Posts for Solar Capital

American Teleconferencing Services: Debt Defaults

Now that we’ve heard IIQ 2021 results, multiple BDCs have reported that American Teleconferencing Services (AFS) and parent Premiere Global Services Inc. (dba PGi) have defaulted on a tranche of their debt: one that matures 6/8/2023. We’ve written about AFS before, warning that a default was likely back on June 4, 2021. A second lien loan to PGi that matures in 2024 has been non performing for several quarters.

As many as 8 BDCs – both public and non traded are involved with the two related borrowers with a total cost of $135mn. At this point, the $13mn in the second lien debt – all held by Oxford Square (OXSQ) has been written down by as much as (98%). Odds of recovery seem low. The remainder of the debt is first lien – mostly in the 6/8/2023 debt. The discounts applied by different BDCs in the same tranche vary widely: from (14%) to (56%). However, all the lenders involved increased their discount over the prior period, as per this data from Advantage Data.

Although PGi and AFS are clearly deteriorating, we’ve had no luck finding any direct discussion of the subject by the BDCs involved or in the public record. In the interim, though, we’ve downgraded AFS to CCR 5 from CCR 4 (PGi was already CCR 5).

We’ll be posting again when we find a credible update about what is happening at AFS/PGi.

American Teleconferencing Services: Ratings Downgraded, Withdrawn.

On June 4, 2021 S&P announced that conference audio and video provider Premier Global Services Inc., (dba PGi), whose wholly owned subsidiary is American Teleconferencing Services, was downgraded to CCC-, from CCC+, with a negative outlook, with the rating agency citing “significantly” deteriorating operating performance over the past quarter. Also downgraded was the company’s senior secured debt to CCC-, from CCC+. S&P noted that the company’s declining operating performance “increases the likelihood that [PGi] will default or undertake a distressed exchange” in the next six months unless the company’s private equity sponsor injects equity. Just the day before, Moody’s was more radical and just withdrew its ratings altogether, citing “insufficient information”.

This is obviously not good for the company or for the 10 BDCs with $171mn in first lien and second lien debt exposure to PGi or its subsidiary. At March 31, 2021, a couple of lenders were already carrying their exposure as non performing but most had not yet made the move. Aggregate FMV was already down to $117mn, a (32%) discount.

Our last update on these pages dates back to August 26, 2020 when the business was already struggling, and we applied a CCR 4 rating. Now, PGi/American Teleconferencing might slip into non performing – CCR 5 – status shortly judging by the rating agency hullabaloo. Most at risk are likely to be BDC lenders holding the second lien debt, which can often get written to zero in these situations. There is currently nearly $24mn in second lien debt at FMV. Then there are wide variations in how first lien debt is discounted: from (6%) to (46%). We calculate that after netting out already non performing loans, some $12mn of investment income is still at risk of interruption temporarily, or forever should the company fail.

We expect we’ll be circling back to PGi/American Teleconferencing again shortly as the situation clarifies. At the moment, the chances of further unrealized losses seems the likeliest short term outcome, which could show up in the IIQ 2021 BDC valuations.

American Teleconferencing Services: IVQ 2020 Update

We’ve written about American Teleconferencing Services before: back on August 21, 2020 when we provided a IIQ 2020 update. The company has been troubled since IVQ 2018 and is rated “speculative” by Moody’s. From a BDC perspective this is a “Major” underperformer because aggregate exposure at cost is over $100mn and involves no less than 7 BDCs. We have rated the company CCR 4.

Now Capital Southwest (CSWC) – one of the seven – has published IVQ 2020 results. No word on its conference call about American Teleconferencing. However, the BDC Credit Reporter notes that CSWC has increased its discount on the first lien and second lien held to record levels. The former debt – which matures in 2023 – is discounted -45% and the latter -60%. In the prior quarter, CSWC’s discounts were -33% and -48%.

This does not bode well for the company, or CSWC or the other BDC lenders who have yet to report. We did undertake a public search to get some color but found nothing recently. The downward trend is undeniable, though, and keeps the company rated CCR 4 on our five level scale. We don’t where CSWC rates the investment. Some $8.2mn of annual investment income is involved.

American Teleconferencing Services: IIQ 2020 Update

Now that IIQ 2020 BDC results have been released, we can confirm that American Teleconferencing Services – a wholly owned subsidiary of communications company Premiere Global Services – remains rated CCR 4. We’re guided mostly by the latest valuations from multiple BDCs with first lien and second lien exposure. The former is discounted by wildly varying percentages : (6%) to (35%). The latter has been nearly cut by half in value. Moody’s has given the company a Caa2 rating as recently as August . The ratings group had this to say:

“The debt restructuring in October 2019, surge in audioconferencing volumes and virtual events during the pandemic and sponsor’s equity contributions have improved the liquidity position but it is uncertain how the business will perform when the crisis abates. The rating additionally considers execution risks in plans to cross-sell services and operate under shared services agreements with TPx Communications, which was acquired in February 2020 by affiliates of Siris Capital, which also owns the parent company of American Teleconferencing Services.”

There does not seem any reason to add the company to the Weakest Links list yet but the business has some considerable way to go before lenders are out of the woods in what is a Major position in aggregate: $109.4mn at cost and $88.8mn at FMV. Most at risk – but with modest exposure – is Capital Southwest (CSWC) with $2.1mn in the second lien, which is valued at $1.1mn. The outlook is favorable in the short run, as Moody’s suggests but the company will need monitoring.

IHS Intermediate Inc.: Files Chapter 7

On June 15, 2020 IHS Intermediate Inc. (also Interactive Health Solutions) filed for Chapter 7 bankruptcy. According to news reports, the company “collects employee healthcare data for companies” but “has faced more competition in recent months, according to Bloomberg Law“. Private equity firm FFL Partners is the company’s largest shareholder. The company filed in Delaware federal court claiming between 1,000 and 5,000 creditors and between $100 million and $500 million in assets. Any type of recovery for lenders is unlikely.

There are three BDCs involved with the company: publicly traded Solar Capital (SLRC); Goldman Sachs BDC (GSBD) and non-traded Sierra Income. SLRC has a long standing relationship with the company dating back to 2011. When the company was acquired in 2015, SLRC re-upped for another tour of duty in the 2022 second lien Term Loan, and was joined by the other two BDC lenders. (Interestingly, Pennant Park Investment – PNNT- which had been involved as well, bowed out for reasons unknown). For years the company performed well, only becoming underperforming by our standards in IQ 2019 when Sierra discounted the debt by (15%). By IIIQ 2019 Sierra and SLRC had the debt on non accrual. At that point, we rated the company CCR 5. GSBD only followed suit the next quarter. In fact quarterly valuations varied widely between the three BDC players but by the IQ 2020 the entire $59.6mn in outstandings had been written down to nothing.

Judging by the pricing (L +850) and the second lien status in a middle market company, this was always a higher risk transaction. The lenders have lost ($6.3mn) in annual investment income and will be recovering zilch. We have few clues about why the business failed except comments by SLRC along the way about the loss of key customers. This is one of those rare recent bankruptcies where Covid-19 is not being blamed as the company was essentially in deep trouble more than nine months ago.

For each of the three BDCs involved this is a material loss. SLRC is writing off ($24.7mn). To put that into perspective total aggregate net realized losses in the past 3 years have been only half that amount. For GSBD aggregate realized losses have been higher in the past 3 full years but this ($10mn) write-off is still equal to one-tenth of the total. For Sierra Income, whose realized losses exceed ($110mn) in this 3 year period, the ($25mn) loss is a serious additional blow.

Losses are going to happen in leveraged lending, especially when you’re charging a double digit yield. For this size company and at this pricing the capital involved is as much “equity risk” as debt and frequently when there’s a business reverse – as has happened here – results in a complete loss. That explains the understandable ambivalence investors, the BDCs own lenders and the managers themselves have about second lien lending. Both GSBD and SLRC have been boasting repeatedly for several years about the diminishing proportion of second lien debt on their books. This loss illustrates the downside involved.

We doubt second lien loans are going away in the future but unitranche debt – which wraps up into one facility both first and second lien loan risk – has already taken much of its market share and will continue to. This will not in any way reduce the risk of loss but will change the wrapper and make harder to distinguish the debt capital at most risk.

IHS Intermediate represents the 7th BDC-financed bankruptcy of the month of June (aggregate cost of those investments : $314mn) and the 23rd we’ve recorded this year. It’s the first Chapter 7 in June. Generally speaking Chapter 7 liquidations are rare. There have only been a couple of others in 2020 to date and most of the time result in little or no recovery for the BDC lenders involved. By the time asset-based lenders are repaid and the costs of the bankruptcy process absorbed, most lenders and unsecured creditors are left without a sou. In this case, we don’t know who the first lien lender was and what recovery they might or might not expect.

For our purposes, we will leave IHS rated CCR 5 till the BDCs involve book a realized loss, which should occur in the second or third quarter 2020.

Alteon Health: Cutting Costs

We have to had yet another medical company to the Under Performers list due to the reverberations of the complete focus of the health sector on Covid-19. That’s healthcare recruitment and placement firm Alteon Health, LLC. According to a regional publication, the PE owned form is sharply cutting costs in response to a drastic drop-off in the demand for its services. Based on that news, and the valuation of the company’s traded debt as of April 3 at a 16% discount, we’re initiating at a Corporate Credit Rating of 3.

The three BDCs with $25.4mn of debt at cost to the company were valuing the exposure at close to book value at year-end 2019. All exposure is in the 2022 Term Loan. The BDCs are (in descending order of size): Solar Capital (SLRC); Solar Senior Capital (SUNS) and Ares Capital (ARCC). There’s $2.0mn of investment income in play. There does not seem to be any immediate risk of default but things are moving quickly these days and with the medical crisis in the country likely to last quite some time more, Alteon might be back on our radar very shortly.

Blackhawk Mining: Court Approves Chapter 11 Plan

On September 4,2019 coal company Blackhawk Mining received approval from the bankruptcy court of its restructuring plan, opening the door for a return to normal status. We’ve written about Blackhawk 4 times previously, and have expected this relatively expedited trip through bankruptcy land.

According to the news report:

The plan will eliminate more than 60 percent of Blackhawk’s total debt and provide for more than $50 million in incremental liquidity and the restructuring transaction will be effectuated with no disruption to the company’s employees, vendors, customers or landlords, the release stated.

Under the plan, Blackhawk’s $639 million first-lien term loan will be discharged and lenders will receive 71 percent of the company’s equity and a newly issued $375 million first-lien term loan.

Blackhawk’s $318 million second-lien term loan will also be discharged and lenders will receive 29 percent of the company’s equity”.

For the two BDCs with the $10.5mn of first lien exposure (FS-KKR Capital or FSK and Solar Capital or SLRC) , this means a realized loss is likely to be booked soon and we’ll be learning exactly how the new exposure – a mix of debt and equity – will look like. Looking forward, coal mining continues to be a challenging business so even if whatever debt remains gets placed back on “performing” status, the BDC Credit Reporter will continue to carry all ongoing investments as under performing for the foreseeable future.

In terms of capital outstanding and investment income at risk, the amounts risked by FSK and SLRC are modest. However, we continue to wonder how the investment committees of these BDCs could convince themselves that investing in coal mining – even in early 2018 when the loans were first taken on – was a good idea from an underwriting standpoint. Industries that used to be the province of specialist lenders have become targets for generalist lenders like these two well known and respected public BDCs. Now those same lenders have become owners…

BlackHawk Mining: Post Bankruptcy Financing Approval

On August 13, a news report indicated that troubled coal miner BlackHawk Mining has received bankruptcy court approval for $240mn of post-petition financing. That’s important as it suggests the company may shortly complete the restructuring of its debt and leave Chapter 11 status behind. For the two BDCs involved with $10.5mn of exposure at cost – as discussed in our earlier post on July 18, 2019 – that might mean the conversion of some portion of its debt to equity and new loan advances. We’re a little confused as to why both FS-KKR Capital (FSK) and Solar Capital (SLRC) still carry the debt as accruing at June 2019 and at full value. Neither BDC discussed the miner in their most recent Conference Calls. We’ve got more to learn obviously.

Blackhawk Mining: More Details Of Restructuring Plan

As noted in an earlier post, coal miner Blackhawk Mining is preparing to file a pre-packaged Chapter 11. The BDC Credit Reporter’s main interest is estimating the impact on the two BDCs involved : FS-KKR Capital (FSK) and Solar Capital (SLRC), both with roughly equal shares in the first lien debt with an aggregate cost of $11.2mn. We’ve learned additional details about the plan going forward: “On the effective date of the plan, the company’s $639 million first lien term loan will be discharged and lenders will receive 71 percent of the company’s equity and a newly issued $375 million first lien term loan”. That suggests 40% of the first lien debt will be written off and swapped. That will reduce the nearly $1.5mn of investment income received by $0.600mn between the two BDCs. How the BDCs will value the equity is unknown, but a Realized Loss is probable. In addition, we have learned that:  “To further strengthen the business, the company will receive $50 million of new money debtor in-possession financing from certain of its lenders that will be part of the exit facility for the company”. Chances are FSK and SLRC will be part of this financing as well, increasing their exposure to the troubled miner. The lenders will be reassuring themselves that after the restructuring is done that “based upon the company’s current projections, pro forma leverage will be less than 2.0x debt to EBITDA and in line with industry peers”. We would add that any industry where standard debt/EBITDA leverage is only 2.0x is highly risky and the lenders/investors involved are far from being out of the woods. One could argue – with greater capital potentially deployed and much of the exposure soon to be in equity, and with lower investment income forthcoming, FSK and SLRC have gone only deeper into those woods.

Blackhawk Mining: To File Chapter 11

Another BDC portfolio company prepares to  file for Chapter 11. This time, the filer is Blackhawk Mining, LLC, which operates coal mines in two states. Given other bankruptcies going on in this sector, the news is not entirely unsurprising. Still, the two BDCs involved – FS-KKR Capital (FSK) and Solar Capital (SLRC) valued their $11.2mn in senior debt positions at 3/31/2019 at par. That’s unlikely to continue, even though management and creditors have a pre-packaged plan ready and expect to be operating normally in 60 days. The plan involves reducing debt by 60%, which may entail a debt for equity swap for senior lenders – including the two BDCs – and all the challenges of owning a “dirty fuel” company at the wrong point in history. Income – running at an annual pace of $1.2mn for FSK and SLRC – is likely to drop by more than half. Neither BDC will be greatly affected given the relatively small exposure each holds, but the setback does beg the question as to how both BDCs investment committees could have green lighted (as recently as 2018) such commodity loans. Blackhawk brings to 20 the number of BDC portfolio companies currently in bankruptcy and the total capital invested at cost to $578mn, according to the BDC Credit Reporter’s calculations.

Falcon Transport: Closed Operations

We have found out – belatedly and thanks to an excellent article by Business Insider– that a BDC-funded company – Falcon Transportclosed down abruptly in late April. We had no idea because the company was carried at full value on Solar Capital’s (SLRC) books at 3/31/2019, with $12mn in first lien debt. This will be a hit to income, given that the debt was priced at closed to 11%, which will cost SLRC $1.3mn in annual investment income. Moreover, with the entire trucking industry going the way of the retail sector in the past two years and the energy sector back in 2014-2015, the chances of a resurrection seem slim. Now claims are being made of mismanagement by the private equity group which controlled the company. We’re guessing, but chances seem high for a very large write-off when the dust settles. We’ve added Falcon Transport – better late than never – to our list of bankrupt BDC portfolio companies. Despite the recent exits of Hexion Inc. (restructured and recapitalized) and Z Gallerie (assets acquired), there are still 19 names, with a cost of $565mn in the bankruptcy category.