BDC Credit Reporter: Daily Update- April 17, 2017
From the universe of approximately 6,000 public and private companies in which Business Development Companies have made loans or investments, there are 500-700 which are currently under-performing against initial expectations. We have set-up the BDC Credit Reporter to keep readers apprised of the changing number of under-performing companies on our Watch List and to bring you as early as possible news of developments as they occur. Hopefully, that will keep readers of the BDC Credit Reporter- which we hope to formally launch as a sister publication of the BDC Reporter before too long- apprised on a current basis on potential positive and negative changes in the value of the BDC portfolios in which they’re invested, and of potential changes in investment income. We ask: why wait around until the quarterly release of portfolio data by the BDCs when you can get updated daily by the BDC Credit Reporter and make your decisions accordingly ? We’ll have much more to say about our process, but basically we use our own proprietary search capabilities-which has taken us months to assemble and organize- as well as data supplied daily by information aggregators such as Alpha-Sense and Advantage Data. Furthermore, we maintain an automated reading list of dozens of specialized financial publications, which we also review daily. We’re still deciding on the best format to deliver the information gathered. For the moment, we’re limiting ourselves to a Daily Update. In the first paragraph we discuss the company involved and in the second paragraph BDC exposure thereto.
The steel manufacturer, filed for Chapter 11 on December 15, 2016, and which received Debtor In Possession financing of up to $40mn a few weeks later financed by its owners. A week later, a group of the secured creditors proposed an alternative DIP arrangement, which included more capital but tougher terms. The unsecured creditors complained but by March 1st the parties agreed, and a $212mn post petition financing package was agreed upon. On April 14th, 2017 the Company reverted to the bankruptcy court judge arguing for more time to negotiate out a plan with all the parties, and claiming great strides had been made in stabilizing the business, including hiring a restructuring officer. The Company sought till July 13, 2017 to submit a Plan of Reorganization.
BDC exposure to the Company is limited to Great Elm Corporation (GECC), which added the investment to its portfolio from a MAST Fund at the time of the establishment of the BDC, which is the result of the merger of the assets of the portfolios of Full Circle Capital (FULL) and certain assets contributed by MAST Capital, which also serves as Investment Advisor. At December 31, 2016, GECC had $15.1mn invested at cost in a First Lien Note, maturing on December 15, 2016. The BDC had written down the Note by (8%). On its Conference Call GECC said the Note had been refinanced, presumably as part of the $212mn post petition financing. However, the outcome of the transaction remains up in the air until the Plan of Reorganization is agred upon, should that occur and be approved by the judge. We have no view at this time as to whether the value will be higher or lower at the ultimate resolution. However, the debt is publicly traded at a discount of only a couple of percentage points, suggesting the markets are optimistic.
The telecommunications company is the largest BDC-involved corporate bankruptcy of 2017, with total debt of several billion. On April 13, 2017 the Company announced a Plan of Reorganization that appears to have a broad buy-in by the different parties involved. The Plan would include a debt-for-equity swap, which will give certain of the Company’s lenders a controlling stake, and will reduce total debt obligations by $4bn. Avaya has requested a court hearing on May 25th to submit the Plan to the judge and subsequently release to the creditors.
BDC exposure to Avaya was $40.7mn at cost at year-end 2016. All the exposure was in the form of First Lien obligations due between 2018 and 2020. Virtually all the debt is held by non traded BDC Business Development Corporation of America (BDCA), but American Capital Senior Floating (ACSF) has $1.256mn invested as well. Valuations range from a premium to par to a (625) discount, depending on the issue. According to Advantage Data’s records only the 2018 debt due 2018 is on non-accrual, but that may be out of date. For BDCA, the outcome of the bankruptcy will be very important given the $39.5mn invested in Avaya. We expect some of the debt outstanding may be converted to equity, and some may be refinanced or repaid as part of the Plan. A Realized Loss may be booked once the Plan has been finalized. We would expect ACSF to receive full repayment, and no loss.