Posts for Portman Ridge Finance Corporation

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.