BDC Credit Confidential: Week Ended July 26, 2019Premium Free
Over at our sister publication – the BDC Credit Reporter – we had a busy week. Highlights include a new name for the BDC Portfolio Company Bankruptcy List that occurred at the beginning of July but which came to our attention only last week. There are 20 companies and $0.54bn at cost still in bankruptcy of one form or another. We have added two more companies – including a famous retailer – to our Worry List after news stories suggested potential serious credit problems ahead. There are now 57 companies (on our Worry List with an aggregate cost of $2.4bn of exposure at cost. There are also 48 companies on our less urgent but still worrisome Watch List, with a total cost just under $2.0bn. Expect those numbers to continue to grow in all categories as our coverage of the 3,000 company BDC portfolio company becomes ever more comprehensive. However, there was some good news this week, as two related entities – both held only by MVC Capital – were removed from the under-performing category. With earnings season beginning, we expect much chopping and changing to ensue in BDC credit, and as we continue to fill in the gaps in our database of portfolio companies.
Crius Energy: Acquired By Vistra Energy
As a result of the closing today, Crius Energy unitholders are entitled to receive C$8.80 per trust unit upon the redemption of such units. In addition, Crius Energy unitholders that were holders of record on March 26, 2019 will receive C$0.209 per unit for the distribution previously declared by Crius Energy on Jan. 16, 2019. The combination of these amounts results in total cash payable to Crius Energy unitholders of C$9.009 per unit. Crius Energy expects that the distribution of C$0.209per unit will be payable today, with the transaction consideration of C$8.80 payable within three business days of today’s date. The units of Crius Energy are expected to be delisted from the Toronto Stock Exchange as of the close of markets on July 17, 2019, and Crius Energy is expected to be wound-up following the redemption of the trust units on July 18, 2019.
This is good news for the only BDC with exposure to Crius Energy: MVC Capital (MVC). A couple of years ago MVC sold its largest portfolio company – US Gas & Electric (USGE) – to Crius in return for units in the Trust. Moreover, MVC has a $37.5mn second lien debt position, yielding 9.5%, in USGE’s debt, held by a subsidiary. Admittedly, thanks to the dropping value of the Crius Energy trust units that occurred in the quarters preceding the buy-out offer – and which caused us to place the investment on our under-performing list – MVC will not receive back all its $25.9mn investment, as per the latest filing. (When interest is added to the principal balance received, the return is positive). However, Realized Loss likely to be booked in the fiscal quarter ended July 2019 should be modest: under $5mn by our estimate, and there may even be a write up on an unrealized basis, by comparison with the $21.3mn FMV valuation at the of April 2019. The USGE debt remains on the books, assumed by the new owner. However, the creditworthiness of Vistra is much greater than that of Crius, which allows us to return USGE’s debt to Performing status. All in all, a positive outcome for MVC (which is likely to be repaid in full by Vistra before long) on a credit that was headed south fast. Just before Vistra stepped in with its checkbook , the Crius trust units had been written down (49%) on the BDC’s books on an unrealized basis.
J.C. Penney: Financial Picture Update
“As of the end of last quarter, J.C. Penney had $3.9 billion of debt, plus another $1.2 billion of lease liabilities. Meanwhile, the company’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) has plunged in recent years due to strategic missteps and tough business conditions. This has driven J.C. Penney’s leverage to unsustainable levels. Adjusted EBITDA totaled $568 million in fiscal 2018 — down from $1 billion in fiscal 2016 — putting J.C. Penney’s leverage ratio at more than seven times EBITDA. For comparison, most investment-grade companies have debt that is no more than three times EBITDA”.
The real problem is looming farther out. J.C. Penney has about $2.5 billion of secured debt that will mature between 2023 and 2025. It also has $1.2 billion of unsecured debt maturing between 2036 and 2097. J.C. Penney needs to whittle down the principal balance of this debt while ensuring that it can extend the maturities of what remains.
J.C. Penney’s unsecured debt maturing in 2036 and beyond currently trades for between $0.23 and $0.26 on the dollar. Even some of its lower-priority secured debt trades for less than $0.50 on the dollar. Thus, the market is already factoring in a substantial likelihood that creditors won’t be repaid in full. This should motivate them to cooperate with the company’s efforts to restructure its debt. It might even make sense to write off some of the principal if J.C. Penney can offer more collateral in exchange (and perhaps some equity warrants to reward creditors if the company manages to turn itself around).
From a BDC perspective, the exposure is modest at $3.3mn, and spread over three FS KKR non-traded BDCs: FSIC II, FSIC III and FSIC IV in two different loans/notes, one maturing in 2020 and another in 2023. We expect lower valuations will be applied in future quarters than as of 3/31/2019 when FMV was close to par, but the impact on individual BDC balance sheets and income statements, even if Chapter 11 does eventually occur, should be modest.
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