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Capitala Finance: Portfolio Company Liquidated

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Preamble

At a time when there is very little in breaking BDC news, we delve back into the credit picture, reviewing underperforming companies for the BDC Credit Reporter and for our readers.

Today in our research – we’re updating Capitala Finance’s (CPTA) portfolio list as of IIQ 2020 – we leaned a good deal about one of the BDC’s multiple non accruing borrowers at quarter’s end: BigMouth, Inc.

The update from BDC Credit Reporter sheds some light on what happened to a company that was accruing income normally till the end of 2019 but has now been liquidated.

The story also provides CPTA shareholders with a clear picture as what to expect from this investment going forward. 


BigMouth, Inc. : Liquidated

The BDC Credit Reporter has learned some of the background to the recent failure of BigMouth, Inc., a portfolio company of Capitala Finance (CPTA) and – most likely – other Capitala Group entities. We know from CPTA’s 10-Q that in July 2020 a final $2.4mn payment was received by the BDC on $5.372mn invested at cost in the company. At the end of the IQ 2020, total outstandings at cost were $10.3mn. During the second quarter either CPTA received a repayment of the $5mn difference or wrote the debt off. An equity stake had been previously written off in the IVQ 2019.

From a trade article we learned that BigMouth – on the CPTA books since 2016 and on the underperforming list since IVQ 2018 – missed a debt payment to its lenders – including CPTA as recently as April 1, 2020, due to the impact of the pandemic on its business of selling pool inflatables. Very quickly after that a receiver was appointed and the business liquidated in short order. We learned that “Capitala filed suit against BigMouth April 23, claiming that BigMouth owes it $22.9 million. The amount, Capitala said in the filing, includes $20.7 million in principal on the term loan, $2 million in principal on the revolving credit, plus interest on both“.

This all happened very fast and we can’t tell from the 10-Q if the $2.4mn received in July represented the only proceeds or – as mentioned above – whether some other funds were received previously. Overall, the transaction represents a modest-sized setback for the BDC and for the Capitala Group. Unfortunately, the company seems to have been beyond saving as private equity sponsor CID Capital does not seem to have stepped in with any support, nor did Capitala seek a “debt for equity swap”.

CPTA will permanently lose close to ($1.0mn) per annum in investment income from the first lien debt lent to the company. A final realized loss will be booked in the IIIQ 2020. For our records, we have moved BigMouth from CCR 5 to CCR 6, which is the rating system we used for companies no longer held on any BDC’s books, for whatever reason. That’s why you will not find in the BDC Credit Reporter’s database of underperformers.

@BDC Credit Reporter 2020

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