"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

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.

24 Hour Fitness Worldwide: Files Chapter 11

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.

24 Hour Fitness Worldwide: Closing Locations

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.

Serta Simmons Bedding: Creditors Clash

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.

Serta Simmons Bedding: Debt Restructuring Proposed

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.

Men’s Wearhouse: May File Bankruptcy

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.