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Monroe Capital: Seeks Involuntary Bankruptcy Of Portfolio Company

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We are re-printing a just published article from the BDC Credit Reporter about one of Monroe Capital’s (MRCC) under-performing portfolio companies: Education Corporation of America (ECA). For those of you following the controversial for-profit education space, ECA was one of the key players, with 75 campuses nationwide and 20,000 students enrolled. In 2018, the company lost its accreditation and  many of its trade and vocational schools closed. Since 2015, MRCC has been a lender and investor in ECA. However, for the past year its debt has been on non-accrual, and no income has been accrued. The BDC did double down in 2019 and acquired one of the schools that ECA owned in a new transaction. Now, MRCC and other creditors are asking the bankruptcy courts to force some sort of corporate resolution at ECA. Both the latest developments and some historical perspective are included in the post below:

For five consecutive quarters Monroe Capital (MRCC) has carried its loan to Education Corporation Of America (ECA) as non-performing. Finally, the BDC – and other creditors – has asked the court to force the for-profit education company into involuntary bankruptcy in Delaware. This is one more step in the slow unwinding of the company. In December of 2018, ECA lost its accreditation and closed campuses all around the country. Subsequently, MRCC bought one of its schools – the New England College of Business – back in May 2019. On MRCC’s books this is now carried as a separate portfolio company. The BDC has $2.2mn in first lien debt and equity invested in the newly acquired education firm which we’ve rated CCR 4. In the IIIQ 2019, the equity value of the MRCC position dropped to $1.1mn from $2.6mn in the prior – inaugural – quarter. That’s not a good sign and given the BDC’s mixed history in this space and the challenges the for profit segment faces, we added New England College to the under performers list.

Back to ECA. That company has been managed by a court appointed receiver for months. Now, for reasons that are not yet clear to us, MRCC and other creditors want a final resolution of this situation. The BDC has $8.2mn at cost invested in ECA, in the form of debt and preferred. Mostly the latter. Interestingly, the BDC still valued its investment at just under $6mn as of September 2019. The creditors may believe there is still some value tied up in the business that might be unlocked by a bankruptcy process.

If the court does accede to the request, the fate of MRCC’s investment in ECA should be known soon. How the New England College Of Business spin-off plays out may take longer to clarify. In any case, this has been a tiresome episode for the BDC, which became involved with ECA and the for profit education sector back in 2015., and which went sideways in a hurry. As recently as March 2018 the investment was valued at par, as Advantage Data’s records show. We added ECA to the under performers list only in the IIQ 2018 and because the preferred was written down a modest (12%). The next quarter ECA was on non accrual. MRCC will likely have to book an eventual Realized Loss of anywhere from ($3mn) to ($8mn). We will undertake a fuller post mortem of the ECA investment in the future once the matter is closed out.

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