"Bain Capital Specialty Finance is a business development company utilizing the significant experience and expertise of Bain Capital Credit’s Private Credit Group, which has over 20 dedicated professionals around the world who exclusively focus on middle-market investments. This scale enables the team to remain focused on sourcing and analyzing a large opportunity set, while remaining highly selective in approving credits. Our approach facilitates detailed focus on structuring, monitoring, and managing each of its current and prospective portfolio company investments. We will also draw on the broader capabilities within Bain Capital Credit's platform of investment professionals around the world".

Posts for Bain Capital Specialty Finance

Petrochoice Holdings Inc.: Downgraded By S&P

The BDC Credit Reporter really tries to be comprehensive and catch wind of credit troubles brewing at every BDC-financed portfolio company, but we’re not perfect. Here’s a case in point. We missed PetroChoice Holdings Inc. : ” one of the largest distributors of lubricants and lubricant solutions in the United States“. This is a business that was highly leveraged before Covid-19 and is being impacted by lower demand for lubricants because we’re all driving less.

Back in the IQ 2020 – we can now see with the benefit of hindsight – the company began to underperform. The ratings groups were fast to act with Moody’s downgrading the company from B3 to Caa1. The first and second lien debt – more on that in a minute – also got downgraded.

Fast forward to this week and we hear PetroChoice was also downgraded by S&P Global Ratings to CCC+ from B- on concerns about the company’s liquidity in the face of a “challenging” economic environment. Ratings on the company’s borrowings were cut as well, with the first-lien credit facility dropped to B-, from B, and the second-lien loan to CCC-, from CCC. Both ratings groups are worried about debt coming due in 2022 and the currently low odds that the company will be able to refinance the obligations.

This is worrying for 5 BDCs with first and second lien debt exposure. The total amount outstanding at cost is $102mn – a Major borrower by our standards. There’s more than $9mn of investment income at risk of interruption and/or loss if PetroChoice defaults. You might think the company has plenty of time to deal with its challenges but S&P warned forebodingly that by mid-2021 “total liquidity sources to fall below $10 million.” That’s too little to run a business of this size so we expect to hearing more about PetroChoice in the weeks ahead.

The BDC with the biggest exposure is FS KKR Capital (FSK) with $65mn at cost – all in the more vulnerable second lien debt, and priced at LIBOR + 875 bps, plus a 1.0% floor. The income involved is equal to 1.0% of investment income and 2% of Net Investment Income at the giant BDC. FSK has only discounted its position by -11% – which represents about 2% of its net worth. Of course, if things go awry at PetroChoice both income and net assets could be materially impacted.

Also at risk of taking a knock if PetroChoice should stumble is Bain Capital Specialty Finance (BCSF) with just over $16mn invested, but all in the senior debt, leaving both less income and capital at risk of ultimate loss. Golub Capital (GBDC) has a small position and two non-traded BDCs have moderate sized exposure..

We are rating PetroChoice CCR 4 because the odds of a loss at this stage are higher than of full recovery. We are also placing the company on our Alerts list – a new feature of the BDC Credit Reporter coming shortly and which you’ll find in the Data Room section showing which troubled companies credit situation is reaching some sort of resolution in the short term. There are so many underperforming companies out there we need a way to point out which ones might be affecting BDC results – for good or ill – in the coming quarter or two.

NPC International Inc: Company Sold

The long and winding road for NPC International Inc. appears to be reaching a final resolution. The franchisee of hundreds of fast food locations, which filed for bankruptcy back on July 1, 2020 has inked a $801mn deal to sell its assets to two different buyers. The company is likely to exit bankruptcy shortly. We won’t get into all the details or the history of the company’s failure, but refer readers to our five earlier articles.

For the only BDC with exposure –Bain Capital Specialty Finance (BCSF) – this will mean a final tallying up. As of June 2020, the BDC had $14.5mn showing in first and second lien debt to the company, which had been on non-accrual since IVQ 2019. As of September 2020, only the first lien debt shows up in BCSF’s investment list, suggesting a realized loss of ($9.2mn) has already been booked. We can’t be 100% certain as the BDC does not name names when these losses occur.

BCSF had $5.3mn at cost and $4.3mn at FMV left outstanding – all in first lien debt – as of September 2020. We believe – in the absence of harder numbers – that’s a pretty good picture of what to expect going forward in terms of proceeds to be received, all of which may show up in the IQ 2021 results. If we’re right, BCSF will have lost two-thirds of the maximum funds advanced to NPC, a relationship that began IQ 2017.

This transaction is close enough to its resolution for the BDC Credit Reporter to mention – again – that the restaurant business is a very difficult one for lenders. We searched our own archives with the word “restaurant” and were reminded of the large number of casualties we’ve seen over the years, even before Covid-19 raised the stakes further. The sector should probably be added to oil & gas exploration; energy services and brick and mortar retail as segments that BDCs – and their shareholders – should treat with extreme caution.

We undertook a search of Advantage Data’s database of all BDC investments and found 59 different restaurant-related companies listed. The BDC Credit Reporter’s own database shows 14 different restaurant companies underperforming. That’s a very rough way to assess such things but a quarter of all restaurant names in some sort of trouble seems high to us. Food for thought. Pun intended.

NPC International Inc : Bankruptcy Court Dispute

The Wall Street Journal and other publications are reporting that NPC International Inc. – the huge Pizza Hut franchisee which is in Chapter 11 – is in dispute with the franchisor in bankruptcy court. In a nutshell, Pizza Hut wants more say in who the potential buyer of the company’s assets might be and how they behave. The franchisor wants to ensure that the group who will be in charge of 1,200 restaurant locations bearing its name will follow all the rules involved with being a franchisee.

From the standpoint of the only BDC involved with NPC –Bain Capital Specialty Finance (BCSF) – this is potentially Bad News. The longer the bankruptcy endures, the more expenses pile up. Furthermore, the more Pizza Hut inserts itself into the sales process the greater the risk of the final price being received (currently pegged at $325mn) for the business being lower than originally hoped for.

The BDC Credit Reporter has the company rated CCR 5 and expects most of the $14.4mn invested in first lien and second lien debt to be written off. As of June 30, 2020, the FMV is only $3.3mn. If this drama continues, BCSF can expect to recover even less than that and a resolution may get pushed further out.

A-L Parent: Downgraded To CCR 4

After a review of the IIQ 2020 BDC results, the BDC Credit Reporter decided to downgrade Learfield Communications, LLC (owned by A-L Parent, LLC) to CCR 4 from CCR 3. We noted that the two BDCs holding the company’s second lien debt sharply discounted their positions as of June 30, 2020. Furthermore, on May 20, 2020, Moody’s downgraded the company to Caa1 and the second lien debt – the only BDC exposure – to Caa3. We are mostly concerned that the media company which depends on college sports broadcasting is said to have very weak liquidity. Furthermore, leverage was said to be very high at year-end 2019 (10x !) and is likely only to have gotten worse. As a result, we are also adding the company to the Weakest Links list.

Apollo Investment (AINV) has $5.5mn invested at cost and Bain Capital Specialty Finance (BCSF) $4.0mn and total investment income at risk is nearly $0.8mn. For neither BDC is the amount at risk highly material to future results. However, given the second lien status and the long dry spell ahead for college sports an eventual complete write-off is a distinct possibility.

We’ll be keeping track of developments at the company in the public record and next time the BDCs involved report, but there’s a chance a bankruptcy or restructuring may have happened before then. Learfield is a clear Second Wave credit casualty. Admittedly, Moody’s had downgraded the company previously in 2019 and at the end of the year the BDCs involved had discounted their debt by (10%), causing us to add the name to the underperformers list. However, the interruption in business brought on by Covid-19 has accelerated the company’s troubles. Of course, all that leverage piled up before the crisis happened didn’t help…

NPC International: Files Chapter 11

As had been signalled by the media a day before NPC International filed for Chapter 11 on July 1, 2020. The fast food franchisee is armed with a Restructuring Support Agreement (“RSA”) agreed with most of its creditors and the goal of substantially reducing its debt load. The company hopes to come through the bankruptcy process with a new balance sheet and stronger prospects.

This is a major bankruptcy in terms of size in the fast food sector but relatively minor from a BDC perspective. Only $14.5mn is invested at cost in NPC by one BDC: Bain Capital Specialty Finance (BCSF). The BDC is both a first lien and second lien lender, according to Advantage Data records. We get the impression the $9.2mn in second lien debt will be written off. BCSF has already written down that debt by almost (100%) as of March 31, 2020. The first lien debt may get fully or partly converted to equity and the BDC might be asked to contribute to DIP or post-bankruptcy financing. The amounts, though, should not be material for such a huge BDC. Even at the end of the first quarter the debt was already on non accrual (and had been since the IVQ 2019) and the FMV was only $2.7mn.

What’s notable is that NPC International – which we’ve written about multiple times before – is the first BDC-financed company bankruptcy of July and yet another setback in the restaurant sector. This is a First Wave credit: a company already in deep trouble (non performing) months before Covid-19 delivered the coup de grace. Nor is there any guarantee that the company will not be back here in Chapter 11 (or Chapter 7) in the near future as industry conditions continue to be difficult and constantly changing.

Electronics For Imaging: Downgraded By Moody’s

According to S&P Global Market Intelligence Moody’s has downgraded Electronics for Imaging’s corporate credit rating to Caa1, from B3, and changed the outlook to negative from stable. The ratings group “expects the company’s adjusted leverage and liquidity will fall short of forecasts through 2022 as the company’s revenue recovers from an expected significant decline in 2020“. Thankfully, liquidity is “adequate” for the time being, but the business is facing economic headwinds, a not uncommon challenge going forward. BTW, Electronics for Imaging provides digital imaging and print management solutions for commercial and enterprise printing.

First lien debt has been downgraded to B3, from B2 and second lien to Caa3, from Caa2. Both loans are trading at wide discounts to par. Five BDC lenders – with an aggregate of $95mn at cost – are invested in both, so it’s worth noting. The public BDCs involved are (in order of investment size) FS-KKR Capital (FSK); FS KKR Capital II (FSKR); Bain Capital Specialty Finance (BCSF) and Garrison Capital (GARS). Non-listed GSO-Blackstone also has a big position in the first lien debt.

We first placed the company on the underperformers list in the IQ 2020, when the debt was up to (17%). [Each BDC has very different values]. Our initial rating was CCR 3. However, this latest development is causing us to downgrade the company further to CCR 4. Given the dollars involved, there’s a lot of investment income in play: nearly $6.5mn. Thankfully, we’re not placing the company on our Weakest Links register. Yet.

Still, of the four dozen companies we’ve dealt with this week in the BDC Credit Reporter, this is the largest in terms of FMV: $84.1mn so bears watching closely. This seems to be an example of a business that we would characterize as being part of the “second wave” of troubled credits: performing well enough before Covid-19 wreaked havoc on its growth prospects. The company undertook a major acquisition last year. Even though the synergies promised from that transaction have largely been realized that has not been enough to keep the company’s prior B3 rating.

Forming Machining Industries: Downgraded

On June 18, 2020 Moody’s downgraded manufacturer of complex assemblies for commercial, military, and business aircraft Forming Machining Industries (whose dba is Atlas Group) to Caa1 from Caa2. This company is heavily involved in the aerospace industry and with Boeing’s ill-fated 737 MAX aircraft. Covid-19 has not helped the situation and liquidity is weak, forcing the company to rely on drawing on its Revolver to make up for break-even or negative cash flow. As you’d expect, leverage is very high as well.

There is one BDC with exposure to the company’s first lien and second lien debt: Bain Capital Specialty Finance (BCSF). Total exposure is $23.1mn at cost and was added to the underperformers list when the BDC discounted the debt by a fifth in the IQ 2020. We calculate that about ($1.25mn) of annual investment income is at risk for BCSF. Our initial rating was a CCR 3, but now we’re downgrading the company to a CCR 4. There does not seem any immediate threat of default so we’re leaving the company off our Weakest Links list for the moment, although the backstory does not seem promising.

This is just one of 142 companies added to the underperformers list (now at 583 companies) in 2020, mostly due to the impact of Covid-19. Of those only 19 so far have slipped two investment ratings down to CCR 4. This is an example of a potential Second Wave credit default candidate – a company that was performing as anticipated before the impact of the virus on its business environment was felt, except for the troubles with the 737 MAX.

We will circle back when new information comes out. We’ve heard today (June 19) that a new CEO has joined the troubled company, so we expect some sort of turnaround effort is underway.

Calceus Acquisition: Added To CreditWatch By Ratings Groups

Till recently, Calceus Acquisition (aka Cole Haan) was that rarity: a retailer performing well and closing in on an IPO. Now, with Covid-19, the IPO is off and the ratings groups are worrying about declining financial performance as stores are closed and debt to EBITDA shoots up. Moody’s projects EBITDA to drop as much as (40%-60%)  in “FYE May 2020 from the LTM period ended November 30, 2019”. EBITA coverage of interest due could drop to 1.1x. Both Moody’s and S&P have changed the company’s outlook to negative. Still, Moody’s has affirmed the company’s B1 “corporate family rating”. Nonetheless, this is still a moving target given the economic uncertainty.

There is only one BDC with exposure to Cole Haan: Bain Capital Specialty Finance (BCSF), which holds $7mn of the company’s 2025 Term Loan and which was valued at par at year end 2019 before this brouhaha started. Now the debt is trading – according to Advantage Data – at 88 cents on the dollar. Given that and the downgrades and the obvious stresses on the company, we’ve added Calceus Acquisition to the Under Performers list with an initial rating of CCR 3. That means we’re still more hopeful than not no ultimate loss will occur. This may change in the days ahead. A lot can happen in a few weeks when little or no income is coming in. Ask…everyone.

NPC International: In Forbearance Agreement With Lenders

This has been brewing for a long time (we’ve been writing about the company since June 2019) but NPC International has failed to make debt interest payments on its first and second lien debt; gone into default and been – temporarily – reprieved in the form of a “forbearance agreement” from its lenders. Furthermore, earlier in 2020, NPC received a new $35 million loan to improve liquidity. “The terms of the super-priority loan, which was provided by existing lenders, prevent the company from making payments on the second-lien term loan, the people said“.

As you’d expect Moody’s and S&P were not happy about what has happened and called a non-payment payment of interest what it is – even if the lenders chose to forebear : a default and sharply downgraded the company.

All the above comes from Bloomberg, which also reports that management and its PE sponsor are considering all options (who doesn’t ?); including a Chapter 11 filing. That would allow the company to push back against lease contracts, which would make sense.

For months, we’ve had NPC rated CCR 4 and placed on our list of companies that we expect will file bankruptcy or drastically restructure in 2020. Given the depths of the company’s troubles – very high debt; liquidity crunch; declining industry sector – there’s an aura of inevitability about this story.

For the only BDC with material exposure – Bain Capital or BCSF – that means the likely wipe-out of its second lien debt, which is currently trading at 5 cents on the dollar. BCSF also holds the first lien debt, which is trading at 48 cents on the dollar. If those discounts hold, BCSF will be taking a realized loss of ($11.5mn), out of the $14.2mn committed. Unfortunately, as of September 2019, the BDC had only reserved ($8.3mn), so there’s nearly another ($4mn) to go. Also, $1.2mn of investment income will be suspended, and most of that is unlikely to be coming back post-conclusion of any restructuring. For a huge BDC like BCSF not a major blow, but hardly immaterial either.

The collapse of NPC has happened over a relatively short period, according to Advantage Data records. BCSF signed up in the IQ of 2017. Until the IIIQ 2018, all the debt was carried at or above par. Since the IVQ 2018, though, every quarter has brought a further devaluation. We added the company to the under performers list when BCSF devalued some of its debt greater than (10%) in the IQ 2019, and has been CCR 4 – our Worry List – since the IIQ 2019. Our latest update on these pages was in August 2019 and by then the die was almost cast. In a more general sense, this chronology supports our view that we should start paying attention whenever a company’s previously stable valuation starts to erode. That may provide some false negatives, but also provide a little more lead time about credits going awry. By the time the actual default occurs – as in this case – most of the damage is done.

Medical Depot Holdings: Raises New Equity, Restructures Debt

Last time we wrote about Medical Depot Holdings, also known as Drive DeVilbiss, we concluded in this manner: “It’s hard to envisage a scenario where some sort of loss does not occur given the amount of debt involved, but we’ll have to wait and see. We have a Corporate Credit Rating of 4. That’s our Worry List”.

On September 20, 2019 the company announced by press release that it “had agreed in principle” to receive $35mn of additional capital “together with a reduction in cash debt service obligations from its current
lenders
“. This was quickly picked up and repeated in different forms by financial and trade publications as evidence of a successful “rescue operation”.

However, from the BDC Credit Reporter’s standpoint, the company’s announcement raises more questions than answers. There’s the “in principle” part; the source and form of the $35mn and what is meant by “reduction in cash debt service“. Also not clear is what the lenders have received in return – besides the heartfelt thanks of the company and its owners. So we’re marking this development as trending positive, but not changing our Credit Rating till the many blanks get filled in. When that might occur – and from what source- remains unclear.

We have reported that there are two BDCs with $32.4mn of exposure at cost: Bain Capital Specialty Finance (BCSF) and Business Development Corporation of America (BDCA). We may learn from them what “reduction in cash debt service” means. We’re guessing: a lower interest rate on the debt (but whose ?) and – potentially – lower income.

Medical Depot Holdings: Downgraded By Moody’s, BDC Credit Reporter.

On June 19, 2019 Moody’sdowngraded Medical Depot Holdings, Inc.’s (d/b/a Drive DeVilbiss – “Drive”) Corporate Family Rating to Caa2 from Caa1. Moody’s also downgraded the company’s Probability of Default Rating to Caa2-PD from Caa1-PD, its first lien credit facilities to Caa2 from Caa1 and its second lien term loan to Ca from Caa3. The outlook is stable“.

The ratings group believes the capital structure of the medical equipment manufacturer is “unsustainable“. Added: “Adjusted debt/EBITDA (based on management’s adjusted EBITDA) exceeded 12 times for the twelve months ended March 31, 2019. At the same time, the company’s liquidity has weakened given sustained negative free cash flow and increased utilization of its revolving credit facility. This is due to the cash costs associated with restructuring activities and weaker operating performance“.

All the above is bad news for the two BDCs with exposure to the company: Bain Capital Specialty Finance (BCSF) and Business Development Corporation of America (BDCA). Both are lenders in the first lien 2023 debt, with exposure of $32.4mn and $2.7mn of income at risk of interruption. At June 20219, both lenders had sharply discounted their loans (23%) and (27%). Yet, since then the market value has dropped even further: to a (30%) discount, as we write this on August 31, 2019.

It’s hard to envisage a scenario where some sort of loss does not occur given the amount of debt involved, but we’ll have to wait and see. We have a Corporate Credit Rating of 4. That’s our Worry List.

NPC International: Closer To Default

According to news reports, closely held NPC International – a major Pizza Hut franchisee – is getting ever closer to breaching a key financial covenant after reporting IIQ 2019 results.

“Total debt rose to 6.9 times a measure of earnings, just below the threshold that would trigger a default under the company’s revolver, according to a person with knowledge of the matter. The ratio stood at around 6.3 times in the first quarter”. 

The only BDC with exposure – both first lien and second lien – is Bain Capital Specialty Finance (BCSF). Total cost is $14.2mn. There’s $1.2mn of income at risk should NPC file for bankruptcy. We placed the company on the under-performing list from the first quarter of 2019, when the second lien debt was written down by (13%). The second quarter discount is (39%) and the current market price is discounted (57%). Judging by the challenges facing the industry; the trend of the valuation and the latest market price, chances of a further downgrade – currently CCR 4 – to CCR 5 (non accrual) is high.

NPC International: Trade Publication Article Describes Multiple Challenges

On June 13, 2019 Restaurant Business published an article summarizing many of the financial and operational challenges facing Wendy’s and Pizza Hut franchisee NPC International. Based on what we read, other research undertaken (including reading Moody’s recent downgrade of the Company and its debt) and after reviewing on Advantage Data the latest prices quoted for the first lien and second lien loans, the BDC Credit Reporter downgraded our outlook from CCR 3 to CCR 4 on our 5 point scale. There are two BDCs with exposure, almost all held by Bain Capital Specialty Finance (BCSF), with $14mn of loans in both first and second lien Term Loans. Read the Company File for our analysis of investment income at risk and the potential for realized and unrealized credit losses.