"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

Isagenix International: Lenders Agree To Forebear

A press release issued by “global wellbeing” company Isagenix International on September 23, 2022 did not provide many details but made clear that trouble was afoot:

Isagenix International (“Isagenix” or “the Company”), a leader in providing nutrition solutions for weight loss, performance, and healthy aging, announced today that it has entered into a forbearance agreement with an ad hoc group of the Company’s secured lenders. This forbearance agreement is an important first step as the Company works toward a holistic solution for its secured debt on terms that will ensure Isagenix’s continued market leadership and long-term growth. Isagenix is focused on operating business as usual — both during the forbearance period and well into the future.  

Isagenix International Press Release – September 23, 2022

No more substantive information was provided but that was sufficient to cause the BDC Credit Reporter to downgrade the company – which has been underperforming to varying degrees since IQ 2019 – to its lowest rung on our investment rating scale – CCR 5. The forbearance means the secured debt is non performing at the moment.

This is very similar to the situation back in 2019 and 2020, when the company’s performance deteriorated; ratings groups downgraded the debt and lenders started to worry. We last wrote about the company on August 28, 2020, just as Isagenix received an equity infusion along with more flexible terms from its senior lenders.

Almost exactly two years later, Isagenix is again in deep trouble; subject to downgrades from S&P and Moody’s and again needing concessions from its lenders. Back in 2020, there was $36mn at cost in BDC advances to Isagenix, discounted (60%). This time the exposure is not much different – $34mn. The first lien debt is mostly discounted (40%) at June 30, 2022 but that was before this need for “forbearance”, which just means “please don’t take any action on our defaults till we come up with a mutually agreeable solution”.

There are 7 BDCS with exposure to Isagenix, including 6 public players. Far and away the biggest exposure is held by Cion Investment (CION) with $14.7mn (and discounted the least), followed by Crescent Capital (CCAP) with $5.4mn. Main Street Capital (MAIN); Capital Southwest (CSWC); Barings BDC (BBDC) and First Eagle Alternative Credit (FCRD) – as well as non traded MSC Income Fund (not coincidentally managed by a MAIN affiliate) – all have relatively small positions in loans due 6/14/2025 and 6/30/2025. Most of the BDCs are discounting their debt by (40%) – a third quarter in a row of value depreciation. Until the forbearance we rated the company CCR 4.

We don’t know what ails this company – which some consider to be a multi level marketing business – but we are aware of lawsuits pending and speculative grade ratings from both S&P and Moody’s. The big discount applied even by supposedly “secured” first lien lenders hints at a possible significant realized loss down the road, and potential further write-downs on an unrealized basis in the short run. Income – with the “forbearance” has been interrupted and is unlikely to revert to the prior status quo.

For more of the history of the credit; the various downgrades we have applied and for background information read the Isagenix Company File below. For our part, we’ll be keeping tabs on what happens next and will update the Company File or write another article, or both.

For the public BDCs involved, the saving grace is that outside of CION – and maybe CCAP – the amounts involved are not needle moving, even if worst comes to worst.

See Company File.

Cineworld Group PLC: Files Chapter 11

The BDC Credit Reporter’s headline of August 22, 2022 said “Cineworld Group PLC: May File Chapter 11″. Now you can scrap the “maybe” because the filing occurred on Wednesday September 7, 2022, as reported by the Wall Street Journal , amongst others. Here are some of the details:

London-based Cineworld has more than $5 billion in debt and faces a roughly $1 billion legal judgment stemming from a soured merger with Canadian cinema chain Cineplex Inc. The chapter 11 proceedings open a path for Cineworld to cut its liabilities through a possible asset sale or financial restructuring as it tries to retain moviegoers who are tempted to stream flicks at home.

Cineworld expects to deleverage its balance sheet while seeking concessions from landlords and continuing its theater operations uninterrupted. The company said Wednesday it has commitments from its lenders for a roughly $1.94 billion loan to carry it through the restructuring process and cover operating expenses.

Cineworld Files for Chapter 11 After Sluggish Ticket Sales- Wall Street Journal – September 7, 2022

We are downgrading Cineworld to CCR 5 from CCR 4. As made clear, though, in our prior article, given the modest amounts of exposure held by Barings BDC (BBDC) and non traded Barings Capital Investment Corp, losses should be minimal. Still, the bankruptcy is likely to result in a temporary interruption of interest received, which amounts to about ($0.400mn) on an annual basis. We doubt, though, that Cineworld will remain under court protection for very long.

Serta Simmons Bedding: Downgraded by Moody’s

Everything old is new again. Back in 2020 Serta Simmons Bedding, LLC was forced to recapitalize, in an effort to reduce its debt load. We wrote 7 articles (!) on the subject, beginning in 2019. Two years later and Serta seems to be in serious trouble again. According to news reports, Moody’s has just downgraded the company and its debt:

DORAVILLE, Ga. – Moody’s Investors Service has downgraded Serta Simmons Bedding’s corporate rating to Ca from Caa3 and said the outlook was negative for the bedding manufacturer based on $1.9 billion of debt it is facing next year and its declining cash reserves.

In addition to the corporate rating, Moody’s downgraded SSB’s probability of default to Ca-PD from Caa3-PD; first lien super-priority first-out term loan to B3 from B2; first lien super-priority term load to Ca from Caa2; and first lien term loan to C from Ca.

Sheila Long O’Mara Furniture Today September 7, 2022

Then as now, BDC exposure to Serta is limited. According to Advantage Data, there is only one BDC lender to the privately-held mattress company. That’s Barings BDC (BBDC), which is both a first lien and second lien lender. Judging by the IIQ 2022 BBDC valuations, the strain on the business has been recognized as the $3.4mn invested in the second lien lien was valued at $2.5mn – a (26%) discount. By contrast, the $7.2mn invested in a first lien loan – both of which come due in August 2023 – is carried close to par.

We have downgraded Serta Simmons to CCR 4 from CCR 3, just one quarter after adding the company back to the underperformers watchlist. We’ll continue to watch this developing story, but given the modest exposure by BBDC, no great impact is expected whatever happens. (We expect a Chapter 11 restructuring not dissimilar to th one that came before is the likeliest outcome).

Cineworld Group PLC: May File Chapter 11

All over the business news is that Cineworld Group PLC – the parent of Regal Cinemas – is considering filing for Chapter 11 protection. (Given how these things go “may file” really means “will file”). Times are tough in the movie exhibition business despite the post-pandemic re-opening, and the company is highly leveraged ($5bn in debt !). At the moment, though, there’s no talk of liquidation and some sort of restructuring is the most likely outcome.

“Cineworld would expect to maintain its operations in the ordinary course until and following any filing and ultimately to continue its business over the longer term with no significant impact upon its employees.”

Yahoo Finance: Quoting A Cineworld Press Release – August 22, 2022

From our parochial BDC sector perspective, the impact should be minimal. According to Advantage Data’s records, total exposure to Cineworld at cost is just $4.6mn held by two related players: Barings BDC (BBDC) and non-traded Barings Capital Investment Corp. Most of the exposure is in first lien debt – some in “super senior” status and unlikely to be much affected in terms of valuation in any restructuring. Admittedly, some of the debt comes with a very high cash and PIK yield, but given the small amounts involved this will not make a material difference if interest income is interrupted by a bankruptcy. A “realized loss” is likely on the small amounts of equity BBDC and its sister BDC hold in Cineworld, but the aggregate owned is less than $200K.

We are rating Cineworld CCR 4 on our 5 point scale and will continue to track this “developing story”. Overall, though, the BDC sector has very little exposure to the movie exhibition business – never a very large sector – so Cineworld’s troubles do not seem to augur more troubles elsewhere.

K&N Engineering: In Restructuring Negotiations With Lenders

Bloomberg Law on July 29, 2022 ran a story for its subscribers indicating that K&N Engineering Inc. (aka K&N Parent) “began confidential negotiations with its lenders ahead of upcoming debt maturities, according to people with knowledge of the matter”. The sponsor is reportedly Goldman Sachs Asset Management and the object of the negotiations are first lien and second lien debt due in 2023 and 2024 respectively.

Here’s a brief lowdown on the company in the crosshairs, drawn from Wikipedia: “K&N Engineering, Inc. is a manufacturer of air filters, cold air intake systems, oil filters, performance parts, and other related products. K&N manufactures over 12,000 parts for various makes and models of cars, trucks, SUVs, motorcycles, ATVs, industrial applications and more.”

This is not a complete surprise to the BDC Credit Reporter because K&N was added to the underperformers list in the IQ 2022 when the BDCs holding the second lien debt increased their fair market discount to cost to as much as (30%). Even though the first lien remained mark near cost, we downgraded the company from CCR 2 to CCR3.

With this latest news, the odds of loss has greatly increased, and we are downgrading the company further to CCR 4. As of the IQ 2022, there were 4 BDCs with nearly $80mn of exposure: CION Investment (CION) is only in the first lien and Apollo Investment (AINV) only in the second lien. Barings BDC (BBDC) and Prospect Capital (PSEC) are in both layers of debt.

In the IIQ 2022, only AINV has published results, continuing to value its $23.6mn of junior debt at $19.5mn , only slightly less than in the prior quarter. Still, there’s a good chance the $51mn held by AINV, PSEC and BBDC (the latter has a very small exposure) in second lien debt could face ultimate losses of (20%) or more. Moreover, both the first and second lien debt is at risk of income interruption should a default occur.

What ails K&N ? We can’t make out what the challenges might be from a quick review of the public record and none of the BDCs involved are talking, but we’ll continue to root around. In the interim, we’ll be keeping an eye on how PSEC, BBDC and CION value their positions as IIQ 2022 results come out.

Barings BDC : IIIQ 2021 Credit Status

With the IVQ 2021 BDC earnings season right round the corner, the BDC Credit Reporter is updating the credit status of as many public BDCs as possible, using IIIQ 2021 data and any subsequent developments we are aware of.

Portfolio Metrics

In the case of Barings BDC (BBDC), total investment assets at cost amount to $1.632bn, and the fair market value to $1.654bn, a slight premium to par. The BDC portfolio at fair value has grown 10% in the first 9 months of 2021.

Unrated

There are 146 portfolio companies. Unfortunately, the BDC does not rate the credit status of its portfolio, only reporting on the number of non accruals. In its absence, the BDC Reporter has undertaken its own calculations of the value of underperforming companies.

Non Accrual (s)

As of September 30, 2021 there was 1 company non performing: Legal Solutions Holdings. See our November 22, 2021 article. This is what was said in the BBDC 10-Q on the subject:

In connection with the MVC Acquisition, we purchased our debt investment in Legal Solutions Holdings, or Legal Solutions. During the quarter ended September 30, 2021, we placed our debt investment in Legal Solutions on non-accrual status. As a result, under U.S. GAAP, we will not recognize interest income on our debt investment in Legal Solutions for financial reporting purposes. As of September 30, 2021, the cost of our debt investment in Legal Solutions was $10.1 million and the fair value of such investment was $11.0 million.

Barings BDC 10-Q IIIQ 2021 11/9/2021

Subsequent to quarter’s end, Carlson Travel was restructured, filed for bankruptcy and after one day exited court protection. The FMV of BBDC’s exposure was valued at $8.9mn. See our November 15, 2021 article.

Rest Of The Worst

The BDC Credit Reporter has identified 3 additional underperformers – all of which are performing (i.e. paying interest) and are rated CCR 3 on our 5 point rating scale. The companies are Accurus Aerospace ($20.9mn) ; Custom Alloy ($36mn) which is discussed further below and the MVC Private Equity Fund ($8.2mn).

The total FMV of the underperformers is $86mn, or 5.2% of the portfolio as a whole. Of the 5 companies, 3 are rated as Trending, which means they are expected to show meaningful changes in values or amounts outstanding at the next earnings release. These are Carlson Travel, Custom Alloy and Legal Solutions.

Credit Focus

Our greatest concern from a credit standpoint – in terms of value or income loss – is at Custom Alloy, whose value dropped sharply in the IIIQ 2021. This is what we wrote most recently on the subject:

This is a credit worth tracking as Custom Alloy accounts for 7% of BBDC’s total investment, and even more of its NII because of the high rates being charged. We have added the company to the Trending List and will be monitoring BBDC’s IVQ 2021 results with great interest for signs of any further weakening. We were encouraged, though, by a recent October 2021 news item that indicated the company is investing $8.1mn in a new facility to service a Navy contract. Maybe Custom Alloy’s troubles – whatever they are – are just a passing phase and – once again – the company will be removed from the underperformers list.

BDC Credit Reporter- Custom Alloy Corporation: IIIQ 2021 Update November 23, 2021

Solid

Both troubled Carlson Travel and Legal Solutions do not appear to be in danger of more than immaterial losses. The former consists principally of first lien debt which should remain fully valued in the recent restructuring and the latter is supported by a credit indemnification from the BDC’s manager, part of the MVC acquisition terms.

Follow Up

We will update BBDC’s credit status following its IVQ 2021 results for which a publication date has not yet been set.

Hoffmaster Group: Loan Values Decline

We hear from bankruptcy monitoring publication Petition that Hoffmaster Group may be in some distress. The “specialty disposable tabletop products” manufacturer has several publicly traded loans in the market. Those loans – especially a second lien one – are trading down in value. A first lien Term Loan due in 2023 is discounted by (8%) and the aforementioned second lien by (25%). This is a private company owned by private equity shop Wellspring Capital Management LLC so any color as to why this might be happening is not available.

BDC exposure to Hoffmaster dates back to 2010. As of the IIIQ 2021, there were three BDCs with exposure to the first and second lien debt, including two public players: Barings BDC (BBDC) and Portman Ridge Finance (PTMN). Audax is the non-traded BDC involved. Total aggregate BDC exposure at cost is modest at $7.4mn. BBDC is in the first lien debt with $2.2mn which , most recently, was marked at a premium to par. PTMN, though, is exclusively invested with $1.5mn in the second lien loan, and had discounted that (14%) already. Interestingly, in recent quarters BDC valuations had been improving.

We’ve rated Hoffmaster CCR 3 since the IIQ 2020. Back in April 2020 Moody’s downgraded the company to Caa1 based on pandemic-related concerns for the business. Furthermore, Advantage Data showed certain of the loan valuations dropping. However, this is our first article on the company. The CCR 3 rating is being maintained as its too early to presume that an eventual loss is in the offing, despite the big discount being applied to the second lien debt. That may change as more formation filters in from Moody’s; the BDCs involved or elsewhere.

We’ve also added Hoffmaster to our Trending list, which means that we expect the next BDC valuations to be possibly materially different than the current one. By the time IVQ 2021 values roll around at the BDCs, the exposure held could drop by several hundred thousand dollars or more.

As always, we’ll circle back as new information occurs. The good news, though, for all the BDCs involved is that the amounts at risk of loss – and the income therefrom – are of marginal relative importance.

Custom Alloy Corporation: IIIQ 2021 Update

Now that Barings BDC (BBDC) has reported IIIQ 2021 results, we see that Custom Alloy Corporation‘s debt outstanding has been discounted by as much as (17%). Overall, BBDC has invested $40.8mn at cost, but the FMV has dropped to $36.0mn. As a result we’ve added the company back to the underperformers list, with a CCR 3 rating.

Previously, the company was added to the underperformers in IQ 2020 but was returned to performing status (CCR 2) in the IVQ 2020, as valuation returned to par. We’re not sure why BBDC has discounted the debt again, but note that the rate charged is very high (15.0%) and pay-in-kind, suggesting this is a troubled borrower.

This is a credit worth tracking as Custom Alloy accounts for 7% of BBDC’s total investment, and even more of its NII because of the high rates being charged. We have added the company to the Trending List and will be monitoring BBDC’s IVQ 2021 results with great interest for signs of any further weakening. We were encouraged, though, by a recent October 2021 news item that indicated the company is investing $8.1mn in a new facility to service a Navy contract. Maybe Custom Alloy’s troubles – whatever they are – are just a passing phase and – once again – the company will be removed from the underperformers list.

Legal Solutions Holdings: Placed On Non Accrual

Frankly we don’t know much about Legal Solutions Holdings. The public record does not offer much information. However, we do know that the company used to be financed by MVC Capital, which was acquired by Barings BDC (BBDC) in late 2020. We also know that in the IIIQ 2021, BBDC placed its senior subordinated loan to the company, which was yielding 16.0%, on non -accrual for the first time.

This debt has a par value of $11.4mn, a cost of $10.1mn and – surprisingly given the above – a fair market valuation of $11.0mn. Judging by the valuation at least, BBDC expects to be repaid in full and more on this debt nominally due in March 2022.

This investment dates back to 2014 and was valued by MVC just before the BBDC acquisition at $9.3mn. Why the value has increased in a one year period despite becoming non performing is not clear to us. We’ll reach out to BBDC and see if we can find an explanation. This may have something to do with the blanket “Credit Support Agreement” Barings offered when acquiring MVC’s assets for BBDC.

In the interim, the company is being rated CCR 5, downgraded from CCR 2 in the IIQ 2021 when the valuation was roughly equal to cost. We assume BBDC is – at least temporarily- deprived of $1.8mn of annual investment income from Legal Solutions, most of which was already in pay-in-kind form.

The valuation seems to suggest BBDC should get out of this non performing credit scott free, or better. However, till we learn more from the BDC’s managers or in the next earnings release, this remains a question mark.

Carlson Travel: Files Chapter 11

On November 11, 2021 Carlson Travel Inc. filed for Chapter 11 bankruptcy protection, as part of a pre-packaged plan. A month earlier, the key components of the plan agreed between the owners and most of the lenders was spelled out:

Through the plan, the debtors seek to implement a restructuring that deleverages the debtors’ balance sheet from $1.6 billion prepetition to $625 million in exit notes as well as a $150 million exit revolving credit facility that is presumed to be undrawn at emergence. $500 million of the exit notes will provide new money to the estate (either via a marketed offering or a backstopped rights offering to existing creditors). The plan also provides for $350 million of new equity financing, split between a rights offering to the plan’s Class 5 and “direct allocations” to supporting parties…“.

From Reorg.com 10/6/2021

The key creditor is Barings, Inc. As a result, two of the asset manager’s BDCs are involved – non traded Barings Capital Investment and publicly traded Barings BDC (BBDC) with an aggregate exposure at cost as of September 2021 of $13.6mn. The exposure consists of first lien debt and “super senior secured debt” and a sliver of equity. Barings has been involved with the company since at least IIIQ 2020 as a BDC lender.

Despite the big debt haircut reported BBDC and Barings Capital don’t seem to be at risk of any loss, judging by the IIIQ 2021 valuation. Both debt tranches are valued at a premium. The only loss should come in the immaterial $0.13mn of equity invested.

We have downgraded Carlson from CCR 3 to CCR 5 on the news of the bankruptcy but are optimistic – on the basis of the public record that this is a bullet that the Barings BDC lenders can duck. What we don’t know, though, is whether these lenders will receive equity in the post-bankruptcy entity. We’ll update readers after the IVQ 2021 BBDC results are published, which should address the issue if the company formally emerges from court protection by that date.

Serta Simmons Bedding: IIIQ 2020 Update

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.

Fieldwood Energy: IIIQ 2020 Update

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.

Mallinckrodt Intl Finance SA: Files Chapter 11

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.

Kenan Advantage Group: Acquires Bulk Transporter

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.

Mallinckrodt Intl Finance SA: To File Chapter 11 ?

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.

Fieldwood Energy: Files Chapter 11

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, LLCa 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.

Men’s Wearhouse Inc. Files Chapter 11

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.

Serta Simmons Bedding: Restructuring Finalized

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.