ADG, LLC: IVQ 2020 Update

ADG, LLC (dba Great Expressions Dental Centers) is a BDC portfolio company we should have written about ages ago for a number of reasons. First, BDC exposure is Major: $106mn at cost, almost all held by Ares Capital (ARCC), with New Mountain Finance (NMFC) holding a $5.9mn second lien position. Second, the company was underperforming by our standards even before the pandemic and since everyone’s been sheltering in place, has been on non accrual since IQ 2020. Finally, we’re projecting the company is Trending, i.e. likely to materially change in value in early 2021. More on that at the end. Although we’ve not written about ADG, LLC before we’ve been tracking the business in our Company Files and in our daily search for new developments.

Here’s the lie of the land: At year-end 2020, ARCC had a small first lien debt position of $7mn, half the size of the quarter before and performing, valued at a (10%) discount to par. The BDC also holds an $89mn second lien debt position due 3/1/2024 that is on non accrual but discounted only (12%). NMFC also holds a second lien debt position – maturing at the end of March 2024 – and discounted (24%). However NMFC’s debt – which may or may not be in the same facility – is not carried as non performing but its 11.0% yield is all Pay-In-Kind. Then there’s $3.0mn in equity held by ARCC (which has a very long standing relationship with the company that predates its current PE owner) , valued at zero. The total FMV for all positions and both BDCs is $89mn. ARCC is forgoing about ($7.5mn) of annual investment income due to the non accrual.

There’s no up to the minute news in the public record but the BDC valuations have been greatly improving in the last three quarters. That suggests the business is turning around. We do know that the whole dentistry sector is on the upswing after some dark months last year when dental chairs were off limits in many states due to Covid-infection fears. Sadly, neither ARCC or NMFC has mentioned ADG on their conference calls. Nonetheless, we’ll go out on a limb and suggest there’s better news ahead. That’s why we have ADG, LLC “Trending”, with the prospect of higher debt or even equity valuations and the possibility the second lien debt might return to performing status.

For the moment ADG, LLC remains rated CCR 5 but we’ll be looking out for ARCC’s disclosure about the company on April 28, 2021 when its IQ 2021 results get published.

American Achievement Corp: Exits Chapter 11

We hear from S&P Global Market Intelligence that “the bankruptcy court overseeing the involuntary bankruptcy petition filed against American Achievement Group Holding Corp. on March 16 has dismissed the case, according to a court order, ending the company’s brief encounter with Chapter 11“. The BDC Credit Reporter had written about the involuntary bankruptcy (which occurred January 14, 2021) back on February 20, 2021. We won’t go back into the whys and wherefores that caused the bankruptcy filing. However, we don’t know the full details of how matters have been patched up except that the parties have agreed to an out-of-court restructuring which will “would leave all creditors unimpaired“. Another $35mn Revolver is contemplated to provide the company with liquidity.

We can’t say when all this will come together but the news seems to be good for the only BDC with exposure: Sixth Street Specialty Lending (TSLX). The BDC had placed its $23.8mn in senior debt to the company on non accrual in the IVQ 2020 and discounted its position by ($2.2mn), or (9%). Presumably the debt will shortly return to accrual status and – we assume – accrued interest will be collected.

The company is rated CCR 5 and remains there for the moment. However we are adding American Achievement to our Trending list because we expect in the IQ or IIQ 2021 for a significant change in status (from non performing to performing) and the resumption of interest income, which amounts to $2.2mn a year, not to mention a rating upgrade. We will circle back when we receive confirmation from TSLX that all is well.

Production Resource Group LLC: IVQ 2020 Update

A reader wrote to ask for an update on Production Resource Group, LLC which we wrote about on May 27, 2020, just after the debt went on non accrual. This is a fair question and reminds us to set up a more formal regular credit follow-up system, especially for larger amounts at risk. In this case the advances by the three BDCs involved were huge – $511mn – as of the IQ 2020.

The current amount outstanding at year-end 2020 from two of the BDCs involved – FS KKR Capital II (FSKR) and Ares Capital (ARCC) – is high but has decreased, as we’ll explain – to $267mn. (No word yet from non-traded TCW Direct Lending VII, which had advanced $30.2mn as of IIIQ 2020).

Apparently – according to FSKR – a “debt for equity ” swap occurred in the fall of 2020:

We have reached a definitive agreement to recapitalize the Production Resource Group balance sheet and bolster liquidity. In exchange for our term loan position we will receive a package of take-back securities that are comprised of a reinstated term loan, preferred equity and common equity. The consensual restructuring transaction provides for a substantially reduced debt and interest burden while maintaining a path for a substantial recovery of our original par balance along with significant upside beyond that.

FSKR CC – 8/11/2020

In the IVQ 2020 this was reflected on the BDCs balance sheets and P&L. ARCC booked a realized loss of ($60mn) and its total exposure at cost dropped from $104mn at cost/$38.4mn at FMV in IIIQ 2020 to $45.6mn/$45.8mn. Exposure consisted of two Term Loans maturing in 2024, but with much lower pricing than before. Our rough estimate is that ARCC’s investment income will have dropped from $9.0mn annually to $3.9mn – a ($5.1mn) loss of income. The BDC also has Class A common stock units with a cost of $4.9mn and an FMV of $5.2mn.

FSKR’s exposure at cost just before the non-accrual was $381mn – a large amount even for a BDC its size. As of year end 2020 FSKR has $221mn invested between 4 term loans and two preferred stock holdings. We suppose – but cannot confirm – that the ($160mn) difference was booked as a realized loss. Unlike ARCC, FSKR does not call out Production Resources Group in its 10-K, with its ($872mn) of net realized portfolio losses in 2020. FSKR currently values its multiple holdings at a combined $199.7mn.

We have upgraded the restructured company from CCR 5 to CCR 3 – after three quarters of non performance – from IVQ 2020. Given the very little information we have about the new financial structure and the still challenged business of sports broadcasting, the company remains on the BDC Credit Reporter’s underperforming companies list. We’ll update our Company file when we hear from TCW Direct Lending VII and write a new update when all the IQ 2021 results are out.

For both ARCC and FSKR, this has been a material set-back, permanently reducing both income and capital and illustrates the danger of taking very large positions (especially in the case of FSKR, which is half the size of ARCC but took on more than twice the exposure). For ARCC, this was the second largest realized loss of 2020, out of total net realized losses of ($148mn). Nor was being at the senior level in the capital structure much protection against loss. Judging from ARCC’s write-offs, some 60% of capital advanced when things turned sour has been lost. All the BDCs involved will have to hope their equity stakes in the reorganized company provide some eventual offset. Maybe Production Resource Group will be bought by a SPAC ?

FDS Avionics Corp: Company Sold

Increasingly Business Development Companies are “turning around” their own under-performing portfolio companies. This drastically changes the profile of an investment – usually both increasing the capital put at risk and extending the holding period. Furthermore the ultimate prospective return changes as equity stakes taken from a turn-around can range widely in value over time. With that in mind, the BDC Credit Reporter is very interested in chronicling every instance of a BDC seeking to tackle a distressed asset. In this case, Fidus Investment (FDUS) took charge of FDS Avionics in 2014, investing $7.2mn of subordinated debt and equity.

By 2017, the company was in trouble and FDUS booked a ($2.4mn) realized loss and invested another $750,000 “along with certain co-investors and management, giving us a controlling interest”. In 2019 FDUS – on a conference call – explained its approach: “This is an aerospace parts company, it’s primarily electronics. It serves the general aviation, the commercial and the military end markets, so there’s some diversity there. It’s been lumpy historically. And it also was in need of a product refresh whereby customers really wanted to wait for certain new products versus buying some of the legacy products. We continue to believe in, I’d say, the value proposition of the business. And as such, we made a control equity investment probably 20 months ago now.”

Through IVQ 2020, FDUS exposure at cost was $8.4mn in first and second lien debt, preferred and common. At one point FMV had dropped as low as $4.0mn. Now we learn the following: ” On February 12, 2021, we [FDUS] exited our debt and equity investments in FDS Avionics Corp. (dba Flight Display Systems).  Flight Display Systems was acquired and combined with Calculex Inc. and Argon Corporation under a new holding company, Spectra A&D Holdings (“Spectra”). We received payment in full of $5.1 million on our second lien and revolving debt. We sold our preferred and a portion of our common equity investments for a realized gain of approximately $1.0 million. In conjunction with the transaction, we invested $8.0 million in first lien debt and $4.1 million in preferred equity, of which $2.0 million was rolled over from our original common equity investment in Flight Display Systems”.

So FDUS is clawing back $1.0mn of the ($2.7mn) lost in 2017 but has actually increased its exposure by one third. The BDC will be accruing income on the loan (terms not yet revealed) and -possibly – on the preferred (unlikely). For a time consuming investment that was fraught with problems this is a successful interim resolution, but far from the final word. We may be years away from a final tally.

We are upgrading the company – now Spectra A&D Holdings – to CCR 3 from CCR 4 and we will periodically revisit how the new owners are performing.

Accent Food Services LLC: Restructured

This is the third article we’ve written about Accent Food Services, LLC. We started out in September 2020, basing ourselves on what Fidus Investment (FDUS) was willing to tell us about the vending machine company’s troubles. Even then, we were bracing for the worst: “We know too little – even the identity of the first lien lender and its payment status – so we can’t estimate whether Accent will pull out of this valuation dive or not. Given the second lien status, though, a complete write-off is possible.” 

Roll forward to the most recent FDUS reporting for IVQ 2020 and we learn that “In Q4, we realized a loss of $36.1 million on Accent Food Services. That’s 100% of the total cost of the funds FDUS advanced to the company. Just before Accent began to deteriorate – IIIQ 2019 – FDUS had the investment valued at $35mn. The BDC was receiving about $3.5mn in annual investment income before Accent went on non accrual late in 2019. As recently as September 2020, FDUS still valued its debt at $5mn.

Not unreasonably, a BDC analyst asked for a recap of what went wrong at Accent and to his credit, the CEO of FDUS gave a fulsome answer, albeit after the horse has left the barn. We are re-publishing the full discussion from the February 26, 2021 FDUS conference call:

What I would say, look, Accent was on nonaccrual prior to COVID-19. Having said that, it had a positive outlook and had real market presence. I mean revenues were growing. It just — it needed to clean up its act, which is actually now done, and COVID created the opportunity for the company to do that and get their cost structure in line and whatnot.

But — so the — what happened was the shelter-in-place orders, and in particular, the work-from-home orders greatly impacted the business, right? The most of any company in our portfolio, no question. So our one nonaccrual got hit the hardest.

Secondly, I’ll go — say the senior debt providers and, quite frankly, the equity group were not helpful to put it mildly. And the senior group played loan-to-own ball and — as opposed to work together, which most people do. And so given the status of the company at the second half of the year, which were very different, quite frankly, than the projections we were getting throughout the COVID period, we chose not to double down, and basically, take a controlling stake in the company. We have that opportunity. And it would have required a very large equity investment. And so it’s very unfortunate all around, but that’s how it played out.

And the company has a solid medium-term outlook and a good management team. And so we supported the company with actually a small equity investment in the new restructured company. So that’s the situation. It’s very unfortunate. But we didn’t have — other than owning the company and writing a very big equity check, we didn’t have the cards given the — given COVID. And that’s what happened“.

There’s a lot to unpack there, including the reminder that BDCs like FDUS have the ability to walk away or “double down” (the very language underlining the uncertainty involved). Generally speaking, it’s hard for a second lien lender to control a situation like this one and the large amount already invested might actually have been a deterrent to putting even more money to work. We find it amusing that FDUS invested $2mn in the newly restructured/owned company but – maybe – that will provide some partly offsetting return one day.

Otherwise, though, this was a major loss for the BDC, far and away the biggest write-off taken in a difficult year and a reminder of how vulnerable junior debt capital can be, especially in the lower middle market. (BTW, FDUS also booked multiple realized gains in 2020, leaving the BDC with a net realized loss of just ($1mn) for the year.

In terms of our ratings, we are upgrading Accent Food Services from CCR 5 to CCR 3. Even though the amount FDUS has invested is now small – barely material by our standards – we’ll continue to update the company’s progress to the best of our ability.

Swipe Acquisition Corp: Restructuring Completed

Swipe Acquisition Corp is a manufacturer of gift cards and hotel key cards and – unsurprisingly – was badly impacted by Covid-19. As recently as the IQ 2020 the company was marked as performing to plan but quickly downshifted to underperforming and then to non performing by the IIIQ 2020. We now learn that the business has been taken over by its lenders in a debt for equity swap, which occurred in the IVQ 2020. One of those lenders – Owl Rock Capital (PRCC), on its February 24, 2021 outlined what has happened in recent weeks :

In order to best position the company in the near term, we rightsized the outstanding debt amount and equitize the remainder of the debt balance.”

From Advantage Data’s records we know that the Owl Rock organization – which includes non-traded Owl Rock Capital II – had $176mn advanced in senior debt to Swipe as of September 2020. We don’t have yet have ORCC II’s results, but we can see that ORCC’s own investment at cost in Stripe debt has dropped from $156mn in debt to $52mn in the post-restructuring IVQ. We know that the BDC took a realized loss of ($51mn), virtually all Swipe related.

In addition, $48mn is booked from the IVQ 2020 under “New PLI Holdings” as a common stock investment. That’s where the debt for equity swapping occurs. All of that does not recognize to the last dollar but indicates ORCC has roughly already written off one-third of its initial capital and reduced its investment income by two-thirds. That’s ($8.5mn) of annual investment income forgone.

This is a big move for Owl Rock – according to management on its conference call – making the move to owner/lender from solely a lender. Only time will tell if i) the company requires additional capital; ii) the asset manager is successful at effecting a turnaround. Still, this is an example of what we’ve been calling out for some time: the ever increasing willingness of BDCs of all stripes to turn around their own failed investments. (That must be frustrating to all those “distressed” investments funds waiting around for opportunities like Swipe). For investors in BDCs the increasing number of “control” investments created in this way make evaluating BDC value and performance more difficult than in the past.

For the moment, the BDC Credit Reporter has upgraded Swipe/PLI to CCR 3 from CCR 5, given the restructuring and the return to accrual status. We’ll continue to offer updates in the quarters ahead.

MD America Energy: Emerges From Bankruptcy

Now that Sixth Street Specialty Lending (TSLX) has reported IVQ 2020 results, we’ve learned about what has happened to its troubled energy company, MD America Energy. We last wrote about the company in December 2020 when bankruptcy was filed. At the time, we projected – from what we knew at the time : “We are expecting the BDC will book a realized loss of ($5mn-$8mn), probably in the IVQ 2020“.

This is what TSLX’s management said on its February 17, 2021 conference call:

In December, we also removed our first lien loan in an E&P company, MD America, from nonaccrual status following the company’s emergence from Chapter 11. During Q4, our $13.6 million fair value loan was restructured into a $9 million first lien loan and a $3.9 million equity position. We believe the company’s new capital structure is more appropriately suited for today’s commodity price environment“. 

The 10-K shows TSLX has booked a realized loss of ($4.0mn). Still, the BDC – as of September 2020 – had invested $17.9mn, but now has a new Term Loan – with a maturity of 2024 – with a par value of $9.0mn, yielding 9.25%. The prior debt – due in 2023 – had a par value of $18.1mn and its yield was 10.0% before going on non accrual. This means TSLX is permanently losing ($1mn) of annual investment income. The BDC will have to hope the $3.9mn in the equity of SMPA Holdings – the new entity – will be worth something one day. If not – and assuming this new debt gets repaid – TSLX will have lost half its investment in the energy company.

We are upgrading MD Energy/SMPA Holdings from CCR 5 to CCR 3. You will not be surprised that we are keeping the company on the underperformers list given the sector in which it operates and its recent failure. We can’t help worrying that the $3.9mn equity stake has an element of being a can kicked down the road. Even the new senior debt cannot be considered safe with three years till repayment. We’ll check back in next quarter with TSLX to see what progress the restructured company is doing.

Edmentum Ultimate Holdings: Company Sold

In December 2020 , the Vistria Group – a private equity firm – acquired Edmentum Inc. and its parent, Edmentum Ultimate Holdings. Terms were not disclosed but the press release announcing the acquisition indicated “New Mountain Finance Corporation and funds managed by BlackRock will retain ownership positions“.

From a BDC perspective this is a very important transaction as Edmentum was – through September 30, 2020 – one of the larger BDC-financed portfolio companies (number 79 on the list maintained by Advantage Data). Also, there are five BDCs involved, many of them with very large dollar exposure. These include New Mountain Finance (NMFC) and BlackRock TCP Capital (TCPC). Also important is that with the Vistria Group acquisition the future exposure of the 5 BDCs involved is changing. See the Advantage Data Table for IIIQ 2020 of all BDC exposure:

Edmentum has been on BDC books since IVQ 2012 – initially only in the form of first and second lien debt -and has had a chequered past. In 2015 the company was restructured and several of the lenders recognized realized losses. (For example, NMFC lost half of its $31mn then invested). In the restructuring, Oaktree Specialty Lending (OCSL); Prospect Capital (PSEC), NMFC and BKCC initiated equity stakes. To keep a long story short, over the years BDC exposure increased to reach $204.4mn even as some of the debt outstanding was carried as non-performing at different times by different lenders. The BDC Credit Reporter has carried Edmentum on its underperforming list since the IVQ 2014.

However, in recent quarters the valuation of the BDC investments has been improving. As of September 2020 virtually all the different debt and equity stakes held by BDCs were valued at par or at a premium, with the exception of a small equity stake held by Gladstone Capital (GLAD). Now as we begin to hear from BDCs about IVQ 2020 results the outcome of their investments is becoming known, with varying results. GLAD reported the following :

In December 2020, our investment in Edmentum Ultimate Holdings, LLC was sold, which resulted in a realized loss of approximately $2.4 million on our equity investment. In connection with the sale, we received net cash proceeds of approximately $4.9 million, including the repayment of our debt investment of $4.6 million at par.

PSEC fared better: On December 11, 2020, we sold our 11.51% Class A voting interest in Edmentum Holdings and recorded a realized gain of $3,724 in our Consolidated Statement of Operations for the quarter ended December 30, 2020. Concurrently, Edmentum Holdings fully repaid the $9,312 Unsecured Senior PIK Note and the $45,277 Unsecured Junior PIK Note, and Edmentum, Inc. fully repaid the $8,758 Second Lien Revolving Credit Facility receivable to us at par.

OCSL also ended up in the black : “We realized a full par recovery on our debt investment and recorded a total gain of $23 million”. 

Not heard from yet are NMFC and BKCC. However, we get the impression from the press release and comments made by TCPC after the IIIQ 2020 results that New Mountain and BlackRock intend to maintain investments in post-sale Edmentum. Here’s what NMFC said on its November 5, 2021 conference call in answer to a question about its intentions for Edmentum: “We’d like to maybe take some chips off the table, recapitalize the balance sheet, maybe bring in a partner. But at the same time, we do think there’s very significant upside from here that you probably wouldn’t quite get until you show the sustainability of the earnings trend, which we absolutely believe in. And so we may elect to hold some exposure for another period of time to get the benefit of that incremental value gain”.

So while 3 BDCs are going out the door, these two others are likely to remain, but we’ll need the IVQ 2020 results to suss out all the details.  The GLAD realized loss and the earlier 2015 losses notwithstanding, this is a positive turnaround for Edmentum, which was rated CCR 5 as recently as September 2019 and which we have maintained at a CCR 3 rating ever since. After we hear from TCPC and NMFC we’re likely to return Edmentum to CCR 2 status, especially if and when we get a better understanding of the new capital structure and prospects for the business.   

Aptim Corp: S&P Global Ratings Update

According to a news report, S&P Global Ratings is feeling a little better about Aptim Corporation, an environmental consulting and remediation company. APTIM Corp. was “affirmed” on Feb. 11 2021 at CCC+ and its outlook revised to “stable” from “negative”. Apparently some receivables that had been of questionable collectibility have come in, improving liquidity.

The CCC+ rating on the company’s $515 million of 7.75% senior secured notes due 2025 was affirmed as well.S&P Global Ratings believes Aptim’s balance sheet cash will be sufficient to handle fixed charges over the next 12 months“. However, as you can see by the speculative rating, Aptim is hardly free and clear of trouble as leverage is high, operating profitability poor and the company’s capital structure as “unsustainable”.

Nonetheless, these developments – and the modestly positive signal from S&P – might result in shrinking the discount on the value of the 2025 debt – with a cost of $30.5mn and a IIIQ 2020 discount that ranges between -37% and -48%. We note that Main Street (MAIN); Great Elm (GECC); FS KKR Capital II (FSKR) and non-traded HMS Income all hold the same debt but their valuations differ. In fact, FSKR even carries the debt as non-performing.

The -$13mn in unrealized losses might shrink either in the IVQ 2020 valuation or in the IQ 2021 based on the improving situation at Aptim. We have rated the company as underperforming since the IVQ 2018; and further downgraded the business to a CCR 5 when we first saw the FSKR non-accrual in the IIQ 2020.

The BDC Credit Reporter will circle back as the IVQ 2020 results come in from the BDCs involved and see what we’ll learn. We have no view as to the likelihood of an eventual loss but that “unsustainable” capital structure remains cause for concern, especially as the BDC debt outstanding is in junior debt capital. Still, in the short term values might be going up rather than going down or getting written off.

UPDATE: We have added Aptim to our Alerts list of companies whose value is expected to materially change in the next 1-2 quarters.

Avanti Communications: New Financing Arranged

On January 20, 2021 we wrote that Avanti Communications was in “financial difficulty”, based on a news report. The satellite launcher and operator has a huge debt load and a bond deadline was looming. We’ve now learned that today – February 8, 2021 – the $145 million debt (Super Senior Facility/SSF) needed to be refinanced or extended.

Apparently, the existing lenders have blinked and offered a one year extension. Here’s what “Advanced Television” – a trade publication – had to say:

In a statement on February 8th, Avanti said: “Today the Company announces that it has agreed on the headline terms of an amendment and extension of the SSF to 31 January 2022 (the “A&E Transaction”). When completed, the A&E Transaction will provide a material maturity extension of the SSF combined with a new capital injection of $30 million provided by the Company’s existing junior lenders, enabling the Company to execute on its growth plan including the closing of its exciting pipeline of significant contracts.”Avanti added: “In order to provide time to finalise (i) requisite consent processes and (ii) definitive long form documentation, the Company has agreed a short-term extension of the maturity of the SSF from 8 February 2021 to 15 February 2021“.

This news suggests that Avanti will live to fight another day but that Great Elm (GECC) and BlackRock TCP Capital (TCPC) – both of whom are junior lenders – will be anteing up more capital. Currently – using data through September 30, 2020 – the two BDCs have advanced $115mn.

There’s no change to our CCR 5 rating for Avanti (TCPC carries the debt as non performing but GECC as performing – a subject unto itself). We will learn more about both BDCs exposure to Avanti either when IVQ 2020 results are discussed. Or, if the BDCs are being coy, when IQ 2021 results are updated as this new capital seems likely to be advanced in the current quarter.

AMP Solar Group: Investment Sold

When we last wrote about AMP Solar Group on January 12, 2021, we were full of questions. We’d heard that the Carlyle Group had made an investment in the company, but we didn’t know what were the implications for Apollo Investment (AINV), which has a very long standing equity investment with a cost of $10.0mn and a value through September 30, 2020 of $8.570mn.

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. ..We just don’t know but hope to learn more from AINV when IVQ 2020 results are published and discussed in February 2021“.

Now AINV has reported those results we know a lot more, even if not much color was offered. Apparently, the BDC received $14.0mn for its position, resulting in ” a net gain of approximately $5.6 million during the quarter“.

Six years after getting first involved with AMP Solar this is a positive outcome for AINV which has been long trying to sell-off its “non core” alternative energy investments. At one point this investment had been written down on an unrealized basis by (91%) so the gain realized must feel like vindication to the BDC.

The BDC Credit Reporter had rated the investment CCR 3, as its value had been appreciating in recent quarters, but the rating had been CCR 4 in the past. We are re-rating to CCR 6 as the BDC no longer has any exposure.

AG Kings Holdings: Sale Of Company Closed

The AG Kings Holdings story is coming to a conclusion. We’ve been covering the company since June 2019 with a series of updates. The retail chain has been sold to Albertson’s Acme Markets in January 2021, according to BDC lender Capital Southwest (CSWC). The sale was known about previously, but not its final closing, which seems to have occurred.

This means that the debtor-in-possession financing provided by CSWC – and by WhiteHorse Finance (WHF) – has been repaid in full. However, some legacy debt will be written off.

CSWC revealed that its 2021 term debt with a cost of $3.5mn was valued at $0.7mn at year end 2020 but was repaid at a higher value in January, but the exact amount was not given. Here’s what CSWC’s management said on its most recent conference call: “So our exit was higher than where it was valued last quarter. So that’s the first thing I would say. And then the $739,000 that’s left is basically the last interest. I mean, there’s a litigation trust and the final bankruptcy cleanup and there’s a final working capital adjustment and some final economics, which, candidly, we believe, is going to be meaningfully higher than the $740,000, we have it valued right now. So we think there’s upside in NAV from that perspective. And then our all-in recovery at the end of the day, will be about $0.80 on the dollar“.

We expect CSWC will end up taking a realized loss of ($2.5mn-$3.0mn). WHF will, in all likelihood, book a loss as well. Nonetheless, the absolute amounts are relatively small. The BDCs were fortunate that the pandemic boosted AG Kings business and its prospects at this critical juncture and resulted in better than might have been expected proceeds from the company’s sale. Once the final payouts are made we’ll re-rate AG Kings from CCR 5 to CCR 6, reflecting the end of all BDC exposure.

Elyria Foundry: Company Sold

All the assets of BDC portfolio company Elyria Foundry has been sold to TRM Equity as of January 25,2021. Terms were not announced. “Elyria Foundry, specializes in ductile iron castings up to 200,000 pounds serving a broad set of markets including defense, oil and gas, construction equipment and mining. Elyria Foundry has operated since the early 1900’s and has developed a strong technical and metallurgical team that drives its success”. The company is based in Ohio.

This should be good news for the only BDC with exposure – Saratoga Investment (SAR). This is an investment that dates back to 2008 ! As of November 2020, SAR had a $1.3mn second lien loan, bearing a 15% PIK yield to Elyria and a $9.7mn equity stake, valued at just $0.730mn.

We imagine that SAR’s management has been aware of the acquisition for some time. That might mean the latest valuation is up to date and proceeds received will not be sufficient to do much more than repay the debt and allow for a small payout on the equity, or $2.0mn in all. That would result in a realized loss of -$9mn. However, we just don’t know and SAR’s proceeds might be higher or even lower (though we don’t think so). The most notable part of this story is that the long relationship between SAR and Elyria seems finally to be coming to an end and should release some capital back to the BDC.

We are re-rating Elyria – because now sold – to a CCR 6 rating from CCR 4. We’ll have to wait till SAR reports February 2021 quarterly results before discovering if at the end of the road with Elyria what the final bill looked like.

Great Western Petroleum: Fitch Places On Positive Watch

We’ve written about Great Western Petroleum twice before, and each time the situation at the refiner was dismal. The first time – in April 2020 – we had just downgraded the company to CCR 4, even though the valuations applied by its only BDC lender – FS Energy & Power – were optimistic. Then in September, we updated the situation after a much heralded restructuring fell through. Third time’s the charm because Great Western has a new restructuring in place and the situation is looking better for the company. Fitch Ratings has just placed the business on “Credit Watch Positive” and is talking about upgrading its debt ratings. Click here for all the details. That’s just as well because as of September 2020 FS Energy’s $95mn of total invested capital (in 2021 and 2025 debt and in preferred) was discounted about (40%).

However, when we get into the details of the proposed restructuring that Fitch is cheering on, we notice some of the devilish consequences. First, the $46mn in preferred held by FS Energy is going to be converted to common stock. That will represent a hit to income as the BDC has been accruing into income preferred distributions at an annual yield of 15.5%.

The 2025 note holders – and the BDC has $13mn outstanding out of $75mn in that tranche – will be pushing out their repayment by a year, on the same terms as the new second lien debt being raised as part of the restructuring.

The only immediately good news from FS Energy’s standpoint is that it’s $36mn of debt due in September 2021 should be refinanced by the new arrangement. Given that this debt is discounted by (40%) that should be a positive for the BDC even if a 9.0% yielding instrument will be leaving the portfolio.

Of course, we don’t have the full picture. We don’t know if FS Energy will be participating in the new second lien loan which might ratchet back up its exposure. Furthermore, although business fundamentals have improved this remains a “speculative credit” by most measures and FS Energy will be involved for many more years to come.

Alpha Media LLC: Update

We’ve written about Alpha Media, LLC at length in two recent articles. We promise this third article will be kept short, and it’s likely you’ll not hear anymore about this radio broadcaster who recently filed Chapter 11. That’s because a bankruptcy-focused specialist newsletter called Petition has given us a detailed view of what was happening in the run-up to the bankruptcy. The shenanigans involved between different creditors/prospective owners ares fascinating but there’s one central take-away for the BDC Credit Reporter that we were not aware of till now: apparently the first lien lenders to the company sold out their interests to Fortress – which was trying to gain control – and at par.

That’s all we need to know – if true – because the only BDC exposure is by WhiteHorse Finance (WHF) and is in the first lien secured term debt due 2/25/2022. This suggests WHF is out of Alpha Media and all the drama involved. We are re-rating the company to a CCR 6. This also mans WHF received early in January 2021 about $5.1mn. The FMV was already only -3% below cost so the BDC’s book value won’t be materially affected.

We’ll seek confirmation when WHF reports IVQ 2020 or IQ 2021 results but this seems like a positive outcome for WHF and much ado about nothing by the BDC Credit Reporter.

Infinite Care LLC: Returns To Performing Status

BDC managers do not like to name names – even when they have good news to report. On December 24, 2020 Harvest Capital (HCAP) – as part of a conference call devoted to its proposed merger with Portman Ridge (PTMN) – reviewed recent developments at two of its four non performing portfolio companies. In this regard we learned the following about an anonymous company: “..Another one of our longer-lived nonperformers is we recently took active management of the company, and its performance has improved dramatically in the last 6 months and is back on accrual status this quarter. And we’re hoping to be out of that investment potentially in the next 6 months“.

By a process of deduction, we’re 99% certain HCAP is talking about Infinite Care LLC – a home health care operator. The company has been on HCAP’s books since 2016 and in 2017 was completely restructured and the BDC took legal and operational control. The debt has remained non performing for years. Of late, though, despite having first lien debt remaining on non accrual, HCAP has been valuing one of the loans above cost, a suggestion something has been changing for the better.

As of September 2020 total HCAP exposure at cost to Infinite Care was $13.7mn, of which $7.8mn was in debt priced at a below market 3.0% and due 1/1/2021. The $5.9mn of equity involved is still valued at zero, but that may change based on the opaque disclosure on that conference call. Overall, HCAP’s outstandings were valued at $8.5mn.

It’s too early to assume HCAP will be making a full recovery – or better, but the trend is positive. At this point we’re guessing that a buyer is being negotiated with and that the New Year 2021 loan maturity will be extended. Maybe HCAP will get away with a small realized loss when all is said and done, and a greater value than what was showing at September 30, 2020. As importantly the capital tied up in this business for many years will get freed up to benefit whoever the future shareholders of the BDC will be.

Serta Simmons Bedding: IIIQ 2020 Update

We’ve written about bedding manufacturer Serta Simmons Bedding LLC multiple times before because much has been going on with the company. Even before the pandemic, the company was underperforming. The BDC Credit Reporter downgraded Serta to a CCR 3 rating in the IQ 2019. That was raised to a CCR 4 in the IQ 2020 when the debt of the BDC was discounted by (50%), and talk of bankruptcy was in the air. Our most recent update occurred on June 23, 2020 shortly after the company dodged the bankruptcy bullet by undertaking a controversial restructuring gambit.

As this thoughtful article from Bloomberg explains, management sided with certain of its existing lenders to (essentially) stiff some of the other lenders; while reducing total debt and generating fresh liquidity at the same time. We won’t get into a detailed discussion of how the situation played out but will say that the only BDC with exposure – Barings BDC (BBDC) – joined in with the “winners” in this internecine struggle. The losers – led by Apollo Global – went to court to dispute the deal and lost.

For our purposes, BBDC went from a $4.9mn par position ($3.9mn at cost) in a first lien term loan due in November 2023 priced at LIBOR + 350 (with a 1% floor) to positions of $10.6mn at cost in two “super priority loans” with a August 1 2023 end date, but priced at LIBOR + 750, also with a 1% floor. Although pricing is the same, one tranche is a “first out” and the other a “second out” and are valued differently by BBDC and the market. As of September 30, 2020 BBDC values the first out at a premium to par and the second lien at a (12%) discount, slightly worse than the prior quarter when this debt was first booked.

To get to this point – better pricing and “super priority” status – BBDC had to agree to swap out its earlier debt at a discount and advance new funds to the struggling mattress manufacturer. Not clear from the BDC’s financial statements is whether a realized loss of any sort was booked as part of this bold exchange. (We had first thought BBDC was going for a debt for equity swap, but realize now that this is a debt for debt swap – also a standard restructuring technique).

At this stage, we have upgraded Serta to CCR 3 status. However, we don’t believe the company is out of the woods yet given market conditions and the still substantial debt load. Furthermore, BBDC has essentially “tripled down” in terms of total exposure, raising what was a modest exposure to a more material level. Undoubtedly, we will be revisiting Serta’s long and winding credit road again.

Elite Dental Partners LLC: Restructured

We learn from Golub Capital’s (GBDC) December 1, 2020 10-K filing and subsequent conference call that portfolio company Elite Dental Partners, LLC was restructured in the IIIQ 2020. A “debt for equity” swap was involved and GBDC booked a ($6.5mn) realized loss. (As far as we can tell, this was the largest realized loss incurred by GBDC in FY 2020 where total realized losses reached -$18.7mn, and one of two such setbacks in the dental field). After the restructuring was completed, the debt – which was on non accrual – returned to accrual status. Currently total remaining exposure amounts to $15.5mn, with $11.4mn in a unitranche loan and the rest in equity. GBDC values its overall investment at a slight discount to cost. The maturity (2023) and pricing of the debt (L + 525 bps) is unchanged from before the default and restructuring.

We wish we had more color to offer but GBDC is typically very tight lipped about its troubled credits and this is no exception. We believe Elite Dental – default notwithstanding – avoided filing for bankruptcy with this restructuring. We can also deduce that GBDC went from owning less than 5% of the equity to having somewhere between 5%-25%. Finally, we believe that the company’s troubles – which had begun to show up from a valuation perspective in the IVQ 2019 – were exacerbated by the pandemic and the virtual shut-down of dental practices in most places. Understandably the stakeholders – including GBDC – must have concluded that the fundamental business was worth saving and have done so.

The BDC Credit Reporter has upgraded the company from CCR 5 – non performing – to CCR 3. We are leaving the company on the underperformers list because the dental business continues to be challenged by rolling stay-at-home orders. Furthermore, we don’t know how generous the lenders were in cutting debt service obligations and what other creditors might be involved and on what terms. We do note that the unitranche debt is paying only 2% in cash going forward, with the remainder in PIK form. That suggests boosting/preserving liquidity remains important to Elite’s management.

We will continue to monitor the progress – of what remains a relatively large investment for GBDC – going forward. Given that the company is privately-held much of what we might learn – unless conditions deteriorate – will be from GBDC’s quarterly revaluations. Some $0.7mn of annual investment income remains in play.

AG Kings Holdings: IIIQ 2020 Update

We have just heard from one of the two BDC lenders to AG Kings HoldingsCapital Southwest Corporation (CSWC) about where things stand for the grocery chain in bankruptcy. Apparently, the purchase of the business by Albertson’s is proceeding. CSWC had only this to say ” That’s in process of closing/documentation process“. As of September 2020, CSWC is valuing its non performing senior debt (except for a DIP loan which is valued at par) at a (26%) discount. That’s better than two quarters ago when the debt was discounted by as much as (48%).

Given that we seem to be in the final furlong, the BDC Credit Reporter believes the current valuation is likely to be very close to the final outcome. That means CSWC will be booking a permanent ($2mn) realized loss, but will be recouping $6mn or so (including that DIP advance) to reinvest into new deals elsewhere. Chances are good that will show up by year end 2020.

Also affected is WhiteHorse Finance (WHF) – which has not reported yet – but which holds a much bigger position and much of which was recently added. We’ll refrain from guessing what loss – if any – WHF might incur till that BDC files its results.

At a time when so many troubled companies are finding an exit only by a “debt for equity swap” with their lenders, this outcome is more traditional with a sale to a third party. Ironically, AG Kings was lucky enough to be in the right segment of the food and supplies business in the time of Covid-19, which has reduced what looked like a significant loss for the lenders to a modest one. We expect to be able to close the file when CSWC and WHF report IVQ 2020 results, or by IQ 2021 at the latest.

AGY Holding Corp: Company Restructured.

Last time we wrote about AGY Holding Corp in May 2020, we darkly warned that “caution is warranted. Forewarned is forearmed“. This was not a very bold statement as at the time the company had been on partial non accrual since IIIQ 2019. Still, the two BlackRock public BDCs, BlackRock Investment (BKCC) and BlackRock TCP Capital (TCPC) were continuing to carry first lien obligations as current and at full value.

Now we hear from TCPC on its IIIQ 2020 conference call that the company has been restructured. Apparently, all the debt has been sold for a nominal amount and the TCPC and BKCC left with small preferred stock positions with little immediate value. Furthermore, TCPC has booked a realized loss of somewhere between ($16.5mn and ($18.0mn). Just from last quarter, the FMV of the BDC’s exposure has dropped by ($4.0mn).

Management put a brave face on the subject but the truth of the matter is that the company is an almost complete loss for the BlackRock BDCs, with over ($70mn) in capital invested likely to be written off. In an even worse position than TCPC is BKCC, which was showing $57mn invested at cost as of June 2020. The coming realized loss is greater than 12% of all the losses BKCC has booked over its long history. Even the loss of net book value per share between this quarter and June will knock about ($0.20) out of BKCC, or about (4%).

The amount of investment income lost is over ($8.0mn) on an annual basis, some of which was still being taken into income all the way through June and – maybe – beyond. Now the realized losses have been booked, per our system, we are upgrading the remaining preferred investment in a restructured AGY to CCR 3 from CCR 5. However, judging by the $0.5mn left on TCPC’s books as a preferred stock investment from the IIIQ 2020 on, the size of the public BDC exposure may not be material by the BDC Credit Reporter’s standards and may get dropped from coverage.

To conclude by stating the obvious, the amount of the AGY loss – and the very high discount to cost involved – represents a serious setback for both BDC lenders. The problem appears to have been an increase in the cost of one critical ingredient in AGY’s business which management and its lenders never found a way around over a multi-quarter period of distress. As is often the case in this situation, the BDCs have been slow to write down the value of their failing investment. Even when the first non accrual occurred, the combined FMV was still $57mn versus a cost of $64mn. Roll forward one year and another $50mn plus has received the ax.