Integro Parent Inc. (aka Tyser’s) is a London-based specialty insurance broker and has just seen its corporate credit rating and debt tranches downgraded by Moody’s. The outlook is “Negative”. Apparently, the pandemic has impacted business conditions in many markets, leaving the company in a classic highly leveraged state, with weak liquidity and cash flow. The company rating has been lowered to a speculative Caa1.
That was enough for the BDC Credit Reporter to add the company to our underperformers list – the first addition in some time – with an initial rating of CCR 3. There are two BDCs with material exposure up and down the company’s capital structure : New Mountain Finance (NMFC) and Crescent Capital (CCAP). Total exposure at cost was $48.5mn at year-end 2020, most of which is held by NMFC, as this table from Advantage Data shows:
Both BDCs are valuing both first and second lien debt at or above par. The first lien is priced at 6.75% and the second lien at 10.25%. (CCAP holds a non-material equity position as well). We have also added Integro to our Trending list because it’s possible that with the Moody’s downgrade, the BDCs involved might reduce the value of their positions in the upcoming IQ 2021 results. Just a 20% overall discount could reduce the FMV by ($10mn) or so. We’ll check back when we hear from CCAP and NMFC in the next few weeks.
Did the cavalry arrive in the nick of time at Isagenix International LLC ? On almost the same day as Fitch Ratingssuggested the company might default before year-end, a press release indicates the principals of the company have injected $35mn in new equity capital. Moreover – but with less specificity- we learn that the existing lenders to the troubled company “have reconfirmed their support for the business with an amendment to their credit agreement, which will give the company greater flexibility for growth“.
That’s just as well for the 6 BDCs with an aggregate of $35.6mn in first lien loans to the company. As of June 2020, the debt was being discounted by (60%) or more. The debt – priced at a moderate LIBOR + 575 bps – was poised to be added to the BDC Credit Reporter’s Weakest Links list. We’ll hold off for the moment. By the way, the principal debt holder amongst the BDCs involved is non-traded Cion Investment with $13.4mn at cost; followed by Crescent Capital (CCAP) with $6.3mn and then by sister funds Main Street Capital and HMS Income Fund, both with $5.7mn.
We will retain the current Corporate Credit Rating of 4 till further details are made available and we hear more about the financial performance of the closely-held weight loss company. Nonetheless, the news of the capital support must be a positive for everyone involved. Although we’re writing about Isagenix for the first time here, the company has been underperforming since the IIQ 2019, first with a CCR 3 rating and CCR 4 since IQ 2020. Maybe this capital infusion will be what it takes to return Isagenix to the ranks of normal performance.
Privately-held filtration company BFC Solmetex LLC has been added to the BDC Credit Reporter’s underperforming list in the IIQ 2020 with a Corporate Credit Rating of 3.
Stellus Capital (SCM) – one of two BDCs with exposure alongside Crescent Capital (CCAP) – has discounted the 9/26/2023 first lien Term Loan to the company by (15%), from close to par in the prior period. No explanation was given. CCAP, which is involved in the same tranche, will probably follow suit when IIQ 2020 results are published. Total BDC exposure at cost is $21mn or so, and investment income involved about $1.8mn.
We first wrote about APC Automotive Technologies when the company first filed for Chapter 11 protection back on June 3, 2020. Relatively quickly – thanks to an agreement with its creditors – the company is exiting bankruptcy, having received court approval of their restructuring plan:
“As part of the restructuring, the company has reduced the debt on its balance sheet by more than $290 million and secured a new $50 million senior secured term loan to finance its go-forward operations. The current management team, including Chief Executive Officer Tribby Warfield, will continue to lead the company forward and advance its strategic, operational, and growth transformation initiatives”.The Brake Report
At this stage we don’t know what role Cion investment and Crescent Capital (CCAP) will play in the restructured APC Automotive, if any. However, both BDCs are likely to be booking their losses in the IIIQ 2020.
We are upgrading the company from CCR 5 to CCR 3, and are awaiting further intelligence on the future business outlook.
Reuters reports that oil field services company BJ Services Companyhas filed for Chapter 11 on July 20, 2020. The company reported assets and liabilities between $500mn and $1.0bn. Right away, management will be seeking to sell core assets – such as its cementing business – to pay down its debts. Not helping the situation for BJ Services is an admitted “cash crunch”.
Four BDCs have $25.3mn in exposure at cost in the company as of March 31, 2020: Crescent Capital (CCAP); Monroe Capital (MRCC); Garrison Capital (GARS) and non-traded Monroe Capital Income Plus. The BDCs were all in the same 2023 first lien term loan, and marked their positions at par or at a discount of only (4%). Given the industry which BJ operates in; the sizeable liabilities and the liquidity crisis, it seems unlikely that the current high valuation can be maintained in bankruptcy. However, we have no clear idea yet how this debt might fare once everything is settled. We can calculate, though, that ($1.8mn) of investment income on an annual basis will be suspended.
The BDC most at risk of loss is CCAP, which owns about half the outstandings and which is involved in a last out arrangement, which should result in a bigger eventual capital loss.
Frankly, the BDC Credit Reporter has been caught flat footed by BJ’s bankruptcy. The company was carried as performing (CCR 2) in our database because of the near-par valuation by all its lenders. In retrospect, the fact that a oil services firm like this one should stumble is no great surprise. In any case, we have leapfrogged the company’s rating down three levels to CCR 5, or non performing. We’ll be reverting with more details on how the bankruptcy might play out for the BDC lenders involved once we learn more about the company’s plans.
As a parting thought, we do wonder why any BDC would lend to an oil services company – even a giant one – given the well known wreckage of so many similar businesses since 2014. This debt was booked in 2019. Perhaps the recovery the BDC lenders will ultimately achieve will prove us wrong but – if past is prologue – expect that losses will be material and for a loan that was priced at a modest LIBOR + 7.00%.
On June 18, 2020 S&PdowngradedASP MCS Acquisition (dba Mortgage Contracting Services) to D from CCC, after the company failed to make a scheduled interest payment. Furthermore, the rating group grimly projects that the company is unlikely to make that payment within the allowed 5 day grace period, despite having the resources to do so. Also downgraded to D is the company’s 2024 Term Loan with a face value of $390mn.
This is all very bad – but not unexpected – news for the two BDCs with a total of $19.1mn at cost of exposure in that same 2024 Term Loan. The biggest exposure ($13.9mn) is held by non-traded Business Development Corporation of America and $5.2mn by publicly traded Crescent Capital (CCAP). Both BDCs had already greatly written down the value of their positions – by (61%) and (64%) respectively as of March 31, 2020.
The BDC Credit Reporter had already applied a CCR 4 credit rating to the company from IIQ 2019, and has been underperforming since the IIIQ 2018. However, we are now adding the company to our Weakest Links list given that non accrual seems to be inevitable. Just over $1.1mn of annual investment income will be suspended should that default occur.
On June 3, APC Automotive Technologies (“APC”) filed for Chapter 11 bankruptcy protection as part of a broad restructuring plan with its creditors. As the press release indicates the central component of the plan is reducing “APC’s outstanding indebtedness by approximately $290 million on a net basis, significantly strengthening the Company’s balance sheet and enhancing financial flexibility going forward.” In addition, the company has organized $50mn in Debtor-In-Possession (“DIP”) financing for what is expected to be a short period under court protection.
Frankly, the BDC Credit Reporter does not have much history with APC, which only showed up on BDCs books two quarters ago. At March 31, 2020 the largest BDC lender was non-traded Cion Investment, which had advanced $11.2mn in senior debt. With a much smaller position and in equity/preferred is newly public Crescent Capital (CCAP) with $1.8mn. Both BDCs had written down their investments: CCAP to zero and Cion to a FMV of $7.8mn. One of the two debt tranches Cion was involved in was already on non accrual as of the first quarter 2020.
This restructuring probably means i) the CCAP position will be written off. It’s a small stake and should have a material impact. ii) Cion is likely to be involved in the DIP and see its overall exposure increase. In terms of valuation, though, that will have to wait till the final exit from Chapter 11 when all the details are finalized. In the short term, all the existing debt is likely to become non-performing and all or some eventually written off. Cion will become an equity owner (we have to assume) and will be keeping the company on its books – in new forms – for some time to come.
We rate APC CCR 5 and – depending on the final structure of the company – will upgrade the company to CCR 3 when the bankruptcy is finalized. Otherwise this development is notable because APC is the second BDC to file Chapter 11 in June 2020 so far. We expect many more to come, and most to adopt the “debt to equity” format where lenders become owners and extend for an indefinite period (equity is called permanent capital for a reason) their investment relationship. If APC markedly recovers Cion may yet make back its losses. For CCAP, though, it may be too late.
On March 14, 2020 we added opioid treatment company Baymark Health Services to the BDC Credit Reporter’s under-performers list, with an initial rating of CCR 3 on our five point scale.
We were motivated by five factors. First, the publicly traded 2025 Term Loan debt of the company dropped (8%) in value during the most recent market melt-down. Second, we noted that – after a 12 month period – the private equity owner of the fast growing chain of treatment centers “pulled” the company from being sold. Third, the BDC Credit Reporter is aware – and has written about – multiple other similar dependency treatment centers of late facing financial and operational difficulties. Fourth, the company has been growing very quickly of late – by merger and acquisition. Recently, a number of “roll-ups” in various sectors have gone wrong, raising a red flag to the BDC Credit Reporter where Baymark is concerned. Fifth, the industry is highly dependent on reimbursement by governmental authorities and insurance groups, whose track record for reliability has been unconvincing of late.
However, to be fair, the latest BDC valuation of that same 2025 Term Loan was at a slight premium to cost. That was by OFS Capital (OFS) – one of 3 BDCs with $12.9mn invested in aggregate, all in that same 2025 Term Loan. The other BDCs involved are non-traded Hancock Park and recent public BDC Crescent Capital (CCAP), which inherited the investment from Alcentra Capital, whose portfolio has been acquired. All the BDCs exposure dates back to early 2018. Investment income involved is $1.3mn.
To date, the term debt has been trouble-free, judging by the quarterly valuations. We are adding the company to our watch list (CCR 3) out an abundance of caution and remembering – if Alcentra’s disclosure back in the day when the loan was first booked – this is a second lien position. That seems to be confirmed by the pricing: LIBOR + 825 bps.
We admit that not everyone might agree that BayMark – owned by eminent PE group Webster Equity Partners – should even be on the under performers list. We leave to readers – having made our case herein – to make their own minds up.
Closely-held Envocore Holding, LLC – about which very little is known from the public record – saw its preferred stock written down by both of its BDC lenders: Alcentra Capital (ABDC) and OFS Capital (OFS). Moreover, on its March 12, 2019 Conference Call, ABDC explained that the unrealized loss was due to the company “missing earnings for a variety of reasons”. The lenders are said to be working closely with the sponsor and management. ABDC added Envocore to its recently established Watch List.
We have also added the company to the BDC company under-performer list as of the IVQ 2018, based on the equity write-down and that sliver of an update from ABDC and the sector in which the company operates (see below). Our rating is CCR 3, or Watch List. Total exposure at cost as of the end of 2018 is $37.1mn and consists of first lien debt, preferred and common, about equally divided. The potential income at risk is $4.2mn.
By the way: “Founded in 1991, Envocore Energy Solutions is the leading provider of custom energy (lighting & water) efficiency services to Energy Service Companies and utility clients. The Company acts as a sub-contractor to the Energy Service Companies and utility companies and will perform design, engineering and installation. The Company is based in Gambrills, MD“.