After a press release from Moody’s, we updated the Confie Seguros Holdings II Company File. Click here . The company remains rated CCR 3, and is held by 5 BDCs, and we anticipate no material change when IQ 2021 results are published.
"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".
Posts for Barings BDC
We’ve written about bedding manufacturer Serta Simmons Bedding LLC multiple times before because much has been going on with the company. Even before the pandemic, the company was underperforming. The BDC Credit Reporter downgraded Serta to a CCR 3 rating in the IQ 2019. That was raised to a CCR 4 in the IQ 2020 when the debt of the BDC was discounted by (50%), and talk of bankruptcy was in the air. Our most recent update occurred on June 23, 2020 shortly after the company dodged the bankruptcy bullet by undertaking a controversial restructuring gambit.
As this thoughtful article from Bloomberg explains, management sided with certain of its existing lenders to (essentially) stiff some of the other lenders; while reducing total debt and generating fresh liquidity at the same time. We won’t get into a detailed discussion of how the situation played out but will say that the only BDC with exposure – Barings BDC (BBDC) – joined in with the “winners” in this internecine struggle. The losers – led by Apollo Global – went to court to dispute the deal and lost.
For our purposes, BBDC went from a $4.9mn par position ($3.9mn at cost) in a first lien term loan due in November 2023 priced at LIBOR + 350 (with a 1% floor) to positions of $10.6mn at cost in two “super priority loans” with a August 1 2023 end date, but priced at LIBOR + 750, also with a 1% floor. Although pricing is the same, one tranche is a “first out” and the other a “second out” and are valued differently by BBDC and the market. As of September 30, 2020 BBDC values the first out at a premium to par and the second lien at a (12%) discount, slightly worse than the prior quarter when this debt was first booked.
To get to this point – better pricing and “super priority” status – BBDC had to agree to swap out its earlier debt at a discount and advance new funds to the struggling mattress manufacturer. Not clear from the BDC’s financial statements is whether a realized loss of any sort was booked as part of this bold exchange. (We had first thought BBDC was going for a debt for equity swap, but realize now that this is a debt for debt swap – also a standard restructuring technique).
At this stage, we have upgraded Serta to CCR 3 status. However, we don’t believe the company is out of the woods yet given market conditions and the still substantial debt load. Furthermore, BBDC has essentially “tripled down” in terms of total exposure, raising what was a modest exposure to a more material level. Undoubtedly, we will be revisiting Serta’s long and winding credit road again.
Dedicated readers with an interest in the “energy-calypse” (trademark pending) will remember that we last wrote about Fieldwood Energy LLC on August 4, 2020. That was when the E&P producer achieved a Chapter Twenty Two – filing for Chapter 11 protection twice. The first time was in 2018. At that point there were three BDCs with $13.3mn in exposure to the company’s debt. Leading the pack was Barings BDC (BBDC) with $10mn, followed by non-traded Monroe Capital Income Plus Corp and NexPoint Capital with just over $3mn invested between them.
We promised at the time to “circle back to Fieldwood once we hear about whether the court is in agreement with the proposed plan and when we can evaluate what the company’s balance sheet – and business prospects – might look like going forward“. However, the most interesting news since our last article is that BBDC has thrown in the towel – not unreasonably given the circumstances – and booked a realized loss in the IIIQ 2020 from the disposition of its investment. The BDC did not explicitly spell out what the realized loss was but we know that the $10.063mn at cost had an FMV of $1.817mn at June. This suggests the loss was somewhere between ($8mn) and ($10mn). Given that there was no interest forthcoming as the debt was on non accrual from the IIQ, income is unaffected. BBDC booked ($21mn) in net realized losses in the quarter, so this was a material setback, even if expected.
The other two non-traded BDCs continue to have exposure to Fieldwood. The company has arranged a $100mn DIP facility and is seeking to sell its assets. As far as we can tell, the business remains under court protection. From the BDC Credit Reporter’s standpoint, this has become a “non material” company given that the remaining FMV is only $0.75mn.
Whatever the final outcome – and prospects do not look encouraging – this is yet another example – if any were needed – that lending to E&P companies is fraught with risk and not appropriate in almost any situation and at any position in the capital structure.
The long projected bankruptcy filing of Mallinckrodt PLC and many of its subsidiaries (including Mallinckrodt Intl Finance SA) has finally occurred on October 12, 2020. Our last article on September 28 had called out a likely filing, but the BDC Credit Reporter has been mentioning the high likelihood of this move since September 2019. Bankruptcy is accompanied by a huge and highly complex restructuring agreement affecting creditors, plaintiffs and other interested parties. However, from our perspective the most important news is the following statement in the company’s press release about the restructuring:
“All allowed First Lien Credit Agreement Claims, First Lien Note Claims and Second Lien Note Claims are expected to be reinstated at existing rates and maturities“
From what we can tell, the only BDC with exposure is publicly-traded Barings BDC (BBDC), which has invested $3.2mn in first lien debt due in 2024. Based on the above, we expect that no loss is forthcoming. As of June 2020, BBDC carried the debt at a (25%) discount. That is likely to get reversed if and when the restructuring plan is implemented as envisaged. The valuation is likely to be increased in the IIIQ 2020 results when published but a final resolution will have to await what might be a relatively short trip through the bankruptcy process. It’s also possible that BBDC has already sold this position and all the above is moot. In its most recent conference call BBDC did admit to trading out of these large cap, liquid positions where other troubled names were concerned. Maybe Mallinckrodt was on the list…
We are downgrading the company from CCR 4 to CCR 5 for the moment, but may upgrade to CCR 3 – or even CCR 2 – when the bankruptcy process is complete. The company is removed from the Weakest Links list of companies expected to default. As we’ve said in earlier updates, this bankruptcy will be big news in the broader financial markets but is of little importance in the BDC sector given the very modest, single BDC, exposure and at the top of the capital structure.
According to a news report on October 2, 2020 , Kenan Advantage Group has acquired Paul’s Hauling Ltd.
“The North Canton, Ohio-based tank truck transportation and logistics provider said the acquisition, announced Oct. 2, was completed through its Canadian subsidiary, KAG Canada/RTL Westcan. Paul’s Hauling provides bulk transport services in western Canada“.
The BDC Credit Reporter thought this was a good sign for the financial health of Kenan, which was recently added in the IQ 2020 to the underperformers list with a CCR 3 rating, due to its first and second lien debt discounted as much as (19%). Even in the IIQ 2020, the first lien – held by Barings BDC (BBDC) – was still discounted (10%) and thus remains just within the boundary of underperforming. However, we are going to be bold and – based on this latest news – suppose the trucking company is back to performing as expected.
As a result, we are upgrading Kenan to CCR 2 from CCR 3, one of many companies that made a quick cameo on the underperforming list and can now be removed for the right reason. Besides BBDC, the other BDC lender is FS KKR Capital (FSK), which has $17.30mn in Kenan’s subordinated debt. Don’t expect to see much of a pick up in value at FSK when IIIQ results are published. Already in the IIQ 2020 FSK reduced its discount to (1%) from (16%) in the IQ. The principal beneficiary – if they still hold the position – is BBDC, whose $4.3mn senior debt position was discounted by a tenth and should be valued back to par. That’s worth a few hundred thousands of unrealized appreciation, but unlikely to move any needles.
We are seeing almost daily “revelations” that Mallinckrodt PLC is preparing to file for Chapter 11 “within weeks” and is feverishly negotiating a restructuring agreement with its lenders and creditors. The latest such article is from the Wall Street Journal on September 25, 2020 in its premium Pro Bankruptcy publication. While we don’t doubt the veracity of the carefully placed rumor – this is the WSJ after all – the BDC Credit Reporter has been quoting experts warning of an imminent bankruptcy filing for the pharmaceutical giant as far back as September 2019 and as recently as February 2020.
If and when a bankruptcy occurs, it’s going to be big news given the size of the business and the billions of dollars lent to the Ireland-headquartered company. Thankfully, the BDC sector will be almost completely unimpacted. Only one BDC – publicly-traded Barings BDC (BBDC) – has any Mallinckrodt exposure. As of June 30, 2020, BBDC had advanced $3.2mn to the company in a Term Loan due 9/1/2024. The BDC had discounted the debt by (25%) already, to $2.4mn. It’s even possible that BBDC – based on what we’ve seen in other troubled large company loans – has already divested itself of the Mallinckrodt position. We’ll learn if that’s the case when IIIQ 2020 results come out. Either way, the loss is likely to be modest for BBDC. The investment income at risk is less than ($0.100mn).
We have already rated the company CCR 4 and placed the name on the Weakest Links list since May 2020. The likelihood that the company will move to CCR 5 has grown a little stronger with the WSJ report, even if these reports seem carefully timed by participants in the process seeking some advantage.
With all the sense of inevitability of an ancient Greek drama, yet another energy company has filed for bankruptcy protection. This time it’s Fieldwood Energy, LLC “a premier independent E&P company in the Gulf of Mexico“. Based on the company’s press release, the company already has a formal restructuring plan to submit to the bankruptcy court, agreed to by two-thirds of its senior lenders. Once again a company and its creditors are looking to the “debt for equity swap” as the solution for what ails the business. Also – as per the usual – Fieldwood has arranged a Debtor-In-Possession (“DIP”) facility and is using cash on hand to fund liquidity needs while going through the bankruptcy process. The amount of the DIP, though, is not given.
There are three BDCs with exposure – all in the first lien debt – to Fieldwood: $13.3mn. The only public BDC is Barings BDC (BBDC), which also has the only material exposure: $10.1mn. The rest is held by non traded Monroe Capital Income Plus and NexPoint Capital. The loan – now on non accrual -is priced at just LIBOR + 525 bps, suggesting lenders believed this was a “safe” energy loan (to our minds a clear oxymoron) when first booked back in 2018.
However, the investment has been in trouble for some time, rated as underperforming as far back as IQ 2020, long before Covid-19 drastically reduced market demand for fossil fuels. The BDC Credit Reporter has been writing about the company since April 15, 2020 and had already downgraded Fieldwood to a CCR 4 rating, and placed the name on our Weakest Links list. Now the company has been downgraded to CCR 5 and added to the Bankruptcy list.
For BBDC this is a telling reminder that no energy loan is safe in a world where oil can trade at $100 a barrel one day and at next to nothing a few years later. These single focus businesses cannot handle almost any amount of debt when their main product is subject to such drastic fluctuations. In this case BBDC, and the other lenders, look likely to be left with equity of dubious value and may have to stump up more funds with no great confidence that this time the right capital structure has been found.
We’ll circle back to Fieldwood once we hear about whether the court is in agreement with the proposed plan and when we can evaluate what the company’s balance sheet – and business prospects – might look like going forward.
On August 2, 2020 Tailored Brands – the parent of Men Wearhouse Inc. – filed Chapter 11. The BDC Credit Reporter has been writing about the troubled men’s clothes retailer since September 2019. In our most recent post on May 9, 2020 we predicted the company was likely to file for bankruptcy protection. In the last few days, the financial press has been abuzz with similar predictions. So, in two words: no surprise.
As per the new normal in leveraged lending, the company has agreed a restructuring plan with its senior lenders for a “debt to equity swap”, which will see $630mn of debt written off in return for a controlling interest in the business. In addition – and critically important from both a borrower and lender perspective because liquidity is tight and the future of all retail uncertain – the lenders are offering up $500mn in Debtor-In-Possession (“DIP”) financing. $400mn of that debt – unlike your bog standard DIP loan – will convert into longer term financing when the partly de-leveraged company exits bankruptcy. For more information, Tailored Brands has its own website on the subject.
Thankfully, BDC exposure – as we’ve noted previously – is modest, with only Barings BDC (BBDC) involved, with a $9.9mn position in the first lien debt and already written down by two-thirds. For a while income will be lost on the debt – we presume – to the tune of under ($0.35mn) a year. More importantly, the BDC will be booking in the IIIQ 2020 a Realized Loss of ($6mn-$7mn). Chances are high, though, that BBDC will be required to ante up for the DIP /long term financing. Along with the equity, BBDC will be tied to this men’s clothing business for many years to come. However, the amount at risk – even after their portion of the DIP is funded – should barely be material.
Nonetheless, this is a setback for a “first lien secured loan” that was thought of when first booked by BBDC in the IIIQ 2018 to be low risk, given the pricing was LIBOR + 325 bps. The likely recovery of one-third or less is also a reminder that sitting high on the capital structure is no guarantee in and of itself of low losses.
For our part, we’ve downgraded the company to CCR 5 (non performing) from CCR 4, and added the business to the Bankruptcies list we maintain, the first of August. The company has been removed from the Weakest Links list. We’ll circle back at the earlier of hearing from BBDC or learning more about whether the court approves the prepackaged restructuring plan. We expect to eventually upgrade Men’s Wearhouse when out of bankruptcy to CCR 3. That’s still on the underperforming list because the company will still be substantially leveraged and still in retail and still selling business wear when most everybody is wearing pajamas.
By the way, by our estimate, is still a First Wave bankruptcy: a company that was in deep trouble due to shifts in retail and consumer taste even before Covid-19. The business would have likely ended up in a similar place in the months ahead anyway even without the impact of the virus. The damage,though, to the company and to its lenders is that much worse because of what has been happening since March and the recovery therefrom that much more difficult.
On June 22, 2020 Serta Simmons Bedding announced by press release that a previously disclosed restructuring arrangement with some of its lenders had been finalized.
“The transaction includes $200 million of new capital and the exchange of approximately $1 billion in First Lien Debt and $300 million in Second Lien Debt, and will reduce the Company’s debt held by participating lenders by over $400 million, increasing the Company’s liquidity and financial strength, while supporting the acceleration of SSB’s business transformation plan“.
As we explained in a prior article, this is a classic debt for equity swap, with the existing lenders also putting up fresh capital to float the business in its next incarnation. From a BDC perspective there are no great amounts involved. The only BDC with exposure – Barings BDC (BBDC) – has only $3.9mn at cost invested and a FMV of $1.9mn. Their aggregate capital invested might go up, but not in a way that will move any needles.
For the BDC Credit Reporter the transaction – which included much friction with another group which we covered in our prior post – remains interesting as a fast moving example of the “debt for equity swap” and the changing roles of the debt providers in failed leveraged buyouts.
We retain our current rating of CCR 4 for the company till bankruptcy is formally exited, at which point a rating of CCR 3 or CCR 4 is likely. Which one will depend on the final structure and business conditions in the already highly competitive mattress market in the near future.
If the BDC Credit Reporter had waited just a few minutes more, we could have incorporated our last news item about 24 Hour Fitness Worldwide closing down a quarter of its locations for ever into the much bigger news of the day: the company’s Chapter 11 filing, just announced on Bloomberg. Obviously this was no surprise to anyone. What we learned today (Monday June 15, 2020) is that the company and its $1.4bn in debt was not able to agree a restructuring plan before filing for protection. We also learned that $250mn in Debtor In Possession financing has been agreed on, as the gym chain seeks to re-open many locations and operate as normally as Covid-19 allows.
We have downgraded the company from CCR 4 to CCR 5, i.e. non performing. Furthermore, the bankruptcy filing removes 24 Hour Fitness from the Weakest Links list now our projection has come true. For the only BDC with exposure – Barings BDC (BBDC) – this officially means no income is being generated on the LIBOR + 350 2025 Term Loan, a loss of under ($0.2mn) per annum. The value of the debt has already been written down by (80%) to under $1mn. For the BDC Credit Reporter, running from pillar to post with many other troubled names, the amounts now involved make this a Non Material investment so expect less coverage in the future.
This is the fifth BDC-financed company to file for bankruptcy protection in June. For BBDC this is a reverse for a loan booked in the IIIQ 2018 that must have seemed very “safe” given the pricing at the time. However, contrary to what management says, the troubles at 24 Hour Fitness predated Covid-19 . Over-building in the gym space; technological changes (“Peloton”) and the drag of high leverage had already caused BBDC to write down the debt by (25%) in the IVQ 2019. As a result, 24 Hour Fitness falls into our “first wave” of credit defaults – already weakened businesses given a knock out punch by the impact of the virus. Unfortunately that’s a reminder that we’re still at the beginning of a potential three waves of bankruptcies. Many more companies seem to be headed this way.
According to news reports, 24 Hour Fitness Worldwide is planning on closing a quarter of its locations permanently. This is likely related to bankruptcy plans underway. Prior to the closures – according to Marketwatch – 24 Hour Fitness had more than 400 gyms in 14 states, with around 22,000 employees. For our prior articles on the company, click here.
The plot thickens at Serta Simmons Bedding just two days after the BDC Credit Reporter last wrote about the mattress giant. A June 11 article in the Wall Street Journal describes an ongoing legal battle between two different groups of lenders for control of the company, which is teetering on the edge of bankruptcy. On one side there’s Apollo Global Management and on the other Advent International and a group of debt holders (led by mutual funds that invest in debt) that includes the only BDC with exposure: Barings BDC (BBDC).
What’s important to know is that BBDC’s group, working with Advent, is offering a debt for equity swap, summarized thus by the WSJ:
“The traditional loan funds that own most of Serta’s debt made a counteroffer to Advent, pledging to lend Serta $200 million and to exchange about $1.3 billion of loans they owned for $875 million of new ones, reducing the company’s overall debt by $400 million. But the funds, many of which bought their loans years ago for face value, demanded that the new debt they purchased and swapped into have first claim on all of Serta’s assets, essentially leapfrogging Apollo and other lenders. Advent took the offer from Eaton Vance and the other mutual funds, prompting Apollo and its group to ask the court to block the deal“.
Who knows who will win this legal battle ? We don’t and – in any case – the terms could change again. However, this does give us a glimpse of how BBDC is prepared to proceed: advancing more monies; remaining a lender but also becoming an equity investor. That would tie the BDC to Serta’s fortunes for many years to come and increase its total investment outstanding, though likely only modestly.
Not to make too much of one incident in one company by one BDC, but the BDC Credit Reporter believes the strategy being chosen for Serta may be repeated many times over in the months ahead as more companies face or file bankruptcy. Big asset managers like Barings – with plenty of cash, big teams of professionals standing by and an army of lawyers on retainer – will – most of the time – choose fight over flight. The relative portion of any debt owed that will be turned to equity and any new cash to be advanced will vary by transaction but the basic model will be the same.
If played out dozens or hundreds of times as we expect, this will continue to shift the traditional roles of lenders to non-investment grade companies. No longer do mutual funds, BDCs or other lenders just supply inexpensive first and second lien debt but are also seeking to be owners when necessary to protect their interests. This could never have happened when banks dominated leveraged lending in years past, but asset managers, mutual funds and other non-bank groups do not have the same regulatory requirements or the same mindset. The Covid-19 recession (still looking for a good name) could accelerate this shift that’s been underway beneath the radar for years.
Once again we’re hearing what’s going on in the conference rooms of troubled companies through the anonymous whisperings of a “person familiar with the matter” to the Wall Street Journal. In this case, the word is that Serta Simmons Bedding is eschewing bankruptcy and seeking to negotiate an out-of-court restructuring of its huge debt load. The WSJ indicates some debt would be swapped for equity and new capital would be injected in some form that is not clear to the BDC Credit Reporter. Nothing is yet finalized so just consider this a rumor in progress.
We’ve written about Serta Simmons before – one of a series of bigger companies considered lower risk when the debt was first issued at pricing of LIBOR + 350 bps which have gotten into trouble. As we noted on April 22, 2020, we’ve rated Serta CCR 4, which indicates that we expect some sort of loss to eventually happen. This news story, although not definitive, confirms our prediction. So do market prices, with the 2025 Term Loan involved here trading at a (60%) discount at the moment, even higher than the (51%) discount at March 31, 2020 when the only BDC involved – Barings BDC (BBDC) last valued its position.
This latest news item does not move any credit rating needles but suggests the company and its lenders are – at least – getting close to an understanding. The news story also suggests the company – not unsurprisingly – seems to be in need of fresh liquidity, which always focuses deal doing. Not to get ahead of ourselves, though, the amount of debt that might be converted from debt to equity seems relatively modest and may leave Serta still on our underperforming list even if some consensus is reached.
For BBDC – as in many other positions – the exposure is modest in and of itself and should not result in any significant loss of capital or income whatever happens. This investment, though, falls squarely in what we’re calling the “First Wave” of defaults/restructurings because Simmons was facing business headwinds even before Covid-19 kept their customers out of the showrooms. We’ll circle back if and when we get beyond Deep Throat-like coat and dagger revelations and official terms are agreed. Or not.
We’ve seen this movie before: a company gets into trouble; hires “financial advisers”; drops anonymous hints about possibly filing bankruptcy and then – nine times out of ten – does just that. Men’s Wearhouse is in the midst of that time honored process right now with “people familiar with the matter” whispering to Bloomberg about Chapter 11 as an option being considered.
For the BDC Credit Reporter, this does not move the needle as we’ve rated the company CCR 4 and added the name to our Weakest Links list since March 2020 when operational steps being taken let us know the situation was getting dire.
There’s no change in BDC exposure – which remains solely in Barings BDC (BBDC). We only write this update to warn readers that the headline “Men’s Wearhouse Files Chapter 11” might be flashing over the news wires soon.
We hear from Seeking Alpha that energy company Seadrill Ltd may file Chapter 11 after failing to renegotiate with its creditors a mutually agreeable restructuring of its balance sheet. The company indicated :”We are considering all options at this stage, of which Chapter 11 is one.. We anticipate this to take place over the coming year, but it is too early to say for certain.”
This does not sound good for the only BDC with exposure: Barings BDC (BBDC), which has $9.5mn invested at cost in the 2021 senior secured term debt. Even at March 31, 2020 BBDC had written down the investment by (83%) to $1.6mn. Now the BDC faces losing ($0.600mn) of annual investment income from what was supposed to be a “safer” energy investment, if such a creature exists. Currently the debt trades at a fifth of par, but a complete write-off is still possible. The loan was first booked back in IIIQ 2018 but has been underperforming ever since. At this point the position is not material for a BDC with over $1bn in portfolio assets.
We are maintaining our CCR 4 rating for the company – which the latest news has only justified – and we are adding Seadrill to the BDC Credit Reporter’s soon-to-be world famous Weakest Links list, given that we’ve heard from the horse’s mouth that a bankruptcy filing is being actively considered. That usually means a bankruptcy firm is already on speed dial and contingency plans drawn up.
One of the undercovered stories of the current crisis is the impact of the fast decline in loan prices on many BDCs off-balance sheet joint ventures. Typically these JVs consisted of a curated portfolio of relatively liquid and lower risk first lien loans and are highly leveraged in order to create a superior yield and income stream. To avoid having to consolidate these assets on their balance sheets BDCs have taken on joint venture partners who provide a portion of the junior capital and divide up voting duties between them. This allows the BDCs to treat the joint ventures as unconsolidated subsidiaries and – in almost every case – leverage up the vehicle’s balance sheet with secured third party debt at generous advance rates given the perceived liquidity and quality of the collateral.
Barings BDC (BBDC) has had one such JV since 2019 with the State of South Carolina Retirement Systems (“SCRS”). The long term goal is ambitious given that BBDC committed $50mn in equity capital and its partner $500mn. At March 31, 2020, though, BBDC had actually advanced only $10.1mn and SCRS $100mn, both in the form of equity capital. The JV had $358mn in portfolio assets, suggesting third party debt must be around $248mn. The JV’s assets are a motley crew according to BBDC’s 10-Q: ” As of March 31, 2020, Jocassee had $67.4 million in senior secured private middle-market debt investments, $186.4 million in U.S. syndicated senior secured loans, $43.7 million in European syndicated senior secured loans, $21.3 million in structured product investments, $7.3 million in an equity investment and $31.8 million in a short-term investment“.
In the IQ 2020, BBDC wrote down its investment in the JV by (37%) due to a drop in portfolio value that seems to have exceeded (10%). According to the 10-Q, no income was received. As a result we have downgraded Jocassee Partners from performing status (CCR 2) to CCR 4. Although there’s a good chance the book value of the portfolio and of BBDC’s equity investment may rise in the future, we’re projecting there will be losses of some kind, which is why we’ve leapfrogged from CCR 2 to CCR 4.
As far as we can tell the two partners seem to be prepared to continue growing the portfolio. Just in the IQ 2020 BBDC sold $69mn in assets to the JV and on its conference call BBDC’s management indicated new investments were being made: “We completely reevaluate the opportunities in areas such as European credit, structured credit, and continue to make investments in these areas that all have attractive risk-adjusted return profiles in this environment“.
The public record is light on the balance sheet of the JV or who its secured lender might be and – unlike many other BDCs – no portfolio list has been made available. This makes the BDC Credit Reporter’s assessment more difficult than usual for a JV, but we expect to be able to offer quarterly updates for many periods to come. Unlike many of its BDC peers BBDC does not seem to have any plans to bring those JV assets back onto their own balance sheet.
On May 22, 2020 Hertz Corp filed for Chapter 11. The BDC Credit Reporter had anticipated as much in our earlier – and first – article about the car rental giant on April 24, 2020. Apparently, despite much back and forth with lenders, the company will be entering bankruptcy without a pre-agreed restructuring deal so the future remains uncertain. Furthermore, some payment relief is being negotiated with asset-based lenders, but that’s not yet resolved. Any number of outcomes remain possible with the travel industry still in a state of high uncertainty. (We avoided saying “unprecedented”).
There is only one BDC with exposure, as discussed in our earliest post: Barings BDC (BBDC). We cannot assess if the (30%) fair market discount taken at 3/31/2020 will be sufficient or whether a further loss – and then a realized loss – will be coming. Certainly, chances are the $0.2mn of annual investment income will be suspended until a final resolution emerges. Given the size of BBDC the impact both in NAV and income terms will not be material.
However, the Hertz story is notable for other reasons. First, this is one of the most high profile BDC-financed companies to file for bankruptcy protection since Covid-19 came along and is undoubtedly a victim of the virus impact. At year end 2019 BBDC and all other lenders valued the debt of Hertz at par or better. The length of time from the initial impact of the virus on business activity has been short – less than 3 months.
Also – as the Hertz press release ruefully mentions – the multitude of programs offered by the Treasury and Federal Reserve to help Covid-19 affected companies failed to do so in this instance. As far as safety nets go there appear to be big holes through which many companies may yet fall.
Finally, to those who claim the government should do nothing to help in these troubled times because bankruptcy is an almost painless transition from one set of owners to another with little other consequence, we note that Hertz will be “reducing planned fleet levels through vehicle sales and by canceling fleet orders“, which will reverberate for years to come across the automotive industry. Also, Hertz will be “deferring capital expenditures and cutting marketing spend” which will hurt a myriad associated businesses.
Most important of all, for a government with the stated goal of minimizing the impact of Covid-19 on employment, Hertz will be “implementing furloughs and layoffs of 20,000 employees, or approximately 50% of its global workforce“. The moral hazard here is not government propping up troubled companies but the fact that the governmental lifeboat is – seemingly randomly – picking up some of those in the water and some not. But we digress.
Not very surprisingly, Fitch Ratings has downgraded the corporate and debt ratings of Fieldwood Energy, LLC. According to a May 13, 2020 release the corporate rating has been dropped from CCC to C. As you’d expect, the company is having trouble in the energy space and has entered into a forbearance agreement with lenders under its three most senior debt agreements. Effectively, the company is already on non accrual.
The BDC Credit Reporter is not much surprised as we’ve had the company rated as underperforming with a CCR 4 rating since IQ 2019. That rating implies we expected that a loss was more likely than a full repayment and that seems to be the case here. The two BDCs with an aggregate of $12.4mn invested at cost in the company’s 2021 Term Loan are Barings BDC (BBDC) and non-traded NexPoint Capital. BBDC still had its $10.1mn of debt outstanding accruing income at 3/31/2020 but that was already discounted (69%). Currently, the debt trades at a (85%) discount in the market, so more pain is on the way. NexPoint, with less capital on the line, has not reported results but had marked the debt at a (15%) discount at year end 2019 AND held a small portion of the second lien debt due in 2022. That will result in a larger write-down shortly .
At this stage this looks like a (almost) complete wash out for both BDCs and a loss of about ($0.900mn) of investment income. Neither BDC will be hugely impacted by the likely loss but the BDC Credit Reporter is surprised that either fund is even involved with this borrower. Fieldwood was already a troubled credit back in 2017 for what is now FS-KKR Capital, and had to be restructured. As recently as IIIQ 2018 BBDC joined in the current debt. The very next quarter the debt began to be written down and the quarter after that was added to our underperformers list…
For the moment we are maintaining the company’s CCR 4 rating and its presence on our Weakest Links list of companies expected to shortly default. However, we expect a shift to CCR 5 before long.
The BDC Credit Reporter is committed to eventually writing about every BDC portfolio company where any material exposure exists. We’ve come round to Puerto Rico-based insurance company Advantage Insurance Holdings. The two BDCs with exposure are BlackRock Capital (BKCC) and MVC Capital (MVC). Both are invested in the insurer’s convertible preferred and have been for years. The preferred, though, has been non income producing at BKCC since June 2019 (no word on MVC’s treatment) and total exposure is $14.8mn at cost with BKCC holding $8.9mn and MVC $5.9mn.
In the IQ 2020, BKCC discounted the preferred by (47%), (11%) more than in the prior period and the worst valuation level since getting involved in 2012. (MVC’s discount is only 2%). The company has been underperforming since 2016…None of this is auspicious but there seems to be a difference of valuation opinion between MVC and BKCC.
For our part, we rate the company CCR 5, or non performing. In terms of value, we would not be surprised to see a complete write-off one day. However, we have no idea when that might be as public information is thin on the ground. Till then, neither the BDCs involved nor the BDC Credit Reporter should hold out much hope for this investment. We can’t tell if Covid-19 will impact the company.
12/23/2020: Due to the acquisition of MVC by Barings BDC (BBDC), the post has been re-classified to BBDC.