PREAMBLE

Work In Progress

We are in the process of undertaking a Credit Review of Cion Investment (CION), using the IIQ 2022 10-Q filing. This involves identifying every underperforming entity in the middle market focused BDC’s 121 portfolio companies. We should be finished by the beginning of next week. The process involves completing a Company File for every underperformer in the BDC Credit Reporter’s database and inputting the latest cost and fair market value of all investments, drawn from CION’s filing and Advantage Data‘s voluminous records.

A Mix

We’re also writing along the way articles for the BDC Credit Reporter about most of the more salient underperformers. Spoiler Alert: There are quite a few, and more than we anticipated. However, many of the underperformers – including several companies with loans on non accrual – have been written down to very modest valuations and cannot do much damage in the future. The company reviewed here that we’ve copied from the BDC Credit Reporter, though, could be problematic for CION – its only BDC lender.

Coming Soon

By the way – and speaking of the BDC Credit Reporter: After many years of trial and error in our quest to chronicle for readers in real-time the credit dynamics of the several hundred underperforming BDC-financed companies, we’ll be shortly launching as a premium subscriber only publication. We will be writing dozens of articles a month about troubled companies, review BDC exposure to them and offer up our assessment of what losses of capital and income, if any, might occur down the road. The BDC Credit Reporter – now on a new publishing platform than previously – should prove an important tool for any reader interested in “getting granular” with BDC credit conditions and in as timely a manner as possible. The good news for anyone interested in knowing more about the BDC Credit Reporter: for a few days more you can sign up and read both the articles and root around in our ever growing database of Company Files for free. Just click here. There’s no commitment and no charge.

FROM THE BDC CREDIT REPORTER

OCT 13, 2022  2 MIN READ

Harland-Clarke Holdings Corp: Downgraded By Moody’s

A famous check printing company which survived the pandemic is in trouble again. The prognosis is not good.

Harland-Clarke – to oversimplify “is a provider of check and check related products”. In fact, the company’s “new” name has actually been Vericast since 2020, but we use the nomenclature the BDC lenders apply in their filings. In any case, the news is discouraging for the company whatever its name. On October 7, 2022 Moody’s downgraded Harland/Vericast to Caa3. Obligations rated Caa3 are “judged to be of poor standing and are subject to very high credit risk”.

The Moody’s reasons for downgrading are numerous, but this paragraph says what we need to know:

The downgrades reflect deterioration in Vericast’s operating performance and Moody’s view that macroeconomic headwinds and the investments needed to transform the business will lead to sustained negative free cash flow, diminished earnings and weak liquidity over the next 12-18 months. A secular decline in the company’s checks and print advertising business and rising costs  will make it difficult for Vericast to improve cash flow to a level that is supportive of its current capital structure, which Moody’s views as untenable. High leverage and negative free cash flow create elevated risk of a balance sheet restructuring including a distressed exchange.

We have a CCR 4 rating already for the company, and this latest development does nothing to improve matters. We were influenced principally by the lower valuation of Cion Investment’s (CION) $9.3mn first lien 2026 Term Loan that have been showing up for the last four quarters. As of June 30, 2022, the discount was (22%). So far CION has booked ($2.0mn) in unrealized losses. More is likely in the IIIQ and beyond. A default/restructuring/bankruptcy must also be in the cards.

That would cost CION annual interest income of about ($1.0mn), depending where LIBOR ends up. Our very rough maximum loss estimate is 50% – similar to what Moody’s believes – given that financial performance is off, EBITDA down; liquidity weak and interest rates rising – a perfect storm. That could mean  CION has another ($2.7mn) in unrealized losses to book.

Of course, we’ll be keeping careful track of the company, and would not be surprised if we didn’t hear something sooner rather than later because management has some tricky refinancing to tackle in an increasingly hostile environment.

This is unfortunate for CION, which has been lending to the business since 2017 and successfully navigated the pandemic when the debt was discounted by nearly a third, according to Advantage Data’s records. This time, a return to normal seems less likely, especially as some business lines are in “secular decline” – words never used in a joyful way.