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Prospect Capital: Portfolio Company Shutterfly Downgraded

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The BDC Credit Reporter has just downgraded BDC-financed Shutterfly Inc. (The article is below as the BDC Credit Reporter is still in beta-mode and thus not behind a paywall for a few more days). There are 3 BDCs with an aggregate of $179mn invested in first lien debt in the company.

However, there is only one public BDC involved: Prospect Capital (PSEC). The BDC has advanced $20.2mn to the company, and valued its position at $17.5mn as of June 2022, a (14%) discount. Judging from the fact – as discussed below – that the debt is trading at a (38%) discount according to Bloomberg, PSEC may be writing down Shutterfly some more either in the IIIQ or the IVQ, or both. Moreover, the big discount; the increasing losses at the business and concerns about liquidity are reasons to be concerned that a default may occur.


OCT 24, 2022  1 MIN READ  PSEC

Shutterfly Inc.: IIIQ 2022 Losses Reported

A famous photo service company appears to be booking ever larger losses and debt markets are jumpy.

October 24, 2022

All of a sudden a Major (i.e. over $100mn in exposure at cost) BDC-financed portfolio company seems to be getting into trouble. We’re talking about Shutterfly, Inc. “a premium photo service specializing in the consumer and professional photography markets”. According to Bloomberg Law, the company – privately owned by Apollo Global – booked a larger preliminary loss than last year. This is reportedly ($45mn-$55mn) in EBITDA, worse than an already worrisome ($41mn) in the same period the year before.

We only recently added Shutterfly to the underperformers list after reviewing the IIQ 2022 valuation placed on the company’s first lien debt due 9/25/2026 by the 3 BDCs with exposure.  According to Advantage Data’s records, there is $179.1mn involved, and the discounts applied range from (13%) to (18%) from single digits the quarter before. The BDCs involved are non-traded Blackstone Private Credit Fund with $156.9mn advanced, followed by publicly traded Prospect Capital (PSEC) with $20.2mn and related non-traded BDC Prospect Sustainable Income Fund with $2mn.

We are downgrading Shutterfly to CCR 4from CCR 3. We’re influenced by another report by Bloomberg, itself quoting S&P Global, which  suggests the company may be having liquidity problems.”The company may face tight liquidity as the cost of its floating-rate debt rises and consumers pull back on discretionary spending in a potential recession, S&P said in the note. The company’s debt load may become unsustainable in a recession, according to the credit grader”.

All the BDCs involved are likely to write down their debt as of September 30, 2022 and – possibly – at year end. Currently – says Bloomberg – the 2026 debt is trading at 62 cents on the dollar, suggesting an additional ($36mn) in unrealized losses.  This deep a discount on first lien debt suggests holders do not much expect to be repaid in full, even if they sit near the top of Shutterfly’s balance sheet.

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