7mn invested in the company, but that’s down to $7.6mn at December 31, 2019. That’s because BDCA wrote off its entire investment back in 2019. OFS continues to have the $7.6mn at cost outstanding on its books.

However, the company has been on non-accrual since 2016 and the investment written to zero since 2017. That’s due to one of the company’s subsidiaries being caught up in a medical fraud case – a very familiar story in the healthcare sector. For some reason OFS has not followed the lead of its BDC peer and booked a realized loss as yet. We do know quite a lot more from periodic updates by OFS on conference calls over the years, but given that the investment is unlikely to ever be worth anything, we won’t revisit what has become ancient history in credit terms.

However, the BDC Credit Reporter has to assume OFS will eventually write off its position and the company will be removed from the list of BDC funded companies. At the moment, though, Community Intervention Services is an example of a “zombie” investment, of which there are many in BDC portfolios as lenders wait for final resolutions on investments gone bad.

The good news from the OFS perspective – at least – is that the company can have no further impact on its income or book value, except to increase its realized loss column when the time is right. The bad news is the reminder to BDC debt investors that debt investments can result in 100% losses when things go awry, as happened here.

Foresight Energy: Files Chapter 11


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.

McDermott International: Files Chapter 11

On January 21, 2020 McDermott International announced its intention to “commence [a] prepackaged Chapter 11 filing in the U.S. Bankruptcy Court for the Southern District of Texas (“the Court”) later today“. In a press release, the oil field services giant indicated that “two-thirds of all funded debt creditors” had agreed to a re-structuring package that would “de-lever” its balance sheet. That’s a massive $4.6bn of debt getting vaporized. The company hopes to re-emerge with just $500mn of funded debt and the ability to provide letters of credit in support of work projects – a critical aspect of its business. That will mean “nearly all funded debt” will be converted to equity.

To move the Chapter 11 along, McDermott has arranged $2.8bn in Debtor-In-Possession (DIP) financing. As has been frequently the case recently in these “pre-packs” the company hopes to be in and out of bankruptcy in a short period: two months is the estimate given till court confirmation of the plan is expected.

We learned from the press release that subsidiaries of McDermott have entered into a share and asset purchase agreement with a joint partnership between The Chatterjee Group and Rhône Group which will serve as the “stalking-horse bidder” in a court-supervised sale process for Lummus Technology. The sale of this subsidiary has been a key element in the MCDermott saga. Here are the key details from the press release:

Under the terms of the Agreement, the Joint Partnership has agreed, and is committed, to acquire Lummus Technology for a base purchase price of $2.725 billion. McDermott will have the option to retain or purchase, as applicable, a 10 percent common equity ownership interest in the entity purchasing Lummus Technology. McDermott expects to hold an auction in approximately 45 days to solicit higher or better bids for the Lummus Technology business. Either the Joint Partnership or the winning bidder at the auction will purchase Lummus Technology as part of the Chapter 11 process, subject to regulatory and court approval. Proceeds from the sale of Lummus Technology are expected to repay the DIP financing in full, as well as fund emergence costs and provide cash to the balance sheet for long-term liquidity.

We’re not bankruptcy experts so we don’t know what the odds are of the McDermott plan – which is ambitious by any standard – being accepted in its current form and timetable. More certain is that the two BDCs involved are likely to lose the $0.700mn of annual investment income being accrued and some sort of realized loss will be booked in 2020. The only BDC with material exposure as of September 30, 2019 was non-listed Business Development Corporation of America, with $9.8mn invested at cost in the May 2025 Term Loan, already written down (35%) as of the IIIQ 2019. Oaktree Strategic Income (OCSI) has a tiny $0.6mn exposure in the same Term Loan.

For our part, we’ve had McDermott on our Under Performers list since July 2019 and with a Corporate Credit Rating of 4 (Worry List) for months. Since October 2019, we’ve added the company to our Bankruptcy Imminent list, where we seek to flag for readers those credits most likely to hit the headlines. For all prior McDermott articles, click here. We expect there’ll be one or two more follow-up articles as the restructuring plays out, but the McDermott credit story seems closer to the end than the beginning.

Frontier Communications: March Bankruptcy Targeted

We’ve written eight prior articles about the publicly traded telecom + cable giant Frontier Communications, dating all the way back to March 2019. In fact, the company was added to our Under Performer list following IVQ 2018 results with a CCR 3 (Watch List) rating and downgraded further to a CCR 4 (Worry List) back on June 13, 2019. More recently, we predicted the company might file Chapter 11 in the IVQ 2019, but that did not happen. In our last report before this one, though, we said a Chapter 11 filing was likely in the IQ 2020. With the latest news reports, that seems likely to turn out to be true.

People with knowledge of the matter” – and there are dozens of lenders, lawyers, insiders and regulators involved at this stage so journalists have plenty of sources – indicate the company is aiming to file a consensual, pre-packaged bankruptcy by March. On the horizon are $356mn of interest payments due in mid-March. As a result, Frontier’s new CEO and his team have been busy – according to these reports – meeting creditors and seeking to craft out a restructuring plan that would be blessed by the court. (The company itself has no comment).

From a BDC perspective, the question is now more about how each lender class will fare in the restructuring, and what impact there will be on interest income – running about $5mn a year. As we’ve noted before, the debt held by the BDC lenders remains valued at a premium to par, both in their own valuations and when we look at the market price of their secured debt on Advantage Data. Will Frontier restructure itself, go in and come out of Chapter 11 in a hurry and have no impact on the value or income of the $67.5mn in debt held by 8 BDCs ? We have our doubts, but that’s the state of play at the moment. We shall soon learn if those valuations are appropriate.

McDermott International: Forbearance Extended

According to the Wall Street Journal, McDermott International’s lenders agreed “to wait at least six more days before they declare a default, the engineering company said as it continues restructuring negotiations“. The initial forbearance was due to expire on the stroke of midnight (the BDC Credit Reporter is adding dramatic effect) on January 15th, 2020 after a missed interest payment in November of 2019.

Nonetheless, not all is well between junior and senior lenders, with the latter more forgiving and flexible and the former less so, leaving the possibility of an inter-creditor battle if and when Chapter 11 occurs, which we consider an imminent possibility. For the moment, though, as the WSJ indicates : “Lenders could have let the forbearance expiration on the junior bonds trigger a cross-default. They instead made a deal with the company to wait until at least Tuesday before declaring a default on their own claims“.

We expect to be updating the McDermott story, which we’ve written about 6 times since September 2019, shortly.

Constellis Holdings: Restructuring Underway

We warned in an earlier article on October 9, 2019 that for Constellis Holdings “a day of reckoning is coming – and fast”. Judging from two major – and related – developments, the time is nigh. On January 3, 2020 the Wall Street Journal reported the troubled security company “is in talks with creditors on a deal to restructure its $1 billion of debt, according to people with knowledge of the discussions”. Darkly, unnamed sources, warned that if an out of court restructuring didn’t happen, a “pre-packaged” Chapter 11 filing was also on the table. (That’s all part of the negotiation process in these kind of deals as interested parties suddenly find their way to the phone to confide to journalists, who are themselves happy to be of service).

We also learned that the company failed to make a scheduled principal payment on December 31 and has received a short term forbearance from its lenders.

At the same time, Moody’s went and downgraded the company’s corporate rating to Ca, and re-rated several debt tranches outstanding. Most worrying of all is that Moody’s reports that the company’s finances suddenly deteriorated in the last quarter of the year, resulting in a “liquidity crunch”.

All of which suggests the Day of Reckoning is here for the 8 BDCs with nearly $107mn in debt exposure at various points in the company’s balance sheet. Just one month ago, one of those BDC lenders – OFS Capital or OFS – waxed relatively optimistic about the outlook for Constellis: ” I want to note that the company is current on its payments. And based on discussions with management, they have stressed that they have adequate liquidity to fund operations. The company has a growing backlog and expects sequential performance improvement. The sponsor has substantial amount of cash invested in this business, and we expect continued focus from the sponsor”.

We now know that at least some of those reassurances are no longer true. This is reflected in the public prices of the outstanding debt as provided by Advantage Data. The 2022 Term Loan is trading at a (57%) discount, versus (14%) at September 30, 2019. The second lien debt is worth only 10 cents on the dollar in the market, down from 25 cents. At 9/30/2019 FMV was still around $84mn, down ($23mn) from cost. Now, we wouldn’t be surprised to see further losses of ($30mn)-($40mn) more at FMV and ultimate Realized Losses – which could crystallize very soon – of nearly ($75mn). Add to that the loss of income and you’ve got the first bona fide major set-back for BDC lenders in 2020 , should there be no last minute rescue.

As we’ve noted before, the bulk of the exposure – and thus any damage – will be concentrated in the four non-listed FS-KKR BDCs – CCT II, FSIC II, FSIC III and FSIC IV. This was a borrower that the group jumped into under the KKR regime, bringing BDC exposure from modest ($12mn) to major, when they initiated exposure in the IVQ 2018. Maybe the far sighted folk at the jointly run asset manager have their eyes on becoming equity owners of Constellis, but we don’t think so as Advantage Data’s records show the debt was purchased at a cost very close to par, and before the current downturn in corporate fortunes.

We’ll probably be learning a lot about the company’s plans and the impact on its various lenders very soon and will be able to make a better assessment. At this point, though, with a potential loss range of $75mn-$100mn in a down case, this looks like a major credit reverse is on its way.

Frontier Communications: Debt Recovery In Bankruptcy Estimate

We’ve been tracking the credit decline of Frontier Communications through most of 2019, in multiple posts. The communications giant has been moved from a CCR 3 rating to CCR 4. In October, we added Frontier to our Bankruptcy Imminent list. In fact, there was no Chapter 11 or restructuring in the fourth quarter of 2019 and – given decent liquidity – there might not be any move in that direction in the IQ 2020 either. However, we’re confident enough to project that a bankruptcy in the IQ 2020 is highly likely.

BDC exposure to the company remains high with $67.5mn outstanding at cost, spread over 8 different BDCs, and three asset management organizations (FS Investment-KKR; Oaktree and Business Development Corporation of America). To date, though, all outstandings – despite ever worsening financing performance and multiple downgrades by both Moody’s and S&P – have been valued at or above par. That suggests debt investors are not worried about taking any kind of haircut should a Chapter 11 occur.

We analyzed the debt held by the BDCs against Frontier’s latest 10-Q. Broadly speaking, one third of the company’s huge debt load is secured and two-thirds unsecured. All BDC exposure is in first lien and second lien secured debt, which explains debt holder sanguinity. Valuations did not materially change at the top of the capital structure even after Frontier’s CEO left his post in early December, and replaced by a former DISH executive first brought in as a financial adviser and then appointed to the top job.

Nor were senior debt holders fazed – if prices reflect their views – by the never ending drop in the company’s stock price – now being de-listed from the NYSE and trading under $1.0. Since we wrote our first post, Frontier has lost two-thirds of its market capitalization.

We’re not so sure that Frontier’s senior lenders – including those 8 BDCs – should be so complacent about the value of their loans – which mature between 2024 and 2027, according to Advantage Data’s summary records. Our suspicions are confirmed by an article in Seeking Alpha on December 31, 2019 by Gary Chodes, which seeks to evaluate what the recovery rate on Frontier’s secured and unsecured debt might be if worst came to worst. The conclusion of interest to senior lenders: an estimated 24% recovery rate. That would imply over ($50mn) in ultimate Realized Losses for the BDC group, not including interest forgone. Readers can make up their own mind about the validity of Mr Chodes calculations. We don’t have a deep enough understanding of the company’s financial situation and business prospects to offer up a competing view. Instead, we offer up this warning on a take it or leave it basis. In any case, we expect to be returning to the Frontier Communications imbroglio repeatedly in 2020.

McDermott International: Bankruptcy Imminent ?

Bloomberg reported on December 30, 2019 that McDermott International’s stock had been declining for the past two days on rumors that a Chapter 11 filing was in the works and $2.0bn of financing has already been lined up to help the engineering company post filing as access to letters of credit to support projects is critical in its business.

None of the above will come as any surprise to the readers of the BDC Credit Reporter. We’ve been ringing the bell since September about the company and not been much impressed with the financial rescue plans that have been mooted or implemented in the interim to keep McDermott from “going chapter”. On October 21, 2019, we even placed McDermott on our Bankruptcy Imminent list. That fate for the company now seems everything but certain. The common stock shareholders seem to have come to a similar conclusion. Since that October post, the market capitalization of McDermott has dropped by nearly two-thirds.

For the BDC sector, the only good news – as noted in earlier posts – is that BDC exposure is small ( $10.4mn at cost) and limited to non-traded Business Development Corporation of America and Oaktree Strategic Income (OCSI). Both BDCs are invested in the 2025 Term Loan, which they’ve already discounted (35%) at September 30, 2019. According to Advantage Data that same loan now trades at a (43%) discount. Up ahead is likely some interruption/loss of investment income as well, with the non-listed BDC with the most to lose with 95% of the exposure.

Clover Technologies/4L Holdings: To File For Bankruptcy

Clover Technologies Group LLC, which does business as 4L Holdings (the “world’s largest collector of used printer cartridges”) is filing for a pre-packaged Chapter 11 bankruptcy, but not before selling one of its subsidiaries – Clover Imaging – to its management and Norwest Group, according to a trade publication.

According to a December 11, 2019 press release from the company, the envisaged restructuring is radical. Essentially all outstanding long term debt will be converted into equity in a classic “debt for equity” swap; eliminating a reported $644mn of borrowings. There’s more to the deal including that Clover Imaging sale and the concurrent acquisition on December 4 by a Clover Technologies subsidiary of a company called Teleplan.

Given that the bankruptcy is pre-packaged and apparently non-controversial, the company expects only a brief stay under court protection and to continue operating normally. Some international subsidiaries of this large business with 18,000 employees won’t even be included in the bankruptcy. Chances are Clover Technologies will be back operating normally – but with a very different balance sheet – in a few weeks. We’ve seen some very fast bankruptcy resolutions, so that’s just an estimate taking into account the holiday season.

Kirkland & Ellis LLP is serving as 4L’s legal counsel, Jefferies LLC is serving as its financial advisor and Alvarez & Marsal is serving as restructuring advisor.  Gibson, Dunn & Crutcher LLP is acting as legal counsel for the ad hoc group of term loan lenders and Greenhill & Co. is acting as its financial advisor”.

There are two BDCs with $22.3mn of debt exposure to the company: non-listed Business Development Corporation of America and Investcorp Credit Management (ICMB) in a roughly 55/45 split. Advantage Data records show exposure dating back to 2012-2013. At the moment both BDCs own the company’s 2020 Term Loan, which is publicly traded. From a valuation standpoint, the company did not appear on our under-performing list till the IIQ 2019. As of the IIIQ 2019 ICMB was discounting its position by (38%), BDCA by (46%). Currently, the debt trades at (46%) off, suggesting ICMB will have to write down its position slightly. Going forward, the most impactful element will be the permanent loss of investment income that amounts to about $1.4mn annually. There will be a realized loss involved as well which should show up in the IVQ 2019 or the first quarter of 2020.

The good news is that – given the absence of leverage – Clover Technologies may drop off the under-performing list in 2020 if the radical balance sheet changes causes the equity to trade at par or higher.

Murray Energy: Lenders Seek To Acquire Company

As we’ve written about earlier, controversial coal company Murray Energy is in Chapter 11. According to Law360, though, progress is being made towards a plan that will get Murray out of Chapter 11. Apparently, senior lenders with $1.7bn of debt outstanding have clubbed together to offer themselves as a buyer for essentially all the company’s assets. Given that so much of business news is hidden behind a paywall – an ironic complaint from the publisher of the BDC Reporter with its own premium version – we don’t know many of the details.

Speculating, though, remains free. Should the senior lenders successfully become the buyers of the highly troubled company in a declining industry – the likely format is the exchange of much – if not all – existing debt for equity. Most likely, new monies would have to be advanced by those same lenders in some form as well. For the 6 BDCs involved with $52.5mn of debt exposure at September 30, 2019, that’s likely to mean no or little income forthcoming from capital already invested and the prospect of dipping into their pockets for more advances. The $5.7mn of investment income that was being collected before the filing is unlikely to be returning any time soon.

Most affected by the Murray Energy debacle is the FS-KKR complex with roughly $40mn of the BDC debt outstanding, led by FS-KKR Capital (FSK) with $18.9mn already at risk, according to Advantage Data.

How this all plays out remains up in the air, and is subject to further updates before Murray exits bankruptcy court protection. Even after that, given the industry in which the company operates, we imagine we’ll be discussing the company – possibly under a new name – for some time to come as its lenders seem to be digging in.

Monitronics International: Reports IIIQ 2019 Results

Last time we discussed Monitronics International (dba Brinks Home Security), the company was filing for Chapter 11. Even then, management was aiming to be back operating normally once a major restructuring was effected. We were skeptical – wrongfully so – that this could be accomplished by September 2019 given the many moving parts. Our apologies to the many professionals involved because Monitronics was up and running again out of bankruptcy as a public company (ticker: SCTY) by the end of August.

The company did manage to shed a great deal of debt, as reinforced on the latest Conference Call: “Restructuring resulted in the elimination of over $800 million of debt, including $585 million of bond, and $250 million of the company’s term loans“.

Funnily enough, though, BDC exposure to Monitronics has substantially increased following the voluntary Chapter 11 and restructuring. From $51mn at cost in June 2019, BDC advances have nearly tripled to $148mn. The BDCs involved today are those who were present before, but generally speaking their exposure has greatly increased. That’s because of the nature of the restructuring which saw prior debt partly paid off in cash, equity in SCTY and new Term debt due in 2024. To that was added $295mn in new Term debt and a Revolver. Regarding the latter, $124mn has yet to be drawn.

This is all a wonder of financial engineering, but from what we can tell term debt has only been decreased by just under $100mn, and the revolving debt – if fully drawn – will be greater than the prior balance outstanding. The big change is the write-off of $585mn in 2020 Senior Notes, which received a little cash and 18% of the equity. For all the turgid details see pages 16-18 of the 10-Q.

This leaves Monitronics less leveraged, but not necessarily out of the woods. The company reported its latest results on November 13, which are a mix of before and after bankruptcy and not very instructive from an earnings standpoint. Management did not brave any questions and is still working on its 2020 Plan. As a result neither the BDC Credit Reporter, nor anyone else, has any meaningful metrics to work with. We do note, though, that debt to Adjusted EBITDA (annualizing the IIIQ) remains close to 5:1, and that’s before we get into any mandatory capex.

In any case, Monitronics/Brinks is facing a changing industry, and real challenges with customer attrition that lower debt will not change. Management is promising to make major improvements in how the business is run, promising a “best-in-class” customer experience, including transforming the “sales process from hiring to training, to performance management” and much more in that vein. We wish Monitronics well, but there’s a lot to do in what remains a highly leveraged business with myriad competitors.

This is a classic example of stakeholders – including BDC lenders – “doubling down” on a failing business through a restructuring process. Historically security companies like this one have been cash cows and Brinks has a well known and respected name. So we understand the impetus to try again with a new capital structure and strategic approach. There are no regulators to wag their fingers at the lenders involved and if this does not work out failure is likely to be some time off given the Revolver availability. Regardless, we are rating the “new” Monitronics CCR 4 (WorryList) till we get more tangible news about post-bankruptcy performance, but expect we’ll be reporting back periodically for some time.

Murray Energy: Files For Chapter 11

Back on September 13, we wrote when first posting about Murray Energy: “We don’t want to bury the lead: Murray Energy is likely to file for bankruptcy or re-organize and the BDC lenders involved are going to absorb some rather large losses“. On October 29, 2019 the coal company filed for Chapter 11 protection.

Given that we have already quoted ourselves once, here is what we said about BDC exposure at the time, which remains the most up to date picture we have:

BDC exposure totals $52.4mn, spread over 6 BDCs. These include publicly traded FS-KKR Capital (FSK) and three sister non-traded BDCs funds (FSIC IIFSIC III and FSIC IV but not – surprisingly – FS Energy). Then there are two others: Cion Investment and Business Development Corporation Of America.The exposure is in two different loans, one which matures in 2021 and the other in 2022. The debt has been on our under-performing list since IVQ 2018 and is currently rated CCR 4 (Worry List), where the chances of an eventual loss are greater than a full recovery.

As of June 2019, the 2021 debt was carried at par but the 2022 debt was discounted by a third. Currently, though, the 2022 debt trades at twice that discount, suggesting holders are not optimistic. We wouldn’t be surprised to see the 2022 debt fully written off once the dust settles, which would result in ($8.5mn) of further losses and ($12.5mn) in Realized Losses, to be absorbed by Cion and BDCA. Less clear is what might happen to the 2021 debt, which still trades at par. We won’t speculate at this point but will point out that – overall – $5.5mn of annual investment income is at risk.

This was a useful first test of our Bankruptcy Imminent list, on which Murray Energy had been placed since October 4, 2019, when we were told the company’s banks were in forbearance. Like snow in May, loan forbearances rarely stays around for long – unless you’re Greece.

We won’t speculate too much about the way forward at this stage or try to evaluate how much more capital the existing BDC lenders might advance and what ultimate credit and investment income losses might look like. We’ll wait till more is heard about Murray’s exit plans and just how bad its financial position is. Even if the coal giant does successfully leave Chapter 11, with coal industry fundamentals headed ever further downwards, any remaining BDC exposure post-bankruptcy will remain on the under-performing list.

Frontier Communications: Hedge Fund Recommends Bankruptcy

The Frontier Communications saga continues with hedge fund and investor Robert Citrone recommending the company file for Chapter 11 bankruptcy sooner rather later. As the attached article reminds us, there’s an ongoing debate amongst “stakeholders” as to what the communications company should do to deal with its heavy debt load and uncertain future.

“Normally haste makes waste, but in this instance we believe haste limits waste,” Ormond said in the letter. “The further the delays in addressing the balance sheet and state of the business in a court-supervised process, the greater the risk to the corporation, operating assets, employees and surrounding Norwalk.”

Increasing subscriber losses and turnover, combined with limited financial guidance, will only lead to further deterioration in the business, according to the letter.

We have no view on whether to file or not is better, but the pressure does increase the chances of the former. We are adding Frontier to our Bankruptcy Imminent list. The company is already rated CCR 4 (Worry List). As a reminder BDC exposure is substantial at $61.7mn and valued close to par. A bankruptcy could have detrimental effects – but to varying degrees – on the 9 BDCs involved.

McDermott International: SA Article

On October 23, 2019 Seeking Alpha author Henrik Alex wrote an article about McDermott International entitled: “The ‘One McDermott Way’ Might Still End In Bankruptcy Court“. The article lays out in useful detail the various options available to the company and the obstacles faced in taking advantage of the supposed “financial lifeline” offered by certain secured lenders. Any one interested in the subject will find the article helpful. For our own earliest posts about McDermott, click here.

Mr Alex’s conclusion is as follows:

Even after Monday’s bridge loan announcement, the much-touted “One McDermott Way” might still end in bankruptcy court if the company fails to arrange a quick sale of the Lummus Technology business given the dealbraker requirement to exchange at least 95% of the company’s senior unsecured notes into new PIK notes. While secured lenders would likely waive a minor consent shortfall (e.g. 90%), I do not expect them to approve a material amount of holdouts. But even if the condition will be waived, McDermott will face a reduction in borrowing capacity and letters of credit.

Judging by this week’s trading pattern so far, both unsecured bond- and equityholders seem to have very little conviction in the company avoiding a bankruptcy filing and so do I.

That said, the company still has until January 31, 2020 to enter into a firm purchase agreement for Lummus Technology “in form and substance satisfactory to the Supermajority Lenders and the Administrative Agents” as required by the terms of the credit agreement.

Should McDermott indeed have to seek bankruptcy protection, common equityholders will almost certainly end up with nothing. Even unsecured noteholders might see very little or even no recovery as already implied by the very low trading price.

That conclusion largely coincides with our own thoughts, except that we are more skeptical about the chances of selling Lummus Technology, which has been for sale for some time. This validates our decision to add McDermott to our Bankruptcy Imminent list. Thankfully, BDC exposure is small: limited to two BDCs. Business Development Corporation of America has the biggest chunk: $9.8mn and Oaktree Strategic Income (OCSI) just $1.3mn.

McDermott International: Stock Price Drops

Despite the financial lifeline offered by certain lenders to McDermott International, which we discussed two days ago, the company’s stock price continues to drop and has reached $1.6550 at time of writing, falling nearly (7%) intra-day. We have McDermott on our recently launched Bankruptcy Imminent list – our attempt to give readers a heads up on what credit calamity might be round the next corner. We’ve also checked on the current value of the company’s publicly traded loans and bonds, and both seem to be trending down in value in most cases. This is all adding to our concern that McDermott – and the $11.1mn of first lien BDC exposure to two BDCs – could default or be restructured in the fourth quarter 29019.

McDermott International: Arranges Additional Financing

Nominally on October 21, troubled oil services company McDermott International arranged $1.7bn of additional financing to meet an upcoming severe cash shortfall.  That sounded like very good news to the stock and bond markets worried about the solvency of the company for several weeks now. The stock price jumped. However, investors soon began to have second thoughts and the stock and bonds both dropped ! The Wall Street Journal reportedMcDermott’s bond rose as high as 33 cents on the dollar after the refinancing was announced, from about 29 cents on Friday, before falling to about 24 cents when the revised estimates were disclosed in a U.S. Securities and Exchange Commission filing. The company’s shares plotted a similar course, opening 21% higher at $2.84 before dropping to $2.04“.

The reasons include the fact that the “lifeline” debt cannot be accessed in one lump sum , or at will, but only in 4 tranches that relate to performance and require “sign-off” by other creditors, which is another word from concessions. Those were well spelled out in another article, this time from Bloomberg. Furthermore, the company paid out millions in retention bonuses to senior executives. Often when you’re paying your senior people a small fortune to do the work they’ve been doing for a healthy paycheck already, the chances of things going off the rails is high. Just as importantly, the company revised its earlier financial projections for 2019:

The company changed its estimate of earnings before interest, tax, depreciation and amortization, or Ebitda, to $474 million in 2019 from $725 million because of incremental charges on existing projects, according to the SEC filing. It also revised its free-cash-flow estimate for the year to negative $1.2 billion from negative $640 million.

This is far from resolving McDermott’s financial troubles and may – ironically enough – accelerate the need for a Chapter 11 filing or a full scale reorganization. We’ve been writing about the credit since September 19, 2019 when a restructuring firm was first hired, but the company has been rated CCR 4 – our Worry List – since July 30. We followed up with an update regarding this impending lifeline on September 25, 2019.  Now – as then – we remain skeptical that McDermott can dodge the bankruptcy/restructuring bullet.  Furthermore, we’re placing the company on our still-under-development Bankruptcy Imminent list, which means we believe there is a strong chance of a filing or re-organization occurring within the next 3 months. Judging by the market reactions by closing time, we may not be alone. This would cause – judging by the current valuation of the 2025 debt in the markets – a (35%) or greater loss for the two BDCs involved, or close to ($4mn) between the two, and the loss for some time of nearly $0.800mn of investment income. Not disastrous for either BDC but another reminder that the “oil patch” is a difficult place to play in.

Murray Energy: Forbearance Extended Two Weeks

On October 16, 2019 Murray Energy announced that its lenders “amended a forbearance agreement regarding debt payments until Oct. 28 at 11:59 p.m. The company originally had until Oct. 14 at 11:59 p.m., but the deal allowed the agreement to be extended. Lenders have agreed to not exercise available remedies related to payments due on Sept. 30“. We had previously discussed the initial forbearance in a post on October 3.

The coal company took the opportunity to also announce its intention not to pay debt service due on two other debt agreements.

This only means that the day of reckoning – which is unlikely to be favorable to the company and its lenders – has been slightly delayed. Given the continuing weakness in the coal sector, we are not optimistic. However, we should note that the bulk of $52.4mn in BDC exposure is in the 2021 Term Loan, which continues to trade at only a (2%) discount to par.

However, non-listed Business Development Corporation of America and Cion Investment with $12.5mn of exposure in the 2022 Term Loan may be less sanguine. According to Advantage Data, that debt is trading at a (66%) discount. Last time the position was valued the discount was (33%), suggesting further unrealized write-downs are coming in the third quarter. If we get a Chapter 11 filing there’s $5.6mn of investment income at risk. A little further down the road: material Realized Losses.