Delphi Behavioral Health: New CEO Appointed

This is not exactly breaking news: Delphi Behavioral Health Group, LLC (“Delphi”) has appointed a new CEO, according to an August 11, 2022 trade article. In fact, we’re not sure if that’s good news or bad news from a credit standpoint, but is a useful jumping off point to re-address the status of this mental health provider – last reviewed on August 20, 2020.

Back then, the business was quickly restructured, a realized loss of ($5.5mn) taken by its BDC lender Capital Southwest (CSWC), which then proceeded to double down to become both lender and part owner of the rejigged business. Unfortunately two years on we are not sure the company has gotten out of the credit woods.

In the IVQ 2021, CSWC suddenly sharply discounted its first lien debt by (15%) and its equity stake – previously written down only (5%) – by (31%). Furthermore, a “Protective Advance” was made at a very high rate, suggesting new monies were needed. As of IIQ 2022, that Protective Advance has grown in amount and the debt and equity discounts remain at the IVQ 2021 level.

All this validates our maintaining a CCR 3 rating on the company because uncertainty remains as to whether the BDC’s management will be able to “turn around” the company – involved in a difficult sector beset with reimbursement issues since Babylonian times and now facing the challenge of staff shortages and higher wage pressures. That similar business on CSWC’s books – which also went through a restructuring : AAC Holdco is also facing problems.

At the moment, CSWC has $7.9mn invested at cost in Delphi, and has valued its positions at $6.3mn. We will be curious to see if the new CEO is being brought in as a final gambit to save the company or to take the business to the next level. This is a credit that should be on every CSWC shareholder’s dance card to keep track of in the quarters ahead.

Vology Inc.: Company Sold

We hear from trade publications that Vology Inc. has been sold to a company called ATSG. Here’s the given rationale:

Vology’s portfolio complements ATSG’s existing digital workplace, digital infrastructure, and cybersecurity services offerings, according to the company. The deal will bolster ATSG’s security, cloud, and managed services, the company said. The acquisition also strengthens its presence in the Southeast United States, ATSG said.

Ty Trumbull Channel E To E – August 15, 2022

This acquisition is important to the BDC Credit Reporter’s readers because Logan Ridge Finance (LRFC) is a “control” investor, with debt, preferred and equity invested. For those of you interested in the history, Vology was initially a portfolio company of Capitala Finance, which advanced $9mn in the form of a subordinated loan in 2015. Years later, the company defaulted and Capitala and others stepped in to undertake a recapitalization. Very quickly the valuation of the “new” Vology dropped, while in the interim Capitala Finance was acquired by Logan Ridge Finance (LRFC).

As of the IIQ 2022, LRFC had $8.9mn invested at cost in Vology but the value was only $3.6mn – par value of the senior debt. Our credit rating was CCR 4 on the 5 point scale we use. We imagine the BDC’s manager must have been aware of the acquisition plan at that date, which suggests the company might be being sold for an enterprise value that will not result in any recovery beyond the senior debt. As a result, we’re guessing LRFC will be booking a realized loss of ($5.3mn) in the IIIQ 2022.

For the BDC there is no obvious good news here except for resolving a long term troubled investment, and being able to plow the proceeds from the debt repayment back into new investments of its own choosing.

For the BDC Credit Reporter, this illustrates our frequently made point that BDCs sometimes can successfully turnaround troubled portfolio companies, and sometimes not. Capitala/LRFC seem to have tried their best, but no cigar.

The Vology story – even though the business has found a home with a bigger player – is also a reminder that “technology” companies – broadly defined – are not necessarily immune from getting into trouble. With the BDC sector heavily invested in similar businesses, we should not be complacent. On the other hand, whatever challenges Vology has been facing, they do not appear to be of recent vintage – and cannot be called any sort of “canary in the coal mine” regarding current credit conditions. If anything, the fact that Vology has been acquired signals that new investment activity continues, even for less than perfect targets.

Outdoor Voices : Sale Of Company Being Explored

Women’s clothing company Outdoor Voices, Inc. might be sold, according to an August 15, 2022 Bloomberg story. Details are scarce and the process of exploring “strategic options” is at an early stage said “people with knowledge of the matter”.

There is only one BDC with exposure to Outdoor Voices and that’s TriplePoint Venture Growth (TPVG), which has been both lender and investor since 2019. We’ve had the company on our underperforming list since the beginning of the pandemic when TPVG began to write down the value of the $0.4mn invested in common equity. Since then, total exposure has reduced from $10mn to $6.8mn, as some debt was repaid during the IIQ 2022. The equity, though, is valued at next to nothing.

A sale may be a good thing and result in full recovery of all TPVG’s exposure, or crystallize a loss. We have no idea how the company – which has faced internal struggles in the past – is faring. It’s possible the prospect of lower consumer spending going forward might be a reason for the possible disposition.

In any case, the exposure and the potential loss is not material for TPVG and we continue to rate the company as CCR 3 and are UNDETERMINED as to whether a realized loss might occur. We’re more interested in Outdoor Voices as a possible example of BDC portfolio companies that are “consumer facing” beginning to show signs of financial stress. However, there’s not enough hard information here to draw any meaningful conclusion. We may learn more if and when a sale does occur and we see what happens to the BDC’s exposure.

Teligent, Inc.: Liquidation Of Company Completed

On July 26, 2022 pharmaceutical company Teligent Inc. officially went out of business because its assets were ordered liquidated by a bankruptcy court earlier in the month.

We last wrote about the company back on April 12, 2022. At that time, we estimated that the only BDC with exposure to the company – Ares Capital (ARCC) might end up booking a realized loss of ($57mn). We did admit, though, that these are difficult numbers to get right.

Now, with the IIQ 2022 ARCC 10-Q at hand, the likely realized loss is likely to be lower than we anticipated. Some $68.8mn remains invested at cost and the FMV is $39.3mn, which suggests the BDC will need to take a realized loss of ($29.5mn)- likely to show up in the IIIQ 2022 numbers. This quarter’s FMV is slightly higher than the $39.1mn valuation at the end of the IQ 2022.

Through the first half of 2022, ARCC has booked $55mn in net realized gains. If this Teligent realized loss happens, most of that realized gain will be wiped out, but there should be no further impact on the BDC’s net asset value. Moreover, ARCC will have nearly $40mn to re-invest into new deals.

Teligent’s troubles – as far as we can tell – were self inflicted, and liability risk so substantial that liquidation was the only way out. For ARCC – which saw the company quickly go from performing normally to non performing in the IIQ 2020 – this has been a long and winding road. The BDC seems to have taken equity control of the business back when the defaults occurred in the hope of turning Teligent around. However, those ambitions did not last and the liquidation followed.

We continue to rate the company CCR 5, but expect to drop coverage going forward as the asset is written off the books once and for all. For ARCC, this is a material – but not huge reverse. The likely realized loss is equal to just 0.3% of ARCC’s net asset value at June 30, 2022. There has been no income being generated since 2020.

Engine Group: Sells Subsidiary

In March 2022, the Engine Group – “a global, multi-disciplined marketing services platform with leading-edge digital capabilities” – sold its British subsidiary : Engine Group UK, which is owned by Lake Capital. Since 2021, Lake Capital has been actively seeking to sell all or parts of Engine Group – now named just Engine. The proceeds here were Sterling 77.5mn, or roughly $100mn.

There is only one BDC with exposure to the Engine Group: Prospect Capital (PSEC). Advantage Data records shows that exposure began with first lien and second lien loans, first booked in IIIQ 2017, with a total cost of $40mn. Everything went to plan till 2018, when the first unrealized write-downs began. By the IIQ 2020, both loans were on non accrual, and written down to about $11mn from the-then $39mn advanced.

Some sort of restructuring appears to have occurred, with the exposure swapped into a first lien loan due in November 2023, with a cost of $12mn and equity of $27mn. The debt, though, has been amortizing in the intervening quarters and only $3.6mn was left as of March 2022, valued close to par. The equity at cost, though, was unchanged and valued at next to nothing : $294,000.

Normally, we’d expect that PSEC – as both lender and investor – might benefit from the sale of a key subsidiary. However, the transaction occurred in the first quarter of the year and did not seem to affect the equity valuation much, but may have accelerated the debt payoff.

In any case, we rate Engine CCR 4, and will wait to see if the ($27mn) of unrealized losses still booked will get realized, or if the loss will shrink. There was no word on the subject either this quarter, or at any other time, on its conference call.

Ansira Holdings/Ansira Partners: IIIQ 2021 Update

We understand very little about what’s happening at Ansira Holdings (aka Ansira Partners) except that the marketing services company seems to be underperforming. Most everything we’ve divined is from the valuations of 6 BDCs with exposure of $106mn at cost – all in a unitranche loan maturing in 2024, and discounted (18%) at fair value. As of September 2021, Crescent Capital (CCAP) is carrying the debt as non performing and has been since IQ 2020. Just over $0.6mn of annual investment income is being forgone by CCAP.

Confusingly, all the other BDCs – using a similar valuation discount – count their unitranche loan to Ansira as performing. Pricing on the debt is LIBOR + 6.50% with a 1.00% floor, or 7.50% in total. The valuation has been stable since the unitranche loan was minted in IIQ 2020.

It’s possible that CCAP is being more conservative than the other BDCs, or there are undisclosed “last out” arrangements involved, none of which show up in the BDC’s footnotes. Unfortunately, none of the public BDCs with exposure have provided any color on this credit so investors will have to contend with uncertainty.

We rate Ansira CCR 5, even if only one BDC has the debt as non performing. Given that we hear of new developments at the business and the valuation is stable, Ansira is not Trending. We’ll just wait and see what we hear from its lenders or from the public record.

Chief Fire Intermediate: IIIQ 2021 Update

We’ve got nothing positive to report about Chief Fire Intermediate, which we’ve discussed previously. After reviewing Logan Ridge Finance’s (LRFC) IIIQ 2021 results, the debt remains on non accrual and the entire investment has been written to zero, and has been for the last two quarters.

The company is rated CCR 5, and we expect a 100% realized loss will be booked at some point on the $9.0mn of debt, preferred and equity invested at cost. Given the non accrual and the 100% discount, this should not impact LRFC.

Pace Industries: IQ 2021 Update

Pace Industries – an aluminum, zinc and magnesium die casting company – entered into and exited Chapter 11 bankruptcy last year. How the private company is performing since the exit is unclear. We do know that the company sold a 22,000 office building in Arkansas recently and is said to be re-locating its HQ to suburban Detroit where it has existing space. For our two prior articles about the company, click here.

There is only one BDC with exposure : TCW Direct Lending. A review of the valuation of the $133.3mn advanced by the BDC to Pace does not clarify the picture. TCW has increased its exposure from $96mn at cost – all in senior debt, just before the bankruptcy. Now, TCW has “doubled down” and has $133mn invested in first lien, subordinated debt and equity. The equity is written to zero, the subordinated debt is discounted only (7%) – BUT is carried as non performing – and the first lien debt is valued at par.

This is a Major exposure for TCW given the amounts involved. At first, when the company exited bankruptcy we upgraded its rating from CCR 5 to CCR 3 but are now returning to CCR 5 – i.e. non performing – given that the subordinated debt is on non accrual. By the way, the senior debt is paying a sub-market rate of 3.5% – all paid in kind. This all seems to suggest – despite the generous debt valuations – that Pace is not out of the woods yet. Given that TCW’s total exposure is equal to more than a fifth of its capital this should be a worry to its manager and shareholders. To date – from what we can tell – the BDC has not booked any realized loss on this investment and much could yet go wrong.

Direct Travel Inc.: IQ 2021 Update

As you might expect a company with a name like “Direct Travel Inc.” – “a leading provider of corporate travel management services” – has been impacted by the pandemic. Apparently – according to a brief mention on a BDC’s conference call – the company was restructured in October 2020 with term loans due 12/1/2021 being extended to 10/1/2023, and re-priced to allow most interest to be paid in PIK. Furthermore, lenders took a majority percentage of the company’s equity as well. At March 31, 2021, total BDC exposure was $105.4mn, and the FMV $83.2. In this second quarter after the restructuring the valuations were unchanged from IVQ 2020.

There are two BDCs involved with Direct Travel: Bain Capital Specialty Finance (BCSF) and TCG BDC (CGBD). The former has two-thirds of the exposure mentioned above, and the latter the rest. Of the pre-restructuring debt, CGBD is more “conservative” in its valuation at (20%), while BCSF applies a (30%) haircut. More importantly, CGBD carries its legacy debt as non performing while BCSF does not.

Our policy in these situations is to rate the company with the most “conservative” approach – or CCR 5 in this case, which has been the case since IIQ 2020. (As recently as IVQ 2019, the company was carried as “performing”).

How is Direct Travel Inc. doing under its new owners and with a new capital structure that includes new debt ? From the public record, we can’t really tell. Common sense – and the number of people we’ve seen rubbed elbows on planes with recently – would suggest that business should be improving. If so, the BDCs involved might well benefit above and beyond getting repaid on their loans if their equity gets “in the money”. However, we’re getting ahead of ourselves and will need to see what future valuations might look like before any upgrade is possible.

Ansira Holdings: IQ 2021 Update

We don’t fully understand what’s happening at marketing company Ansira Holdings, although two public BDCs – Bain Capital Specialty Finance (BCSF) and New Mountain Finance (NMFC) – have first lien debt outstanding, along with one non-traded player – Audax Credit BDC. (Total BDC exposure is $86.4mn – some in delayed draw debt and some in Revolver and some in unitranche). We do know, though, that some BDCs started writing down their debt by more than (10%) in IVQ 2019 and that rose to as much as (28%) in IQ 2020. At that point, the maturity of the debt was extended from June 2022 to June 2024, presumably related to the impact of the pandemic.

As of the IQ 2021, the debt is discounted just over a fifth by the BDCs involved (except for BCSF’s Revolver, which is valued at par – which may have different collateral or repayment rights). The BDC Credit Reporter has rated the company CCR 4 out of an abundance of caution and because we know so little about a company which has been underperforming for 6 quarters. (Neither NMFC or BCSF have provided any update on their conference calls). Total investment income involved is $6.5mn, with BCSF with the biggest share, followed by NMFC.

Ansira Holdings has a moneyed sponsor – Advent International – and market conditions must be improving. Also, the debt valuations have been stable since the maturity extension. So it’s possible we’ll be in a position to upgrade the credit rating in future periods. However, we cannot discern any specific catalyst for a change in the short term , so we’re not adding Ansira to the Trending list, and will just continue to track the privately-owned company’s progress as best we can.

Dynamic Product Tankers: IQ 2021 Update

We’ve written twice before about Dynamic Product Tankers, a company owned 85% by Apollo Investment (AINV), which is also a junior lender. The last time was in November 28, 2020 when the $22mn in subordinated debt on the books was valued at par and the $49.8mn at cost in equity was valued at $27.1mn. Jump forward two quarters and the cost remains the same; the subordinated debt is still valued at par and the equity has a slightly lower value – $25.5mn. We rated the company CCR 4.

AINV has not said anything about what’s happening to this shipping investment in some time so there is no news to report. However, the fundamentals of the sector have been improving with the uptick in business activity and this might benefit the company. We’ll find out more when IIQ 2021 results are published. Dynamic is being added to the Trending list because odds are good we might see a material change in value.

In any case, with $1.2mn in annual investment income (a below market 5.31% yield) and a current FMV equal to nearly 5% of the BDC’s net assets, this is an important asset for AINV. This is the second largest underperforming company by value on the BDC’s books as of March 31, 2021. As we’ve seen with other troubled investments of long standing held by AINV, this seemed like an almost certain eventual loss till this year. That might yet be the case, but there’s also a possibility that the BDC – which has been invested in the business since 2015 – might get some or all its $50mn invested back.

Spotted Hawk Development: IQ 2021 Update

We’ve written about Apollo Investment’s (AINV) long standing and ill fated investment in Spotted Hawk Development (aka SHD Oil & Gas) twice before. The last time – back on November 27, 2020 – we noted that two of the three debt tranches AINV has advanced were on non accrual and the FMV of the $115mn invested was only $42.3mn, based on IIIQ 2020 results.

Six months later – and going off the IQ 2021 AINV results – not much has changed. Total exposure at cost remains the same and two of the debt facilities remain on non accrual. The FMV is $35.4mn. (However, that valuation is slightly better than in the IVQ 2020 when the FMV was $32.4mn, the lowest ever. Maybe the increase in the price of oil has begun to revive Spotted Hawk’s value, if only on paper.

Back on May 20, 2021 AINV’s management had the following, vaguely encouraging, update to offer on the company:

Sort of now that oil prices have picked up, and there’s some sense of — there’s some — visibility is too strong a word. There’s some possibility of sort of constructive transactions. We’re going to be as aggressive as we can there to sort of exit that, but we don’t have anything”.

We continue to rate the oil and gas explorer as CCR 5 – given the two non accruals. However, we have the investment on our Trending List because there’s a strong possibility – with $70+ oil and much enthusiasm about everything in the markets these days – that the value of the business might be improving and its cash flows – potentially – increasing. Furthermore, we’re sure that if anyone shows any interest in AINV’s 38% interest in the company, they’ll find a receptive seller. This may yet be an almost complete write-off when AINV finally creates some resolution, but there’s a chance the BDC might do better than one might have expected just a few months ago. Of course, these things change very quickly in any commodity industry.

SIMR, LLC: IQ 2021 Update

We’ve not written about SIMR, LLC (aka STATinMED Research) before but the life sciences data company has been underperforming since IIIQ 2019, when we first noted a drop in the equity valuation of the BDCs that held those positions. The situation got worse in 2020 with first lien debt discounted by increasing percentages and the equity written to zero. At IQ 2021, the debt was discounted (10%)-(15%) by the two BDCs with a position: Capital Southwest (CSWC) and non-traded Cion Investment. Overall, BDC exposure at cost was $45.4mn and FMV $27.1mn.

That FMV versus cost alone is cause for concern. However, we also note that back in 2019 the lenders ramped up pricing from LIBOR + 9.00% to LIBOR + 17.00% plus a 2.00% floor ! That’s an all-in rate of nearly 20% and a sure sign that all is not well. For CSWC, that’s a worrying $2.6mn of annual investment income at risk if SIMR should default and even more at Cion: $3.4mn.

We do not know what’s gone wrong at SIMR – which was acquired in 2018 by Ancor Capital Partners. CSWC has been mum about the situation and Cion does not hold conference calls. The public record has provided no clues. We have rated the company CCR 4, but have not added the name to our Trending List as the valuation has been stable of late, and there is no obvious catalyst for a change in value or income in the IIQ 2021 results. However, given the high amount of income at risk (equal – for CSWC – to 8.2% of its FY 2021 Net Investment Income), this is a company whose fortunes are worth tracking regularly.

Glacier Oil & Gas: IQ 2021 Update

We last wrote about Glacier Oil & Gas back on August 18, 2020 shortly after Apollo Investment (AINV) placed its debt on non accrual. At the time the BDC had invested $67mn at cost in the Alaskan oil & gas company and valued its investment at $14.7mn. Not much has changed in the interim. The debt remains on non accrual and the value of the BDC’s investment has been reduced somewhat to $8.1mn. That’s unchanged from the IVQ 2020 value.

With no income being generated, and little in the way of remaining value, we were tempted to categorize Glacier as non material and not bother with providing a written update. (This is a long standing “legacy investment” of Apollo that was previously known as Miller Energy, and which was restructured back in 2016 with no success). However, with the price of oil above $70 hope springs eternal that the company may escape its CCR 5 (non performing) status.

Unfortunately AINV has not discussed the company since April 2020, so we don’t have any updates to offer. The BDC does own 47% of Glacier’s equity, as well as holding that non accruing debt and could well benefit if the economics of the industry finally turn in its favor. We’re not taking anything for granted, but are adding the company to our Trending List because the value of Glacier may increase when the IIQ 2021 results are published. In the past, we’ve assumed the final value of Apollo’s misguided foray into oil and gas investing might be zero once AINV finally settles its account. At least now there is a glimmer of hope for AINV – and its long suffering shareholders – that some recovery might be possible. We’ll provide an update after the IIQ 2021 AINV results are published.

Maxus Carbon: IQ 2021 Update

With Apollo Investment’s (AINV) IQ 2021 filings, we can provide our fifth update on Maxus Carbon (aka Carbonfree Chemicals). The BDC valued the now all equity investment with a cost of $77.8mn at $25.4mn. That’s essentially unchanged from the prior two quarters and since AINV’s debt to the business was converted into equity.

The valuation might suggest that nothing much – good or bad – is happening at Maxus Carbon but what was said on the May 20, 2021 AINV conference call suggests otherwise. Here is what was said by AINV’s CEO Howard Widra:

[Maxus Carbon] has some really good developments there. And that’s an all equity debt investment that had been converted to our equity. But that’s all equity and is a carbon-efficient business that has a lot of demand, obviously, where the world is going right now. And so, we hope that over the next year can have some real significant positive things happen to it”.

We can’t tell if the above is something specific getting underway or just hopeful comments from the BDC. It’s about time something happened at Maxus Carbon – on the books since 2013, and non-income producing since IIIQ 2020.

We are retaining our CCR 4 rating and not adding Maxus to our Trending List given the unchanged nature of the recent valuations and the vague nature of management’s status update. In the current environment, though, where capital is loose, it’s not impossible that SOMETHING might happen of a positive nature where this long standing “zombie” investment is concerned. That’s at variance with our earlier thoughts that the most likely resolution would be a write-off of the project and a complete loss. At this stage, both good news or bad news are equally likely.

Merx Aviation: IQ 2021 Update

Apollo Investment (AINV) has reported its full year and fiscal IVQ 2021 results through March 31, 2021. To management’s credit, much was said about the BDC’s largest investment – aircraft lessor and maintenance company Merx Aviation Finance LLC. We’ve written about Merx before on three occasions. The BDC Credit Reporter has been skeptical of the – let’s say – “generous” valuations AINV has placed on its debt and equity investments in Merx, despite the severe impact of the pandemic on flying and the value of aircraft and their leases. Both in the IVQ 2020 and in the IQ 2021 results, AINV has increased the value of its investment in Merx after a modest unrealized write-down earlier in 2020. As of now, the $190.5mn of first lien debt is carried at par, as was the case before the pandemic. The value of the now $120.3mn in equity is given as $125.1mn, up $0.5mn in the period.

On the latest conference call AINV sought to explain how Merx could be re-leasing planes at lower rates than before the pandemic or having to sell them off and still see an increase in the value of the equity stake. (Previously the BDC pointed to increases in their aircraft maintenance activities for its higher valuation, but this was not mentioned in the most recent conference call). Much as we’d like to, we don’t follow how AINV maintains such a high equity valuation despite the undeniably tough conditions. We rate the company CCR 4 despite the fact that AINV values its overall investment modestly over cost. However, we encourage readers to review the conference call transcript and decide for themselves.

With all that said, industry trends seem to be on the mend for Merx and total capital at risk – thanks to a large principal repayment – has dropped from $321mn as of March 2020 to $311mn a year later. The debt is performing at a 10% yield (down from 12% previously). The equity is non-income producing. The overall annual return on assets invested – both debt and equity – is 6.4% versus something closer to 15% pre-Covid when the loan yield was higher and dividends were being paid. AINV’s management does not envisage a return to those halcyon days but hopes for a ROA somewhere in-between.

This is very much a work in progress, but if industry conditions improve as expected, AINV should be able to avoid any further reduction in its debt yield from Merx. Once securitizations of aircraft are sufficiently paid down – which are senior to where AINV sits – we may even see a resumption of some dividend payouts. However, we cannot estimate when that might occur. We are maintaining our CCR 4 rating till we get more substantive good news and the credit remains Trending because we would not be surprised to see values and income change materially again – probably for the better – in IIQ 2021.

Even if AINV extricates itself from Merx without a realized loss (even though the loss of investment income has been substantial in recent quarters), the question remains why a BDC supposedly committed to portfolio diversification would invest 30% of its capital (using the IQ 2021 numbers) in a single company ?

Instituto De Banca Y Comercio Inc: IVQ 2020 Status

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.

NPC International Inc: Company Sold

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.