Posts for Corporate Capital Trust II

Frontier Communications: To Skip Interest Payments

On March 16, 2020 Bloomberg reported that troubled telecom giant Frontier Communications plans to skip making interest payments on some of its bonds, starting a 60 day countdown to a payment default. We’ve written nine times (!) about Frontier before, given the twists and turns of what promises to be “one of the biggest telecom reorganizations since Worldcom Inc. in 2002″.

None of that is surprising as news reports and the BDC Credit Reporter have been predicting a Chapter 11 filing and a massive re-organization for months, but does indicate the day of reckoning is coming ever closer. The bankruptcy – which we expected in the IVQ 2019 – looks likely to land in the IIQ 2020.

Since our last report a couple of the many BDCs that hold the company’s debt have reported IVQ results and their latest valuations on their Frontier positions. Oaktree Strategic Income (OCSI) and non-traded sister BDC Oaktree Strategic Income II hold the 6/15/2024 senior Term debt and – in the case of latter BDC – the 2026 Senior Note. All we can report – without comment because we don’t understand the capitalization of Frontier well enough to differ – is that the debt is still carried at a premium. Obviously, Oaktree – which must be familiar with whatever plans for a restructure are underway – believes that there will be no loss booked if and when the seemingly inevitable bankruptcy happens.

We’ve not yet heard from all the other BDCs that have a position in Frontier, most of whom are part of the FS Investments-KKR group. However, publicly traded FS KKR Capital (FSK) has reported its IVQ 2019 portfolio and we see that Frontier has dropped out since September 2019. No comment was made on the latest conference call, but we imagine management may have decided caution was the better part of valor and sold out its position. For all we know that may be true for its 4 sister non-listed BDCs. If that’s true, BDC exposure to this upcoming massive bankruptcy might be very small.

We’ll continue to track this company and expect to be discussing the Chapter 11 filing and its implications before long.

Foresight Energy: Files Chapter 11


In a not unexpected development, Foresight Energy filed for voluntary Chapter 11 on Tuesday March 10, 2020 after patching together an agreement amongst  an ad hoc group “holding more than 73% of the approximately $1.4 billion in claims under each of the Partnership’s first lien credit agreement and second lien notes”.  As part of the package a $100mn DIP facility and cash on hand will finance the business while in bankruptcy and a new $250mn debt facility repay the $100mn and the business going forward once an exit occurs from the protection of the bankruptcy court. Moreover, the company’s CEO will remain in place as lenders become owners in yet another debt for equity swap with an uncertain eventual income. (Foresight, after all,  “is a leading producer and marketer of thermal coal).

[FYI: Foresight is an affiliate of Murray Energy Corp. – another BDC portfolio company – the nation’s largest privately owned coal company, which itself filed for chapter 11 in October 2019 and which owns a stake in Foresight. The company has been in deep trouble for many months but blamed the coronavirus – clearly Covid-19 is not catch on as a term – for causing a global recession and triggering the bankruptcy. No mention of the leper-like unpopularity of its sole business activity: coal mining ]. 

From a BDC perspective, this is a relatively small size exposure at cost: $26.6mn and all in the company’s 2022 debt, which was discounted by just under (50%) at September 30, 2019 – the last quarter we have data for. Also, all the BDCs involved are non-traded: Business Development Corporation of America; FS Investment II and FS Investment III and CCT II. The last 3 BDCs are all controlled by KKR-FS Investments.  The debt was already on non accrual as of the IIIQ 2019, costing the BDC lenders just over ($2.0mn) a year of investment income.

Consider this just a placeholder article till we learn more about what role – if any – these BDC lenders are playing in the new Foresight. Whatever happens, though, some sort of loss in the short term is likely to be booked in the IQ or IIQ 2020. Longer term, skeptical observers have to wonder if coal businesses can survive in any corporate wrapper over the long term and whether any new monies the BDCs might invest to become owners is like grabbing that great table on the Titanic on the night of the iceberg.

Belk Inc.: Lay-Offs Announced

This is the BDC Credit Reporter’s first article about Belk Inc., the revered North Carolina department store company. However, we’ve had Belk on our radar – and on the under performers list – since IVQ 2016. No wonder: the business of Belk is retail and you know what’s happened to that…

Furthermore – and worrying – is the large amount of BDC capital invested in the debt and equity of the company. Mostly the former. At 9/30/2019 there were 6 BDCs involved with a combined $170mn invested at cost in various debt tranches and a sliver of common stock. The FMV was $128mn, and may go lower when IVQ 2019 results get published. According to Advantage Data, which keeps a list of all BDC funded companies by capital committed, Belk was the 103rd largest investment, out of 4,000 or more companies out there.

The BDC with the most to lose is FS-KKR Capital (FSK), which has committed $122mn, or 72% of the total – all in junior debt or equity. In the IIIQ 2019, there was an amendment made to the debt, and the second lien was split into two. One tranche is carried at par and the second – larger – amount was discounted in value even more than before. See the discussion on FSK’s Conference Call.

As far back as June of 2019 S&P was on the record with a downgrade to CCC, and the contention “a debt exchange that we would view as distressed could occur over the next 12 months”. For our part – not to be outdone – we long ago added the retailer to our list of companies that we expect to default or be restructured in 2020.

All the above is to explain why we’re writing about what might be – or might not – a minor development (except to the individuals involved) at the company: the lay-off of 80 personnel at headquarters. This seems to be yet another sign that all is not well in North Carolina and there may be other shoes to drop. We’ll be keeping close tabs – including those fourth quarter 2019 BDC valuations and any color coming from conference call.

Frontier Communications: March Bankruptcy Targeted

We’ve written eight prior articles about the publicly traded telecom + cable giant Frontier Communications, dating all the way back to March 2019. In fact, the company was added to our Under Performer list following IVQ 2018 results with a CCR 3 (Watch List) rating and downgraded further to a CCR 4 (Worry List) back on June 13, 2019. More recently, we predicted the company might file Chapter 11 in the IVQ 2019, but that did not happen. In our last report before this one, though, we said a Chapter 11 filing was likely in the IQ 2020. With the latest news reports, that seems likely to turn out to be true.

People with knowledge of the matter” – and there are dozens of lenders, lawyers, insiders and regulators involved at this stage so journalists have plenty of sources – indicate the company is aiming to file a consensual, pre-packaged bankruptcy by March. On the horizon are $356mn of interest payments due in mid-March. As a result, Frontier’s new CEO and his team have been busy – according to these reports – meeting creditors and seeking to craft out a restructuring plan that would be blessed by the court. (The company itself has no comment).

From a BDC perspective, the question is now more about how each lender class will fare in the restructuring, and what impact there will be on interest income – running about $5mn a year. As we’ve noted before, the debt held by the BDC lenders remains valued at a premium to par, both in their own valuations and when we look at the market price of their secured debt on Advantage Data. Will Frontier restructure itself, go in and come out of Chapter 11 in a hurry and have no impact on the value or income of the $67.5mn in debt held by 8 BDCs ? We have our doubts, but that’s the state of play at the moment. We shall soon learn if those valuations are appropriate.

Constellis Holdings: Restructuring Underway

We warned in an earlier article on October 9, 2019 that for Constellis Holdings “a day of reckoning is coming – and fast”. Judging from two major – and related – developments, the time is nigh. On January 3, 2020 the Wall Street Journal reported the troubled security company “is in talks with creditors on a deal to restructure its $1 billion of debt, according to people with knowledge of the discussions”. Darkly, unnamed sources, warned that if an out of court restructuring didn’t happen, a “pre-packaged” Chapter 11 filing was also on the table. (That’s all part of the negotiation process in these kind of deals as interested parties suddenly find their way to the phone to confide to journalists, who are themselves happy to be of service).

We also learned that the company failed to make a scheduled principal payment on December 31 and has received a short term forbearance from its lenders.

At the same time, Moody’s went and downgraded the company’s corporate rating to Ca, and re-rated several debt tranches outstanding. Most worrying of all is that Moody’s reports that the company’s finances suddenly deteriorated in the last quarter of the year, resulting in a “liquidity crunch”.

All of which suggests the Day of Reckoning is here for the 8 BDCs with nearly $107mn in debt exposure at various points in the company’s balance sheet. Just one month ago, one of those BDC lenders – OFS Capital or OFS – waxed relatively optimistic about the outlook for Constellis: ” I want to note that the company is current on its payments. And based on discussions with management, they have stressed that they have adequate liquidity to fund operations. The company has a growing backlog and expects sequential performance improvement. The sponsor has substantial amount of cash invested in this business, and we expect continued focus from the sponsor”.

We now know that at least some of those reassurances are no longer true. This is reflected in the public prices of the outstanding debt as provided by Advantage Data. The 2022 Term Loan is trading at a (57%) discount, versus (14%) at September 30, 2019. The second lien debt is worth only 10 cents on the dollar in the market, down from 25 cents. At 9/30/2019 FMV was still around $84mn, down ($23mn) from cost. Now, we wouldn’t be surprised to see further losses of ($30mn)-($40mn) more at FMV and ultimate Realized Losses – which could crystallize very soon – of nearly ($75mn). Add to that the loss of income and you’ve got the first bona fide major set-back for BDC lenders in 2020 , should there be no last minute rescue.

As we’ve noted before, the bulk of the exposure – and thus any damage – will be concentrated in the four non-listed FS-KKR BDCs – CCT II, FSIC II, FSIC III and FSIC IV. This was a borrower that the group jumped into under the KKR regime, bringing BDC exposure from modest ($12mn) to major, when they initiated exposure in the IVQ 2018. Maybe the far sighted folk at the jointly run asset manager have their eyes on becoming equity owners of Constellis, but we don’t think so as Advantage Data’s records show the debt was purchased at a cost very close to par, and before the current downturn in corporate fortunes.

We’ll probably be learning a lot about the company’s plans and the impact on its various lenders very soon and will be able to make a better assessment. At this point, though, with a potential loss range of $75mn-$100mn in a down case, this looks like a major credit reverse is on its way.

Acosta Holdco: Exits Bankruptcy

As anticipated in our article of December 17, 2019 Acosta Inc. (owned by Acosta Holdco) has exited bankruptcy after a very brief stay. As a trade article indicates, the company went into court protection on December 1 2019 and now – just 30 days later – is back to business as usual. This follows, as detailed in the company’s press release, a monumental shedding of debt and the input of new capital by the new owner group, which composed of the company’s former lenders: “Through the process, Acosta eliminated all of its approximately $3 billion of long-term debt, and its new investors have funded $325 million in new equity capital“.

What we don’t know is which of the 5 FS Investments – KKR non-listed and public BDCs still have exposure to Acosta. At September 30, 2019 the BDCs had exposure of $39.7mn at cost, written down on an unrealized basis by (58%) to (64%), and all in the same 2021 Term Loan. The debt was on non accrual. Acosta had been on the Under Performers list since 2017, but only moved to non accrual in the weeks before the bankruptcy.

We did hear from FS Investment -KKR Capital (FSK) that its $17.3mn invested in $19.0mn of the par debt, which was valued at just $6.0mn, was sold after the third quarter end and at a premium to the published September price. This is what was said on the most recent Conference Call by FSK: “We placed Acosta on nonaccrual due to ongoing restructuring negotiations during the quarter and chose to exit this position after the quarter end at a gain to our third quarter mark“. That implies the public BDC will be taking a ($10mn-$11mn) realized loss in the IVQ 2019. That’s roughly $1.0mn of investment income permanently lost, a material but not market moving set-back.

That leaves $22.6mn held by the other 4 sister BDCs which may have been sold off as well or are now converted into equity. If the BDCs stayed put, their exposure may actually have increased if participating in the new capital infusion. We’ll circle back after the IVQ 2019 results are published to get the lay of the land. It’s too early to undertake a post mortem on this BDC investment as exposure may go on for years. For FSK, though, which jumped in during the IVQ 2018 – according to Advantage Data records – and then jumped out at a loss a year later, this was not anything to write home about.

Frontier Communications: Debt Recovery In Bankruptcy Estimate

We’ve been tracking the credit decline of Frontier Communications through most of 2019, in multiple posts. The communications giant has been moved from a CCR 3 rating to CCR 4. In October, we added Frontier to our Bankruptcy Imminent list. In fact, there was no Chapter 11 or restructuring in the fourth quarter of 2019 and – given decent liquidity – there might not be any move in that direction in the IQ 2020 either. However, we’re confident enough to project that a bankruptcy in the IQ 2020 is highly likely.

BDC exposure to the company remains high with $67.5mn outstanding at cost, spread over 8 different BDCs, and three asset management organizations (FS Investment-KKR; Oaktree and Business Development Corporation of America). To date, though, all outstandings – despite ever worsening financing performance and multiple downgrades by both Moody’s and S&P – have been valued at or above par. That suggests debt investors are not worried about taking any kind of haircut should a Chapter 11 occur.

We analyzed the debt held by the BDCs against Frontier’s latest 10-Q. Broadly speaking, one third of the company’s huge debt load is secured and two-thirds unsecured. All BDC exposure is in first lien and second lien secured debt, which explains debt holder sanguinity. Valuations did not materially change at the top of the capital structure even after Frontier’s CEO left his post in early December, and replaced by a former DISH executive first brought in as a financial adviser and then appointed to the top job.

Nor were senior debt holders fazed – if prices reflect their views – by the never ending drop in the company’s stock price – now being de-listed from the NYSE and trading under $1.0. Since we wrote our first post, Frontier has lost two-thirds of its market capitalization.

We’re not so sure that Frontier’s senior lenders – including those 8 BDCs – should be so complacent about the value of their loans – which mature between 2024 and 2027, according to Advantage Data’s summary records. Our suspicions are confirmed by an article in Seeking Alpha on December 31, 2019 by Gary Chodes, which seeks to evaluate what the recovery rate on Frontier’s secured and unsecured debt might be if worst came to worst. The conclusion of interest to senior lenders: an estimated 24% recovery rate. That would imply over ($50mn) in ultimate Realized Losses for the BDC group, not including interest forgone. Readers can make up their own mind about the validity of Mr Chodes calculations. We don’t have a deep enough understanding of the company’s financial situation and business prospects to offer up a competing view. Instead, we offer up this warning on a take it or leave it basis. In any case, we expect to be returning to the Frontier Communications imbroglio repeatedly in 2020.

Acosta Holdco: To Exit Bankruptcy

Well, that was quick. According to the Wall Street Journal, Acosta Inc. – which is held by Acosta Holdco – is close to exiting bankruptcy just two weeks after filing. That was what expected back on September 30, 2019 months before the actual filing, when we first wrote about the credit problems of the marketing company.

Here’s what we wrote at the time, most every bit of which has turned out to be correct:

We expect the debt [of Acosta] to be shown as on non accrual in the upcoming IIIQ FS-KKR portfolios when earnings are released and to be written down to the market level, which should cut the fair market value by at least $6mn. We’re likely to see a restructuring done relatively quickly – if past experience is any guide – and a realized loss is likely to follow but we don’t have sufficient information to estimate the extent. This is almost certainly going to be another reverse for the FS-KKR organization. Curiously FSKFSIC III and FSIC IV appear to have jumped in relatively recently – perhaps ill advisedly seeking a bargain. Total BDC exposure jumped from $13.4mn at the end of 2017 to the $40.1mn current level. That’s a tripling of Acosta debt held.

In the IIIQ 2019 results, all 5 BDCs involved – with aggregate exposure of $39.7mn – placed the debt on non accrual and wrote it down between (58%) and (65%), according to Advantage Data records. (Interestingly, every BDC involved – all of whom are in the FS-KKR family and all of whom are in the same 2021 Term Loan – used a different discount percentage). What we don’t know yet is how the lenders will treat this negotiated debt-for-equity swap, but we expect to see realized losses booked if bankruptcy is exited by year end.

We know from another Wall Street Journal article – and other sources – the outline of the new structure. Remarkably, the company is having its entire debt written off and is receiving $250mn in new equity capital. That might just get Acosta off our under-performing company list, from a rating of CCR 5 (Non Performing) currently. Still, the BDCs involved will be losing roughly $2.0mn in annual investment income. They will be hoping Acosta is able to use this second chapter to become successful and earn back – one day – any realized losses incurred from this drastic restructuring. For the medium term, though, the BDC capital lent/invested in Acosta will be “dead money”.

Team Health Services: Bond Values Lower

The BDC Credit Reporter is a work-in-progress in that we are still loading all the several hundred under-performing BDC financed companies into our database and this website. We mention this to explain why we’re only getting round to waving warning flags about Team Health Inc. (aka Team Health Holdings), a company that has been under-performing since the IQ 2019; held by 6 different BDCs and which seems to be getting worse rather than better.

Back on August 12, 2019, as this trade article summarizes nicely, Moody’s downgraded the outlook for the company:

Team Health Holdings Inc.’s ongoing contract fight with UnitedHealth Group Inc. is hurting the bond status on the Knoxville-based hospital staffing and management company.

Moody’s Investors Service on Friday downgraded the outlook for Team Health from stable to negative, after affirming the company’s B3 Corporate Family Rating and B3-PD Probability of Default Rating.

The change of outlook reflects rising uncertainty around Team Health’s ability to reduce leverage given its recently disclosed dispute with UnitedHealth Group Inc., one of its largest commercial payors,” Moody’s said.

Moody’s also affirmed the B2 rating on Team Health’s senior secured credit facilities and Caa2 rating on its unsecured notes“.

We’re read Moody’s Ratings Action, and it’s clear that Team Health has a myriad business and financial challenges, including debt to EBITDA (admittedly a multiple that has become almost meaningless without knowing how the denominator is derived) of over 8x.

Just as distressing is the market price of the 2024 publicly traded 2024 Term loan which at December 12, 2019 was trading at a (28%) discount. Many BDCs hold that first lien debt which was trading at an (18%) discount in the market on September 30. (We note that the BDCs own valuations ranged from a (1%) to a (14%) discount in their IIIQ 2019 portfolio values). By the way the BDCs with exposure to Team Health include Barings BDC (BBDC) but only in the first lien; FS-KKR Capital (FSK) and four of its non-traded sister BDCs: FSIC II, FSIC III FSIC IV and CCT II. The biggest exposure is that of FSK, just under $15mn.

If the first lien debt is already trading down so much, where can be the second lien debt be that accounts for half of BDC exposure ? This debt does not trade so that’s a question without an answer, but at September 2019 quarter’s end the BDCs – all related – were writing down the debt by (22%). We’d guess the discount on the second lien – due in 202- might be as high as (50%).

We’ll have much more to say as we dig deeper and more developments occur. Our concern is not only about Team Health but similar health organizations facing pressure relating to payment practices. As the BDC Credit Reporter becomes more comprehensive quickly identifying BDC funded companies with a similar business model – and risk – will become easier. As the song says: “we’ve only just begun”.

Monitronics International: Reports IIIQ 2019 Results

Last time we discussed Monitronics International (dba Brinks Home Security), the company was filing for Chapter 11. Even then, management was aiming to be back operating normally once a major restructuring was effected. We were skeptical – wrongfully so – that this could be accomplished by September 2019 given the many moving parts. Our apologies to the many professionals involved because Monitronics was up and running again out of bankruptcy as a public company (ticker: SCTY) by the end of August.

The company did manage to shed a great deal of debt, as reinforced on the latest Conference Call: “Restructuring resulted in the elimination of over $800 million of debt, including $585 million of bond, and $250 million of the company’s term loans“.

Funnily enough, though, BDC exposure to Monitronics has substantially increased following the voluntary Chapter 11 and restructuring. From $51mn at cost in June 2019, BDC advances have nearly tripled to $148mn. The BDCs involved today are those who were present before, but generally speaking their exposure has greatly increased. That’s because of the nature of the restructuring which saw prior debt partly paid off in cash, equity in SCTY and new Term debt due in 2024. To that was added $295mn in new Term debt and a Revolver. Regarding the latter, $124mn has yet to be drawn.

This is all a wonder of financial engineering, but from what we can tell term debt has only been decreased by just under $100mn, and the revolving debt – if fully drawn – will be greater than the prior balance outstanding. The big change is the write-off of $585mn in 2020 Senior Notes, which received a little cash and 18% of the equity. For all the turgid details see pages 16-18 of the 10-Q.

This leaves Monitronics less leveraged, but not necessarily out of the woods. The company reported its latest results on November 13, which are a mix of before and after bankruptcy and not very instructive from an earnings standpoint. Management did not brave any questions and is still working on its 2020 Plan. As a result neither the BDC Credit Reporter, nor anyone else, has any meaningful metrics to work with. We do note, though, that debt to Adjusted EBITDA (annualizing the IIIQ) remains close to 5:1, and that’s before we get into any mandatory capex.

In any case, Monitronics/Brinks is facing a changing industry, and real challenges with customer attrition that lower debt will not change. Management is promising to make major improvements in how the business is run, promising a “best-in-class” customer experience, including transforming the “sales process from hiring to training, to performance management” and much more in that vein. We wish Monitronics well, but there’s a lot to do in what remains a highly leveraged business with myriad competitors.

This is a classic example of stakeholders – including BDC lenders – “doubling down” on a failing business through a restructuring process. Historically security companies like this one have been cash cows and Brinks has a well known and respected name. So we understand the impetus to try again with a new capital structure and strategic approach. There are no regulators to wag their fingers at the lenders involved and if this does not work out failure is likely to be some time off given the Revolver availability. Regardless, we are rating the “new” Monitronics CCR 4 (WorryList) till we get more tangible news about post-bankruptcy performance, but expect we’ll be reporting back periodically for some time.

Frontier Communications: Hedge Fund Recommends Bankruptcy

The Frontier Communications saga continues with hedge fund and investor Robert Citrone recommending the company file for Chapter 11 bankruptcy sooner rather later. As the attached article reminds us, there’s an ongoing debate amongst “stakeholders” as to what the communications company should do to deal with its heavy debt load and uncertain future.

“Normally haste makes waste, but in this instance we believe haste limits waste,” Ormond said in the letter. “The further the delays in addressing the balance sheet and state of the business in a court-supervised process, the greater the risk to the corporation, operating assets, employees and surrounding Norwalk.”

Increasing subscriber losses and turnover, combined with limited financial guidance, will only lead to further deterioration in the business, according to the letter.

We have no view on whether to file or not is better, but the pressure does increase the chances of the former. We are adding Frontier to our Bankruptcy Imminent list. The company is already rated CCR 4 (Worry List). As a reminder BDC exposure is substantial at $61.7mn and valued close to par. A bankruptcy could have detrimental effects – but to varying degrees – on the 9 BDCs involved.

Constellis Holdings: Hires Restructuring Firm

The Wall Street Journal reports on October 9 that defense contractor Constellis Holdingshas engaged PJT Partners Inc. to engineer a plan for restructuring the company’s debt-laden balance sheet, according to people familiar with the matter“. PJT Parners is an investment bank, often used in turnaround work.

Otherwise, the WSJ article has no new information, except a recap of some of the highlights from the most recent financial filings. Some of that data is admittedly dire. We noticed that even after a recent asset sale – the subject of our last post about Constellis – “the company’s liquidity remained tight, amounting to just $33 million of cash and $18 million of availability on a revolving credit facility as of June 30“. That alone should send chills down the spines of anyone concerned about the company.

Anyway, the advent of a restructuring firm and those slim liquidity numbers suggests a day of reckoning is coming – and fast.

We discussed BDC exposure before when we first added Constellis to the under-performing list back in August. Judging by the current market valuations (source: Advantage Data) of the three different loans outstanding in which BDC lenders are involved, the debt is discounted from (8%) to (70%), higher than in June. Thankfully, 90% of of BDC exposure is in the 2022 Term Loan, which is valued the highest even after the news of a prospective restructure. Nonetheless, at current levels – and things could get much worse – potential ultimate realized losses could reach $20mn on the $109mn invested at cost, most of which has not been recognized even on an unrealized basis as of June 2019. Not to mention the loss of investment income, which we’ve previously pegged at $9mn annually.

Unfortunately Constellis has the possibility of being one of the biggest credit hotspots of the fourth quarter (if that’s when the rubber meets the road) for the BDC sector. The prospective damage will be widespread. There are 4 FS-KKR related non-listed funds with $90mn at cost lent to Constellis. OFS Capital (OFS) and Garrison Capital (GARS) and – to a lesser degree – two non-listed BDCs are also exposed.

Foresight Energy: Skips Interest Payment

Here we go again: another coal miner is in deep trouble. The Wall Street Journal, and multiple other publications, report that “struggling coal miner” Foresight Energy LP has decided to miss making a scheduled bond interest payment and is preparing to restructure its balance sheet. On the other side, lenders and bond holders have hired specialist financial advisers for the negotiations ahead.

There are 4 BDCs – all non listed – with $22.4mn exposure to the troubled coal miner: Business Development Corporation of America (BDCA), and three FS-KKR entities, Corporate Capital Trust II, FSIC II and FSIC III. All are in the 2022 Term Loan and all are looking at a significant unrealized depreciation write-down in the coming quarter. As of June 2019, the debt was valued at a (18%) discount by the most conservative valuation. At time of writing on October 1, 2019 Advantage Data’s middle market real-time loan pricing shows the discount has risen to (46%). That’s , at least, an extra ($6mn) write-down from the mid year number. Annual income at risk is $1.8mn. Also very likely a little way down the road is a debt for equity swap of some kind and some sort of material realized loss.

We note – wryly – that the debt at Foresight was valued close to par all the way through the IQ 2019 valuations, suggesting the lenders involved were not expecting the upcoming financial crisis. Only in the IIQ of 2019 was the debt written down sufficiently to be automatically added to our under-performing list as the Watch List level (CCR 3).

As most everyone must know, the coal mining sector has been in trouble for some time, and the recent trend is for ever greater problems. In the few months we’ve been publishing the BDC Credit Reporter, we’ve written about Murray Energy and Blackhawk Mining. One is considering Chapter 11 and the other is already there. As we’ve said before, why any BDC lender would invest in this notoriously challenging corner of the energy sector is beyond us. Admittedly, Corporate Capital Trust II has been involved for some time and might be able to argue that the risks have increased since writing their cheque. However BDCA only invested for the first time in the IQ 2019 and FSIC III in the IVQ of 2018.

Acosta Holdco: Payment default expected

We’re a few days late on this major story: Acosta Inc. – a leading marketing company to major brands – is about to miss a scheduled bond payment on October 1 2019, according to the Wall Street Journal. The company has been in trouble for some time and has hired a turnaround adviser and recently been downgraded by Moody’s.

Now a restructuring is underway, which appears to be arranged in conjunction with the company’s many bank lenders and bond investors. “ The Jacksonville, Fla.-based company, owned by private-equity firm Carlyle Group , has notified its lenders and bondholders they should sign nondisclosure agreements to enter into formal restructuring negotiations in advance of an expected credit default“, according to “people familiar with the matter“.

The immediate challenge for Acosta, which is squeezed for cash, is a $31 million coupon payment due on Oct. 1 to bondholders that own $800 million in unsecured debt maturing in 2022. BDC exposure, though , is in its 9/26/2021 Term Loan. Aggregate debt at cost is $40.1mn, all held by 5 BDC funds – both listed and non-listed – controlled by KS-KKR Capital. For example, FSK has $19.1mn of debt outstanding. Total income at risk for the group is $2.1mn as the debt is priced at only LIBOR + 325 bps.

Given that the Carlyle Group is the sponsor and as you can tell by the pricing, this was supposed to be a “safer” loan, given that the income barely covers the BDCs cost of debt capital. Unfortunately, the company has been under-performing – by our standards – since the IIQ 2017. At June 2019 the debt was discounted by as much as (59%) on the various BDCs books. As of today – according to Advantage Data’s real-time loan pricing records – the discount has increased to (67%) and could go lower.

We expect the debt to be shown as on non accrual in the upcoming IIIQ FS-KKR portfolios when earnings are released and to be written down to the market level, which should cut the fair market value by at least $6mn. We’re likely to see a restructuring done relatively quickly – if past experience is any guide – and a realized loss is likely to follow but we don’t have sufficient information to estimate the extent. This is almost certainly going to be another reverse for the FS-KKR organization. Curiously FSK, FSIC III and FSIC IV appear to have jumped in relatively recently – perhaps ill advisedly seeking a bargain. Total BDC exposure jumped from $13.4mn at the end of 2017 to the $40.1mn current level. That’s a tripling of Acosta debt held.

Frontier Communications: Makes Scheduled Debt Payments

Those are sighs of relief you’re hearing. On September 16, 2019 the Wall Street Journal reported that Frontier Communications was making its scheduled debt payments. This would not normally be news, but many investors were – apparently – concerned the troubled and highly leveraged communications company might choose to file for Chapter 11 or a restructuring instead.

That’s good news of a kind, but the problems at Frontier continue, so this may be more respite than anything else. (We’ve written about the company multiple times previously. Here’s a link to the list of articles). There is $62mn of debt outstanding at 8 different BDCs and over $5mn of annual investment income at risk. The exposure is carried as of June 2019 at close to par, so if anything negative happens to Frontier in the future the impact will be material from a BDC perspective (and much more so in the high yield bond market). For the moment lenders and shareholders can breathe easy. Tomorrow, though, is another day.

Vivint Smart Home: To Merge Into SPAC

On September 16, 2029 Vivint Smart Home, a subsidiary of APX Group Holdings, which is owned by Blackstone announced it is being acquired by Mosaic Acquisition Corp., a publicly traded special purpose acquisition company (“SPAC”), backed by Fortress Investment Group, itself a subsidiary of Softbank. The existing investors will throw in another $100mn of equity to add to the $2.3bn already invested and Fortress affiliates will fund another $125mn. According to the press release discussing the merger: “With an agreed initial enterprise value of $5.6 billion, Vivint is anticipated to have revenues of $1.3 billion for fiscal year 2020E and Adjusted EBITDA of $530 million, implying an Adjusted EBITDA multiple of approximately 10.5x”.

According to Lisa Abramowicz at Bloomberg, this boosted the bonds of APX, which had been trading at a discount.

BDC exposure to Vivint is substantial ($137mn), spread across 4 different debt instruments and with valuations ranging from par to a discount of (20%). The debt is very recent, added during the IVQ 2018, and was added to our under-performers list only in the IIQ 2019 as Moody’s downgraded the company and BDC valuations dropped measurably, many beneath the 90% FMV to cost we consider a useful trigger in the absence of any other information.

All the BDC debt is held by FS – KKR Capital entities including its public vehicle (FSK) and 4 non-traded funds. This merger should result in an upgrade of the debt values but we don’t know if Mosaic will be refinancing the debt or assuming the obligations. We get the impression this is more of a capital infusion than anything else, and expect some debt may get repaid while the rest might be retained. Anyway, good news for the FS-KKR Capital group in the short run. In the long run, though, we’ll have to see if Vivint’s ambitions for domination of the “secure home” market can live comfortably with its capital structure. We’ll be leaving the Corporate Credit Rating at 3, but the trend is positive.

Constellis Holdings: Sells Assets To Improve Liquidity

According to the Wall Street Journal’s crack Pro publication, Constellis Holdings – a troubled leading defense contractor with multiple operations – has sold a training facility for $40mn. More than the amount involved – which is modest by comparison with the debt on the company’s balance sheet – we noted that the WSJ article indicated the sale was undertaken to “avert a liquidity crunch”.

We added Constellis to the under-performing list (CCR 3) only in the IIQ 2019, as reported in a post on August 17, 2019 and based in downward valuation changes, rating downgrades and changes in the C-suite. As we become more familiar with the Apollo Global-owned private company, we recognize that Constellis should have been a candidate for our concern some time before. The drawdown of US forces in Afghanistan and Iraq, which has been going on for some time, is one negative factor; along with a major restructuring of its business underway, discussed by its CEO in a recent article in a defense trade publication.

The sale of the training facility by itself will not be sufficient to right the ship, and we’ll be keeping a close eye on developments at the company in the months ahead. Given the over $100mn invested by 9 BDCs – especially 4 FS-KKR entities – this deserves watching.

Constellis Holdings: Added To Under-Performing List

With the publication of the IIQ 2019 valuations by 8 BDCs with $107mn in various forms of debt exposure (2022-2024 and both senior and second lien), we’ve added Constellis Holdings to our under-performers list with an initial rating of CCR 3 (Watch List). The debt has been discounted between (6%-30%) from 0% to (5%) in the prior quarter.

This is not surprising as there has been a massive number of changes in senior management in recent months and downgrades from both S&P and Moody’s in the spring, worried about high leverage; cash flow losses and operational challenges. For the BDC sector, this is very big exposure in aggregate, with annual income of approx. $9mn at risk should the company default down the road. With that said $90mn of the debt is held by the three FS-KKR non traded BDCs (FS II-III and IV), which are intending to go public under one banner before long. How Constellis plays out will be of above average interest at FS Investment-KKR in the quarters ahead.

Frontier Communications: S&P Downgrades Debt Rating

On June 20, 2019, S&P Global Ratings downgraded “its long-term issuer credit rating and issue-level rating to CCC from CCC+, with a negative outlook. It’s also trimmed its rating on senior secured first- and second-lien debt to B- from B”, according to Seeking Alpha. The rating group went to say: “Notwithstanding its favorable near-term liquidity position,” the company will likely look at options “given the business’ downward trajectory and inability to refinance looming unsecured debt maturities in 2022, which are trading at deeply distressed levels,” S&P says. From the BDC Credit Reporter‘s standpoint, this only confirms our prior assessment that a bankruptcy or restructuring is more likely than not. We’ve had the company on our Worry List all year. The stock price is now $1.35, but was recently at an all time low of $1.21.

Frontier Communications: Restructuring And Chapter 11 Alternatives

Bloomberg published an excellent article about the different constituencies amongst Frontier Communications creditors, and the several alternatives being considered to cope with the telecom company’s mountain of debt. No change to the BDC Credit Reporter‘s views, as noted in the Company File.