BDC CREDIT

Week 2

Overview

The second week of the year was a busy one where distressed companies were concerned. However, there was only modest activity impacting the 43 public BDCs we track, as we’ll show.

By the way, for Week 1’s Credit Recap, click here.

BDC FINANCED COMPANIES

Bankruptcy Filings

Only one company financed by a public BDC filed for Chapter 11 this week, as far as we can tell. That was Tricida Health – a pharmaceutical company with $350mn in debt. The business was brought down by the failure of its research to meet clinical requirements.

Already In Bankruptcy

The biggest news of the week was that the BDC Credit Reporter updated the Interior Define story, based on new information coming out of its only BDC lender Horizon Technology Finance (HRZN), and reduced its estimate of the likely realized loss on the company:

Also in the news was bankrupt crypto miner, Core Scientific. The company seems to be generating income from its mining activities in November and December. We also learned that Celsius – its largest former customer and also in bankruptcy – has sold off some of its mining rigs for $1.3mn.

All this still leaves it unclear if the exposure to Barings BDC (BBDC) and Trinity Capital (TRIN) will be getting a bigger or smaller recovery when the Chapter 11 process is completed.

Bankruptcy Expected

There has been a multitude of dire warnings that Bed Bath & Beyond will file for bankruptcy and Carvana Inc. will not be far behind.

As noted in Week 1, Sixth Street Specialty Lending (TSLX) has $53mn in first lien debt. Given the recent addition of this debt to TSLX’s books, we expect the advance to be well-secured and don’t expect any loss to occur even in bankruptcy.

It may or may not be a similar storyline at used car dealer Carvana. The only public BDC exposure is from Oaktree Specialty Lending (OCSL), which has invested $5.8mn in first lien debt alongside two other non-traded BDCs for a total of $56mn. This debt, too, originated only in the IIQ 2022 when Carvana’s troubles were well known, and we presume the debt is well secured and sits high on Carvana’s balance sheet. However – unlike TSLX’s position in BB&B which is valued at par- OCSL and the other lenders have already discounted their positions by (18%).

In Default

This week, we heard from Saratoga Investment (SAR), reporting its quarterly results through November 2022. We won’t repeat our credit findings, which can be found in a full-length article. The notable item for our purposes here is the only SAR portfolio company currently non-performing: Knowland Technology Holdings. The $15.9mn invested in second lien debt remains – as the quarter before – discounted by (39%), but potentially at risk of a full write-off. For the full story see the latest update in the BDC Credit Reporter.

NON BDC-FINANCED COMPANIES

Bankruptcy Filings

We don’t pretend to capture all significant leveraged company bankruptcies, but we identified 6 new filings in this week alone – none of which involved any public BDCs but still a useful indicator of what’s happening in the broader environment: Nautical Solutions; United Furniture Industries; Quotient Inc.; Window Select; American Virtual Cloud Technologies and Forma Brands/Morphe Inc.

Bankruptcy Expected

If that wasn’t bad enough, at least two other companies are expected to follow in the weeks ahead: Party City and Avaya Holdings.

CONCLUSION

Seven bankruptcies in one week is a material, eyebrow raising, number. However, public BDC investors have barely been impacted by all these credit setbacks, as shown. Moreover, the news about the potentially lower loss than we anticipated at Interior Define is good news of a sort. Likewise, the SAR quarterly filing suggested no great changes in their credit picture, which may or may not augur well for the many other IVQ 2022 quarterly filings to come in February.

Even the spate of bankruptcies at companies not financed by public BDCs is not as worrying as it might be. Based upon what we know, most of these credit setbacks were set in motion some time ago and tell us more about the companies involved than the condition of businesses generally. Of course, the reported slowdown in consumer spending and the undeniable increase in interest rates has accelerated the descent of companies like Bed Bath & Beyond; Party City, and United Furniture Industries.

If there is any trend discernible in the first two weeks is that venture-debt financed companies that have tripped up are likely to end up on the chopping block faster than they might have in more expansive times.