NEWS

For the second time this quarter a portfolio company of Apollo Investment (AINV) has filed for bankruptcy protection.

Back on November 21, 2019 Bumble Bee Foods filed for Chapter 11 protection in the U.S.

Now, the Canadian subsidiary of Bumble Bee – Connor Brothers Clover Leaf Seafoods – has followed suit in Canada, seeking court protection from creditors.

ANALYSIS

Prior Reports

The BDC Credit Reporter has written a full report on the Connor Brothers action.

Moreover, there have been several prior posts about Bumble Bee’s troubles, dating back to July.

Long Time Coming

Neither Bumble Bee’s bankruptcy nor Connor Brothers’ filings were unexpected.

We seek to briefly summarize total AINV exposure to the two companies, and the possible next move.

Exposed

The BDC has $19.3mn of exposure to the two related entities, valued at cost.

All the exposure is in the form of Term Debt that is traded – according to Advantage Data’s records – and matures in 2023.

The BDC valued the debt at a (7%) discount to cost at September 30, 2019, slightly lower than the quarter before.

In the latest quarter, probably due to loan defaults, the debt was priced at Prime + 850bps in cash and 2.0% in PIK.

In the prior quarter, the debt was priced at LIBOR + 800 bps.

As a result, the total interest rate increased by 50% for a quarter from 10.52% to 15.50%.

As far as we know from our review of the AINV 10-Q and Conference Call transcript, the income from the debt was accrued into the BDC’s income statement.

(Sometimes with troubled credits a BDC lender will cease to accruie income even if paid should there be doubts about the ability to continue to receive interest income).

Possible Impact

Given the dual bankruptcies, it’s likely AINV will have to book ($0.750mn) a quarter less of investment income starting in the IVQ 2019.

How long that income interruption will go on is unclear as Bumble Bee – and possibly Connor Brothers – may exit bankruptcy relatively quickly thanks to a potential Thai acquirer.

The buyer would be Fong Chun Formosa (FCF), according to court filings.

“The company and its affiliates have negotiated a sale of substantially all of their assets, subject to higher or better offers, to FCF Co., Ltd. or its affiliates,” Bumble Bee’s filing said. “The company intends to commence proceedings under chapter 11 of the bankruptcy code to pursue approval of the sale to FCF, subject to higher or otherwise better offers.”

In a press release, FCF Co. confirmed it had entered into a purchase agreement to “acquire substantially all of the company’s assets and to ensure that the 120-year old provider of healthy and nutritious shelf-stable seafood continues to serve its valued customers.”

A list of Bumble Bee’s 20 largest creditors is topped by FCF Co., which is owed more than USD 50 million (EUR 45.3 million).

VIEWS

What’s Important

We bring these troubled loans to our readers attention as part of the BDC Reporter’s broader focus on credit performance in the BDC sector.

It’s a truism but credit is Job 1 for every BDC/lender and we seek to evaluate just how well each management team performs over time.

Like talking about death or your finances, this is a subject that BDC managers prefer not to dwell on.

We imagine that some managers would rather not discuss credit troubles at all.

All the more reason – given that credit results are the key component of BDC success or failure – for the BDC Reporter and BDC Credit Reporter to shine more of a light on the subject.

Lessons Learned

It’s not just a matter of totting up the impact on the P&L and balance sheet after a realized loss has been booked – as we often do – but learning about the underwriting process of the BDC managers involved, and what outcomes look like.

Any long time investor in the space will agree that while credit problems are a natural part of leveraged lending, there are wide variations in performance over time.

Frankly Speaking 

Historically, AINV has had a mediocre credit record since going public 15 years ago.

However, under a new management team and with a new focus on first lien loans booked on Apollo Global’s proprietary platform – including MidCap Financial – there is the prospect that credit outcomes will improve.

We also review how much candor BDC managers reveal when discussing these credit issues that are so vital to stock performance.

Transparency – like credit results –  varies greatly between different management groups.

Some are very close lipped about any reversal , both during and after any loss, while others are relatively forthcoming (we couldn’t say very).

As a result, we are keen to use any opportunity to evaluate the BDC’s credit approach, including this one.

Back To The Narrative

In the short run, these two bankruptcies are a material set-back for AINV, which added the debt just over two years ago in the IIIQ 2017.

At one point, the debt was valued at a (small) premium to cost but has been discounted since the IVQ 2018.

Close To The Vest

We can’t say that the external manager has been very forthcoming to shareholders about Bumble Bee/Connor Brothers at any point through the loans’ time on the BDC’s books.

We’ve only found one reference to Bumble Bee in all the AINV’s Conference Call transcripts, dating back to August of this year, and which only occurred in answer to a question:

Ryan Patrick Lynch Keefe, Bruyette, & Woods, Inc., Research Division – MD

…. And then you guys’ investment in Bumble Bee. I think that company is about to file for bankruptcy or may have just been announced that they’re going to file for bankruptcy. Just wanted to know, does your 6/30 fair value market — you guys have it marked at about 95% of cost. Is that mark inclusive of if they have to run through bankruptcy?

Tanner Powell Apollo Investment Corporation – President & CIO of Apollo Investment Management

What I’d say there is that is an LCD article that came out today or yesterday. Our valuations are a point in time. The company has had, has experienced issues not only related to tariffs, but also related to historical issues with price fixing and consequent litigation expenses. We are a participant in a broader facility and are working with the borrower to deal with the issues and move things forward. But in terms of the specifics, our valuation is a point in time with the information available to us at the time as of quarter-end.

Unsure

For our part, from a credit standpoint the jury is out till we see how the loans play out in these new conditions.

Recently AINV’s management has been blaming most of its credit difficulties on “legacy investments” and on the prior policy of taking on substantial second lien and unsecured debt risk.

The Bumble Bee related loans were booked under the new regime and their strategy of preferring first lien investments.

However, this does not seem to have been a MidCap loan or one booked by Apollo Global’s Direct Origination platform.

A Test Of Sorts

We’ll be interested to see – even if choosing Bumble Bee was a credit selection mis-step – whether the BDC’s underwriting will allow them to avoid any material capital or income loss.

That will reflect on where the debt sits on the borrowers balance sheet; the strength of the documentation and all the components that make up a well constructed  even when a default occurs.

From what we know about the prospective buyer we should know a great deal more about the resolution of this situation in a relatively short period of time.