Last time we wrote about AGY Holding Corp in May 2020, we darkly warned that “caution is warranted. Forewarned is forearmed“. This was not a very bold statement as at the time the company had been on partial non accrual since IIIQ 2019. Still, the two BlackRock public BDCs, BlackRock Investment (BKCC) and BlackRock TCP Capital (TCPC) were continuing to carry first lien obligations as current and at full value.
Now we hear from TCPC on its IIIQ 2020 conference call that the company has been restructured. Apparently, all the debt has been sold for a nominal amount and the TCPC and BKCC left with small preferred stock positions with little immediate value. Furthermore, TCPC has booked a realized loss of somewhere between ($16.5mn and ($18.0mn). Just from last quarter, the FMV of the BDC’s exposure has dropped by ($4.0mn).
Management put a brave face on the subject but the truth of the matter is that the company is an almost complete loss for the BlackRock BDCs, with over ($70mn) in capital invested likely to be written off. In an even worse position than TCPC is BKCC, which was showing $57mn invested at cost as of June 2020. The coming realized loss is greater than 12% of all the losses BKCC has booked over its long history. Even the loss of net book value per share between this quarter and June will knock about ($0.20) out of BKCC, or about (4%).
The amount of investment income lost is over ($8.0mn) on an annual basis, some of which was still being taken into income all the way through June and – maybe – beyond. Now the realized losses have been booked, per our system, we are upgrading the remaining preferred investment in a restructured AGY to CCR 3 from CCR 5. However, judging by the $0.5mn left on TCPC’s books as a preferred stock investment from the IIIQ 2020 on, the size of the public BDC exposure may not be material by the BDC Credit Reporter’s standards and may get dropped from coverage.
To conclude by stating the obvious, the amount of the AGY loss – and the very high discount to cost involved – represents a serious setback for both BDC lenders. The problem appears to have been an increase in the cost of one critical ingredient in AGY’s business which management and its lenders never found a way around over a multi-quarter period of distress. As is often the case in this situation, the BDCs have been slow to write down the value of their failing investment. Even when the first non accrual occurred, the combined FMV was still $57mn versus a cost of $64mn. Roll forward one year and another $50mn plus has received the ax.
The BDC Credit Reporter – and everyone else – saw this coming weeks ago: Sur La Table filed Chapter 11 on July 8 2020. Also not surprising is that the company comes to bankruptcy court with a plan to be bought out by a “stalking horse” bidder- Fortress Investment, which is working with the existing lenders. The lenders are offering debtor-in-possession (“DIP”) financing to bridge this difficult period. (The amount involved is what seems like a paltry $3.0mn, according to court filings). The company itself – which had already reduced corporate staff – will be closing up to 51 of its stores.
From a lender standpoint, this was a borrower already on non accrual since IQ 2020. What is unclear is how the two BDCs with $31.5mn exposure in the company’s first lien debt will fare. Capitala Finance (CPTA) has already discounted its position by (41%) and Blackrock Capital (BKCC) by (34%) – typical of the fluid world of BDC valuations. We’re assuming the two BDCs are involved in the DIP facility and are part of the buying group. More capital – besides writing off debt – may be required in some form. We’re waiting for further filings to get a clearer picture.
What we did learn from the CEO’s first day filings with the bankruptcy court is that he was hired back in August 2019 to turn around the business. Also new to us was that Sur La Table was in default under its debt agreements and raised $15.0mn from its investors on June 12, 2019 to pay down some of the debt and get back in compliance. However, Advantage Data records show that in neither that quarter, nor the quarter before nor the quarter after the default and loan reduction did either CPTA or BKCC discount their positions to reflect the strained situation. The debt, though, did drop from $45mn to $31.5mn.
In an earlier article on June 29, 2020 we mentioned that we were disappointed by the values at which Sur La Table was carried on both BDCs books. This latest revelation in a court filing indicates without a doubt that the company was in deep trouble more than a year ago. Yet, the debt was not discounted on either BDC’s books by a material percentage till IQ 2020. That’s the same quarter as the Term Loan was placed on non accrual. This does not speak well to the valuation methodologies of either BDC involved.
For the moment, the BDC Credit Reporter’s rating remains CCR 5. We’ll provide an update on likely recovery once further details come in.
A Seattle Times reporter appears to have found a “Deep Throat” equivalent at troubled “Sur La Table, a company already non performing and which we’ve written about twice before. As a result, we’ve learned – and the company has confirmed – that 27 employees – a fifth of its corporate employees- will be laid off. Less clear cut is the possibility that 5 stores will be closed. The most interesting development, learned from an anonymous just laid-off employee, is that the company’s troubles may have predated Covid-19 and the forced temporary closure of its 130 stores in March.
“As recently as 2018, when Sur La Table still shared sales data with employees, monthly revenues from physical locations were routinely in the ‘minus 6 and 7 percent’ range, the employee said”.
That made the BDC Credit Reporter wince because all the way through 2018 and 2019, right up to when the company’s debt was placed on non accrual in IQ 2020, its BDC lenders Capitala Finance (CPTA) and BlackRock Capital (BKCC) carried the value of the then-performing debt at par. Nor were the amounts negligible: $45mn through the IQ 2019 and $31.5mn thereafter following a partial repayment. We’d expect that if employees were being shown same store sales results so were its lenders, but cannot confirm that.
Is Sur La Table a Second Wave credit casualty, an innocent bystander but otherwise strong business brought low by the impact of the crisis or a member of the First Wave whose business was already weak before the closures made everything worse ? It’s important because the BDC Credit Reporter, and the investors who rely on quarterly BDC valuations, want to believe that the managers, and the external valuation firms engaged at great cost to shareholders, are providing loan estimates that reflect reality. There is already a high degree of skepticism amongst many users of these valuations about their accuracy and this anecdote from an insider only heightens the concern that some of these asset values cannot be relied on.
We’re not casting aspersions at the two BDCS involved or anyone else, but analysts and investors might want to ask harder questions as to what has to happen before an investment is de-valued and whether that process fully reflects the risks the businesses involved are facing.
The BDC Credit Reporter is committed to eventually writing about every BDC portfolio company where any material exposure exists. We’ve come round to Puerto Rico-based insurance company Advantage Insurance Holdings. The two BDCs with exposure are BlackRock Capital (BKCC) and MVC Capital (MVC). Both are invested in the insurer’s convertible preferred and have been for years. The preferred, though, has been non income producing at BKCC since June 2019 (no word on MVC’s treatment) and total exposure is $14.8mn at cost with BKCC holding $8.9mn and MVC $5.9mn.
In the IQ 2020, BKCC discounted the preferred by (47%), (11%) more than in the prior period and the worst valuation level since getting involved in 2012. (MVC’s discount is only 2%). The company has been underperforming since 2016…None of this is auspicious but there seems to be a difference of valuation opinion between MVC and BKCC.
For our part, we rate the company CCR 5, or non performing. In terms of value, we would not be surprised to see a complete write-off one day. However, we have no idea when that might be as public information is thin on the ground. Till then, neither the BDCs involved nor the BDC Credit Reporter should hold out much hope for this investment. We can’t tell if Covid-19 will impact the company.
12/23/2020: Due to the acquisition of MVC by Barings BDC (BBDC), the post has been re-classified to BBDC.
The BDC Credit Reporter first wrote about AGY Holding back in November 2019 when its BDC lender – BlackRock Capital (BKCC) – placed its second lien debt on non accrual. (There’s also a first lien loan which – then and now – remains performing). Two quarters later – and in the early days of Covid-19 – BKCC has almost completely written down that second lien exposure to just $0.5mn from a cost level of $24.5mn. That represents ($16.7mn) in fair market value lost in two quarters since our first mention.
BKCC sought to explain what’s happening at the company on its May 7, 2020 conference call in these terms: ” At AGY, that is a company that — the top line performance of that company has continued to hold up, but profitability is under pressure, as we have discussed before, due to a significant and atypical spike in one of the metals used in their production process. And so that has impacted profitability, which then impacted the valuation of the business in the market“. That’s instructive but not conclusive in any way.
Till we learn more, the BDC Credit Reporter is getting more concerned about the nearly $32mn in first lien debt to AGY Holding held by BKCC and sister BDC BlackRock TCP Capital (TCPC). That’s still accruing income for both lenders at 12.00% or $3.8mn of investment income annually. Note, though, that the income is Pay-In-Kind.
Furthermore, given the importance of the company to BKCC as a “Control” investment, we have access to summary results in the filings. These show sales flat but a Net Loss of ($63.3mn) in 2019. Compare that with 2018 where the loss was “only ($2.7mn). Furthermore, the $11mn invested in the equity by BKCC in the parent – KAGY Holding – remains written down to zero as of 3/31/2020. These are obvious red flags and pre-date any Covid-19 impact…
We do not have enough information to value the first lien debt – which BKCC and sister BDC TCPC – have been carrying at par or better. Common sense, though, suggests caution is warranted. Forewarned is forearmed.
Back on May 3, 2020, the BDC Reporter downgraded Sur La Table to CCR 4 on reports of an imminent Chapter 11. As we write this on May 9, 2020 that has not yet come to pass. In the interim, though, both BDC lenders to the company – and both in the 2022 Term Loan – have reported IQ 2020 results. Both are carrying Sur La Table as non-accruing. BlackRock Capital (BKCC) has discounted the debt by (34%) and Capitala Finance (CPTA) by (41%). As a result, we have downgraded the company’s rating to non-performing, or CCR 5. We had placed the company on our “Weakest Links” list, projecting that a non-accrual was likely, an issue which is now moot.
The income lost on the $35mn invested at cost by the BDCs involved is ($3.5mn). BTW, BKCC has $21mn and CPTA the rest. We expect the final realized loss – barring a miracle – could be coming in the second or third quarter 2020 and might be as high as 50% of cost or ($17.5mn). That would mean slightly greater write-downs by both BDCs to book value. However, our loss projection is just a guesstimate.
With the benefit of hindsight, one has to question the wisdom of lending to a bricks & mortar retailer. In defense of both BKCC and CPTA, the initial loan was entered into years ago: 2011 and late 2016 respectively. One might argue that the retail apocalypse had not yet begun. Moreover, outstandings reduced from $45mn to the current level thanks to a repayment in mid-2019, so things could be worse. At year end 2019 the debt had been written down (4%), but was still carried as performing, even though we had some concerns given the sector and managerial changes.
The fact that we’ve gone from CCR2 to CCR5 in one quarter can be laid at the door of Covid-19. So far, though, neither the company’s PE sponsor nor any government program has been capable of supporting the firm, underscoring the limitations of both in these extreme conditions. We wouldn’t be surprised to see CPTA and BKCC end up as as owners in an eventual debt for equity swap, but that may require new capital to restart operations. Historically, BDCs taking over retailers has not worked out very well so we’ll reserve judgement – and any more commentary – till we learn more about the future plans of Sur La Table.
On May 1, 2020 we heard from Bloomberg that cookware retailer Sur La Table may file for Chapter 11 bankruptcy. As usual, this came from “people familiar with the matter”. A sale of the 125 store chain is also underway, but no details were mentioned. We don’t know how poorly Sur La Table is performing but with its retail locations mostly closed, online commerce can only take the company so far. Not to mention that even without Covid-19, Sur La Table was already competing in a retail sector in a long term apocalypse of changing customer mores.
There are two BDCs with $31.6mn in first lien debt exposure to the company: BlackRock Capital (BKCC) and Capitala Finance (CPTA). Both are in a 2022 Term Loan and both are long term lenders, with the former a lender since 2011. A small relief for both BDCs will be that their exposure dropped from $45mn to the current level when an earlier 2020 Term Loan was refinanced in the IIQ 2019.
Still, there’s nearly $3.5mn of investment income at risk of being interrupted shortly. It’s hard to estimate what realized loss might be involved, especially in the current conditions, so we won’t try. We do know, though, that the two lenders discounted the debt only (5%) at year end 2019, so a bigger final loss should be expected before long, probably in the second or third quarter. The gradual re-opening of America might mitigate the damage but appears to be happening too late to save the company or private equity owner Investcorp, who bought the chain nearly ten years ago.
We have downgraded the company from performing or CCR 2 to CCR 4. Furthermore, we’ve added Sur La Table to the Weakest Links list, i.e. those companies we expect to become non performing shortly. The list can be found in the BDC Credit Reporter’s Data Room. There are now 31 companies on the list with a FMV of $1.3bn.
Juul Labs was on a deadline with the FDA, as we discussed in an earlier posting in February, set for May. Their assignment – and those of their rival vape manufacturers is to ” present scientific studies showing that their products are safer than cigarettes. They also must demonstrate that their e-cigarettes present a net benefit to public health—in other words, that the benefit of helping adult cigarette smokers switch to a safer alternative outweighs the potential harm of hooking young people on nicotine“. If you’ve done any reading into vaping you’ll know that’s a tall order. Covid-19, though, has given Juul a reprieve till September, thanks to a judge’s decision, as the Wall Street Journal reports on April 23, 2020.
We continue to be unsure how to value the $39.1mn of BDC first lien debt exposure held by sister BDCs BlackRock Capital and BlackRock TCP Capital (TCPC), which remains valued at par. Truth be told, we’re more pessimistic than before but maybe we’re under-estimating the influence of Big Tobacco, which owns a big stake in Juul. We’ll get back to this conundrum in September.
US WELL SERVICES: Hit by both lower oil prices and the Coronavirus, the publicly traded oil services company cuts back on staff and salaries. http://bit.ly/USWS03202020 Last Article: http://bit.ly/USWS03042020
On March 3, 2020 troubled publicly traded US Well Services (ticker:USWS) published its IVQ 2019 results and held a conference call. The bottom line: in the last quarter of the year the bottom fell out of the market for electric fracturing of oil wells. Here are extracts from the conference call transcript:
“Throughout the course of the year, market conditions deteriorated, culminating in a sharp deceleration activity during the fourth quarter. U.S. Well Services was adversely impacted by customer-driven decisions to delay jobs and longer than anticipated holiday shutdowns. As a result, U.S. Well Services active fleets experienced lower utilization than in prior quarters…Revenue for the fourth quarter was $92.7 million, which represents a 29% sequential decline relative to the third quarter of 2019. USWS generated an adjusted EBITDA of approximately $12.1 million for the fourth quarter as compared to $35.3 million for the third quarter of 2019.”
That’s a two-thirds drop in EBITDA in a short period. No wonder that the stock price of USWS is down to $1.07. That’s much lower than the last time we wrote about the struggling oil services business back on October 3, 2019. Then the stock – at a then all time low – was at $1.82. Only some $50mn in cash and the fact that several drills are operating for customers seems to keeping USWS from imploding. Management does not seem worried but the BDC Credit Reporter notes the $274mn of debt on the balance sheet and the much deteriorating market conditions. We don’t want to be unfair but these seem like ingredients for a bankruptcy (again) or equivalent.
From a BDC perspective, all the lenders who got repaid when the company went public recently must be sighing in relief. At one point not so long ago, there was over $100mn of BDC capital invested, mostly in debt in the company before its transformation into a public company. Now, there are still BDCs with equity exposure, but the amount at September 30, 2019 (we don’t have all the relevant BDCs results yet) was $9.4mn at cost. The BDCs involved were PennantPark (PNNT); Capitala Finance (CPTA) and BlackRock Capital (BKCC). The first two have reported and – curiously – PNNT seems to have increased its exposure from a immaterial $0.7mn to a more material $3mn. Their discount is only (21%), presumably because stock was purchased more recently and cheaply. CPTA’s equity is discounted by as much as four-fifths.
We’ll continue to watch the company’s progress, but the likelihood is high that this will end badly for US Well Services – managerial optimism notwithstanding. For the BDCs involved that would almost certainly result in a complete realized loss on all invested capital, given the debt sitting higher on the balance sheet.
We’ve written about Juul Labs, and it’s relationship with deep-pocketed minority investor Altria before. Now we hear from a Wall Street Journal report that the SEC is taking an interest in one of the largest melt-down in a company’s value in recent memory. According to the WSJ “E-cig makers have until May 20  to submit to the FDA applications to have their devices approved for sale on the market”, but Juul may have problems getting the nod, even with Altria’s help.
As before, we remain unclear how the ongoing uncertainty at Juul will affect the two BDCs with exposure – the two BlackRock public BDCs : Blackrock Capital Investment (BKCC) and BlackRock TCP Capital (TCPC). Neither BDC has yet reported IVQ 2019 results, so our valuation and exposure data remains from the IIIQ 2019. We shall wait and see.
The winner of the M&A Bad Timing Award – Altria – has written down its investment in Juul Labs. Again. The consumer products giant wrote down its investment in Juul – the controversial e-vaping company – by $4.1bn. An earlier write down had been taken for $4.5bn in October 2019. It was only in December 2018 that Altria acquired 35% of the common stock of Juul for $13bn.
Now Juul faces lawsuits both from users and from governmental authorities that could cost untold billions. Already, the toll is showing up in the company’s results : “The Richmond, Virginia, company on Thursday reported that it had swung to a loss in the fourth quarter from the associated costs, citing burgeoning legal cases that it expects to grow“.
We’ve hesitated till now to add Juul Labs to the BDC credit Reporter’s Under Performers list given that the new 2023 Term debt in which two BDCs have exposure was trading at close to par on September 30, 2019 and remains valued at only a (2%) discount to par at time of this writing. Nonetheless, we’ve decided to add the company, with a Corporate Credit Rating of 3 (Watch List) based on the possibility of a potentially huge but currently unknowable amount having to be paid out as compensation for the many vaping deaths and other damage. Not to mention the legal costs and reputational impact to the company, which may yet prove fatal. The Altria write-down was a timely trigger for our own downgrade.
Two-thirds of the $52mn of BDC debt exposure is held by BlackRock TCP (TCPC) and the other third by sister firm Blackrock Capital (BKCC). That’s $4.8mn of annual income at risk. We don’t expect there will be any immediate threat to Juul’s debt, but down the road there’s a reasonable risk of serious trouble, as we’ve seen with other companies whose products have suddenly become controversial. Think Mallinckrodt and opioids.
Canadian retailer Red Apple Stores has been under-performing since 2014, according to the BDC Credit Reporter’s way of marking these things. At September 30, 2019, the only BDC with exposure is BlackRock Capital (BKCC) with $29.7mn in second lien debt, preferred and equity. The last two are valued at zero and the debt at a (24%) discount, up from a (29%) discount in June.
However, when we checked on November 3, 2019 the bid-ask for the debt – which is institutionally traded and available on Advantage Data’s Middle Market Loans module, we found the discount unchanged from June, so we’re not sure why there was this modest increase in valuation between the second and third quarters.
We are continuing to rate Red Apple CCR 4 (Worry List). That means we believe the ultimate resolution is more likely to be a loss than full repayment. $2.3mn in annual investment income remains at risk of interruption and – given its junior nature – the entire investment could yet be lost. Once again BKCC provided no color on the company’s performance in its Conference Call and public information is sparse. (The last time BKCC provided any insights into this major portfolio company’s performance was in the IIIQ of 2017, when the BDC was “working with” management to cut marketing expenses to boost EBITDA). We don’t expect any immediate developments at Red Apple, but we could be surprised given the thin amount of public information and the BDC’s reticence to discuss.
During the BlackRock Capital (BKCC) IIIQ 2019 Conference Call on October 31, 2019 , we learned that the $24.2mn second lien loan in AGY Holdings, subsidiary of KAGY Holdings, has been placed on non accrual. No date was given. The reason for the move was given by BKCC as the need to “fund various initiatives at the business at this time. And so it does reflect sort of things going on in the business that are generally operational things that we wanted to do“. BKCC is both investor and lender, with another $24.8mn in first lien debt still current.
With this move BKCC reduces the FMV of its second lien debt at one fell swoop from a discount of (1%) to (29%) and loses ($2.9mn) of annual investment income. That’s a material impact on BKCC: 3.7% of Investment Income and almost 8% of Net Investment Income. Should the first lien debt go the way of the second lien and the $11mn of equity and Preferred, written to zero, the loss of income would be even worse. Overall, BKCC has invested $60mn in KAGY/AGY, and still values the investment at $42mn.
We have found very little information about the glass yarn manufacturer but Advantage Data records and the occasional word from BKCC management indicates this has been a troubled credit since 2012 and has been restructured before with only limited results so far. We have to at least consider the possibility that this could yet turn out to be a complete write-off given that the common stock and Preferred have no value and the second lien has just been discounted.
The other BDC with exposure is sister fund BlackRock TCP Capital (TCPC) with $16mn invested at cost. Included therein is $8.6mn at cost in a $10.3mn second lien tranche identical to that of BKCC. If that’s placed on non accrual as well, $1.1mn of annualized investment income will be affected. The investment was carried at a big premium last quarter so the unrealized depreciation involved could be material.
For our part, we had carried KAGY Holdings in the under-performing group at CCR 5, due to the non-accrual on the Preferred. However, we’d left AGY as “performing” and a CCR 2 rating. In the absence of third party information, we were led by the high valuations given the company for both its first and second lien debt. That was too generous. We’ve now rated the second lien as CCR 5 (Non Performing) and the first lien at CCR 4 (Worry List). Fool me once, etc.
On October 2, 2019 the stock price of publicly traded U.S. Well Services (USWS) reached a 52 week and all-time low price in its short history of $1.82. That was more bad news for the three BDCs with $66mn of equity at cost invested in the company. Ever since the company underwent a reverse capitalization back in November 2018 and was listed on the NASDAQ, its price has headed downward. That impacted the BDCs involved, whose fair market value at June 2019 was lower than at March, as the stock price dropped from $7.98 to $4.20. That put a dent in the FMV values of PennantPark Investment (PNNT), Capitala Finance (CPTA) and – most of all – BlackRock Capital (BKCC). Coincidentally or otherwise, all 3 BDCs reported lower NAV Per Share in the quarter.
Look for a repeat in the third quarter as the stock price of USWS dropped to $2.19 at the end of the IIIQ. That’s roughly another (50%) drop in the last 3 months and should result in a further unrealized loss of ($16mn) or more. At the 52 week low price, the loss would be even higher.
Unfortunately for the BDCs involved their common stock holdings are “locked up” and cannot be disposed off till November. By then, the value of the USWS common will be down by (75%) or more compared to cost. Not inconceivable is that the oil services company – which we wrote about last on July 13, 2019 – could file for Chapter 11, wiping out all $66mn of the stock – mostly received as part of a debt for equity swap last year.
Not to rub things in, but this story is part of the broader troubles in the oil field services sector, which the BDC Credit Reporter has been warning bout for months and which we most recently opined about on September 6, 2019.