Viasat Inc: Receivables Placed On Non Accrual

We’ve been reviewing the Great Elm Capital (GECC) IQ 2022 results, principally to understand what’s happening at satellite operator Avanti Communications. However, we also noticed that receivables due from another satellite company – Viasat Inc. – had been placed on non accrual for the first time. There are 3 different receivables involved, acquired in 2021. One tranche was due March 15, 2022 and the remaining two in June and September of this year. The total amount invested at cost is only $1.1mn.

However, as of March 31, 2022 the value of all three receivables has been dropped to $100K each, or $0.3mn in total – a (73%) discount. We have no idea why this has occurred. GECC has invested in and collected Viasat receivables in the past without any problem. Viasat itself is a public company, performing normally. If we learn more, we’ll provide an update. For the moment, we are rating the company CCR 5 on our 5 point scale.

Avanti Communications: Great Elm Capital Write-Downs

On May 9, 2021, the BDC Credit Reporter indicated that satellite operator Avanti Communications has seen its balance sheet restructured again. We also projected that the company’s main lender and substantive investor – Great Elm Capital (GECC) – would place any performing loan on non accrual and write-down – or off – the remaining $8mn value in Avanti carried at December 31, 2021:

We’ve not yet heard from GECC regarding IQ 2022 but everything points to all debt owed either being placed on non accrual or written off. As a result, realized losses are likely to be on the way. As far as we know, GECC and the other BDC lenders may have no debt outstanding in the restructured company. Even if they do, the huge Avanti exposure that has been around for years must have virtually no remaining value. For GECC, the $8mn of value left in Avanti at year-end will likely drop to an immaterial $0-$3mn when all the dust settles.

BDC Credit Reporter – Avanti Communications : Completes Restructuring May 9, 2022

On May 11, 2022 GECC reported IQ 2022 results and – as expected – placed the two performing loan tranches: Avanti 1.25 Lien Loan and 1.125 Lien Loan on non-accrual as of March 31, 2022, ” with any accrued but uncapitalized interest income reversed as of the accrual date”. All 4 types of debt held by GECC, amounting to $66mn at cost, are now non performing.

GECC – which had already written its $50.7mn of equity investment in Avanti to zero in previous quarters, wrote down the $8mn of remaining value in the Avanti debt to just $0.6mn – as we had anticipated. The debt will be converted to equity but is unlikely to have any value and may become a realized loss before long. In addition, we learned that new funds were advanced recently to Avanti but GECC – unlike in prior times – did not participate.

With these moves, the $117mn invested at cost by GECC in Avanti has been written down by (99.5%). No further income is being generated. The two most recent loans placed on non accrual generated $0.7mn annually in investment income by our estimate.

As we’ve said previously, the Avanti story is not yet over, but for the two public BDCs involved – which includes BlackRock TCP Capital (TCPC) with GECC – $130mn invested in the debt and equity of the satellite operator has a remaining value of just over $1mn and no investment income is being generated.

This is a credit disaster that’s been a very long time coming as Avanti – to any outside observer – has seemed way over-leveraged and unviable for years. For TCPC this is a modest reverse, given its size and relatively modest exposure. For GECC, Avanti has been its biggest investment and a major income producer till recently and frequently required special disclosures in its financial statements. Now Avanti – for better or worse – is a negligible part of the BDC’s portfolio, which is now dominated by a handful of specialty finance investments.

Avanti Communications: Completes Restructuring

Yet again satellite operator Avanti Communications has restructured its balance sheet. The company itself gave some of the details in a press release in April 2022 – but left us with some questions. We heard that total debt has been reduced “from $810 million to $260 million”. Apparently, control of the company has changed as well. The company indicates:

“Funds (or subsidiaries of such funds) and/or accounts managed, advised or controlled by HPS Investment Partners LLC or affiliates/subsidiaries thereof ($80 billion leading global investment firm) and Solus Alternative Asset Management LP (leading US registered investment advisor specialising in corporate recapitalisations) will become the principal shareholders”.

Avanti Communications Press Release – April 13, 2022

Business continues as usual, but there are unresolved financial and legal items as well. Here’s what a trade publication reported:

The financial reconstruction also sees Avanti pass to Glas Trust Corp. Ltd. (as one of the Primary Security Agents which also includes The Bank of New York Mellon) new or extensions to debentures on some assets of Avanti’s Hylas 2 (AH2) satellite and payment obligations to Glas Trust. The agreement is in the form of a formal charge on the company’s assets and signed on March 22 between the parties.

Some of Avanti’s subsidiary/related companies are officially in default as regards their financial filings to the UK’s Companies House. For example, Avanti Communications Group plc should have filed by June 30 2021 (for the accounts up to Dec 31st 2020) and are now overdue.

Advanced Television – April 14, 2022

Exactly how this translates for the BDCs with exposure to Avanti is not clear, but cannot be good. As of the year-end 2021, there were 3 players involved, led by Great Elm Capital (GECC); BlackRock TCP Capital (TCPC) and non-traded AB Private Credit Investors, with an aggregate cost of $136mn. At that point FMV was down to $15mn, a (89%) discount. Judging by TCPC’s just released IQ 2022 valuations and the restructuring news, the value of Avanti has even further to drop.

Most impacted – and much discussed over the years on these pages – is GECC with $118mn invested in equity and debt investments. The BDC in its latest 10-K was required to make some very sharp disclosures about its Avanti relationship, which we’ll quote at length:


Avanti is highly leveraged.  If there is an event of default under the indenture governing the PIK Toggle Notes or any other indebtedness and the obligations under the PIK Toggle Notes are accelerated, Avanti likely will not have sufficient liquidity to pay the obligations under the PIK Toggle Notes.  Under such circumstances, Avanti may consider other restructuring options, such as entering into an insolvency procedure under English law or by filing for Chapter 11 protection under the U.S. Bankruptcy Code, the consequences of which could include a reduction in the value of the assets available to satisfy the PIK Toggle Notes and the imposition of costs and other additional risks on holders of the PIK Toggle Notes, including a material reduction in the value of the PIK Toggle Notes.  In such an event, we may lose all or part of our investment in Avanti…

In addition, as noted above, we own approximately 9% of Avanti’s common stock. Avanti’s common stock was delisted from its primary exchange in September 2019 and no longer trades on an exchange, which limits the liquidity of our investment.  Equity securities also expose us to additional risks should Avanti default on its debt or need additional financing. Equity securities rank lower in the capital structure and would likely not pay current income or PIK income, which we had been receiving on our investment in Avanti prior to the 2017 liability management transactions. 

We are currently receiving PIK interest on our Avanti investment under the PIK Toggle Notes and we have generated significant non-cash income in the form of PIK interest.  As part of the 2017 restructuring, the PIK Toggle Notes became pay-if-you-can notes whereby Avanti is required to make interest payments in cash, subject to satisfying certain minimum cash thresholds.  Otherwise, the interest will be paid as PIK interest. … … The Avanti common stock was delisted from its primary exchange in September 2019 and no longer trades on an exchange.

Avanti’s financial condition is uncertain. The 2017 liability management transactions did not materially change Avanti’s long term capital structure and did not address the longer-term sustainability of Avanti’s business model. In addition, Avanti is faced with near term debt maturities, including related to the PIK Toggle Notes, which mature in October 2022. As of result of the uncertainty surrounding Avanti’s financial condition and ongoing liquidity challenges, as of December 31, 2021, we determined that our investment in the PIK Toggle Notes was fair valued at zero and, we put our investment in the PIK Toggle Notes and the 1.5L loan on non-accrual, with any accrued but unpaid or capitalized interest income reversed as of period end. As a result of this write down and non-accrual status, we have determined that that the accrued incentive fees payable associated with the portion of PIK interest generated by the PIK Toggle Notes and 1.5L loan should not at this time be recognized as a liability and as such we have reversed $5.0 million in accrued incentive fees related to those investments in the current period.

Great Elm Capital – 2021 10-K

We’ve not yet heard from GECC regarding IQ 2022 but everything points to all debt owed either being placed on non accrual or written off. As a result, realized losses are likely to be on the way. As far as we know, GECC and the other BDC lenders may have no debt outstanding in the restructured company. Even if they do, the huge Avanti exposure that has been around for years must have virtually no remaining value. For GECC, the $8mn of value left in Avanti at year-end will likely drop to an immaterial $0-$3mn when all the dust settles.

Even now, the Avanti story is not yet over. Expect more updates in the near future. However, the damage appears to be almost fully done and the prospect – always slim – of some eventual recovery from a business turnaround. For the BDC investors involved this has been a slow motion horror show and one that does not reflect well on either GECC or TCPC, both of whom were unwilling to accept what was obvious to almost everyone else: that Avanti was way too over-leveraged to affords the debt piled on through the years.

MacuLogix Inc: Debt In Default

In the IVQ 2021, MacuLogix Inc. – a company that develops tests for macular degeneration – defaulted on its debt maturing September 1, 2023. We know this from Horizon Technology Finance (HRZN) – one of its senior lenders. (The BDC also owns equity in the company).

Now we’ve just heard from HRZN regarding its IQ 2022 results and discovered the debt remains on non accrual and has been reduced further in value. Moreover, the BDC has made additional loans, due in 2022. All these loans are carried as non performing. The total capital invested is $12.1mn, up $0.4mn from the prior quarter, at cost. The latest value is $5.5mn, indicating a (55%) discount has been taken by the BDC overall.

The BDC Credit Reporter rates the company CCR 5.

We can’t tell from the public record what ails MacuLogix, or what the outcome might be for HRZN’s investment. We can say that the BDC is not receiving ($1.2mn) of annual investment income and may yet have to advance more funds to protect its interests. We’ll provide an update when we hear anything useful.

Grupo Hima San Pablo: BDC Writes Investment Off

On May 3, 2022, we heard the following from WhiteHorse Finance (WHF) in a press release which previewed IQ 2022 results:

During the three months ended March 31, 2022, the realization from Grupo HIMA San Pablo, Inc. generated an approximate $6.9 million net loss, or approximately a net loss of 29.8 cents per share.

WhiteHorse Finance Press Release May 3, 2022

No further details were provided, but this does provide a useful heads up regarding the Puertno Rican hospital chain, whose debt has been non performing in one way or another since IVQ 2017 (!). As of the IVQ 2021, 4 BDCs – including WHF – have exposure to Grupo Hima, in the form of first lien and second lien debt, with a cost of $44.4mn. At fair market value the positions already aggregated only $10.9mn.

WHF – according to its latest 10-K – had invested $19.5mn in the hospital chain, but had written exposure to $7.5mn. Assuming we understand what WHF is doing, this suggests the BDC will be recognizing a final loss but recovering $12.6mn of capital advanced and a small fair market value gain from the settlement of this long troubled credit.

The other BDCs involved – none of which have reported results yet are Portman Ridge (PTMN); Main Street Capital (MAIN) and Stellus Capital (SCM). The news out of WHF suggests the “realization” of the Grupo Hima situation means a final resolution has been made. Unfortunately, we don’t know the details and could not find anything from a quick search of the public record. We hope to circle back with more details when one or more of the BDC lenders provides more of an explanation of what has happened.

Rug Doctor/RD Holdco: Second Lien Debt On Non Accrual

We don’t know what’s going wrong exactly at Rug Doctor (aka RD Holdco) – the carpet cleaner rental company, but matters seem to be getting worse. Admittedly, based on the trend of BDC valuations we’ve tracked on Advantage Data, performance has not met expectations since – at least – 2018. Now that Ares Capital (ARCC) has reported its IQ 2022 results ahead of its peers, we can report the company’s second lien debt – due 5/2023 – has been placed on non accrual for the first time.

There are 3 other BDCs with exposure to the debt and equity of the company, and total outstandings at cost (using the year end 2021 data) amounted to $92mn. For ARCC, the loss of income on an anualized basis will amount to about ($2.2mn). That a 10% yield on $22mn at cost. The BDC also has $14mn invested in the equity but that remains valued at zero, unchanged at that level since IQ 2020.

The other BDCs – SLR Investment (SLRC); Main Street Capital (MAIN) and non-traded MSC Income Fund share $56mn in combined exposure and have not yet reported their IQ 2022 valuations. SLRC has the biggest stake – also in second lien and equity – and will probably be writing down both from a cost of $32mn to $9mn if they follow the ARCC lead. SLRC’s total value as of IVQ 2021 was $17mn, so there’s a potential ($8mn) unrealized write-down in play.

MAIN has $10.9mn in a “Senior Note” which was last valued at par and may not be subject to as much of a potential write-down, if any. Ditto for MSC Income Fund with $12mn in that same senior facility.

Looking down the road is not easy, given we know so little about what ails Rug Doctor. However, one can make a case that the – given this latest non accrual and years of underperformance – both the equity invested and the second lien obligations are in danger of a complete realized loss at some point. If that’s how matters pan out, two-thirds of the funds invested at cost by the BDCs could be lost – all of which would affect ARCC and SLRC. Both BDCs are sufficiently large in terms of capital base to absorb such losses, but this would be a reverse nonetheless and one that’s been a long time coming.

For the moment, we are downgrading Rug Doctor from CCR 4 to CCR 5. We’ll provide an update as we learn more from the BDCs involved and/or publicly available information.

Dunn Paper: Lenders Seeking Sale Of Company

Dunn Paper has been in financial difficulties in recent months due to “declining profitability and elevated leverage”, as admitted by the company in a press release. In March 2022, an interest payment on senior debt was missed, which required the borrower to enter into a forbearance agreement with some of its lenders. A new credit facility has been received, although the amounts and terms are not known. (For a brief explanation of Dunn Paper, see a company description at the bottom of this post).

The above notwithstanding – on April 26, 2022 – a specialist publication – quoting anonymous sources – indicated second lien lenders are banding together; hiring counsel and seeking to push for a sale of the company. As you’d expect details are sparse. However, we imagine several BDCs might be represented in this group of second lien lenders. Prospect Capital (PSEC), Southwest Capital (CSWC) and a non-traded BDC all have second lien exposure to Dunn. (PSEC is also in the first lien debt).

Dunn has been underperforming only quite recently – since IIIQ 2021 – when all the BDCs involved started to write down the value of the second lien debt. As of the IVQ 2021, the biggest discount was applied by CSWC: (16%). All in all, BDC exposure amounts to a relatively modest $21mn, with PSEC holding $16mn, including $4mn in first lien exposure. Until the latest news, we rated Dunn CCR 3 on our 5 point investment rating scale. Now, Dunn has been moved – due to its failure to make an interest payment – to CCR 5.

The yield on the second lien debt was being charged at just over 10%, suggesting total annual income forgone on the second lien debt is ($1.7mn), and another ($0.3mn) on the first lien.

Dunn’s weak financial performance – according to their own reports – seems to derived from the supply chain and related inflationary increase of input costs. That might mean what ails the business might be salvageable by a restructuring or the sale to the right party. The PE sponsor recently brought back “Founder” Brent Earnshaw as CEO, amidst other senior executive changes. That must give some hope to the second lien lenders that a full recovery – or something very close to one – is a realistic prospect. We get the impression from reading between the lines that this troubled situation will be resolved within a relatively short period.

We will continue to track the public record and ascertain what valuations PSEC and CSWC ascribe to their respective positions when IQ 2022 results are published. Neither BDC, though, has yet set a date for reporting their most recent results. At the moment, we expect neither the interruption of income nor any realistic prospective loss to be material for the BDCs involved, and there’s always a chance this will be resolved without any significant loss.

About Dunn Paper
Dunn Paper is a leading manufacturer and supplier of advanced paper, tissue, and packaging products for use in food, medical, and specialty markets. The company operates 7 paper mills across the United States and Canada and focuses on eco-friendly specialty paper and tissue. Dunn Paper also works with top converters allowing their sustainable paper products to have thousands of potential applications. The company’s first mill opened in 1924, and in 2016 the company was acquired by Arbor Investments, a specialized private equity firm with a focus on premier companies in food, beverage, and related industries.

Dunn Paper Press Release April 22, 2022

PhyMed Management LLC: Debt Placed On Non Accrual

On April 26, 2022 Ares Capital (ARCC) – one of two BDC lenders to PhyMed Management, LLC – an anesthesiology company – reported its IQ 2022 results, which included a sharp write-down of the value of its second lien loan and marking the obligation as non-performing. At cost ARCC invested $56mn in the debt – due in September 2022 – but has now written the fair market value to just $14mn. Last quarter, according to Advantage Data, ARCC valued this loan at $52mn. That was only a (5%) discount to par and would have rated the company as performing normally – a rating of 2 on our standard 5 point scale.

A second BDC lender in the same loan – SLR Investment (SLRC) has advanced $38mn and was valuing its exposure at $37mn, and performing normally at year end. SLRC has not yet reported IQ 2022 performance, but expect to see a drastic drop in the value of this investment.

Obviously, something has gone wrong in the last few months to take PhyMed from performing to non-performing (aka CCR 5) so quickly. We have searched the public record for an explanation but none is readily forthcoming as yet.

For the two BDCs involved, with $94mn advanced, the impact on income will be material from the non accrual. In a sign – with the benefit of hindsight – that not all was right at PhyMed – the loan at ARCC was being charged an interest rate of 15% at year-end 2021, mostly in PIK form. For SLRC, this facility is the 5th largest in its portfolio at year end 2021, representing 1.8% of assets and is showing on its 2021 10-K with a 16% yield. Between ARCC and SLRC, nearly ($15mn) in annual interest income will be forgone until this issue is resolved.

Moreover – in the absence of any other information – the sharp drop in the valuation ascribed by ARCC on what is a second lien obligation leaves open the possibility that ultimately a significant – if not complete – realized loss might be the eventual outcome. Should ARCC write-off the full exposure, the loss on a net asset value per share basis would be ($0.11). The BDC – the largest in the sector – just reported a $58mn net realized gain for the IQ 2022. PhyMed may end up cancelling those gains when this matter is settled out. (We’ll wait to calculate the corresponding number for SLRC which has just merged with a sister BDC, and whose share count we don’t have at hand to make the calculation).

Hope springs eternal, and it’s possible PhyMed will be rescued in some way. We’ll add the name to our daily searches of the public record and wait to see what ARCC and SLRC have to say – if anything – on their upcoming earnings conference calls. At the moment, though, this looks like a very sharp and material reversal for both BDCs.

Teligent, Inc.: To Liquidate, Part Repay Lenders

Good news (of a sort): Teligent, Inc. is being liquidated. We wrote about the troubled pharmaceutical manufacturer twice previously. Bankruptcy was filed back in 2021 and has now become a liquidation after assets were sold to a third party. From the very sparse public record, we learn on April 11, 2022 from Bloomberg Law that the company will be paying its lender $33mn out of the $90mn owed. (Unsecured creditors – who’ve been battling in court with the lender – will receive 11 cents on the dollar).

The lender in this case is Ares Capital (ARCC) or “its affiliates”. Previously, given the serious troubles at Teligent that we won’t regurgitate here, we were concerned that ARCC might have to write off 100% of its $77mn of exposure reported as of December 31, 2021. We’re not sure what the difference is between the IVQ 2021 stated exposure and the $90mn mentioned by Bloomberg Law. Most likely, the difference consists of post-bankruptcy monies advanced by ARCC not on the books at year-end and which kept Teligent afloat long enough to achieve the asset sale.

The numbers being thrown around imply that ARCC will end up booking a realized loss of ($57mn) on Teligent when all is said and done. To put that into context ARCC has booked $17mn in annual realized gains over the last 3 years (ARCC had a very good 2021, but losses in 2019-2020). Net assets at 2021 year end were in excess of $20bn, so this loss – while notable – may not move the needle much and any income once earned on this investment has not been received since IQ 2020.

As of the IVQ 2021, ARCC had already written down its exposure by ($38mn). If we’re right about the final bill, the BDC will be ultimately booking another ($19mn) in losses. This probably means a further unrealized drop in the upcoming IQ 2022 results and a final realized loss in the IIQ 2022 numbers.

Although we were overly-conservative about ARCC’s prospective loss, the BDC itself seems to have been somewhat over optimistic about its recovery, based on the numbers at year end. As always, these are very hard outcomes to handicap once the courts – and other parties get involved.

Sungard Availability Services: Files For Bankruptcy Again

Just three years after filing for Chapter 11 bankruptcy Sungard Availability Services – an IT company – has done so again. A pre-packaged bankruptcy plan agreed with its lenders has taken the company in and out of Chapter 11 status, with similar filings in the UK and Canada. Management is putting the best possible spin on this “Chapter 22”:

“Like many companies, our business has been affected by challenges in our capital structure, driven by the global COVID-19 pandemic and other macroeconomic trends including delayed customer spending decisions, insourcing and reductions in IT spending, energy inflation, and reduction in demand for certain services,” said Michael K. Robinson, Chief Executive Officer and President, Sungard Availability Services. “Over the past three years, we’ve made significant network, product and infrastructure investments which are being well-received by customers and gaining significant traction.  We believe the chapter 11 process is a right and critical step forward for the future of our business and our stakeholders.”  

Sungard Availability Services Press Release- April 11, 2022

The company has arranged $95mn of Debtor In Possession (“DIP”) financing and with monies in hand will tackle over the next several months “uneconomical leases and underutilized space”. Thanks to the DIP monies “Sungard AS intends to meet its financial obligations, including paying suppliers in the normal course of business for goods and services delivered from today forward. The Company also has filed the customary motions to honor its ongoing commitments to employees and customers”.

There is only one BDC with exposure: FS KKR Capital (FSK). The bankruptcy move will not be a surprise to FSK which has been involved with the business since 2014, when an earlier manager of the BDC first booked exposure. FSK – and its sister BDCs that have since been combined into FSK – were involved in the 2019 restructuring and took an undetermined amount of realized losses. As of year end 2021, FSK’s exposure at cost amounted to $26.3mn in first lien, second lien and equity. (The last of those seems to have been added after the 2019 restructuring). The FMV was $14.3mn, with the equity written to zilch, the second lien discounted (39%) – and placed on non accrual. The first lien debt was valued at a slight premium.

We have very few details – if any exist – about what post-Chapter 22 Sungard will look like. We can reasonably imagine, though, that the equity and second lien debt will be written off (cost $20.6mn and an additional $8.3mn loss at FMV). The impact on FSK’s income should be modest as the second lien loan is already non accruing. Even if the first lien debt becomes non performing, there is only $5.8mn outstanding and at a sub-market, non income producing rate of 3.8% PIK.

Or, in other words, most of the damage – except for the potential further write-down of the second lien (equal to 0.1% of FSK’s net assets) – is already done, earlier in 2021 and back in 2019. The most interesting aspect of all this might be whether FSK receives more equity going forward in Sungard and whether that amounts to anything more than a wing and prayer.

As we’ve been writing about of late, BDCs do have the ability to take the long view and benefit therefrom should a turnaround occur. (An article we’ve read – which may be out of date – indicates a FSK representative sits on the Board of this company that used to have over $1bn in annual sales). The amounts invested here, and FSK’s share of the DIP financing, may prove to be too small to provide much of a potential upside, but still deserves watching.

Logan Ridge Finance: Quarterly Credit Review

Portfolio Data

Logan Ridge Finance (LRFC) at the end of IVQ 2021 had 40 portfolio companies, and a portfolio with a cost of $190.5mn and a FMV of $198.2mn, a premium of 4%. Inception to date losses on $189mn of equity capital at par were ($82mn), or 43%.

First lien debt as a percentage of the portfolio at fair value was 49.6%, second lien debt 15.2%, subordinated debt 2.5%, collateralized loan obligations 3.9% and equity portfolio 28.8%.

Performing vs Underperforming

Of the 40 companies in portfolio, 36 are performing or are non-income producing. Performing investments are $176mn and underperforming investments are $22mn, of which $8mn are non-performing. (LRFC’s manager does not offer an investment ratings table. All the data here is compiled by the BDC Credit Reporter).

Underperforming investments account for 10.9% of the portfolio as whole. The percentage of underperformers has dropped from $26mn and 13.2% of the portfolio in IIIQ 2021. Note, though, that LRFC booked ($8.3mn) in realized losses in IVQ 2021 and ($8.0mn) for the year as whole. Furthermore – despite paying no distribution – net asset value per share fell for a third quarter in a row, to $39.48.

See the BDC Credit Table for further data.

Underperformers

There are two companies rated CCR 3 in our 5 point investment rating scale: Alternative Biomedical Solutions and Vology Inc, with a fair market value of $14.1mn. Both companies value trended downward in the IVQ 2021.

There are two companies rated CCR 5 – non accrual: BigMouth Inc and Sequoia Healthcare Management. The former is a liquidated business and the investment at risk is non material at $0.6mn. The latter is a hospital group accused of fraud, with a FMV of $6.4mn, down from $8.3mn in the prior quarter and with a cost of $11.9mn. All the exposure is in a term loan maturing 1/14/2022. (Cion Investment also has first lien debt to the company, which is also on non accrual but with a different maturity).

Potential Upside

As noted above, LRFC has an unusually high proportion of investments in the form of junior capital (common stock, warrants and preferred). The total cost is $51.7mn and the FMV $64.7mn. Seven performing company equity investments (not including two CLOs and Vology, which is underperforming) are valued over $2mn. The largest value by far is the $16.3mn of equity in Eastport Holdings, a full service marketing firm, which represents a quarter of the total. The value of Eastport has been trending downward for several quarters, but remains 500% of its cost.

Conclusion

By BDC standards, LRFC’s portfolio is small – the second smallest in the public universe after PhenixFin – and with an unusually high proportion of non-income producing investments and a low percentage of first lien debt. However, the number and value of underperforming companies and investments is normal by BDC standards, and the names involved are unchanged, albeit mostly being written down further. This follows a quarter where several poor performers were written off the books.

Projection

Looking forward, the underperformers are more likely than not – as a group – to drop further in value, but that may be offset by increases in the value of equity investments. The manager’s plans to decrease its proportion of equity investments should increase the proportion of income producing investments over time, but the timing and the percentage involved is unknowable.

We project that given more difficult market conditions; downward pressure on the valuations of underperformers and the decreasing value of Eastport Holdings of late that NAV Per Share is more likely than not to decrease by the end of 2022 versus the level as of December 31, 2021. Since the end of 2017, LRFC’s NAV Per Share has dropped (53%), including (2%) in 2021. That metric could reach (55%) or greater in 2022. See the BDC Nav Change Table.

US TelePacific Corp: Debt Refinancing Concerns

Privately-held communications company U.S. TelePacific (aka as TPx Communications) is in protracted negotiations with its existing lenders. Apparently, since November 2021 the company has brought on an adviser to assist in negotiations regarding its revolver and term loan, which mature in May 2022 and May 2023 respectively. The debt markets are already valuing the Term Loan at 75.6% of par. Furthermore, back in September 2021 S&P – and later Fitch – downgraded the company. The former has downgraded the business to a CCC+ rating. Commentators are projecting that private equity group Siris Capital Group – which acquired the company back in February 2020 – and has already lobbed some extra capital in to support the business might have to write another cheque. If not, liquidity might become a serious problem within months….

This is a material problem for 4 BDCs with exposure to the company – all in that $655mn Term Loan. Three of the BDCs are publicly traded: Main Street Capital (MAIN) with $17.0mn at cost; TCG BDC (CGBD) with $6.6mn and Capital Southwest (CSWC) with $5.2mn. Non-traded MSC Investment has $12.4mn at risk.

Till the IIQ 2021 – based on the BDC valuations – the company was rated as “performing to plan”, as the maximum discount taken on the debt (the S&P downgrade notwithstanding) was (7%). [The BDC Credit Reporter does not typically move any company to “underperforming” until a (10%) discount or greater has been reached]. However, in the IIIQ 2021 – probably reflecting the challenges mentioned above – the discount reached (18%). Given what we’ve heard of the current valuation a further unrealized loss is likely in the IVQ 2021. As a result, we rate the company as Trending (i.e. likely to show a material change in valuation on the next quarterly valuation).

We are rating U.S. TelePacific CCR 4 (An eventual realized loss is more likely than full repayment) because the market discount is substantial for a “secured” term loan. Moreover, we hear that many of the outstandings are held by CLOs, which might make finding a resolution – such as a debt for equity swap – more difficult. Finally, we’re concerned that 10 weeks or more have passed without a resolution between borrower and lenders.

Both the CSWC and CGBD positions are held in their joint ventures, but MAIN and – we believe – MDC Investment’s are carried on their balance sheet. We’ll learn more when IVQ 2021 results are published but a final resolution – positive or negative – is likely not to occur till later in 2022, or even later is no meeting of the minds can be reached.

Fusion Connect: Completes Recapitalization

Fusion Connect Inc. has restructured itself – again. Last time, the “leading managed security service provider of cloud communications and secure network solutions” was re-organized was when coming out of Chapter 11 bankruptcy back in January 2020. The company, after making ill-fated serial acquisitions, had sought court protection, burdened by a reported $760mn in liabilities. When exiting Chapter 11, Fusion managed to “shed” $400mn in debt in a transaction which saw its lenders become owners. See the BDC Credit Reporter’s article on the subject from January 14, 2020 – one of six articles we wrote about the company before, during and just after its bankruptcy exit.

Unfortunately, in the last two years Fusion Connect has failed to thrive and has now needed to raise new capital; write-off even more debt and establish new debt financing. All this is spelled out in a press release by the company and its owners on January 19, 2022.

This equity issuance and recapitalization, led by funds affiliated with or managed by Morgan Stanley Private Credit, Ellington Management Group, and Investcorp Credit Management BDC, Inc., was supported by existing stakeholders, including 100% of the company’s creditors. Following receipt of required regulatory approvals, Morgan Stanley Private Credit, via its affiliated or managed funds, will become the majority shareholder in the company. Several members of the Fusion Connect management team also participated in the capital raise, demonstrating substantial support for the company. 

Fusion Connect Press Release – January 19, 2022

There are two BDCs with $12mn of exposure to Fusion Connect: Investcorp Credit Management (ICMB) and Portman Ridge Finance (PTMN). However, only the former’s exposure – in both debt and equity – is material, with PTMN only holding $0.866mn in equity at cost, which was last valued at $0.221mn. As of September 2021, ICMB was a lender in two different debt facilities – both due at different times in 2025. The so-called “Exit Term Loan” – with a cost of $3.2mn was current and valued at par. However, the “Take-Back Term Loan” , with a cost of $5.1mn was valued at $2.0mn and the PIK portion of its interest income (8% according to management) was non performing. ($2.8mn of equity held was already valued at essentially zero).

We’re guessing that the Exit Term Loan will be refinanced at par by the new $60mn credit facility. By the way, that facility is paying 11.5% as of last September. Most likely – but still an estimate – the Take-Back Term Loan will be written off, resulting in a realized loss. Ditto for the equity at both ICMB and PTMN.

Judging by the press release, ICMB will remain both lender and part owner – along with the above mentioned partners – in Fusion Connect. Whether ICMB’s total outstandings will increase even after the likely realized losses is unclear, but we wouldn’t be surprised if that proves to be the case. We currently rate the company CCR 5 due to the non accrual of the PIK on the Take Back loan, but will upgrade our rating to CCR 3 or CCR 4 once we hear the final details from ICMB. (We expect PTMN will have no further role).

This is proving a never-ending story for ICMB, but we imagine management is consoling itself that – one fine day – Fusion Connect will hit its stride and whatever equity stake the BDC has ended up with will be worth enough to recoup the losses incurred in 2020 and 2022. We’ll continue to monitor the company, but expect that the recapitalization won’t affect the BDCs books till the IQ 2022 results are published.

Knowland Technology Holdings: IVQ 2021 Update

Knowland Technology Holdings (as per Advantage Data but named Knowland Group by its only BDC lender – Saratoga Investment or SAR ) “is a web-based software company that provides business development products and services to the hospitality industry”. The company has its own Wikipedia page. The company, which bills itself as “the world’s leading provider of data-as-a-service insights on meetings and events for hospitality” waxes optimistically about a rebound in corporate gatherings, as this article from hospitality.net suggests.

Judging, though by SAR’s recent valuations of its second lien debt to this privately held company with nearly 200 employees, the investment made seems to be underperforming. According to Advantage Data’s records, the company has been underperforming – not surprisingly – since the IIQ 2020. As of November 2021, the debt – which matures in 2024 and yields 11.0% including a 1% PIK element – has a cost of $15.8mn and a FMV of $10.4mn. That’s a (34%) discount, and given both the nature of the business in these pandemic affected times and the amount of the discount, worrying. By the way, the August 2021 valuation was $10.8mn, so the valuation trend is down as the little red arrow accompanying this article indicates.

We rate the company CCR 4, with the possibility that $1.7mn of annual investment income might be interrupted. Much more info we cannot offer as SAR has not said anything about the company and the public record is not eye opening either. We have no reason at this time to expect any great change coming in SAR’s next valuation, except that the onset of omicron might be a depressant. We’ll circle back when we get any news or at the next SAR earnings release in April 2022.

1888 Industrial Services: IIIQ 2021 Update

We’d like let you know what’s happening at oil field services company 1888 Industrial Services, but we can’t as the public record is sparse. Please read our earlier articles in December 2019 and May 2020. However, the valuations of the three BDCs that have an aggregate $62.3mn advanced at cost to the company tell the story. Back when we last reviewed the company the fair market value of the investments came to $19mn. As of the IIIQ 2021, the value has dropped to $7.3mn. That’s a discount from cost of (88%).

PhenixFin (PFX) – which used to be Medley Capital – has the biggest single position: a revolver of $3.5mn at cost valued at par. Still, and underlining the liquidity crunch the company must face, the 6.0% interest is paid in kind, not cash. Curiously, Investcorp Credit Management BDC (ICMB) allows has a Revolver with a cost of $2.0mn and a FMV of $0.5mn. No mention in the BDC’s footnotes as to whether the interest is paid in cash or in kind. Sierra Income – soon to be acquired by Barings BDC (BBDC) – is also funding the same Revolver. There the cost is given as $1.2mn and the FMV $1.1mn. No word of being paid in kind. A couple of the term loan tranches held have been given nominal value as of September, but the bulk of any remaining value is in the Revolver.

In our last report of a year and a half ago, we rather optimistically projected that the BDCs involved might lose 50% of their $62mn invested. Obviously – judging by the latest numbers – we were well off the mark. In the interim, we’ve had a revival in oil prices and some greater level of business activity in oil field services. None of that, though, seems to have helped the company nor has the huge influx of capital into the economy post pandemic. At this stage, we’re waxing more pessimistic and assume very little – if any – of the capital advanced will be recovered.

Most at risk of further write-downs is PFX, with a current FMV of $3.6mn, followed by ICMB ($2.6mn) and Sierra, with just $1.0mn of value left. We continue to rate the company CCR 5 and will provide an update when the IVQ 2021 results come out. We are keeping our expectations low.

Teligent, Inc.: Drugs Recalled

This can’t be good. Teligent Inc. has announced the recall of two of its drugs. These consisted of:

two lots of topical lidocaine solution after companies testing the drug received superpotent (sic) results at the nine-month and 18-month stability time points. The company faced similar problems in September, and it had a number of run-ins with the FDA prior to that.

Fierce Pharma – December 8, 2021

For a company already in bankruptcy – as discussed in our prior article when we initiated coverage – this is yet another setback. For the only BDC with exposure – Ares Capital (ARCC) – this means the prospect of even higher losses when the company’s future fortunes are settled. We “cut to the chase” in our earlier post and suggested that a complete write-off was a possibility, meaning that ARCC might take a further ($34.5mn) write-down and a realized loss of ($73.8mn). For the BDC, which is trying to buy the company out of bankruptcy and has just funded $12mn in new financing, this news could not come at a worst time, we imagine.

We continue to carry Teligent as CCR 5 and Trending in that we expect the next valuation in the IVQ 2021 could be materially lower than as of September 30, 2021.

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.

BJ Services Company: IIIQ 2021 Update

Last time we wrote about oil field services company BJ Services Company, the business had just filed for Chapter 11, and without a pre-packaged plan. Subsequently – as we’ve gleaned from the public record – at least some of BJ’s assets were sold to other entities such as American Cementing. More recently, BJ’s former headquarter’s building was sold for $40mn.

Where does this leave the 4 BDCs previously with $25.2mn invested in the company’s unitranche debt when bankruptcy occurred ? As of September 30, 2021, total exposure at cost was down to $10.6mn and only Crescent Capital (CCAP) and Portman Ridge (PTMN) – who acquired the loan from now defunct Garrison Capital – are still involved. PTMN is carrying its modest $1.4mn position at par. The BDC has a “first out” status in the unitranche loan and that might explain the valuation and why the debt is carried as performing.

Over at CCAP – which has most of the exposure – one tranche of debt with a cost of $8.0mn is valued at $5.5mn, down (35%), just slightly off the prior quarter and the lowest value given since the bankruptcy occurred. The debt remains on non-accrual, and is a “last out” structure. (Confusingly, there’s also a $1.2mn senior loan from CCAP that is carried as current and valued at cost.)

We’re surmising – because neither PTMN or CCAP are explaining anything – that the BDCs are waiting for the asset sales to be complete to tot up their losses – if any – on BJ Services and close out these loans. With the sale of the HQ, we’d guess this process is almost complete and the BJ Services book will shortly be closed.

The only loss that will ensue – if we’re right – is a realized one by CCAP for ($2.5mn) or so, offset by receiving some proceeds to be re-invested. If that’s the case, CCAP will probably be mildly pleased as the BDC had nearly $13mn invested when BJ Services – seemingly out of the blue – filed for Chapter 11 back in 2020.

All this should be confirmed shortly, possibly when the IVQ 2021 results BDC results are published. For the moment, we’re retaining BJ Services as a CCR 5 – i.e. non performing – credit and Trending, because we expect something material to occur.

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.