Isagenix International: Lenders Agree To Forebear

A press release issued by “global wellbeing” company Isagenix International on September 23, 2022 did not provide many details but made clear that trouble was afoot:

Isagenix International (“Isagenix” or “the Company”), a leader in providing nutrition solutions for weight loss, performance, and healthy aging, announced today that it has entered into a forbearance agreement with an ad hoc group of the Company’s secured lenders. This forbearance agreement is an important first step as the Company works toward a holistic solution for its secured debt on terms that will ensure Isagenix’s continued market leadership and long-term growth. Isagenix is focused on operating business as usual — both during the forbearance period and well into the future.  

Isagenix International Press Release – September 23, 2022

No more substantive information was provided but that was sufficient to cause the BDC Credit Reporter to downgrade the company – which has been underperforming to varying degrees since IQ 2019 – to its lowest rung on our investment rating scale – CCR 5. The forbearance means the secured debt is non performing at the moment.

This is very similar to the situation back in 2019 and 2020, when the company’s performance deteriorated; ratings groups downgraded the debt and lenders started to worry. We last wrote about the company on August 28, 2020, just as Isagenix received an equity infusion along with more flexible terms from its senior lenders.

Almost exactly two years later, Isagenix is again in deep trouble; subject to downgrades from S&P and Moody’s and again needing concessions from its lenders. Back in 2020, there was $36mn at cost in BDC advances to Isagenix, discounted (60%). This time the exposure is not much different – $34mn. The first lien debt is mostly discounted (40%) at June 30, 2022 but that was before this need for “forbearance”, which just means “please don’t take any action on our defaults till we come up with a mutually agreeable solution”.

There are 7 BDCS with exposure to Isagenix, including 6 public players. Far and away the biggest exposure is held by Cion Investment (CION) with $14.7mn (and discounted the least), followed by Crescent Capital (CCAP) with $5.4mn. Main Street Capital (MAIN); Capital Southwest (CSWC); Barings BDC (BBDC) and First Eagle Alternative Credit (FCRD) – as well as non traded MSC Income Fund (not coincidentally managed by a MAIN affiliate) – all have relatively small positions in loans due 6/14/2025 and 6/30/2025. Most of the BDCs are discounting their debt by (40%) – a third quarter in a row of value depreciation. Until the forbearance we rated the company CCR 4.

We don’t know what ails this company – which some consider to be a multi level marketing business – but we are aware of lawsuits pending and speculative grade ratings from both S&P and Moody’s. The big discount applied even by supposedly “secured” first lien lenders hints at a possible significant realized loss down the road, and potential further write-downs on an unrealized basis in the short run. Income – with the “forbearance” has been interrupted and is unlikely to revert to the prior status quo.

For more of the history of the credit; the various downgrades we have applied and for background information read the Isagenix Company File below. For our part, we’ll be keeping tabs on what happens next and will update the Company File or write another article, or both.

For the public BDCs involved, the saving grace is that outside of CION – and maybe CCAP – the amounts involved are not needle moving, even if worst comes to worst.

See Company File.

Monitronics International : Updated Company File

We are busy bringing up to date as many Company Files of underperforming BDC-financed businesses as we can. That involves – in part – circling back to our BDC Credit Reporter archives and seeing what has happened to companies we’ve written about in the past and filling in the multiple fields in the Company Files. It’s exhausting work, but is generating many interesting credit stories.

The latest is Monitronics International Inc. (aka Brinks Home), which has been on one BDCs books or another since 2012 according to Advantage Data’s records. Now the only lender is FS KKR Capital (FSK), but with what we call Major exposure of $119mn. (Anything over $100mn at cost gets the Major label). Admittedly, all the invested capital is in first lien debt and all performing.

Nonetheless, we have rated Monitronics CCR 3 – the first step down into being an underperformer on our 5 point scale. Please find attached the updated Company File – which includes the multiple BDC Credit Reporter articles we’ve written on this subject over the years, and much more data besides.

Here is what we wrote in our Credit Notes, where we summarize in the Company File our latest thoughts:

9/16/2022: There is a very long and complex history to the Monitronics/Brinks Home story and to the BDC involvement therein. Basically the company was highly leveraged, restructured itself in a pre-packaged bankruptcy which only increased its BDC exposure in late 2019. Since then valuations – at least – have recovered, until the last couple of quarters. The business needs new capital but failed to raise new high yield monies last year and is still on the hunt. This may become a problem credit again for FSK, which inherited this name from FSKR. The amounts involved are Major (over $100mn) so it’s worth paying attention.

Wahoo Fitness: Downgraded By S&P

We’ve not found the original article as yet, but a Twitter post on September 12, 2022 says Wahoo Fitness Acquisition LLC has been downgraded by S&P:

This is bad news for the two BDCs with exposure to the fitness company: Main Street Capital (MAIN) and Capital Southwest (CSWC). The former has invested $14.4mn in the company’s first lien senior loan due in August 2028. The latter is in the same loan in its I-45 joint venture with…MAIN for $4.8mn Both lenders have already discounted their positions by (12%) as of June 30, 2022, suggesting credit deterioration has been underway for a little while. Still, back at the end of the IQ 2022, the debt was valued at par.

We had already added Wahoo Fitness to the underperformers list as of the IIQ 2022 with a CCR 3 rating. This latest move – coming relatively recently after the company was acquired and with the Peloton story in mind – causes us to move Wahoo Fitness to CCR 4. We would be the first to admit we don’t yet know what’s going wrong, but a (75%) drop in EBITDA cannot be ignored. There’s the prospect here of several million dollars being lost – first lien standing notwithstanding.

We’ll be keeping an eye out for more and better information.

American Teleconferencing Services: IIQ 2022 Update

This is embarrassing: we still don’t really know what’s happening with American Teleconferencing Services Inc (AFS), a subsidiary of Premiere Global Services (PGi). We’ve written extensively about both companies in the past, and communicated on these pages that there was much trouble afoot. The BDC Credit Reporter has written 4 times about AFS alone – most recently on August 31, 2021.

What we do know from the valuations by the multiple BDCs that hold the AFS and PGi debt is that this has been a disaster for lenders. The outstandings at both related companies amounted as of June 30, 2022 to $125mn, but the value totals only $7mn. Despite most of the exposure being “first lien”, the ultimate outcome should be an almost complete loss – one of the worst in recent memory based on the dollars and the multiple BDCs involved.

As a reminder, the BDCs involved are Capital Southwest (CSWC); Cion Investment (CION); Oxford Square Capital (OXSQ); Main Street Capital (MAIN); PennantPark Floating Rate (PFLT); SLR Investment (SLRC) and two non-traded players.

We continue to rate the company CCR 5, given the non accruals that date back to 2019. Furthermore – and more than most troubled companies that we track – we expect there will be no meaningful recovery and – at some point – over ($100mn) of realized losses will be booked. The damage, though, has been done. As noted, the exposure has been all but written off and no income is being produced.

Cineworld Group PLC: Files Chapter 11

The BDC Credit Reporter’s headline of August 22, 2022 said “Cineworld Group PLC: May File Chapter 11″. Now you can scrap the “maybe” because the filing occurred on Wednesday September 7, 2022, as reported by the Wall Street Journal , amongst others. Here are some of the details:

London-based Cineworld has more than $5 billion in debt and faces a roughly $1 billion legal judgment stemming from a soured merger with Canadian cinema chain Cineplex Inc. The chapter 11 proceedings open a path for Cineworld to cut its liabilities through a possible asset sale or financial restructuring as it tries to retain moviegoers who are tempted to stream flicks at home.

Cineworld expects to deleverage its balance sheet while seeking concessions from landlords and continuing its theater operations uninterrupted. The company said Wednesday it has commitments from its lenders for a roughly $1.94 billion loan to carry it through the restructuring process and cover operating expenses.

Cineworld Files for Chapter 11 After Sluggish Ticket Sales- Wall Street Journal – September 7, 2022

We are downgrading Cineworld to CCR 5 from CCR 4. As made clear, though, in our prior article, given the modest amounts of exposure held by Barings BDC (BBDC) and non traded Barings Capital Investment Corp, losses should be minimal. Still, the bankruptcy is likely to result in a temporary interruption of interest received, which amounts to about ($0.400mn) on an annual basis. We doubt, though, that Cineworld will remain under court protection for very long.

Serta Simmons Bedding: Downgraded by Moody’s

Everything old is new again. Back in 2020 Serta Simmons Bedding, LLC was forced to recapitalize, in an effort to reduce its debt load. We wrote 7 articles (!) on the subject, beginning in 2019. Two years later and Serta seems to be in serious trouble again. According to news reports, Moody’s has just downgraded the company and its debt:

DORAVILLE, Ga. – Moody’s Investors Service has downgraded Serta Simmons Bedding’s corporate rating to Ca from Caa3 and said the outlook was negative for the bedding manufacturer based on $1.9 billion of debt it is facing next year and its declining cash reserves.

In addition to the corporate rating, Moody’s downgraded SSB’s probability of default to Ca-PD from Caa3-PD; first lien super-priority first-out term loan to B3 from B2; first lien super-priority term load to Ca from Caa2; and first lien term loan to C from Ca.

Sheila Long O’Mara Furniture Today September 7, 2022

Then as now, BDC exposure to Serta is limited. According to Advantage Data, there is only one BDC lender to the privately-held mattress company. That’s Barings BDC (BBDC), which is both a first lien and second lien lender. Judging by the IIQ 2022 BBDC valuations, the strain on the business has been recognized as the $3.4mn invested in the second lien lien was valued at $2.5mn – a (26%) discount. By contrast, the $7.2mn invested in a first lien loan – both of which come due in August 2023 – is carried close to par.

We have downgraded Serta Simmons to CCR 4 from CCR 3, just one quarter after adding the company back to the underperformers watchlist. We’ll continue to watch this developing story, but given the modest exposure by BBDC, no great impact is expected whatever happens. (We expect a Chapter 11 restructuring not dissimilar to th one that came before is the likeliest outcome).

Output Services Group: Files Chapter 11

We admit to being late in reporting a corporate bankruptcy that impacts multiple BDC lenders. In August 2022, Output Services Group Inc. (aka OSG Group and OSG Billing Services) filed for a pre-packaged bankruptcy. The company is seeking to reduce total debt by $134mn from $824mn at the time of the filing. The second lien lenders are to become part owners and the existing equity sponsor (Aquiline Capital Partners) will retain an interest because of loans advanced to the business being converted to equity. By the way, OSG – according to Reuters – “provides print, mail, digital communications and payment services to customers in a variety of industries and countries”.

Caught up in all this are 4 BDCs, 2 public and 2 private. The former are Goldman Sachs BDC (GSBD) and PennantPark Floating Rate (PFLT) and the latter are Nuveen Churchill and Audax Business Credit. Total exposure at cost is modest at $13.1mn and all invested in a 2024 first lien loan. Amusingly and instructively the valuations applied by the different BDCs as of June 30 2022 are all over the place from a (5%) discount to (27%) for the same risk.

Presumably those values will change and reflect whatever deal has been hammered out between the parties, but any realized loss – given the senior nature of the obligations – should be modest when we get all the details reflected in the IIIQ or IVQ 2022 disclosures. From what we have learned already there may no loss at all for the first lien lenders, just an extension of the debt maturity, a higher rate going forward and interest being optionally paid partly in PIK. Hey, the BDCs involved might actually get to write up their positions. The bankruptcy court appears to have already confirmed the plan.

Given the favorable resolution, the first lien standing and the modest outstandings involved none of the BDCs mentioned should be materially affected by OSG’s troubles and metamorphosis. We just wonder if the parties went far enough to ensure the company won’t fall back into the troubled zone in the years ahead.

Ansira Holdings/Ansira Partners: Bain Capital Places On Non Accrual

See prior articles Ansira Holdings: IQ 2021 Update (June 7, 2021) and Ansira Holdings/Ansira Partners: IIIQ 2021 Update November 27, 2021).

In the IIQ 2022, Bain Capital Specialty Finance (BCSF) placed its three different first lien loans to Ansira Holdings Inc. on non accrual. Much earlier – back in the IQ 2020 Crescent Capital (CCAP had placed its debt to related entity Ansira Partners, LLC on non accrual as well. All these loans, and those held by New Mountain Finance (NMFC) , Goldman Sachs BDC (GSBD)and non-traded Audax Capital mature in December 2024. Interestingly, the different lenders apply very different discounts to value their debt holdings, with CCAP discounting (21%) and BCSF (47%), and all sorts of variations in-between.

We had already rated Ansira CCR 5 because of CCAP, so there’s no change associated with BCSF’s decision. However, the move does confirm that the digital marketing agency continues to have serious problems even now that Covid has largely ceased to impact the economy. Total BDC exposure is Major (i.e. over $100mn) at a cost of $108mn. The current FMV totals $71mn – a serious write-down for senior debt. Total investment income at risk is around ($9mn), some of which is already not accruing according to BCSF and CCAP.

What ails Ansira ? You’re not going to get any “color” from the BDC lenders involved. Even when BCSF – on its IIQ 2022 conference call – admitted the debt had been placed on non accrual, the borrower was not even named. (We worked out who was involved by looking at the footnotes in the 10-Q).

The public record is not much use either. The only relevant item we’ve discovered is an encouraging press release from the company itself (what could be more objective ?), dated August 16, 2022. Here’s a highlight:

“In the first and second quarters the company welcomed more than 10 new brands to its client roster, hosted two client events to share thought leadership and connect cross-industry peers, began to roll out enhanced reporting for its website platform, and continued to receive third-party industry accolades for its work and technology.  

“Supply chain challenges and chip shortages, compounded by inflation, continue to impact many of our client verticals but our team has proven to thrive under this downward pressure, reacting by innovating and refining our solutions and services,” said Ansira President and Chief Revenue Officer Andy Arnold. “We are constantly finding ways, both big and small, to help clients at the enterprise level, and at the last mile of customer engagement, to drive demand and retention.”

Ansira Partners Press Release – August 16, 2022

How does this all end for Ansira and its BDC lenders ? Notwithstanding the non accruals and big discounts taken, we’re not ready to presume a realized loss is a given. This is a large business with a diversified book of business and a deep pocketed sponsor in Advent International. We will just have to keep track of developments as best we can.

See Company File

Carestream Health: Files For Chapter 11

There are fewer Chapter 11 bankruptcies these days, but there are some and even a few that impact the BDC sector. A case in point is Carestream Health (also known as Carestream Dental), a medical imaging company owned by Onex. On August 23, 2022 we heard that the company had filed for a pre-packaged bankruptcy with the goal of reducing its $1bn debt mountain, but with the goal of continuing to operate normally. We already know that lenders and owners have a tentative agreement to eliminate about half the debt outstanding.

Thanks to Advantage Data’s records, we’ve identified two BDCs with exposure to either Carestream Health or Dental. The good news is that the amount at risk is minuscule. The only public BDC with exposure is Portman Ridge Financial (PTMN) with $1.8mn in second lien debt at cost and with a no cost equity stake. Non traded BDC Steele Creek Capital holds an $0.7mn first lien loan to Carestream Dental. Chances are any losses incurred will be in the equity and in PTMN’s second lien position, already written down by (10%) as of the IIQ 2022. That could go lower, but we don’t have enough information to be sure.

We are rating Carestream CCR 5 because of the bankruptcy and expect PTMN will see about $175,000 of annual interest income interrupted and Steele Creek possibly have to contend with a temporary income loss of $35,000 on an annual basis. Any realized losses that might occur are likely to occur in the third or fourth quarter 2022, given that a restructuring seems close.

As to the reasons for Carestream’s problems – besides all that debt – Bloomberg summed up what the company said to the court:

The company blamed the increased use of digital images by doctors and dentists instead of film-based X-rays, as well as a push by governments to drive down the cost of health care. China, for example, created an agency that buys medical equipment in high volume in order to save money, Carestream said in court papers.

Steven Church -Bloomberg – August 23, 2022

These all seem like “idiosyncratic” causes for Carestream’s troubles and nothing related to the broader economic environment and concerns about supply chain problems; payroll cost increases and inability to pass on inflationary increases. We’re still not seeing many corporate victims of the very difficult environment that has been in play all year and which many expect to result in a recession.

Cineworld Group PLC: May File Chapter 11

All over the business news is that Cineworld Group PLC – the parent of Regal Cinemas – is considering filing for Chapter 11 protection. (Given how these things go “may file” really means “will file”). Times are tough in the movie exhibition business despite the post-pandemic re-opening, and the company is highly leveraged ($5bn in debt !). At the moment, though, there’s no talk of liquidation and some sort of restructuring is the most likely outcome.

“Cineworld would expect to maintain its operations in the ordinary course until and following any filing and ultimately to continue its business over the longer term with no significant impact upon its employees.”

Yahoo Finance: Quoting A Cineworld Press Release – August 22, 2022

From our parochial BDC sector perspective, the impact should be minimal. According to Advantage Data’s records, total exposure to Cineworld at cost is just $4.6mn held by two related players: Barings BDC (BBDC) and non-traded Barings Capital Investment Corp. Most of the exposure is in first lien debt – some in “super senior” status and unlikely to be much affected in terms of valuation in any restructuring. Admittedly, some of the debt comes with a very high cash and PIK yield, but given the small amounts involved this will not make a material difference if interest income is interrupted by a bankruptcy. A “realized loss” is likely on the small amounts of equity BBDC and its sister BDC hold in Cineworld, but the aggregate owned is less than $200K.

We are rating Cineworld CCR 4 on our 5 point scale and will continue to track this “developing story”. Overall, though, the BDC sector has very little exposure to the movie exhibition business – never a very large sector – so Cineworld’s troubles do not seem to augur more troubles elsewhere.

Peloton Interactive: Cost Cutting Measures

(In)famous Peloton Interactive Inc., announced – as reported on CNBC – a number of cost cutting measures in a continuing effort to improve business performance and its stock price.

From a BDC perspective, four different players – including two public ones – have recently added exposure to the company. At cost, the aggregate at risk – all in senior debt due in May 2027 – is $10.4mn. The BDCs involved are BlackRock Capital (BKCC); BlackRock TCP Capital (TCPC(); BlackRock Direct Lending and Oaktree Strategic Income Fund.

The BDC Credit Reporter has added Peloton to its underperformers list as of the IIQ 2022, with a rating of CCR 3, due to concerns the company may not successfully implement its turnaround plans. Admittedly, the amount at risk are not significant – either in total or individually – but we’ll check back in regularly over what may be a long period to ascertain Peloton’s credit status.

Phymed Management LLC: IIQ 2022 Update

We first wrote about Phymed Management, LLC back in April 2022 when Ares Capital (ARCC) – and later SLR Investment (SLRC) – placed their combined $94mn in secxond lien debt to the company on non accrual during the IQ 2022. At that point – without explaining why – both BDCs wrote the debt down: (74%) and (50%) respectively.

Roll forward to ARCC’s latest IIQ 2022 10-Q, and the discount on the still non performing debt increased further, to a value of only $1.2mn on a cost of $55.8mn. That means – as we suspected in our prior article – that a complete realized loss is the most likely outcome here. No explanation or “color” has been forthcoming from ARCC’s external manager and the public record does not provide any insights.

The most “actionable” news here is that SLRC – which has yet to report IIQ 2022 earnings – should be taking a further unrealized loss that might amount to ($18mn) if the BDC adopts the same discount percentage as ARCC has. If the entire $37.8mn SLRC investment at cost ends up a realized loss, that will be a material “hit” to the BDC. For a sense of context, total realized losses over the last three full fiscal years at SLRC were less than ($30mn).

We continue to rate Phymed CCR 5, but might switch the company to a non material status if the fair market value drops to a negligible value, which would end regular coverage. Still, both the BDC Credit Reporter and – we expect – our readers might want to understand what went wrong at the company, and so quickly. (As recently as the IVQ 2022 the company was performing, and rated CCR 2). For the moment, management at ARCC and SLRC are like Sergeant Schultz in Hogan’s Heroes: “I see nothing! I hear nothing! I know nothing!”

Carestream Health: Debt For Equity Exchange Planned

We hear from Moody’s that medical film company Carestream Health, Inc plans to restructure its debt, including a debt for equity exchange. As a result, the rating agency has “downgraded Carestream Health Inc.’s (“Carestream”) Probability of Default Rating (PDR) to Caa3-PD from B3-PD“. This is considered a “distressed exchange”.

There is only one BDC with exposure to the company: Portman Ridge (PTMN), which has invested $1.7mn in second lien debt and owns no cost equity. As of March 202, the debt was valued at a slight premium and the equity at zero. The yield on the debt is high at 13.50% and will – presumably – go away if converted to equity as envisaged by the restructuring.

We don’t quite know what to make of this and the amounts involved are small. Still, we are adding Carestream to the underperformers list for the first time, with a rating of CCR 3. We might learn more when the BDC reports second or third quarter 2022 results.

Knowland Technology Holdings: Placed On Non Accrual

We’ve written about Knowland Technology Holdings (aka Knowland Group) once before, back on January 7, 2022. Already, at that point the company had been on the BDC Credit Reporter’s list of underperformers since May 2020, and was rated CCR 4. We were worried then that $1.7mn of annual investment income might get interrupted in the future.

Here we are a few months, and two quarterly periods later, and the only BDC lender – Saratoga Investment (SAR) – to Knowland has placed its $15.9mn in second lien debt on non accrual as we feared. Just what ails the business was not discussed by SAR on its just completed conference call for the quarter ended May 31, 2022 but may relate to the slow recovery in group travel in the wake of Covid.

We are downgrading Knowland from CCR 4 to CCR 5. Given that the outstanding debt is in a junior position, there is a very real possibility of an eventual significant realized loss. As of the latest 10-Q, SAR has discounted its debt by (37%), from (33%) in the prior quarter. That’s nearly ($6mn) of unrealized write-down already, and that might get worse, or better.

Knowland and SAR, according to the latter, might agree to converting the cash interest payments to pay-in-kind, which might allow the BDC to resume recognizing income. This quarter, though, the BDC reversed 5 months of interest while placing the debt on non accrual. The fact that SAR is considering such a move is bullish from a credit standpoint.

Clearly, Knowland – the only non accrual on SAR’s books – will be worth tracking because of the current and future material impact on the BDC’s earnings and net asset value. We’ll revert with any development we pick up from the public record, or when SAR reports its next quarterly results.

Pepper Palace: Added To Underperformers List

On July 6, 2022, we heard from Saratoga Investment (SAR) regarding its calendar IIQ 2022 results ended May 31. One of the key credit developments was the unrealized write-down of the BDC’s investment in Pepper Palace, Inc. – a specialty food manufacturer of spicy sauces and seasonings. Exposure consists of $34.5mn at cost in first lien debt and equity. The equity was sharply discounted from a cost of $1.0mn, down to a value of $0.2mn. The debt has been reduced from $33.5mn to $28.8mn. The amount of annual investment income at risk is $2.7mn.

SAR said the following about the newly underperforming company, which we rated CCR 2 previously:

This markdown reflects the current performance of the company, but they continue to pay interest. We are working closely with the company and the sponsor as they work to improve performance.

Saratoga Investment – Conference Call – July 7, 2022

There is nothing in the public record which explains what’s wrong at the Tennessee-based company, which has “200-500 employees”, according to LinkedIn. We do know that the investment is a relatively new one for SAR – which has been on a portfolio growth spurt of late – booked in the middle of 2021.

All we can do is add the company to our underperformers list with a rating of CCR 3 on our 5 point scale. We will track the public record daily for any development worth bringing to readers attention.

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.