Coming Together 

One of our favorite points to make of late is that the BDC sector and the other parts of the leveraged lending market are increasingly overlapping.

Even more pointedly, BDCs are investing in the larger debt transactions that are covered by the SP/LSTA Index.

A few years ago BDCs limited themselves almost exclusively to lower middle market and middle market transactions, but that has changed.

As a result what happens to the 100 largest loans tracked by the SP/LSTA resonates in BDC performance as well.

Some. Not All. 

However, not every company in the index has BDCs lending them money, and not every BDC fishes in these credit waters.

Nonetheless , when we hear from S&P about the latest credit performance in the SP/LSTA space, it’s worth drilling down to determine the impact on individual BDCs.

As a report just published – February 18, 2020 – shows, recent credit results have been poor:

“With four fresh defaults already matching January’s tally, the default rate of the S&P/LSTA Leveraged Loan Index now stands at 1.95% by issuer count, the highest LTM reading since April 2018, according to LCD”.

Roll Call 

Of the four troubled companies that managed to trip up in the past 2 weeks, there are two with material BDC exposure, with $33mn invested at cost and an $18mn FMV.

These “American Commercial”,  which we know as “Commercial Barge Line” (as we use Advantage Data’s company name utilization), and whose Chapter 11 we wrote about in the BDC Credit Reporter at the time.

Then there’s fast food chain franchisee NPC International, which we’ve written about a couple of times.

NPC has not filed for bankruptcy but, by S&P’s standards, might as well have:

…NPC International Inc. elected not to make interest payments due Jan. 31, 2020, on its $655 million ($640 million outstanding) first-lien and $160 million second-lien term loans, prompting a downgrade of the facilities—both Index constituents—to D by S&P Global Ratings. Per LCD’s criteria, a lowering of the loan rating to D triggers a default. NPC reached a forbearance agreement with lenders and will not make principal or interest payments required under the first-lien credit agreement. Under the new priority term loan credit agreement, it is also restricted from paying debt service to second-lien lenders. S&P Global as such views the missed payments as a default, and does not expect.

There ‘s no BDC exposure at the moment to Pier 1, which surprised no one by very recently filing for bankruptcy protection.

Back on September 26, 2019 we wrote about the retailer, expressing our doubts about the chances of Pier 1 staying out of Chapter 11 – whatever management was saying.

In the time between our doomsaying and the filing, we learned that two BDCs with exposure jettisoned their positions after the IIQ 2019.

Main Street (MAIN) and HMS Income – which is managed by MAIN – exited somewhere in the summer or early fall, with their debt already written down by three quarters.

We have to assume a realized loss was booked of about ($12mn).

Only troubled RentPath Inc. did not have any BDC capital invested in 2019, but was held by THL Credit (TCRD) and Crescent Capital (CCAP) back in 2017.

The two lenders appear to have exited at par.

The same debt which the BDCs used to hold is currently discounted (25%). 

Summing Up

All in all, BDC exposure to this batch of defaulted borrowers is relatively modest (there are hundreds of millions of dollars of total debt in play).

Still, no less than 8 different BDCs of all sizes – with very different market strategies and reputations – have been invested since 2017 in all 4 names, and with varying results.

No Guarantees

If one had expected, though, those losses might be modest due to the exposure to debt in larger companies, the evidence in this very brief period suggests not.

We’ve noted the divergence between the Pier 1 cost and FMV.

Losses in NPC might amount to two-thirds of the capital in its second lien loans held by two BDCs (BCSF and TP Flexible Income).

Commercial Barge Lines losses – in first lien debt – may be (40%) of par, or higher to FS-KKR Capital (FSK) and Great Elm Corporation (GECC).

End On A Positive 

The Good News – in a roundabout way  – regarding increasing BDC exposure to the largest loans is that there is a great deal more public information available than in the LMM or MM sectors.

That allows the investors in the BDCs involved to make a more timely and accurate assessment of what losses to expect.

Small mercies.