Posts for TCW Direct Lending VII,LLC

Production Resource Group LLC: IVQ 2020 Update

A reader wrote to ask for an update on Production Resource Group, LLC which we wrote about on May 27, 2020, just after the debt went on non accrual. This is a fair question and reminds us to set up a more formal regular credit follow-up system, especially for larger amounts at risk. In this case the advances by the three BDCs involved were huge – $511mn – as of the IQ 2020.

The current amount outstanding at year-end 2020 from two of the BDCs involved – FS KKR Capital II (FSKR) and Ares Capital (ARCC) – is high but has decreased, as we’ll explain – to $267mn. (No word yet from non-traded TCW Direct Lending VII, which had advanced $30.2mn as of IIIQ 2020).

Apparently – according to FSKR – a “debt for equity ” swap occurred in the fall of 2020:

We have reached a definitive agreement to recapitalize the Production Resource Group balance sheet and bolster liquidity. In exchange for our term loan position we will receive a package of take-back securities that are comprised of a reinstated term loan, preferred equity and common equity. The consensual restructuring transaction provides for a substantially reduced debt and interest burden while maintaining a path for a substantial recovery of our original par balance along with significant upside beyond that.

FSKR CC – 8/11/2020

In the IVQ 2020 this was reflected on the BDCs balance sheets and P&L. ARCC booked a realized loss of ($60mn) and its total exposure at cost dropped from $104mn at cost/$38.4mn at FMV in IIIQ 2020 to $45.6mn/$45.8mn. Exposure consisted of two Term Loans maturing in 2024, but with much lower pricing than before. Our rough estimate is that ARCC’s investment income will have dropped from $9.0mn annually to $3.9mn – a ($5.1mn) loss of income. The BDC also has Class A common stock units with a cost of $4.9mn and an FMV of $5.2mn.

FSKR’s exposure at cost just before the non-accrual was $381mn – a large amount even for a BDC its size. As of year end 2020 FSKR has $221mn invested between 4 term loans and two preferred stock holdings. We suppose – but cannot confirm – that the ($160mn) difference was booked as a realized loss. Unlike ARCC, FSKR does not call out Production Resources Group in its 10-K, with its ($872mn) of net realized portfolio losses in 2020. FSKR currently values its multiple holdings at a combined $199.7mn.

We have upgraded the restructured company from CCR 5 to CCR 3 – after three quarters of non performance – from IVQ 2020. Given the very little information we have about the new financial structure and the still challenged business of sports broadcasting, the company remains on the BDC Credit Reporter’s underperforming companies list. We’ll update our Company file when we hear from TCW Direct Lending VII and write a new update when all the IQ 2021 results are out.

For both ARCC and FSKR, this has been a material set-back, permanently reducing both income and capital and illustrates the danger of taking very large positions (especially in the case of FSKR, which is half the size of ARCC but took on more than twice the exposure). For ARCC, this was the second largest realized loss of 2020, out of total net realized losses of ($148mn). Nor was being at the senior level in the capital structure much protection against loss. Judging from ARCC’s write-offs, some 60% of capital advanced when things turned sour has been lost. All the BDCs involved will have to hope their equity stakes in the reorganized company provide some eventual offset. Maybe Production Resource Group will be bought by a SPAC ?

Centric Brands Inc.: Exits Bankruptcy

The long line of companies that filed for bankruptcy as the pandemic took hold in the spring of 2020 is now headed in the other direction with cleaned up balance sheets, new owners and high hopes. Included in this group is Centric Brands, which exited Chapter 11 on October 9, 2020 following a “debt for equity swap” with its well known lenders, including Blackstone and Ares Management. Old debt is being forgiven in return for a controlling equity and new debt (including a securitisation facility) being provided by the owner/lenders.

The BDC Credit Reporter has been writing about Centric for some time, and with special interest, given the large amounts of BDC capital advanced to the company even before the restructuring : $129.9mn at cost. We’re guessing that the valuations by the 3 BDCs involved as of June 2020 must be close to the final deal struck, which has been in the works since the filing in May. Almost certainly written off is the $24.6mn invested in the equity of pre-bankruptcy Centric by Ares Capital (ARCC), which the BDC has written down to zero. That was carried at par back in early 2019.

Then there’s $98.5mn in first lien 2023 Term debt, held by ARCC, TCW Direct Lending VII and Garrison Capital (GARS), which has been discounted between (4%) and (16%) by the lenders involved. There are some “last out” arrangements in the debt which may explain the discrepancies.

Interestingly, and despite the bankruptcy, none of the BDCs carried any of their debt as non-performing as of June 2020. That may be because the 2023 debt was Pay-In-Kind anyway. Finally, there’s $6.7mn in 2021 DIP financing provided by the same trio, which is likely to be folded into the post-bankruptcy capital structure. In fact, we wouldn’t be surprised that after all is said and done the BDCs involved end up with more capital in Centric than ever before.

Exactly how large the realized losses will be is impossible to tell as each BDC might value its new equity stake differently. We’re guessing that total losses booked will be ($35mn-$40mn), or roughly a third of the capital invested at June 30. ARCC will be the biggest loser by far, followed by TCW Direct Lending and with GARS losing ($1mn-$2mn). Losses could have been much higher but the BDCs were positioned above $700mn+ in second lien debt held by Blackstone. That’s the debt being written off and which will reduce leverage by about half. For that Blackstone receives 70% of the equity of the new Centric and the other lenders 30%.

Of course, neither Centric Brands nor BDC exposure is going anywhere and success is not guaranteed. We are upgrading the company from CCR 5 to CCR 3, still on the underperformers list. Centric has had to lay off hundreds of employees and continues to be leveraged, so questions will remain for some time about its viability under its new lender ownership.

We will circle back with an update when IIIQ 2020 or IVQ 2020 BDC results are published and we can ascertain what realized losses were booked and what the revised outstandings look like for all three BDCs involved.

Centric Brands Inc: Reorganization Plan Approved

Since May 2020 Centric Brands, Inc. has been under bankruptcy court protection. Now, though, the company is poised to exit that status by mid-October 2020 following court approval of a reorganization plan and some well placed settlement payments to disgruntled creditors. The deal seems like a debt-for-equity swap, with first lien and second lien lenders receiving equity in the restructured company while continuing as lenders in new, smaller, debt facilities.

After all conditions have been finalized, Centric Brands — whose owned brands include Zac Posen, Hudson and Swims — plans to exit Chapter 11 by the end of October with a “recapitalized” balance sheet, as well as new financing facilities, “significantly reduced” debt and interest payments, plus the full support of all of its lenders.

This is a Major BDC investment by BDC Credit Reporter’s standards: i.e. over $100mn at cost or $129.9mn in this case. There are three BDCs involved, headed by Ares Capital (ARCC), which is invested in both the debt and equity of Centric. Then there’s non-traded TCW Direct Lending VII and publicly traded Garrison Capital (GARS). The debt held by the BDCs matures in 2021 and 2023. The latter with a cost of close to $100mn is valued at roughly a (15%) discount and is likely to be partly written off when the company exits bankruptcy. That will result in about ($15mn) in realized losses along with nearly ($25mn) ARCC holds in the equity of the insolvent entity, or a total loss of about ($40mn). The 2021 debt is Debtor In Possession financing and is likely to be repaid in full. What we don’t know is if the lender-now-owners will have to inject incremental new capital or not. More details to follow.

This will be a significant – but not overwhelming loss, principally for ARCC, and to a much lesser degree for the other two. On the other hand, it looks like all the players will live to fight another day and – potentially – recoup proceeds lost from an eventual sale of the restructured Centric Brands another day.

We will be upgrading the company from CCR 5 to CCR 3 or CCR 4 when the exit from bankruptcy occurs. As we’ve written in earlier articles about Centric, much will depend on how generous the new lender owners have been in structuring the going forward balance sheet. The company continues to operate in an industry – lifestyle brands sold mostly at retail – that continues to be pandemic impacted. Furthermore, some debt for equity swaps in the past have been done with less than generous terms, rapidly returning the business to the bankruptcy court. We hope Centric won’t be a “Chapter 22” story.