Posts for New Mountain Finance

ADG, LLC: IVQ 2020 Update

ADG, LLC (dba Great Expressions Dental Centers) is a BDC portfolio company we should have written about ages ago for a number of reasons. First, BDC exposure is Major: $106mn at cost, almost all held by Ares Capital (ARCC), with New Mountain Finance (NMFC) holding a $5.9mn second lien position. Second, the company was underperforming by our standards even before the pandemic and since everyone’s been sheltering in place, has been on non accrual since IQ 2020. Finally, we’re projecting the company is Trending, i.e. likely to materially change in value in early 2021. More on that at the end. Although we’ve not written about ADG, LLC before we’ve been tracking the business in our Company Files and in our daily search for new developments.

Here’s the lie of the land: At year-end 2020, ARCC had a small first lien debt position of $7mn, half the size of the quarter before and performing, valued at a (10%) discount to par. The BDC also holds an $89mn second lien debt position due 3/1/2024 that is on non accrual but discounted only (12%). NMFC also holds a second lien debt position – maturing at the end of March 2024 – and discounted (24%). However NMFC’s debt – which may or may not be in the same facility – is not carried as non performing but its 11.0% yield is all Pay-In-Kind. Then there’s $3.0mn in equity held by ARCC (which has a very long standing relationship with the company that predates its current PE owner) , valued at zero. The total FMV for all positions and both BDCs is $89mn. ARCC is forgoing about ($7.5mn) of annual investment income due to the non accrual.

There’s no up to the minute news in the public record but the BDC valuations have been greatly improving in the last three quarters. That suggests the business is turning around. We do know that the whole dentistry sector is on the upswing after some dark months last year when dental chairs were off limits in many states due to Covid-infection fears. Sadly, neither ARCC or NMFC has mentioned ADG on their conference calls. Nonetheless, we’ll go out on a limb and suggest there’s better news ahead. That’s why we have ADG, LLC “Trending”, with the prospect of higher debt or even equity valuations and the possibility the second lien debt might return to performing status.

For the moment ADG, LLC remains rated CCR 5 but we’ll be looking out for ARCC’s disclosure about the company on April 28, 2021 when its IQ 2021 results get published.

Integro Parent Inc: Downgraded By Moody’s

Integro Parent Inc. (aka Tyser’s) is a London-based specialty insurance broker and has just seen its corporate credit rating and debt tranches downgraded by Moody’s. The outlook is “Negative”. Apparently, the pandemic has impacted business conditions in many markets, leaving the company in a classic highly leveraged state, with weak liquidity and cash flow. The company rating has been lowered to a speculative Caa1.

That was enough for the BDC Credit Reporter to add the company to our underperformers list – the first addition in some time – with an initial rating of CCR 3. There are two BDCs with material exposure up and down the company’s capital structure : New Mountain Finance (NMFC) and Crescent Capital (CCAP). Total exposure at cost was $48.5mn at year-end 2020, most of which is held by NMFC, as this table from Advantage Data shows:

Both BDCs are valuing both first and second lien debt at or above par. The first lien is priced at 6.75% and the second lien at 10.25%. (CCAP holds a non-material equity position as well). We have also added Integro to our Trending list because it’s possible that with the Moody’s downgrade, the BDCs involved might reduce the value of their positions in the upcoming IQ 2021 results. Just a 20% overall discount could reduce the FMV by ($10mn) or so. We’ll check back when we hear from CCAP and NMFC in the next few weeks.

Edmentum Ultimate Holdings: Company Sold

In December 2020 , the Vistria Group – a private equity firm – acquired Edmentum Inc. and its parent, Edmentum Ultimate Holdings. Terms were not disclosed but the press release announcing the acquisition indicated “New Mountain Finance Corporation and funds managed by BlackRock will retain ownership positions“.

From a BDC perspective this is a very important transaction as Edmentum was – through September 30, 2020 – one of the larger BDC-financed portfolio companies (number 79 on the list maintained by Advantage Data). Also, there are five BDCs involved, many of them with very large dollar exposure. These include New Mountain Finance (NMFC) and BlackRock TCP Capital (TCPC). Also important is that with the Vistria Group acquisition the future exposure of the 5 BDCs involved is changing. See the Advantage Data Table for IIIQ 2020 of all BDC exposure:

Edmentum has been on BDC books since IVQ 2012 – initially only in the form of first and second lien debt -and has had a chequered past. In 2015 the company was restructured and several of the lenders recognized realized losses. (For example, NMFC lost half of its $31mn then invested). In the restructuring, Oaktree Specialty Lending (OCSL); Prospect Capital (PSEC), NMFC and BKCC initiated equity stakes. To keep a long story short, over the years BDC exposure increased to reach $204.4mn even as some of the debt outstanding was carried as non-performing at different times by different lenders. The BDC Credit Reporter has carried Edmentum on its underperforming list since the IVQ 2014.

However, in recent quarters the valuation of the BDC investments has been improving. As of September 2020 virtually all the different debt and equity stakes held by BDCs were valued at par or at a premium, with the exception of a small equity stake held by Gladstone Capital (GLAD). Now as we begin to hear from BDCs about IVQ 2020 results the outcome of their investments is becoming known, with varying results. GLAD reported the following :

In December 2020, our investment in Edmentum Ultimate Holdings, LLC was sold, which resulted in a realized loss of approximately $2.4 million on our equity investment. In connection with the sale, we received net cash proceeds of approximately $4.9 million, including the repayment of our debt investment of $4.6 million at par.

PSEC fared better: On December 11, 2020, we sold our 11.51% Class A voting interest in Edmentum Holdings and recorded a realized gain of $3,724 in our Consolidated Statement of Operations for the quarter ended December 30, 2020. Concurrently, Edmentum Holdings fully repaid the $9,312 Unsecured Senior PIK Note and the $45,277 Unsecured Junior PIK Note, and Edmentum, Inc. fully repaid the $8,758 Second Lien Revolving Credit Facility receivable to us at par.

OCSL also ended up in the black : “We realized a full par recovery on our debt investment and recorded a total gain of $23 million”. 

Not heard from yet are NMFC and BKCC. However, we get the impression from the press release and comments made by TCPC after the IIIQ 2020 results that New Mountain and BlackRock intend to maintain investments in post-sale Edmentum. Here’s what NMFC said on its November 5, 2021 conference call in answer to a question about its intentions for Edmentum: “We’d like to maybe take some chips off the table, recapitalize the balance sheet, maybe bring in a partner. But at the same time, we do think there’s very significant upside from here that you probably wouldn’t quite get until you show the sustainability of the earnings trend, which we absolutely believe in. And so we may elect to hold some exposure for another period of time to get the benefit of that incremental value gain”.

So while 3 BDCs are going out the door, these two others are likely to remain, but we’ll need the IVQ 2020 results to suss out all the details.  The GLAD realized loss and the earlier 2015 losses notwithstanding, this is a positive turnaround for Edmentum, which was rated CCR 5 as recently as September 2019 and which we have maintained at a CCR 3 rating ever since. After we hear from TCPC and NMFC we’re likely to return Edmentum to CCR 2 status, especially if and when we get a better understanding of the new capital structure and prospects for the business.   

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.

AAC Holdings: Completes Restructuring

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

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

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

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

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

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.

Benevis Holdings : Files Chapter 11

On August 3, 2020 dental support business Benevis Holdings filed voluntary Chapter 11. The Georgia-based mid-market company blamed Covid-19 for the need to close clinics across the country, and the resulting need to seek court protection. No official Restructuring Support Agreement was filed by the company but management indicated that its lenders were supportive of a restructuring of its balance sheet and sale of the business. Benevis has already arranged $30mn in Debtor In Possession (“DIP”) financing, to be provided by its existing bank group, headed by New Mountain Finance. We’re not yet clear if the parties intend to undertake a “debt for equity swap” or are preparing Benevis to be sold to a third party, but we believe the former is most likely. The company indicated assets and liabilities are between $100mn-$500mn.

The only BDC lender to Benevis is publicly traded New Mountain Finance (NMFC), but we imagine other funds managed by its eponymous parent are involved in the current loan and in the DIP financing. NMFC has invested $85.6mn at cost, all in first lien Benevis debt and discounted by (25%) as of March 31, 2020. We cannot tell whether that value remains reasonable or not. However, something under ($6.0mn) in annual investment income is at risk of temporary or permanent interruption from the filing. Moreover, total exposure is likely to increase with the new DIP loan and – potentially – any new capital that might be required.

We get the impression from the company’s press release that management believes the loss of income is a temporary phenomenon and the business will bounce back shortly. After all, Benevis was performing normally – judging by NMFC’s year end 2019 valuation of its debt – which was at par. However, if we get a second wave of business closings, management’s optimism may prove to be misplaced.

The BDC Credit Reporter is leapfrogging our credit rating down from CCR 3 to CCR 5, and adding Benevis to the list of BDC-financed bankrupt companies. We’re only at August 3, and this is the fourth bankruptcy of the month and the 43rd of the year…

This is a material investment for NMFC: 5.8% of net book value as of March 31, 2020. We would expect to see that value drop further in the IIQ 2020 when results are announced shortly. However, what the final outcome might be is impossible to speculate about, but we’ll be keeping close tabs on the company’s progress through bankruptcy court and will be listening out to whatever NMFC chooses to share about its plans.

Permian Holdco 1-3: File Chapter 11

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

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

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

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

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

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

CentralSquare Technologies: Downgraded By Moody’s

On June 19, 2020 Moody’s downgraded CentralSquare Technologies – a software company – to its “Caa2” rating from “Caa1”. Both the company’s first lien and second lien debt have received a downgrade, and the outlook is “Negative”. Of greatest interest to us – because BDC exposure is limited to the 2026 second lien Term Loan – was rated just “Ca” from Caa3″. The ratings group is worried by Covid-19 impacted sales; very high leverage (above 11x debt to EBITDA !) and liquidity concerns, especially as the company appears to be generating negative cash flows and has tapped out its Revolver. That leaves only its cash to service debt and cash flow losses.

We are adding the company to our underperformers list for the first time. Even through March 31, 2020 the company’s $54.7mn of second lien debt at cost was only discounted (7.5%) by New Mountain Finance (NMFC). With this latest news we are leapfrogging our rating from CCR 2 (Performing) to CCR 4 (Worry). Just under $5.0mn of annual investment income is at risk for NMFC. The danger of that income stream is all the more at risk given that we’re adding CentralSquare to our Weakest Links list of companies greatest at risk of seeing their debt move to non performing status.

We’re playing catch up with our own rating partly because we rely on seeing BDC discounts greater than (10%) before we move a credit to underperforming status, barring any other information. We now know that even though NMFC has barely discounted its debt – held since IIIQ 2018 – Moody’s had already downgraded the company to “speculative” as far back as August 5, 2020. Even then debt to EBITDA was over 10x. If we’d been aware of the Moody’s action, we would have downgraded the company to at least CCR 3 status in the summer of 2019.

With a still weak business environment and cash possibly melting away the company may be within our crosshairs for an update sooner rather than later. We’ll also be interested to see what value NMFC places on its debt given the new Moody’s downgrades when the June 30, 2020 portfolio values are set.

AAC Holdings: Files Chapter 11

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

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

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

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

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

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

AAC Holdings: Forbearance Extended

Back on January 30, 2020 we wrote that troubled publicly traded AAC Holdings (aka American Addiction Centers) had negotiated an extension to its forbearance agreement with its lenders after a prior falling out. That provided some hope that borrower and lenders – who’ve been going back and forth for many months – would eventually come to some sort of modus vivendi, as opposed to ending up in court arguing.

Now we hear from a company press release that the parties “have reached an agreement to extend the deadline to enter into a restructuring support agreement with its senior secured lenders from February 21, 2020 to March 20, 2020“. Such an extension had been contemplated back in January, as we discussed at the time after reading the legal agreement:

“Even that date is not fixed, as the parties have agreed the forbearance is “subject to extension in the discretion of the Forbearing Lenders if the Company shall not have entered into agreements embodying the material terms of a consensual financial restructuring among the Company and the parties to the Credit Facilities“.

This new extension of the extension allows the company to draw another $2mn from funds committed by the lenders.

We’re not sure if the fact that this negotiation keeps going on and on is a good sign or not. Rather than draw any conclusions from what little information we have, we’ll just wait for the next chapter in this long saga. We’ve now written over 10 articles about AAC Holdings ! We can say,though, that the total amount advanced – based on Capital Southwest’s (CSWC) IVQ 2019 financials – has increased from the $66.2mn balance as of September 30, 2019. The lenders are anteing up funds to keep the business solvent. By the time all 4 BDCs involved report their exposure, the cost could be over $70mn and potentially subject to further increases. Sometimes you’ve got to spend money to save money seems to be the philosophy here.

AAC Holdings: Lenders Terminate Forbearance

In an 8-K on January 16, 2020 treatment center operator AAC Holdings Inc. announced that its banks had terminated a Forbearance Agreement that had been in place since October of 2019, and were exploring all options regarding defaults under their credit agreement. In fact, the break-up occurred on January 9, with the delivery of a notice by the lenders, headed by Credit Suisse.

The BDC Credit Reporter has written about the troubles at AAC – also known as American Addiction Centers – eight times, starting in April 2019 and – most recently- on October 25, 2019 when the forbearance was agreed upon. Throughout, based upon our review of the company’s publicly available financial statements and due to the ever lower stock price, we’ve been pessimistic about the likelihood of AAC Holdings being able to right its own ship without a restructuring or bankruptcy. With this move by the lenders, our thesis seems ever more likely to be realized.

Not helping is that the falling out with the lenders was – if this latest filing is to be believed – triggered by ” the failure of the Company under the Forbearance Agreements to have provided the Forbearing Lenders with a three-year business plan for the Company“. There’s more going on because the company also announced – in a highly unusual or even bizarre move – the “conditional resignation” of its CEO. We’ll quote from the release to leave no doubts as to the situation:

On January 8, 2020, Michael T. Cartwright, Chairman of the Board of Directors (the “Board”) and Chief Executive Officer of AAC
Holdings, Inc., a Nevada corporation (the “Company”), delivered to the Board his conditional resignation as Chief Executive Officer.
Mr. Cartwright’s resignation as Chief Executive Officer will become effective only upon (i) the Company entering into amendments to its two
previously reported forbearance agreements, each dated October 30, 2019, entered into between the Company and the lenders under the
Company’s two primary credit facilities and (ii) the Company receiving $10.0 million of incremental funding under the Company’s previously
disclosed credit facility entered into by the Company in March 2019. Mr. Cartwright currently intends to remain as Chairman of the Board.
Also on January 8, 2020, the Board appointed Andrew W. McWilliams, the Company’s Chief Financial Officer, to serve as Chief Executive
Officer, commencing upon the effectiveness of Mr. Cartwright’s resignation, as described above.

As the AAC Holdings credit story becomes more confused, we remind readers that BDC exposure is material: $66mn at cost spread over 4 BDCs, three public and one non-listed. The public BDCs are Capital Southwest (CSWC); Main Street Capital (MAIN) and New Mountain Finance (NMFC). The private BDC is HMS Income, which is managed by MAIN. The debt is in the company’s 2020 and 2023 Term Loans and three BDCs marked their positions as being on non accrual from the IIIQ 2019. The FMV totals $56mn, leaving plenty of room for further valuation losses.

This is publicly traded debt and we’ve checked Advantage Data’s Middle Market Loan marketplace and found the 2020 Term Loan still valued at par by the market and the 2023 discounted (25%), only slightly lower than at 9/30/2019. Nonetheless – re-iterating the position we’ve held for some time – we have little hope that the company can avoid bankruptcy/restructure for much longer, and we expect ultimate recoveries to be lower than current valuations. Most immediately at risk for the BDC lenders is receiving any investment income. In total, there’s nearly $10mn of annual interest in play over all facilities. According to Advantage Data records, the BDC with the greatest dollar exposure is NMFC with nearly $25mn at cost, but all in the 2020 debt. Tied for most at risk in the 2023 Term Loan is MAIN and HMS Income, with CSWC in third place.

We expect to be reporting back shortly on what is becoming a strange credit story and a potentially material set-back for several well regarded BDC lenders. On the other hand, we’d be the first to admit that it’s not over till it’s over.

AAC Holdings: To Receive Forbearance From Lenders

On October 22, 2019 AAC Holdings issued a press release indicating that the company was just about to arrive at a mutually satisfactory arrangement with its lenders, following events of default under the debt. This was carefully worded – because nothing has been signed – as follows: “The Company expects to enter into an agreement securing additional liquidity and receiving a forbearance from its senior secured lenders regarding certain previous events of default. The Company expects to finalize the agreement with its senior secured lenders next week, although no assurance can be made that an agreement will result from these discussions within that time frame or that an agreement consistent with these discussions will be reached at all“.

The company also expects to finalize the appointment of three new directors, after losing that many in a mass resignation, which was the subject of our last post. That will allow AAC to remain a public entity.

If all the above happens, AAC Holdings will cheat the hangman a little while longer. That gives the company time to improve fundamentals at its addiction centers and sell off real estate to reduce debt, as has been the plan for some time. Nonetheless, even if the forbearance is formally approved, we continue to keep AAC Holdings rated CCR 4 (Worry List) and on our Bankruptcy Imminent list. BDC exposure is high at $66mn. Click here for all our prior articles. Like Game Of Thrones, the story makes more sense if you begin at the beginning.

AAC Holdings: Directors Resign.

On October 1, 2019 4 of 7 directors at AAC Holdings (aka American Addiction Centers) resigned. Shortly afterwards, the SEC warned that the troubled public company was not in compliance with rules regarding the minimum number of audit committee members because of the departures. At the same time, the stock price of AAC continues to plumb new lows, dropping to $0.50 a share at time of writing.

In our minds this more evidence that AAC is close to filing Chapter 11 or restructuring out of court. We’ve added AAC to our Bankruptcy Imminent list (our version of Fitch Ratings Loans Of Concern), and the company is already rated CCR 4.

To be fair, the 2020 and 2023 debt in which several BDCs are invested are publicly traded – as reported by Advantage Data – and the former is trading almost at par and the latter at a (11%) discount, not that much worse than the valuations at June 2019. Nonetheless, if we are right and the markets are wrong ( a tall order admittedly) there is a lot at stake for the 4 BDCs involved with $66.3mn of exposure at cost and valued almost at full value, and with over $7.0mn of investment income involved.

Geo Group: Banks Pledge To End Relationship.

According to a September 30, 2019 news report: “All of the existing banking partners to private prison leader GEO Group have now officially committed to ending ties with the private prison and immigrant detention industry. These banks are JPMorgan Chase, Wells Fargo, Bank of America, SunTrust, BNP Paribas, Fifth Third Bancorp, Barclays, and PNC“.

This is notable because of existing BDC exposure to the private prison operator of $48.2mn, provided by two major players: Cion Investment and publicly listed New Mountain Finance (NMFC). At June 2019, the 2025 senior debt held by the two BDCs was carried at par and the traded loan maintains that value at time of writing. Nonetheless, we’ve chosen to add Geo Group to our under-performers list with an initial rating of CCR 3 (Watch List). That’s because of the risk that the bank boycott of the company – which follows lobbying by activist groups – could impact refinancing of existing debt when due, or even cause financial failure. Our sister publication – the BDC Reporterdiscussed the subject of the boycott in a recent Twitter post.

AAC Holdings: Reports IIQ Results, Addresses Debt Defaults

We have written about AAC Holdings (aka American Addiction Centers) 5 times already since April 2019. That’s for two reasons. First, this is a public company (ticker:AAC), which means there’s plenty of information available to relay. Second, the $66mn of BDC exposure – mostly carried at a small discount or even at a premium to cost by 4 funds – means the stakes are high.

Anyway, on September 1, 2019 AAC Holdings held its IIQ 2019 Conference Call; summarizing its latest results and (sort of ) addressing some of its problems with its lenders. Here’s what’s happening with EBITDA:

“On a sequential basis, adjusted EBITDA went from a loss of $12 million in the fourth quarter of 2018 to a loss of $6.5 million in the first quarter of 2019 to positive adjusted EBITDA of $3 million in the second quarter of 2019. This represents a $15 million or 125% improvement in quarterly adjusted EBITDA since the fourth quarter of 2018. Overall, as Michael mentioned earlier on the call, while we still have a lot of work to do, I’m pleased with the sequential momentum so far in 2019.

Turning to our 2019 guidance, our full year guidance has revenue in the range of $255 million to $275 million and adjusted EBITDA in the range of $16 million to $21 million. Taking into account actual results through the first half of 2019, this implies revenue of $137 million to $157 million and adjusted EBITDA of $20 million to $25 million in the second half of 2019″.

As to the company’s relationship with its lenders:

We remain committed to our strategic initiatives to improve the balance sheet and enhance value to all stakeholders by the end of the year. Our goal is to utilize our existing assets to reduce our senior debt by at least $100 million by the end of the year in order to reduce the cost [of] capital.

Finally, we remain engaged in active discussions with our lenders on our credit agreement and are making progress on reaching an agreement that will resolve our covenant obligations in the near term.

I’m confident that we will reach an agreement that is favorable to all stakeholders”.

Later in the CC this was said in response to a question: “I mean I think our banks have been extremely supportive. They see the trajectory that we’re making. I think we see the trajectory we’re making, there’s both sides of it. Part of it hinges on us unlocking some of the value of the real estate, which we’ve been actively working on. We’re looking at all proposals, and so we certainly want to get this resolved as soon as possible“.

The BDC Credit Reporter continues to be more conservative/skeptical than either AAC’s management or lenders about the ultimate outcome, which is only appropriate. We have a CCR 4 rating on our 1-5 scale. Much of the turnaround required remains to come, especially the sale of real estate to pay down debt. How that turns out will be critical, both to AAC and its stake holders and as a validation or otherwise of the lenders – which include Capital Southwest (CSWC), New Mountain Finance (NMFC) and Main Street (MAIN) – credit underwriting. Expect to see many more updates before this file gets closed.

AAC Holdings: Major Investors Selling Out

An August 26, 2019 article indicates several of the largest institutional investors in AAC Holdings (aka American Addiction Centers) have been dumping their shares in the troubled public company.

Deerfield Management, the company’s largest shareholder in March and a major investor since 2015, sold all of its holdings in AAC during the second quarter. Similarly, TimesSquare Capital Management — another of the largest shareholders early this year — and Apollo Management also had sold all of their shares by the end of June. And Morgan Stanley’s stake in the company fell from 1.4 million shares in June 2018 to about 1,600 shares in June 2019“.

So what ? The defections suggest some of the most knowledgeable investors are not buying in to management’s oft repeated plans of a turnaround plan. At $0.58 a share, the stock trades only $0.08 off its all-time low and supports the BDC Reporter’s fears that AAC will eventually file for Chapter 11 or undertake a wide ranging restructuring. Debt holders should probably pay attention.

At June 30, 2019, there were 4 BDCs with $66mn of exposure – all first lien – in the company and more than $7mn in annual income at risk. To date, discounts taken on cost have been very modest, which will make the potential impact on BDC net assets all that more telling should AAC stumble.

AAC Holdings: Receives Third Warning Of De-Listing From Exchange

On July 9, 2019 news reports indicated troubled AAC Holdings (aka American Addiction Centers) had received a third warning from the New York Stock Exchange (NYSE) that its stock might be shortly de-listed. The reason: the company’s stock (ticker: AAC) has been trading under $1.0 for a thirty day period. The company is seeking a reprieve and has submitted a plan to the NYSE. According to a press release by the company, “submitting a plan to the stock exchange should allow the company to continue trading. The plan makes AAC eligible for an 18 month period to improve market capitalization and a six month period to improve share prices”.  Notwithstanding management’s ambitious plans to re-position and turn around the business, the BDC Credit Reporter remains concerned about a possible bankruptcy filing or restructuring in 2019. Total exposure is $63.6mn in 2020 and 2023 Term debt still carried at high valuations as of March 2019. The key holders are New Mountain Finance (NMFC); Main Street Capital (MAIN); Capital Southwest (CSWC) and non-traded MAIN sister BDC HMS Income. Total investment income at risk should the company default is in excess of $7.0mn annually. We should say that the publicly traded debt does continue to trade at only a slight discount to par, suggesting our worries may be overblown. Time will tell.

AAC Holdings: Number Two Executive Steps Down

This can’t be good. A month after addiction treatment company AAC Holdings (ticker:AAC) announced an ambitious long term strategic plan to address its recent business woes, its President has resigned unexpectedly. He was with the company for only 18 months. Not surprisingly, AAC’s stock price dropped, and is now at $0.70 a share, not far from it’s all-time low. We continue to worry about a Chapter 11 filing or restructuring – see our earlier post from April 16, 2019. Currently, total BDC exposure is up to $63.6mn, spread over 4 BDCs.

AAC Holdings: Reports IVQ 2018 Results

AAC Holdings – aka American Addiction Centers – had a terrible IVQ 2018, with sales, EBITDA and earnings down. That’s reflected in the just published results and caused the Company to seek – as reported previously – additional debt financing to the tune of $30mn. On the Company’s Conference Call, management remained optimistic that a $30mn cost cutting program and a rebound in occupancy at its facilities would allow AAC to rebound. Still, with projected EBITDA for 2019 of $45mn-$55mn and $300mn in debt (97% due within 12 months), we have reasonable doubts. So do the public shareholders, who’ve brought the stock under $2.0 a share. The 4 BDCs with $60mn of senior debt exposure (at December 31 2018) must have their concerns as well, given that new debt has been added and real estate may be sold and leased back. If the other shoe drops at ACC, the BDC lenders may face material write-downs from the par valuation at year end 2018 and the risk of close to $6.0mn of income interruption if the debt goes on non-accrual.