"THL Credit Inc (TCRD) was organized on May 26, 2009, and began principal operations and went public in April 2010. The BDC is managed by THL Credit Advisors LLC, an alternative asset manager with $16bn of AUM, which is controlled by T.H. Lee Partners L.P., a private equity firm. On December 12, 2019, THL Credit Advisors announced that an agreement had been reached to be acquired by First Eagle Investment Management, an alternative asset manager with $17bn of AUM. If TCRD shareholders approve, First Eagle will become the investment advisor in the first half of 2020. TCRD is a direct lender to middle market companies with EBITDA between $5mn and $25mn; providing both debt and equity. The former consists principally of directly originated first lien senior secured loans, including unitranche investments".
Yak Access LLC – as is not obvious from the name – is a manufacturer of mats for heavy equipment, including for the oil services business. As multiple sources have been reporting, the company had a weak IIQ 2021, and its lenders are beginning to worry about the sustainable servicing of its near $1bn in debt. On October 5, we heard that those same lenders were working with investment bank Evercore to bolster the company’s liquidity and viability. Here’s what Bloomberg said:
“A group of first-lien lenders to Yak Access are working with investment bank Evercore to help navigate the mat supplier’s weak earnings and liquidity pressures, according to people with knowledge of the situation…The lenders’ mobilization came after Yak reported double-digit declines in its profit and revenue for the second quarter. The Platinum Equity-backed company, which mainly serves midstream pipeline and utility clients, suffered from delays and loss of projects. Yak also burned cash during the second quarter, reversing previous trends. Its liquidity includes $23.7 million of revolver availability and $3.4 million in cash.” Bloomberg quoted by Petition on October 17, 2021
For three BDC lenders with exposure, this is hardly breaking news. The debt has been underperforming (i.e. valued at a greater than 10% discount to cost) since IQ 2020. As of IIQ 2021, Guggenheim Credit Income Fund had $4.7mn invested, and discounted (13%). Both First Eagle Alternative Credit (FCRD) and FS KKR Capital (FSK) had modest amounts advanced in the company’s 2026 Term Loan. The former has discounted its position by (6%) and FSK – for reasons unclear – is valuing the debt at a 33% premium. (Both positions – for what it’s worth – are owned through their respective joint ventures and don’t get talked about on conference calls).
In any case, that’s all in the rear view mirror given the latest developments, so we expect to see different valuations applied in the IIIQ 2021 and – possibly – going forward. Exposure here is modest, even by Guggenheim and FSK holds less than a million dollars so we won’t spend much time on digging into the case and its outlook as yet. For the moment, we’ll limit ourselves to bringing the matter to our readers attention and initiating Yak Access at a corporate credit rating of 4. As far as we know, interest payments remain current.
S&P Market Intelligence – bless them – are keeping track of when leveraged companies are drawing on their Revolvers, at a time when i) having a Revolver is a Good Thing ; ii) drawing down funds is both reassuring and worrying. Mostly the latter. Anyway CityMD, a healthcare company, has drawn $50mn on its $150mn Revolver line.
To date, the company has been rated CCR 2, but we’re using this opportunity to add CityMD to the Underperformers list out of an abundance of caution. (That’s a term we’ll be over-using the months ahead). The hospital – which undertook a mostly debt financed merger in the summer – must be in the line of fire given what’s happening to all health care companies, and especially due to its being located in New York. Reasons enough to worry and downgrade to a CCR 3. Still, the company was rated B- after the merger by S&P itself. (BTW, that’s a high corporate credit rating in our neck of the leveraged loan universe).
The only BDC with exposure is THL Credit (TCRD), which only booked its position in the 2026 Term Loan in the IVQ 2019. That seems to have been part of the BDC’s attempt to reposition itself in “safer” credits. This loan only pays LIBOR + 450 bps. We’ll have to see if that pays off in this situation.
THL Credit (TCRD) is the only BDC lender, and a control investor in OEM Group Inc. On April 20, 2020 the BDC, in a Shareholder Letter mentioned that its investment in the company had been written down by ($0.30) per share, or approximately ($9.0mn) in the IQ 2020. Furthermore TCRD said: “We took aggressive action in the first quarter to manage the cost structure at OEM to position it well to preserve value at the current price“. OEM is a Phoenix, Arizona semiconductor capital equipment provider,
The BDC Credit Reporter already had the company on its Underperformer list since IQ 2018, with a Corporate Credit Rating of 3. Management of TCRD has been waxing optimistic about the OEM’s prospects for some time, and mentioning a possible disposition of the $52.7mn invested in debt and equity in 2020. We’ve had our doubts given a look at the company’s financial statements (included in the TCRD 10-K) and lower valuations of late. At December 31, 2019 the overall OEM investment was valued at a discount of (33%) already.
The Covid-19 crisis appears to have seriously affected the company, but detail;s – besides that writedown – are sparse. However, that’s enough to downgrade OEM Group one notch further to a CCR 4. We’re not placing the company on our Weakest Links list yet, awaiting the May 2020 earnings release update. That would be an ominous move for TCRD as the debt – priced at LIBOR + 950 bps – earns annual investment income of $4.8mn annually, more than any other company in the BDC’s portfolio. We will circle back after TCRD eleases earnings and holds its conference call on May 8.
The BDC Credit Reporter has had Martex Fiber Southern Corp on the under performers list since IIIQ 2017. As of September 2019, the company was valued by THL Credit (TCRD) – it’s only BDC lender – at a (30%) discount to its $9.9mn cost. Now, with the latest TCRD conference call covering the year ended December 31, 2019, we hear the investment was “repaid at a loss”. To be specific, in January 2020, the BDC received $4.2mn, suggesting the realized loss to be booked will be ($5.7mn) and the additional loss between September and now is ($2.7mn).
No back story was provided about the payoff. TCRD is anxious to be done with its troubled portfolio companies and may have just “dumped” the debt. In any case, we have removed Martex from the under performers list.
THL Credit (TCRD) reported IVQ 2019 results on March 6, 2020, which included the revelation that portfolio energy company Holland Intermediate Company had defaulted on its $21.3mn Term Loan. There goes ($2.3mn) in annual income for the BDC. (Sierra Income – which has not reported – also has $4.3mn of debt exposure in the same facility). TCRD wrote down the investment to a (68%) discount from (32%) in the prior quarter. Sierra had already applied a (68%) discount as of September 2019.
None of the above is any great surprise to the BDC Credit Reporter. As we wrote in our prior post on December 15, 2019, we had long ago rated the company CCR 4, where we believe the chance of an eventual loss is greater than a full recovery.
The question now is whether if there’s any chance of recovery. We don’t know because the company is closely held and TCRD is close-lipped about the operations and financial performance of the business. To be realistic, though, with the oil price in freefall thanks to the global impact of Covid-19, which happened subsequent to the default and the IVQ 2019 valuation, we’re estimating this might be – at worst- a complete write-off. At best – barring a massive change in market conditions – this will be a non performing and devalued investment for some time to come.
What we also don’t know is whether the lenders might be asked to put more money up to support/save the business which might result in greater exposure. This will be a theme across the energy space and a conundrum many more BDCs than TCRD and and Sierra Income will face.
Holland Intermediate Acquisition Corp. is a closely-held energy company which has been funded by THL Credit (TCRD) since IIQ 2013. TCRD is one of only two BDCs with exposure and essentially the only source of news about how the business is performing given that non-traded Sierra Income rarely discusses portfolio issues. Total exposure at cost is $25.6mn, 80% of which is held by TCRD. As you’d expect for a company in the energy sector, Holland Intermediate has been on the under-performing list for some time: since IIIQ 2015; based on the first lien debt being written down by more than (10%) by one of the BDC lenders.
At June 2019, TCRD was discounting its first lien debt to the company – which is the same facility as Sierra owns – by (15%). The non-traded BDC was using a materially more conservative discount of (31%). We had already assigned the company a Corporate Credit Rating of 4 (Worry List); alarmed by both Sierra’s valuation and the negative trends in the sector. At the time TCRD offered this pint-sized assessment of the company’s status: “The business continues to make progress, albeit at a slower-than-expected pace, and we’ve adjusted the value of our holdings this quarter to reflect this“
In the third quarter 2019 results, both BDCs doubled the discount on their positions, with Sierra Income writing down the debt by (68%), the highest ever in any quarter judging from the Advantage Data records. TCRD increased its discount to (35%). From TCRD’s Conference Call on November 5, 2019 we learned that the BDC is “closely monitoring” the company. The color offered on the call was as follows: “The business continued to face market headwinds this quarter due to overall reduced M&A activity in the energy space, and was marked down accordingly“.
Obviously, these are clear signals to be concerned about, even if the underlying business reason is not clear. We also worry about whether the debt – which is coming up to its maturity in May 2020 will get repaid. The loan is priced at an expensive – but not inordinate – LIBOR + 900 bps. AD’s records show, though, that this loan just refinanced the lenders original loan booked in 2013, which had a 5 year maturity, in 2018. When lenders refinance a medium term loan with a much shorter time period that’s usually sign of stress. We may see another short term loan with the same lenders occur in the first half of 2020. However, if things go awry and a default occurs, there is a material $2.8mn of investment income at risk. We’ll be updating the Holland Intermediate story every quarter when we hear from TCRD, or if we learn something from the public record which – to date – has offered no clues.
We are posting this a little late, even though we heard about the sale of Copperweld Bimetallics some days ago from Direct Lending Deals, because we needed some time to dig into the details and the backstory. Anyway, here is an extract from Direct Lending:
“Twin Brook Capital provided $39 million in senior financing to back Kinderhook Industries’ acquisition of Copperweld Bimetallics, a Fayetteville, Tenn.-based provider of wiring products, according to sources. Twin Brook was administrative agent.The purchase was announced last week. THL Credit [TCRD] was the seller. The finance company took control of Copperweld in an October 2016 restructuring, whereby THL exchanged a $19.3 million second-lien term loan for $3.4 million of preferred equity, $9 million of common equity, a $5.4 million stub of second-lien, and $1.5 million loss. Flash forward to 2019. At June 30, the common equity was marked to market at $23.6 million; the preferred had nudged to $4 million, and the second-lien was flat, at par. Anglin Reichmann Armstrong audited Copperweld’s books in March: 2018 sales were $91.1 million. —Kelly Thompson“
This is both good news and bad news for the only BDC lender and owner -this was a Control position – TCRD. We assume the $5.4mn of debt will have been repaid at par and – depending on the price paid – TCRD will be receiving $25mn-$30mn for the Preferred and equity, versus $12.5mn invested. That could be redeployed at 10% – the current target yield – and earn TCRD $2.5mn of investment income. Also good news for TCRD is that the BDC has been successful in guiding this once non-performing credit back to health after three years, and after TCRD suffered a setback trying to do the same with Charming Charlie, an almost total write-off.
The bad-ish news is that Copperweld was already earning a 12.0% yield on both the second lien debt and Preferred, or $1.1mn of investment income. There was also a healthy dividend received from the common stock owned, which we’ve not been able to quantify. As a result, there may not be any major increase of investment income going forward and a dip in the short run till the proceeds from the October sale are re-invested, affecting IVQ 2019 results.
Nonetheless – assuming no fire sale was involved – a gold star for TCRD and a rare example of a under-performing company returning to performing (or even out-performing) status without any further losses, besides the ($1.5mn) taken in 2016.
This will probably be the last post we write about Charming Charlie, the women’s accessories retailer which went bankrupt twice in a short period and is being liquidated. We wrote a major article on bankruptcy number one back in December 2017 in the BDC Reporter. In the second round, multiple BDCs with $37.4mn of debt and equity invested at cost lost (almost) everything. At June 2019 two BDCs were still holding out for $0.9mn in FMV, presumably from any net proceeds from the Chapter 7 liquidation.
In this regard, a trade publication reported that the founder of the company had acquired the intellectual property associated with Charming Charlie for $1.1mn. That will be little succor to lenders after all other expenses are paid, but brings closer the date of the ultimate Realized Loss crystallization and the end of this sad attempt to keep what was not so long ago a prosperous and fast growing business alive.
On August 26, 2019 the Wall Street Journal reported that the bankrupt company is seeking court approval to hire a specialist firm to sell items of its intellectual property. That may help paying some of the bills associated with the liquidation of the business but is unlikely to end up in the pockets of its three BDC lenders (THL Credit, Cion Investments and Sierra Income) with $37.4mn invested at cost.
As of June 2019, the FMV of the investments – probably based on the hope of some recovery like this – is at $0.800mn, or 2% of capital invested. Notwithstanding the prospective intellectual property sale, we expect all BDC investments to be effectively wiped out. A resolution should occur before year end.
Trade publication Retail Dive – quoting Debtwire – says troubled women’s accessories retailer Charming Charlie has brought in a financial adviser. In addition, the nationwide chain, which was recently recapitalized by THL Credit (TCRD), is seeking new capital, in the form of debt or equity. All this sounds worrying from a credit standpoint. To date, TCRD – alongside non-traded Cion Investments and Sierra Income – have been funding the company with debt and equity in an ambitious attempt to bring the business back to performing status. At March 31, 2019, the three BDCs had advanced $37mn at cost to Charming Charlie, mostly in debt and mostly still on non accrual. The exposure is valued at roughly half of cost. We worry that Charming Charlie, which only exited Chapter 11 in late April 2018, might do a “Chapter 22” and need to file again. This time, though, that might mean liquidation and a potential significant write-off for the lenders involved.
On April 18, 2019 two specialist lenders announced the closing of a $35.00mn asset-backed revolving line of credit for troubled mall retailer Charming Charlie, intended to finance working capital. The two lenders are White Oak Commercial Finance and Second Avenue Capital Partners. There are 3 BDCs with $37mn of debt and equity exposure to the Company, led by TCRD. At 12/31/2018, the 2023 Term Loan outstanding was on non-accrual. For what this financing might mean for the Company’s prospects see the Company File.