Posts for Great Elm Corp.

Viasat Inc: Receivables Placed On Non Accrual

We’ve been reviewing the Great Elm Capital (GECC) IQ 2022 results, principally to understand what’s happening at satellite operator Avanti Communications. However, we also noticed that receivables due from another satellite company – Viasat Inc. – had been placed on non accrual for the first time. There are 3 different receivables involved, acquired in 2021. One tranche was due March 15, 2022 and the remaining two in June and September of this year. The total amount invested at cost is only $1.1mn.

However, as of March 31, 2022 the value of all three receivables has been dropped to $100K each, or $0.3mn in total – a (73%) discount. We have no idea why this has occurred. GECC has invested in and collected Viasat receivables in the past without any problem. Viasat itself is a public company, performing normally. If we learn more, we’ll provide an update. For the moment, we are rating the company CCR 5 on our 5 point scale.

Avanti Communications: Great Elm Capital Write-Downs

On May 9, 2021, the BDC Credit Reporter indicated that satellite operator Avanti Communications has seen its balance sheet restructured again. We also projected that the company’s main lender and substantive investor – Great Elm Capital (GECC) – would place any performing loan on non accrual and write-down – or off – the remaining $8mn value in Avanti carried at December 31, 2021:

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.

BDC Credit Reporter – Avanti Communications : Completes Restructuring May 9, 2022

On May 11, 2022 GECC reported IQ 2022 results and – as expected – placed the two performing loan tranches: Avanti 1.25 Lien Loan and 1.125 Lien Loan on non-accrual as of March 31, 2022, ” with any accrued but uncapitalized interest income reversed as of the accrual date”. All 4 types of debt held by GECC, amounting to $66mn at cost, are now non performing.

GECC – which had already written its $50.7mn of equity investment in Avanti to zero in previous quarters, wrote down the $8mn of remaining value in the Avanti debt to just $0.6mn – as we had anticipated. The debt will be converted to equity but is unlikely to have any value and may become a realized loss before long. In addition, we learned that new funds were advanced recently to Avanti but GECC – unlike in prior times – did not participate.

With these moves, the $117mn invested at cost by GECC in Avanti has been written down by (99.5%). No further income is being generated. The two most recent loans placed on non accrual generated $0.7mn annually in investment income by our estimate.

As we’ve said previously, the Avanti story is not yet over, but for the two public BDCs involved – which includes BlackRock TCP Capital (TCPC) with GECC – $130mn invested in the debt and equity of the satellite operator has a remaining value of just over $1mn and no investment income is being generated.

This is a credit disaster that’s been a very long time coming as Avanti – to any outside observer – has seemed way over-leveraged and unviable for years. For TCPC this is a modest reverse, given its size and relatively modest exposure. For GECC, Avanti has been its biggest investment and a major income producer till recently and frequently required special disclosures in its financial statements. Now Avanti – for better or worse – is a negligible part of the BDC’s portfolio, which is now dominated by a handful of specialty finance investments.

Avanti Communications: Completes Restructuring

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.

California Pizza Kitchen: International Expansion Underway

Mea Culpa. We’ve not written about California Pizza Kitchen (CPK) – one of the more prominent casualties of the pandemic – in some time. The restaurant chain filed for bankruptcy back in 2020 with hundreds of millions of dollars of debt on the books, including $60mn from 8 BDCs. Then a great deal of the debt was converted to equity (which resulted in realized losses) and equity was granted to the lenders in compensation. More recently the company rid itself of its $177mn in post-bankruptcy debt.

This left, since IIIQ 2021, three BDCs with exposure to the rejigged CPK – all in the form of equity stakes. The BDCs involved are Great Elm (GECC); Capital Southwest (CSWC) and Monroe Capital (MRCC), with total exposure at cost of $15.6mn. The equity was received in the IVQ 2020 and has fluctuated in value every quarter since, along with the chain’s business prospects.

These equity valuations peaked in IIIQ 2021 when the three positions were valued at $13.3mn, a (15%) discount to the average cost. In the most recent IVQ 2021, the valuation dropped slightly, probably due to concerns about omicron or perhaps reflecting recent metrics. Nonetheless, the well regarded management of CPK have an aggressive expansion plan in place and just announced two international franchise agreements, and plans to open 7 restaurants overseas by year end 2022.

We can’t be sure, but there’s a good chance CPK’s equity could increase in value as a result of these and other actions, and the improving Covid situation. If so, the BDCs left with an equity stake might be able to recoup their initial pre-bankruptcy investment in full, or even better. GECC has the most to (re)gain, with a current value of $4.7mn; followed by MRCC with $3.7mn and CSWC at $2.3mn. We’ll be looking out for the latest values when BDC earnings season returns in late March/early April 2022.

Avanti Communications: IVQ 2020 Update

We’ve just heard from Great Elm (GECC) regarding its IVQ and full year 2020 results. This includes an update on the BDC’s valuation of its largest investment : Avanti Communications. According to the BDC, the values attached were depressed by the then-uncertainties regarding the refinancing of the satellite company’s debt, which has been subsequently extended for a year. The total investment in debt and equity by GECC is now $105.6mn and the FMV $29.3mn. This compares to $103.0 at cost in the prior quarter and FMV of $39.3mn. That’s a (25%) decrease in the FMV of the BDC’s investment in the IVQ 2020.

The BDC Credit Reporter continues to believe that a complete loss is possible where Avanti is concerned, and that’s increasingly reflected in the valuation. All the debt instruments the BDC holds are accruing interest on a non-cash basis while the other BDC with exposure – BlackRock TCP Capital (TCPC) – has its loans showing as non performing. Effectively, despite $118mn invested at cost between the two BDCs – of which $62.4mn is in the form of debt – no cash income is being received already.

We maintain our CCR 5 rating and have Avanti on our Trending List. Next quarter we expect to see the total amount invested increase due to the previously mentioned refinancing. GECC will be adding $3.7mn to one of the debt facilities – as disclosed in its 10-K. TCPC may also invest further funds, but on a smaller scale. The valuation may increase as a result of the refinancing achieved but that will not necessarily continue in future quarters. We will revert back when the IQ 2021 results come out for GECC and TCPC or if something new transpires at Avanti.

Aptim Corp: S&P Global Ratings Update

According to a news report, S&P Global Ratings is feeling a little better about Aptim Corporation, an environmental consulting and remediation company. APTIM Corp. was “affirmed” on Feb. 11 2021 at CCC+ and its outlook revised to “stable” from “negative”. Apparently some receivables that had been of questionable collectibility have come in, improving liquidity.

The CCC+ rating on the company’s $515 million of 7.75% senior secured notes due 2025 was affirmed as well.S&P Global Ratings believes Aptim’s balance sheet cash will be sufficient to handle fixed charges over the next 12 months“. However, as you can see by the speculative rating, Aptim is hardly free and clear of trouble as leverage is high, operating profitability poor and the company’s capital structure as “unsustainable”.

Nonetheless, these developments – and the modestly positive signal from S&P – might result in shrinking the discount on the value of the 2025 debt – with a cost of $30.5mn and a IIIQ 2020 discount that ranges between -37% and -48%. We note that Main Street (MAIN); Great Elm (GECC); FS KKR Capital II (FSKR) and non-traded HMS Income all hold the same debt but their valuations differ. In fact, FSKR even carries the debt as non-performing.

The -$13mn in unrealized losses might shrink either in the IVQ 2020 valuation or in the IQ 2021 based on the improving situation at Aptim. We have rated the company as underperforming since the IVQ 2018; and further downgraded the business to a CCR 5 when we first saw the FSKR non-accrual in the IIQ 2020.

The BDC Credit Reporter will circle back as the IVQ 2020 results come in from the BDCs involved and see what we’ll learn. We have no view as to the likelihood of an eventual loss but that “unsustainable” capital structure remains cause for concern, especially as the BDC debt outstanding is in junior debt capital. Still, in the short term values might be going up rather than going down or getting written off.

UPDATE: We have added Aptim to our Alerts list of companies whose value is expected to materially change in the next 1-2 quarters.

Avanti Communications: New Financing Arranged

On January 20, 2021 we wrote that Avanti Communications was in “financial difficulty”, based on a news report. The satellite launcher and operator has a huge debt load and a bond deadline was looming. We’ve now learned that today – February 8, 2021 – the $145 million debt (Super Senior Facility/SSF) needed to be refinanced or extended.

Apparently, the existing lenders have blinked and offered a one year extension. Here’s what “Advanced Television” – a trade publication – had to say:

In a statement on February 8th, Avanti said: “Today the Company announces that it has agreed on the headline terms of an amendment and extension of the SSF to 31 January 2022 (the “A&E Transaction”). When completed, the A&E Transaction will provide a material maturity extension of the SSF combined with a new capital injection of $30 million provided by the Company’s existing junior lenders, enabling the Company to execute on its growth plan including the closing of its exciting pipeline of significant contracts.”Avanti added: “In order to provide time to finalise (i) requisite consent processes and (ii) definitive long form documentation, the Company has agreed a short-term extension of the maturity of the SSF from 8 February 2021 to 15 February 2021“.

This news suggests that Avanti will live to fight another day but that Great Elm (GECC) and BlackRock TCP Capital (TCPC) – both of whom are junior lenders – will be anteing up more capital. Currently – using data through September 30, 2020 – the two BDCs have advanced $115mn.

There’s no change to our CCR 5 rating for Avanti (TCPC carries the debt as non performing but GECC as performing – a subject unto itself). We will learn more about both BDCs exposure to Avanti either when IVQ 2020 results are discussed. Or, if the BDCs are being coy, when IQ 2021 results are updated as this new capital seems likely to be advanced in the current quarter.

Avanti Communications: In Financial Difficulty

Space IntelReport – basing itself off a company press release – indicates satellite operator Avanti Communications may be in a “spot of bother” as the British say in their understated way. Here is everything we learned from the trade publication, and which we were not able to duplicate elsewhere:

[Avanti] is back on a cliff edge and facing a British Chapter 11-type restructuring as a bond payment deadline approaches that would trigger a broader default. Avanti said it was in “advanced discussions with a financing source” to cover the debt payment, due Feb. 8, but a recent change in Britain’s bankruptcy code could make a Chapter 11-type filing more appealing than a refinancing on onerous terms“.

BDC exposure to Avanti is “Major”, i.e. over $100mn, or $115mn to be exact as of September 30, 2020. Of that $103mn at cost is held by Great Elm (GECC) and the $12mn remainder by BlackRock TCP Capital (TCPC). At fair market value GECC has $39mn, split between debt and equity and TCPC $5mn. The latter BDC has some of its debt carried as non accrual but GECC does not. All GECC’s debt is paid is kind at rates that range from 9.5% and 12.0%.

We’ve written about Avanti both at the BDC Credit Reporter and at the BDC Reporter for years, ever since Great Elm contributed its position when taking over Full Circle Capital and changing the BDC’s ownership. The company has faced many financial challenges and has been restructured before, leaving the business hugely leveraged. This last challenge could be the proverbial straw but we have no way of really knowing.

If a British bankruptcy should occur, though, a day of reckoning might be here for the bulk of the GECC and TCPC exposure. Just over $100mn of the $115mn invested is in second lien and equity and is very unlikely to have any value. Even the roughly $15mn in “senior debt” might be subject to a haircut. This could prove the biggest BDC portfolio company mishap of 2021 so fat, admittedly only three weeks in.

Far and away most at risk is GECC, despite regularly writing down its position over the years. At cost Avanti represents 38% of GECC’s portfolio assets and a less overpowering 16% at FMV. Also importantly, Avanti seems to represent 17% of investment income, which is the equivalent of 50% of the BDC’s latest Net Investment Income.

the company continues to grow revenue and EBITDA and unleveraged free cash flow. And we are pleased with that progress. We expect them to continue upon that trajectory and are hopeful that the continuation of that trajectory leads to a good result for our investment in the company and ultimately, a successful exit for our investment in the company“.

California Pizza Kitchen: Reaches Agreement With Lenders

According to multiple reports, California Pizza Kitchen (“CPK”) – in Chapter 11 bankruptcy – has reached an agreement in principle in late September 2020 with its first lien lenders and unsecured creditors. That should shortly allow the restaurant chain – already making operational plans for post-bankruptcy operations – to make an exit shortly from the court’s protection.

With a bit of luck CPK should exit bankruptcy in the IVQ 2020 and we’ll get a clear picture of which of the now 6 BDC lenders involved ended up where. Total outstandings from the BDC lenders is $49.5mn in IIQ 2020, slightly higher than in the IQ 2020. (BTW, Prospect Flexible Income appears to be no longer a lender). We already know, though, that this will prove to have been a misstep for all the BDCs involved.

Boardriders Inc.: Restructured

We hear from S&P that Boardriders Inc. has recently been significantly restructured by its sponsor Oaktree and with the support of some of its lenders and other parties:

“S&P noted that Boardrider recently issued $155 million of new money debt, including:

  • $65 million contributed by Boardriders’ financial sponsor owner, Oaktree, consisting of a $45 million initial term loan and a $20 million delayed draw term loan (currently undrawn);
  • $45 million contributed by other existing lenders; and
  • $45 million via a facility backed by a European government.

The transaction provides needed liquidity and fund an operational turnaround

S&P considers the new debt “distressed” and has lowered its rating to SD or Selective Default, but may raise it back to CCC shortly. (This is part of the complex mechanics of rating groups). S&P is not optimistic about the medium term outlook given “[Boardriders] still-unsustainable debt leverage, high debt service commitments, and our view that the company will likely have difficulty generating consistently positive free cash flow before its next significant debt maturity in 2023].

Great Elm Corporation (GECC) remains the only BDC with exposure. What we don’t know is whether the BDC participated in the restructuring and advanced new monies or did not and became structurally subordinated to the new debt in what sounds like a controversial move by the principals. We are retaining the CCR 4 rating on the company that dates back to May and are not choosing to add Boardriders to the Weakest Links list as all the new cash will temporarily help liquidity and ensure debt service. Nonetheless, the outlook for GECC – one way or another – remains highly uncertain. The BDC has discounted its 2024 Term Loan position by (28%) at the end of June, but current market indicators shown by Advantage Data suggest – not surprisingly – that the discount might be (40%).

We’ll be checking the IIIQ 2020 GECC results to learn more about how the BDC acted when asked for more funds and what that has done to total exposure and valuation. In any case, this is a credit whose tribulations are likely to continue for some time to come so – unless GECC sells out its position – expect to hear more. Attached, though, are our prior two articles.

California Pizza Kitchen: Files Chapter 11

On July 30, 2020 California Pizza Kitchen (aka CPK) filed for Chapter 11, as part of a broad restructuring plan (RSA) agreed with its first lien lenders. As readers will expect by now, the RSA envisages a “debt for equity swap” and additional financing to get the restaurant company through this difficult period, presumably financed by some or all those same lenders that are in the existing financing. CPK hopes to be in and out of bankruptcy in 3 months.

The BDC Credit Reporter has written about the company on three prior occasions. Our most recent contribution followed learning that several BDC lenders had placed their debt outstanding to the business on non accrual, but not all. In any case, bankruptcy has seemed like a forgone conclusion for some time. As a result, the seven BDCs involved (6 of whom are publicly traded) will have to face the consequences of their $48.1mn invested in the debt of CPK.

Common sense suggests the second lien debt holders : Great Elm Corporation (GECC) and Capitala Finance (CPTA) will have to write off the $4.1mn and $4.9mn respectively held. The rest of the debt is in first lien debt (including a tranche held by GECC) and will mostly become non income producing, when swapped for common shares. We expect the BDCs involved will write off 80% or more of their positions, but we’ll gather more details shortly. As usual in these situations, total exposure may increase as some of the lenders fund their share of the additional capital. For the record, the other BDCs involved are Main Street (MAIN); Capital Southwest (CSWC); Monroe Capital (MRCC) and Oaktree Specialty Lending (OCSL) ; as well as non traded TP Flexible Income with a tiny position.

CPK is – arguably an example of a “Second Wave” credit default. Admittedly, the company was already underperforming before Covid-19 but would likely not have had to file Chapter 11 if the virus had not occurred. As recently as the IIQ 2019 GECC – in a case of ill timing – bought into the second lien at a (5%) discount to par. Going forward, a much de-leveraged CPK should have a decent chance of survival, and may even thrive in the long run. This might allow the BDCs involved to recoup some of their capital but it’s going to be a long slog.

Currently, the BDC Reporter has rated CPK CCR 5 – or non performing – which remains unchanged. We’ll re-rate the company when the RSA – or some other outcome – is finalized. By the way, this is the ninth BDC-financed company to file for bankruptcy – all Chapter 11 – in the month of July, keeping up the blistering pace set in June.

APTIM Corp.: Wins Federal Contract

A subsidiary of APTIM Corp – the engineering management company – has been awarded a $129mn Federal contract for Navy barge dismantlement, according to a June 10, 2020 report. This follows the recent addition of a new CEO at the troubled company whose debt trades at a severe discount. He joined April 20, 2020. Nonetheless, we note that the 2025 bond is trading 5% points up currently versus the end of the IQ 2020. At that point, the 4 BDCs with $30.9mn exposure to that debt had applied a FMV discount to cost of as much as (65%).

These are green shoots for APTIM, and make our last May 11, 2020 assessment of the company – which is on our Weakest Links list with a CCR 4 rating – possibly too harsh. For the moment we are not changing our corporate credit rating, but we are removing APTIM from the Weakest Links list.

Boardriders Inc: Downgraded By S&P

Bad news for Boardriders Inc., the apparel company. A few weeks after an earlier article by the BDC Credit Reporter triggered by a downgrade by Moody’s, here comes another ratings blow- from S&P. The company’s rating has been lowered to CCC+ from B. The outlook is Negative. What caught our attention was this remark: that Boardriders would “likely need additional liquidity to meet its obligations over the next 12 months; otherwise a default might become highly likely,

We had already downgraded the company in our database on May 11, 2020 to CCR 4 from CCR 3. Now we are also adding the company to our Weakest Links list, based on S&P’s comments and the still difficult market conditions. As before, the only BDC with exposure is Great Elm Corporation (GECC), whose $8.8mn invested at cost in the debt of the company was valued at $8.0mn as of March 31 2020.

California Pizza Kitchen: Second Lien Debt On Non Accrual

We’ve written about California Pizza Kitchen (or “CPK” to the world) on two prior occasions. Most recently, on April 23, 2020 we discussed the restaurant chain’s ambition to restructure its debt as both secular declines in its business which began some time ago and Covid-19 have made business conditions very difficult. Frankly, we were expecting a bankruptcy filing at any moment, but that has not happened. (That does not mean a Chapter 11 filing could not yet occur).

Now that IQ 2020 BDC results have been published we can see how the 6 different BDCs with exposure have valued their loans. We found that CPK’s first and second lien debt has been placed on non accrual by two of the BDCs and not by four others. Apparently, based on comments made by Monroe Capital Corp (MRCC) – which has not chosen to list the debt as non performing – there is a difference of views between the players. Also choosing to leave the debt on accrual is Main Street (MAIN); Great Elm (GECC) and TP Flexible Income. By contrast, CPTA Finance (CPTA) and Oaktree Specialty Lending (OCSL) have their debt positions marked as non-performing.

Total BDC exposure – spread over first and second lien term loans due in 2022- amounts to $43.3mn at cost. The debt is mostly discounted just under (50%) at FMV, but GECC does have a second lien position written down (78%), while CPTA has discounted its own debt in the same loan by (46%)…

The CPK example speaks to a wider phenomenon that’s always underway where BDC valuations are concerned: discrepancies both about what should be treated as a non accrual and fair value marks. However, the Covid-19 crisis has frequently accentuated the variations and over a much wider number of companies due to the greater degree of uncertainty. This makes taking any one valuation or accrual vs non accrual status too seriously until the credit markets settle down. That could take several quarters as the ratings groups are projecting credit troubles continuing at a heightened level through to 2021.

For our part, we have downgraded CPK from CCR 4 to CCR 5. (We tend to take the most conservative credit position). The company has been removed from the Weakest Links list of companies expected to default given that – as least in two cases – that has already happened. We still believe the chances of a bankruptcy filing are high given that full service restaurants will be challenged for some time and take-out cannot fully make up for business lost.

Update 6/2/2020: CSWC reported IQ 2020 results and placed CPK on non accrual but indicated on the conference call being impressed by management and multiple sources of income to mitigate Covid-19 impact.

ASP Chromaflo Intermediate Holdings: Downgraded To CCR 4

We don’t pretend to know what’s going on at ASP Chromaflo Intermediate Holdings, a chemicals company. However, we do have the latest valuation from the only BDC holder of the company’s traded 2024 second lien debt – Great Elm Corporation (GECC). At March 31, 2020 there was $12.1mn invested at cost, with a par value of $12.4mn and an FMV of $9.6mn. That’s a (20%) discount. However, the Advantage Data records on this syndicated loan indicate the market value has dropped since the end of the IQ 2020 and now the debt trades at 50 cents on the dollar.

We are downgrading the company from CCR 3 to CCR 4.

Aptim Corp: Valuation Drops

Great Elm Corporation (GECC) announced IQ 2020 results on May 11, 2020. This included an update on the valuation of Aptim Corp, which we’ve discussed before. GECC wrote down its position in the 2025 Term Loan by (58%). That’s in line with Main Street Capital’s (MAIN) own valuation of the same security. Currently, the discount is even greater at (65%).

Previously we’d rated the company as CCR 4, and added the debt to the Weakest Links list. We affirm both our earlier views following these latest disclosures, and suggest the final value of the 2025 debt – held by 4 BDCs overall at an aggregate cost of $30.9mn – might end up being nil. The other BDCs involved are non-listed FS Investment II and HMS Income, which is managed by MAIN.

California Pizza Kitchen: Seeks To Restructure Debt

When we last wrote about California Pizza Kitchen (“CPK”) in December of last year, we said the following about the company and the sector in which it operates: “We will say that we’ve been concerned about negative trends in the restaurant sector since late 2018. We’re not yet at the “apocalypse” phase attached to anything in the retail sector, but there are several secular trends …that even the best and the brightest restaurant chains are having trouble working through. When you’ve got debt to EBITDA levels of 7x or more – as is the case with CPK and many others – the room for maneuver before a restructuring becomes necessary is limited“. We rated CPK a Corporate Credit Rating of 3.

Of course, in the interim we have moved into an “apocalypse” phase for eateries. Not surprisingly, an already weakened and highly leveraged CPK is not faring well. According to the Wall Street Journal on April 23, 2020 , the company has hired restructuring firm Alvarez & Marsal Holdings LLC, along with Guggenheim Partners, to facilitate deal talks with its lender. On the other side the lenders have hired FTI Consulting Inc. and Gibson, Dunn & Crutcher LLP to represent them legally. Now we know – at least – that big fees are going to get paid out by the company…

The situation is very serious, with the two Term loans in which $48.2mn of BDC exposure is invested – one maturing in 2022 and the other in 2023 – are trading in the syndicated markets at discounts of (65%) and (85%) respectively. Not to beat about the bush, we project that a drastic restructuring or a Chapter 11 filing is imminent. We are downgrading CPK to a CCR 4 rating and adding them to our Weakest Link list of companies we expect to shortly move to non accrual.

For the 6 BDCs involved that will mean – if not already happening – an interruption of over $4mn of annual investment income and potential realized losses of ($30mn-$40mn). Unfortunately, the challenges facing eat-in restaurants are not going away any time soon and the delivery business cannot make up for the switch up in how customers feed themselves.

The biggest BDC exposure in dollar terms is that of Main Street Capital (MAIN), with $14mn in the first lien 2022 Term Loan. Capital Southwest (CSWC) and Monroe Capital (MRCC) are also holders of the 2022 loan. However, likely to take it most on the chin from a write-off standpoint are Capitala Finance (CPTA) with $4.9mn invested at cost and Great Elm Corporation (GECC) ($4.0mn) , which are both in the 2023 second lien debt. If past is prolog, the chances are high a complete write-off is in the cards for the 2023 Term Loan holders. (GECC also holds a position in the first lien). We expect some sort of debt for equity swap will be the ultimate resolution as CPK continues to have a viable – albeit shrunken business model. We’re getting ahead of ourselves, though, and will wait to hear how the dueling advisers hash out a plan for the restaurant chain.

Full House Resorts: Provides Business Update

What if you had a chain of casinos and nobody was allowed in ? You’d mothball them; stop building a new garage; temporarily let go of almost all your employees; cut senior manager salaries and look for virtual business opportunities. Anyway, that’s what Full House Resorts Inc. has been doing and has managed to reduce its monthly “burn” rate to $3mn and still has $21.4mn in cash to (slowly) spend. This was all laid out in a April 17, 2020 press release.

Even the lenders to the company seem to be patient: waivers of covenant defaults are being negotiated, both recent and prospective. That seems to be good news for the only BDC with exposure: Great Elm Corporation (GECC). The total cost invested in the Senior Notes of the company, due in 2024, is $9.7mn, which was valued at par at 12/31/2019.

We added Full House to the Underperformers list a few weeks ago just on the basis of the industry and the knowledge that every location would be closed. We began with a CCR 3 rating. Given the interruption of all business activity we’d have expected to downgrade this to a CCR 4 and ultimately to a CCR 5, i.e. non-performing. However, we’re leaving our rating unchanged based on this update, and we assume what cash the company does have is still servicing debt. With the casinos likely to re-open and virtual gambling on the cards (we couldn’t resist), the company may yet revert to performing status. Ironically, we’re even going to mark the credit trend as “Up” , something we’ve had no occasion to do in weeks, because of the apparent agreement with the casino chain’s lenders.

We’ll circle back when we hear more.

APTIM Corp: Lawsuits Filed Against Company-UPDATED

On February 13, 2020, we heard that APTIM Corp – an engineering services – company was “slapped” with two new lawsuits. The company is accused of not paying for the work of sub-contractors related to the clean-up after two recent hurricane disasters. The BDC Credit Reporter does not typically write an article every time a BDC portfolio company is sued because we would be posting constantly. However, this is a good opportunity to review our concerns about APTIM and its possible impact on the 5 BDCs involved. The public funds are Main Street Capital (MAIN) and Great Elm Corporation (GECC) and non-listed FS Investment III and IV and HMS Income Fund, which is managed by a MAIN subsidiary. Total exposure – all in the 6/1/2025 Term Loan – is $30.8mn at cost. The latest valuation was at September 30, 2019, and the FMV was just under $25mn. Income involved is approximately $2.7mn annually.

We’ve noticed that the value of the 2025 Term Loan has been declining. According to Advantage Data’s records, the debt was most recently discounted by (43%), suggesting the BDC values of last September will shortly be adjusted downward when year end 2019 results are published. Moreover, it’s worth remembering that the debt has been rated Caa2 by Moody’s since mid-2018.

At this stage we don’t have enough information to predict the company might file for Chapter 11 or restructure or default, but given the above context we would hardly be surprised. We will circle back – if need be – after MAIN reports on February 28, 2020. (GECC does not have an earnings release date yet).

UPDATE: (February 20, 2020) We’ve since heard S&P Global Ratings affirmed its CCC+ rating on the company, but revised its outlook to “Negative” from “Stable”. Seems to confirm that we were right to flag APTIM at this time.

UPDATE: New CEO appointed.

The 2025 Term Loan currently discounted (52%).