BDC managers do not like to name names – even when they have good news to report. On December 24, 2020 Harvest Capital (HCAP) – as part of a conference call devoted to its proposed merger with Portman Ridge (PTMN) – reviewed recent developments at two of its four non performing portfolio companies. In this regard we learned the following about an anonymous company: “..Another one of our longer-lived nonperformers is we recently took active management of the company, and its performance has improved dramatically in the last 6 months and is back on accrual status this quarter. And we’re hoping to be out of that investment potentially in the next 6 months“.
By a process of deduction, we’re 99% certain HCAP is talking about Infinite Care LLC – a home health care operator. The company has been on HCAP’s books since 2016 and in 2017 was completely restructured and the BDC took legal and operational control. The debt has remained non performing for years. Of late, though, despite having first lien debt remaining on non accrual, HCAP has been valuing one of the loans above cost, a suggestion something has been changing for the better.
As of September 2020 total HCAP exposure at cost to Infinite Care was $13.7mn, of which $7.8mn was in debt priced at a below market 3.0% and due 1/1/2021. The $5.9mn of equity involved is still valued at zero, but that may change based on the opaque disclosure on that conference call. Overall, HCAP’s outstandings were valued at $8.5mn.
It’s too early to assume HCAP will be making a full recovery – or better, but the trend is positive. At this point we’re guessing that a buyer is being negotiated with and that the New Year 2021 loan maturity will be extended. Maybe HCAP will get away with a small realized loss when all is said and done, and a greater value than what was showing at September 30, 2020. As importantly the capital tied up in this business for many years will get freed up to benefit whoever the future shareholders of the BDC will be.
A very complex transaction involving a SPAC (“special purpose acquisition company”) is happening that will involve its merger with Skillsoft and the concurrent acquisition of Global Knowledge Training LLC (aka GK Holdings Inc. in our records). Both Skillsoft and Global Knowledge/GK Holdings are BDC-financed companies and both are currently on non accrual. Given that the value of the transactions is said to be $1.5bn, chances are the two companies involved – and their lenders – are about to experience a change of fortune.
As of June 2020, Global Knowledge/GK Holdings was financed to the tune of $15mn by three BDCs led by publicly traded Goldman Sachs BDC (GSBD). The BDC has both a first lien and second lien debt position. The latter has been on non accrual since IQ 2020, as the pandemic impacted the education business. Also with outstandings – both in the second lien – are public BDC Harvest Capital (HCAP) with $3.0mn at cost and non traded Audax Credit BDC with $1.0mn. Then there’s non traded Business Development Corporation of America (BDCA for short) which has invested $14.5mn in Skillsoft’s debt, most of which is also on non accrual since the IIQ 2020.
Most likely – as far as we can tell – all this troubled debt will be repaid as part of the envisaged two part transaction and some ($11mn) of unrealized losses reversed by the lenders to the two companies involved. The BDC with the most to gain is BDCA, with GSBD close behind. HCAP’s exposure is small but so is the BDC, which means any improvement in the value of their second lien debt, written down by (40%), will be gratefully accepted.
We’ll be digging deeper and learning more but, at first blush, this all seems to be good news in a situation that was previously headed ever southwards, as detailed in our prior article on April 27, 2020, written before either company’s debt was known to be on non accrual. Based on what we currently understand, the BDC Credit Reporter will be upgrading Skillsoft and Global Knowledge/GK Holdings from CCR 5 all the way back to CCR 2 if and when the deal closes in January 2021. Of course, at that time BDC exposure might be nil if the debt is repaid, making the rating CCR 6 (no further exposure). We will update readers when matters become clearer.
On October 7, 2020 General Nutrition Inc (parent General Nutrition Holdings) was sold to Chinese-firm Harbin Pharmaceuticals as previously agreed to by the bankruptcy court. Just as well given that the $780mn purchase offer for the troubled supplements retailer was the only one on the table. Thankful creditors – both secured and unsecured – overwhelmingly voted for the Harbin plan even though virtually every constituency will lose money. General Nutrition admitted to owing $895mn when first filing bankruptcy. As to the future of the company ? “New GNC will be a wholly owned subsidiary of Harbin and registered in Delaware as a limited liability company“.
For the only BDC involved – publicly traded Harvest Capital (HCAP) – this will be a relief and may even involve in some improvement in net proceeds than the (63%) discount booked as of June 2020 on its $4.0mn in first lien term debt to GNC. Furthermore, as revealed in a footnote in the 10-Q, HCAP advanced additional monies as well:
“Subsequent to GNC’s bankruptcy filing and quarter-end, the Company [HCAP] invested $1.0 million in a debtor-in-possession term loan to GNC, which carries an interest rate of LIBOR + 13.0% with a 1.00% LIBOR floor. In addition, the Company converted approximately $1.0 million of its existing senior secured term loan into a new first lien first-out term loan that carries an interest rate of L + 10.0%“.
We can’t tell you exactly how much of the $5.0mn at cost that HCAP has advanced will end up back in the BDC’s pocket but – we’ll guess – more than $3.0mn. That suggests any realized loss will be minimal, even though HCAP will be losing a nice little 14% earning asset in that DIP loan mentioned above. More importantly, the BDC will have $3mn or more to recycle into new investments or to pay its April dividend, which has been declared but no payment date set. The GNC final tally will show up in the IVQ 2020 books.
We are re-rating General Nutrition to CCR 6 (no longer a BDC portfolio company) from CCR 5. If we’re right, this could be an almost happy ending for a credit that HCAP booked in IQ 2019 and which performed normally till 2020 when Covid-19 was its undoing. This also removes one more BDC-financed portfolio company from the ranks of the bankruptcy list. There are now more exits than entries as troubled companies like GNC get sorted out in a variety of ways.
A judge has cleared the acquisition of General Nutrition Holdings (including General Nutrition Inc.) out of Chapter 11 bankruptcy for $770mn by China-based Harbin Pharmaceutical Group. The transaction should close by year end 2020. The company had filed for bankruptcy in June.
For the only BDC involved – publicly traded Harvest Capital (HCAP) – this is both good news and bad news. Let’s start with the latter: the first lien lender may be paid less than full value from the sale proceeds. The available trade articles are not clear. As of June 2020, the BDC had bought $5.0mn of debt for $4.9mn and had valued its position at just $2.447mn. (We are including here a $1.0mn Debtor In Possession loan funded after bankruptcy, which we expect to be repaid in full). If that holds up, HCAP – whose debt is on non accrual – will write off close to ($2.5mn), probably in the IVQ 2020.
The good news is i) the proceeds may be higher than initially anticipated; ii) any amount recovered will flow back to the BDC, much in the need of liquidity at the moment. However, we will probably not be told the final numbers till the IVQ 2020 results are published.
For HCAP – based on valuation – this was a performing business that we only added to the underperformers in IQ 2020 at CCR 3; dropped to CCR 4 and then CCR 5 in the course of the IIQ 2020 and should be off the books by the end of 2020. HCAP has lost ($0.350mn) in annual investment income, but may gain some of that back in the future from the recovery.
The BDC Credit Reporter, playing armchair credit quarterback, would question why years into the “retail apocalypse” HCAP decided to lend to a brick and mortar seller of nutritional supplements ? To be fair, though, and thanks to the fact that GNC was a public company, we can see that adjusted EBITDA was doing well in the quarter in which HCAP began lending. A year later Adjusted EBITDA had dropped by more than half thanks to Covid-19. Chalk this one up – mostly – to bad luck. After all HCAP was willing to step in with other lenders and become the owner but was beaten out by Harbin.
According to news reports, Deluxe Entertainment has sold most of its business divisions to Platinum Equity. (Deluxe Entertainment’s creative businesses are not included in the acquisition. They will remain operational, but drop the “Deluxe Entertainment” name). Financial terms were not disclosed.
As we’ve written about extensively, Deluxe Entertainment has been owned by its lenders since a debt-for-equity swap and a trip to bankruptcy court last year. Then, Covid-19 wreaked havoc on the entertainment sector starting in March 2020 with unknown, but likely harsh, consequences for the company. As a result, there is no assurance that the new owners of parts of Deluxe Entertainment received much in proceeds from the sale. Furthermore, what happens to the remaining and re-named divisions is unclear.
There are two BDCs with exposure to the post-bankruptcy company: Harvest Capital (HCAP) and non-traded Cion Investment, each in very different parts of the capital structure. HCAP already booked a ($2.4mn) realized loss back in 2019 when the company was restructured and now holds $0.5mn in a second lien Term Loan and $2.1mn in equity (0.63% of the company’s equity). We’re guessing any proceeds will be modest. Cion Investment has much more capital at risk: $24mn in First Lien debt and $9.9mn in the second lien Term debt. And no equity.
We’ll learn more about how this sale trickles down to the two BDCs involved when IIQ 2020 results are known. The BDC Credit Reporter’s best guess, though, is that this experiment in lenders owning an entertainment business in Los Angeles will shortly be over. Notwithstanding the sale, we expect further realized losses are likely.
We are downgrading Deluxe Entertainment from a Corporate Credit Rating of 3 to CCR 4, as we expect some sort of realized loss to be realized. More details to eventually follow.
On June 23, 2020 General Nutrition Inc. (aka GNC) filed for Chapter 11. The company and certain of its lenders have “reached an agreement to pursue a dual-path process that will allow the Company to restructure its balance sheet and accelerate its business strategy”. This includes an agreement to sell the business for $760mn. A marketing process has already begun.
The BDC Credit Reporter wrote about the deteriorating situation at the company back on May 18, 2020. At the time the company was hanging by a thread having just reached a temporary agreement with its lenders. We had expected to have till the summer before hearing from GNC again, but the descent into bankruptcy has been faster than we expected, even though we had a CCR 4 rating on the company.
The only BDC involved is Harvest Capital (HCAP) which had $4.1mn at cost advanced and $3.2mn at FMV as of March 31, 2020. $0.4mn of investment income is about to be suspended. We imagine the coming realized loss might be greater than the (22%) already booked by the BDC. It’s possible, though, that HCAP will be a party to the debtor-in-possession financing being put into into place and may end up with more capital invested than before in both debt and equity.
We are downgrading GNC from CCR 4 to CCR 5, and adding the name to the BDC-financed company bankruptcy list – the 10th one so far in June.
On May 15, 2020 GNC Holdings – parent of General Nutrition Inc. – announced an agreement was reached with certain of its lenders regarding provisions in its loan agreements. Here are the key changes:
“GNC’s Tranche B-2 term loan, FILO term loan and revolving credit facility feature springing maturities that, prior to today’s amendments, were to become due on May 16, 2020 if certain conditions were not satisfied. Due to COVID-19 related impacts on its business, the Company expected it would not be able to reduce the amount outstanding under the convertible notes to less than $50 million by May 16, a requirement to avoid the springing maturity.
As a result of discussions with its lenders, GNC entered into amendments to its loan agreements to extend the springing maturity dates for the term loan facility, FILO credit facility and revolving credit facility until August 10, 2020, subject to certain conditions that, if not met, would cause the extended springing maturity date to move forward to June 15, 2020“.
There is only one BDC with exposure to the company – Harvest Capital (HCAP) – which appears to have $4.1mn invested at cost in the 2021 Term Loan that “sprang forward” to May 2020. As of IQ 2020 HCAP had discounted that position by (22%). This has caused the credit to be added to our underperformers list with an initial rating of CCR3. Notwithstanding the temporary truce between the company and its lenders featured here, we’re further downgrading General Nutrition to CCR 4. With economic pressures still underway; the fact that the borrower is largely a brick and mortar retailer and the short period given to solve its financial problems we cannot be optimistic. A loss seems more likely than full recovery, which is our standard for this rating level. There’s just over $0.4mn of investment income at risk.
We’ll revisit this credit in the summer to see where the situation stands. We fear that we might have to add the company at that time to our Weakest Links list of businesses where a payment default looks highly likely. For HCAP this is a smaller sized position and one which was only added – purchased at par – in the IQ 2019. Like everyone else the BDC could not have guessed that one year on Covid-19 would strike. However, putting new money into a retailer with 4,000 stores worldwide at a time when that sector’s apocalypse was well underway may be questionable for the Monday Morning Quarterbacks amongst us.
On March 23, 2020 Moody’s downgraded GK Hldng Inc. to Ca from Caa2. More recently Fitch has added the company to its Loans Of Concern list for April. For our part, we had initially added the global training company to our Underperformers list way back in IVQ 2017, but only at CCR 3. There the rating remained even through an earlier Moody’s downgrade in 2019 and a valuation drop of the second lien to as low as (30%) at year-end 2019 and before the Covid-19 crisis.
Now – and a little late – we are downgrading the global training company to CCR 4 AND adding the name to our own list of potential defaults that might occur in the short term to BDC-financed companies. Like the other groups, we are concerned about current market conditions impact on the training business; matched with already high leverage; debt coming due and liquidity challenges ahead. There’s no denying that companies such as GK Holdings with debt to EBITDA north of 8.0x are especially vulnerable to difficult conditions like the one we face. This is another example of a company that was already in some trouble before Covid-19 facing an accelerated decline brought on by the current crisis.
In Advantage Data’s records, BDC exposure is under two names – GK Hldng Inc. and Global Knowledge Training LLC, and is also referred to by BDCs as GK Holdings Inc. but all speak to the same risk. At cost $25.7mn is at risk, spread over 5 BDCs including Goldman Sachs BDC (GSBD); Harvest Capital (HCAP), as well as non-traded Audax Credit; TP Flexible Income and Sierra Income. GSBD is the largest debt holder, with $11.5mn in first and second lien exposure. (HCAP, by contrast, has lent only $3mn). Total investment income in play is nearing $3.0mn, as this was a riskier credit from the outset.
We’ll be keeping an even closer eye on the company going forward as some sort of resolution seems to be appearing on the horizon. In the past, the company’s private equity owner has put in new capital. Maybe that will happen again. Till we have reason to believe otherwise, we are worried.
Deluxe Entertainment Group will be shortly exiting from bankruptcy, after receiving court approval of a “comprehensive refinancing”. According to the company’s press release – which is short on details but big on reassurances – debt will be cut “by more than half” and $115mn of new financing will come available. If Bloomberg Law is correct, $800mn of debt will be written off. Bankruptcy should be officially exited within a month.
We’ve written extensively about this bankruptcy, and we will again. After all, the BDC lenders involved seem to be moving from creditors to owners, or maybe both. Most likely, any realized loss to be taken will occur in the IVQ for Harvest Capital (HCAP) and non-listed Cion Investment and TP Flexible Income Fund. Before that, we’re likely to see an unrealized write-down in the IIIQ results, given that HCAP was carrying its debt investment at par as of June 2019, while the other two BDCs discounted their positions no more than (10%).
Even after the company exits Chapter 11, we will continue to carry Deluxe on our under-performing list for an indefinite period. The weakness in the underlying business has not been eliminated by this partial de-leveraging and years may yet pass before the BDCs involved – who began lending back in 2017 – can exit this credit.
In a broader article by Bloomberg BusinessWeek about the CLO market, was a useful backgrounder on what happened to Deluxe Entertainment Group that caused the company to recently file for bankruptcy:
“Deluxe Entertainment Services Group Inc. shows just how quickly liquidity in the leveraged loan market can evaporate. A postproduction media services company for the film industry, Deluxe has struggled with a changing digital media landscape in Hollywood and an increasingly burdensome debt load. But with tens of billions pouring into the leveraged loan market and a CLO machine cranking out deal after deal, Deluxe and its owner, Ronald Perelman’s MacAndrews & Forbes, had little trouble in recent years raising new debt to keep the company afloat.
Deluxe refinanced its debt in 2014, getting enough demand from investors that it was able to upsize its loan by $35 million, to $605 million, and cut its interest rate by a full percentage point. Two years later, the company returned to the market for an additional $75 million, and it tacked on $200 million more in 2017 to refinance some of its other debt.
But as Deluxe’s problems mounted, its cash thinned. After an unsuccessful effort to sell its creative services unit, it turned to its existing lenders, who agreed to back a $73 million loan in July. That’s when it got ugly. The news of the abandoned sale and new debt caused the value of Deluxe’s loan—with $768 million still outstanding—to plunge from 89¢ on the dollar to less than 40¢ in some 24 hours. Within about a week, S&P downgraded its rating by three notches, to CCC-. The downgrade blocked some existing CLO lenders, bound by the 7.5% limit, from fronting additional cash. On Oct. 3, the company filed for Chapter 11. The existing loan now trades at less than 10¢ on the dollar. Deluxe said in a statement that “We appreciate the support we have received from our lenders throughout this process and look forward to completing the refinancing shortly.”
With BDC earnings season coming round, we’ll shortly learn how Harvest Capital (HCAP), Cion Investment and TP Flexible Income Fund, with $20.7mn invested in the bankrupt company as of June have navigated this complex situation. We expect substantial losses to be booked this quarter or next and – possibly – an increase in invested capital.
On October 3, 2019 Deluxe Entertainment Group filed for a pre-packaged Chapter 11. As we had reported on September 4, 2019, the “debt burdened post-production company” had been considering a bankruptcy filing earlier but had chosen instead to undertake a debt for equity swap with its lenders out of the bankruptcy system.
A month later, Deluxe filed Chapter 11 anyway. As before, there will be debt for equity swap with its lenders which will reduce debt by half, and a further cash infusion by the new owners of $115mn. “All lenders will be offered the chance to participate“, say sources to Bloomberg. The decision to choose bankruptcy court after all was agreed to by both sides as a way to speed along the restructuring, which will see the lenders own 100% of the business. Chances are Deluxe won’t be under court protection for long. An October 24 confirmation hearing is being requested.
This means the day of reckoning is nigh for the three BDCs with exposure to the company: Cion Investment, Harvest Capital (HCAP) and TP Flexible Income Fund, with a combined $20.7mn of senior debt. Seems like half that amount will continue to be yield producing in some new loan and the rest written off or converted into equity. What we don’t know how much new capital will be forthcoming from these BDCs to fund the $115mn capital infusion.
For HCAP – the only public BDC in the group – their existing $4.7mn loan at cost, which was performing at June 30 2019 and valued at par, will end the September 30 period in non-performing status and -presumably – written down to some degree. We may have to wait till the end of the fourth quarter 2019 to ascertain HCAP’s total exposure, values and any realized loss.
Finally, we have to wonder why HCAP purchased the loan to Deluxe – as recently as March 4, 2019 – when some of the troubles facing the company must have been on the wall ? Was it a deliberate strategy or poor credit underwriting ? (The other two BDCs have been lenders for a much longer period).
We wrote a long report about the debt for equity swap underway at Deluxe Entertainment on September 4, 2019. This time, we’ll be brief and note that the company laid off 10 employees in Ohio, according to news reports. That’s bad news for the individuals involved but might suggest the company is re-sizing itself in an attempt to be successful with a new capital structure and with former lenders as owners.
On September 4, 2019 Variety reports Deluxe Entertainment Services Group , which was headed for bankruptcy, has agreed for a debt to equity swap instead. “In a deal announced on Saturday, Deluxe said it would offer a deal to all of its term-loan lenders to exchange their debt for 100% of the equity of the newly organized company”.
BDC exposure – Harvest Capital (HCAP) and non-traded Cion Investment – is material at $20.3mn, all in senior debt and carried at par or at a modest discount at June 30, 2019. The income likely to be lost – and right away – is approximately $1.6mn annually. We had a quick look at HCAP and calculated that investment income lost is equal to 11% of its latest Net Investment Income annualized.
Based on other news reports we’ve seen, the company will be writing off half its senior debt, suggesting the losses – both realized and unrealized – will be around ($10mn).
A bankruptcy is not yet out of the question. If all the lenders do not agree to the “reorganization”, a pre-packaged bankruptcy will be filed.
The BDC Credit Reporter had the company rated as under-performing since the IVQ 2018 with a CCR 3 rating. However, the situation deteriorated more recently. In July, the company announced it had abandoned plans to spin off its Creative Services division. The company – and its lenders – had hoped that the proceeds of which, along with a debt raise, would repay a sizable amount of the company’s term loans and ABL borrowings. The value of the existing debt dropped to 20 cents on the dollar on the negative news.
We are now rating Deluxe Entertainment CCR 5 on our 1-5 scale as a material loss is baked in. Nonetheless, as in all these situations where lenders become owners after the traditional PE sponsor has failed, we have to wonder if additional capital will be injected and whether the business can ultimately be made to work. We’ll be hearing more about Deluxe Entertainment for some time.