Typically, the BDC Credit Reporter adds new companies to our underperforming company list following a write-down of the investment by 10% or more by a BDC. However, we watch the credit markets daily for any early signs that might cause us to add a company based on new publicly available information alone. After all, the earlier we can identify credit troublespots, the better. That’s what’s happened with retailer Outdoor Voices Inc., which at September 30, 2019 was fully valued by its only BDC lender TriplePoint Venture Growth (TPVG).
We were disturbed to hear from a trade article that the company’s CEO and co-founder Tyler Haney was either pushed out or voluntarily left the helm on February 22, 2020, which is rarely a good sign. (Ms Haney remains in other roles at the company; the benefit of being a founder and major shareholder). Adding to our concern is that the CEO’s departure may be associated with under-performance by the privately-held company. BizWomen said the following: “…despite initial excitement, the business failed to scale as quickly as expected and has been slow to introduce workout clothing staples like all-black attire, per BofF, and by last year was losing around $2 million a month in 2019 with annual sales of around $40 million“. That’s enough material for us to add Outdoor Voices to the underperformers list, with an initial credit rating on our five point scale of three.
TPVG only invested in the company recently – IQ 2019 – with both debt and equity at a total cost of $10.2mn. As we’ve said, the investment is valued at 100% of par, which seems hard to reconcile with those $2mn a month losses, but we only have a very partial picture. We may learn more from TPVG when the BDC reports IVQ 2019 results on a date yet to be scheduled.
Publicly-traded BDC TriplePoint Venture Growth (TPVG) is issuing new equity so must undertake some updated disclosures, which occurred on January 9, 2020 in a Prospectus. Included was the latest status on one of its under-performing portfolio companies: Harvest Power. The company is an organic waste management company, and went from performing normally to being sharply written down in a hurry. Until the IIQ 2019, the $14.8mn TPVG had invested in the company’s 2021 secured Term Loan was valued at only a (3%) discount. However, in the IIIQ 2019, TPVG wrote the debt down by (49%) to a value of $7.5mn, reflecting the market price of this traded loan.
According to the BDC on its Conference Call on November 11, 2019 , Harvest was exploring “strategic alternatives” – typical code language for being in deep trouble. TPVG expected the subject to be resolved in the IVQ 2019. Based on the most recent TPVG disclosure that turns out to have been correct. The BDC has now written down the value of its investment in Harvest to $4.2mn. Moreover, $2.4mn of that value has actually been collected. (No word on when the rest might be forthcoming or how). Searching in the public record, we’re assuming the fast resolution is related to the sale of two Harvest Power facilities to USA Waste of California, but we could be wrong.
For TPVG that’s a fast but unsatisfactory end to a lending relationship that began in IQ 2014 – according to Advantage Data‘s historic records – and has involved different facilities at different price points. The latest 2021 Term Loan was priced at 12.00%, which suggests a good deal of risk was anticipated when added to the books. Prior loans were priced as low as 7.0%. Now TPVG will end up booking ($10.6mn) in Realized Losses, including a further decrease of ($3.3mn) in value over the FMV at IIIQ 2019 in the year-end portfolio value. Investment income lost from the debt will be $1.8mn, but only $1.6mn once the $4.2mn in proceeds are re-deployed at a similar rate.
We hope to learn a little more – both from the public record and TPVG – when the transaction is fully removed from the books, which will allow us to undertake a credit post-mortem. Mostly, we’d like to understand why Harvest Power went so quickly from hero to zero.