The BDC was first established in 2006 and operated as a public company under the name Triangle Capital (TCAP). The BDC was internally managed. On August 2, 2018, the BDC's entire portfolio was sold to a third party lender and the management was externalized, with Barings LLC becoming the manager. The BDC changed its name to Barings BDC and BBDC respectively. The new manager has shifted the investment focus to syndicated senior secured loans, bonds and other fixed income securities. Over time, Barings expects to transition the portfolio to "senior secured private debt investments in performing, well-established middle-market businesses that operate across a wide range of industries".

LATEST: At the end of IIIQ 2019, BBDC's investment assets had an aggregate cost of $1,186mn, and FMV of $1,158mn. There are 142 companies in the portfolio. We have identified 7 companies that are under-performing, and 135 that are performing.

No companies are on non-accrual.

There are 3 companies rated Corporate Credit Rating 4 – our Worry List. These are Seadrill Ltd ; Serta Simmonds Bedding, LLC and 24 Hour Fitness Worldwide, Inc. That last company added to the under-performing group in the IIIQ 2019 for the first time.

There are 4 under-performing companies on our Watch List CCR 3. These are Fieldwood Energy LLC; Mallinckrodt Plc; Men's Wearhouse and Team Health Holdings, Inc. That last company added to the under-performing group in the IIIQ 2019 for the first time.

BBDC does not provide an investment rating system for its portfolio assets. The BDC Credit Reporter investment rating system values under-performing investments at $47.3mn or 4.1% of total portfolio assets at FMV.

Posts for Barings BDC

Serta Simmons Bedding: Disagrees with S&P Rating

In an unusual move, Serta Simmons Bedding publicly scolded S&P Global Ratings for recently downgrading the company to a CCC rating from CCC+. As this trade article explains, management’s contention is that the rating agency was making the move “based mostly on where our debt is trading in the markets”. The company went on to point to “continued trends of improved performance in our cash and EBITDA” as the reasons why S&P is wrong. Furthermore, the company contrasted the S&P approach with its arch rival Moody’s who were seen by Serta’s management as taking a more constructive approach. We don’t quite understand that last point as Moody’s downgraded Serta to Caa1 from B as far back as April.

For our part, we initiated coverage with a Corporate Credit Rating of 4 (Worry List) back on August 14, 2019. That’s only one level above non performing on our 5 point scale and indicates that we believed the chances of an eventual loss were greater than of full recovery. Initially, we added the company to the under-performing company list following the valuation of its debt by the only BDC with exposure – Barings BDC or BBDC – in the IQ 2019 results. At that point, the 2023 Term Loan in which BBDC was invested – which is institutionally traded – was discounted (19%). As of September 2019, that discount had increased to (33%). For what’s worth, as we write this, the discount has increased to (40%) in the loan market.

All the above only solidifies our concerns and CCR 4 rating where Serta is concerned, especially as the whole sector is going through a difficult period with competitors filing for bankruptcy, as we’ve covered on these pages.

Akorn, Inc.: May File Chapter 11

This came out of left field for Akorn,Inc.’s debt and common stock holders. Sort of. The company – which has been the subject of numerous lawsuits – has been in a standstill period with its lenders since May 6, 2019. The idea was that the company and lenders would arrive at a “comprehensive amendment to the Term Loan Agreement” by December 15, 2019. By the deadline no agreement had been reached and the standstill was extended a few days ago to February 7, 2019. However, in the 8-K filing where this extension was memorialized, the company admitted one of its possible alternative solutions was a Chapter 11 filing. All hell broke loose and the common stock price dropped (28%) on the day. The volume of shares traded was 12x the normal volume.

To this point, we had rated the company as performing as expected, or CCR 2. After all, it’s only BDC lender – Garrison Capital (GARS) carried its 2021 Term Loan at only a modest (7%) discount to par as of September 30, 2019. Absent any other adverse information, the BDC Credit Reporter typically does not add any company to the under-performers list without a downward move on debt held by (10%) or more. Clearly, we had missed the standstill agreement, which normally would have been a red flag and caused a downgrade to under-performing.

Now, we’ve skipped down two levels to CCR 4 (Worry List), based both on what Akorn said in the 8-K and the tight deadline the lenders are giving the company, which suggests the parties are not close to a satisfactory resolution. Some $854mn in debt could immediately come due and payable at any time…

We can’t imagine that if the company does file Chapter 11, the GARS debt – besides becoming non-performing – will not drop further in value. The loan is being charged at LIBOR + 625 bps, increased from two quarters before as compensation for the standstill. If Akorn files for Chapter 11, $0.160mn in annual investment income will be interrupted. This is likely to accelerate very quickly – either to a resolution or a filing – so stay tuned.

Men’s Wearhouse Inc.: IIIQ 2019 Results Weaker

On December 11, 2019 Tailored Brands (TLRD), which owns Men’s Wearhouse Inc., reported third quarter 2019 results. To listen to the company’s CEO on the ensuing Conference Call – as we did – is to believe that the famous retailer with several well known brands is making progress. On the other hand, the Motley Fool’s take on reviewing the latest results was the opposite: Tailored Brand’s continues to face multiple challenges in the retail space and is “running out of time”.

The BDC Credit Reporter added Men’s Wearhouse – a subsidiary of TLRD – to the under-performing list in the IIQ 2019 and wrote our first post on September 13, 2019, rating the company CCR 3 (Watch List), shortly after the dividend was suspended. We had a look at all the results – including the 10-Q – for the latest quarter and came away confirmed in our initial skepticism and that of Motley Fool. The highlights of our concerns; sales dropping at all brands; the departure of a senior manager; huge losses to the bottom line; a declining stock price and still very high debt (given as 4.4x debt to EBITDA by management but much higher when mandatory capex is included).

The good news is that the company has plenty of liquidity thanks to undrawn secured revolver debt and some cash and no debt maturities in the short term. We are maintaining our CCR 3 rating in that there is still a decent chance the business can be turned around without a restructuring or bankruptcy. We do note, though, that since the last time we wrote the only BDC with exposure – Barings BDC (BBDC) – discounted its $10mn investment in the 2025 Term Loan by (17%), lower than in June 2019.

Team Health Services: Bond Values Lower

The BDC Credit Reporter is a work-in-progress in that we are still loading all the several hundred under-performing BDC financed companies into our database and this website. We mention this to explain why we’re only getting round to waving warning flags about Team Health Inc. (aka Team Health Holdings), a company that has been under-performing since the IQ 2019; held by 6 different BDCs and which seems to be getting worse rather than better.

Back on August 12, 2019, as this trade article summarizes nicely, Moody’s downgraded the outlook for the company:

Team Health Holdings Inc.’s ongoing contract fight with UnitedHealth Group Inc. is hurting the bond status on the Knoxville-based hospital staffing and management company.

Moody’s Investors Service on Friday downgraded the outlook for Team Health from stable to negative, after affirming the company’s B3 Corporate Family Rating and B3-PD Probability of Default Rating.

The change of outlook reflects rising uncertainty around Team Health’s ability to reduce leverage given its recently disclosed dispute with UnitedHealth Group Inc., one of its largest commercial payors,” Moody’s said.

Moody’s also affirmed the B2 rating on Team Health’s senior secured credit facilities and Caa2 rating on its unsecured notes“.

We’re read Moody’s Ratings Action, and it’s clear that Team Health has a myriad business and financial challenges, including debt to EBITDA (admittedly a multiple that has become almost meaningless without knowing how the denominator is derived) of over 8x.

Just as distressing is the market price of the 2024 publicly traded 2024 Term loan which at December 12, 2019 was trading at a (28%) discount. Many BDCs hold that first lien debt which was trading at an (18%) discount in the market on September 30. (We note that the BDCs own valuations ranged from a (1%) to a (14%) discount in their IIIQ 2019 portfolio values). By the way the BDCs with exposure to Team Health include Barings BDC (BBDC) but only in the first lien; FS-KKR Capital (FSK) and four of its non-traded sister BDCs: FSIC II, FSIC III FSIC IV and CCT II. The biggest exposure is that of FSK, just under $15mn.

If the first lien debt is already trading down so much, where can be the second lien debt be that accounts for half of BDC exposure ? This debt does not trade so that’s a question without an answer, but at September 2019 quarter’s end the BDCs – all related – were writing down the debt by (22%). We’d guess the discount on the second lien – due in 202- might be as high as (50%).

We’ll have much more to say as we dig deeper and more developments occur. Our concern is not only about Team Health but similar health organizations facing pressure relating to payment practices. As the BDC Credit Reporter becomes more comprehensive quickly identifying BDC funded companies with a similar business model – and risk – will become easier. As the song says: “we’ve only just begun”.

24 Hour Fitness Worldwide: Downgraded by Moody’s

On November 12, 2019, Moody’s downgraded 24 Hour Fitness Worldwide,Inc. to a corporate family rating of Caa1 from B2. There were a series of downgrades as well of individual debt tranches on the company’s balance sheet, from secured to unsecured debt and involving $1.5bn of debt securities. We won’t get into too much detail about the reasons for the downgrade, which relate to business under-performance. This sentence from the Moody’s report speaks volumes by itself: “The Caa1 CFR reflects Moody’s forecasts that 24 Hour Fitness’ EBITDA will decline further resulting in funded debt/EBITDA (excluding operating leases) peaking at 8.2x while EBITA/interest expense (excluding operating leases) will erode to 0.3x“.

That adds a new company to the BDC Credit Reporter’s list of under-performing companies. However, exposure is thankfully limited to one BDC – Barings BDC (BBDC) with a $9.5mn at cost in the company’s 2025 debt. That was booked in the IIIQ 2018 before these current weaknesses became apparent (BBDC may have paid a premium for a loan that pays LIBOR + 350 bps) and was still valued at only a (4%) discount to cost as of September 2019.

This same debt appears to be currently trading – after the downgrade and after an unproductive investor meeting – at a substantial discount. We have rated 24 Hour Fitness right off the bat CCR 4 (Worry List) from CCR 2 (Performing). To be direct, given the level of debt versus EBITDA and the nature of the business, which is unlikely to see a surge in growth at this stage in its development, we expect to see a Chapter 11 or major restructuring occur. The company has no immediate liquidity pressure and no debt due till 2022, so there is unlikely to be a sudden rush to the courthouse steps. On the other hand, an operational improvement sufficient to change the outlook is highly unlikely. We imagine that we’ll be revistting this subject in the months ahead.

Men’s Wearhouse: Earnings “Mixed”. Dividend Cut.

On September 11, 2019 publicly traded Tailored Brands (ticker: TLRD) – owner of Men’s Wearhouse and other clothing businesses – reported “mixed” second quarter 2019 earnings, according to a news report . Adjusting for a special one time item, EPS is down a fifth from a year ago and sales are off 4%. Most indicative of all, the company has suspended its dividend “to pay down debt”.

There is only one BDC with exposure: Barings BDC (BBDC). We placed the senior loan on the under-performing list from the IIQ 2019, when the BDC discounted the value of the debt by (12%) from (5%) previously. BBDC’s exposure started in IIIQ 2018 and this was expected to be a super-safe loan judging by pricing (L + 325%). Annual investment income of just under $0.600mn is ultimately at risk.

The latest news is likely to cause a further unrealized write-down in the next earnings release, unless the valuation folk take comfort from the savings in cash flow to come from the dividend elimination. We note the 80% drop in TLRD’s stock price in the space of a year and we worry. The credit is rated a CCR 3 (Watch List), but could be headed lower before the year is out.

Mallinckrodt Plc: Bankruptcy Possible – Analyst

On September 3, 2019, one of the 15 analysts covering publicly traded opioid pharmaceutical manufacturer Mallinckrodt Plc (ticker: MNK) suggested a bankruptcy filing is”possible”, according to a financial publication. This sounds plausible as the company has “more than $5 billion of debt, most of which will start to come due in 2020, according to Bloomberg“. The publication added that “the company recently announced that it borrowed the final $95 million on its revolving credit line, meaning that it has no more capacity to borrow“. Showing how dire conditions have become Reuters reported the company has hired restructuring firms, including two of the usual suspects in this situation, Latham & Watkins and Alix Partners.

Of all that $5.0bn of debt, there is only $11.2mn at cost held by a BDC, and that’s Barings BDC (BBDC). This was supposed to be a “safe as houses” position for BBDC, priced at just LIBOR + 2.75%. At June 30, 2019 the position was valued at 90% of cost. However, based on Advantage Data’s real time loan pricing we know this debt is now trading at 77 cents on the dollar and could drop lower given the many lawsuits pending against the business and the myriad uncertainties facing the segment, even if a restructuring becomes possible.

Should Mallinckrodt Plc end up in bankruptcy or restructured, the NAV or income loss to BBDC will be modest but will be one of the first credit reverses since the new external manager took over and renamed Triangle Capital (TCAP).