Posts for Golub Capital

Oliver Street Dermatology: Defaults On Debt

Right up front we have to warn that the BDC Credit Reporter is playing the “name game” here. Here’s the background: Bloomberg reported on February 5, 2020 that “U.S. Dermatology Partners has defaulted on a $377 million financing provided by a group of investment firms, according to people with knowledge of the matter“. The article went on to say the debt was funded – at least in part – by BDC offshoots of Golub Capital (GBDC); Carlyle Group (CGBD) and Ares Management (ARCC). The rub ? No such company name exists in the Advantage Data records, nor even the prior name of the business: Dermatology Associates.

After much rifling through virtual files, we’ve worked out that GBDC carries its portion of the unitranche debt – which is nominally publicly traded – as Oliver Street Dermatology and has a $27.5mn investment at cost, all but $0.2mn of which is in the May 2022 unitranche loan. At September 30, 2019 that debt was discounted between (12%) and (18%). CGBD’s exposure is even bigger ($73mn) and goes under the name Derm Growth Partners III. Like ARCC, CGBD has a sliver of equity in the company ($1mn), valued at zero. The debt – in that same 2022 unitranche loan – was discounted (30%). We’ve not been able to clarify if ARCC has any exposure to the troubled company under yet another name.

What we do know is that we placed the company on the Under Performers List with a CCR 3 rating in the IQ 2019, when the equity stake was written down by CGBD by (86%), after being carried at a 45% premium the quarter before. That kind of valuation change is what draws our attention to previously performing companies.

The rating was dropped to CCR 4 when the debt – as mentioned above – was discounted (30%), compared to (13%) in the IIQ 2019. Now, with the default, we’ll be downgrading the company by whatever name to CCR 5.

We know a little about what’s ailing the privately-held company from CGBD’s last Conference Call: “We’re working through some operational and financial performance challenges with the sponsor and the company“. CGBD, though, waxed optimistic about any ultimate outcome because “this is a first lien tranche“. Still, if we read the filings right, the interest rate on the debt has been upped by 1.0% recently and was entirely on PIK through September 2019 – typical signs of credit weakness.

Now we seem to be looking at yet another “debt for equity swap” – a favored resolution in these situations amongst leveraged lenders, who move from lender to owner, or some hybrid thereof. We’ll wait for further details before drawing any grandiose conclusions but, given the $100mn of public BDC exposure to the business – owned by ABRY Partners since 2016 – this is a story worth following.

Joerns Healthcare: Restructuring Complete

On August 21, 2019 Joerns Healthcare announced the restructuring of the company – undertaken under bankruptcy court protection – is complete. As noted in our two earlier posts on July 3 and August 10, the key element of the company’s plan was a debt for equity swap which will extinguish $320mn out of $400mn of pre-petition debt, and turn lenders into owners.

For the three BDCS involved (Golub Capital, Main Street and HMS Income), with $30mn of exposure – mostly in first lien pre-petition debt – this means Realized Losses will shortly be taken which will show up in the third quarter 2019 results. We expect losses taken to be over $20mn. Similarly, there will be income lost as most of the capital invested in debt form will either be written off or converted to equity.

The biggest impact will be felt by Main Street (MAIN), which has close to $15mn invested and will lose a substantial portion of its invested capital, which dates back to 2013. The Good News ? The whole bankruptcy/restructuring process has occurred over a relatively short time frame, benefiting both the company and its long term prospects and its creditors/owners.

Nonetheless, Joerns will remain on our under-performing list even now the restructuring is complete and notwithstanding the above average debt write-off. This was supposed to be a lower risk, standard loan in an industry beloved by most every lender out there. This set-back is worrisome both for Joerns itself and for the huge healthcare sector as a whole. For what it’s worth, the BDC Credit Reporter has so far identified 23 under-performing companies held by BDCs, or 10% of all under-performing credits in our database.

Joerns Healthcare: Restructuring Plan Approved By Bankruptcy Court

On August 9, 2019, news reports indicated Joerns Healthcare Inc. has had its restructuring plan approved by the bankruptcy court. As we wrote earlier, the company had filed for Chapter 11 back in July. One of the BDCs involved – Main Street Capital (MAIN) – had indicated as much on its Conference Call :

” Joerns is, basically, liquidity squeeze based on transition of the business from a sale model more than rental business. And from a capital structure perspective, we need to equitize the debt. That company entered bankruptcy in the second quarter, and we expect to exit here in the next 15 to 30 days with a restructured balance sheet”.

Joerns is wiping out $320mn in debt out of $400mn, according to news reports. In addition, the company is gaining $40mn in fresh advances. Looking at the (45%) discounts being taken by the unitranche lenders in the IIQ 2019 valuations, BDC losses on the $28mn of exposure will be significant. With those lenders becoming equity holders – a Golub representative will be sitting on the Board , amongst others – investment income from the original capital will be greatly reduced. There was $2.8mn of investment income spread amongst MAIN, Golub Capital (GBDC) and HMS Income. That’s all been suspended since July and is likely to resume by the end of September. When interest income does resume, the amount may be 50%, or more, lower.

Nor is the company out of the woods. The CEO has left and the new lender-owners are out seeking a replacement. This will be another test of whether lenders – including several well known BDCs – are well suited to “turn around” their own failing companies.

Also noteworthy is that the BDCs involved were marking this credit at only modest discounts to book until IVQ 2018, when all 3 discounted the unitranche loan by a tenth. Two quarters later the debt is on non accrual and written down 4.5x more…However, we read in a trade article that the company was in default under its debt from 2018, and much was happening behind the scenes to attempt a rescue. All of which ultimately failed to get traction and resulted in the pre-packaged deal with the unitranche lenders. This big a haircut, though, indicates the lenders underwriting was far too generous, and the timing of the write-downs suggests the BDC’s shareholders were being kept out of a loop that they deserved to be included in.

On the plus side, these are losses the BDCs involved can absorb on an individual basis without too much difficulty. For example, the amount MAIN invested at cost is equal to 0.5% of its total assets. Still, this a serious credit reverse for what was envisaged as a low to mid risk loan, priced at LIBOR + 6.00%.

Uinta Brewing: More Details On Investor Exit

We knew that Riverside Company had exited Uinta Brewing Company in March 2019, based on a trade article on July 10, 2019. This was relevant as the unitranche lender to the craft brewer is Golub Capital (GBDC), which at year end 2018 had $5.9mn invested in debt and equity. In the IQ 2019, the exposure was reduced to $1.6mn.  All debt was on non accrual since IIQ 2018.  Golub now owns Uinta, and a new capital structure will emerge, which we may learn more about on the next Conference Call. That may involve the asset manager providing additional capital to boost the business. In the interim, we’ve learned more – thanks to a trade publication – what ails the brewer. The company, thanks to Riverside’s investment capital,  grew very fast to become a national presence. Here’s an extract explaining what went wrong:

That expansion led to a wide but shallow market. Increased competition from an ever-growing number of breweries resulted in market penetration weaker than expected.

“Over the course of (the Riverside investment), the challenge of competing on a national scale without large marketing budgets and personnel became extraordinarily difficult for us to sustain,” Uinta president Jeremy Ragonese told Brewbound.

As a result, Uinta has been pulling back from a variety of markets in a reconfiguration of the footprint expected to last through the summer.

The question going forward is whether Golub can do any better.

Pet Supplies Plus: Recall

On July 3, 2019 Pet Supplies Plus published a press release to the FDA website announcing a recall of its bulk ear products sold to dog owners as treats. The company was concerned that the treats might be infected with salmonella. As a trade publication explained “Salmonella can not only affect animals that eat the product, but also pose a risk to humans who handle, especially if they have not washed their hands”. To date no one has fallen ill from contact with the company’s products but 45 people in 13 states have been diagnosed with Salmonella-related illness from bulk ear products. Three different public and non-traded BDCS have $17mn in exposure to Pet Supplies Plus, in the form of both debt and equity, which began only in IVQ 2018, and is valued at cost. We cannot determine as yet what impact – if any – this recall might have on the company’s business and prospects.

Joerns HealthCare: Files Chapter 11

Joerns Healthcare has filed for Chapter 11. “The company is seeking court approval of a restructuring plan that is supported by the majority of its lenders and noteholders. The plan will eliminate a substantial amount of debt and provide operating capital during the restructuring process and beyond. The company has requested that the plan be approved and the process complete within the next 30-45 days”. This is bad news for the three BDCs with $27.9mn in exposure in 2020 senior/unitranche debt – all publicly traded. Main Street Capital (MAIN) has the biggest share with $13.3mn, and sister non traded fund HMS Income ($11.0mn). Golub Capital (GBDC) comes in third with only $3.5mn, but we imagine the asset manager has exposure in other affiliated funds. Until a restructuring falls into place $0.200mn a month of interest income will be lost. The company was still carried as performing through IIIQ 2018, but the discount increased from the IVQ 2018 and closed the IQ 2019 at (15%).  Chances look high that a Realized Loss will have to be booked, but we’ll postpone making any predictions till we review the restructuring plan that the company is so confident will be approved and implemented in short order.