Posts for Saratoga Investment

Roscoe Medical: Debt Back On Accrual Status

We’ve not written about Roscoe Medical since October 16, 2019 when its junior debt and equity were being deeply discounted by its BDC lenders and some debt tranches were on non accrual. As recently as November 2020 Saratoga Investment (SAR) continued to carry its 3/28/2021 second lien Term Loan as non accruing. However, we hear from Portman Ridge Financial (PTMN) – also a lender and investor – that the debt has been removed from non accrual. (SAR admits the company is back to paying interest but still carried the loan as non performing through November). Furthermore, both BDCs have reduced the discount on their equity stakes from 100% to (55% to 75%), suggesting fundamental improvements in the business.

Overall, BDC exposure is $13.9mn and the current FMV $12.7mn. We have added Roscoe to our Trending list as we expect there is likely to material changes to value and income when the next set of PTMN and SAR earnings come out in the IQ 2021. If SAR begins to accrue its share of investment income again in future quarters like PTMN is doing that will increase investment income by close to $0.5mn annually. Furthermore, there could be further increases in the value of the smallish equity positions both SAR and PTMN hold in the company.

We are ready to upgrade Roscoe from CCR 5 to CCR 3 – based on the IVQ 2020 results but will wait till those first quarter 2021 valuations are published. At this point the medical devices company looks like a real turnaround given that the FMV of those debt and equity assets – despite one loan on non accrual – has doubled since the IQ 2020.

Elyria Foundry: Company Sold

All the assets of BDC portfolio company Elyria Foundry has been sold to TRM Equity as of January 25,2021. Terms were not announced. “Elyria Foundry, specializes in ductile iron castings up to 200,000 pounds serving a broad set of markets including defense, oil and gas, construction equipment and mining. Elyria Foundry has operated since the early 1900’s and has developed a strong technical and metallurgical team that drives its success”. The company is based in Ohio.

This should be good news for the only BDC with exposure – Saratoga Investment (SAR). This is an investment that dates back to 2008 ! As of November 2020, SAR had a $1.3mn second lien loan, bearing a 15% PIK yield to Elyria and a $9.7mn equity stake, valued at just $0.730mn.

We imagine that SAR’s management has been aware of the acquisition for some time. That might mean the latest valuation is up to date and proceeds received will not be sufficient to do much more than repay the debt and allow for a small payout on the equity, or $2.0mn in all. That would result in a realized loss of -$9mn. However, we just don’t know and SAR’s proceeds might be higher or even lower (though we don’t think so). The most notable part of this story is that the long relationship between SAR and Elyria seems finally to be coming to an end and should release some capital back to the BDC.

We are re-rating Elyria – because now sold – to a CCR 6 rating from CCR 4. We’ll have to wait till SAR reports February 2021 quarterly results before discovering if at the end of the road with Elyria what the final bill looked like.

C2 Educational Systems: Valuation Update

Saratoga Investment (SAR) has just reported quarterly results one month ahead of the BDC pack, which has provided a number of updates on where underperforming companies stand, based on valuations as of August 2020. This includes C2 Educational Systems – which was added to the underperformers list as of the IIQ 2020 by SAR – its only BDC lender – and downgraded from CCR 2 to CCR 3 by the BDC Credit Reporter.

As of August 2020, SAR’s valuation remains essentially unchanged with a (19%) discount to cost applied. SAR – as usual – had little to say about any specifics. Research in the public record, though, shows that the company received a significant PPP loan in April, which should have helped the business. We also expect that C2 – which is in the face to face business of tutoring K-12th grade students – is also making necessary changes to its business model by increasing the emphasis on “virtual tutoring”. The business was performing normally – based on SAR’s valuations at the time – before Covid-19 and should be a survivor. The involvement of lower middle market group PE group Serent Capital as owner is also a plus, even though we don’t know if any new capital has been added or will be.

We are maintaining our CCR 3 rating on the company and do not currently expect a loss of any kind down the road. SAR has $16.0mn invested in first lien debt at cost. Should the company return to performing status SAR could book a $3.0mn increase in value.

We’ll continue to track the company’s valuation quarterly via SAR and report back to our readers.

Foliofn Inc.: To Be Acquired

Good news for a change for an underperforming BDC portfolio company and one that’s been in that category for a record time. News reports indicates Goldman Sachs is to purchase Folio Financial (dba Foliofn Inc.). According to the company the transaction will occur in the IIIQ 2020, but terms were not revealed.

The only BDC with exposure – and going back twenty years – is MVC Capital (MVC). The BDC owns $15.0mn in Preferred stock that’s been carried at all sorts of discounts to cost (up to 100%) over the past many years. As recently as October 2019 the discount was (58%) but jumped up in the latest books that closed January 2020 to a discount of just (20%). Maybe that’s reflective of the early days of this negotiation with Goldman.

At this point we don’t know what amount MVC – as part owner and with a director on the Board – will be receiving. Nonetheless, this will create an exit from an investment that has often been given up for dead – money, that is. This has been a non income producing investment but receiving whatever millions will be coming its way will be gratefully accepted by MVC.

This is an investment that goes back to the BDC sector’s dinosaur era and when MVC was known as MEVC Draper Fisher Jurvetson Fund I, Inc. (“meVc”). At that time BDCs were regarded as a vehicle to bring venture capital equity investments to the masses. As you’ll have seen that did not work out and MVC – subsequently taken over and repositioned – is one of the few survivors from the early days. FolioFn is their largest “legacy” investment from that period.

For our part, we are maintaining the company’s CCR 3 rating but are hopeful that should the deal close, Foliofn Inc. – the oldest denizen – can be removed once and for all from the BDC underperforming company list.

Roscoe Medical: Update

The medical supplies company Roscoe Medical has been in financial trouble since late 2018 and its debt on non accrual since the IVQ 2018. Back on May 9, 2019 one of the BDC lenders to the company – Saratoga Investment (SAR) – explained that Roscoe faced “both fundamental weakened performance as well as operational issues. While we believe the operational issues have been largely addressed, we expect the company to continue to face headwinds in a competitive industry“. At the time, SAR had written down its second lien debt by (40%). A second BDC – Portman Ridge (PTMN) discounted its position in the same loan by (57%).

On October 10, 2019 SAR discussed its latest results and increased the discount on the second lien loan to (56%). PTMN has not yet reported. An equity stake stake held by SAR has been long ago written down to nothing. However, the BDC did not have much news to report: “There is no real update since we last reported, these marks reflect both fundamental weakened performance as well as operational issues. We continue to work with the senior lenders and sponsors to pursue strategic alternatives in the near to medium term.

We’ve not found any other public information, but the SAR valuation and commentary is not encouraging. Should the company default, $1.25mn of investment income is at risk. Total BDC exposure at cost is $11.9mn, with PTMN having a slightly bigger share.