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.
Is this good news or bad news for lender to Basic Energy Services, an oil services company ? On December 12, 2019 the publicly traded company with the ticker BAS but just delisted from the NYSE, announced its intention to sell “its pumping services assets (not inclusive of coiled tubing) in multiple transactions with expected proceeds of approximately $30 million to $45 million“. The proceeds – says the press release – “will fund the projected 2020 and 2021 capital budget of Agua Libre Midstream, the Company’s rapidly growing, high return-on-assets business“. No word about proceeds being used to pay down any debt.
We’ve had a look at the 10-Q for the company which shows that lenders are collateralized by the assets of the business in both an ABL and 2023 Term Loan that was originated in 2018. The only BDC exposure is in the latter, and resides in non-listed BDC Guggenheim Credit for $2.0mn. At September 30, 2019 the debt was written down on an unrealized basis by (26%). Currently, the institutionally traded loan is trading at a (33%) discount. Maybe the lenders are waiving the use of proceeds from the asset sale for debt repayment or we just don’t have the full picture. For our purposes, and till, we hear otherwise, we’re assuming none of the monies from the asset sales will repay debt.
Basic Energy has been on the BDC Credit Reporter’s under-performing list since the IVQ 2018, almost immediately after Guggenheim booked the investment and has been trending down in value ever since. We have a Corporate Credit Rating of 4 (Worry List). Unfortunately, even before the latest announcement, the company was burdened by very high debt to Adjusted EBITDA, once you adjust for maintenance capex: over 12x by our estimate. The asset sales – if they happen and at the amounts estimated – may not be sufficient to save the company given the amount of debt on the balance sheet and the negative trends in the oil services sector. We believe a default or reorganization is more likely than full recovery on the debt. We’ll continue to update the Basic Energy story, which should come to some sort of fork in the road long before the 2023 maturity of the Term Loan.
On October 30, 2019 oil services company Basic Energy Services reported third quarter 2019 results. The company is public, so we were able to review a press release, 10-Q, Investor Presentation and Conference Call transcript. We also had a look at Basic Energy’s stock price – ticker BAS – which is not encouraging. Finally, we used Advantage Data’s real-time records to see how the company’s 2023 debt – the only instrument held by a BDC and its largest debt piece – is performing. Also, not encouraging. Last time we checked back in September, the 2023 debt was trading at a (27%) discount. Now the discount has risen to (30%).
We are writing this post because the recent financial performance, where Adjusted EBITDA does not even cover interest and mandatory capex, and the weak outlook for the sector as a whole, lead us to the conclusion that the chances of a default and loss and greater than that of full recovery. As a result, we are downgrading our internal credit rating to a CCR 4 (Worry List) from CCR 3 (Watch List). Luckily for Guggenheim Credit Income Fund – a non listed BDC – the amount at risk is modest at $2.0mn in a portfolio of $376mn.
On August 12, 2019 – but only noted by us on September 17 – Basic Energy Services, Inc. was downgraded by Moody’s to Caa1 at the corporate level. The company provides a variety of oil services, a segment that’s been in the doldrums of late. The summary view from the ratings giant was as follows: “The downgrade of Basic’s ratings to Caa1 reflects slow recovery in the business amid a decelerating market outlook, that we expect will keep financial leverage high”, commented Elena Nadtotchi, Moody’s Senior Credit Officer. ‘The company’s cash balances support its liquidity position, while Basic is cutting costs and reduces investment in 2019’.“
BDC exposure, though, is limited to one non-traded fund: Guggenheim Credit Income Fund. The BDC has $2mn invested in the 2023 first lien debt, and had valued its position at a (21%) discount as of June 2019, down from the quarter before. The debt was only booked in the third of 2018 but has been sliding in value ever since. Moody’s value this debt even lower than the corporate at Caa2.
We checked Advantage Data’s real-time bond pricing and found that the current discount is (27%), suggesting a potential unrealized write-down is coming in the third quarter 2019 results. If a default does occur, Guggenheim is at risk of annual investment income interruption of $2.2mn. A default does not seem likely in the short run, but nor does a full recovery barring a sea change in industry conditions. We have a CCR 3 (Watch) rating , with a downward trend.
On May 7, 2019 huge food distributor CTI Foods Holdings emerged from Chapter 11, after a short stay that began less than 2 months before. In addition, the company announced the arrangement of a new $110mn Revolver to fund post-bankruptcy operations. For the 3 BDCs with $37mn in debt exposure to CTI Foods, this will result in likely booking of Realized Losses in the IIQ 2019 results. There is $28mn of second lien debt from FSK, CCT II and Guggenheim Credit Income Fund which will be written off as part of the restructuring. Apparently, CTI Foods is shedding $400mn in debt to become viable after many months of deteriorating performance in 2018. Less clear is what happens going forward to first lien and secured DIP financing (advanced in the IQ 2019 to help the transition) outstanding. For the BDC Reporter’s Views on this credit, and for further details, see the Company File.