BDC Reporter News and Views on the Business Development Company Industry Fri, 29 Apr 2016 17:56:27 +0000 en-US hourly 1 BDC Credit Reporter: Other BDC Ownership of Under-Performing BlackRock Capital Loans Fri, 29 Apr 2016 17:56:27 +0000 Thanks to our partnership with Advantage Data-one of the top aggregators of financial information-we can provide our readers with useful information about which assets every Business Development Company owns. Now that BlackRock Capital (BKCC) has announced its first quarter 2016 results and shown the marks on its 47 investment portfolio, we have a preview of what changes we might see in the valuation of other BDCs that have the same investments as BKCC, or at least securities of some kind from the same companies.


We’ve gone through the 12 Watch List names at BKCC and identified those under-performing entities which are owned by multiple BDCs, and provided the type of investment, the cost and the IVQ 2015 valuation thereof for each BDC (and the IQ 2016 valuation from BKCC). We’ve dropped all the above into a Table which gives the name and industry of each Watch List company, and the symbols of each BDC which has exposure. Moreover, we’ve categorized each company as to how much the investments have been written down from cost in aggregate,using the latest marks from BKCC as our guide.


Finally-and very important for separating the wheat from the chaff-we’ve also categorized the most recent quarterly trend in the investment valuation: whether unchanged, or increased in value or decreased by a little or a lot. This last category will be important for BDC investors because the BKCC marks are providing an advance notice of potential big swings in downward valuations on some names which may result in lower values than readers might have expected.

Here is a link to the Table from Airtable. We are also including a screen shot of the Table, but that won’t allow you to click on the portfolio data and see the holdings of each BDC.

Screen Shot 2016-04-29 at 10.29.07 AM
Cross Holdings of Under-Performing BKCC Investments With Other Public BDCs Information Provided By Advantage Data. All Rights Reserved.


Got all that ? Anyway, we’ll spell out what to look for:

Both Hunter Defense Technologies and Shoreline Energy LLC were written down by 30% or more from their prior valuation by BKCC in the IQ 2016.

Where Hunter is concerned, that should be of special interest to investors in KCAP Financial (KCAP), Goldman Sachs BDC (GSBD), Main Street Capital (MAIN) and PennantPark Floating Rate (PFLT), all of whom had exposure to the suddenly deteriorating defense company as of their last filings.

Shoreline Energy is also owned by former energy specialist OHA Investment Corp (OHAI).

Three other companies saw their investments written down by more modest percentages in the quarter by BKCC. Still, investors in 6 other BDCs which also own assets in those companies might want to take a look.


We would like to believe that the BDC Credit Reporter is your number one online source for early warning about the changing value of BDC investments. Forewarned is forearmed. BKCC was the first BDC to report, but the batting of those butterfly wings could well effect nearly a quarter of the 40+ public BDCs we track. So far-and we really at the first step of that proverbial journey of a thousand miles-there have been 5 surprising changes in investment values. We shudder to think what might happen to valuations if this continues as more BDCs report their latest marks. However, BKCC may have been an anomaly. The best way to find out is to stay tuned in to the BDC Credit Reporter. If you want to hear right away, check us out on Twitter, where we’ll be posting our findings-if any-in real time as filings come out and we pore through the data.

By the way, we now have a Comments section below every article. Any thoughts, feed-back, suggestions appreciated as we seek to fine tune what is of use to readers and what not. Tables will be getting better and more inter-active in the future as we learn to embed our database. That will allow you to click on a given company name and find out a brief summary of its business and what has been happening between the company and its borrowers/investors, and much more.

]]> 0
BDC CREDIT REPORTER: BlackRock Capital And The Long Road Ahead Fri, 29 Apr 2016 15:49:27 +0000 BlackRock Capital Investment Corporation (BKCC) reported earnings on Wednesday, and revealed credit stress across its 47 company investment portfolio, as we discussed yesterday in a long BDC Credit Reporter article, just as the market opened and dropped the stock price by 12.0%. The bad news included an increase in the number of loans on non-accrual from 2 to 5, a higher number of investments on Watch List, and $56mn in unrealized write-downs, which brought Net Asset Value down by 7%. Moreover, with so many new non-accruing loans Net Investment Income-according to a comment made by the CEO on the Conference Call-was materially lower than would have been the case otherwise, an ominous sign for future recurring earnings and the dividend, which were saved this quarter by the absence of any Incentive Fees.


Apparently, many investors were surprised by the drop in BKCC’s portfolio credit quality. Certainly, the Company’s stock price had been on the rise for weeks from a low of $8.43 on February 11th (the low point for the BDC sector too) to a recent high of $9.56, slightly below the IVQ 2015 NAV of $10.17, and above the now revealed IQ 2016 level. The BDC Credit Reporter was not so surprised, although some of the specifics were not known previously to us, because our review of the IVQ 2015 BKCC portfolio suggested there was trouble afoot, with 10 loans out of 45 on our proprietary Watch List, which amounted to $182mn of assets in the under-performing category. Moreover, the Company itself rated $252mn worth of assets as performing below expectations, as part of its quarterly internal investment monitoring process. When a quarter of your portfolio by value is not meeting expectations, you have a problem, especially in the middle of an economic expansion.


A year before, both the number and value of Watch List investments was much, much lower. Typically, when a deterioration in credit metrics starts to show up-especially one as broad based as this one-things get worse before they get better. That has been the case at BKCC, and should probably continue in that vein for awhile. We point out that we added 2 new Watch List names in the quarter. Both the newbies are still marked relatively close to cost, and we do not yet have any color on what issues might be causing the modest mark-downs. However, any further write-down of investments like these which are almost fully valued would have an out-sized impact on NAV, rather than the more troubled companies which have been all but written off already. Unfortunately or otherwise, BKCC has several investments which are under-performing but whose dollar value is still high. Thus, the risk to the downside remains worrisome.


Also disturbing from a credit standpoint is that none of the 10 Watch List investments from the IVQ of 2015 came off the list this quarter. A few did not drop any more in value, or were even slightly written up. However, many investments appear to have deteriorated in just 3 months, and were written down further, including the 3 new non-accruing loans.


Finally, the BDC Credit Reporter and investors-out of the corner of their eye-have to look out for “Performing” investments that might stumble in the quarters ahead. This is a very difficult exercise, but we noticed on the Conference Call that at least one analyst was asking questions about BKCC’s remaining “Performing” oil and gas and coal mining investments.  Given the bankruptcy of most coal miners (including Peabody Energy , which we’ve discussed previously) and an untold number of oil and gas producers and service companies, and the still continuing very difficult market conditions (even as oil hits a 2016 high) it’s not unreasonable to ask how a few companies have managed to walk through the rain and not get wet. Unfortunately, BKCC did make quite a big push into energy and mining with 6 different investments. 4 are impaired but there remain 2 Performing investments with a value of $33mn that bear fretting about, even if publicly available information is sparse.


Outside of oil and gas and mining, BKCC does have some exposure to one other of the 6 Watch List Sectors that BDC Credit Reporter has identified: Retail. If you’ve been reading us loyally (please say you have), you’ll know that we’re worried that the growth of online shopping, a tepid economic environment and the dog-eat-dog economics of retailing is already resulting in above average stresses to anyone selling anything to foot borne shoppers in malls of any kind. We won’t recap all the bankruptcies of famous retailers that have occurred of late, but if you have teenage daughters, or buy clothes for your little ones or have sought to buy a new putter or engrave a mug, you’ll have noticed that not all is well in Retail-land. In a grandiose moment yesterday-when we read that institutional investors have 6-8% of their credit assets in Retail-we wondered aloud in a tweet on the BDC Reporter whether that sector might be the next crisis in lending if this drip-drip of failures becomes a flood.


BKCC has one under-performing retailer already on its Watch List: Red Apple Stores-a general merchandiser with a chain of stores in Canada. That $23mn Second Lien loan is still paying interest, and has been written down only modestly. However, the BDC’s investments in Red Apple’s Preferred and equity have been written off…We wish we could tell you more, but information is hard to find. Otherwise, BKCC only has one other retailer in its investment stable, and that’s performing fine: Sur La Table, the famous kitchen supplies store.  There is no reason for alarm on this name from what we know (it’s not on our Watch List). Worth noting, though, for those of you who like to worry is that the Sur La Table loan is one of the largest on BKCC’s books. At $50mn, the first lien loan yielding 12% is the third largest loan, and the largest Performing credit in the BDC’s portfolio.


As we said in our article yesterday, BKCC has big problems from a credit standpoint. Now that we’ve listened to the Conference Call and had more time to review the latest portfolio, we’ve concluded that the Company won’t be back to business as usual for a while, as each of these twelve under-performing loans goes through their individual arc (we are writing from Los Angeles after all). Some will return to Performing status, some will be restructured and some may be written off once and for all. Moreover-and without being overly paranoid-we have to worry about other shoes that might drop from the 35 Performing investments in the portfolio, given BKCC’s exposure to three stressed sectors and their strategy of taking relatively large concentrated positions when they lend. We’d be very surprised if the drop in Net Asset Value that began to take place in mid-2015 after BKCC sold off many of its successful equity investments does not continue for several quarters. The price of investing in the BDC Sector is eternal vigilance, and BKCC will need special monitoring.


We are short BKCC, and have been for weeks based on the IVQ 2015 portfolio analysis. We will probably close the short if the price drops below $8.0 or rises above $8.5. Just where the Company’s NAV will end up is unknowable, and the market has already taken a very big write-down with its 15% drop in the last 2 days. 

]]> 0
BDC CREDIT REPORTER: Quick Notice re: Advanced Lighting Technologies. Heads Up to FSIC and KCAP investors. Thu, 28 Apr 2016 14:03:42 +0000 We’ve just written an article about BlackRock Capital’s (BKCC) IQ 2016 portfolio valuation. One of the companies which was written down by $2mn, and which is now valued at 50% of original cost is Advanced Lighting Technologies. The debt is on non-accrual, but other details are sparse.


Investors in FS Investment (FSIC) and its sister, non-traded BDC FS Investment II might want to take notice as the combined exposure in the FS Investment ecosphere is over $110mn at Cost, as the table below shows.

Screen Shot 2016-04-28 at 6.46.08 AM
BDC Holdings of Advanced Lighting Technologies. Data supplied by Advantage Data, an Internet-based platform with pricing and analytics on approximately 390000+ U.S. and international corporate bonds.

On a much smaller scale, KCAP Financial (KCAP) is also a holder of the Company’s debt (“just” $3mn at Cost and valued at $2.2mn at year end 2015).


If the BKCC write-down is repeated elsewhere, expect a 15%-20% drop in the value of Advanced Technologies in the IQ 2016 portfolio valuations of these other BDCs.

A mature man in his 50's scratching his head while making a decision.
A mature man in his 50’s scratching his head while making a decision.

In aggregate for FSIC and KCAP shareholders that’s up to $11.6mn of new losses in this quarter. Of course, those losses are still Unrealized, but when a loan is written down as much as has happened here we worry if they’ve fallen and can’t get up.

]]> 0
BDC CREDIT REPORTER: No good news in the IQ 2016 10-Q filing of BlackRock Capital Thu, 28 Apr 2016 13:36:30 +0000

A man left his cat with his brother while he went on vacation for a week. When he came back, he called his brother to see when he could pick the cat up. The brother hesitated, then said, “I’m so sorry, but while you were away, the cat died.”

The man was very upset and yelled, “You know, you could have broken the news to me better than that. When I called today, you could have said he was on the roof and wouldn’t come down. Then when I called the next day, you could have said that he had fallen off and the vet was working on patching him up. Then when I called the third day, you could have said he had passed away.”

The brother thought about it and apologized.

“So how’s Mom?” asked the man.

“She’s on the roof and won’t come down.”

BlackRock Capital (BKCC) is on the roof. The trouble showed up in the IVQ 2015 investment portfolio. The BDC Credit Reporter counted 8-10 Watch List investments with an aggregate value of $182mn. (Two of those investments had been so written down we did not add them to the Watch List but in a change of policy we’ve decided to count them going forward even if the dollars involved at fair market value are immaterial. That’s why we’re saying “8-10” Watch List investments).  Two of the Watch List names were on Non Accrual.


To put into context, 10 Watch List investments represented a fifth of the entire 45 company portfolio. $182mn of Watch List dollars was equal to 24% of the BDC’s equity capital at year end 2015.  Nor was this a matter of the BDC Credit Reporter being overly conservative. The Company’s internal investment rating system counted investments with an aggregate value of $252mn in its varying under-performing categories. That’s equal to a third of the Company’s capital at the time.

Maybe the most disturbing aspect of BKCC’s deteriorating portfolio that showed up last year was its very diversity. Some BDCs took a big bet on lending to the energy sector and got burned, but have managed to keep their troubles quarantined in that ill-fated segment. Unfortunately, the Company’s Watch List comes from all over the place. Sure, there are a couple of energy companies (including a huge loss on New Gulf Resources which filed for Chapter 11 late last year and has already emerged minus virtually all its debt). However, there is a manufacturer of capital equipment, a defense contractor, a general store retailer, an herbicide chemical company and so on.


Frankly, we were so surprised by the deterioration in BKCC’s portfolio last quarter we wondered if this was just an anomaly caused by the very tough marked conditions at the time. After all, earlier in 2015, the Company had successfully sold several investments for very big profits. Moreover, at the start of the year, there were only a couple of investments on our Watch List.


Fast forward to the release of the IQ 2016 10-Q and we’ve got bad news for investors that we’re trying to break gently, as per the introductory joke. The number of Watch List names has increased by two (both of which may be controversial to some of our readers, but more of that in a minute). However, the number of non-accrual credits jumped from 2 to 5. As the filing and the earnings release reveal, 15.3% of the Company’s debt investments are not paying. Moreover, Advantage Insurance Holdings, which is one of the new Watch List names we’ve added this quarter is still current but all the income being booked is in PIK form. As a result, the percentage of non-cash paying loans is even higher, and beginning to affect income and Net Investment Income.


We’re waiting on the Conference Call in an hour for more details, but BKCC took a big Unrealized write-down on Hunter Defense Technologies, to which it has a Second Lien loan. The investment was valued at $40.3mn just last quarter, and is now at $16.7mn. Hunter has now been written down two-thirds from cost in a short period. Not a good sign. The loan is on non-accrual.

Advanced Lighting Technologies-which was on non accrual last quarter but which management believed was improving and was down in value only for “technical” reasons was written down another $2mn in the first quarter, despite the bounce back in the credit markets.

Shoreline Energy LLC was valued at $24.7mn in the IVQ of 2015, very close to Cost. However in the intervening 3 months the value has dropped in half to $12mn. The loan is on non-accrual.

Troubled investments already on the books have either gone sideways like Red Apple Stores, Vertellus Specialties (written down another $7mn), Marsico and SOURCEHOV (which spells its names entirely in caps as if shouting).

We’ve added Advantage Insurance Holdings to the Watch List because the investment was written down more than 10% in the quarter when the effect of accruing the 8% PIK income mentioned above is excluded, which is the typical BDC Credit Reporter trigger point.

We’ve also added U.S. Well Services to the Watch List because the very large ($47mn) First Lien loan was written down more than 10%. Confusingly, though, BKCC has a Preferred investment in the same company which is valued over cost. However, that premium was reduced in the period, so we’re being cautious.

Overall, BKCC took $55.7mn in Unrealized write-downs in the last 3 months. Given that once loans start to deteriorate, the trend tends to be down, we expect to have more bad news about Mom in the quarters ahead.More after the Conference Call.


We are short BKCC and have been for weeks, because of our review of the IVQ 2015 portfolio.

]]> 0
BDC CREDIT REPORTER: Morning Update-Gymboree Corporation Wed, 27 Apr 2016 17:57:11 +0000 Most every morning we trawl through any new information about the 300 or so companies on our Master Watch List, thanks to Alpha-Sense, a dedicated search engine that collects disparate data from every corner of the financial universe and drops a summary in our inbox overnight. (We hope to begin daily tracking of EVERY company to whom a Business Development Company has a loan or investment in a few days). Although the Alpha-Sense collected information is targeted, most of the press releases, SEC filings, company presentations etc. that we review are not immediately useful for the BDC Credit Reporter, and our goal of alerting readers to changes in under-performing BDC investments in as close to real-time as possible.  However, there are a few nuggets every day and worth knowing if you’re an investor or a would-be investor in the BDC that is a lender or investor to that company. Anyway, here is one of today’s findings:

GYMBOREE CORPORATION: This under-performing children’s apparel retailer arranged for a $50mn Term Loan from its existing asset-based lenders (headed by Bank America) lenders under a pre-arranged facility that permits  such borrowings. Catch number one is that any increase in the Term debt reduces net availability under the Company’s Revolver because the facilities are secured and subject to a borrowing base.  At October 2015, the Company had $143mn of undrawn availability, so this $50mn Term Loan is going to make a dent in liquidity.

Catch Number Two: This is expensive money. Under its Revolver, Gymboree paid 3.4%, based on the filing we saw. However, this new Term Loan is charged out at LIBOR + 10.25%. Gulp.


However, the Company has high hopes for this cash infusion (which occurred April 22). $40mn of the monies will be going to buy back a portion of the $400mn in Unsecured 9.125% Notes, coming up for repayment in 2018. These “Senior”  Notes are actually unsecured and have traded at a deep discount (two-thirds off par). After all, Gymboree is a “Speculative” credit in the eyes of the rating agencies and losing money by the bucketful and is loaded up with over a billion dollars of debt serviced by less than a hundred million in “Adjusted EBITDA”.

Gymboree Store


Anyway, a Dutch Auction is underway with a view to reducing debt and interest expense by buying back as many of the Notes as possible at the lowest price possible. The price of the Notes has jumped in expectation at this sighting of a small lifeboat to nearly 50 cents on the dollar.


We are still getting familiar with Gymboree’s finances, but our take on the new debt and the Note buy-in is a sweet-sour one. Liquidity-very important for retailers and the suppliers who provide unsecured trade advances-will be reduced by this financial engineering. Moreover, it’s not clear how much the Dutch Auction will help the over-leveraged status of the Company given that’s it’s funded with more debt and expensive to boot. We notice that the bank lenders are waiving the fixed charge coverage ratio while the Term Loan is outstanding, which suggests that if that trigger was retained Gymboree would be tripping it. That suggests free cash flow remains tight or negative.

On the other hand, this Term Loan will chip away at the mountain of unsecured debt sitting on the balance sheet, and result in a Realized Gain from buying debt in at a doscount. Interest expense might even drop on a net basis if the Notes are bought in cheap.

However, the Company is far, far from being out of the woods, and both its secured and unsecured lenders remain at risk. The former have eaten into their margin for error should the Company fail, and the latter still have to wonder how they will get repaid.


Screen Shot 2016-04-27 at 10.14.02 AM
BDC Gymboree Debt Outstanding IVQ 2015 Source: Advantage Data

As the table above shows, the only publicly traded BDC with exposure to Gymboree is KCAP Financial (KCAP), who has been involved with the Company for years. However, exposure is modest and has been written down by nearly half from cost. Non-traded BDCs (which we do not yet track, but which we are considering) have outstandings as well. VII Peaks etc. appears to hold a sliver of the Notes, but has written down the investment by 76%. Today’s news may boost-ever so slightly-the value of that position and may allow them to exit, albeit at a Realized Loss.  Corporate Capital Trust is in one of the first lien facilities with a substantial investment of $11mn. This lender has also been active with Gymboree for years, and has owned the Notes at times. At year end 2015, Corporate Capital only had first lien exposure and had already written down their exposure substantially (by 44%).


If we look at the glass half empty, the possibility for an even bigger write-down exists for the senior debt (and a full write-off of the Notes) should Gymboree ultimately fail. (That’s not an impossibility given all the above and the famous slow death of retail going on, as we’ve been discussing on the BDC Credit Reporter). The senior debt may be collateralized but in a Chapter 7 the inventory involved will need to be deeply discounted to move, and the excess borrowing base is being eroded. It’s too hard to determine if Gymboree could successfully choose Chapter 11. If that route was chosen, some of the senior debt might have to be written off or converted to equity to right-size the Company. Our Worst Case is a 75% write-down from cost, based on what we know. That would have little impact on KCAP, given the de minimis size of the remaining exposure. VII Peaks,too, has very little left to lose from its initial three quarter of a million dollar investment. The most worried of the lenders here will be Corporate Capital Trust, with over $6mn of value remaining and which might yet see $3mn more written off.

If we look at the glass half full, Gymboree is still alive and kicking and actively seeking to de-leverage and improve its metrics, albeit as sales and EBITDA are dropping. This is a large, popular retailer with a broad base of stores (even as we write those words we cringe) which might yet get to the far shore. Moreover, the senior lenders do stand at the top of this $1.2bn in assets pyramid with collateral coverage. The big write-downs on the value of the loans may yet get written back to par. Again, that will hardly have KCAP or VII Peaks break out the champagne, but Corporate Capital has a lot to gain: nearly $5mn of reversal of Unrealized Losses.


]]> 0
BDC CREDIT REPORTER: TPG Specialty Loan to Sports Authority-Update Wed, 27 Apr 2016 14:23:43 +0000 Update Red Button

We wrote yesterday about the unraveling of the Sports Authority bankruptcy which has shifted from a Chapter 11 to a liquidation/sale. There’s much gnashing of teeth and arguing between the different creditors of the fast failing sports company.


We noted that TPG Specialty (TSLX) had a newly minted loan to Sports Authority, booked late in 2015, and due for repayment in June 2017 We mused about what the clever folk at this larger sized BDC were up to in making the sizeable advance of $44.2mn just prior to the initial bankruptcy announcement (which was expected by industry observers).


We heard from a reader and industry professional today who shed some additional light on the subject: informing us that the financing was ” FIFO bridge loan they [TSLX] made at the end of last year. They were hoping to roll it into a DIP (“Debtor In Possession”) but that doesn’t seem likely to happen now.”


What neither my kind source nor the BDC Credit Reporter know is whether the potential repayment of the TSLX loan has become embroiled in the disputes about who gets what and when that are swirling around Sports Authority, or whether they have a rock solid facility with collateral support. We have placed a question mark around the full recovery.  Given the size of the advance, this is worth watching.

]]> 0
BDC CREDIT REPORTER: Update on the unraveling Sports Authority Chapter 11 bankruptcy. Tue, 26 Apr 2016 19:57:17 +0000 There’s no joy in the exciting world of Retail. Sports Authority filed for Chapter 11 bankruptcy back in March 2016 with hopes of restructuring and getting back to the business of selling athletic equipment. Today, the Company announced that even the hope of continuing as a going concern was impossible and a liquidation was the best alternative. Thousands of employees will likely lose their jobs.  (However  senior management has requested a generous bonus pool from the judge to keep them involved).


That means most stores will be closed forever, and inventory liquidated. Bids will be sought for other stores for other operators. We quote from DowJones Newswire:

Sports Authority has abandoned hope of reorganizing and exiting bankruptcy and instead will count on buyers to save parts of its sprawling retail chain, company lawyer Robert Klyman told a judge Tuesday.

“It has become apparent that the debtors will not reorganize under a plan but instead will pursue a sale,” Mr. Klyman told Judge Mary Walrath at a hearing in the U.S. Bankruptcy Court in Wilmington, Del.

Loaded with more than $1.1 billion in debt, Sports Authority filed for bankruptcy protection in March, saying it would attempt to trim its operations and restructure, while looking for buyers as an alternate path. Now the alternative route is the only path forward for the distressed retailer, an employer of thousands of people.

Some stores were already being closed when the bankruptcy filing came, others were to follow, and a May 16 auction is set for the bulk of Sports Authority’s operations.

“Major” potential bidders are looking over Sports Authority’s assets, and the company hopes for a good outcome to the auction, said Mr. Klyman, a lawyer at Gibson Dunn Crutcher.

However, liquidators are just as entitled to bid at bankruptcy auctions as are buyers who continue to operate the stores, and there are no guarantees any of the stores, or collections of outlets, will stay in operation.

News that Sports Authority believes it is past saving came at the start of a fight over a bankruptcy financing that pits the company and its senior lenders against landlords and vendors that had consigned goods to Sports Authority for sale.


Four Business Development Companies have exposure to Sports Authority. The two public names are FS Investment Corp (FSIC) and TPG Specialty (TSLX). Then there are two other FS Investment non-public BDCs with exposure. In toto, the BDC sector has over $60mn in loans to the failed retailer, only a tiny fraction of that $1.1bn in debt.

FSIC has been a lender since 2012, and has held a $6.3mn position since 2014 in a senior secured loan nominally expiring in 2017. As recently as the third quarter of 2014, the loan was valued pretty much at par. Then began the slide in value which culminated in an Unrealized write-down of 67% in the IVQ of 2015 to just $2.1mn ($5.6mn when you add up the whole group’s fair market value exposure). At this point all the shenanigans underway at Sports Authority won’t make much of a difference to a huge BDC like FSIC.


More intriguing is what TSLX is doing with a newly booked $44.2mn loan at cost to the Company, which is fully valued at year-end 2015. We assume the loan is different than the one in which FSIC is invested. TPG Specialty’s managers pride themselves of being clever underwriters who see value where other do not and who structure facilities to avoid losses. That may be the case here for all we know. We don’t have the information to determine if the TSLX loan (which may be a participation, a club deal or a direct facility) has superior collateral or some other protection than the FSIC loan. However, the maturity is 2017, and that’s clearly not going to happen. We imagine someone at TSLX is sweating right now as the situation at Sports Authority deteriorates and the battle between landlords, unsecured creditors and secured lenders heat up over an ever smaller pie. The BDC Credit Reporter will be reading the next quarterly filing with great interest.

]]> 0
BDC Credit Reporter: Peabody Energy Update. Tue, 26 Apr 2016 16:25:47 +0000 The huge coal mining giant Peabody Energy filed for Chapter 11 bankruptcy in the US (but not in Australia) a few days ago. The company is heavily leveraged and huge amounts of debt in various classes are at risk. According to the filing, Peabody has assets of $11bn and liabilities of $10 billion at the end of 2015, mostly in the form of secured and unsecured bonds.


However, the BDC Sector-to its credit-had virtually no exposure to Peabody. The only BDC lender to the coal producer is American Capital Senior Floating (ACSF), which had a tiny participation of $903,000 in a loan with a 2020 maturity, picked up in the IQ of 2015, and written down to $475,000 (a 52% haircut) at 12-31-2015. The exposure is in a Senior Secured position.


Quantifying if the write-down in the IQ 2016  will be higher or lower than the latest Fair Market Value is hard. However, from what we know about the difficult conditions in the coal market, the expensive Debtor In Possession financing underway, and the complex nature of the bankruptcy,  we expect a further write-down, and no income generation for ACSFl. The current market price  for the loan is down by over 10 points since year-end, so we wouldn’t be surprised to se the loan written down to 40 cents on the dollar when the filing for the first quarter arrives.


There is a very good article in Seeking Alpha on April 25, 2016  seeking to dissect the complexities of the bankruptcy process, and the risks to the most senior debt.


Our take-away: uncertainty about virtually every aspect of what will happen next prevails where Peabody is concerned. Yet another step down in the ultimate price is not impossible. However, even at our Worst Case of a $300,000 value, ACSF will have lost “only” $603,000 from cost and another $175,000 since 2015 year-end, both relatively immaterial to Net Asset Value. Elsewhere, and especially amongst the unsecured bond holders, the pain will be palpable as several billion dollars will likely be lost. Thankfully, the BDC Sector has dodged this bullet.

]]> 0
BDC CREDIT REPORTER: BDC exposure to apparel retailer Charlotte Russe. Tue, 26 Apr 2016 15:04:11 +0000 Charlotte Russe Inc.: On April 25, 2016 Standard & Poor’s Ratings downgraded the corporate rating on women’s apparel retailer Charlotte Russe to B- from B. Moreover, the rating on the Company’s senior secured term loan facility was downgraded in a similar fashion. We note that S&P threw in a mention that if Charlotte Russe did default, the expected recovery for the type of assets securing the loan was low, around 30% of the initial loan advance.  The rating agency blames poor merchandising decisions and that oft heard trope: “mall traffic persistently declines”.


From a financial standpoint, how bad do things look for a B- rating ? Pretty poor from the BDC Credit Reporter’s perspective. In fiscal 2015, “fixed charge coverage” was down to 1.0x, which means debt service was taking up all the Company’s EBITDA. (Frankly, we don’t know the subtleties in how S&P calculates their fixed charge coverage-which more of an art than a science sometimes). S&P, without giving any reasons, says they “expect some improvement in operating performance over the next 12 months”, but simultaneously says the Company will remain “challenged” and will still be generating “negative free operating performance despite a meaningful reduction in capital spending”.


The Company’s corporate rating and senior secured debt was already downgraded by Moody’s back on January 29, 2016, which gave even more insights into what’s happening at Charlotte Russe.  In explaining their decision, the ratings agency pointed to a same store sales decline of 10%, which is a whopping amount. Again, blame is laid on “declining mall traffic”, amongst other issues. EBITDA margins, too, are lower. Moody’s way of calculating leverage (adding back lease costs) for “funded debt” is very high at 7x.  Interest coverage (which does not even include principal payments) is said to be  “below 1 time for the LTM period”. There’s much more detail in the Moody’s press release link above , specifically about the senior secured term loan which matures in 2019.


From what we can tell, Charlotte Russe is bringing down inventory and cutting back on capital expenditures , which is generating cash in the short term. (These are what  we call Pyrrhic victories). The Company has access to a $75mn asset based loan (secured by receivables and inventory) of which only $5mn was drawn back in January. As  a result, Moody’s is comfortable with the Company’s “liquidity over the next 12-18 months”.  The BDC Credit Reporter is less sanguine-based on what we’ve read. There is no reason to suppose the secular trends for mall based retailers are going to change. Moreover, the Company has no unsecured assets and is very highly leveraged already. Charlotte Russe sells to those fashionable but fickle 18-24 year old female shoppers. One false step in your product selection and you’re in trouble.

BDC EXPOSURE: Main Street Capital (MAIN) is the only publicly traded BDC with exposure to Charlotte Russe. The BDC has $14,065,000 to the Company through the senior secured Term Loan due 2019, referenced above. MAIN has been a lender to Charlotte Russe for several years, and has been adding to its position in recent quarters. In fact, MAIN added nearly $10mn to its position in the last year even as the value of the position has been declining versus its cost. Management at MAIN must presumably be comfortable with the credit metrics at the Company. However, the biggest step down in the value of the debt began in September 2015 (MAIN did not add any more exposure) and was written down just over 30% at the end of 2015 to $10,031,000.  Given all the above, we expect a further write down of the investment in the first quarter of 2016 and potentially the rest of the year.

In addition, two other BDCs (both non public) have positions in the senior secured Term Loan, bringing total exposure at Cost to $50,000,000 (including MAIN). The BDC Credit Reporter does not cover the non-traded BDC sector, so we’re giving less details of their exposure here to keep an already long article from getting longer.

WORST CASE:  What are the chances of a default ? The BDC Credit Reporter is just getting to grips with these types of estimates. Unlike the rating agencies we are not paid by the issuers so do not have to be as circumspect. On the other hand, we don’t have the benefit of all the financial and industry reporting that the wise men and women at the agencies have at their finger tips. Still, given what’s been happening with AeropostalePacific Sunwear (which we wrote about on 4-102016) , etc. there is a very reasonable possibility Charlotte Russe might follow. The Company has 559 retail stores in the U.S., and $935mn in sales.

If the Company defaults, MAIN will lose an asset with a yield at cost of 7.6%, and generating just over $1mn a year in interest income. (The BDCs in aggregate would lose $3.5mn of investment income). We learn from Moody’s that the senior secured debt has a second lien interest on the Company’s receivables (which cannot be considerable given the business involved) and inventory (which will be a huge number on paper but less so if liquidated). In a Worst Case, we would be surprised if MAIN and the other senior secured lenders would recover more than 30% of their loans measured at cost or $15mn, of which MAIN would have a $4.2mn share. That suggests MAIN could yet have to write down its investment in Charlotte Russe by another $5.8mn. That’s equal to 0.5% of the BDC’s Net Asset Value at year end 2015.

BEST CASE: Of course, the Company might yet limp through, and its senior secured lenders get repaid in full by 2019 or before. That would allow MAIN and the others to write back up the 30% haircut taken to date, and any further reductions in value that might precede such a turnaround. At the moment,though, we’d say the odds are not favorable.

CONCLUSION:  Retailer Charlotte Russe faces the same fate as several other clothing retailers that have already filed for bankruptcy, thanks to both its own mis-steps (if we’re to believe S&P) and the effect of shrinking mall traffic. Unfortunately the Company is in a very volatile retail segment, and heavily leveraged to boot. Same store sales are down by double digits and an inventory clearance and reduction in capex spending is underway. That may improve liquidity in the short run, but begs the question of what happens next. Both S&P and Moody’s have reduced their ratings to just above Speculative level. The BDC lenders,too, have recognized that all is not well and have marked down their holdings by 30% already, starting as recently as September 2015.  If the worst should come to pass, the senior secured lenders will be sitting pretty much at the top of the Company’s capital structure (unless the ABL loan gets drawn in extremis as can happen). However, with the business models of most mall-based clothing retailers in question, and the uncertain value of much of the collateral supporting the debt,  a bigger than average write-off might occur.  We will continue to monitor the Company  as well as the BDC industry’s exposure to this segment of the Retail sector.


]]> 0
The BDC Activist Decries Another Joint Transaction Between Two Fifth Street BDCs. Thu, 21 Apr 2016 17:23:30 +0000 For many readers, today’s press release that Fifth Street Asset Management (FSAM) has served as Joint Lead Arranger for a new loan to Lytx, Inc. (formerly the much easier to pronounce but still orthographically incorrect DriveCam) might pass as an innocuous news item. For the BDC Activist, the announcement is another reminder that the tail is wagging the dog in BDC-land.


Back in February, we wrote an article decrying the frequency with which the SEC allows an asset management organization-like FSAM-to place portions of the same loan in different credit portfolios under its management. In a nutshell, we worry that the practice is unfair to the shareholders of those portfolios because they receive no pecuniary benefit from the manager’s enhanced ability from the SEC’s exemption to underwrite larger transactions and divvy them up in smaller tranches. Moreover, the BDC Activist complained that these co-investments by related funds reduces diversification as portfolios become increasingly alike even though the strategies, economics and capital structures are substantially different one from the other. Finally, the BDC Activist frets that deals will be done with the interests of the Manager as the paramount factor, rather than the shareholders of the funds in which the loans are placed.


The investment managers standard response is that the ability to band together multiple funds under its control allows bigger transactions to be underwritten than would otherwise be possible. This is undeniably true, and does probably result in higher fees and income in absolute terms. Not to forget that the underwriting of larger deals burnishes the Manager’s reputation in the clubby world of bigger ticket leveraged finance.

However, we question whether Bigger is Better from the standpoint of a shareholder in the fun,  when all the beans are counted. Typically, the larger the transaction, the lower the interest rate and fees associated with the loan as this segment of the market has many well heeled bank and non-bank competition, not to mention the voracious Collateralized Loan buyers, all seeking larger, more liquid deals. In this case, FSAM has not mentioned any numbers regarding the size of the loan, or the terms involved. (These press releases are really just infomercials). However, we do know the sponsor behind the transaction bought Lytx (pronunciation unknown) for “more than $500mn” just a few weeks ago. If we assume the Private Equity owner plumped down a third of the capital required (typical), that implies the debt raised in one form or another was around $350mn in aggregate. Unless there’s some unusual risk in this particular deal, the pricing of a senior tranche will probably by Libor + 5.5%-6.5%, judging from the latest data from that invaluable resource: After the funds have paid their own management fees, incentive fees, incremental operating cost and interest expense, we’d be very surprised if there was much profit left over for shareholders in this narrow margin business for Big Ticket deals.


In the press release FSAM explicitly states that the underwriting was possible by combining the resources of its two publicly traded funds Fifth Street Finance (FSC) and Fifth Street Senior Floating Rate (FSFR). The BDC Activist would like to point out that the two BDCs are supposed to be run in materially different ways; are widely different in portfolio size (FSC has total assets $2.3bn and FSFR  is only a fourth as large) ; fee arrangements (FSC charges 1.75% on its Base Management Fee and FSFR 1%) and target yields (FSC lends at yields in double digits while FSFR is supposedly the more conservative of the twins with an 8% yield). Yet both BDCs now have the same borrower in their portfolios.


Shareholders of the two BDCS may not know  (without comparing portfolio lists) or care that they share assets from a common borrower. Certainly, the impact of all this will not felt for awhile. Over time, though, the portfolios of FSC and FSFR will become increasingly alike (we’ve seen a similar process underway at the PennantPark BDCs: PNNT and PFLT), which creates more “systemic risk”-as they say-when one of these jointly owned borrowers gets into trouble. Moreover, this increasingly common practice from “asset managers” like FSAM does belie BDC claims in their Prospectuses and elsewhere that their managers are building bespoke portfolios of loans in line with a pre-determined strategy that is supposed to provide market beating returns. From where the BDC Activist sits, it looks more like these BDC  funds are just useful pockets of capital into which loans can be “stuffed” to generate maximum transaction and  fees for the Manager.

We recognize that nobody else in the BDC community appears to be concerned by this phenomenon, and the BDC Activist’s campaign is a lonely one.   The External Managers are-obviously-delighted with the flexibility and economies of scale involved; the analysts do not seem disturbed, investors appear indifferent and the SEC continues to dole out more exemptions at a rapid rate. Yet, there was a reason the rule-now more often broken than adhered t0-was instituted in the first place…


]]> 0