Posts for Cion Investment Corporation

Country Fresh Holdings LLC: Files Chapter 11

On February 16, 2021 fresh food distributor Country Fresh Holdings LLC filed for Chapter 11 in Texas.

Pandemic-related supply chain and business disruptions have affected Country Fresh and our customers dramatically over the past year,” said Bill Andersen, Country Fresh President and CEO. “Despite efforts to improve company results before and during COVID, we believe that this sale transaction will result in a better capitalized company and positions our customers, suppliers, employees, and all other stakeholders for maximum success going forward.”

The company already has a “stalking horse” bidder in place in the form of PE group Stellex Group and has arranged debtor-in-possession financing with certain of its existing lenders, who were not named. Country Fresh hopes to go through the bankruptcy process in 60 days.

BDC exposure to Country Fresh is significant and includes 4 public and non-traded funds. Leading the group – and the earliest lender – is PennantPark Floating Rate Capital (PFLT) which has $23mn invested in the form of “super senior” term debt; a second lien loan and equity. Only PFLT has reported IVQ 2020 results so far and placed its $5.9mn second lien loan on non accrual for the first time. The other loans were still performing at the end of 2020, but are likely now on non accrual as well. PFLT also has $10.5mn of equity in the company which has been written to zero for the past 3 quarters and is likely to stay there.

Also with substantial exposure is non-traded Cion Investment while Goldman Sachs BDC (GSBD) and Goldman Sachs Private Middle Market Fund have tiny equity stakes left over from a 2019 restructuring and written off already on an unrealized basis.

At first approach, we’d guess PFLT and Cion might be involved in the DIP financing and are likely to receive back their “super senior term loan advances”. Still, realized losses are likely to be substantial: over ($25mn) , or 77% of all capital advanced because mostly concentrated in the second lien and equity. If the “super senior” don’t pay interest investment income will be forgone from the IQ 2021 forward, but may get recouped when the business is sold.

This is second time not the charm for PFLT and Cion, both who were involved in Country Fresh’s earlier restructuring in 2019, which resulted in ($7.1mn) in realized losses at the time for PFLT.

Also notable is that Country Fresh – by our count – is just the fourth BDC-financed company to file for Chapter 11 in 2021. Whether the BDCs involved will convert debt to equity and/or advance new monies in the form of loans or equity is not yet clear. We’ll circle back when we learn more.

Ambrosia Buyer: Debt Placed On Non Accrual

As we noted at the top of our earlier article on November 26, 2020 about Ambrosia Buyer Corp., there are actually three different names used by different BDCs for the same borrower. Here’s what we wrote:

Occasionally BDCs use different corporate names for portfolio companies, which is very confusing for the BDC Credit Reporter and requires much checking and double checking. In this case we are going to discuss Ambrosia Buyer Corp; Trimark USA LLC and TMK Hawk Parent Corp. Three names but one company and set of debt. As CreditRisk Monitor explains: “Ambrosia Buyer, Corp. was formed by Centerbridge Partners, L.P. to facilitate its acquisition of TMK Hawk Parent Corp. d/b/a TriMark USA, LLC (“TriMark”) from Warburg Pincus LLC. TriMark is a leading distributor of foodservice equipment and supplies in North America serving over 80,000 customers”. Several BDC lenders are involved in a first lien Term Loan due August 2024 and a second lien maturing one year later. Total BDC exposure is a material $63.5mn at cost, split between four firms: Apollo Investment (AINV); New Mountain Finance (NMFC); Audax Credit BDC and Cion Investment, which is related to AINV.”

We also predicted in that same article that a default was a likely outcome: “As half of Ambrosia/Trimark’s customers – according to Moody’s – are restaurants and that the group already has a Caa rating on the company, we are not optimistic. We don’t know enough to add the company to the Weakest Links list, so we’re not “calling” an imminent payment default. Would we be surprised if one occurred ? No, given the dire economic conditions and the 10X debt to EBITDA remarked on by Moody’s as far back as April 2020″.

Now – thanks to AINV IVQ 2020 results disclosure – and a brief comment on its conference call, we know that company is non performing: “We placed 1 new investment on nonaccrual status during the quarter: our second lien investment in Ambrosia Buyer, or TriMark, was placed on nonaccrual status. The company is the distributor of food service equipment and supplies in North America and has been struggling during the pandemic as its restaurant customers were forced to close. We continue to receive scheduled cash interest payments from the company, but we’ll be applying those proceeds to the amortized cost of our position“.

From an income standpoint, that’s ($1.9mn) forgone on an annual basis, or about 1.7% of the BDC’s latest Net Investment Income Per Share annualized. (The second lien has a principal value of $21.4mn and an interest rate of 9.0%). As of the IIIQ 2020, there were still 4 BDCs involved with the multi-named company, with $63mn invested in first and second lien debt. Only Cion – besides AINV – holds a second lien position ($13.4mn). The remainder are in the first lien debt and may, or may not, also be in default.

AINV dropped its value in Ambrosia 30 percentage points from $16.6mn to $10mn, so it’s likely other BDCs will – at least – discount their debt further. Last quarter the senior loan was already haircut by (33%). For our part, we are downgrading the company from CCR 4 to CCR 5 and will provide an additional update when we hear from NMFC.

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.

Petrochoice Holdings Inc.: Downgraded By S&P

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

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

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

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

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

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

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

Ambrosia Buyer Corp : Lender Dispute

Occasionally BDCs use different corporate names for portfolio companies, which is very confusing for the BDC Credit Reporter and requires much checking and double checking. In this case we are going to discuss Ambrosia Buyer Corp; Trimark USA LLC and TMK Hawk Parent Corp. Three names but one company and set of debt. As CreditRisk Monitor explains: “Ambrosia Buyer, Corp. was formed by Centerbridge Partners, L.P. to facilitate its acquisition of TMK Hawk Parent Corp. d/b/a TriMark USA, LLC (“TriMark”) from Warburg Pincus LLC. TriMark is a leading distributor of foodservice equipment and supplies in North America serving over 80,000 customers”. Several BDC lenders are involved in a first lien Term Loan due August 2024 and a second lien maturing one year later. Total BDC exposure is a material $63.5mn at cost, split between four firms: Apollo Investment (AINV); New Mountain Finance (NMFC); Audax Credit BDC and Cion Investment, which is related to AINV.

The debt was performing normally till Covid came along but was downgraded from CCR 2 to CCR 3 in the IQ 2020 and then to CCR 4 in the IIQ 2020. We were influenced by the ever lower BDC valuations and a major downgrade of Trimark by Moody’s in the spring. As of September 2020, the BDCs involved are discounting their exposure by anywhere from (21%) to (33%). The AINV/Cion combo are in the second lien debt and the other BDCs in the 2024 first lien. However, AINV/Cion have applied the more modest discounts, which seems counter-intuitive.

In any case, Ambrosia/Trimark is caught up in a major struggle between lenders that has ended up in court. Here is the dispute in a nutshell as spelled out by Institutional Investor: “

“…a group of lenders to TriMark USA, which provides equipment to the foodservice industry, sued their fellow private credit providers, alleging that they improperly amended the credit agreement.

TriMark has been struggling during the pandemic, as its customers — restaurants — had to close. The lenders changed the credit agreement in a bid to give the company more liquidity.  

Friday’s lawsuit claims that these changes devalued certain lenders’ debt and makes it less likely that they’ll get repaid if TriMark defaults. “This breach-of-contract case arises from a cannibalistic assault by one group of lenders in a syndicate against another,” the lawsuit said.” 

The plaintiffs include Audax, BlueMountain Capital Management, Golub Capital Partners, Intermediate Capital Group, New Mountain Finance Corp., Shenkman Capital Management, York CLO Managed Holdings, and Z Capital Credit Partners. 

..The list of asset managers and owners they are suing is long. Two of the defendants are TriMark’s private equity owners Centerbridge Partners and Blackstone, which holds a minority stake in the company. “Blackstone is a minority investor in the company and these claims are wholly without merit,” a spokesperson for the firm said via email. A spokesperson for Centerbridge declined to comment

The plaintiffs are also suing BlackRock, Ares Management, Oaktree, Sculptor Capital Management, Australia’s Future Fund, and the Canadian construction industry pension plan, among several others“.

We can’t hope to disentangle here which BDC is on which side and who might be doing what to whom. The attached FT article is a useful primer, but may get overtaken by events. Our purpose is simply to highlight that this is a contentious credit and may yet result in significant defaults occurring. Most at risk on paper is NMFC with $33mn invested at cost, but in first lien debt. Next is AINV with $21.1mn, followed by Cion with $13.2mn, both in the 2025 Term loan. Audax has a very modest, noin material exposure.

We are maintaining the CCR 4 rating assigned earlier in the year and will revert back when this dispute plays out in a way that allows us to determine what lasting damage might occur to the BDCs involved – if any. As half of Ambrosia/Trimark’s customers – according to Moody’s – are restaurants and that the group already has a Caa rating on the company, we are not optimistic. We don’t know enough to add the company to the Weakest Links list, so we’re not “calling” an imminent payment default. Would we be surprised if one occurred ? No, given the dire economic conditions and the 10X debt to EBITDA remarked on by Moody’s as far back as April 2020.

KLO Holdings, LLC: Update

Did you ever wonder what happened to KLO Holdings LLC (aka Hemisphere Design Works), a kayak manufacturer which was a fruit of the combination of a combination of Michigan-based KL Outdoor and Montreal, Canada-based GSC Technologies ? We did. We last wrote about the business on January 31, 2020 when the business was already in deep trouble and on non accrual since mid-2019. Overall, we’d written three articles about the company, based on BDC valuations and what we were able to learn from the public record.

Now, thanks to a regional publication in Muskegon, Michigan we’ve been (almost) fully updated about what has happened to the company in recent months:

After an abrupt closure last year, kayak-maker KL Outdoors is back under new ownership, and business is “booming,” according to a company representative...KL Outdoors has since been resurrected by the founder of the Canadian company, GSC Technologies, state records show. The company has produced 64,000 kayaks since purchasing the liquidated assets of KLO Industries in June, David Baun of the new KL Outdoors told the Muskegon City Commission earlier this week.“We have 84 employees and we’re looking at continuing to grow,” Baun said.

As of June 2020 there were two BDCs with $11.8mn invested in the 2022 Term Loan of KLO Acquisition and KLO Intermediate – the predecessor company and its subsidiary, as well as in its Canadian company the inelegantly named 9357-5991 Quebec Inc. These were Apollo Investment (AINV) and Cion Investment. The former- public – BDC had written down its $4.8mn stake in KLO Acquisition to zero. (For some reason, Cion, although invested in the same facility still valued its position at $1.6mn).

AINV values its position in the Canadian entity at $2.2mn. Given what we know, we expect that both BDCs will take a 100% realized loss on the liquidation of the company in the IIIQ 2020 results. For AINV, this means a modest loss given the amount involved and the BDC’s size and a more material hit for Cion. We estimate the loss of annual investment income will be ($1.6mn), but that’s already impacted both lenders for over a year.

Neither BDC has revealed much about the fate of KLO since an update was made by AINV on a November 5, 2019 conference call, which amounted to the following:

Regarding KLO, our investment was placed on nonaccrual status last quarter due to the underperformance from lower customer demand, consolidation challenges and higher costs. The company’s liquidity position has continued to weaken. The company expects to complete a comprehensive restructuring in the coming months“.

BDC credit stories like these with their only episodic updates and large omissions are part of the impetus for publishing the BDC Credit Reporter. Otherwise, investors are left with more answers than questions by the BDCs involved and have to read the tea leaves of those gradually reducing quarterly valuations. Back in June 2019 when the company’s debt was first placed on non accrual (by one of the BDCs involved but not the other), the discount taken was just (14%), but then increased to (70%) by year end 2019 and now to (100%) and a likely complete write-off. We wonder if AINV will even mention KLO when reporting third quarter 2020 results ?

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.

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.

APC Automotive Technologies: Reorganization Confirmed

We first wrote about APC Automotive Technologies when the company first filed for Chapter 11 protection back on June 3, 2020. Relatively quickly – thanks to an agreement with its creditors – the company is exiting bankruptcy, having received court approval of their restructuring plan:

As part of the restructuring, the company has reduced the debt on its balance sheet by more than $290 million and secured a new $50 million senior secured term loan to finance its go-forward operations. The current management team, including Chief Executive Officer Tribby Warfield, will continue to lead the company forward and advance its strategic, operational, and growth transformation initiatives”. The Brake Report

At this stage we don’t know what role Cion investment and Crescent Capital (CCAP) will play in the restructured APC Automotive, if any. However, both BDCs are likely to be booking their losses in the IIIQ 2020.

We are upgrading the company from CCR 5 to CCR 3, and are awaiting further intelligence on the future business outlook.

Rhino Energy LLC: Files Chapter 11

On July 22, 2020 Rhino Resource Partners, and its wholly owned subsidiary Rhino Energy, filed voluntarily for Chapter 11. According to a press release: “.. Rhino has obtained $11.75 million of post-petition financing and the support from a stalking horse bidder to acquire the company. Rhino intends to use the bankruptcy process to implement an orderly sale of substantially all of its assets in an effort to maximize value for all stakeholders and allow for the prospect of continued employment and business opportunities at its operating locations“. Rhino Energy is a publicly traded coal company.

There is only one BDC with exposure that dates back to 2017 and which has been underperforming almost since the beginning. The BDC in question is Cion Investment which has invested $9.8mn in first lien debt and $0.280mn in equity. As of March 31, 2020 the debt was still valued at a modest discount of just (6%), but the equity was written down (95%). We doubt that the first lien lenders will get away without a material loss but don’t have the numbers at hand to be sure. However, we know that Cion will not be collecting about $1.0mn of annual investment income from the debt until this is resolved.

We are downgrading Rhino from CCR 3 to CCR 5. This is the sixth BDC-financed company to file for bankruptcy protection in July to date, and the fourth in a row from the energy sector broadly defined. Fossil fuels are having a very hard time.

Deluxe Entertainment: Portion Of Business Sold

According to news reports, Deluxe Entertainment has sold most of its business divisions to Platinum Equity. (Deluxe Entertainment’s creative businesses are not included in the acquisition. They will remain operational, but drop the “Deluxe Entertainment” name). Financial terms were not disclosed.

As we’ve written about extensively, Deluxe Entertainment has been owned by its lenders since a debt-for-equity swap and a trip to bankruptcy court last year. Then, Covid-19 wreaked havoc on the entertainment sector starting in March 2020 with unknown, but likely harsh, consequences for the company. As a result, there is no assurance that the new owners of parts of Deluxe Entertainment received much in proceeds from the sale. Furthermore, what happens to the remaining and re-named divisions is unclear.

There are two BDCs with exposure to the post-bankruptcy company: Harvest Capital (HCAP) and non-traded Cion Investment, each in very different parts of the capital structure. HCAP already booked a ($2.4mn) realized loss back in 2019 when the company was restructured and now holds $0.5mn in a second lien Term Loan and $2.1mn in equity (0.63% of the company’s equity). We’re guessing any proceeds will be modest. Cion Investment has much more capital at risk: $24mn in First Lien debt and $9.9mn in the second lien Term debt. And no equity.

We’ll learn more about how this sale trickles down to the two BDCs involved when IIQ 2020 results are known. The BDC Credit Reporter’s best guess, though, is that this experiment in lenders owning an entertainment business in Los Angeles will shortly be over. Notwithstanding the sale, we expect further realized losses are likely.

We are downgrading Deluxe Entertainment from a Corporate Credit Rating of 3 to CCR 4, as we expect some sort of realized loss to be realized. More details to eventually follow.

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.

APC Automotive Technologies: Files Chapter 11.

On June 3, APC Automotive Technologies (“APC”) filed for Chapter 11 bankruptcy protection as part of a broad restructuring plan with its creditors. As the press release indicates the central component of the plan is reducing “APC’s outstanding indebtedness by approximately $290 million on a net basis, significantly strengthening the Company’s balance sheet and enhancing financial flexibility going forward.” In addition, the company has organized $50mn in Debtor-In-Possession (“DIP”) financing for what is expected to be a short period under court protection.

Frankly, the BDC Credit Reporter does not have much history with APC, which only showed up on BDCs books two quarters ago. At March 31, 2020 the largest BDC lender was non-traded Cion Investment, which had advanced $11.2mn in senior debt. With a much smaller position and in equity/preferred is newly public Crescent Capital (CCAP) with $1.8mn. Both BDCs had written down their investments: CCAP to zero and Cion to a FMV of $7.8mn. One of the two debt tranches Cion was involved in was already on non accrual as of the first quarter 2020.

This restructuring probably means i) the CCAP position will be written off. It’s a small stake and should have a material impact. ii) Cion is likely to be involved in the DIP and see its overall exposure increase. In terms of valuation, though, that will have to wait till the final exit from Chapter 11 when all the details are finalized. In the short term, all the existing debt is likely to become non-performing and all or some eventually written off. Cion will become an equity owner (we have to assume) and will be keeping the company on its books – in new forms – for some time to come.

We rate APC CCR 5 and – depending on the final structure of the company – will upgrade the company to CCR 3 when the bankruptcy is finalized. Otherwise this development is notable because APC is the second BDC to file Chapter 11 in June 2020 so far. We expect many more to come, and most to adopt the “debt to equity” format where lenders become owners and extend for an indefinite period (equity is called permanent capital for a reason) their investment relationship. If APC markedly recovers Cion may yet make back its losses. For CCAP, though, it may be too late.

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.

Academy, Ltd: Downgraded by Moody’s

We heard on April 19, 2020 that Moody’s had downgraded Academy, Ltd (dba Academy Sports) to a Caa2 rating from a Caa1. The outlook is Negative. Nothing very surprising given that the company is a retailer of sporting goods at a time when most of its customers are sheltering in place and sporting activities are greatly limited. Academy , in any case was already on the BDC Credit Reporter’s Underperforming list since IVQ 2018 and has a Corporate Credit Rating of 4. Our rating remains unchanged with this new rating step down by Moody’s but we’re reassured enough by word that the company has $649mn in cash as of February 2020 not to add its name to our Weakest Links list of soon-to-be defaulting borrowers. In this regard we may slightly less conservative than Moody’s, not a situation we’re accustomed to.

In any case, BDC exposure to Academy Ltd consists of just one non-listed player – Cion Investment – with $12.6mn at cost in the 2022 Term Loan. At year-end 2019 that was discounted only (7%). According to Advantage Data, this syndicated loan was trading at a (37%) discount on April 24. That suggests the BDC will be recognizing a material unrealized loss in the IQ 2020. There’s $0.7mn of investment income in play here but – as mentioned – no immediate sign that there’s a danger of interruption.

How companies like Academy perform going forward depends largely on that great unknown – the length and the breadth of the Covid-19 disruption. If we get back to something akin to normal by the summer, odds look good for no further deterioration. If we’re all hunkered down for months more, or there’s a second wave of closings, then matters could get worse.

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.

Tensar Corp: Added To Under Performers

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

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

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

KLO Acquisition: Closes Plant

We don’t have the full picture on KLO Acquisition (aka Hemisphere Design Works). As always with privately-held companies with financial difficulties, information is doled out unevenly. We most recently wrote about the company – which boasted of being the largest manufacturer of kayaks over several brands – back on November 24, 2019.

Now we hear from local publications that the manufacturer is preparing to close a third – and final – manufacturing plant in Muskegon, Michigan. As required by law, the company informed its employees and the state, on January 27, 2020 of the projected closure of a plant at Remembrance Road in Muskegon. In October 2019 two other plants in the town were officially slated for closure.

That does not mean the company is out of business. Management may be retrenching to other facilities in other areas. However, the news does suggest that the troubles that have plagued the company – a combination of of Muskegon-based KL Outdoor and Montreal, Canada-based GSC Technologies – have not abated.

The public debt in which the two BDCs with $16.6mn of exposure at cost continues to be on non-accrual and discounted by two-thirds in value. We hope to hear more – and get fresh valuations – when Apollo Investment (AINV) and sister non-traded BDC Cion Investment report results in the next few weeks. At the moment, though, this “first lien” loan investment in KLO looks like a bust, with likely realized losses of ($11mn) or more. That’s twice the amount provided for at September 30, 2020 so chances are we’ll see further write-downs in the IVQ 2019 results.

Harland Clarke Holdings: Dispute Between Creditors

Back on November 29, 2019 when we first wrote about Harland Clarke Holdings Corp. we warned that we might be writing again about the troubled check printer before long. That’s because the day of reckoning about how to handle debt maturing was fast approaching. Just three weeks later and we hear from the Wall Street Journal that the struggle to reorganize the company’s balance sheet is underway.

Apparently, the company has reached out to junior creditors to swap their claims for cash or more senior ranked debt. As you might expect, the existing senior lenders are not happy about such a move. That’s all we know for now, but we see that the value of the 2023 Term Loan held by Cion Investment – the only BDC lender to the company – has dropped from a (21%) discount at September 30, 2019 to (28%). We’re quoting from Advantage Data’s Syndicated Loans real-time pricing module.

The BDC Credit Reporter is still new to this particular under-performing company, but it’s fair to say that all the ingredients exist for a default or restructuring that could happen sooner rather than later and would affect Cion and many other creditors. Nearly $0.900mn of investment income is at risk of interruption for the sole BDC with exposure, and a further unrealized depreciation is likely when IVQ 2019 results are published. We expect to posting about the company once again before too much time passes.

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.