Posts for Owl Rock Capital II

Swipe Acquisition Corp: Restructuring Completed

Swipe Acquisition Corp is a manufacturer of gift cards and hotel key cards and – unsurprisingly – was badly impacted by Covid-19. As recently as the IQ 2020 the company was marked as performing to plan but quickly downshifted to underperforming and then to non performing by the IIIQ 2020. We now learn that the business has been taken over by its lenders in a debt for equity swap, which occurred in the IVQ 2020. One of those lenders – Owl Rock Capital (PRCC), on its February 24, 2021 outlined what has happened in recent weeks :

In order to best position the company in the near term, we rightsized the outstanding debt amount and equitize the remainder of the debt balance.”

From Advantage Data’s records we know that the Owl Rock organization – which includes non-traded Owl Rock Capital II – had $176mn advanced in senior debt to Swipe as of September 2020. We don’t have yet have ORCC II’s results, but we can see that ORCC’s own investment at cost in Stripe debt has dropped from $156mn in debt to $52mn in the post-restructuring IVQ. We know that the BDC took a realized loss of ($51mn), virtually all Swipe related.

In addition, $48mn is booked from the IVQ 2020 under “New PLI Holdings” as a common stock investment. That’s where the debt for equity swapping occurs. All of that does not recognize to the last dollar but indicates ORCC has roughly already written off one-third of its initial capital and reduced its investment income by two-thirds. That’s ($8.5mn) of annual investment income forgone.

This is a big move for Owl Rock – according to management on its conference call – making the move to owner/lender from solely a lender. Only time will tell if i) the company requires additional capital; ii) the asset manager is successful at effecting a turnaround. Still, this is an example of what we’ve been calling out for some time: the ever increasing willingness of BDCs of all stripes to turn around their own failed investments. (That must be frustrating to all those “distressed” investments funds waiting around for opportunities like Swipe). For investors in BDCs the increasing number of “control” investments created in this way make evaluating BDC value and performance more difficult than in the past.

For the moment, the BDC Credit Reporter has upgraded Swipe/PLI to CCR 3 from CCR 5, given the restructuring and the return to accrual status. We’ll continue to offer updates in the quarters ahead.

CIBT Global: Placed On Non Accrual

Owl Rock Capital (ORCC) on July 13, 2020 announced preliminary results for the IIQ 2020, including the news that portfolio company CIBT Global, Inc. had been placed on non accrual. The company is a “leading global provider of immigration and visa services with the required reach, agility and client commitment to enable corporations and individuals to more easily navigate complex regulations so they can legally work, live and visit around the world“. As you would expect business activity is very low. In fact, back on March 20, 2020 Moody’s downgraded the company to Caa1 and its second lien debt (where BDC exposure lies) to Caa2, with a Negative outlook.

There are two BDCs with $68.7mn in exposure at cost, which had already been discounted (15%) at March 31, 2020. Both the BDCs are part of the Owl Rock construct: publicly traded Owl Rock Capital (ORCC) and non-traded Owl Rock Capital II. 85% of the debt – all second lien by the way – is held by the former. The income lost amounts to ($5.4mn). We can only imagine that the value will drop even further when IIQ results are released. A doubling or tripling of the unrealized loss is possible. Given that the company is highly leveraged (7.6x EBITDA at year end and God only knows what now) a complete write-off for the Owl Rock lenders is not impossible given the junior nature of the debt held. However, we’re getting ahead of ourselves and will revert when we receive an update from the ratings groups and/or the BDC lenders.

The BDC Credit Reporter initially downgraded the company from CCR 2 to CCR 4, based on Moody’s rating the second lien deep in its “speculative” grade. With this latest news, CIBT Global has been reduced to CCR 5. This could prove an expensive mistake for ORCC, with $58.3mn invested at cost, equal to 1% of the huge BDC’s net assets.

Geodigm Corporation: Placed On Non Accrual

On July 13, 2020 Owl Rock Corporation (ORCC) in an 8-K filing announced in advance of the full and formal publication of its IIQ 2020 results, certain preliminary statistics and developments. This included the news that portfolio company Geodigm Corporation was placed on non-accrual in the IIQ 2020. No details as to what was happening at the dental imaging company, but we can guess given the hard times caused by Covid-19.

There are two BDCs with $142mn in exposure at cost to the company: Owl Rock Capital (ORCC) and non-traded Owl Rock Capital II. This is what we call a Major exposure, i.e. over $100mn in aggregate. Through March 31, 2020 the two BDCs had discounted their first lien debt position by (15%). We do not know what haircut has been taken now the loan is non performing. We calculate, though, that income forgone is equal to ($10.0mn) on an annual basis, with ORCC accounting for 86% of the exposure and the income missing.

We had placed Geodigm on the underperforming list for the first time in IQ 2020, leapfrogging from a CCR 2 to a CCR 4 status. Now we are downgrading the company again – to CCR 5. With the benefit of hindsight, the company should have been on our Weakest Links list given this non accrual but we did not have the information to make that call. Geodigm is an example of a Second Wave troubled credit. Through year end 2019 the company was still valued at par and seemingly in no danger. Now in less than 6 months the company has made the full trip from CCR 2 to CCR 5. We blame Covid-19 and the almost complete shut-down of the dental sector because of concerns about transmission.

We’ll learn a great deal more about what Geodigm is currently valued at and – possibly – its outlook when ORCC reports results in early August. Chances are strong the debt will be discounted further than in the IQ 2020.