Posts for Goldman Sachs Private Middle Market

Country Fresh Holdings LLC: Files Chapter 11

On February 16, 2021 fresh food distributor Country Fresh Holdings LLC filed for Chapter 11 in Texas.

Pandemic-related supply chain and business disruptions have affected Country Fresh and our customers dramatically over the past year,” said Bill Andersen, Country Fresh President and CEO. “Despite efforts to improve company results before and during COVID, we believe that this sale transaction will result in a better capitalized company and positions our customers, suppliers, employees, and all other stakeholders for maximum success going forward.”

The company already has a “stalking horse” bidder in place in the form of PE group Stellex Group and has arranged debtor-in-possession financing with certain of its existing lenders, who were not named. Country Fresh hopes to go through the bankruptcy process in 60 days.

BDC exposure to Country Fresh is significant and includes 4 public and non-traded funds. Leading the group – and the earliest lender – is PennantPark Floating Rate Capital (PFLT) which has $23mn invested in the form of “super senior” term debt; a second lien loan and equity. Only PFLT has reported IVQ 2020 results so far and placed its $5.9mn second lien loan on non accrual for the first time. The other loans were still performing at the end of 2020, but are likely now on non accrual as well. PFLT also has $10.5mn of equity in the company which has been written to zero for the past 3 quarters and is likely to stay there.

Also with substantial exposure is non-traded Cion Investment while Goldman Sachs BDC (GSBD) and Goldman Sachs Private Middle Market Fund have tiny equity stakes left over from a 2019 restructuring and written off already on an unrealized basis.

At first approach, we’d guess PFLT and Cion might be involved in the DIP financing and are likely to receive back their “super senior term loan advances”. Still, realized losses are likely to be substantial: over ($25mn) , or 77% of all capital advanced because mostly concentrated in the second lien and equity. If the “super senior” don’t pay interest investment income will be forgone from the IQ 2021 forward, but may get recouped when the business is sold.

This is second time not the charm for PFLT and Cion, both who were involved in Country Fresh’s earlier restructuring in 2019, which resulted in ($7.1mn) in realized losses at the time for PFLT.

Also notable is that Country Fresh – by our count – is just the fourth BDC-financed company to file for Chapter 11 in 2021. Whether the BDCs involved will convert debt to equity and/or advance new monies in the form of loans or equity is not yet clear. We’ll circle back when we learn more.

Zep Inc.: Upgraded By Moody’s

On August 17, 2020 Moody’s upgraded the corporate and debt ratings of Zep Inc., a producer of “chemical based products including cleaners, degreasers, deodorizers, disinfectants, floor finishes and sanitizers, primarily for business and industrial use“. The “Corporate Family Rating” was increased to Caa1 from Caa2 . Moody’s also upgraded Zep’s first lien senior secured credit facilities to B3 from Caa1 and its second lien term loan to Caa3 from Ca. The outlook is stable.

Apparently, the company has benefited from “the significant increase in demand for its products as customers across its food & beverage and industrial end markets enhanced standard operating procedures and protocols around cleaning, sanitation and maintenance in their facilities in response to the coronavirus pandemic“. Liquidity, too, is getting better and Moody’s expects these trends to continue.

For the 6 BDCs with $126mn in “Major” exposure to Zep, this is good news. In the IQ 2020, the second lien debt held was discounted (59%) and the first lien (30%), but was already being valued higher in the second quarter, reflecting the same trends as caused the Moody’s upgrade. Most impacted will be the Goldman Sachs organization whose 3 public and private BDC funds each have a major position in Zep to the tune of $88.4mn or two-thirds of the total. Oaktree Specialty Lending (OCSL) is also a significant lender with $31.6mn, mostly in second lien. Also involved are Oaktree Strategic Income (OCSI) as well as non-traded Audax Credit, but for only small amounts.

The BDC Reporter is upgrading Zep to a Corporate Credit Rating of 3 from CCR 4 given that the odds of full recovery are greater than that of eventual loss. Nonetheless, before setting off the fireworks and having a parade at this good news, we should remember most BDC exposure is in the second lien debt which still has a speculative rating (Caa3). Furthermore, the debt does not mature till 2025. Much can happen in the five years ahead, which is why we are retaining Zep on the underperformers list.

Still, in the short term – and the IIQ upward valuation notwithstanding – we may see a lower discount (i.e. unrealized appreciation) in the BDC IIIQ 2020 results.

Zep, Inc: New CEO Hired

On August 20, 2019 Zep Inc., an industrial cleanings product developer, announced the hiring of a new CEO: Dan Smytka.

That’s notable from a BDC standpoint, both because of the substantial exposure to the company ($126.6mn at June 2019) from 6 public and non-traded BDCs and because the business has been under-performing of late. That caused the second lien debt in the latest quarter to be written down by as much as (30%) and first lien debt by (19%), according to Advantage Data‘s records. (As usual there’s much variation in values between BDCs). By comparison, a year ago the debt was valued, in all cases, close to par. We checked the latest prices on Advantage Data for both tranches of debt and found discounts of (25%) and (30%), suggesting the markets have been getting more pessimistic since mid-year.

What’s more, Moody’s downgraded the company to speculative status back in April, including the first lien secured debt. The rating group is concerned about debt to EBITDA that exceeds 10x ! A saving grace is that the earliest debt maturity is 2022.

Clearly Mr Smytka has a big challenge ahead and the BDCs involved – especially three Goldman Sachs funds with the bulk of the exposure – will be watching with great interest if a turnaround can be achieved. With over $12mn of annual investment income at risk, this is one of the largest BDC trouble spots. We have the company on our Worry List or CCR 4.