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Medley Capital: Portfolio Company Files Chapter 11

INTRODUCTION:  In a few weeks, the BDC Credit Reporter-which tracks all the under-performing companies in the BDC Sector-will be spun off into its own subscriber-only publication. However, we are still building up the database of companies. In the interim, the BDC Reporter brings its readers the latest credit developments and the BDC players impacted. In this case, the Chapter 11 bankruptcy of the largest municipal towing company is a major exposure for Medley Capital (MCC). This is the third bankruptcy this year which affects the BDC Sector.

NEWS:

“United Road Towing Inc., the nation’s largest towing company, has filed for chapter 11 bankruptcy protection, along with more than two dozen affiliates.

United Road is going up for sale in bankruptcy, with an auction planned before the end of March.

Owned mostly by Medley Capital Corp. and Milestone Partners II LP, United Road said its decision to file for bankruptcy was driven largely by nonfinancial reasons, including a lawsuit involving the competition rights of former executives and a class-action case from people whose cars were towed without their consent.

Diving prices for scrap metal and lack of capital for marketing and equipment purchases also contributed to the decision, court papers say.

United Road lost the class action when it went to trial in 2015, and the company filed for bankruptcy protection just as the $5 million judgment was scheduled to become final. The chapter 11 filing will halt efforts to collect the judgment.

According to the website of the Illinois-based company, United Road “dispatches approximately 500,000 tows, manages over 300,000 impounds and sells over 60,000 vehicles annually across the United States.”

Papers filed in the U.S. Bankruptcy Court in Wilmington, Del., estimate the company’s assets at $10 million to $50 million, and its debts at $50 million to $100 million. United Road owes about $14 million to first-lien lenders and $19 million to second-lien lenders, court papers say.

Topping the list of unsecured creditors are the plaintiffs in the class-action lawsuit.

The company’s lawyers are Young Conaway Stargatt & Taylor and Winston & Strawn. Its financial adviser is Getzler Henrich & Associates LLC, and SSG Capital Advisors is serving as investment banker. The bankruptcy case number is 17-10249.”

Source: Dow Jones Newswires

 BDC EXPOSURE

From Advantage Data (www.advantagedata.com)

The only BDC currently with exposure is Medley Capital (MCC). At September 30, 2016, the mid-sized BDC had $43mn invested in the Company in the form of $18.7mn of second lien debt, behind a small bank group with a first lien interest. MCC also has an even bigger Preferred position and an equity stake.

MCC began lending to the Company back in 2011, starting with a second lien loan. Over the years, the Preferred and equity were added, giving the BDC a two-thirds ownership stake. The Preferred has been on non-accrual for many quarters. The second lien debt was paying cash interest until the end of 2015. Since then, the instrument has been paying exclusively Pay In Kind.

We don’t know if MCC has been taking the PIK interest into income in recent quarters but we note that the cost balance of the debt has increased, which suggests it’s possible.

If that’s the case, MCC will no longer be allowed to book into income going forward the LIBOR + 9.0% PIK on $18.7mn, or nearly $2mn  year.

At 9-30-2016 MCC was valuing the Second Lien debt at par, notwithstanding that the Company had not been able to pay cash interest for 3 quarters.

By contrast, the Preferred and common has been almost completely written off.

At the time of the latest valuation, the Company and MCC were aware that a Chapter 11 filing was a strong likelihood, based on what the DJ Newswire article suggests.

MCC must believe that asset coverage (valued at $10mn-$50mn) is sufficient to ensure full loan repayment, even with the costs and uncertainties of the bankruptcy process.

We will learn more as the Chapter 11 process unfurls and when MCC reports IVQ 2016 results.