Murray Energy: Assessing Restructuring Options

e don’t want to bury the lead: Murray Energy is likely to file for bankruptcy or re-organize and the BDC lenders involved are going to absorb some rather large losses. On September 10, 2019 the Wall Street Journal’s bankruptcy publication reported that the privately-held coal miner had hired Kirkland & Ellis and Evercore to assess restructuring options.

That follows a recent downturn in the short term prospects for the U.S. coal industry, according to Moody’s and as reported by S&P… That’s not to mention the obvious secular decline in the prospects for coal mining and coal usage. Previously in 2019 , the rating groups had downgraded the company’s debt to SD or Selective Default, so the writing has been on the wall.

BDC exposure totals $52.4mn, spread over 6 BDCs. These include publicly traded FS-KKR Capital (FSK) and three sister non-traded BDCs funds (FSIC II, FSIC III and FSIC IV but not – surprisingly – FS Energy). Then there are two others: Cion Investment and Business Development Corporation Of America.The exposure is in two different loans, one which matures in 2021 and the other in 2022. The debt has been on our under-performing list since IVQ 2018 and is currently rated CCR 4 (Worry List), where the chances of an eventual loss are greater than a full recovery.

As of June 2019, the 2021 debt was carried at par but the 2022 debt was discounted by a third. Currently, though, the 2022 debt trades at twice that discount, suggesting holders are not optimistic. We wouldn’t be surprised to see the 2022 debt fully written off once the dust settles, which would result in ($8.5mn) of further losses and ($12.5mn) in Realized Losses, to be absorbed by Cion and BDCA. Less clear is what might happen to the 2021 debt, which still trades at par. We won’t speculate at this point but will point out that – overall – $5.5mn of annual investment income is at risk.

In any case, we expect we’ll be discussing Murray Energy again in the weeks ahead.

Hollander Sleep Products: Change In Exit Plan

On September 3, 2019 mattress retailer Hollander Sleep Products asked a New York bankruptcy court for permission to switch from a reorganization plan centered on a debt-for-equity swap to a $102 million asset sale.

Details are scarce at this point, but does suggest chances are higher the company will shortly exit from bankruptcy. We don’t have enough data, though, to evaluate whether the price offered will increase or decrease the roughly 50% of debt and equity value written down through June 2019 by PennantPark Investment (PNNT) and PennantPark Floating Rate (PFLT), or ($16mn).

As we wrote on August 16, Hollander has been on non accrual in both the first and second quarter of 2019 and in bankruptcy since May. It’s likely that both the BDCs involved will be booking a significant realized loss in the third or fourth quarter, depending when the judge responds to the latest request and the proposed acquisition becomes effective.

Lago Resort & Casino: Ownership Change

On August 19, 2019 news reports indicate an ownership change has occurred at upstate New York hotel/casino Del Lago. One 50/50 JV partner is buying out the other. By itself that’s not a reason for a post, but with nearby competitor Resorts World Catskills talking “voluntary Chapter 11” , attention is deserved. Note, too, that Moody’s downgraded Del Lago back in January to Caa3.

As of June 2019, only one BDC – PennantPark Floating Rate (PFLT) – has exposure to Del Lago. According to Advantage Data records, the first lien debt has been on the BDC’s books since 2016 and consistently valued close to par. That includes the period after the Moody’s downgrade. Nonetheless, we are adding Del Lago to the under-performing BDC portfolio company list, with an initial Corporate Credit Rating (Watch) of 3 on our 5 point scale.

Hollander Sleep Products: Chapter 11 Plan To Progress

Bedding manufacturer Hollander Sleep Products is under bankruptcy court protection since May, but seeking to get its plan approved and to return to a normal, but less leveraged status. On July 22, 2019 the company “sought a court order … approving a settlement with unsecured creditors that revises its restructuring support agreement and marks an important step toward the maker of bedding products emerging from Chapter 11 bankruptcy”.

There are two sister BDCs with $34mn of exposure to Hollander: PennantPark Floating Rate (PFLT) and PennantPark Investment (PNNT). Most of that exposure is in pre-petition debt and on non accrual. (There is also $3.7mn of DIP financing paying interest currently). At June 2019, the Pennants had discounted the old debt by (53%), up from (13%) after the debt first became non performing. That suggests realized losses – when Chapter 11 exit does likely occur in the IVQ – will exceed ($20mn) and leave the two BDCs with over $2.0mn a year in lower investment income. What the new capital structure of Hollander will look like; whether there will be a debt for equity swap and what the role of the two BDCs will be we’ll leave for a future post as the dust settles.

Arthur Penn – CEO of both BDCs- did address the subject of Hollander on the latest PNNT Conference Call on August 8, 2019. He made clear PNNT/PFLT were not leading the debt discussions, He said there were “stalking horse” bids, but did not seem confident what the ultimate value of the company might be in the marketplace. That leaves open the possibility that the value at June 30, 2019 may yet materially drop further, making a bad situation worse for both PFLT and PPNT.

LifeCare Holdings: Court Approves Sale Of Hospitals

Law360 reports that a bankruptcy judge approved the sale of 15 hospitals for $34mn by LifeCare Holdings. That brings ever closer the resolution – and likely liquidation – of the long term care chain, which filed for Chapter 11 in May, 2019. The company has been on the BDC Credit Reporter’s Bankruptcy List, but may get removed shortly.

The only BDC with exposure is PennantPark Floating Rate (PFLT), with $4.6mn at cost, written down to just $0.758mn at June 2019 and on non accrual since the IQ 2019. Presumably, the latest valuation was based on the likely proceeds from the proposed sale, so no great increase in what PFLT might receive at the end of the day is expected. The worrisome element here from a PFLT perspective is not the size of the investment – which was small, nor the minimal of income lost, but the likely severe discount of proceeds from the cost basis, despite a “first lien secured debt” status: (84%). Investors expect recovery rates on failed loans will be substantially higher for senior debt, and makes us worry about the prospects for other loans of PFLT- and similar BDC lenders – when defaults occur.

Montreign Operating Company: Updated Company File

Since the BDC Credit Reporter first warned of a possible Chapter 11 at Empire Resorts, owned by Montreign Operating Company, we’ve learned more. One of its BDC lenders – PennantPark Floating Rate (PFLT) – simultaneously wrote its senior debt down and predicted no loss would occur on its IIQ 2019 Conference Call. We also read a news article from a trade publication providing further information about the roughly $0.5bn in debt outstanding that might be in need of a haircut or restructuring. All this was included in the Company File we keep on every under-performing business, which we’ve updated. Our view of the likelihood of loss – PFLT’s optimism notwithstanding – has increased.

Montreign Operating Company: May File Chapter 11

Resorts World Catskills is owned and operated by Montreign Operating Company, LLC, an indirect wholly-owned subsidiary of Empire Resorts, Inc., a gaming and entertainment corporation which has operated in the Catskills since 1993. On August 9, Empire Resorts, stung by heavy losses from under-performance at its facility, raised the possibility of a voluntary Chapter 11 filing.

As a result, we’ve reduced the company’s Corporate Credit Rating from CCR 3 to CCR 4- Worry List. There are 3 BDCs – all in the senior debt with $67mn at cost outstanding: PennantPark Floating Rate (PFLT), CM Finance (CMFN) and Business Development Corporation of America (BDCA). Most recently PFLT discounted its debt by (18%), but that may prove too conservative if Chapter 11 occurs. The other two BDCs- whose valuations dates back to March – have discounts of (8%) and (9%), and are likely to be taking bigger reserves for loss when their second quarter results come out.

Affinion Group Holdings: Recapitalization Completed

Affinion Group Holdings, and several of its subsidiaries, have completed yet another recapitalization of the highly leveraged company. We’ve used the opportunity to update the Company Profile page which provides a summary of all prior restructurings and evolving BDC exposure. Speaking of the latter, the only remaining exposure is by Pennant Park (PNNT) and PennantPark Floating (PFLT), which has $46mn invested in the equity at cost and which was valued at $18mn at year end 2018. The BDCs relationship with the Company goes back more than a decade and – as the Company Profile page shows – there have been many twists and turns along the way. This is unlikely to be the last. In the short run, we expect the recapitalization will reduce the BDCs investment valuation, but the trend may reverse in the future depending on the performance of the Company. On the other hand, the equity could be fully written off one day. This is just a snapshot.