Posts for TCW Direct Lending

Centric Brands Inc: Credit Coverage Initiated

We are initiating our credit coverage of Centric Brands Inc. with a rating of CCR 3, dating back to the IIQ 2019. At that time, Ares Capital (ARCC) discounted the value of its $24.6mn equity stake in the company by (24%), from par in the prior period. Given that the company is publicly traded (ticker: CTRC) that reflects a declining stock price, which was as high as $5.33 a share in mid-March. By the end of June CTRC was at $4.11. As we write this on December 28, 2019, the stock price has halved since the summer to $2.15.

Admittedly, most of the substantial BDC exposure of $123.8mn at cost is in the form of Term debt due in 2023, held by the afore mentioned ARCC, TCW Direct Lending and Garrison Capital (GARS). That debt has been valued very close to par since first being booked and remains so in late December, according to Advantage Data’s records.

Nonetheless, even a quick glance at the company’s 10-Q is enough to elicit credit concern. The company is fast growing, thanks to acquisitions in 2018 and 2019, but debt levels are very high and getting higher. We note that Adjusted EBITDA, as reported in the latest 10-Q for the first 9 months of 2019, was given as $122mn. Interest expense – which admittedly includes Pay-In-Kind income – was $142mn…The ‘comprehensive loss” over the same 9 month period was ($171mn). Yes, we know investors are too clever to take GAAP accounting as the be-all in this brave new world of adjusted numbers but that’s still a lot to swallow.

Notwithstanding the apparent complacency of the debt markets, the BDC Credit Reporter is worried about the leverage levels. Our concern is heightened because the amount of total BDC exposure is so high, especially for ARCC and TCW Direct Lending. Any sort of stumble by the company could materially impact book value and investment income earned. Nor should debt holders take too much comfort from the “first lien senior secured” appellation of the $99mn in term debt held by the BDCs. Sitting above them in order of priority is a secured Revolver – led by ARCC as administrative agent – and many of the company’s trade receivables are being sold off in a different financing facility.

We expect that we’ll be updating readers multiple times in the year ahead given that Centric is a public company and every quarter brings a new snapshot of performance. We’ll also keep an eye on stock and debt price performance, even if we don’t fully trust the credit antennas of the latter in the current frothy and generous market conditions.

Connor Brothers Clover Leaf Seafoods: Files Bankruptcy In Canada

As expected, the Canadian subsidiary of bankrupt Bumble Bee Foods has filed for protection itself under Canadian law. The subsidiary is the long named Connor Brothers Clover Leaf Seafoods, which we’ve written about in the past. On December 2, 2019 trade publication – SeaFoodSource reportedConnors Bros. has commenced court-supervised restructuring proceedings under Canada’s Companies’ Creditors Arrangement Act, as has fellow Bumble Bee affiliate Cloverleaf Holdings Company, according to the CBC. The companies operate the Bumble Bee, Clover Leaf, and Brunswick brands in Canada“.

Connors Bros. operates a fish processing plant in Blacks Harbour, New Brunswick in Canada that employs between 400 and 800 people depending on the season and packs a variety of products, including tinned herring and sardines.

The Canadian bankruptcy- which is materially different than the process in the U.S. – is not expected to result in much change operationally or lead to liquidation. That may explain why the 2023 debt issued by Connor Brothers, held by the two BDCs with exposure thereto, is trading at only a (7%) discount to par when we checked Advantage Data’s Middle Markets loan module on December 3, 2019. In total, there is $13.6mn at cost of exposure. Two-thirds is held by non-listed TCW Direct Lending and one third by Apollo Investment (AINV). Both BDCs have modest discounts on the debt held, but will – presumably – be losing approximately $2mn of investment income on an annualized basis until the bankruptcy is resolved. Bumble Bee is reportedly going to be sold. We imagine – but have no confirmation – that Connor Brothers will be included in whatever transaction occurs.

Overall, the Bumble Bee/ Connor Brothers failure is a material blow to both BDCs involved, with over $60mn of exposure and $7.5mn of income interrupted. What we don’t know yet is how long the bankruptcies will go on for – impacting IVQ 2019 results already – and what recovery rates will look like. In theory, the lenders could still collect all principal and interest once the dust settles. Or not.

In any case, we’ve added Connor Brothers to the BDC Credit Reporter’s list of BDC-funded companies in bankruptcy. See in the Data Room.

Bumble Bee Foods: Files Chapter 11

As long expected, Bumble Bee Foods filed for Chapter 11 on November 21, 2019. The BDC Credit Reporter had first reported on the tuna manufacturer’s business and legal woes on July 22, 2019, when we placed Bumble Bee on our CCR 4 (Worry List). On two subsequent occasions we’ve mentioned the prospect of bankruptcy on August 10 and – most recently – on November 19, 2019.

With the filing, we’ve learned that the company has assets and liabilities of as much as $1 billion each, according to court papers. Furthermore “It has arranged an $80 million term loan from its current lenders and a $200 million revolving credit facility to keep operating while in bankruptcy, the documents showed“.

Bumble Bee is in litigation with the Department of Justice and has been pleading poverty to reduce fines owed, according to news reports: “The company flagged its financial distress at the time of sentencing, arguing the $81.5 million fine initially levied could push it into insolvency. The U.S. Department of Justice agreed, cutting the amount to $25 million and giving Bumble Bee an installment plan over several years that required no more than $2 million upfront“. Now that’s a deal.

Most importantly to the company’s lenders, Taiwan-based FCF Fishery has offered $925mn for the company as a “stalking horse” bidder. We don’t have a complete picture of Bumble Bee’s finances, and a full sales process will be required to ensure creditors get top dollar, but it’s an encouraging sign for the two BDCs (Apollo Investment or AINV and TCW Direct Lending) with $48mn lent to the company via its 2023 Term loan. That debt was valued at only a (7%) discount as of September 2019 by AINV. That’s the discount which the traded debt continues to be valued at when we just checked Advantage Data’s records. The FCF proposal “calls for paying down part of Bumble Bee’s existing first-lien debt“, according to the Wall Street Journal. In fact, we might see the lenders getting back 100 cents on the dollar once negotiations are complete. In either case, if the current valuation for Bumble Bee holds and other legal issues are resolved the lenders – notwithstanding this bankruptcy – might dodge a major credit bullet.

Bumble Bee Foods, LLC: Preparing To File Chapter 11

For weeks rumors have swirled around about a soon-to-occur Chapter 11 filing by Bumble Bee Foods, LLC. The latest comes from the Wall Street Journal on November 15, 2019, relying on “unidentified people familiar with the matter” (lawyers ? bankers ? the janitor ?). This may be posturing by one of the parties involved as part of the gamesmanship that comes with the territory. Still, we’ve been warning about bad things likely to happen since July 22, 2019, with a follow-up on July 23. We explicitly reported that a Chapter 11 was likely back in August, and noted BDC exposure at that time.

This time is different only in that the WSJ is a pretty reliable source and we have the IIIQ 2019 BDC exposure numbers to update readers on. TCW Direct Lending has two thirds of the exposure at $32.6mn at cost but has chosen to write the position down only by (3%) at FMV. Apollo Investment (AINV) has $15.2mn, and has marginally increased its fair market discount to (7%). Both lenders are in the publicly traded 2023 Term loan, which trades at that same (7%) discount at time of writing.

It seems like both lenders expect to be able to ride out any bankruptcy or restructuring with minimal damage, and we have no alternative data to suggest otherwise. Still, an interruption of investment income is likely – which may or may not be ultimately recouped. We have added Bumble Bee to our Bankruptcy Imminent List, which we’re now limiting to credits that we expect to take such action in the current (IVQ) quarter. Also, let’s not forget Bumble Bee’s Canadian subsidiary Connor Brothers Clover Leaf Seafoods, where AINV and TCW have an additional exposure at cost of $13.6mn. We’re not sure of the Canadian company would be included in the American parent’s bankruptcy, but it’s worth keeping an eye on to judge full exposure.

School Specialty, Inc: To Explore Strategic Alternatives

Publicly traded School Specialty Inc. announced on October 9, 2019 “has commenced a formal process to explore and evaluate potential strategic alternatives focused on maximizing shareholder value”. Previously, the company had announced the hiring of a financial adviser to assist with re-jigging its financial structure. Now the company aims to review “all options”.

We reviewed the latest quarterly financials, which showed the company generating just $10mn of EBITDA and a net income loss of ($6mn). Debt, though, was very high at close to $200mn, and trade payables are growing as sales are dropping. Trouble clearly lies ahead, and the stock price has dropped to $2.50, down from a high of $17.10 within the last 52 weeks.

This must be worrisome news for the only BDC lender: non-listed TCW Direct Lending, which has a material exposure of $43.1mn, all in the publicly traded 2022 Term Loan, which itself is structurally subordinated to an asset-based loan. At June 2019, TCW had discounted its position by as much as (8%). The current market value of the debt is slightly lower at time of writing. The possibility of an even greater write-down – and some sort of write-off – is growing by the day.

We are downgrading the debt from “performing” – or CCR 2 in our 5 point rating system – to CCR 4, or Worry List in a single bound. Given the high interest rate being charged (11.4%), the potential loss of income could be high: close to $5.0mn. We get the impression that School Specialty – only now arriving on our under-performer list – may be here for awhile.

Bumble Bee Foods: Bankruptcy Likely

On August 9, 2019 news reports indicated Bumble Bee is seriously considering Chapter 11 to “relieve its financial stress connected to a guilty plea to a government price-fixing charge”. Here are more details, all of which suggest a filing is almost inevitable even if there are supposedly other alternatives on the table: “

Bloomberg reports, citing people familiar with the proceedings, the prospect of a court-supervised restructuring under Chapter 11 is among several options being evaluated, with a sale of the business another possibility. But the people, who asked not to be named, said potential buyers would have to deal with the aftermath of the legal proceedings, which are still ongoing.

Bumble Bee is also facing a cash squeeze, according to Bloomberg’s sources. Class-action lawsuits related to the antitrust case have increased its potential liability, while the company is also encountering claims it mislabelled products as dolphin-safe, they said.

The seafood supplier has also exceeded the maximum leverage ratio allowed under its senior debt facility, a US$650m term loan due in 2023, one of the people told Bloomberg“.

We’ve written about the company and its Canadian subsidiary twice before on July 22 and July 23. With the latest earnings reports, we see Apollo Investment (AINV) – one of two BDC lenders with exposure – has discounted its senior debt position only (7%) from (1%) the quarter before. That seems unrealistically optimistic even if AINV – and the other BDC lender TCW Direct – are in the 2023 first lien debt. Still, we checked the real time price on Advantage Data for that publicly traded loan, which was trading at 92 cents on the dollar.

This is what AINV said on its latest Conference Call, which does not augur well for the 6/30/2019 being as Bad As Its Gets:

“Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division – MD

 And then you guys’ investment in Bumble Bee. I think that company is about to file for bankruptcy or may have just been announced that they’re going to file for bankruptcy. Just wanted to know, does your 6/30 fair value market — you guys have it marked at about 95% of cost. Is that mark inclusive of if they have to run through bankruptcy?

 Tanner Powell, Apollo Investment Corporation – President & CIO of Apollo Investment Management [38]

 What I’d say there is that is an LCD article that came out today or yesterday. Our valuations are a point in time. The company has had, has experienced issues not only related to tariffs, but also related to historical issues with price fixing and consequent litigation expenses. We are a participant in a broader facility and are working with the borrower to deal with the issues and move things forward. But in terms of the specifics, our valuation is a point in time with the information available to us at the time as of quarter-end”.

Time will tell, but we expect a bigger ultimate Realized Loss is coming.

AINV has $2.0mn of annualized investment income at risk, so even a temporary interruption from a stay in bankruptcy court could impact the BDC. TCW’s exposure is even larger at $42mn and $4.5mn of investment income is involved, but we’ve not seen a June 2019 valuation as yet from the non traded BDC.

Bumble Bee Foods: Further Information About Financial Problems

We first wrote about the troubles at Bumble Bee Foods, LLC just yesterday (July 22, 2019). We added the tuna fisher/processor to our Worry List right away on the news that a turnaround firm had been hired to advise management. That’s never a good sign where credit is concerned. Now we learn from a trade publication that the company has been in ‘”technical default’ since March of 2019 and has breached a “financial covenant” on a $650 million loan. This only validates our decision to move the company – still valued by its two BDC senior lenders at a discount of less than 10% (our typical trigger level) to the Worry List. What we still don’t know is whether the senior debt that the BDCs are involved in can expect full recovery if Bumble Bee does stumble into bankruptcy or an out-of-court restructuring.

Bumble Bee Foods, LLC/Connor Bros Clover Leaf Seafoods : Turnaround Firm Hired. Sale Prospect.

We heard from the Wall Street Journal on July 19, 2019 that famous Bumble Bee Foodshas hired turnaround firm AlixPartners LLP as the seafood purveyor seeks to recover after pleading guilty to fixing prices on canned tuna, according to people familiar with the matter”. In another news report, we also discovered that “Italy’s Bolton Group International is now seen as the frontrunner to acquire Bumble Bee Foods’ Canadian operation.  The company owns “Clover Leaf, Brunswick and Beach Cliff brands”. This process appears to be some way down the road as ‘one source close to the process said Bolton is now exclusive for Clover Leaf, while another told Undercurrent a deal is “close” and could emerge at the end of July or in early August“. We first heard reports of a prospective sale back in April. From a BDC perspective, there are two senior lenders to the U.S. parent and Canadian subsidiary with $61mn of exposure at cost. The BDCs involved are non-traded TCW Direct Lending and Apollo Investment (AINV) in a 2:1 ratio. At 3/31/2019 the debt was valued close to par: TCW had a (7%) discount and AINV (1%). Total income at risk is over $6.5mn. Both BDCs have been invested in the 2023 Term Loan since 2017. We have no idea how serious Bumble Bee’s troubles might be to be impelled to bring on a turnaround specialist, nor is it clear if the valuation from March end is out of date. The 2023 Term Loan, according to Advantage Data’s real-time loan pricing system, is discounted only (3%) at time of writing. Nonetheless, we’re placing Bumble Bee on our Worry List, skipping the Watch List category, moving down from Performing.