BDC Credit Reporter: Mood Media Restructured
Late last year, the BDC Credit Reporter-which is in the process of being revamped-wrote the following about Mood Media, a portfolio company of several public and non-traded Business Development Companies. In the interim we lost the thread of the Mood Media story till we read a press release on April 14th 2017, which we’ll discuss in great detail below. This article will be of interest to any shareholders of any of the BDCs involved in the company (see the Advantage Data table) and to those readers interested in how BDCs treat investments that go off the rails, and what that might mean for the future value of Mood Media but also dozens of other companies that have gotten into trouble, been restructured and slipped back into a fund’s portfolio in recent years.
THAT WAS THEN-Written in November 2016
“Mood Media, Inc. brings piped in sounds to retailers worldwide. The Canadian publicly-traded company (ticker:MM) is in the midst of a two year turnaround in a highly competitive sector that has been undergoing rapid technological change. Moreover, the Company is highly leveraged. However, with both public status and publicly rated debt, information is readily available. Several BDCs have exposure in the form of secured and unsecured debt due in 2019 and 2020 respectively for an aggregate of $125mn. That’s according to Advantage Data records at September 30, 2016:
The BDCs with the greatest exposure ($89mn) are FS Investment (FSIC) and non-traded FS Investment II. As of September 2016, the secured debt was marked down just marginally, but the 2020 Unsecured Notes have been discounted by a fifth. Still, that’s an upward trend from the prior 3 quarters when the discount was up to 35%.
Management has been claiming success in improving sales, EBITDA and free cash flow on recent earnings calls.
However, the BDC Credit Reporter is not convinced, and we have the benefit of the latest earnings release (IIIQ 2016). Revenues were down on prior year, as was EBITDA for the quarter and for the year vs expectations. Free Cash Flow is up but only due to lower capital expenditures, and remains at barely break-even over the year. As a result the Company has made no progress on reducing a debt load of $620mn which begins to come due in 2019. Liquidity is only OK with $21mn in cash and $8mn under its Revolver. Back in April 2016 Moody’s downgraded the Company to Caa1 and said the “company’s capital structure may not be viable” without major progress. In November, the Company’s lenders in an amendment left alone an interest coverage ratio that was scheduled to otherwise increase, a sure sign that performance was not on the original plan.
In a Worst Case we calculate a $420mn Enterprise Value for the Company versus $620mn in debt outstanding and the possibility of $200mn in credit losses, principally in the junior debt, or an additional 37% discount from the current level.
We have a Corporate Credit Rating of 4, implying we believe an ultimate loss is more likely than full recovery. Moreover, we are marking the Credit Trend as Down given that both tranches of debt trade and the junior position is at a higher discount than at September quarter end. In our view, the BDC valuations here-both senior and junior-are unduly optimistic and there is much room for potential downside write-downs.”
IVQ 2016 VALUATION
When the IVQ 2016 valuations were posted, we proved to be correct about the increase in the discount on the 2020 Subordinated Notes, which went to 37% from 20%. Most of the other debt remained marked at par or above as the Company continued to struggle.
UP TO DATE
Now we hear from a press release that Mood Media has agreed to a restructuring which will drastically change the Company’s ownership, and which will rejig its balance sheet. Apparently Apollo Group affiliates and GSO Blackstone (on behalf of the FS investments Funds amongst others presumably) have both been lenders to the Company and will be converting debt to equity and gaining an equity interest, along with HPS Investment Partners.
The lenders/new owners will buy the outstanding shares of the public Canadian company for C$0.17 a share. (That’s twice the price mentioned above late last year but sharply off the C$ 4.12 reached in 2012).
The C$0.17 cash price per common share represents a 162% premium over the closing price of the common shares of Mood Media on the Toronto Stock Exchange (the “TSX”) on April 12, 2017 and a 149% premium over the 20-day volume weighted average trading price on the TSX for the period prior to and including such date.
WITH THE OLD PUBLIC SHAREHOLDERS OUT OF THE WAY…
Here are the main details of the restructuring spelt out, almost unintelligibly, in a press release. We’ve attached the full version (some companies like to send out a Dummies version and a comprehensive one). We are told the recapitalized company will have a lower amount of debt than the $637mn outstanding at year end 2016. However, there’s no reconciliation table available and despite reading both the Dummies and the Advanced press releases we still had to work out for ourselves what the total debt level will be going forward. We know that there will be a $315mn Revolver funded by HPS Investment Partners, which will repay the existing $250mn Revolver and the $50mn of 2023 Unsecured Notes owed by a Mood Media subsidiary. The existing $350mn of Senior Unsecured Notes will be converted into $500mn face value of second lien debt, but half of that will be converted into equity. However, some Note Holders may choose not to invest in the Company and will receive different terms, which includes the forgiveness of 50% of their revised debt obligation in what is called the New Company Notes. The main terms of what looks like $250mn in New Company Notes are as follows:
The New Company Notes will (i) bear interest at LIBOR plus 14% (6% cash and 8% payment in kind) with a LIBOR floor of 1%, (ii) mature seven years after completion of the Transaction, and(iii) be callable on theone year anniversary oftheir issuance at 102% of par, on the two year anniversary at 101% of par and on the third year anniversary at par.