Yet again satellite operator Avanti Communications has restructured its balance sheet. The company itself gave some of the details in a press release in April 2022 – but left us with some questions. We heard that total debt has been reduced “from $810 million to $260 million”. Apparently, control of the company has changed as well. The company indicates:
“Funds (or subsidiaries of such funds) and/or accounts managed, advised or controlled by HPS Investment Partners LLC or affiliates/subsidiaries thereof ($80 billion leading global investment firm) and Solus Alternative Asset Management LP (leading US registered investment advisor specialising in corporate recapitalisations) will become the principal shareholders”.Avanti Communications Press Release – April 13, 2022
Business continues as usual, but there are unresolved financial and legal items as well. Here’s what a trade publication reported:
The financial reconstruction also sees Avanti pass to Glas Trust Corp. Ltd. (as one of the Primary Security Agents which also includes The Bank of New York Mellon) new or extensions to debentures on some assets of Avanti’s Hylas 2 (AH2) satellite and payment obligations to Glas Trust. The agreement is in the form of a formal charge on the company’s assets and signed on March 22 between the parties.
Some of Avanti’s subsidiary/related companies are officially in default as regards their financial filings to the UK’s Companies House. For example, Avanti Communications Group plc should have filed by June 30 2021 (for the accounts up to Dec 31st 2020) and are now overdue.Advanced Television – April 14, 2022
Exactly how this translates for the BDCs with exposure to Avanti is not clear, but cannot be good. As of the year-end 2021, there were 3 players involved, led by Great Elm Capital (GECC); BlackRock TCP Capital (TCPC) and non-traded AB Private Credit Investors, with an aggregate cost of $136mn. At that point FMV was down to $15mn, a (89%) discount. Judging by TCPC’s just released IQ 2022 valuations and the restructuring news, the value of Avanti has even further to drop.
Most impacted – and much discussed over the years on these pages – is GECC with $118mn invested in equity and debt investments. The BDC in its latest 10-K was required to make some very sharp disclosures about its Avanti relationship, which we’ll quote at length:
Avanti is highly leveraged. If there is an event of default under the indenture governing the PIK Toggle Notes or any other indebtedness and the obligations under the PIK Toggle Notes are accelerated, Avanti likely will not have sufficient liquidity to pay the obligations under the PIK Toggle Notes. Under such circumstances, Avanti may consider other restructuring options, such as entering into an insolvency procedure under English law or by filing for Chapter 11 protection under the U.S. Bankruptcy Code, the consequences of which could include a reduction in the value of the assets available to satisfy the PIK Toggle Notes and the imposition of costs and other additional risks on holders of the PIK Toggle Notes, including a material reduction in the value of the PIK Toggle Notes. In such an event, we may lose all or part of our investment in Avanti…
In addition, as noted above, we own approximately 9% of Avanti’s common stock. Avanti’s common stock was delisted from its primary exchange in September 2019 and no longer trades on an exchange, which limits the liquidity of our investment. Equity securities also expose us to additional risks should Avanti default on its debt or need additional financing. Equity securities rank lower in the capital structure and would likely not pay current income or PIK income, which we had been receiving on our investment in Avanti prior to the 2017 liability management transactions.
We are currently receiving PIK interest on our Avanti investment under the PIK Toggle Notes and we have generated significant non-cash income in the form of PIK interest. As part of the 2017 restructuring, the PIK Toggle Notes became pay-if-you-can notes whereby Avanti is required to make interest payments in cash, subject to satisfying certain minimum cash thresholds. Otherwise, the interest will be paid as PIK interest. … … The Avanti common stock was delisted from its primary exchange in September 2019 and no longer trades on an exchange.
Avanti’s financial condition is uncertain. The 2017 liability management transactions did not materially change Avanti’s long term capital structure and did not address the longer-term sustainability of Avanti’s business model. In addition, Avanti is faced with near term debt maturities, including related to the PIK Toggle Notes, which mature in October 2022. As of result of the uncertainty surrounding Avanti’s financial condition and ongoing liquidity challenges, as of December 31, 2021, we determined that our investment in the PIK Toggle Notes was fair valued at zero and, we put our investment in the PIK Toggle Notes and the 1.5L loan on non-accrual, with any accrued but unpaid or capitalized interest income reversed as of period end. As a result of this write down and non-accrual status, we have determined that that the accrued incentive fees payable associated with the portion of PIK interest generated by the PIK Toggle Notes and 1.5L loan should not at this time be recognized as a liability and as such we have reversed $5.0 million in accrued incentive fees related to those investments in the current period.
Great Elm Capital – 2021 10-K
We’ve not yet heard from GECC regarding IQ 2022 but everything points to all debt owed either being placed on non accrual or written off. As a result, realized losses are likely to be on the way. As far as we know, GECC and the other BDC lenders may have no debt outstanding in the restructured company. Even if they do, the huge Avanti exposure that has been around for years must have virtually no remaining value. For GECC, the $8mn of value left in Avanti at year-end will likely drop to an immaterial $0-$3mn when all the dust settles.
Even now, the Avanti story is not yet over. Expect more updates in the near future. However, the damage appears to be almost fully done and the prospect – always slim – of some eventual recovery from a business turnaround. For the BDC investors involved this has been a slow motion horror show and one that does not reflect well on either GECC or TCPC, both of whom were unwilling to accept what was obvious to almost everyone else: that Avanti was way too over-leveraged to affords the debt piled on through the years.