Posts for Saratoga Investment

Roscoe Medical: IVQ 2021 Update

Roscoe Medical is a medical equipment company, part of a constellation of such companies owned by Compass Health Brands. Roscoe itself has been a BDC portfolio entity since 2014, and has been underperforming to various degrees since 2018. From the IQ 2019, the company’s debt went on non-accrual and was written down by as much as (55%). An equity stake went to zero in value. Then matters began to turn around in late 2020. Both debt and equity began to revive in value. From early 202, the debt went back to performing status, the equity gained some value. (All this data drawn from Advantage Data’s records).

However, this is a still unfolding story with an uncertain outcome. In recent months, the valuations given by the two BDCs with exposure – Saratoga Investment (SAR) and Portman Ridge (PTMN) – have weakened again. As of November 2021, SAR valued its $5.1mn of second lien debt at par but wrote down the value of its equity by (83%) from (59%) the quarter before. PTMN is only in the second lien debt, which is discounted only (3%). The cost is $8.2mn.

Given the uneven performance in the past, and the recent (modest) downward valuation trend, the BDC Credit Reporter rates Roscoe CCR 3. Unfortunately, the public record (including the BDCs own disclosures) do not make clear what ails the company, and what the outlook might be. The only time a BDC piped up on the subject was SAR in May 2019:

I would say that the challenges that they’re facing at Roscoe have a lot less to do with the fact that they operate in and around the healthcare space, and more to do with the fact that they’re a highly competitive market. So the portion of their business that has faced the more extreme challenges really is the portion where they’re distributing to the broader retail environment. And so it’s been less indicative of a larger trend that would be natural to ask about. But we haven’t seen or experienced in our portfolio relative to health care in general.

Saratoga Investment Conference Call May 9, 2019

Given the high interest on the second lien debt (11.25%), the amount of income that could possibly be forgone is material : ($1.5mn). However, we’re not there yet, based on the relatively mild discounts being applied. The second lien debt does expire in March 2022 so either a refinancing or an extension is likely in the cards. We’ll circle back – whatever the status – when PTMN and then SAR report their next quarterly results.

Knowland Technology Holdings: IVQ 2021 Update

Knowland Technology Holdings (as per Advantage Data but named Knowland Group by its only BDC lender – Saratoga Investment or SAR ) “is a web-based software company that provides business development products and services to the hospitality industry”. The company has its own Wikipedia page. The company, which bills itself as “the world’s leading provider of data-as-a-service insights on meetings and events for hospitality” waxes optimistically about a rebound in corporate gatherings, as this article from suggests.

Judging, though by SAR’s recent valuations of its second lien debt to this privately held company with nearly 200 employees, the investment made seems to be underperforming. According to Advantage Data’s records, the company has been underperforming – not surprisingly – since the IIQ 2020. As of November 2021, the debt – which matures in 2024 and yields 11.0% including a 1% PIK element – has a cost of $15.8mn and a FMV of $10.4mn. That’s a (34%) discount, and given both the nature of the business in these pandemic affected times and the amount of the discount, worrying. By the way, the August 2021 valuation was $10.8mn, so the valuation trend is down as the little red arrow accompanying this article indicates.

We rate the company CCR 4, with the possibility that $1.7mn of annual investment income might be interrupted. Much more info we cannot offer as SAR has not said anything about the company and the public record is not eye opening either. We have no reason at this time to expect any great change coming in SAR’s next valuation, except that the onset of omicron might be a depressant. We’ll circle back when we get any news or at the next SAR earnings release in April 2022.

C2 Educational Systems: IIQ 2021 Update

C2 Educational Systems is a K-12 test preparation company. As you might expect, with schools closed and face-to-face tutoring banned in many places, the company did not fare well during the pandemic. In fact, we just learned from the public record that the company received a $10.0mn PPP loan to tide matters over. (Also disclosed is that the company employs around 500). We hear from the corporate website that “We’re Back In Person”, which must be good news both for the company and its students.

The only BDC with exposure is Saratoga Investment (SAR), which has been a lender since 2017. For years, the investment was valued at par. However, during the pandemic – and as recently as the quarter ended November 2020 – SAR wrote down its first lien $16mn loan by a fifth. In the quarter ended February 2021, the term debt that was due 5/31/2021 was extended to 5/31/2023, and the pricing increased by 2% to LIBOR + 8.50%, presumably reflecting additional risk. In the most recent quarter ended May 2021, total debt increased by $2.5mn and SAR invested half a million dollars in preferred stock. The discount on the debt has been reduced – but remains in underperforming territory at (13%).

All the above suggests that C2 has needed substantial financial support, but is pulling through. Interest – which amounts to 10.0% in absolute terms – is current and the preferred is valued at a (very) slight premium. We have rated the company CCR 3 since the second calendar quarter of 2020. If the debt investment ultimately returns to par, SAR could see a $2.5mn increase in asset value, plus whatever the preferred becomes worth.

We are adding C2 to our Trending List because the next time the BDC reports earnings – for the quarter ended August 2021 – we may see a material improvement in valuation. However, the recent upsurge in Covid cases could delay this turn around. Given the size of this investment to SAR , this is a company worth tracking regularly for both good and bad news.

My Alarm Center: Files Chapter 11

You might have expected in this period of easy money and hot markets, that leveraged companies had become immune from failure. That’s not the case, as proven by My Alarm Center, LLC, which has just filed for Chapter 11 bankruptcy protection, as discussed in trade publication SecurityInfoWatch:

“In a statement provided to, My Alarm Center said that its lenders and other key stakeholder have agreed to support its reorganization plan, which provides for the elimination of approximately $235 million in legacy debt obligations, strengthens its financial structure and supports its long-term growth plans“. 

We won’t spend a great deal of time on the company’s restructuring plans because the three BDCs with exposure are all currently in the equity and preferred. Chances are high the $8.0mn invested at cost – and with an aggregate FMV of $0.4mn at year-end 2020 – will all be written off. The BDCs involved are Saratoga Investment (SAR); Crescent Capital (CCAP), which inherited the investment from Alcentra Capital, and OFS Capital (OFS). SAR has the biggest exposure at just under $5mn at cost, but a FMV of just $0.3mn. The BDC already booked a realized loss of ($7.7mn) back in 2017 when the company was previously restructured. At that point SAR – and others – fronted more capital, which is now likely to be lost as well.

We had already rated the company CCR 5 due to SAR carrying one of its preferred positions as non performing. The rating remains unchanged. We expect to see realized losses booked by the BDCs involved in the second or third quarter 2021, probably the former. From a fair market value standpoint, the impact on the BDCs will be minimal.

All in all, a sorry episode for all the BDCs involved and in an industry famous for its allegedly high, stable cash flows where companies are sold for multiples of revenue. However, technological change and competition have resulted in a number of setbacks in the alarm monitoring business. For the BDC sector a rare new bankruptcy in 2021.

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.