BDC Reporter http://bdcreporter.com News and Views on the Business Development Company Industry Sun, 24 Jul 2016 19:27:02 +0000 en-US hourly 1 https://wordpress.org/?v=4.5.3 Sports Authority: Convert From Chapter 11 to Chapter 7 ? http://bdcreporter.com/2016/07/sports-authority-convert-from-chapter-11-to-chapter-7/ http://bdcreporter.com/2016/07/sports-authority-convert-from-chapter-11-to-chapter-7/#respond Sat, 23 Jul 2016 14:35:12 +0000 http://bdcreporter.com/?p=852 Friday July 22, 2016

Unsecured Creditors Asking Bankruptcy Court To Convert To Chapter 7

  • Landlords and unsecured creditors filed papers with bankruptcy court seeking conversion of Sports Authority’s bankruptcy case.
  • Requesting that Chapter 11 be converted to Chapter 7 and a trustee named to wind-up business and maximize recoveries
  • Filings reveal very few assets left besides stadium naming rights (see prior article).
  • Reportedly $50mn in unpaid administrative claims and an unstated value of trade claims.
  • However, amounts supposedly still owed to Term Loan lenders (which may include BDCs) down to $71mn.
  • Prior reports had indicated lenders were still owed $240mn.
  • Evidence to date suggests lenders fared relatively well in terms of recoveries despite failure and liquidation of Sports Authority business.
  • May be good news for Franklin Square BDC lenders who may recover greater amount than IQ 2016 valuation (see INVESTMENT OWNERSHIP).
  • Only possible fly in the ointment for lenders: Chapter 7 trustee seeking recovery of some proceeds received.

Screen Shot 2016-07-23 at 7.19.59 AM

 

 

 

Sports Authority storefront

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Sports Authority: More Proceeds From Naming Rights Sale ? http://bdcreporter.com/2016/07/sports-authority-more-proceeds-from-naming-rights-sale/ http://bdcreporter.com/2016/07/sports-authority-more-proceeds-from-naming-rights-sale/#respond Fri, 22 Jul 2016 13:27:43 +0000 http://bdcreporter.com/?p=846 Friday, July 22, 2016

Sports Authority To Sell Naming Rights

  • The bankrupt sports equipment retailer Sports Authority has just one more asset to sell: naming rights to the Denver Broncos stadium.
  • On Monday a liquidator will be seeking bids for the 5 years remaining on the 10 year contract for the right to be named in Denver.
  • Given the shortened term involved and the rushed nature of the sale, determining likely value to be received is difficult.
  • Based on Dow Jones Newswire article summary of prior similar deals amount raised  could be from a few million to tens of millions.
  • Any amount received will mitigate losses by lenders, said to be $240mn.
  • For prior articles and BDC ownership, see prior article on July 20.
  • TSLX,FSIC, FSIC II, FSIC III
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BDC Credit Reporter Readings: Is High Yield credit deteriorating ? http://bdcreporter.com/2016/07/bdc-credit-reporter-readings-is-high-yield-credit-deteriorating/ http://bdcreporter.com/2016/07/bdc-credit-reporter-readings-is-high-yield-credit-deteriorating/#respond Thu, 21 Jul 2016 17:02:39 +0000 http://bdcreporter.com/?p=842 BDC Credit Reporter: Readings July 17, 2016
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BDC CREDIT REPORTER-COMPANY ALERTS http://bdcreporter.com/2016/07/bdc-credit-reporter-company-alerts-week-beginning-july-11-2016/ http://bdcreporter.com/2016/07/bdc-credit-reporter-company-alerts-week-beginning-july-11-2016/#respond Wed, 20 Jul 2016 15:19:03 +0000 http://bdcreporter.com/?p=787 WEDNESDAY July 20, 2016

Sports Authority Liquidation Almost Complete. BDC Losses May Be Lower Than Anticipated.

  • Sports Authority liquidation drawing to a close, but final conflicts remain between lenders, landlords and suppliers.
  • WSJ reports most senior lenders have been fully repaid. However, lenders are “still owed $240mn”.
  • Hard to determine whether BDC lenders to bankrupt firm will book any Realized Loss at end of day. See Investment Ownership below.
  • BDC Credit Reporter expects TSLX will be repaid in full, and Franklin Square funds loss-if any-will be lower than valuation at March 31, 2016.I
  • Screen Shot 2016-07-20 at 8.03.04 AM
  • TSLX, FSIC, FSIC II, FSIC III

Analysis


THURSDAY July 14, 2016

AVANTI COMMUNICATIONS FACES LIQUIDITY SHORTAGE. SEEKS NEW CAPITAL OR SALE

  • UK-based publicly traded satellite services company Avanti Communications (LSE:AVN) may be facing liquidity crisis.
  • According to trade news reports, Company needs to raise $50mn in cash by fall.
  • Company liquidity said to be declining fast: cash on hand has dropped by 50% in last 3 months through end of June.
  • Reportedly: Board and management seeking to major cost reductions over the next 3 years.
  • Company has announced intention to raise additional equity capital if possible and has put business up for sale.
  • Two BDCs with exposure to Company: Hercules Capital (HTGC) and TCP Capital (TCPC), both in senior debt due 2019.
  • Source: Advantage Data (www.advantagedata.com)
    Source: Advantage Data (www.advantagedata.com)
  • BDC exposure already written down between 18-27%. Senior bond trading at 30% discount currently.
  • BDC Credit Reporter says: ” Both Hercules and TCP Capital may face prospect of Realized Losses on Avanti Communications investment “
  • BDC Credit Reporter published first Alert on Company back on May 25th, 2016 when stock hit record low.
  • See Company File from BDC Credit Reporter’s database of under-performing companies.

Avanti Communications logo


WEDNESDAY July 13, 2016

WARREN RESOURCES AGREES RESTRUCTURING AGREEMENT WITH ALL CREDITOR GROUPS

  • Bankrupt oil company Warren Resources moved one step closer to exiting Chapter 11 with an agreement amongst all creditors, in 8-K filing.
  • The Amended Restructuring Support Agreement sets out debt to be restructured, forgiven and division of equity interests amongst creditors.
  • The terms are in line with earlier versions of Restructuring Support Agreement and make possible a court approved bankruptcy exit in September.
  • Included is a $20mn Debtor In Possession Facility (DIP), to be funded by existing senior lenders and eventually rolled into new senior debt of post-Chapter Company.
  • BDC Credit Reporter reviewed weekly DIP budget, which shows operational cash flow break-even and $30mn in BK expenses funded by DIP and cash.
  • No material change expected in impact on BDC lenders to Company-all in senior debt-as discussed in prior article on June 3, 2016.
  • BDC lenders should book substantial fees for DIP financing even when writing off a portion of their debt exposure in the anticipated debt for equity swap.
  • BDC Credit Reporter says: ” Worried that even after restructuring and huge debt forgiveness Company may not be cash flow positive if oil price stays down and new drilling stays low”
  • FS Energy, FSIC II, FSIC III, FSIC

Oil price drop


TUESDAY July 12, 2016

  • Medley Capital (MCC) portfolio company Essex Crane Rental Corp. entered into 6th Forbearance Agreement with lenders on 6-23.
  • As part of terms, Essex agreed to no longer draw on its Revolver and use incoming cash to pay expenses.
  • Borrower also agreed with lender plan to liquidate all its assets at public auction, effectively ending the business.
  • Proceeds to be received are unknown, but were considered preferable to sale of business and other options.
  • Medley Capital arranged $30mn secured Term Loan to Essex Crane in mid-2014, retaining $20mn.
  • Loan was carried at par till IVQ 2015 when placed on non-accrual, written down by over 80%. IQ 2016 value: $3.7mn.
  • MCC likely to book Realized Loss in IIIQ. Unrealized value unlikely to be material in IIQ.
  • Our View: Big-if not unexpected- setback for MCC given speed of write-down and likely 80%+ write-off of “senior secured” investment.
  • Ownership data from Advantage Data
    Ownership data from Advantage Data
  • MCC

MONDAY July 11, 2016

  • Caesar’s Entertainment Corporation (CZR) has tentatively agreed merger terms with Caesar’s Acquisition Company (CACQ).
  • Merger of two non-bankrupt entities subject to satisfactory completion of Caesar’s Entertainment Operating Company (CEOC) Chapter 11 plan.
  • CEOC re-organization may fail on dispute between its junior debt holders and Caesar’s Entertainment re: fraudulent conveyance.
  • The formal CEOC reorganization plan to be adjudicated in early 2017.
  • BDC Credit Reporter reviewed the Caesar companies press release and SEC filings of July 11.
  • Conclusion: ” The tentative CZR-CACQ merger agreement increases likelihood of Chapter 11 plan being accepted by judge”.
  • That’s good news for BDC lenders to all Caesar’s entities due to their senior position on the respective balance sheets.
  • However, complexity of deals and no resolution till 2017 suggests huge legal bills will reduce cash availability for 6 months plus.
  • See earlier article for BDC exposure to Caesar’s.
  • Caesar's Entertainment

 

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BDC ACTIVIST DAILY NEWS FEED http://bdcreporter.com/2016/07/bdc-activist-daily-news-feed-beginning-july-13-2016/ http://bdcreporter.com/2016/07/bdc-activist-daily-news-feed-beginning-july-13-2016/#respond Wed, 20 Jul 2016 14:44:28 +0000 http://bdcreporter.com/?p=801 ThursdayJuly 21, 2016

MVC Capital Files Proxy Statement

  • Two proposals in Proxy for shareholders to vote on August 30th.
  • First : Election of 7 nominees to the Board
  • Second:  ratifying Grant Thornton as accounting firm.
  • Proxy explains why Ernst & Young withdrew as accountant.
  • BDC Activist questions aggregate cost of directors to MVC: 3% of Operating Expenses.
  • Also, notes absence of any independent director with obvious mezzanine lending experience-new strategic direction of MVC.
  • Also, Chairman of Board not “independent director”.
  • Activist concerned with “business as usual” approach even as Company faces new regulatory problems, including possibility of NYSE de-lsting and portfolio valuation questions.
  • Activist notes MVC stock nearly halved from high in last 5 years and trades way below NAV.
  • MVC

mvc-capital-logo

Wednesday July 20, 2016

Monroe Capital Corporation Prices Public Offering of Common Shares

  • Monroe Capital (MRCC) priced secondary offering at $15.50, premium to NAV.
  • Amount raised: $48mn + over-allotment.
  • Offering occurred shortly after gaining shareholder permission to raise equity BELOW Net Asset Value.
  • BDC Activist says: ” Kudos to MRCC for raising capital at a premium to book and to initial IPO”.
  • See prior BDC Credit Reporter article re: MRCC

Thursday July 14, 2016

Monroe Capital Receives Shareholder Approval To Raise Equity Below NAV

  • Another BDC-mid-sized Monroe Capital (MRCC)- received permission from shareholders to raise equity below NAV in the next year.
  • Approval was given as part of the annual shareholder meeting.
  • However, the meeting had to be re-convened to ensure sufficient shareholders voted.
  • The final tally in favor of the capital raising proposal was an overwhelming 78%, with 18% saying No, and 4% abstaining.
  • BDC Activist says: “We would be with the minority. No good reason to allow dilution.”
  • Issue may be academic: MRCC trading at 9% premium to book and at 1 Year high.
  • MRCC

Wednesday July 13, 2016

TPG Specialty Issues New Letter

  • TPG Specialty Lending (TSLX) continues campaign to appoint director to Board of TICC Capital (TICC) with new letter to shareholders.
  • TSLX also encourages TICC shareholders to vote for termination of external management contract at September 2, 2016 Shareholders Meeting.
  • Main arguments for termination: poor long term performance, high fees, “unsustainable” dividend.
  • Part of a year long campaign by TSLX to gain control and/or effect regime change at TICC, covered in many articles on BDC Reporter.
  • BDC Activist asks the question: “After you’ve ejected the pilot, who’s going to fly the plane ? And to where ? And for how much ?”
  • TSLX,TICC

 

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The BDC Activist reviews TICC Capital’s “Loan Rotation” announcement and makes a suggestion. http://bdcreporter.com/2016/07/the-bdc-activist-reviews-ticc-capitals-loan-rotation-announcement-and-makes-a-suggestion/ Tue, 19 Jul 2016 14:57:32 +0000 http://bdcreporter.com/?p=819 The BDC Activist noticed that beleaguered TICC Capital (TICC) unexpectedly issued a press release today (July 19, 2016) providing an “update” on its “loan rotation strategy” for the quarter ended June 30, 2016. Apparently in the last quarter, the Company continued to divest itself of syndicated first and second lien loans, whose yield averaged just 6.89%, and at the slightest premium to par. To keep the home fires burning and income coming in, TICC turned around (thus “rotation”) and re-invested some of the proceeds in higher yielding, less liquid loans and purchased at a discount to par. According to the press release, the “weighted average yield” on $36mn of these new positions is 11.6%. (We don’t want to be Grinch-y but we have to point out that the footnote included in the press release-thanks to regulatory requirements when throwing around numbers-comes with a number of assumptions. A good portion of that yield will come from the ultimate redemption of the new loans purchased at par. The running rate yield-not disclosed-until the loan repays will probably be materially lower).

WE HAVE QUESTIONS. THEY DON’T HAVE ANSWERS.

Unfortunately, this announcement creates more questions than answers. First of all, TICC has chosen to update shareholders only on loans pro-actively sold in the period. “Normal” amortization of the portfolio was not included. Nor is there any word about what has happened to the composition of the Company’s CLO portfolio, which has both generated the highest Taxable/GAAP income in recent quarters and the greatest Unrealized Depreciation. What has happened to borrowing levels is also not addressed. As a result, we don’t know how TICC is addressing leverage levels that were breaching the BDC 200% minimum asset coverage at March 31. By our count, and not including cash, TICC’s asset coverage of its debt obligations was 178% at the end of the last reported quarter, usually an alarm bell for a BDC.

FRYING PAN TO FIRE ?

Nor are we clear why TICC is expecting shareholders to cheer a strategy of ridding itself of its “safest”, most liquid loan assets and replacing them with less liquid and riskier loans. That 70% increase in the “average yield” comes with a far greater risk of eventual default.  After all, we are late in the economic cycle, but TICC is making the argument that “risk-adjusted” returns are better in the more speculative segment of the non-investment grade credit market. Only time will tell if that’s true.

SYNDICATED RISKIER LOANS

However, we wonder how these new double digit loans were booked given that TICC has very little new deal origination capacity. We surmise from the press release that the BDC has been buying this loan paper in the secondary markets, going where others fear to tread.  Unfortunately, with the huge sale of syndicated loans last year (read our article on the subject here) , and the announced continued shift towards lower credit grade paper, and with no new news on the CLO portfolio, everything suggests TICC Capital’s credit risk profile is increasing sharply. The higher yields from these new assets may staunch some of the loss of income from de-leveraging the portfolio and from potential lower CLO income (if the last quarter’s numbers in that area continue), but the risk of much higher credit losses over time has risen. Yet-even after selling more than they have invested-TICC probably remains over-leveraged by BDC standards. The BDC Activist asks the Board of the BDC (rhetorically) whether that seems wise or appropriate ? Two Boxers

EYE ON THE PRIZE

Of course, this announcement has everything to do with the ongoing battle between the incumbent External Manager of TICC Capital and “activist” investor and fellow BDC  TPG Specialty (TSLX), which we mentioned recently in the BDC Activist. The press release refers to the Proxy contest underway. Presumably, TICC’s current Manager wants to reassure shareholders, shortly about to vote for directors (including one backed by TSLX) and on a proposal to cancel the existing management agreement (amongst other subjects), slated for September 2. Unfortunately, the piecemeal information provided in the press release does not make anything clearer, but does worry the BDC Activist about rising credit risks at TICC. That won’t show up in the short run, and TICC’s External Manager is in a titanic battle in the here and now.

CONCLUSION

From the BDC Activist’s perspective, the “loan rotation” announcement answers none of the questions shareholders have about what the manager is doing to tackle the over-leveraged nature of the balance sheet and what sustainable income is likely to be in the quarters ahead.  We can’t help feeling that the principal objective is a focus on maintaining income returns at a certain level in the short run, rather than a comprehensive strategy to achieve appropriate “risk-adjusted” returns over the long term.

However, we don’t know how throwing out the External Manager and appointing one TSLX-favored director will necessarily lead to a better outcome either.  The BDC Activist suggests that the best course of action-given that the credit markets have firmed substantially in recent months and even CLOs are back on investors Buy Lists-would be for the Board to sell off all the assets, pay off outstanding debt and return capital to shareholders,  while the going is good.

After all, the strategies that the Company was employing for the last several years have not worked out. The External Manager has admitted as much by selling off the bulk of its syndicated loan portfolio, and putting its CLO portfolio into deep freeze. The Manager has no known sourcing capacity for originating new loans and can only acquire assets in the secondary markets.  Even with the recently lowered management fees that’s a very expensive way (1.5% on all assets AND an Incentive Fee) to invest in second hand non-investment grade debt. Sometimes you have to know when to “fold ’em” and this might be the time.  If not-at the next credit shock-investors in TICC might find that the higher credit risks being added to the portfolio in recent months will bite them back. The Company has a new “independent” Chairman of the Board since March 1st in Steve Novak (albeit 13 years as a Director at TICC). Maybe we will witness a “re-think” ?

DISCLOSURES

We have no position in TICC Capital or TPG Specialty.

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BDC ACTIVIST: Is Alcentra Capital Raising Non Accretive Debt Capital ? http://bdcreporter.com/2016/07/bdc-activist-short-is-alcentra-capital-raising-non-accretive-debt-capital/ http://bdcreporter.com/2016/07/bdc-activist-short-is-alcentra-capital-raising-non-accretive-debt-capital/#respond Mon, 11 Jul 2016 20:05:46 +0000 http://bdcreporter.com/?p=792
  • Mid-sized BDC Alcentra Capital (ABDC) continues to raise debt capital with its  its Inter Note program.
  • Between June and July 9 raised $7mn issuing 2021 Notes with stated rates of 6.25% and 6.375%, plus offering costs.
  • Unsecured Notes outstanding now reaching $50mn, equal or greater than outstandings under Revolver at 3.76% cost.
  • BDC Activist questions net benefits to common stock shareholders from greater exposure to expensive Notes.
  • ABDC: Generates 12.0% yield but 15% of assets in non-income producing equity & 15% of interest income in non-cash form (PIK/OID).
  • After paying 1.75% management fees, incremental operating costs,  interest/cost of Notes & incentive fee, net return only 2.2%
  • On a cash basis, net return to shareholders for assets purchased with Notes even lower at 0.6%.
  • When BDC Activist figures in bad debt provision of 2% per annum, shareholder return minuscule to negative over long term.
  • By our count 20% of ABDC assets funded with Inter Notes effectively generate very poor/negative returns for shareholders.
  • However, the assets generate $900K in annual Management Fees and over $500K in Incentive Fees.
  • Typical example of differing economics between Manager and shareholders in a BDC.
  • Key Issue: Non-Accretive Capital
  • Disclosure: Parent of BDC Reporter/Activist Southland Capital Management:  long Inter Notes. No position in common stock.
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    BDC Investment Status Report: Southland Capital Management http://bdcreporter.com/2016/06/bdc-investment-status-report-southland-capital-management/ http://bdcreporter.com/2016/06/bdc-investment-status-report-southland-capital-management/#respond Mon, 13 Jun 2016 20:59:09 +0000 http://bdcreporter.com/?p=766 June 13, 2016:  Southland Capital Management, the Registered Investment Adviser which publishes the BDC Reporter, is invested in the BDC sector, both through our small family and friends Fund (BDC II) and through a number of  Separately Managed Accounts (SMA) with different strategies, risk-reward profiles and objectives for clients and for our own account. We offer up to any reader interested how SCM looks at the BDC investing landscape at the mid-point of 2016.

    MAIN FOCUS

    Currently, we are mostly invested in BDC Notes in our Fund (every investment in fact, except for one short position we’ll discuss below). Moreover, we’re just adding a new SMA client who will be invested exclusively in the Notes and on an unleveraged basis. (The Funds uses leverage up to a maximum of 3:1, but at 2.25x currently).

    SLEEPING WELL AT NIGHT

    At the current time, investing in BDC Notes is a decent place to be. After the drama of earlier in the year when most BDC Notes (and similar Closed End Funds Preferred and Notes) dropped to prices below par, there has been a sharp reversal of fortune. Of the 22 different positions we hold, 19 are trading above par. Two-thirds are trading above the price we paid for them. Even the BDC Notes trading below our cost are down no more than -0.9%, while paying out annual yields north of 7.0%. On a Total Return basis ALL of our BDC Note investments (some of which date back to 2012) are in the money.

    TOMORROW WE COULD BE TOSSING AND TURNING

    Of course, Mr Market (as we discuss below) is in a good mood of late. The experience of the last few months suggests that these relatively thinly traded securities could drop back down in value when we have the next crisis. The good news, though, is that the likely drop in value has typically been only a fifth of what happens to the corresponding common stocks, which limits price volatility. Moreover, we continue to be convinced that the BDC Notes we’ve chosen are capable of weathering the next recession and still getting repaid at par (whatever happens in the interim to their price as investors duck and weave), which cannot be said with the same confidence about the common stock price of these same BDCs.

    LET’S TALK RISK

    By our reckoning we face two major risks in our Fund.  The first is what happens to interest rates in the next 5 years. An increase in long term rates might reduce the value of the Notes during our holding period, but would not affect investments held to maturity, assuming no credit problems. We might also have to pay more to borrow under our margin agreement should short term rates increase. We are at 1.0% per annum or less (thank-you Federal Reserve) but that could increase and reduce the net yield to be received over the lifetime of the investment.  Still, those are risks that more likely to result in lower than anticipated gains rather than losses and falls into the category of Risks We Are Willing To Take.

    Harder to evaluate is the risk of an unexpectedly large drop in the value of the Notes during a crisis and a margin call under our borrowing agreement. Thankfully, the Fund’s lender provides a generous borrowing base calculation, and the Fund does not leverage itself to the hilt. Given the low volatility nature of the investments in portfolio and the diversification across two dozen issues, the chances of a margin call occurring are minor, and would require Note values to drop by nearly a third. In any case, we have the ability to retain income in the Fund to de-leverage, if necessary, or sell some investments if need be.In our Fund and with our eyes open,  we’d rather target mid double digit returns by taking on this risk than play it safer by avoiding the use of leverage.

    Of course, our unleveraged new SMA invested in a portfolio of BDC Notes won’t even face this risk, but should be able to continue clipping coupons through any turmoil we can reasonably envisage.

    STRESS TESTED

    By the way, we stress test every BDC Note with a 20% expected write-off of assets and a host of other calculations before we deem them resilient enough to invest in. Not every BDC Note passes our Stress Test, but most do which accounts for the favoritism which we’ve extended to this asset class.

    POOR PICKINGS IN BDC COMMON STOCKS

    Finding any opportunities right now in being Long BDC common stocks is very hard. The whole BDC Sector is in rally mode since falling to a post-Great Recession low on February 11th. Using the imperfect measuring stick of the UBS Exchange Traded Note with the ticker BDCS, the sector is up 17% since the depths of February, using the latest price.  (Still, BDCS is trading plumb even with its price at year-end, as we approach the 6 month mark of 2016-a stark reminder of how volatile this sector has been). Moreover, after a month of rallying, BDC prices have remained at relatively stable levels since mid-March. We are now entering the fifth month of the upturn in prices, one of the longest periods in recent BDC history, even if prices have been treading water in the last 12 weeks.

    LOCKSTEP

    Drilling down a bit, we note that three-quarters of BDCs are trading above their 200 Day Moving Average, and 60% above the 50 Day Average. Many BDCs are trading close to or above their Net Asset Value, after having been at big discounts to book in the winter. 15% of the public BDCs we track are within 5% of their 52 week highs, and only a couple are even near their 52 week lows. As usual, the entire BDC sector is moving-more or less-in lock step.Tracking No Hat

    BARGAIN HUNTING

    As we fancy ourselves as “value buyers”, there are very few “bargains” out there, both from a short term or long term perspective.  Regarding the former, after the very sharp mark-up in prices that has already occurred and the flattening out in prices of the March-June period, we are not ready to presume there will be another leg up in BDC prices.  The challenges which caused the 37% drop in BDCS between July 2014 and February 11th 2016  have not gone away. Energy investments in BDC portfolios continue to be challenged and we expect write-downs to continue to outpace any write-ups. There are plenty of credit issues to worry about in non-energy credits. Then there are all the usual suspects of macro risks to worry about, including Brexit and what that might do to the world economy. (Remember that the last time the markets worried about the European Experiment in 2011 BDCS dropped 28% in a few weeks, even as credit quality remained excellent). We could be wrong-Mr Market never fails to surprise, beguile and bewilder-but we’re comfortable just saying No Thank-You. Also galling is that borrowers-after a few weeks away-are back in the driver’s seat in leveraged finance. There is still plenty of capital looking for a home, and borrowers are once again being offered generous pricing and loose covenants by lenders of every stripe, from High Yield down to middle market LBO lending. If there’s anything we’ve learned from investing in the BDC sector over the past decade or more is that-like the weather-change in sentiment is a constant. Today everything is expensive. The day after tomorrow we could be back at an all-time low.

    GOOD BUT GOOD ENOUGH ?

    Longer term, there are a number of better-quality BDC companies which can reasonably navigate any recession we’re likely to have over the next 5 years (our rule of thumb ) and generate a decent return, based on our models.  However, our projections-which typically assume 10%-20% NAV erosion even for the better companies (heresy to some but supported by the facts if you look at the long term performance of those BDCs that have some hair on their chin) suggest average annual returns will be in the high single digits at best, with much rocking and rolling along the way. We’d rather be in BDC Notes at 2:1 leverage and earn a 14% or so annual net return (and take the ensuing interest rate risk) while remaining higher up on BDCs balance sheet 7 years into the economic expansion.  As far as we know globalization and technological change have not abolished the cyclicality inherent in capitalist economies. As we’ve said, there are very few BDC common stock investments out there which promise to generate a 15% per annum return over the next 5 years in our Base Case at current prices. We only have two holdings which fall into that category, and both are held in our house account.

    SHORT SHORT LIST

    We’re left looking either at “shorting” certain BDCs whose valuations have risen too far in the latest rally or “special situations”. Regarding the former, we have a number of names on our Watch List which both offer up the opportunity for “shorting” and which we can borrow in volume and at a borrow cost that is acceptable. However, with the Good Times Are Here Again atmosphere obtaining in the BDC Sector and leveraged finance space right now, this is not yet the time-in our minds-to be shorting. We need individual catalysts to separate BDCs from the rallying pack. We had success shorting BlackRock Investment (BKCC) , helped when the Company announced several new non-accrual loans in the IQ 2016. However, we closed down our position in Prospect Capital (PSEC) on recognizing that renewed investor enthusiasm for this controversial stock was not about to abate in the short term. As we’ve said above, we’re only left with a “short” in FS Investment Corporation (FSIC). We did the research and came away convinced that there are potentially many credit losses ahead in that portfolio and the stock has been trading at or above NAV, which seems unsustainable. Nonetheless, we’re still in the red on that insight by 8% three months after the short was initiated. The next earnings report might be the catalyst we’re looking for, but there’s no guarantee what Mr Market will do.

    Analysis
    Analysis

    SPECIAL SITUATIONS

    That leaves us with Business Development Company Special Situations. These are typically short term opportunities to take advantage of an unusual set of circumstances that might be keeping a BDC’s stock price down.  This usually involves SCM undertaking some “deep dive” analysis to identify the opportunity and to quantify the potential downside. We recently closed out such a Special Situation investment in American Capital (ACAS). We initiated the investment shortly after the management of the BDC bowed down to pressure from Elliott Management to finally relinquish control over their mismanaged assets.  After much scrubbing of the huge ACAS portfolio, and reviewing filings galore, we came to the conclusion that the chances of a premium to the then stock price was high and the downside was limited, given the discount in place and the presence of some very clear value within the trail mix of a portfolio that American Capital had assembled. Months later we were rewarded with news of the Ares Capital (ARCC) purchase of the bulk of the the ACAS assets (still underway) and we closed out with a gain. (Of course, we could have squeezed out more dollars by hanging in there till the deal closes but we preferred to take the money and run. In this case we just ran right over to Ares Capital for immediate re-investment as a Long Term investment…)

    INVESTMENT OF ONE

    Today we only have one Special Situation/Best Idea long BDC common stock investment on the books, using our own capital.  Two months ago, we undertook a “deep dive” into Full Circle Capital (FULL). This micro BDC is in the throes of being liquidated one way or another (getting repaid from existing borrowers or selling assets in the market or to another lender). Our review-at a time when the stock price was at $2.52 a share-indicated the ultimate value of FULL-after all bills get paid and taking into account some very poorly underwritten credits-is $3.0-$3.25 a share. That was two months ago. We are up just under 6% so far, but there are still several months to go before we find out if we were wise or foolish. The Company just agreed to reduce its Revolver from $45mn to $5mn with Santander Bank, which suggests the portfolio liquidation is continuing apace. There is a October 2016 deadline on the amended facility, which MIGHT suggest there is a timetable that management and the lenders are following.

    UPSIDE-DOWNSIDE

    Since we initiated our position there has been some news about portfolio asset sales, but nothing definitive or which will decisively move the needle one way or another. We wait, watch and worry. We are targeting a 20% capital gain over a 6 month total time horizon, or 40% per annum if we’re right. If we’re wrong, the downside should be limited by the fact that most of the Company’s debt has been paid off or is covered by cash from asset dispositions.  Given the work we’ve been doing on the BDC Credit Reporter we’re familiar with some of the Company’s more liquid assets and believe that has helped us in evaluating the de minimis value of the portfolio. Moreover, everything points to the final liquidation of the Company by the autumn.

    UPDATES

    We will update the status of the investment every month or if we sell our position.

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    BDC Credit Reporter: Company Alerts-UPDATED http://bdcreporter.com/2016/06/752/ http://bdcreporter.com/2016/06/752/#respond Wed, 08 Jun 2016 14:15:44 +0000 http://bdcreporter.com/?p=752                                                                                                                                                                SEE ALL ALERTS

    Tuesday June 21, 2016

    Caesar’s Companies Agree Amendment With Senior Lenders

    • Both bankrupt Caesar’s Entertainment Operating C0. (CEOC) and non-bankrupt parent Caesar’s Entertainment (CEC) agree amendment with senior lenders.
    • Key provisions include lenders support for CEOC restructuring plan, in return for repayment (if BK court allows) of $300mn of Revolver debt outstanding in next few weeks.
    • Also CEC to pay $10mn monthly  to lenders from January-June 2017 on CEOC obligations, under certain circumstances.
    • Amendment appears to be net positive for both senior lenders and chances of CEOC bankruptcy plan getting approved by bankruptcy court.
    • However, CEC already envisaging potential bankruptcy for itself should deal with CEOC creditors requiring asset restitution fail.
    • BDC exposure is Major: over $200mn. 5 BDCs involved but principally held by Franklin Square funds. 99% in senior secured. See Advantage Data chart.
    • Write-downs at 3-31-2016 4-14% (depending on BDC) for same loan.
    • Today’s news appears to be net positive for valuation, but far from resolved. BDC Credit Reporter has both companies on WATCH status. No snr. debt loss expected.
    • FSIC, FSIC II, FSIC III, CORPORATE CAPITAL, VII PEAKS

    Screen Shot 2016-06-21 at 6.58.18 AM


    Monday June 20, 2016

    Halcon Resources: Solicits Creditor Approval of Restructuring/De-Leveraging Plan.Oil price drop

    • Energy co. in Chapter 11 Halcon Resources formally requests all creditor approval of restructuring plan in order to emerge from bankruptcy.
    • Proposed restructuring plan apparently unchanged from outline described on June 10, 2016 (see below).
    • BDC exposure is modest and exclusively in Subordinated Notes, which are receiving modest cash and equity and being written off.
    • BDCs involved: Main Street Capital (MAIN) & HMS Income Fund. Written down exposure at 3-31-2016 by 80%.
    • BDC Credit Reporter expects Realized Loss to be booked in IIQ 2016, and none to small further write-down in value, if restructuring closes.
    • MAIN,HMS

    Speed Commerce Operating Company LLC: New Company announces acquisition by Garrison Investment Group

    • Garrison Investment Group announced completion on June 15 of acquisition of assets of bankrupt Speed Commerce Inc. and launch of new operating company.
    • New entity called Speed Commerce Operating Company, LLC (NewCo) and will be owned by the creditors of the former entity, principally Garrison funds.
    • NewCo has recruited new senior management (CEO, CFO and COO) and intends to continue and expand Speed Commerce’s prior business.
    • Details are spare but Garrison has $150mn invested in prior investments in bankrupt company and new capital.Navistar truck
    • New CEO-in interview with trade publication-announces ambitious plan for bigger footprint and staffing increase.
    • Major example of lenders becoming control owners in a failed business.
    • BDC Exposure: Moderate:$27mn at cost to Garrison Capital (GARS) and non-traded Credit Suisse Park View BDC.
    • All exposure apparently in uni-tranche loan to Speed Commerce Inc. NewCo exposure in amount and form unknown.
    • Uncertainty about how BDCs will value new investment after 75%-85% write-downs through March 31, 2016 prior to NewCo launch. Realized Losses expected.
    • GARS, CREDIT SUISSE

     

    Tuesday June 14, 2016

    Gymboree StoreGymboree Corporation: Reports Earnings As Projected. Debt Level Remains High.

    • Children’s clothes retailer Gymboree Corporation reported quarterly results.
    • Sales, Adjusted EBITDA above same period last year. 2016 guidance re-affirmed at Adj EBITDA of $120mn-$135mn.
    • Company claims liquidity “sufficient” to service debt and “invest in the business”.
    • However, rest of 2016 Plan includes closing 20-30 stores, opening 6. Capex cost: up to $35mn in FY 2016.
    • BDC Credit Reporter points out: Despite buying back debt at discount, leverage remains very high: nearly 8x Adjusted EBITDA.
    • See earlier article dated April 27, 2016.
    • Free cash flow calculated as median Adj EBITDA less interest and median capex only approx. $15mn projected vs debt over $1.0bn.
    • BDC exposure: Modest. 3 BDCs with Senior or Subordinated debt. Biggest: Corporate Capital with $11mn At Cost. FMV: 31% lower.
    • Corporate Capital Trust, KCAP, VII Peaks II.

    Navistar International: Analyst Downgrades. Expresses Credit Concerns In Long Term.Navistar truck

    • Truck manufacturer Navistar International (ticker:NAV) downgraded by analyst at Stifel.
    • Action follows release of quarterly earnings and big jump in stock price last week.
    • Stifel concerned with heavy truck market conditions, Navistar market share and heavy debt load.
    • BDC Credit Reporter spotlighted similar concerns in article on June 7th, after reviewing results and outlook.
    • We downgraded Company from WATCH to WORRY.
    • FSIC, FSIC II, FSIC III

    Monday June 13, 2016Landfill Compactor

    City Carting: Company assets sold to strategic buyer

    • Waste management company City Carting sold certain operations to Tunnel Hills Partners on June 3rd in a cash and stock transaction.
    • Assets sold generated $110mn of sales in 2015. Terms of transaction not known.
    • City Carting has been on block for over a year.
    • BDC exposure is Modest: all in two Preferred issues totaling $15mn at cost from Alcentra Capital (ABDC)
    • At 3-31-2016, junior Preferred tranche was written down by $1.5mn.
    • Possible Realized Loss to be booked in IIQ 2016.
    • See Alerts database and Company File.
    • ABDC

    Friday June 10, 2016

    Halcon Resources, LLC: Restructuring Agreement in Chapter 11 Announced

    • Bankrupt public oil and gas producer Halcon Resources (HK) announced a complex restructuring deal with its creditors while in Chapter 11.
    • The plan-which was as expected-involves the swapping of nearly $2bn (or two-thirds) of debt outstanding for equity in the Company.
    • Proposed arrangement would de-leverage balance sheet, reduce interest expense by $200mn annually, and allow exit from BK.
    • The arrangement still requires more creditors approval and court approval.
    • BDC Credit Reporter View: No Change from news.
    • BDC exposure is modest and exclusively in Subordinated Notes, which are receiving modest cash and equity and being written off.
    • BDCs involved: Main Street Capital (MAIN) & HMS Income Fund. Written down exposure at 3-31-2016 by 80%.
    • BDC Credit Reporter expects Realized Loss to be booked in IIQ 2016, and none to small further write-down in value, if restructuring closes.
    • MAIN,HMS

    Charming Charlie, LLC: Requests bank loan amendment

    • S&P reports senior secured loan group to women’s accessory retailer consented to amendments to Loan Agreement on June 1, 2016
    • Terms of amendment unknown, but may relate to step-down requirements on leverage and debt service in 2016. Worrisome development.
    • Company has been under-performing for several quarters due to lower same store sales causing material drop in EBITDA (35% in 2015)
    • To the best of our knowledge, S&P credit rating remains at B, after reduction in December 2016.
    • 4 BDCs with exposure to Company-all in senior debt- with aggregate cost $45mn. Write-downs began second half 2015. Still modest. May increase IIQ 2016.
    • Biggest exposure is by THL Credit (TCRD) with cost of $24.6mn, according to Advantage Data.
    • BDC Credit Reporter downgraded Company from WATCH to WORRY on out-sized EBITDA drop, bank amendment, weak mall retail environment.
    • See Alerts database for further details.
    • TCRD, SIERRA, CION, PFLT

    Thursday June 9, 2016

    Cenveo Corporation: Completes Debt Restructuring

    • Print product public company Cenveo Corporation announced the completion of a major debt restructuring.
    • Complex restructuring includes debt forgiveness for equity issuance and  extension of debt maturities. Avoids bankruptcy.
    • Total debt to drop as well as interest expense according to 8-K filing.
    • BDC Credit Reporter expects rating agencies to increase credit rating
    • BDC exposure: $12.8mn at Cost in 2019 Senior Secured debt: Main Street and HMS Income Fund.
    • Current 12% write-down expected to be written up IIQ 2016.
    • BDC Credit Reporter maintains Company on WATCH status.
    • See full Company File from Master List of all BDC under-performing companies.
    • MAIN, HMS

    Wednesday June 8, 2016

    Glori Energy: Change In Senior Management

    • The Company announced the departure of its Chief Executive, replaced by the Executive Chairman as Interim CEO.
    • New CEO has 30 years experience in oil and gas production
    • Source: Press Release
    • SCM, HTGC

    Navistar International: Citi Credit Analyst Downgrades Debt

    • Citi credit analyst downgraded 2021 Notes from Buy to Neutral after reviewing quarterly earnings
    • Reasons: “Debate around long-term fundamentals & the cycle, management expectations for a much weaker 2H [2016]”.
    • Source: Barron’s
    • See BDC Credit Reporter Spotlight article prior day with similar conclusions.
    • FSIC III, FSIC II, FSIC

     

     

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    BDC Credit Reporter Spotlight: Navistar International Announces Quarterly Results http://bdcreporter.com/2016/06/bdc-credit-reporter-spotlight-navistar-international-announces-quarterly-results/ http://bdcreporter.com/2016/06/bdc-credit-reporter-spotlight-navistar-international-announces-quarterly-results/#respond Tue, 07 Jun 2016 17:02:38 +0000 http://bdcreporter.com/?p=748 On June 2, 2016  the BDC Credit Reporter published an Alert relating to a Zacks report suggesting troubled truck manufacturer would announce better than expected EBITDA performance for the fiscal quarter ended April 30, 2016 when results were published on June 7th. We suggested that the report-if true-might result in some upgrade to the outlook for the Company’s subordinated debt (where all BDC exposure resides) and which were written down by a fifth from cost at 3-31-2016.

    UNDERWHELMED

    Now that the quarterly numbers for Navistar have rolled in, the BDC Credit Reporter is less sanguine. Yes, EBITDA and (that bugbear of the SEC) Adjusted EBITDA were significantly higher than in prior periods. Moreover, the Company-which is in a highly cyclical business and is heavily leveraged and subject to above average regulatory and litigation challenges-managed to eke out a small profit. That’s notable because Navistar has not been profitable for several years.

    QUICK DIVE

    That was the good news, but much of the rest of the earnings release, investor presentation  and 10-Q filing, which the BDC Credit Reporter quickly reviewed, suggests the outlook in the short and medium term remains very cloudy. Notably, total sales are well down from the same time last year: 18%. Moreover, in certain segments such as Global Operations, the drop is even sharper: 47% ! Moreover, much of the EBITDA improvement came from a non-recurring item : warranty adjustments.

    Crystal Ball

    LOOKING INTO A GLASS DARKLY

    More importantly, the Company pulled way back on prior guidance for the year ahead on almost every front: sales, EBITDA and cash.

    The Lisle, Ill., truck producer now expects 2016 revenue in a range of $8.2 billion to $8.6 billion, down from its already downbeat prior forecast of $9 billion to $9.25 billion. Analysts, according to Thomson Reuters, had anticipated $8.79 billion. The guidance cut comes as Navistar says it now expects retail deliveries of Class 6-8 trucks and buses in the U.S. and Canada to be between 330,000 and 360,000 units, compared with a prior range of 350,000 units to 380,000 units.

    The company also lowered its adjusted Ebitda forecast to $550 million to $600 million from its earlier outlook range of $600 million to $650 million.

    Manufacturing cash is projected to reach $800mn. Previously, the Company forecast having up to $1bn in cash in FY 2017.

    FREE CASH FLOW: GOING BACKWARDS

    We are under-whelmed by what’s happening to so-called Manufacturing Free Cash Flow. The number for the quarter was positive by $28mn, but only thanks to receiving cash from the Company’s finance operations (which makes the term “Manufacturing Free Cash Flow” a bit of a misnomer, but we’re quibbling). According to the notes to the Investor Presentation, $64mn of free cash cash was raised from the finance business. That helped the Company pay down a little debt, but as we’ll discuss in a minute, there’s plenty of debt left on the books. Free cash flow over the last 6 months is negative $276mn, which is depleting the manufacturing operation’s cash reserves. In the last three years, a third of Navistar’s manufacturing cash has been used up.

    FROM A LENDER’S PERSPECTIVE

    This is not reassuring for the Company’s debt holders. At April 28, 2016, Navistar had $3.1bn in debt outstanding, essentially unchanged from the end of the last fiscal year 6 months ago. With capex projected at $125mn a year, interest expense at $240mn, continuing pension liabilities requiring outlays of $100mn-$200mn annually, and a weakening business environment, the Company’s room for maneuver is narrowing. Using our own Adjusted EBITDA (which deducts out capital expenditures), leverage is at 7.3x, which as a rough measure of such things, is very high, and potentially unsustainable.

    FROM A BDC PERSPECTIVE

    Unfortunately, all the nearly $50mn in BDC exposure to the Company is in the form of Subordinated Debt, due in 2021. Currently all debt obligations are current.

    Looking down the road, though, we are concerned that the Company may have problems servicing its multiple obligations should there be any further deterioration in business conditions. No wonder the Subordinated Notes were being carried at a discount ranging from 19% to 24% of par by three different BDCs (all of them Franklin Square related and all sub-advised by GSO Blackstone).  We are guessing that in the IIQ of 2016 the valuation of the credit exposure may drop further.

    Here is the Investment Ownership for both Navistar International and Navistar Financial Corp:

    Screen Shot 2016-06-07 at 9.52.23 AM

    All investment ownership data provided by an arrangement with Advantage Data (www.advantagedata.com)

    MR MARKET ON A HIGH

    Nonetheless, Navistar International is in no imminent danger. Shareholders are in a good mood after the latest results, with the stock up sharply.

    LONG WAY TO THE FINISH LINE

    However, the debt holders have another 5 years to go before getting repaid and there are many challenges ahead including possible higher interest rates, a weakening market abroad and at home for new truck purchases, diminishing returns from cost cutting measures, litigation with shareholders and ongoing government investigations.

    Exposure at the junior level to a highly cyclical and highly leveraged company suggests Navistar International, and its separately financed subsidiary Navistar Financial (whose senior debt held by FS Investment III is currently valued above par) will be on the BDC Credit Reporter’s Master List for some time to come. Currently, we do not see any catalyst for any meaningful debt reduction in the medium term.

    OUR VIEW

    The BDC Credit Reporter has three internal rating appellations for under-performing companies: Watch, Worry and Write-Off. It’s too early to predict any Realized Loss (i.e. Write-Off) will occur given current performance, but with debt so high and sales, EBITDA and cash all projected to trend downwards by management themselves, we are placing Navistar International on our WORRY list, which is a downgrade from the WATCH status previously. Should Navistar stumble in the years ahead, we expect a partial or complete loss of the investment  may yet occur on the Subordinated Debt, and will-in all likelihood-require a larger provision than the discount currently applied.

    DISCLOSURES

    We happen to be short FSIC, and have been for several weeks.

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