"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

Bain Capital Specialty: IIIQ 2021 Credit Status

With the IVQ 2021 BDC earnings season right round the corner, the BDC Credit Reporter is updating the credit status of as many public BDCs as possible, using IIIQ 2021 data and any subsequent developments we are aware of.

Portfolio Metrics

In the case of Bain Capital Specialty Finance (BCSF), total investment assets at cost amount to $2.380bn, and the fair market value to $2.357bn, a slight discount of (1%). The BDC portfolio at fair value has shrunk (5%) in the first 9 months of 2021.

Investment Rating

There are 105 portfolio companies. The BDC rates the credit status of its portfolio quarterly. As of September 30, 2021 the value of under-performing assets was $244mn, or 10.3% of the entire portfolio. Both the amount and the percentage are largely unchanged from the quarter before.

Non Accruals

BCSF has no loans on non accrual, although two portfolio companies have some debt which is non -performing, as we’ll discuss shortly.

Underperformers

We have identified 7 underperforming portfolio companies, with an aggregate value of $181mn. However, 2 are not material and non income producing. These are NPC International (fast food), which we wrapped up in an article on January 14, 2021 and East BCC Coinvest II (capital equipment).

That leaves 5 companies, of which 2 are rated CCR 3. First there is GSP Holdings, LLC. The company has been underperforming since IIQ 2020 and its first lien debt held by BCSF is discounted up to (21%), but was at a (46%) at worst, suggesting some improvement recently. We have found very little public info on the company. The latest value is $34.1mn.

We also don’t know much about TLC Purchaser and TLC Holdco, with a value – mostly in debt – of $42mn. Of late, the valuation has been modestly trending down with the equity held discounted (57%) and the debt up to (15%). TLC has been underperforming since 2020.

Credit Focus

Of greater concern are Ansira Holdings, Direct Travel and Chase Industries, all of which we rate CCR 4, where the likelihood of an ultimate realized loss is greater than full recovery. We discussed Ansira, which has multiple BDC lenders, back in November 2021. One BDC has its unitranche loan exposure marked as non accruing but BCSF has its loan positions as performing. Total exposure by BCSF is $43.6mn, with much of the income already booked as pay-in-kind. Should the marketing services company default, BCSF has $3.7mn of annual investment income at risk of interruption.

Direct Travel is in a difficult business right now and has already been restructured earlier in the pandemic. Another BDC lender – TCG BDC – carries its exposure to the company’s 10/1/2023 loan as non-performing but BCSF’s 10/2/2023 term loan is still counted as performing, but discounted in value by up to (20%). Furthermore, all the income being booked is in PIK form…Some $6.5mn of annual interest income is in play here – 3.3% of the BDC’s total investment income, so what happens at Direct Travel will materially affect the BDC.

Finally, there’s Chase Industries. Again this specialty door manufacturer has multiple BDC lenders. Also again, BCSF’s income is at least partly being booked in PIK form. BCSF’s exposure is in the first lien debt, which is discounted only (17%). However, Goldman Sachs BDC is in second lien debt, which is non performing (63%). This is cause for concern for BCSF, and the main reason why we’ve applied a CCR 4 rating. The BDC’s debt has a value of $11.4mn and $0.900mn of annual interest income at risk.

Follow Up

We’ll be focused principally on Ansira, Direct Travel snd Chase Industries when BCSF publishes its IVQ 2021 results on February 23, 2022. Clearly, bad news is possible that may cause both further unrealized losses and material loss of interest income. On the other hand, with travel recovering; housing on an uptick and business conditions favorable all three companies financial performance could improve, boosting asset values and leaving income untouched. We’re also reassured that the $114mn of exposure at FMV is almost all in a first lien position. As they say, this could go either way in the short run where valuation and income is concerned but the ultimate outcome promises to be favorable for BCSF.

Ansira Holdings/Ansira Partners: IIIQ 2021 Update

We understand very little about what’s happening at Ansira Holdings (aka Ansira Partners) except that the marketing services company seems to be underperforming. Most everything we’ve divined is from the valuations of 6 BDCs with exposure of $106mn at cost – all in a unitranche loan maturing in 2024, and discounted (18%) at fair value. As of September 2021, Crescent Capital (CCAP) is carrying the debt as non performing and has been since IQ 2020. Just over $0.6mn of annual investment income is being forgone by CCAP.

Confusingly, all the other BDCs – using a similar valuation discount – count their unitranche loan to Ansira as performing. Pricing on the debt is LIBOR + 6.50% with a 1.00% floor, or 7.50% in total. The valuation has been stable since the unitranche loan was minted in IIQ 2020.

It’s possible that CCAP is being more conservative than the other BDCs, or there are undisclosed “last out” arrangements involved, none of which show up in the BDC’s footnotes. Unfortunately, none of the public BDCs with exposure have provided any color on this credit so investors will have to contend with uncertainty.

We rate Ansira CCR 5, even if only one BDC has the debt as non performing. Given that we hear of new developments at the business and the valuation is stable, Ansira is not Trending. We’ll just wait and see what we hear from its lenders or from the public record.

Direct Travel Inc.: IQ 2021 Update

As you might expect a company with a name like “Direct Travel Inc.” – “a leading provider of corporate travel management services” – has been impacted by the pandemic. Apparently – according to a brief mention on a BDC’s conference call – the company was restructured in October 2020 with term loans due 12/1/2021 being extended to 10/1/2023, and re-priced to allow most interest to be paid in PIK. Furthermore, lenders took a majority percentage of the company’s equity as well. At March 31, 2021, total BDC exposure was $105.4mn, and the FMV $83.2. In this second quarter after the restructuring the valuations were unchanged from IVQ 2020.

There are two BDCs involved with Direct Travel: Bain Capital Specialty Finance (BCSF) and TCG BDC (CGBD). The former has two-thirds of the exposure mentioned above, and the latter the rest. Of the pre-restructuring debt, CGBD is more “conservative” in its valuation at (20%), while BCSF applies a (30%) haircut. More importantly, CGBD carries its legacy debt as non performing while BCSF does not.

Our policy in these situations is to rate the company with the most “conservative” approach – or CCR 5 in this case, which has been the case since IIQ 2020. (As recently as IVQ 2019, the company was carried as “performing”).

How is Direct Travel Inc. doing under its new owners and with a new capital structure that includes new debt ? From the public record, we can’t really tell. Common sense – and the number of people we’ve seen rubbed elbows on planes with recently – would suggest that business should be improving. If so, the BDCs involved might well benefit above and beyond getting repaid on their loans if their equity gets “in the money”. However, we’re getting ahead of ourselves and will need to see what future valuations might look like before any upgrade is possible.

Ansira Holdings: IQ 2021 Update

We don’t fully understand what’s happening at marketing company Ansira Holdings, although two public BDCs – Bain Capital Specialty Finance (BCSF) and New Mountain Finance (NMFC) – have first lien debt outstanding, along with one non-traded player – Audax Credit BDC. (Total BDC exposure is $86.4mn – some in delayed draw debt and some in Revolver and some in unitranche). We do know, though, that some BDCs started writing down their debt by more than (10%) in IVQ 2019 and that rose to as much as (28%) in IQ 2020. At that point, the maturity of the debt was extended from June 2022 to June 2024, presumably related to the impact of the pandemic.

As of the IQ 2021, the debt is discounted just over a fifth by the BDCs involved (except for BCSF’s Revolver, which is valued at par – which may have different collateral or repayment rights). The BDC Credit Reporter has rated the company CCR 4 out of an abundance of caution and because we know so little about a company which has been underperforming for 6 quarters. (Neither NMFC or BCSF have provided any update on their conference calls). Total investment income involved is $6.5mn, with BCSF with the biggest share, followed by NMFC.

Ansira Holdings has a moneyed sponsor – Advent International – and market conditions must be improving. Also, the debt valuations have been stable since the maturity extension. So it’s possible we’ll be in a position to upgrade the credit rating in future periods. However, we cannot discern any specific catalyst for a change in the short term , so we’re not adding Ansira to the Trending list, and will just continue to track the privately-owned company’s progress as best we can.

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.