ALM Media: Downgraded

On October 9, ALM Media was downgraded by S&P Global Ratings to CCC, from CCC+, on increased refinancing risk associated with upcoming debt maturities in July 2020 and 2021. The issuer’s most current maturity, its B term loan due July 2020 (L+450, 1% LIBOR floor) was downgraded to CCC+, from B–.  The downgrade reflects the increased potential for a liquidity event if there are delays in the refinancing of its debt. The first-lien term loan was quoted around a 94.25 bid today.

There is only one BDC with $22.7mn of exposure, but in both a first lien and second lien loan. That’s non-listed Cion Investment, whose $10mn in second lien debt was already discounted (35%) and remains there when we checked Advantage Data’s real-time market price records today. This company has been on the under-performing list since IIIQ 2017 and does not seem to be likely to return to performing status any time soon. We have a CCR 3 (Watch List) rating.

AAC Holdings: Directors Resign.

On October 1, 2019 4 of 7 directors at AAC Holdings (aka American Addiction Centers) resigned. Shortly afterwards, the SEC warned that the troubled public company was not in compliance with rules regarding the minimum number of audit committee members because of the departures. At the same time, the stock price of AAC continues to plumb new lows, dropping to $0.50 a share at time of writing.

In our minds this more evidence that AAC is close to filing Chapter 11 or restructuring out of court. We’ve added AAC to our Bankruptcy Imminent list (our version of Fitch Ratings Loans Of Concern), and the company is already rated CCR 4.

To be fair, the 2020 and 2023 debt in which several BDCs are invested are publicly traded – as reported by Advantage Data – and the former is trading almost at par and the latter at a (11%) discount, not that much worse than the valuations at June 2019. Nonetheless, if we are right and the markets are wrong ( a tall order admittedly) there is a lot at stake for the 4 BDCs involved with $66.3mn of exposure at cost and valued almost at full value, and with over $7.0mn of investment income involved.

Fusion Connect: New CEO Appointed.

The BDC Credit Reporter has tracked Fusion Connect from under-performing to Chapter 11 filing and, most recently, to getting ready to exit bankruptcy, expected by the end of the year.

Now we hear that the existing CEO is departing and a new chief executive has been promoted internally to take that key position on an interim basis. The company will be head hunting for a permanent CEO once Chapter 11 is exited. The new interim CEO will be very busy as he has also been appointed President and COO as the individual wearing those two hats has also resigned.

Given that Fusion will shortly be owned by its lenders, which includes Garrison Capital (GARS) and Investcorp Credit Management BDC (ICMB) – formerly CM Finance – these changes – and those to come – deserve watching. We still rate Fusion Connect a CCR 5 because it’s non-performing but expect to maintain the company on our under-performing list with a rating of CCR 3 (Watch List) once operating normally again. We still have a lot to learn about the ultimate balance sheet of the restructured entity; its strategy going forward – and we see from this news – who will be at the helm long term.

Murray Energy: Lenders Agree To Forebear

On October 2, 2019 coal producer Murray Energy announced by press release its intention not to pay principal and interest payments due on September 30, 2019. However, the company was also able to announce a majority of lenders under its most senior loan agreements agreed to “forbear”, or hold back from acting on the upcoming payment default. This is not much to write home about as the forbearance only lasts till October 14. We assume – as we wrote in an earlier update – that Murray will be using the extra time on the clock to complete its ongoing negotiations with stakeholders in an effort to keep from falling into involuntary bankruptcy proceedings.

For the 6 BDCs with $52.4mn invested at risk, this development does not move the valuation needle but suggests that some sort of resolution will be coming shortly. Very shortly. Judging by what little we know that will mean some sort of Realized Loss is likely, which is why Murray Energy is rated CCR 4 (Worry List), and could be at CCR 5 (Non Performing) within a fortnight. Back on September 13 we wrote that we expected to hear more about Murray Energy “before long”. After the latest news, the same prediction continues to apply.

Bellatrix Exploration: Files For Bankruptcy Protection, Up For Sale

On October 2, 2019 publicly traded Canadian oil and gas company Bellatrix Exploration – burdened with heavy debt – threw in the towel and sought bankruptcy protection in its home country. A court will now supervise a restructuring of some kind, which includes the possibility of the sale of some or all the assets of the business. Here is what the company’s chief executive said:

Bellatrix has for an extended period of time focused on its key strategic priorities of reducing debt levels, improving liquidity and strengthening its financial position, including transactions completed by the Company in 2018 and 2019 to, among other things, provide additional needed liquidity and to reduce its overall senior note and convertible debenture obligations,” said Brent Eshleman, President and Chief Executive Officer of Bellatrix. “In light of industry challenges facing the Western Canadian oil and natural gas sector, including prolonged and continued poor natural gas and natural gas liquids prices, we believe that the commencement of the CCAA restructuring proceedings at this time will provide the Company with the time and stability required to continue operating our business while we work to implement the Strategic Process and achieve an outcome that is in the best interests of Bellatrix and our stakeholders.”

 This must be bad news for the four BDCs with $96mn of exposure to Bellatrix in the form of second lien and equity. All are part of the FS-KKR complex. $8.2mn of annual interest income is about to be suspended. The Biggest Loser of the four BDCs is non-listed FS Energy & Power, which has four-fifths of the exposure.

We don’t know what the ultimate resolution might be but there is a reasonable risk – given that all BDC exposure is junior on the balance sheet – that there will be a 100% write-off. Should that occur, the fact that the BDCs managers marked the debt as of June 2019 at a very slight discount will result in a large capital loss; not to mention the loss of substantial income. Publicly traded FS-KKR (FSK), though, should only be modestly impacted as its investment cost is “only” $6.0mn and FMV $5.8mn as of June 2019.

In a bigger picture sense, the failure of Bellatrix is a reminder – if one was needed – that the E&P sector in North America remains under pressure. The Calgary-Herald – while discussing the Bellatrix situation – mentioned other difficulties encountered by producers in the region of late:

In April, junior gas company Trident Energy Corp. announced it was shutting its doors. Last month, the City of Medicine Hat, which owns its own energy division, said it will shut more than 2,000 of its 2,600 natural gas wells over the next three years. Tristan Goodman, president of the Explorers and Producers Association of Canada, said in an interview there is no question the industry is in crisis. He said additional bankruptcies and insolvencies in the sector are a possibility.

For the BDC Credit Reporter’s prior posts about Bellatrix, starting as far back as April 17, 2019, click here.

U.S. Well Services: New 52 Week Low

On October 2, 2019 the stock price of publicly traded U.S. Well Services (USWS) reached a 52 week and all-time low price in its short history of $1.82. That was more bad news for the three BDCs with $66mn of equity at cost invested in the company. Ever since the company underwent a reverse capitalization back in November 2018 and was listed on the NASDAQ, its price has headed downward. That impacted the BDCs involved, whose fair market value at June 2019 was lower than at March, as the stock price dropped from $7.98 to $4.20. That put a dent in the FMV values of PennantPark Investment (PNNT), Capitala Finance (CPTA) and – most of all – BlackRock Capital (BKCC). Coincidentally or otherwise, all 3 BDCs reported lower NAV Per Share in the quarter.

Look for a repeat in the third quarter as the stock price of USWS dropped to $2.19 at the end of the IIIQ. That’s roughly another (50%) drop in the last 3 months and should result in a further unrealized loss of ($16mn) or more. At the 52 week low price, the loss would be even higher.

Unfortunately for the BDCs involved their common stock holdings are “locked up” and cannot be disposed off till November. By then, the value of the USWS common will be down by (75%) or more compared to cost. Not inconceivable is that the oil services company – which we wrote about last on July 13, 2019 – could file for Chapter 11, wiping out all $66mn of the stock – mostly received as part of a debt for equity swap last year.

Not to rub things in, but this story is part of the broader troubles in the oil field services sector, which the BDC Credit Reporter has been warning bout for months and which we most recently opined about on September 6, 2019.

Capstone Nutrition: Acquired By PE firm

The news – reported on September 24, 2019 – that PE firm Brightstar Capital had finalized its acquisition of Capstone Nutrition should have been music to the ears of its 3 BDC lenders, with an aggregate $117mn in exposure. That’s a pretty penny to have outstanding and to a contract manufacturer much of whose debt has been on non accrual since 2016 !

The BDCs involved are Medley Capital (MCC), Sierra Income and Business Development Corporation of America. Big discounts in excess of three-quarters of cost have been taken as of the latest IIQ 2019 results.

What we don’t know – and nobody is saying – is whether the purchase price was large enough to ensure the repayment in full of the lenders – including the afore mentioned 3 BDCs. If so, that will be a major gain (over $80mn) – and elicit a huge sigh of relief from the BDCs and their shareholders. If not, a realized loss of an undetermined amount will be crystallised as early as the third quarter 2019 BDC results.

Deluxe Entertainment Services Group: Lays-Off Staff

We wrote a long report about the debt for equity swap underway at Deluxe Entertainment on September 4, 2019. This time, we’ll be brief and note that the company laid off 10 employees in Ohio, according to news reports. That’s bad news for the individuals involved but might suggest the company is re-sizing itself in an attempt to be successful with a new capital structure and with former lenders as owners.

Pier 1 Imports: Reports IIQ 2019 Results

The embattled retailer Pier 1 Imports, who we wrote about on April 17 and April 29, reported second quarter 2019 results on September 25, and they were not pretty. One example: comparable store sales dropped (12.6%). As you might expect, the stock price dropped in reaction: by (12%).

Management, though, continues to argue that its turnaround plans will bear fruit and the company will be able to avoid Chapter 11 or equivalent. We have our doubts – as do the two BDCs with exposure, who’ve discounted their debt to the company by (74%) as of IIQ 2019, from (44%) in the prior quarter. (At the moment, based on Advantage Data‘s middle market liquid debt records, the same discounts apply as in June). There’s $1.0mn of annual investment income at risk, held by publicly listed Main Street Capital (MAIN) and non-listed sister BDC HMS Income.

McDermott International: Seeks Bridge Loan

We first wrote about trouble at oil field services giant McDermott International back on September 19, 2019 when a restructuring firm was hired. Now there are reports that the company is seeking a huge bridge loan to fund a $1.7bn working capital deficit until assets can be sold to repay existing debt. Here’s what Bloomberg said about what asset sales might accomplish:

The company confirmed it was working with Evercore to explore unsolicited interest in its Lummus Technology business, with a valuation exceeding $2.5 billion. That amount combined with its $1.5 billion in boats, equipment and buildings, as well as $500 million in storage assets, could be enough to cover its debt and preferred stock, Citi research analysts wrote in a Sept. 18 note.

McDermott said it had about $3.8 billion of gross debt at the end of the second quarter and $1 billion of cash available.

If it were to sell the technology business for more than $500 million, McDermott’s bond rules stipulate that it must use the net proceeds to repay debt, according to a Covenant Review report“.

We’re not expert enough in the intricacies of McDermott’s arrangements to determine if asset sales – were they to happen – would be positive or negative for the 2025 Term Loan held by the two BDCs with $11mn in exposure at cost. What does seems clear: the McDermott story – thanks to its massive cash needs and already high debt – will be on the front burner where credit developments are concerned through the rest of 2019. We maintain a CCR 4 (Worry) rating.

Medical Depot Holdings: Raises New Equity, Restructures Debt

Last time we wrote about Medical Depot Holdings, also known as Drive DeVilbiss, we concluded in this manner: “It’s hard to envisage a scenario where some sort of loss does not occur given the amount of debt involved, but we’ll have to wait and see. We have a Corporate Credit Rating of 4. That’s our Worry List”.

On September 20, 2019 the company announced by press release that it “had agreed in principle” to receive $35mn of additional capital “together with a reduction in cash debt service obligations from its current
lenders
“. This was quickly picked up and repeated in different forms by financial and trade publications as evidence of a successful “rescue operation”.

However, from the BDC Credit Reporter’s standpoint, the company’s announcement raises more questions than answers. There’s the “in principle” part; the source and form of the $35mn and what is meant by “reduction in cash debt service“. Also not clear is what the lenders have received in return – besides the heartfelt thanks of the company and its owners. So we’re marking this development as trending positive, but not changing our Credit Rating till the many blanks get filled in. When that might occur – and from what source- remains unclear.

We have reported that there are two BDCs with $32.4mn of exposure at cost: Bain Capital Specialty Finance (BCSF) and Business Development Corporation of America (BDCA). We may learn from them what “reduction in cash debt service” means. We’re guessing: a lower interest rate on the debt (but whose ?) and – potentially – lower income.

Frontier Communications: Makes Scheduled Debt Payments

Those are sighs of relief you’re hearing. On September 16, 2019 the Wall Street Journal reported that Frontier Communications was making its scheduled debt payments. This would not normally be news, but many investors were – apparently – concerned the troubled and highly leveraged communications company might choose to file for Chapter 11 or a restructuring instead.

That’s good news of a kind, but the problems at Frontier continue, so this may be more respite than anything else. (We’ve written about the company multiple times previously. Here’s a link to the list of articles). There is $62mn of debt outstanding at 8 different BDCs and over $5mn of annual investment income at risk. The exposure is carried as of June 2019 at close to par, so if anything negative happens to Frontier in the future the impact will be material from a BDC perspective (and much more so in the high yield bond market). For the moment lenders and shareholders can breathe easy. Tomorrow, though, is another day.

Vivint Smart Home: To Merge Into SPAC

On September 16, 2029 Vivint Smart Home, a subsidiary of APX Group Holdings, which is owned by Blackstone announced it is being acquired by Mosaic Acquisition Corp., a publicly traded special purpose acquisition company (“SPAC”), backed by Fortress Investment Group, itself a subsidiary of Softbank. The existing investors will throw in another $100mn of equity to add to the $2.3bn already invested and Fortress affiliates will fund another $125mn. According to the press release discussing the merger: “With an agreed initial enterprise value of $5.6 billion, Vivint is anticipated to have revenues of $1.3 billion for fiscal year 2020E and Adjusted EBITDA of $530 million, implying an Adjusted EBITDA multiple of approximately 10.5x”.

According to Lisa Abramowicz at Bloomberg, this boosted the bonds of APX, which had been trading at a discount.

BDC exposure to Vivint is substantial ($137mn), spread across 4 different debt instruments and with valuations ranging from par to a discount of (20%). The debt is very recent, added during the IVQ 2018, and was added to our under-performers list only in the IIQ 2019 as Moody’s downgraded the company and BDC valuations dropped measurably, many beneath the 90% FMV to cost we consider a useful trigger in the absence of any other information.

All the BDC debt is held by FS – KKR Capital entities including its public vehicle (FSK) and 4 non-traded funds. This merger should result in an upgrade of the debt values but we don’t know if Mosaic will be refinancing the debt or assuming the obligations. We get the impression this is more of a capital infusion than anything else, and expect some debt may get repaid while the rest might be retained. Anyway, good news for the FS-KKR Capital group in the short run. In the long run, though, we’ll have to see if Vivint’s ambitions for domination of the “secure home” market can live comfortably with its capital structure. We’ll be leaving the Corporate Credit Rating at 3, but the trend is positive.

Anchor Glass: Downgraded By S&P

On September 5, S&P Global Ratings downgraded packaging company Anchor Glass Container Corp to CCC+. That’s bad news for non-traded BDC Business Development Corporation of America (BDCA), which has a $20.0mn position in the company’s 2024 second lien debt. S&P reduced the rating on that debt to CCC-.

As of June 2019, BDCA had discounted its debt position by (30%). However, this is a traded loan and the current price is at 50% of par, suggesting an unrealized depreciation is coming in the IIIQ 2019 of (20%) or about ($4mn).

Judging by what S&P is saying about the financial performance, cash flow and leverage at Anchor Glass that may be the least of BDCA’s problems. If the company files for bankruptcy or restructures, there is $2.0mn+ in annual investment income at risk for BDCA. Last time we checked (two seconds ago) BDCA’s annualized Net Investment Income Per Share was just under $110mn. In these situations a 100% write-off of junior debt is possible, so a material Realized Loss is possible.

Given that debt to EBITDA is over 10x; capex requirements are heavy and the economic backdrop is not favorable, the odds of things going wrong seem high. However, according to S&P, the company – thanks to an asset based Revolver – has no immediate liquidity problems so this is likely to be a slow burn.

Murray Energy: Assessing Restructuring Options

We don’t want to bury the lead: Murray Energy is likely to file for bankruptcy or re-organize and the BDC lenders involved are going to absorb some rather large losses. On September 10, 2019 the Wall Street Journal’s bankruptcy publication reported that the privately-held coal miner had hired Kirkland & Ellis and Evercore to assess restructuring options.

That follows a recent downturn in the short term prospects for the U.S. coal industry, according to Moody’s and as reported by S&P… That’s not to mention the obvious secular decline in the prospects for coal mining and coal usage. Previously in 2019 , the rating groups had downgraded the company’s debt to SD or Selective Default, so the writing has been on the wall.

BDC exposure totals $52.4mn, spread over 6 BDCs. These include publicly traded FS-KKR Capital (FSK) and three sister non-traded BDCs funds (FSIC II, FSIC III and FSIC IV but not – surprisingly – FS Energy). Then there are two others: Cion Investment and Business Development Corporation Of America.The exposure is in two different loans, one which matures in 2021 and the other in 2022. The debt has been on our under-performing list since IVQ 2018 and is currently rated CCR 4 (Worry List), where the chances of an eventual loss are greater than a full recovery.

As of June 2019, the 2021 debt was carried at par but the 2022 debt was discounted by a third. Currently, though, the 2022 debt trades at twice that discount, suggesting holders are not optimistic. We wouldn’t be surprised to see the 2022 debt fully written off once the dust settles, which would result in ($8.5mn) of further losses and ($12.5mn) in Realized Losses, to be absorbed by Cion and BDCA. Less clear is what might happen to the 2021 debt, which still trades at par. We won’t speculate at this point but will point out that – overall – $5.5mn of annual investment income is at risk.

In any case, we expect we’ll be discussing Murray Energy again in the weeks ahead.

Men’s Wearhouse: Earnings “Mixed”. Dividend Cut.

On September 11, 2019 publicly traded Tailored Brands (ticker: TLRD) – owner of Men’s Wearhouse and other clothing businesses – reported “mixed” second quarter 2019 earnings, according to a news report . Adjusting for a special one time item, EPS is down a fifth from a year ago and sales are off 4%. Most indicative of all, the company has suspended its dividend “to pay down debt”.

There is only one BDC with exposure: Barings BDC (BBDC). We placed the senior loan on the under-performing list from the IIQ 2019, when the BDC discounted the value of the debt by (12%) from (5%) previously. BBDC’s exposure started in IIIQ 2018 and this was expected to be a super-safe loan judging by pricing (L + 325%). Annual investment income of just under $0.600mn is ultimately at risk.

The latest news is likely to cause a further unrealized write-down in the next earnings release, unless the valuation folk take comfort from the savings in cash flow to come from the dividend elimination. We note the 80% drop in TLRD’s stock price in the space of a year and we worry. The credit is rated a CCR 3 (Watch List), but could be headed lower before the year is out.

Oilfield Services Sector: Outlook Negative

Halliburton, one of the biggest publicly-traded oilfield services company out there, warned investor on September 4, 2019 that “slowing growth in the maturing U.S. shale industry and spending cuts by oil and gas customers will lead to a consolidation of oilfield-service suppliers“.

A Reuters article confirmed the pessimism in a report quoting a Barclays survey that concluded “North American spending growth on oil and gas production will slow to a 2% this year…down from a January estimate of a 9% gain. Analysts for the bank expect spending in the second half of the year to be 15% below the first half“.

What’s more BDC portfolio company Liberty OilField Services admitted to slowing fracking activity at a Barclays sponsored energy conference.

“I think the fall off may be quicker and harder and earlier than a number of people expected,” Michael Stock, Liberty’s finance chief, told attendees”.

All this is bad news for the BDC sector which still has material exposure to the oilfield services sector. The BDC Credit Reporter’s database shows there are 19 BDC portfolio companies in this sector, 12 of whom are already under-performing. Total exposure at cost is $560mn, of which $393mn are to companies rated 3-5 in our 5 point rating system.

We count 26 different public and non-traded BDCs involved in the sector. Unfortunately, our records are still being added to so the actual exposure may be even higher. It may be time for investors to dust off their portfolio holdings lists and see what exposure to the oilfield sector their favorite BDCs have. A downturn is unlikely to be as impactful as back in 2014-2015 when oil dropped from $100 a barrel but could still hurt 2019 and 2020 results in a meaningful way.

Mallinckrodt Plc: Bankruptcy Possible – Analyst

On September 3, 2019, one of the 15 analysts covering publicly traded opioid pharmaceutical manufacturer Mallinckrodt Plc (ticker: MNK) suggested a bankruptcy filing is”possible”, according to a financial publication. This sounds plausible as the company has “more than $5 billion of debt, most of which will start to come due in 2020, according to Bloomberg“. The publication added that “the company recently announced that it borrowed the final $95 million on its revolving credit line, meaning that it has no more capacity to borrow“. Showing how dire conditions have become Reuters reported the company has hired restructuring firms, including two of the usual suspects in this situation, Latham & Watkins and Alix Partners.

Of all that $5.0bn of debt, there is only $11.2mn at cost held by a BDC, and that’s Barings BDC (BBDC). This was supposed to be a “safe as houses” position for BBDC, priced at just LIBOR + 2.75%. At June 30, 2019 the position was valued at 90% of cost. However, based on Advantage Data’s real time loan pricing we know this debt is now trading at 77 cents on the dollar and could drop lower given the many lawsuits pending against the business and the myriad uncertainties facing the segment, even if a restructuring becomes possible.

Should Mallinckrodt Plc end up in bankruptcy or restructured, the NAV or income loss to BBDC will be modest but will be one of the first credit reverses since the new external manager took over and renamed Triangle Capital (TCAP).

Deluxe Entertainment Services Group: Agrees Debt For Equity Swap

On September 4, 2019 Variety reports Deluxe Entertainment Services Group , which was headed for bankruptcy, has agreed for a debt to equity swap instead. “In a deal announced on Saturday, Deluxe said it would offer a deal to all of its term-loan lenders to exchange their debt for 100% of the equity of the newly organized company”.

BDC exposure – Harvest Capital (HCAP) and non-traded Cion Investment – is material at $20.3mn, all in senior debt and carried at par or at a modest discount at June 30, 2019. The income likely to be lost – and right away – is approximately $1.6mn annually. We had a quick look at HCAP and calculated that investment income lost is equal to 11% of its latest Net Investment Income annualized.

Based on other news reports we’ve seen, the company will be writing off half its senior debt, suggesting the losses – both realized and unrealized – will be around ($10mn).

A bankruptcy is not yet out of the question. If all the lenders do not agree to the “reorganization”, a pre-packaged bankruptcy will be filed.

The BDC Credit Reporter had the company rated as under-performing since the IVQ 2018 with a CCR 3 rating. However, the situation deteriorated more recently. In July, the company announced it had abandoned plans to spin off its Creative Services division. The company – and its lenders – had hoped that the proceeds of which, along with a debt raise, would repay a sizable amount of the company’s term loans and ABL borrowings. The value of the existing debt dropped to 20 cents on the dollar on the negative news.

We are now rating Deluxe Entertainment CCR 5 on our 1-5 scale as a material loss is baked in. Nonetheless, as in all these situations where lenders become owners after the traditional PE sponsor has failed, we have to wonder if additional capital will be injected and whether the business can ultimately be made to work. We’ll be hearing more about Deluxe Entertainment for some time.

Hollander Sleep Products: Change In Exit Plan

On September 3, 2019 mattress retailer Hollander Sleep Products asked a New York bankruptcy court for permission to switch from a reorganization plan centered on a debt-for-equity swap to a $102 million asset sale.

Details are scarce at this point, but does suggest chances are higher the company will shortly exit from bankruptcy. We don’t have enough data, though, to evaluate whether the price offered will increase or decrease the roughly 50% of debt and equity value written down through June 2019 by PennantPark Investment (PNNT) and PennantPark Floating Rate (PFLT), or ($16mn).

As we wrote on August 16, Hollander has been on non accrual in both the first and second quarter of 2019 and in bankruptcy since May. It’s likely that both the BDCs involved will be booking a significant realized loss in the third or fourth quarter, depending when the judge responds to the latest request and the proposed acquisition becomes effective.