Instituto De Banca Y Comercio is a trade school for bank personnel in Puerto Rico, which we’ve been tracking for years. The only BDC with exposure is Ares Capital (ARCC), dating back to 2007 when the for-profit business was bought out by a PE group: Leeds Equity Partners. At one point, ARCC held a position via its joint venture with GE Capital but bought back its position – following some complex accounting – in 2016 when the company was non performing and the BDC was breaking up with its JV partner. At the end of 2020, this now 13 year relationship consisted of total exposure of $121mn in the form of debt and preferred, with a FMV of $32.3mn. $17.3mn in first lien debt is accruing at 10.5%, and there is $103.7mn in preferred. We’re not sure if ARCC is booking any income on the preferred, which only has a value of $15.0mn.
We don’t know how the business is performing but the valuation trend is unchanged between IVQ and IIIQ 2020. ARCC does not mention the company much anymore since the buyout of the GE position from the JV in 2016. Understandably, given the near ($90mn) written down already, the BDC Reporter has a CCR 4 rating on the company. Should the debt go on non accrual ARCC would forgo ($1.8mn) of annual interest income. A full realized loss of the preferred would reduce net assets by ($15.0mn). These are sizeable numbers but not especially material for a BDC of ARCC’s size.
We have no reason to believe anything is going to happen soon as the debt is not due till 2022, and the public record is bare on any details on how the company is performing, so we don’t have Instituto as Trending, but it is a Major exposure being over $100mn at cost. We’ll check back periodically to see how outstandings and valuations change on this “zombie” investment that just keeps going and going without much in the way of resolution. ARCC has extended the debt at least 4 times since 2007.
After a press release from Moody’s, we updated the Confie Seguros Holdings II Company File. Click here . The company remains rated CCR 3, and is held by 5 BDCs, and we anticipate no material change when IQ 2021 results are published.
The long and winding road for NPC International Inc. appears to be reaching a final resolution. The franchisee of hundreds of fast food locations, which filed for bankruptcy back on July 1, 2020 has inked a $801mn deal to sell its assets to two different buyers. The company is likely to exit bankruptcy shortly. We won’t get into all the details or the history of the company’s failure, but refer readers to our five earlier articles.
For the only BDC with exposure –Bain Capital Specialty Finance (BCSF) – this will mean a final tallying up. As of June 2020, the BDC had $14.5mn showing in first and second lien debt to the company, which had been on non-accrual since IVQ 2019. As of September 2020, only the first lien debt shows up in BCSF’s investment list, suggesting a realized loss of ($9.2mn) has already been booked. We can’t be 100% certain as the BDC does not name names when these losses occur.
BCSF had $5.3mn at cost and $4.3mn at FMV left outstanding – all in first lien debt – as of September 2020. We believe – in the absence of harder numbers – that’s a pretty good picture of what to expect going forward in terms of proceeds to be received, all of which may show up in the IQ 2021 results. If we’re right, BCSF will have lost two-thirds of the maximum funds advanced to NPC, a relationship that began IQ 2017.
This transaction is close enough to its resolution for the BDC Credit Reporter to mention – again – that the restaurant business is a very difficult one for lenders. We searched our own archives with the word “restaurant” and were reminded of the large number of casualties we’ve seen over the years, even before Covid-19 raised the stakes further. The sector should probably be added to oil & gas exploration; energy services and brick and mortar retail as segments that BDCs – and their shareholders – should treat with extreme caution.
We undertook a search of Advantage Data’s database of all BDC investments and found 59 different restaurant-related companies listed. The BDC Credit Reporter’s own database shows 14 different restaurant companies underperforming. That’s a very rough way to assess such things but a quarter of all restaurant names in some sort of trouble seems high to us. Food for thought. Pun intended.
Here’s a mystery for you. What are the implications of the announcement that Carlyle Group is making a $374mn investment commitment to AMP Solar Group ? As Carlyle’s press release says, the company :
…”is a global renewable energy infrastructure manager, developer and owner. Since 2009, the Company has successfully developed over 1.8 gigawatts of distributed and utility-scale renewable generation projects, hybrid generation plus storage projects, and stand-alone battery storage projects around the world. Amp Energy’s proprietary digital energy platform, Amp X, also provides a diverse portfolio of disruptive and interoperable solutions, including a state-of-the-art smart transformer, that enable real-time autonomous management and optimized dispatch of all forms of distributed generation and loads across the grid. The Carlyle investment will help catalyze the continued rapid growth of both Amp’s asset base and Amp X within its core markets of North America, Japan, Australia, Iberia and the UK.“
Apollo Investment (AINV) has $10mn invested in equity in AMP Solar (owns 6.6%) and $13.2mn in a UK subsidiary, which goes by the name AMP Solar Group UK or Solarplicity. The former investment is valued at a (14%) discount to cost while the latter is valued at only $0.17 on the dollar. The debt and the preferred on the UK company is on non accrual so the entire $23.2mn which AINV has invested at cost is non-income producing.
We don’t know if Carlyle’s involvement validates the multi-year investment in AMP Solar and we will see either a sale of the BDC’s position to them or an increase in the business valuation. Maybe the debt to the UK operation – never very profitable as the yield was fixed at 4% – will return ? We just don’t know but hope to learn more from AINV when IVQ 2020 results are published and discussed in February 2021.
This is the fourth article we’ve written about Maxus Carbon’s, Apollo Investment’s (AINV) poorly performing project finance for a chemical plant that has been around for 7 years. Click here for the prior articles and to get caught up. After placing remaining debt on non accrual in the IIQ 2020, the BDC in the IIQ 2020 has quietly restructured its position in the company. Again. We say “quietly” because management made no mention of the conversion of the $30.4mn in first lien debt – albeit non performing – into equity on its IIIQ 2020 conference call transcript. This removed Maxus from AINV’s long list of companies on non accrual but – arguably – further weakened the BDC’s position on the company’s balance sheet, which is now all equity for $77.9mn at cost. Of course, no income is being received.
AINV valued some of its earlier equity at $24.9mn at FMV and the just converted debt at zero. Counter-intutively, the latest valuation is slightly higher than last quarter, which was for $22.6mn. At this point AINV has written down 69% of invested capital and has no income coming in. When this investment started out AINV made a $60mn loan and charged 13%. That’s ($7.8mn) of annual income lost along the way.
We are “upgrading” Maxus from CCR 5 to CCR 4 because technically no longer non performing. Still, at best this is a lateral move.
Based on the ever lower valuation and the debt to equity conversion, the BDC Credit Reporter does not hold up much hope and would not be surprised if AINV – one day – would write off the entire project. The current FMV of the investment would amount to about 2.5% of net assets as of September 2020.
As always we are at the mercy of AINV in terms of updates on the chemical plant’s progress. We’ll provide the latest disclosure next quarter of what remains – even with two thirds of the value written down – a material “Legacy” investment for the BDC and an almost certain dud once the final bill comes due.
With Stellus Capital’s (SCM) IIIQ 2020 results just published , we have updated security company Protect America Inc.’s Company File, and added to the BDC Credit Reporter’s credit commentary. Spoiler alert: No progress here and odds look good that the BDC will eventually have to write off all its second lien debt position. The rating is CCR 5 and has been for multiple quarters.
Saratoga Investment (SAR) has just reported quarterly results one month ahead of the BDC pack, which has provided a number of updates on where underperforming companies stand, based on valuations as of August 2020. This includes C2 Educational Systems – which was added to the underperformers list as of the IIQ 2020 by SAR – its only BDC lender – and downgraded from CCR 2 to CCR 3 by the BDC Credit Reporter.
As of August 2020, SAR’s valuation remains essentially unchanged with a (19%) discount to cost applied. SAR – as usual – had little to say about any specifics. Research in the public record, though, shows that the company received a significant PPP loan in April, which should have helped the business. We also expect that C2 – which is in the face to face business of tutoring K-12th grade students – is also making necessary changes to its business model by increasing the emphasis on “virtual tutoring”. The business was performing normally – based on SAR’s valuations at the time – before Covid-19 and should be a survivor. The involvement of lower middle market group PE group Serent Capital as owner is also a plus, even though we don’t know if any new capital has been added or will be.
We are maintaining our CCR 3 rating on the company and do not currently expect a loss of any kind down the road. SAR has $16.0mn invested in first lien debt at cost. Should the company return to performing status SAR could book a $3.0mn increase in value.
We’ll continue to track the company’s valuation quarterly via SAR and report back to our readers.
On August 6, 2020, TriplePoint Venture Growth (TPVG) offered up an update on troubled portfolio company Roli, Ltd on its IIQ 2020 conference call:
“We have one company rated 4 on our watch list, Roli, a music technology company. During the quarter, we further marked down our loans on Roli, reflecting the impact of COVID on some of our recovery assumptions associated with the ongoing turnaround of the company. Here in Q3, the company has made good progress, and we expect to see some favorable trends over the next couple of quarters“.
The BDC Reporter wrote the following in its review of TPVG’s Conference Call where Roli was discussed: “TPVG has advanced $29mn to Roli Ltd, which has been on non accrual since IIQ 2019. The current value is just $15.0mn. By the way, just before Roli became non performing, the debt and equity outstanding was valued almost at par”. The company is rated CCR 5 and we expect the ultimate outcome is likely to be some sort of realized loss, but concede that – except for these occasional updates from the lender – we have little inside information about the company’s fortunes.
The “I-45 SLF LLC” is a joint venture set up between two public BDCs that have a history of working together: Main Street Capital (MAIN) and Capital Southwest (CSWC). The JV dates back to 2015 and was rated as performing through the end of 2019. However, the BDC Credit Reporter first downgraded the entity to CCR 3 in the IVQ 2019 as multiple portfolio companies experienced credit problems. The situation was only exacerbated by the pandemic and the rating was dropped to CCR 4 in IQ 2020, as the discount on the BDC’s junior capital in the entity reached (43%). In the second quarter 2020 the valuation increased modestly – along with market loan values. Nonetheless, we are retaining the CCR 4 rating.
In the most recent quarter income from the JV paid out to its sponsors was reduced due to the precipitous drop in LIBOR only marginally offset by the 80 basis point average “LIBOR floors”. Furthermore, MAIN and CSWC injected additional equity capital in the quarter while the JV’s lender reduced its debt commitment, as mentioned in CSWC’s 10-Q: “On April 30, 2020, the I-45 credit facility was amended to permanently reduce the I-45 credit facility amount through a prepayment of $15.0 million and to change the minimum utilization requirements”.
A quick look down the portfolio list of I-45 SLF shows that several troubled companies already on CSWC and MAIN’s own books are here as well. We’ve reviewed the entire portfolio and identified several underperformers and noted that cost to FMV is only 85%, even after loan values generally increased in the June 2020 quarter. We’re pretty sure the BDC partners will not be getting back in full the capital deployed whenever the JV is eventually closed down. At this stage we expect the eventual realized loss will be ($15mn-$20mn), split 80/20 between CSWC and MAIN. In the interim, though, the JV should continue to pay out a dividend, so we’re not adding the name to the Weakest Links list.
Now that IIQ 2020 BDC results have been released, we can confirm that American Teleconferencing Services – a wholly owned subsidiary of communications company Premiere Global Services – remains rated CCR 4. We’re guided mostly by the latest valuations from multiple BDCs with first lien and second lien exposure. The former is discounted by wildly varying percentages : (6%) to (35%). The latter has been nearly cut by half in value. Moody’s has given the company a Caa2 rating as recently as August . The ratings group had this to say:
“The debt restructuring in October 2019, surge in audioconferencing volumes and virtual events during the pandemic and sponsor’s equity contributions have improved the liquidity position but it is uncertain how the business will perform when the crisis abates. The rating additionally considers execution risks in plans to cross-sell services and operate under shared services agreements with TPx Communications, which was acquired in February 2020 by affiliates of Siris Capital, which also owns the parent company of American Teleconferencing Services.”
There does not seem any reason to add the company to the Weakest Links list yet but the business has some considerable way to go before lenders are out of the woods in what is a Major position in aggregate: $109.4mn at cost and $88.8mn at FMV. Most at risk – but with modest exposure – is Capital Southwest (CSWC) with $2.1mn in the second lien, which is valued at $1.1mn. The outlook is favorable in the short run, as Moody’s suggests but the company will need monitoring.
According to news reports, Deluxe Entertainment has sold most of its business divisions to Platinum Equity. (Deluxe Entertainment’s creative businesses are not included in the acquisition. They will remain operational, but drop the “Deluxe Entertainment” name). Financial terms were not disclosed.
As we’ve written about extensively, Deluxe Entertainment has been owned by its lenders since a debt-for-equity swap and a trip to bankruptcy court last year. Then, Covid-19 wreaked havoc on the entertainment sector starting in March 2020 with unknown, but likely harsh, consequences for the company. As a result, there is no assurance that the new owners of parts of Deluxe Entertainment received much in proceeds from the sale. Furthermore, what happens to the remaining and re-named divisions is unclear.
There are two BDCs with exposure to the post-bankruptcy company: Harvest Capital (HCAP) and non-traded Cion Investment, each in very different parts of the capital structure. HCAP already booked a ($2.4mn) realized loss back in 2019 when the company was restructured and now holds $0.5mn in a second lien Term Loan and $2.1mn in equity (0.63% of the company’s equity). We’re guessing any proceeds will be modest. Cion Investment has much more capital at risk: $24mn in First Lien debt and $9.9mn in the second lien Term debt. And no equity.
We’ll learn more about how this sale trickles down to the two BDCs involved when IIQ 2020 results are known. The BDC Credit Reporter’s best guess, though, is that this experiment in lenders owning an entertainment business in Los Angeles will shortly be over. Notwithstanding the sale, we expect further realized losses are likely.
We are downgrading Deluxe Entertainment from a Corporate Credit Rating of 3 to CCR 4, as we expect some sort of realized loss to be realized. More details to eventually follow.
According to news reports, 24 Hour Fitness Worldwide is planning on closing a quarter of its locations permanently. This is likely related to bankruptcy plans underway. Prior to the closures – according to Marketwatch – 24 Hour Fitness had more than 400 gyms in 14 states, with around 22,000 employees. For our prior articles on the company, click here.
Juul Labs was on a deadline with the FDA, as we discussed in an earlier posting in February, set for May. Their assignment – and those of their rival vape manufacturers is to ” present scientific studies showing that their products are safer than cigarettes. They also must demonstrate that their e-cigarettes present a net benefit to public health—in other words, that the benefit of helping adult cigarette smokers switch to a safer alternative outweighs the potential harm of hooking young people on nicotine“. If you’ve done any reading into vaping you’ll know that’s a tall order. Covid-19, though, has given Juul a reprieve till September, thanks to a judge’s decision, as the Wall Street Journal reports on April 23, 2020.
We continue to be unsure how to value the $39.1mn of BDC first lien debt exposure held by sister BDCs BlackRock Capital and BlackRock TCP Capital (TCPC), which remains valued at par. Truth be told, we’re more pessimistic than before but maybe we’re under-estimating the influence of Big Tobacco, which owns a big stake in Juul. We’ll get back to this conundrum in September.
We wrote extensively about Borden Dairy when the milk giant filed for bankruptcy back in December 2019. At the time there were many unresolved items as management chose to proceed with a filing without the agreement of its lenders, so there was no tidy restructuring package pre-agreed to light the way forward. In the interim there has been much maneuvering between the stakeholders in and out of court, but still no exit plan is in place. Now the bondholders of the company and those of Dean Foods – also in Chapter 11 – want to merge the two companies. This is occurring even as Dean is well on its way to merging – in a $433mn deal – with a dairy co-operative. As the Wall Street Journal reports, there are anti-trust issues still plaguing that transaction.
So, the Borden and Dean bondholders are promising – sort of – to invest $1.0bn in new capital in this tie-up of two bankrupt companies. We’re not here to handicap the chances of Dean’s current deal falling apart and Borden having the chance to step up. We’re writing to point out that IF that should happen BDC exposure is likely to grow from its current $171mn level to an even higher number if FS KKR Capital (FSK) and FS Investment II are part of that $1.0bn new financing.
Obviously, the BDC lenders will argue that it’s not good money after bad, and will keep them from writing off even more if the Dean deal slips away. How much that might be is unknowable after months of no resolution. Neither the BDC Credit Reporter nor anyone else can really handicap those odds. We should learn relatively soon,though, if this “hail mary pass” from the Borden/Dean bond holders will change the narrative as the judge will – presumably – want to adjudicate on the original transaction before long. We’ll be getting back to readers when any kind of decision is made.
In a controversial decision, the bankruptcy judge for Quorum Health, which filed for protection on April 7, is tentatively setting an exit by May 22. However, that could change if a committee of equity holders is formed and challenges that timetable.
If this timetable is adhered to, we’ll be learning sooner rather than later what happens to the $17.6mn of BDC exposure at cost summarized in our prior article. Based on the latest valuations of the first lien and second lien debt held, we expect a (20%) and (65%) discount respectively. That represents a possible ($8mn) realized loss and an incremental ($6.5mn) more than at December 31, 2019.
On March 16, 2020 Bloomberg reported that troubled telecom giant Frontier Communications plans to skip making interest payments on some of its bonds, starting a 60 day countdown to a payment default. We’ve written nine times (!) about Frontier before, given the twists and turns of what promises to be “one of the biggest telecom reorganizations since Worldcom Inc. in 2002″.
None of that is surprising as news reports and the BDC Credit Reporter have been predicting a Chapter 11 filing and a massive re-organization for months, but does indicate the day of reckoning is coming ever closer. The bankruptcy – which we expected in the IVQ 2019 – looks likely to land in the IIQ 2020.
Since our last report a couple of the many BDCs that hold the company’s debt have reported IVQ results and their latest valuations on their Frontier positions. Oaktree Strategic Income (OCSI) and non-traded sister BDC Oaktree Strategic Income II hold the 6/15/2024 senior Term debt and – in the case of latter BDC – the 2026 Senior Note. All we can report – without comment because we don’t understand the capitalization of Frontier well enough to differ – is that the debt is still carried at a premium. Obviously, Oaktree – which must be familiar with whatever plans for a restructure are underway – believes that there will be no loss booked if and when the seemingly inevitable bankruptcy happens.
We’ve not yet heard from all the other BDCs that have a position in Frontier, most of whom are part of the FS Investments-KKR group. However, publicly traded FS KKR Capital (FSK) has reported its IVQ 2019 portfolio and we see that Frontier has dropped out since September 2019. No comment was made on the latest conference call, but we imagine management may have decided caution was the better part of valor and sold out its position. For all we know that may be true for its 4 sister non-listed BDCs. If that’s true, BDC exposure to this upcoming massive bankruptcy might be very small.
We’ll continue to track this company and expect to be discussing the Chapter 11 filing and its implications before long.
Community Intervention Services is a PE-owned dependency treatment center chain that has attracted BDC financing as far back as 2015. The two BDCs involved were Triangle Capital, whose loan was acquired by Business Development Corporation of America (BDCA) some time ago when all its assets were sold to the non-traded BDC; and OFS Capital (OFS).
The initial subordinated loan facility was led by Triangle Capital and OFS was a participant, according to the latter. At the height, the two BDCs had $25.7mn invested in the company, but that’s down to $7.6mn at December 31, 2019. That’s because BDCA wrote off its entire investment back in 2019. OFS continues to have the $7.6mn at cost outstanding on its books.
However, the company has been on non-accrual since 2016 and the investment written to zero since 2017. That’s due to one of the company’s subsidiaries being caught up in a medical fraud case – a very familiar story in the healthcare sector. For some reason OFS has not followed the lead of its BDC peer and booked a realized loss as yet. We do know quite a lot more from periodic updates by OFS on conference calls over the years, but given that the investment is unlikely to ever be worth anything, we won’t revisit what has become ancient history in credit terms.
However, the BDC Credit Reporter has to assume OFS will eventually write off its position and the company will be removed from the list of BDC funded companies. At the moment, though, Community Intervention Services is an example of a “zombie” investment, of which there are many in BDC portfolios as lenders wait for final resolutions on investments gone bad.
The good news from the OFS perspective – at least – is that the company can have no further impact on its income or book value, except to increase its realized loss column when the time is right. The bad news is the reminder to BDC debt investors that debt investments can result in 100% losses when things go awry, as happened here.
We last wrote about refrigerants distributor Hudson Technologies Company back on February 14, 2020. Then, we wondered aloud how the BDC term lenders to the troubled company – who have just participated in a restructuring and amendment of their debt – would value their exposure at year end 2019. As of the third quarter, FS KKR Capital (FSK) – for one – had applied a (44%) discount to their $38mn position. Now FSK has reported its latest IVQ 2019 valuation and the valuation remains essentially unchanged – discounted (42%), albeit the public BDC has reduced its capital at risk by ($5.3mn). No reason was mentioned by management for the lower debt level on the latest FSK conference call, but we’re guessing it’s part of a general debt paydown of its obligations by the company.
The unchanged discount suggests that the lenders remain unsure that the turnaround measures which the lenders – including Wells Fargo , which provides the company’s Revolver – will succeed.
On February 4, 2020 the company released its IVQ 2019 earnings and held a conference call. We’ve read both documents and are impressed by management’s optimism about market conditions and about the $22mn of availability supporting the company’s liquidity. The CEO said the following to sum up the financial re-engineering that has been accomplished:
“The amendment [ of the Term Loan ] reset the maximum total leverage ratio of financial covenant through December 31, 2021, reset the minimum liquidity requirement; and added a minimum LTM adjusted EBITDA covenant. With the new revolving credit facility and the amendment of the term loan in place, we believe we have the financial flexibility and liquidity that drive improved operating performance as we move through 2020 and beyond”.
With the stock price of the public company at $0.85 and with the FSK debt still deeply discounted, Hudson Technologies lives on to fight another day. We cannot tell if the procurement issues arising in China from the coronavirus will help or hinder its results going forward. We continue to have a CCR 4 rating on the company, which means we expect the odds of a loss are greater than of full recovery. For 2020, given what we know, we still expect further deterioration in value but don’t predict a move to non performing (CCR 5).
Apparently, controversial drug maker Mallinckrodt PLC has begun confidential discussions with its creditors. That didn’t stop “people familiar with the matter” calling up the Wall Street Journal and confiding the key elements of the company’s game plan. The Irish parent of the company is considering a bankruptcy filing for its U.S. generic drug business. That’s one potential element to find a solution to the liabilities associated with the numerous lawsuits faced relating to the opioid crisis. The BDC Credit Reporter last wrote about the subject on September 9, 2019. Even then bankruptcy was being mooted.
At the time of our last report, we surmised that the only BDC with exposure – Barings BDC or BBDC – would have to further discount its position when the IIIQ 2019 results were published. That’s just what happened, with the discount on the 2024 Term Loan being increased from (9%) to (25%), which was very close to our September 9 estimate.
We’ll be interested to see what happens when BBDC reports IVQ 2019 results. The discount already taken may be adequate at this stage. However, if the company does file for Chapter 11 – and we’re aware that there’s financial gamesmanship going on in these breathless anonymous confessions to the WSJ – income will be interrupted for the first time. On the other hand, for all we know BBDC has managed to extricate itself from what is going to be a very long and complex situation and what the ultimate resolution will be is impossible to pre-determine. We’ll find out more when those latest BBDC results come in.
Back on January 30, 2020 we wrote that troubled publicly traded AAC Holdings (aka American Addiction Centers) had negotiated an extension to its forbearance agreement with its lenders after a prior falling out. That provided some hope that borrower and lenders – who’ve been going back and forth for many months – would eventually come to some sort of modus vivendi, as opposed to ending up in court arguing.
Now we hear from a company press release that the parties “have reached an agreement to extend the deadline to enter into a restructuring support agreement with its senior secured lenders from February 21, 2020 to March 20, 2020“. Such an extension had been contemplated back in January, as we discussed at the time after reading the legal agreement:
“Even that date is not fixed, as the parties have agreed the forbearance is “subject to extension in the discretion of the Forbearing Lenders if the Company shall not have entered into agreements embodying the material terms of a consensual financial restructuring among the Company and the parties to the Credit Facilities“.
This new extension of the extension allows the company to draw another $2mn from funds committed by the lenders.
We’re not sure if the fact that this negotiation keeps going on and on is a good sign or not. Rather than draw any conclusions from what little information we have, we’ll just wait for the next chapter in this long saga. We’ve now written over 10 articles about AAC Holdings ! We can say,though, that the total amount advanced – based on Capital Southwest’s (CSWC) IVQ 2019 financials – has increased from the $66.2mn balance as of September 30, 2019. The lenders are anteing up funds to keep the business solvent. By the time all 4 BDCs involved report their exposure, the cost could be over $70mn and potentially subject to further increases. Sometimes you’ve got to spend money to save money seems to be the philosophy here.