US WELL SERVICES: Hit by both lower oil prices and the Coronavirus, the publicly traded oil services company cuts back on staff and salaries. http://bit.ly/USWS03202020 Last Article: http://bit.ly/USWS03042020
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After many quarters of balancing on the brink, Bluestem Brands Inc. has filed for Chapter 11. In a press release, the retailer indicated its commitment to remaining in business through the bankruptcy process, and the arrangement of a $125mn DIP financing by a “syndicate of lenders”. The “syndicate” is also serving as a “stalking horse bidder” for the company’s assets, and seeks to de-leverage and restructure the company’s balance sheet.
Who are the members of the syndicate ? Not disclosed. What might the assets be valued at ? Not mentioned ? How much debt might be wiped from the balance sheet ? Still to be determined. Nonetheless, this seems to be a classic debt-for-equity swap where the lenders become part, majority or the exclusive owners of the new Bluestem Brands. Sometimes that works, and sometimes not.
We’ve been writing about Bluestem Brands for a very long time, both in the BDC Credit Reporter and in our database of all under performing BDC companies that we maintain. Barely a week ago we wrote to ourselves the following summation of our views:”3/4/2020: We worry that Bluestem might be about to meet its moment of reckoning in 2020 with the need to repay its publicly traded Term Loan in November 2020 and its modest liquidity above the mandated level at the end of the IIQ 2019. Sales and EBITDA trends are either anemic or negative. The debt is already discounted by nearly a quarter. As a result, we’ve added the company to the 2020 At Risk Of Non Accrual list.”
Now that’s happened we’ll be interested to see what the 4 BDCs with $28.2mn of exposure at cost – Main Street (MAIN); Capitala Finance (CPTA); Monroe Capital (MRCC) and non-listed HMS Income – will be doing. We imagine they are committed to a portion of the DIP financing and are likely to end up as owners, and may also be committing more junior capital. As mentioned above, we don’t know how much historical debt will be forgiven. So any sort of valuation is hard , but Advantage Data shows the 2020 Term debt in which all the BDCs are invested trading at a (29%) discount; just slightly worse than the recently announced IVQ 2019 (25%) discount announced by the three public BDCs. That suggests, but does not guarantee, the eventual realized loss to be taken might be over ($8mn). In an earlier article, though, we’d been estimating ($15mn). More immediately, income forgone will be about ($1.4mn) annually, mostly absorbed (4/5ths) by sister BDCs: MAIN and HMS Income.
We will report back as we learn more about how this bankruptcy will play out, and what individual BDC exposures to old and new capital (if any) will look like.
Frankly, we don’t what exactly happened at Portrait Studios, LLC, a portfolio investment of Capitala Finance (CPTA). At this point, it hardly matters because the BDC’s IVQ 2019 10-K says the investment in the company was sold and a ($6.2mn) realized loss taken. At time of writing, CPTA maintains $0.5mn on its books as “First Lien Debt” but a footnote says “the residual value reflects estimated earnout,escrow or other proceeds expected post-closing“. Given that as of September 2019 CPTA had $9.1mn invested at cost in two first lien term loans, preferred and equity, we’ll assume $2.4mn was repaid to CPTA and the rest consists of the loss and the remaining value.
For the II and IIIQ 2019, $4.2mn of debt had been on non accrual, so the sale of the investment will be a wash from an income standpoint. One of the loans – with a cost of $2.3mn was still on accrual, and that – presumably – was what was repaid and will continue generate income for CPTA. However, the BDC has lost $6.2mn of capital through the write-off and may lose that last half a million dollars. At a 9% yield on $6.2mn, CPTA has permanently lost ($0.6mn) of yield producing capacity.
From the BDC’s standpoint, though, a troubling non accrual has been removed, one of 4 in the last quarter of 2019. For our part, we’ve effectively removed the company from our under performers list as there is no other BDC exposure and the remaining amount to be collected is not material.
On March 3, 2020 troubled publicly traded US Well Services (ticker:USWS) published its IVQ 2019 results and held a conference call. The bottom line: in the last quarter of the year the bottom fell out of the market for electric fracturing of oil wells. Here are extracts from the conference call transcript:
“Throughout the course of the year, market conditions deteriorated, culminating in a sharp deceleration activity during the fourth quarter. U.S. Well Services was adversely impacted by customer-driven decisions to delay jobs and longer than anticipated holiday shutdowns. As a result, U.S. Well Services active fleets experienced lower utilization than in prior quarters…Revenue for the fourth quarter was $92.7 million, which represents a 29% sequential decline relative to the third quarter of 2019. USWS generated an adjusted EBITDA of approximately $12.1 million for the fourth quarter as compared to $35.3 million for the third quarter of 2019.”
That’s a two-thirds drop in EBITDA in a short period. No wonder that the stock price of USWS is down to $1.07. That’s much lower than the last time we wrote about the struggling oil services business back on October 3, 2019. Then the stock – at a then all time low – was at $1.82. Only some $50mn in cash and the fact that several drills are operating for customers seems to keeping USWS from imploding. Management does not seem worried but the BDC Credit Reporter notes the $274mn of debt on the balance sheet and the much deteriorating market conditions. We don’t want to be unfair but these seem like ingredients for a bankruptcy (again) or equivalent.
From a BDC perspective, all the lenders who got repaid when the company went public recently must be sighing in relief. At one point not so long ago, there was over $100mn of BDC capital invested, mostly in debt in the company before its transformation into a public company. Now, there are still BDCs with equity exposure, but the amount at September 30, 2019 (we don’t have all the relevant BDCs results yet) was $9.4mn at cost. The BDCs involved were PennantPark (PNNT); Capitala Finance (CPTA) and BlackRock Capital (BKCC). The first two have reported and – curiously – PNNT seems to have increased its exposure from a immaterial $0.7mn to a more material $3mn. Their discount is only (21%), presumably because stock was purchased more recently and cheaply. CPTA’s equity is discounted by as much as four-fifths.
We’ll continue to watch the company’s progress, but the likelihood is high that this will end badly for US Well Services – managerial optimism notwithstanding. For the BDCs involved that would almost certainly result in a complete realized loss on all invested capital, given the debt sitting higher on the balance sheet.
Just in case you didn’t know, it’s the companies themselves who pay for their credit ratings from groups like Moody’s and S&P. (That’s different than at the BDC Credit Reporter, whom nobody pays). We were reminded of this economic fact of life on hearing that Moody’s has “withdrawn’ the ratings of retailer Bluestem Brands. The rating firm – usually prone to long discussions in its regular credit reports – was succinct on this occasion: “Moody’s has decided to withdraw the ratings because of inadequate information to monitor the ratings due to the issuer’s decision to cease participation in the rating process“. No other explanation was given.
Apparently S&P Global has not been any kind of succor. That rating group downgraded the company on January 28, 2020 to CCC- from CCC..Here’s the crux of the matter as S&P sees it: “
“Bluestem’s revolver and term loan are due this year and we believe the likelihood that the company will undertake a restructuring in the near term has increased. The company’s $200 million asset-based lending (ABL) facility matures in July and its term loan (roughly $400 million outstanding) comes due on Nov. 7, 2020. In our view, Bluestem does not have a clear refinancing plan and we believe it is increasingly likely that the company will pursue a holistic debt restructuring to address its maturities given its weak operating performance. If the company pursues a restructuring or exchange that provides its lenders with less than they were originally promised under the security, we would view it as distressed and tantamount to a default”.
We’ve written on three earlier occasions about Bluestem, starting back in the spring of 2019. As far back as June 2019, we had a Corporate Credit Rating of 4 on the company – on our five point scale. More recently, when we began projecting out which BDC-financed under-performing companies were most likely to default in 2020, Bluestem was one of our first additions. Now there seems to be a consensus building that the company will not be able to avoid either a “distressed debt exchange” or a Chapter 11 filing in the months ahead.
For the 4 BDCs involved – all in the 2020 Term Loan, which is structurally subordinated to the Revolver (as far as we can tell) – that’s bad news. Not helping is that S&P is only projecting a 45% recovery rate in event of default. That implies ultimate losses of over ($15mn) over cost, or about ($6mn) more than already provided for at September 30, 2019. Then there’s the $2.7mn of annual investment income at risk of interruption…
We expect to be revisiting Bluestem – and its intractable balance sheet inside a retail sector in seemingly permanent crisis – before long.
We pride ourselves on being timely about alerting readers to material new developments at under-performing BDC-financed companies. In this case, though, we’ve been slow to notice the deterioration underway at iconic restaurant chain California Pizza Kitchen (CPK). In July and August 2019, the company was downgraded by both S&P and Moody’s to speculative grade status. Here’s a sample of what the former said: “We are downgrading CPK to ‘CCC+’ from ‘B-‘ to reflect our view that the company’s capital structure may be unsustainable over the long term.
Moody’s said the following: “CPK’s Caa1 Corporate Family Rating is constrained by its high leverage, modest interest coverage, small scale and geographic concentration relative to comparable casual dining concepts. The company is further constrained by the challenging operating environment which includes soft same store sales growth, with weak traffic trends, and increased labor expense as a percentage of restaurant sales which continue to pressure profitability margins“.
All the above notwithstanding, the 2022 and 2023 Term debt in which seven BDCs have committed $48mn was still valued at a discount of less than (10%) last time results were published in September 2019. As of June 2019 the debt was trading (almost) at par. As of now, though, the publicly traded 2022 Term Loan is trading at a (12.5%-15%) discount, and the more junior 2023 facility at (20%) off. Time to get worried about the $5.0mn of annual investment income that is being generated for the BDCs involved.
There are 6 public BDCs with material exposure, led by Main Street (MAIN) and followed in descending dollar amount by Great Elm (GECC); Monroe Capital (MRCC); Capitala Finance (CPTA); Capital Southwest (CSWC) and Oaktree Specialty (OCSL) – a veritable potpourri of funds with little else in common. There does not seem to be any immediate risk of default, although Moody’s did suggest there was a potential need for a covenant waiver or amendment at year end. That may not have been required or has been granted or could be under discussion. We have a Corporate Credit Rating of 3 on CPK on our 5 point scale, but that could move down quickly in 2020 if performance does not turn around – which seems unlikely – or if PE owner Golden Gate Capital, which bought the famous chain in 2011, does not inject new capital.
We admit the BDC Credit Reporter has been a bit slow to flagging CPK’s credit troubles, but expect to hear much more from us in the months ahead if the company’s debt continues to drop in value. We will say that we’ve been concerned about negative trends in the restaurant sector since late 2018. We’re not yet at the “apocalypse” phase attached to anything in the retail sector, but there are several secular trends – referred to by Moody’s above – that even the best and the brightest restaurant chains are having trouble working through. When you’ve got debt to EBITDA levels of 7x or more – as is the case with CPK and many others – the room for maneuver before a restructuring becomes necessary is limited.
On October 2, 2019 the stock price of publicly traded U.S. Well Services (USWS) reached a 52 week and all-time low price in its short history of $1.82. That was more bad news for the three BDCs with $66mn of equity at cost invested in the company. Ever since the company underwent a reverse capitalization back in November 2018 and was listed on the NASDAQ, its price has headed downward. That impacted the BDCs involved, whose fair market value at June 2019 was lower than at March, as the stock price dropped from $7.98 to $4.20. That put a dent in the FMV values of PennantPark Investment (PNNT), Capitala Finance (CPTA) and – most of all – BlackRock Capital (BKCC). Coincidentally or otherwise, all 3 BDCs reported lower NAV Per Share in the quarter.
Look for a repeat in the third quarter as the stock price of USWS dropped to $2.19 at the end of the IIIQ. That’s roughly another (50%) drop in the last 3 months and should result in a further unrealized loss of ($16mn) or more. At the 52 week low price, the loss would be even higher.
Unfortunately for the BDCs involved their common stock holdings are “locked up” and cannot be disposed off till November. By then, the value of the USWS common will be down by (75%) or more compared to cost. Not inconceivable is that the oil services company – which we wrote about last on July 13, 2019 – could file for Chapter 11, wiping out all $66mn of the stock – mostly received as part of a debt for equity swap last year.
Not to rub things in, but this story is part of the broader troubles in the oil field services sector, which the BDC Credit Reporter has been warning bout for months and which we most recently opined about on September 6, 2019.
We’ve written about Bluestem Brands before on two occasions, on April 12, 2019 and June 19, 2019. Now the multi-name retailer – whose results are publicly made available every quarter – has just completed its IIQ 2019 results. Unfortunately, the turnaround at Bluestem continues, and there are signs that the situation is getting a little worse. We won’t undertake an in-depth diagnosis, although we’ve reviewed both the earnings press release and the Conference Call transcript.
We’ll focus on a key metric – and one of two material debt covenants. Required minimum liquidity – demanded by the senior lenders – is $40mn. This quarter, Bluestem had $50mn, down from $59mn the prior quarter. That’s pretty close, and principally why we’re writing this update.
We have a Corporate Credit Watch of 4 (Worry List) for the company, which has been “troubled” since 2016. The latest results don’t change our rating, but we continue to worry that the company is just one reverse away from a covenant default. That would not be the end of the world, but might suggest the attempt to turnaround the business with its current capital structure is unfeasible. That might involve some debt haircut in some form. Given BDC exposure of $29mn – already discounted – by (23%) by 3 of the 4 BDCs, there could be some further Unrealized Losses to come in the short term.
(We should point out that – for reasons unknown – Capitala Finance (CPTA has only a (4%) discount on its share of the 2020 senior debt, one sixth of what Main Street Capital (MAIN), HMS Income and Monroe Capital (MRCC) have valued the same exposure. There’s been a deviation between CPTA and the other BDCs for several quarters, and we don’t know why. If matters do get worse, CPTA – with $3.7mn of debt at cost – has the farthest to fall).
On Tuesday August 6, 2019 Capitala Finance (CPTA) on its Conference Call gave further details about the change of fortunes at equipment lifting company AAE Acquisition, which resulted in a ($20.4mn) Realized Loss. Apparently the company was up for sale but no buyers came through and the first lien lender foreclosed. CPTA was in the second lien and equity, which had been only mostly written down in the first quarter 2019. As a result, 100% of the investment was written off once and for all and $1.2mn of investment income (all previously in PIK at a 6.0% rate) lost. That’s about 2.5% of the BDC’s investment income as of March 2019 (annualized) and – for a sense of proportion rather than a calculation – 7.5% of Net Investment Income. This is a black eye for CPTA, especially given the surprise write-off. We did have the company – due to the valuation – on our under-performing list from the IQ 2019, but this was a surprise to us as well.
On June 18, 2019 multi-unit retailer Bluestem Brands reported results for the quarter ended May 3, 2019. We reviewed the earnings press release, and the Conference Call transcript on Sentieo (not yet linkable). Notwithstanding lower sales in the period compared to a year earlier, the company reported progress in “turning around” the business in several areas. Adjusted EBITDA was barely positive but that’s an improvement over ($12.6mn) a year earlier. Most importantly, from a credit standpoint the company was nowhere near triggering the several key metrics imposed by its senior lenders. Nonetheless, the burden of total debt has remained unchanged over the past several quarters, and its principal Term debt becomes due in late 2020. We have a CCR 4 Credit Rating, which remains unchanged. There are 4 BDCs with $29mn in exposure – all in the 2020 Term debt. In the IQ 2019, the unrealized depreciation was reduced in the BDC valuations and may receive a modest boost in the IIQ, based on these results. Nonetheless, the retailer is far from being out of the woods.
The troubled e-commerce retailer published quarterly and annual results for the period ended February 1 and 2, 2019. Despite closing down several brands and taking one-time losses, the Company’s Adjusted EBITDA and key bank covenants, as well as liquidity, all appear better. May stop the gradual erosion in BDC debt values underway since late 2016, which peaked in IVQ 2018. We updated the Company file and the BDC Credit Reporter’s views accordingly. For all the details, see the Company File.