Over at our sister publication, the BDC Credit Reporter we seek to track every under-performing BDC portfolio company and write an update whenever there’s any materially important news. We cover borrowers held by both public and private BDCs and we write about amounts at risk both large and small (our minimum exposure level is $2.0mn at cost). Much of what we publish does not find itself to the BDC Reporter because the credits are not held by the public BDCs we track on these pages. However, we do try to bring larger credit situations to our readers attention because the ultimate results could be material to the valuation of the public BDCs involved. Regular readers will have noted that we’ve been publishing a series of credit-related articles in this vein of late. 

The spotlight here is on Frontier Communications – a very large and very troubled public telecom company – that has been on our credit radar with its very well known troubles throughout 2019. There are eight BDCs with exposure as of September 2019, according to Advantage Data’s compilation of BDC portfolio records, with an aggregate of $67.5mn in different tranches of senior debt. Interestingly, this grouping of lenders began assembling to lend to Frontier as early as IVQ 2017, but several BDCs only added exposure very recently, when the rot had already set in at Frontier. For example, several FS-KKR Capital funds including publicly traded FSK and non-listed FSIC II, FSIC III and FSIC IV added $30mn for the first time in the IIQ 2019. At that point the BDC Credit Reporter and the rating agencies were already wringing their hands about the future credit outlook,  and the company’s share price was headed to penny stock status. (The current price: $0.64). The debt was purchased in the secondary market pretty close to par value and the effective yields are in the single digits, so we doubt these BDC lenders were drawn by the rich yields on offer. Maybe there is a “loan-to-own” strategy underway. BDCs have long gone beyond being plain vanilla lenders in the leveraged loan market, so anything is plausible. 

As we write the article below, bankruptcy is now almost inevitable and seemingly desired by Frontier’s management. The uncertainty – and what makes this story material — is just how a restructuring might play out when the Frontier Communications cake has to be divvied up and whether the BDCs involved will be impacted. To date, interest has been paid on time and the debt has been valued at par or a few percentage points above (lenders projecting pre-payment fees ?). If that turns out to be the final result, the BDCs involved will have chosen the right spot to be on the balance sheet of what is universally considered a less than well run company. If that does not turn out to be the result, and the BDC lenders – especially the KKR come latelys – get forced to take haircuts and/or do not receive interest for a long period – our conclusion will be more dour. As we’ve said, maybe some of the lenders want to own a de-leveraged Frontier post-bankruptcy and are happy to receive equity for their debt, but that seems unlikely. More likely is the calculation that a de-leveraged Frontier will represent an even better credit proposition once the more junior debt holders have seen their advances written off or converted into stock. 

The next few months will prove very interesting, and we will be returning to this subject before long. 

From the BDC Credit Reporter:

“We’ve written eight prior articles about the publicly traded telecom + cable giant Frontier Communications, dating all the way back to March 2019. In fact, the company was added to our Under Performer list following IVQ 2018 results with a CCR 3 (Watch List) rating and downgraded further to a CCR 4 (Worry List) back on June 13, 2019. More recently, we predicted the company might file Chapter 11 in the IVQ 2019, but that did not happen. In our last report before this one, though, we said a Chapter 11 filing was likely in the IQ 2020. With the latest news reports, that seems likely to turn out to be true.

“People with knowledge of the matter” – and there are dozens of lenders, lawyers, insiders and regulators involved at this stage so journalists have plenty of sources – indicate the company is aiming to file a consensual, pre-packaged bankruptcy by March. On the horizon are $356mn of interest payments due in mid-March. As a result, Frontier’s new CEO and his team have been busy – according to these reports – meeting creditors and seeking to craft out a restructuring plan that would be blessed by the court. (The company itself has no comment).

From a BDC perspective, the question is now more about how each lender class will fare in the restructuring, and what impact there will be on interest income – running about $5mn a year. As we’ve noted before, the debt held by the BDC lenders remains valued at a premium to par, both in their own valuations and when we look at the market price of their secured debt on Advantage Data. Will Frontier restructure itself, go in and come out of Chapter 11 in a hurry and have no impact on the value or income of the $67.5mn in debt held by 8 BDCs ? We have our doubts, but that’s the state of play at the moment. We shall soon learn if those valuations are appropriate”.