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.
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.
On April 27, 2020 the BDC Credit Reporter pro-actively downgraded Capstone Logistics Acquisition to a Corporate Credit Rating of 3 from a CCR of 2. Capstone is “an outsourced supply-chain-solutions provider offering freight handling services, supply-chain consulting, and management of distribution centers“. We downgraded the company, and the $128mn in BDC debt due to our concerns what the national shut-down of business activity may have had on business activity given the leveraged nature of Capstone.
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.
Ares Capital (ARCC) – the largest BDC lender to TridentUSA Health Services (also known as New Trident Holdcorp and Trident Health Services) – has taken a 100% realized loss on its non-performing debt outstanding to the company, which filed for bankruptcy back in February, and which we discussed in a post on September 30, 2019. The loss was realized in the IIIQ 2019. This has a resulted in a major loss for the BDC: $96mn. Moreover, that means 3 other BDCs with another $12mn of exposure are likely to be taking similar write-offs when their results are published: Gladstone Capital (GLAD), Solar Senior Capital (SUNS) and Oaktree Strategic Income (OCSI).
What’s more, back in IVQ 2017 when the company first went on non-accrual other BDCs, such as PennantPark Floating (PFLT) and Investcorp Credit Management BDC (ICMB) had positions as well. In fact, total BDC exposure was $157mn at its peak but only $108mn as of June 2019 when the debt had all been effectively written down on an unrealized basis to zero. We expect those departed BDCs took some sort of realized loss to depart the scene early. If the other BDCs lenders still involved follow ARCC’s path, SUNS will be losing ($7.7mn), GLAD ($4.4mn) and OCSI well under ($1mn). About $12mn of investment income that was being charged will be lost.
This is a credit that dates back to 2013 for ARCC (and other involved) when the BDC giant made a $80mn second lien investment. The debt was added to the under-performing list in the IIQ 2016. The valuation went up and down from there, including rising at one point on the hope of a sale. However, by IVQ 2017, the second lien debt was placed on non accrual. ARCC advanced $16mn in additional debt, on a first lien basis. In the spring of 2018 new debt was advanced and existing debt renegotiated, which Moody’s deemed to be “a distressed exchange” and downgraded the company. Finally, in February 2019 the New Trident filed for Chapter 11. By then most BDCs had written down their exposure 100% or close to.
What went wrong ? You’d be hard pressed to find out from ARCC – which prides itself on its transparency – from the latest Conference Call transcript. Management only discussed the company in response to a question, describing the investment as “unsuccessful” and the amount lost as “pretty substantial”. We’d agree with that last assessment: $96mn is equal to 1.3% of ARCC’s equity capital at par and is equivalent to 45% of this quarter’s Net Investment Income.
We know that the company and its subsidiaries is owned by private equity sponsors Formation Capital, Audax Group, and Revelstoke Capital Partners and that annual revenues are approximately $500 million, according to Moody’s. A couple of BDCs have been quick to say the health care company’s problems were “idiosyncratic” but the bankruptcy has occurred at a time when both the BDC Credit Reporter and rating groups have noticed a deterioration in the sector more generally – a grave concern considering the ubiquity of health care related credits in leveraged lending.
TridentUSA is already in bankruptcy, and has been since February of this year. On September 26, 2019 the company settled two outstanding whistleblower lawsuits brought by the government, agreeing to pay out $8.5mn, as reported by the Baltimore Business Journal. “Trident provides mobile diagnostic services to residents of nursing homes. The company earns federal money to provide mobile x-rays to Medicare and Medicaid participants in the nursing homes. The whistleblowers had alleged that Trident had violated federal law by engaging in a kickback scheme, which led to a government investigation of Trident’s pricing arrangements and its costs to provide mobile x-rays at these facilities“.
In a round-about way, this settlement might be a Good Thing for the embattled company and facilitate its exit from Chapter 11. This report tells us nothing of the bigger picture.
For the BDCs involved, there is nowhere to go but up from here. Four well known public BDCs have $108mn in first and second lien loans to the company or its equally compromised sister entities. The exposure has been almost completely written off as of June 2019 and well over $10mn of investment income lost. The BDCs involved are all publicly listed: Solar Senior Capital (SUNS), Oaktree Strategic Income (OCSI), Gladstone Capital (GLAD) and the biggest player of all Ares Capital (ARCC).
Trident is one of a series of significant healthcare failures due to some kind of fraud that we’ve come across of late. Most recently, we discussed Oaktree Medical Centre in a similar vein on these pages. In recent memory, but before the advent of the BDC Credit Reporter, there have been at least two other similar cases of healthcare fraud or other catastrophic difficulty involving BDC lenders. One notable example would be RockDale BlackHawk. Maybe we should ask harder questions about the due diligence capabilities of the BDC underwriters or are stories like these just the exceptions to the rule ?