On May 3, 2022, we heard the following from WhiteHorse Finance (WHF) in a press release which previewed IQ 2022 results:
During the three months ended March 31, 2022, the realization from Grupo HIMA San Pablo, Inc. generated an approximate $6.9 million net loss, or approximately a net loss of 29.8 cents per share.WhiteHorse Finance Press Release May 3, 2022
No further details were provided, but this does provide a useful heads up regarding the Puertno Rican hospital chain, whose debt has been non performing in one way or another since IVQ 2017 (!). As of the IVQ 2021, 4 BDCs – including WHF – have exposure to Grupo Hima, in the form of first lien and second lien debt, with a cost of $44.4mn. At fair market value the positions already aggregated only $10.9mn.
WHF – according to its latest 10-K – had invested $19.5mn in the hospital chain, but had written exposure to $7.5mn. Assuming we understand what WHF is doing, this suggests the BDC will be recognizing a final loss but recovering $12.6mn of capital advanced and a small fair market value gain from the settlement of this long troubled credit.
The other BDCs involved – none of which have reported results yet are Portman Ridge (PTMN); Main Street Capital (MAIN) and Stellus Capital (SCM). The news out of WHF suggests the “realization” of the Grupo Hima situation means a final resolution has been made. Unfortunately, we don’t know the details and could not find anything from a quick search of the public record. We hope to circle back with more details when one or more of the BDC lenders provides more of an explanation of what has happened.
The AG Kings Holdings story is coming to a conclusion. We’ve been covering the company since June 2019 with a series of updates. The retail chain has been sold to Albertson’s Acme Markets in January 2021, according to BDC lender Capital Southwest (CSWC). The sale was known about previously, but not its final closing, which seems to have occurred.
This means that the debtor-in-possession financing provided by CSWC – and by WhiteHorse Finance (WHF) – has been repaid in full. However, some legacy debt will be written off.
CSWC revealed that its 2021 term debt with a cost of $3.5mn was valued at $0.7mn at year end 2020 but was repaid at a higher value in January, but the exact amount was not given. Here’s what CSWC’s management said on its most recent conference call: “So our exit was higher than where it was valued last quarter. So that’s the first thing I would say. And then the $739,000 that’s left is basically the last interest. I mean, there’s a litigation trust and the final bankruptcy cleanup and there’s a final working capital adjustment and some final economics, which, candidly, we believe, is going to be meaningfully higher than the $740,000, we have it valued right now. So we think there’s upside in NAV from that perspective. And then our all-in recovery at the end of the day, will be about $0.80 on the dollar“.
We expect CSWC will end up taking a realized loss of ($2.5mn-$3.0mn). WHF will, in all likelihood, book a loss as well. Nonetheless, the absolute amounts are relatively small. The BDCs were fortunate that the pandemic boosted AG Kings business and its prospects at this critical juncture and resulted in better than might have been expected proceeds from the company’s sale. Once the final payouts are made we’ll re-rate AG Kings from CCR 5 to CCR 6, reflecting the end of all BDC exposure.
We’ve written about Alpha Media, LLC at length in two recent articles. We promise this third article will be kept short, and it’s likely you’ll not hear anymore about this radio broadcaster who recently filed Chapter 11. That’s because a bankruptcy-focused specialist newsletter called Petition has given us a detailed view of what was happening in the run-up to the bankruptcy. The shenanigans involved between different creditors/prospective owners ares fascinating but there’s one central take-away for the BDC Credit Reporter that we were not aware of till now: apparently the first lien lenders to the company sold out their interests to Fortress – which was trying to gain control – and at par.
That’s all we need to know – if true – because the only BDC exposure is by WhiteHorse Finance (WHF) and is in the first lien secured term debt due 2/25/2022. This suggests WHF is out of Alpha Media and all the drama involved. We are re-rating the company to a CCR 6. This also mans WHF received early in January 2021 about $5.1mn. The FMV was already only -3% below cost so the BDC’s book value won’t be materially affected.
We’ll seek confirmation when WHF reports IVQ 2020 or IQ 2021 results but this seems like a positive outcome for WHF and much ado about nothing by the BDC Credit Reporter.
Just hours after we wrote about Alpha Media LLC’s Chapter 11 filing, we’ve uncovered further details about what’s happening at this radio chain. According to several trade and financial articles we’ve read, management are working with second-lien lenders to provide Debtor In Possession (“DIP”) capital. In fact, the company already signed a $20 million Senior Secured Priming Superpriority Debtor-In-Possession Note Purchase Agreement.
The fly in the ointment – and what we were not aware of when writing our earlier article – is that there is a dispute about the future of the business – and its $267mn in debt – between first lien and second lien lenders. The group funding the DIP is from the second lien side, led by Intermediate Capital Group, said to hold over $100mn of pre-petition debt. The new buyers are offering to advance $37.5mn in expansion capital, which has the understandable support of the radio chain’s management. Here’s the actual bankruptcy filing with all the details.
The fly in the ointment is that – according to financial news reports – the senior lenders to Alpha Media, led by Fortress Investment Group, oppose the restructuring plan. Apparently Fortress made the company an offer it could refuse earlier and has chosen to go with the second lien lenders and their proposal of less debt and additional capital instead. More we cannot tell you at this stage but this might mean this Chapter 11 could get contentious. That can sometimes extract more capital for the company involved but can also exhaust already stretched financial resources and prolong the period of insecurity which a Chapter 11 filing involves.
Where the only BDC lender with exposure – WhiteHorse Finance (WHF) – sits in all this – with $11.2mn of exposure – we can’t say for certainty. WHF’s filings show the BDC holds a “first lien secured term loan“. That would suggest the BDC would line up with Fortress, but we don’t know. Probably WHF – due to its small position (which dates back to 2018 ) – has only little say in this situation. Just how this all plays out for WHF – and all the parties involved – remains a question mark that will get its answer in the weeks ahead. We’ll circle back as appropriate.
According to trade publication Radio Online, the media company Alpha Media, LLC has filed for bankruptcy protection. We also learn that “certain lenders” have agreed to advance Debtor In Possession monies and additional capital in the future (and,, presumably, will forgive some legacy debt) to get the business back on its feet in return for 100% control of the company, alongside management. Now the lenders and management are seeking court approval of this plan. We also learned : “Alpha Media said it will continue operating its stations without interruption, providing engaging news, music, sports and entertainment to its communities. The company’s day-to-day operations will continue in the normal course during this process“.
For the BDC Credit Reporter, this was unexpected news as the only BDC that still has exposure to the company – in the form of a 2022 Term Loan to the tune of $5.0mn – last valued its position at close to par and as performing. That BDC is WhiteHorse Finance (WHF), who briefly mentioned Alpha Media in its last conference call and said its value was “improving”. No word of an imminent bankruptcy. However, with the benefit of hindsight, we notice that the pricing on the loan was hiked up in the IIIQ 2020 from LIBOR + 600bps to Prime + 750 bps. Never a good sign.
We’re in no position to suss out what the final resolution of this investment might be. We don’t even know if WHF is part of the rescue creditor group. What we can say is that this company has been added to our IMPORTANT list, which means we expect a material change to show up in upcoming results. Technically Alpha Media has gone Chapter 11 in IQ 2021 but the debt may have been placed on non accrual earlier. In any case, over half a million dollars of investment income a year is in danger of not being collected for some period. More will be learned when WHF reports IVQ 2020 results.
The amount at risk is relatively modest, but we’ll still be interested to see how the BDC approaches this situation: inject more capital, time, sweat and tears or walk away. This is a calculation many BDC lenders have had to make of late, with most voting for the former. Our money in on WHF – sitting at the top of Alpha’s balance sheet – opting for doubling down.
We have just heard from one of the two BDC lenders to AG Kings Holdings – Capital Southwest Corporation (CSWC) about where things stand for the grocery chain in bankruptcy. Apparently, the purchase of the business by Albertson’s is proceeding. CSWC had only this to say ” That’s in process of closing/documentation process“. As of September 2020, CSWC is valuing its non performing senior debt (except for a DIP loan which is valued at par) at a (26%) discount. That’s better than two quarters ago when the debt was discounted by as much as (48%).
Given that we seem to be in the final furlong, the BDC Credit Reporter believes the current valuation is likely to be very close to the final outcome. That means CSWC will be booking a permanent ($2mn) realized loss, but will be recouping $6mn or so (including that DIP advance) to reinvest into new deals elsewhere. Chances are good that will show up by year end 2020.
Also affected is WhiteHorse Finance (WHF) – which has not reported yet – but which holds a much bigger position and much of which was recently added. We’ll refrain from guessing what loss – if any – WHF might incur till that BDC files its results.
At a time when so many troubled companies are finding an exit only by a “debt for equity swap” with their lenders, this outcome is more traditional with a sale to a third party. Ironically, AG Kings was lucky enough to be in the right segment of the food and supplies business in the time of Covid-19, which has reduced what looked like a significant loss for the lenders to a modest one. We expect to be able to close the file when CSWC and WHF report IVQ 2020 results, or by IQ 2021 at the latest.
On August 24, 2020 AG Kings Holdings, a grocery chain that includes regional names like Balducci’s and King’s Food Market, filed Chapter 11. According to a trade publication, the company – which has been troubled for some time -has a “stalking horse” buyer willing to pay $75mn for most of the stores in the chains. Furthermore, other buyers will be solicited under court protection. We learned that the company has “nearly $115mn in debts”. Of late the company has performed better than in the past thanks to Covid-19. Ironically, though, this recent success only encouraged management to strike while market conditions were as favorable as possible. The goal – despite unresolved issues with the company’s unions – is to be in and out of bankruptcy before the end of 2020.
Readers will know we have written about the company multiple times before, most recently on August 21, 2020. There are two BDCs with exposure of $26.9mn at June 30, 2020: Capital Southwest (CSWC) and WhiteHorse Finance (WHF). The latter recently added to its position in the first lien debt by buying an expanded position at a substantial discount. As a result, the aggregate FMV of the positions held is greater than the cost. WHF has two-thirds of the debt – including the most recent addition – and CSWC the rest.
The debt has been on non accrual since the IVQ 2018, so some sort of resolution was expected. From what we’ve learned from the Chapter 11 filing, and with the possibility of other buyers joining in, the BDCs have a good chance to get repaid in full or in part and in short order. From what we can tell, CSWC and WHF are not part of the buying group. We do know that the company’s “existing secured lender” is providing a $20.0mn Debtor In Possession facility, but we don’t know if that includes the BDCs who are principally in the Term Loan that nominally matures August 8, 2021. (CSWC does show an undrawn Revolver in its portfolio list).
We are retaining the CCR 5 rating for the moment and project the ultimate realized loss will be no greater than what CSWC – which invested close to par value – has booked : (30%) of its cost. If we’re right, CSWC will absorb a realized loss of just over ($3.0mn) and WHF – thanks to boldly buying more debt at a discount – may get away without a net loss. That could occur by the IVQ 2020 results. We expect both lenders will be happy with such an outcome and even more delighted if the company attracts more generous buyers. Much can happen in bankruptcy, but this may be the best outcome available after a year and a half of waiting around and no income coming in.
The BDC Credit Reporter will revisit this story as we learn what the final outcome looks like and we can estimate with greater accuracy what the ultimate economics might look like.
We’ve now heard from the two BDCs with first lien debt exposure to “troubled” retailer AG Kings Holdings. The debt has been on non-accrual since 2019 and remains so after IIQ 2020. However, Capital Southwest (CSWC) discounts it’s $9.5mn invested at cost by (35%). WhiteHorse Finance (WHF), by contrast, values the same debt ($17.3mn at cost) at a 20% premium…That discrepancy seems to be due to the fact that WHF doubled down in the period and bought more of the company’s debt in the secondary market at a discount that management was not willing to share on its conference call, but which an analyst placed at (63%).
Both BDCs have admitted that the retailer has been performing better thanks to the changed market conditions brought on by Covid-19. Nationally supermarkets have benefited from more people eating at home and AG Kings is no exception.
Given the company is still restructuring and still on non accrual , the BDC Credit Reporter is maintaining the CCR 5 (Non Performing) rating. that dates back to IVQ 2018. However, the outlook for recovery of some sort – perhaps even in full – is looking good. That’s positive news for CSWC and even more for WHF, which has made a bold move in buying non-performing debt. This might be to take advantage of the discounted price and/or as part of its restructuring strategy, but we’re just guessing.
We’ll be keeping as close tabs as we can on this private company and the BDC valuations involved. In an exception to the rule, we may see an upgrade before a liquidation or further write-down.
Judging by the write-downs taken by its two BDC lenders in the IIQ 2019 results, troubled supermarket chain AG Kings Holdings continues to deteriorate. Somewhat late in the day – as reported previously – White Horse Finance (WHF) placed the senior debt owned on non accrual and discounted the value by (14%), versus (9%) previously. Capital Southwest (CSWC), which had the debt on non accrual since the end of 2018, admitted on its Conference Call that the company was now rated 4 on its -14 internal scale:
“We did reduce AG Kings to a 4 this quarter, making it the only investment rated a 4 in the credit portfolio. The investment is our first and only non accrual among the investments made since launching our credit strategy 4.5 years ago“.
That’s pretty much all we learned that’s new but with this descending trend, the $17.7mn of remaining FMV (cost $20.2mn) may be in for further cuts unless we hear good news to the contrary. The company is rated CCR 5, but not yet in Chapter 11. That could change.
On June 13, 2019 WhiteHorse Finance (WHF) filed a Prospectus relating to the sale of its stock held by insiders. Included in the Prospectus was up to date information about the BDC’s first lien investment in grocery chain AG Kings Holdings. “We also currently expect to place our first lien investment in AG Kings Holdings, Inc. on non-accrual status and determine the fair value of the investment to be marked between approximately 70% and 80% of face value as of June 30, 2019, compared to 85% as of March 31, 2019″. See page S-6. The only other BDC lender to the Company – Capital Southwest (CSWC) – had already booked its own investment in the same 2021 Term Loan as being on non accrual in the IQ 2019. However, CSWC had discounted the investment by only (9%). The (20%-30%) discount being applied by WHF suggests a further weakening of the Company’s performance in recent weeks, and the possibility of a default. For more about the Company, BDC exposure and our views, see the attached Company file.