PORTFOLIO AND INVESTMENT ACTIVITY

IVQ 2017 Earnings Release:

"As of December 31, 2017, our portfolio totaled $739.4 million and consisted of $619.3 million of first lien secured debt, $39.9 million of second lien secured debt, $45.4 million of subordinated debt (of which $42.7 million was invested in PSSL) and $34.8 million of preferred and common equity (of which $19.1 million was invested in PSSL). Our debt portfolio consisted of 99% variable-rate investments (including 4% where London Interbank Offered Rate, or LIBOR, was below the floor) and 1% fixed-rate investments. As of December 31, 2017, we had one company on non-accrual, representing 0.4% and 0.2% of our overall portfolio on a cost and fair value basis, respectively. Overall, the portfolio had net unrealized appreciation of $5.6 million. Our overall portfolio consisted of 84 companies with an average investment size of $8.8 million, had a weighted average yield on debt investments of 8.3%, and was invested 84% in first lien secured debt, 5% in second lien secured debt, 6% in subordinated debt (of which 6% was invested in PSSL) and 5% in preferred and common equity (of which 3% was invested in PSSL). As of December 31, 2017, all of the investments held in PSSL were first lien secured debt".

Posts for PennantPark Floating Rate Capital

Country Fresh Holdings LLC: Files Chapter 11

On February 16, 2021 fresh food distributor Country Fresh Holdings LLC filed for Chapter 11 in Texas.

Pandemic-related supply chain and business disruptions have affected Country Fresh and our customers dramatically over the past year,” said Bill Andersen, Country Fresh President and CEO. “Despite efforts to improve company results before and during COVID, we believe that this sale transaction will result in a better capitalized company and positions our customers, suppliers, employees, and all other stakeholders for maximum success going forward.”

The company already has a “stalking horse” bidder in place in the form of PE group Stellex Group and has arranged debtor-in-possession financing with certain of its existing lenders, who were not named. Country Fresh hopes to go through the bankruptcy process in 60 days.

BDC exposure to Country Fresh is significant and includes 4 public and non-traded funds. Leading the group – and the earliest lender – is PennantPark Floating Rate Capital (PFLT) which has $23mn invested in the form of “super senior” term debt; a second lien loan and equity. Only PFLT has reported IVQ 2020 results so far and placed its $5.9mn second lien loan on non accrual for the first time. The other loans were still performing at the end of 2020, but are likely now on non accrual as well. PFLT also has $10.5mn of equity in the company which has been written to zero for the past 3 quarters and is likely to stay there.

Also with substantial exposure is non-traded Cion Investment while Goldman Sachs BDC (GSBD) and Goldman Sachs Private Middle Market Fund have tiny equity stakes left over from a 2019 restructuring and written off already on an unrealized basis.

At first approach, we’d guess PFLT and Cion might be involved in the DIP financing and are likely to receive back their “super senior term loan advances”. Still, realized losses are likely to be substantial: over ($25mn) , or 77% of all capital advanced because mostly concentrated in the second lien and equity. If the “super senior” don’t pay interest investment income will be forgone from the IQ 2021 forward, but may get recouped when the business is sold.

This is second time not the charm for PFLT and Cion, both who were involved in Country Fresh’s earlier restructuring in 2019, which resulted in ($7.1mn) in realized losses at the time for PFLT.

Also notable is that Country Fresh – by our count – is just the fourth BDC-financed company to file for Chapter 11 in 2021. Whether the BDCs involved will convert debt to equity and/or advance new monies in the form of loans or equity is not yet clear. We’ll circle back when we learn more.

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.

Montreign Operating Company: Debt Repaid ?

A few months ago, the Montreign Operating Company, which owns and operates a major upstate New York casino called Resorts World Catskills, and which is an indirect subsidiary of Empire Resorts Inc, was on the verge of bankruptcy. We wrote about the liquidity challenges the business faced at the time. Since then, much has happened. First, one of the partners in Empire Resorts – a Malaysian gaming company called Genting Malaysiabought control of the portion of the business not owned for $129mn. Here is a synopsis of the complex transaction:

As of August 18, Kien Huat Realty III – the family trust of Lim Kok Thay, a businessman who is the controlling shareholder of the Genting group, a Malaysia-based casino and plantations conglomerate – held approximately 86 percent of the voting power of Empire Resorts’ capital stock, according to a filing by the American firm. Under the operation announced in August, affiliates of Kien Huat Realty III and Genting Malaysia additionally plan to acquire the outstanding shares held by Empire Resorts’ minority shareholders, for US$9.74 a share. The deal would lead to the privatisation of Nasdaq-listed Empire Resorts via a joint venture between Genting Malaysia and Kien Huat Realty III

Then Covid-19 came along and in March, the casino was closed. The new owner raised additional monies to support working capital needs. Now we understand that the company’s 1/24/2023 Term Loan has been repaid and Moody’s has withdrawn its CCC rating, based on a April 17, 2020 report by the ratings group. This – if correct – would be good news for the 4 BDCs with exposure to Montreign/Empire , all of which is in the said Term Loan. That debt was valued between 0% and a (15%) discount at year end 2019 by the BDCs involved and was rated CCR 4 by the BDC Credit Reporter.

At a time when BDCs are taking losses left right and center and are anxious to de-leverage their portfolios with borrower repayments, this could be good news for non-traded Business Development Corporation of America; PennantPark Floating (PFLT); Investcorp Credit (ICMB) and PennantPark (PNNT) – in descending order of the $74mn invested at cost. We’ve checked as closely as we can, but we’ll need final confirmation from the BDCs involved at some point. We won’t be removing the company from the Underperformers list till we’re certain but the odds look good that we’ve got some good news to report.

Tensar Corp: Added To Under Performers

On March 25, 2020, we added Tensar Corp. – previously rated as performing and CCR 2 – as under-performing and CCR 3, our Watch List. The global engineering’ company’s downgrade was due principally to what has happened to the value of its 2021 Term Loan, which has been discounted by (30%) in the market and a 2022 Term Loan which is off by (40%). Otherwise, we have very little new information about the company except that its plant in Wuhan (!) has recently reopened after being closed because of you-know-what.

There are 4 BDCs with exposure that totals $49.8mn and all in the 2021 Term Loan. The larger exposure is publicly traded Pennant Park Floating Rate (PFLT) with $22.5mn. Also a lender is Great Elm (GECC), which has been adding to its position of late, and non-traded Sierra Income and Cion Investment. At year end 2019, the debt was only modestly discounted by the BDCs involved. In years past Tensar had some difficulties and had a speculative rating from Moody’s but since IVQ 2016 has been valued closer to par and given a B- rating by S&P.

Frankly, we understand very little about the company’s most recent performance and how much Covid-19 has affected its business, although its website admits management is taking all precautions. Apparently, all the company’s factories are open but that does not tell us much. The drop in the debt value – which only accelerated in the last few days – might be a knee-jerk market reaction, or something else. We’re not ready yet to assume a realized loss will occur down the road, but we’ll be looking out for news from the company, the press or the rating groups. At the moment, though, we expect this credit will return to performing status when the world gets back to work, but you never know in these unprecedented conditions for leveraged companies.

Hollander Sleep Products: Credit Post-Mortem

For some time, the BDC Credit Reporter has been promising to undertake credit post-mortems of under-performing BDC investments that reach the end of the line, and are removed from active status. That removal can be because of a successful resolution where all invested capital is returned or any number of scenarios where some sort of realized loss is incurred. Expect more of the latter than the former. The goal of looking back is to ascertain how an investment played out and what we can learn in hindsight about the risks taken and what the outcome tells us about the underwriting of the BDCs involved. As always, information is patchy and we will have to make some assumptions to get to any conclusions. Nonetheless, we believe this is a valid undertaking which should be instructive, both about whatever individual investment is involved and as a window into the broader leveraged debt investment process.

Our inaugural post is about Hollander Sleeping Products, a bedding manufacturer, which first appeared on the books of PennantPark Floating Rate (PFLT) and sister firm PennantPark Investment (PNNT) in late 2014 and was originally consisted of $35.5mn in first lien term debt due in 2020. The debt was priced at LIBOR + 8.0% and was a syndication. The debt was part of the leveraged buy-out of the company by Sentinel Partners. The type of borrower, the pricing, the terms and the purpose were in line with both BDCs stated target market. The external manager does not seem to have originated or “controlled” the loan.

That initial loan performed very well and was valued at or close to par throughout its entire tenure, which ended with its pre-payment in the middle of 2017. At that time, the company acquired Pacific Coast Feather and raised a new Term Loan – also first lien – with a 2023 maturity which, presumably, also financed the acquisition. The pricing remained the same: LIBOR + 8.0%.

The merger makes Hollander the single-largest supplier in the U.S. in the home textiles industry,” said Jennifer Marks, editor-in-chief of industry publication, Home & Textiles Today. She said Hollander already was the single-largest supplier in the nation of filled utility bedding”.

From a valuation standpoint, the new loan performed well all the way up to IVQ 2018 when a (3%) discount was applied by the BDCs, more or less in line with the trading value of the debt at the time. However, by the IQ 2019 the debt was on non-accrual and by May 19, 2019 Hollander filed for Chapter 11.

As of March 2019 the debt was valued at a discount of only (13%) and as of June – which the last quarter on the books – the discount was (53%). At the time, an analyst inquired as to why the valuation could remain so high on a non accruing debt and the BDC manager pointed to the valuation firm who came up with the number, probably linked to the “trading” price of the debt.

The company blamed higher raw material costs and the expense of integrating Pacific Coast for its failure. The initial plan involved new DIP financing from ABL lender Wells Fargo and its existing term lenders. PNNT and PFLT ponied up $3.3mn of extra debt for a total of $34mn. The initial idea was to undertake a partial debt for equity swap.

However, by September management switched course and returned to court to request that the plan be changed to a $102mn asset sale to the only remaining would-be strategic buyer:

A revised plan with a “toggle” feature to allow switching to an asset sale was put to a vote by the impaired creditors and received approval from the holders of all of the company’s $173.9 million in term loan debt and the holders of more than 95% of its $38.5 million in unsecured debt, it said.

Hollander noted that additional changes to the plan include that the providers of the company’s $90 million in debtor-in-possession funding have agreed to accept less than full repayment and to cede repayment priority to Hollander’s prepetition term loan creditors, as well as the establishment of a $1 million wind-down reserve fund.”

As a result of the sale – according to PennantPark – its Hollander investment “was written down completely “. Exactly what that means is not clear as neither BDC calls out by company realized losses. We know that Hollander is no longer carried as an investment as of the September 2019 results and that the PNNT Realized Loss for the quarter was exactly equal to the investment at cost in the 2023 Term Loan. Maybe the DIP financing was repaid in full ?

PennantPark claims it favored proceeding with the debt for equity swap but was out voted by other lenders not willing to move forward in that direction. However, as the quote above shows in the final plan “all” the company’s term debt creditors voted for the asset sale.

From PennantPark’s standpoint the lesson learned from its substantial ($30mn) or so loss is the risk involved in sponsor-led company “roll-ups” and insufficient oversight by the PE group. Here is what was said on the PFLT CC: “And with Hollander, they were just doing too many acquisitions too quickly. They didn’t have enough kind of oversight of the company. And the last acquisition didn’t work. So moving too quickly“.

From the BDC Credit Reporter’s standpoint there are 3 lessons here:

  1. Investments can go from hero to zero in a very short period (i.e. from performing to under-performing or non-performing in this case). We doubt that Hollander’s business performance deteriorated so quickly, suggesting that there can be a lag between when bad things begin to happen (higher costs in this case) and its reflection in the valuations despite all those experts re-valuing positions every 3 months. Maybe there was undue reliance on the “market price” of the debt rather than an evaluation of the enterprise value of the firm.
  2. As is often the case, a “First Lien” or “Senior sScured” nomenclature tells investors very little about the prospects of capital recovery – in this situation nil – when a default/bankruptcy occur.
  3. BDC lenders – if PennantPark is a fair example – are loath to offer much in the way of financial details or color about “failed” investments. Just identifying how much realized losses come to is difficult. In terms of discussion, the manager offered on PFLT’s Conference Call only 3 sentences in their IIIQ 2019 conference call on the subject. Yet, the realized loss incurred for the quarter was roughly equal to the BDC’s entire Net Investment Income, on which much more time was spent parsing the numbers. Most of what we did learn about Hollander – slightly more substantively – came in response to analyst questions. It’s understandable that managers don’t want to linger over credits gone wrong but – in our opinion – it’s a critical element for investors to evaluate how much of performance is “idiosyncratic” and how much not.

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.