We last wrote about Imagine ! Print Solutions Inc. (recently renamed The Imagine Group) back in early 2020, when some of its debt was on non accrual. We wrote at the time “Clearly the company is highly likely to file for Chapter 11 or restructure shortly“. We were right, except about the time frame, but now the reckoning has occurred. We now know from Moody’s, which is bowing out as a rating group, that :
“On 22 January 2020 [we imagine Moody’s meant 2021] , Imagine completed a restructuring whereby first lien and second lien debt holders were either converted to equity or eliminated. Moody’s views these transactions as distressed exchanges and events of default as they reflect a failure to meet the original promise under the debt agreements and results in significant losses to lenders“.
The company will now be owned “by a combination of its former lenders and funds managed by Cerberus Capital Management, L.P. (“Cerberus”), the Goldman Sachs Merchant Banking Division and Arbour Lane Capital Management, LP.“.
Where this leaves the only BDC with remaining exposure to the company – Oxford Square (OXSQ) – is unclear. As of September 30, 2020, OXSQ had $14mn invested at cost in $15mn of second lien 2023 Term debt, with a FMV of under $0.2mn. The debt has been non-performing and depriving OXSQ of $1.35mn in annual investment Income since the IVQ of 2019. Along the way, non-traded Audax Credit BDC and Capital Southwest (CSWC) – through its joint venture – have sold off their positions, which amounted to $1.5mn and $3mn respectively at cost, leaving OXSQ the only BDC standing.
We don’t know if OXSQ is somehow involved with the new ownership or will just be writing off its entire exposure as a result of this transaction. Either way, though, the BDC seems almost certain to record a significant loss from this investment. Technically this was not a Chapter 11 filing but is being treated “as a distressed exchange and thus a default” by Moody’s, and will be added to the BDC Credit Reporter’s list of companies that went bankrupt. Given that OXSQ has essentially already written off the investment, we expect no impact on either book value or income going forwards. Tentatively we have re-rated Imagine from CCR 5 to CCR 6, which indicates sold or no longer held.
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.
On April 27, 2020 Global Tel Link Corp was downgraded to CCR 3 from CCR 2 on valuation concerns.
PRELIMINARY: On April 25, 2020, the BDC Credit Reporter downgraded Verifone Inc. (dba Verifone Systems) to a Corporate Credit Rating of 3, based on a recent downgrade by Moody’s and market conditions.
A few days ago, when Oxford Square (OXSQ) was holding its conference call, an analyst noted that the number of non accrual companies on its books had increased from 1 to 2. When asked who the new non-performer was, management demurred, pointing to the soon-to-be-published 10-K for the answer. Now that filing has been made, we now know the new non-accruing company was Imagine! Print Solutions (aka The Imagine Group). The BDC has invested $14.9mn in the second lien debt – which has been on our underperformers list since IIQ 2018 and was rated CCR 4 most recently, as OXSQ discounted the position by (51%) as of the IIIQ 2019. In light of what we’ve learned, the company credit rating has been dropped to a 5 our our 5 point scale.
Now the 2023 Term Loan has been placed on non accrual, and the discount increased to (85%). OXSQ may have been reticent to provide information but we know Moody’s downgraded the already speculative grade company to Caa3 from Caa1 in December 2019. This extract from Moody’s report should provide a sense of what is going wrong: “The company’s revenue and profitability significantly declined in 2019, driven by the loss of a material customer and significant weakness in its Midnight Oil subsidiary. This resulted in very high financial leverage on a debt/EBITDA basis of 9.1x for the twelve months ending October 2, 2019, up from 6.1x at the end of fiscal year 2018“.
Clearly the company is highly likely to file for Chapter 11 or restructure shortly. Chances are the second lien will not survive any remaking of the company’s capital structure. OXSQ will be losing ($1.6mn) of annual investment income permanently in the most likely scenario. We should note that non-traded Audax Credit BDC has a small $1.4mn position in the company’s 2022 first lien Term Loan, discounted only (15%) at 9/30/2019. However, judging by the parlous condition of the borrower and looking at Advantage Data’s Middle Market Loans pricing module at time of writing, the current discount may be (60%).
It’s no wonder that OXSQ’s management may not have wanted to engage in any discussion of Imagine, as the final outcome for the BDC and – to a lesser degree- for Audax , seems pretty grim.