Posts for Portman Ridge Finance Corporation

Grupo Hima San Pablo: BDC Writes Investment Off

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.

Fusion Connect: Completes Recapitalization

Fusion Connect Inc. has restructured itself – again. Last time, the “leading managed security service provider of cloud communications and secure network solutions” was re-organized was when coming out of Chapter 11 bankruptcy back in January 2020. The company, after making ill-fated serial acquisitions, had sought court protection, burdened by a reported $760mn in liabilities. When exiting Chapter 11, Fusion managed to “shed” $400mn in debt in a transaction which saw its lenders become owners. See the BDC Credit Reporter’s article on the subject from January 14, 2020 – one of six articles we wrote about the company before, during and just after its bankruptcy exit.

Unfortunately, in the last two years Fusion Connect has failed to thrive and has now needed to raise new capital; write-off even more debt and establish new debt financing. All this is spelled out in a press release by the company and its owners on January 19, 2022.

This equity issuance and recapitalization, led by funds affiliated with or managed by Morgan Stanley Private Credit, Ellington Management Group, and Investcorp Credit Management BDC, Inc., was supported by existing stakeholders, including 100% of the company’s creditors. Following receipt of required regulatory approvals, Morgan Stanley Private Credit, via its affiliated or managed funds, will become the majority shareholder in the company. Several members of the Fusion Connect management team also participated in the capital raise, demonstrating substantial support for the company. 

Fusion Connect Press Release – January 19, 2022

There are two BDCs with $12mn of exposure to Fusion Connect: Investcorp Credit Management (ICMB) and Portman Ridge Finance (PTMN). However, only the former’s exposure – in both debt and equity – is material, with PTMN only holding $0.866mn in equity at cost, which was last valued at $0.221mn. As of September 2021, ICMB was a lender in two different debt facilities – both due at different times in 2025. The so-called “Exit Term Loan” – with a cost of $3.2mn was current and valued at par. However, the “Take-Back Term Loan” , with a cost of $5.1mn was valued at $2.0mn and the PIK portion of its interest income (8% according to management) was non performing. ($2.8mn of equity held was already valued at essentially zero).

We’re guessing that the Exit Term Loan will be refinanced at par by the new $60mn credit facility. By the way, that facility is paying 11.5% as of last September. Most likely – but still an estimate – the Take-Back Term Loan will be written off, resulting in a realized loss. Ditto for the equity at both ICMB and PTMN.

Judging by the press release, ICMB will remain both lender and part owner – along with the above mentioned partners – in Fusion Connect. Whether ICMB’s total outstandings will increase even after the likely realized losses is unclear, but we wouldn’t be surprised if that proves to be the case. We currently rate the company CCR 5 due to the non accrual of the PIK on the Take Back loan, but will upgrade our rating to CCR 3 or CCR 4 once we hear the final details from ICMB. (We expect PTMN will have no further role).

This is proving a never-ending story for ICMB, but we imagine management is consoling itself that – one fine day – Fusion Connect will hit its stride and whatever equity stake the BDC has ended up with will be worth enough to recoup the losses incurred in 2020 and 2022. We’ll continue to monitor the company, but expect that the recapitalization won’t affect the BDCs books till the IQ 2022 results are published.

Roscoe Medical: IVQ 2021 Update

Roscoe Medical is a medical equipment company, part of a constellation of such companies owned by Compass Health Brands. Roscoe itself has been a BDC portfolio entity since 2014, and has been underperforming to various degrees since 2018. From the IQ 2019, the company’s debt went on non-accrual and was written down by as much as (55%). An equity stake went to zero in value. Then matters began to turn around in late 2020. Both debt and equity began to revive in value. From early 202, the debt went back to performing status, the equity gained some value. (All this data drawn from Advantage Data’s records).

However, this is a still unfolding story with an uncertain outcome. In recent months, the valuations given by the two BDCs with exposure – Saratoga Investment (SAR) and Portman Ridge (PTMN) – have weakened again. As of November 2021, SAR valued its $5.1mn of second lien debt at par but wrote down the value of its equity by (83%) from (59%) the quarter before. PTMN is only in the second lien debt, which is discounted only (3%). The cost is $8.2mn.

Given the uneven performance in the past, and the recent (modest) downward valuation trend, the BDC Credit Reporter rates Roscoe CCR 3. Unfortunately, the public record (including the BDCs own disclosures) do not make clear what ails the company, and what the outlook might be. The only time a BDC piped up on the subject was SAR in May 2019:

I would say that the challenges that they’re facing at Roscoe have a lot less to do with the fact that they operate in and around the healthcare space, and more to do with the fact that they’re a highly competitive market. So the portion of their business that has faced the more extreme challenges really is the portion where they’re distributing to the broader retail environment. And so it’s been less indicative of a larger trend that would be natural to ask about. But we haven’t seen or experienced in our portfolio relative to health care in general.

Saratoga Investment Conference Call May 9, 2019

Given the high interest on the second lien debt (11.25%), the amount of income that could possibly be forgone is material : ($1.5mn). However, we’re not there yet, based on the relatively mild discounts being applied. The second lien debt does expire in March 2022 so either a refinancing or an extension is likely in the cards. We’ll circle back – whatever the status – when PTMN and then SAR report their next quarterly results.

Hoffmaster Group: Loan Values Decline

We hear from bankruptcy monitoring publication Petition that Hoffmaster Group may be in some distress. The “specialty disposable tabletop products” manufacturer has several publicly traded loans in the market. Those loans – especially a second lien one – are trading down in value. A first lien Term Loan due in 2023 is discounted by (8%) and the aforementioned second lien by (25%). This is a private company owned by private equity shop Wellspring Capital Management LLC so any color as to why this might be happening is not available.

BDC exposure to Hoffmaster dates back to 2010. As of the IIIQ 2021, there were three BDCs with exposure to the first and second lien debt, including two public players: Barings BDC (BBDC) and Portman Ridge Finance (PTMN). Audax is the non-traded BDC involved. Total aggregate BDC exposure at cost is modest at $7.4mn. BBDC is in the first lien debt with $2.2mn which , most recently, was marked at a premium to par. PTMN, though, is exclusively invested with $1.5mn in the second lien loan, and had discounted that (14%) already. Interestingly, in recent quarters BDC valuations had been improving.

We’ve rated Hoffmaster CCR 3 since the IIQ 2020. Back in April 2020 Moody’s downgraded the company to Caa1 based on pandemic-related concerns for the business. Furthermore, Advantage Data showed certain of the loan valuations dropping. However, this is our first article on the company. The CCR 3 rating is being maintained as its too early to presume that an eventual loss is in the offing, despite the big discount being applied to the second lien debt. That may change as more formation filters in from Moody’s; the BDCs involved or elsewhere.

We’ve also added Hoffmaster to our Trending list, which means that we expect the next BDC valuations to be possibly materially different than the current one. By the time IVQ 2021 values roll around at the BDCs, the exposure held could drop by several hundred thousand dollars or more.

As always, we’ll circle back as new information occurs. The good news, though, for all the BDCs involved is that the amounts at risk of loss – and the income therefrom – are of marginal relative importance.

BJ Services Company: IIIQ 2021 Update

Last time we wrote about oil field services company BJ Services Company, the business had just filed for Chapter 11, and without a pre-packaged plan. Subsequently – as we’ve gleaned from the public record – at least some of BJ’s assets were sold to other entities such as American Cementing. More recently, BJ’s former headquarter’s building was sold for $40mn.

Where does this leave the 4 BDCs previously with $25.2mn invested in the company’s unitranche debt when bankruptcy occurred ? As of September 30, 2021, total exposure at cost was down to $10.6mn and only Crescent Capital (CCAP) and Portman Ridge (PTMN) – who acquired the loan from now defunct Garrison Capital – are still involved. PTMN is carrying its modest $1.4mn position at par. The BDC has a “first out” status in the unitranche loan and that might explain the valuation and why the debt is carried as performing.

Over at CCAP – which has most of the exposure – one tranche of debt with a cost of $8.0mn is valued at $5.5mn, down (35%), just slightly off the prior quarter and the lowest value given since the bankruptcy occurred. The debt remains on non-accrual, and is a “last out” structure. (Confusingly, there’s also a $1.2mn senior loan from CCAP that is carried as current and valued at cost.)

We’re surmising – because neither PTMN or CCAP are explaining anything – that the BDCs are waiting for the asset sales to be complete to tot up their losses – if any – on BJ Services and close out these loans. With the sale of the HQ, we’d guess this process is almost complete and the BJ Services book will shortly be closed.

The only loss that will ensue – if we’re right – is a realized one by CCAP for ($2.5mn) or so, offset by receiving some proceeds to be re-invested. If that’s the case, CCAP will probably be mildly pleased as the BDC had nearly $13mn invested when BJ Services – seemingly out of the blue – filed for Chapter 11 back in 2020.

All this should be confirmed shortly, possibly when the IVQ 2021 results BDC results are published. For the moment, we’re retaining BJ Services as a CCR 5 – i.e. non performing – credit and Trending, because we expect something material to occur.

GK Holdings: Company Acquired

As we reported all the way back in October 2020 , Global Knowledge or GK Holdings has been acquired by a special purpose acquisition company (“SPAC”) , which itself is going public on June 14, 2021. The new company is being called Skillsoft Corp, under the ticker SKIL. Skillsoft – of course – is a leading training company, which was also gobbled up by the new public entity, which has put its name on the new public business.

Where the BDC lenders to GK Holdings are concerned, this must be good news. According to Advantage Data, there are nominally 6 lenders to the company, with a total cost of $31.1mn. However, these include Harvest Capital and Portman Ridge (PTMN). The former has just been acquired by the latter, so there are only 5 BDCs involved. (Then there’s non-traded Audax Credit whose exposure to the company is carried under the name Global Knowledge Training LLC, albeit the amount advanced at cost is minimal at $0.9mn).

The FMV of all this BDC exposure at March 31, 2021 was $20.9mn. The roughly ($10mn) discounted was from both first lien and second lien debt held, all of which was on non accrual at March 31, 2021. Unless we are very mistaken, all that debt should be repaid in full with the IPO of Skillsoft and the unrealized loss reversed. All the BDCs involved – led by Goldman Sachs BDC (GSBD); non traded Sierra Income and Stellus Capital (SCM) – should be able to record material unrealized gains and re-deploy the proceeds into new investments.

All the above is based on surmise rather than an explicit acknowledgment by any of the BDCs involved, so we’ll wait till the IIQ 2021 results come out before changing the credit rating from CCR 5 – non performing – to CCR 6, or “repaid”. (The exception to that statement is GSBD, which went on the record months ago about its expectation of not incurring any loss on GK Holdings thanks to the SPAC deal, and is the principal basis for our optimism in this regard for all the lenders involved). However, we’re certainly adding the company to our Trending list as we expect both value and income to drastically change in the IIQ 2021 results.

Roscoe Medical: Debt Back On Accrual Status

We’ve not written about Roscoe Medical since October 16, 2019 when its junior debt and equity were being deeply discounted by its BDC lenders and some debt tranches were on non accrual. As recently as November 2020 Saratoga Investment (SAR) continued to carry its 3/28/2021 second lien Term Loan as non accruing. However, we hear from Portman Ridge Financial (PTMN) – also a lender and investor – that the debt has been removed from non accrual. (SAR admits the company is back to paying interest but still carried the loan as non performing through November). Furthermore, both BDCs have reduced the discount on their equity stakes from 100% to (55% to 75%), suggesting fundamental improvements in the business.

Overall, BDC exposure is $13.9mn and the current FMV $12.7mn. We have added Roscoe to our Trending list as we expect there is likely to material changes to value and income when the next set of PTMN and SAR earnings come out in the IQ 2021. If SAR begins to accrue its share of investment income again in future quarters like PTMN is doing that will increase investment income by close to $0.5mn annually. Furthermore, there could be further increases in the value of the smallish equity positions both SAR and PTMN hold in the company.

We are ready to upgrade Roscoe from CCR 5 to CCR 3 – based on the IVQ 2020 results but will wait till those first quarter 2021 valuations are published. At this point the medical devices company looks like a real turnaround given that the FMV of those debt and equity assets – despite one loan on non accrual – has doubled since the IQ 2020.

CSM Bakery: In Forbearance With Lenders

Business and financial conditions have deteriorated fast at CSM Bakery which – according to Moody’s – “produces and distributes bakery ingredients and products for artisan and industrial bakeries, and for in-store and out-of-home markets, mainly in Europe and North America“. Both Moody’s and S&P have downgraded the company’s debt to SD, or “selective default“. Right now, the asset-based lenders to the company have entered into a forbearance agreement, but only till June 11. Moreover, the 2020 and 2021 term loans have been downgraded to CC and C respectively. This does not look good and a default or restructuring seems likely.

This is bad news for the 4 BDCs involved with $17.3mn invested at cost in those term loans, one which is senior secured and the second subordinated/second lien, according to Advantage Data’s records. The BDCs involved (in descending order of debt held) are non-traded FS Investment II; Monroe Capital (MRCC); Portman Ridge (PTMN) and FS-KKR Capital (FSK). PTMN is in both the loans and MRCC in just the subordinated.

At the end of 2019, this debt was performing and valued close to par. As of March 2020, the BDCs valuations had been discounted by as much as (18%) and the subordinated by (22%). (As always, BDC valuations vary). The current market value of these syndicated loans – using AD’s module – are not much worse right now despite the downgrades. Whether that will continue, especially for the more junior debt, if a default/restructuring occures remains to be seen. As is often the case, we are more pessimistic.

The BDC Credit Reporter had downgraded the company to CCR 3 from CCR 2 after the IQ 2020 results but now reduces the rating to CCR 4, as a loss seems very likely. Furthermore, we are adding the company to our Weakest Links list given the proximity of a non accrual and/or bankruptcy, even though interest has been paid currently till now. There’s ($1.2mn) of investment income at risk of interruption very soon and eventual losses that could exceed ($6.5mn) in our ungenerous estimation, or 38% of cost.

CSM is another example of that second wave of BDC portfolio companies affected by the impact of Covid-19. (The first wave were the companies already badly unperforming but still accruing income before the virus struck. many of those companies have since defaulted/filed Chapter 11 or undertaken major out of court restructurings or are close to doing so). Judging by its valuation the company was performing adequately before the crisis but has deteriorated fast. (Moody’s valued the first lien debt Caa1 in mid-2019). In less than 6 months CSM has gone from adequate performance to the edge of bankruptcy.

(Word to the wise, there will most likely also be a third wave of underperforming companies if the economy does not recover – even if not directly in the worst affected industries – as the weight of servicing debt and the difficulty of raising new capital increases. However, that’s an issue for another time).

We expect to be reporting back on CSM very shortly, given the short leash the lenders are giving the company.

Ravn Air Group: Files Chapter 11

Bad news for Ravn Air Group Inc. – a small Alaskan air carrier – which filed for Chapter 11 on April 6, 2020 and stopped operations effective immediately. According to news reports “the Anchorage-based airline holds out hopes of restarting operations once the COVID-19 pandemic passes.” Management hopes to ” seek federal CARES Act grants and other sources of financial assistance that will allow us to weather the coronavirus pandemic and emerge successfully once it has passed.” 

The only BDC with exposure is Portman Ridge Financial (PTMN) , which at 12/31/2019, had a $1.8mn cost position – valued close to par – in the airline’s 2021 first lien Term Loan. Based on Advantage Data’s records, that debt is trading at 72 cents on the dollar after the bankruptcy news, probably reflecting the debt’s position in the capital structure and the likelihood that Ravn will be back flying into the wilds of Alaska before long.

PTMN will probably have to book a half million or so realized loss – based on what we know – and lose for some time any income, which amounts to about $100,000 a year. Even for a smaller BDC like PTMN that should not be too egregious.

Roscoe Medical: Update

The medical supplies company Roscoe Medical has been in financial trouble since late 2018 and its debt on non accrual since the IVQ 2018. Back on May 9, 2019 one of the BDC lenders to the company – Saratoga Investment (SAR) – explained that Roscoe faced “both fundamental weakened performance as well as operational issues. While we believe the operational issues have been largely addressed, we expect the company to continue to face headwinds in a competitive industry“. At the time, SAR had written down its second lien debt by (40%). A second BDC – Portman Ridge (PTMN) discounted its position in the same loan by (57%).

On October 10, 2019 SAR discussed its latest results and increased the discount on the second lien loan to (56%). PTMN has not yet reported. An equity stake stake held by SAR has been long ago written down to nothing. However, the BDC did not have much news to report: “There is no real update since we last reported, these marks reflect both fundamental weakened performance as well as operational issues. We continue to work with the senior lenders and sponsors to pursue strategic alternatives in the near to medium term.

We’ve not found any other public information, but the SAR valuation and commentary is not encouraging. Should the company default, $1.25mn of investment income is at risk. Total BDC exposure at cost is $11.9mn, with PTMN having a slightly bigger share.

OCI Holdings: Increased In Value

On August 12, 2019 OHA Investment (OHAI) reported its IIQ 2019 results, which included a slight increase in the valuation of OCI Holdings, a health care provider. The Texas-based company remains on non-accrual, which began in October 2018. The subordinated debt is discounted (89%) to $2.5mn, and an equity stake written to zero. Why OCI, grappling with reimbursement challenges from the Texas government, merited this slight uptick in value was not explained by OHAI on its Conference Call.

With the upcoming transition of the OHAI portfolio to Portman Ridge Financial (PTMN), we’ll be keeping a close eye on what happens to this fallen angel in which the BDC has invested $26mn at cost and was once its largest investment at fair value. A rebound in the value is possible but so is a complete write-off. It’s PTMN shareholders who will reap the benefit or consequences.

On December 18, 2019, Portman Ridge Financial (PTMN) acquired OHAI’s assets.