On May 3, 2022, we heard the following from WhiteHorse Finance (WHF) in a press release which previewed IQ 2022 results:
During the three months ended March 31, 2022, the realization from Grupo HIMA San Pablo, Inc. generated an approximate $6.9 million net loss, or approximately a net loss of 29.8 cents per share.WhiteHorse Finance Press Release May 3, 2022
No further details were provided, but this does provide a useful heads up regarding the Puertno Rican hospital chain, whose debt has been non performing in one way or another since IVQ 2017 (!). As of the IVQ 2021, 4 BDCs – including WHF – have exposure to Grupo Hima, in the form of first lien and second lien debt, with a cost of $44.4mn. At fair market value the positions already aggregated only $10.9mn.
WHF – according to its latest 10-K – had invested $19.5mn in the hospital chain, but had written exposure to $7.5mn. Assuming we understand what WHF is doing, this suggests the BDC will be recognizing a final loss but recovering $12.6mn of capital advanced and a small fair market value gain from the settlement of this long troubled credit.
The other BDCs involved – none of which have reported results yet are Portman Ridge (PTMN); Main Street Capital (MAIN) and Stellus Capital (SCM). The news out of WHF suggests the “realization” of the Grupo Hima situation means a final resolution has been made. Unfortunately, we don’t know the details and could not find anything from a quick search of the public record. We hope to circle back with more details when one or more of the BDC lenders provides more of an explanation of what has happened.
As we reported all the way back in October 2020 , Global Knowledge or GK Holdings has been acquired by a special purpose acquisition company (“SPAC”) , which itself is going public on June 14, 2021. The new company is being called Skillsoft Corp, under the ticker SKIL. Skillsoft – of course – is a leading training company, which was also gobbled up by the new public entity, which has put its name on the new public business.
Where the BDC lenders to GK Holdings are concerned, this must be good news. According to Advantage Data, there are nominally 6 lenders to the company, with a total cost of $31.1mn. However, these include Harvest Capital and Portman Ridge (PTMN). The former has just been acquired by the latter, so there are only 5 BDCs involved. (Then there’s non-traded Audax Credit whose exposure to the company is carried under the name Global Knowledge Training LLC, albeit the amount advanced at cost is minimal at $0.9mn).
The FMV of all this BDC exposure at March 31, 2021 was $20.9mn. The roughly ($10mn) discounted was from both first lien and second lien debt held, all of which was on non accrual at March 31, 2021. Unless we are very mistaken, all that debt should be repaid in full with the IPO of Skillsoft and the unrealized loss reversed. All the BDCs involved – led by Goldman Sachs BDC (GSBD); non traded Sierra Income and Stellus Capital (SCM) – should be able to record material unrealized gains and re-deploy the proceeds into new investments.
All the above is based on surmise rather than an explicit acknowledgment by any of the BDCs involved, so we’ll wait till the IIQ 2021 results come out before changing the credit rating from CCR 5 – non performing – to CCR 6, or “repaid”. (The exception to that statement is GSBD, which went on the record months ago about its expectation of not incurring any loss on GK Holdings thanks to the SPAC deal, and is the principal basis for our optimism in this regard for all the lenders involved). However, we’re certainly adding the company to our Trending list as we expect both value and income to drastically change in the IIQ 2021 results.
Now that Stellus Capital (SM) has reported IVQ 2020 results, we know the final outcome of bankrupt retailer Furniture Factory Outlet (FFO) that we’ve written about 3 times before. Unfortunately, despite booking a major final realized loss on the investment, SCM’s external manager was tight lipped about many of the details and was even shy of mentioning the company by name. However, from what we can tell the $13.1mn invested at cost as of September 2020 and valued at $2.1mn was written off in this most recent quarter, resulting in a ($10.1mn) realized loss. Virtually all that exposure – and loss – was in the form of first lien debt.
For SCM this means the permanent loss of about ($0.750mn) – taking into account the $2.1mn recovery – of annual investment income. However, the debt has been on non accrual since IIQ 2020 so the impact has already been reflected in the BDC’s most recent results. The company has now been fully removed from SCM’s books.
This has been a material credit set-back for SCM, equal to 3.7% of the BDC’s equity capital at par and more than three quarters of the funds advanced to FFO. From a post-mortem, Monday Morning Quarterback credit perspective this was probably an avoidable loss. As we explained in our prior article – which we’ll quote below – the choice of industry from the outset was problematic and the first lien position in the balance sheet afforded little protection:
“The furniture business – as old credit hands like the BDC Credit Reporter will tell you – is a notoriously difficult industry to lend into, even if the bulk of your exposure – as with SCM – is nominally in first lien debt. This investment by SCM dates back to 2016, before the general “retail apocalypse” became crystal clear to all. However, as recently as IQ 2018, the BDC doubled its exposure, just when mall vacancies in the U.S. reached a six year high. In retrospect, SCM may have wished they had headed in the opposite direction“.
We’re a few weeks late to this news but troubled retailer Furniture Factory Outlet, LLC filed Chapter 11 on November 5, 2020. This was no great surprise as the company – as discussed in two prior articles – has been underperforming even before the pandemic began. With Covid-19 in the mix, the company entered a spiral, went on non accrual and is now under court protection and has a $7mn “stalking horse” bid from American Freight. Apparently Furniture Factory has $50mn in funded debt to contend with and liquidity challenges.
This looks like the final nail in the coffin for the company’s only BDC lender/investor: Stellus Capital (SCM). The $18mn invested – mostly in first lien debt – was written down to $2.1mn as of September 2020. That value was probably set with the knowledge of the pending bankruptcy. The chances are SCM will have to write off 90% – or even more – of its capital invested, but no material further change in value is likely, if only because the remaining value is so low. The first lien and small subordinated loan SCM holds were generating $0.9mn a year of investment income through IQ 2020.
We checked and confirmed that the company remains in bankruptcy here in mid-January 2021. This might push a final resolution – and a realized loss – to beyond the IQ 2021. At this point, though, there’s no reason to believe that the company is anything but a large loss – albeit one that has been in the cards for months – for SCM.
The furniture business – as old credit hands like the BDC Credit Reporter will tell you – is a notoriously difficult industry to lend into, even if the bulk of your exposure – as with SCM – is nominally in first lien debt. This investment by SCM dates back to 2016, before the general “retail apocalypse” became crystal clear to all. However, as recently as IQ 2018, the BDC doubled its exposure, just when mall vacancies in the U.S. reached a six year high. In retrospect, SCM may have wished they had headed in the opposite direction.
With Stellus Capital’s (SCM) IIIQ 2020 results just published , we have updated security company Protect America Inc.’s Company File, and added to the BDC Credit Reporter’s credit commentary. Spoiler alert: No progress here and odds look good that the BDC will eventually have to write off all its second lien debt position. The rating is CCR 5 and has been for multiple quarters.
We last wrote about Furniture Factory Outlet LLC on August 1, 2020 when the situation at the retailer was dire. Now the only BDC lender – Stellus Capital (SCM) – has reported IIIQ 2020 results and written down its first lien debt to the company by (84%) from (67%) the quarter before. (The subordinated debt and equity remains valued at zero). The BDC did not offer up any more color on what’s happening but the valuation speaks for itself.
The BDC Credit Reporter maintains its CCR 5 rating that dates back to IQ 2020 and expects that a complete write-off (give or take a few hundred thousand dollars) might be the most likely final outcome. In dollars and cents that might mean a further ($2mn) write-down and a ($13mn) realized loss unless there’s a drastic turn of events. We’ve checked the public record and the company seems to be still in operation and has not filed for bankruptcy. Otherwise, though, the outlook seems grim for this SCM investment that dates back to 2016, but which began to weaken in the IQ 2020. Covid-19, though, has accelerated and amplified the downturn.
This particular investment is notable principally for illustrating that being in “first lien” position is no guarantee that the ultimate loss might be not be very high or even a complete write-off. Just scanning down a BDC’s filing for its percentage of portfolio assets in first lien, second lien and equity does not tell us much about default and recovery prospects. As always, one has to look under the hood of each borrower in turn, which is no easy task.
See the Company File here.
Furniture retailer Furniture Factory Outlet LLC was placed on non accrual by its lenders during the IIQ 2020, and rated CCR 5 by the BDC Credit Reporter. On the Stellus Capital (SCM) Conference Call on July 30, 2020, we heard the briefest of updates from the BDC: “As you know, we don’t talk specifically about companies for privacy reasons, but this is a business that’s involved in the furniture retailing aspect in the central and Southeast part of the United States, and certainly been impacted initially by what happened due to COVID. And so this is just a reflection of our current view. If it’s helpful, the business has picked up as we’ve gone further along since the COVID really hit initially”.
In our own research in the public record, we’ve discovered FFO (as its known) has closed many stores temporarily, but some have been permanently shuttered. The company continues to have dozens of store locations across the south-east and had sales – according to one report – of over $100mn before the crisis. From what little information is available, FFO has a fighting chance of staying in operation, but we know nothing about its balance sheet. We take some comfort from the opening of a new store in Kentucky as recently as May.
SCM – the only BDC with exposure – has invested $13.5mn in first lien, subordinated and equity in the company, and values the most senior capital at $4.4mn and the rest at zero as of June 30, 2020. The company was on the underperformers list from the IIIQ 2019 but Covid-19 precipitated the non accrual and substantial valuation write-downs.
We will continue to monitor the company’s progress from the public record and from whatever SCM lets us know. At this stage, with the investment written down by two-thirds and with no income coming in, SCM has more to gain than to lose.
Privately-held filtration company BFC Solmetex LLC has been added to the BDC Credit Reporter’s underperforming list in the IIQ 2020 with a Corporate Credit Rating of 3.
Stellus Capital (SCM) – one of two BDCs with exposure alongside Crescent Capital (CCAP) – has discounted the 9/26/2023 first lien Term Loan to the company by (15%), from close to par in the prior period. No explanation was given. CCAP, which is involved in the same tranche, will probably follow suit when IIQ 2020 results are published. Total BDC exposure at cost is $21mn or so, and investment income involved about $1.8mn.