CREDIT UPDATE

Week 22

Working On

All week, in conjunction with the BDC Credit Reporter, we’ve been working on identifying every underperforming company financed by a public BDC for our database and to complement the BDC Credit Table. In addition, we’re going through the 42 BDCs we track, undertaking a full-fledged quarterly credit review for each one. This week we spent a good deal of time on Horizon Technology Finance (HRZN).

Here are the principal credit updates of the week:

New Underperformers

As we were reviewing HRZN, we noted that the BDC added a new underperformer in the second quarter of 2023, as disclosed in the BDC’s Prospectus whose publication preceded its recent secondary equity offering. Evelo Biosciences was downgraded from CCR 2 on March 31, 2023, to CCR 4. This is an important addition given the amount of investment at a cost of $44.6mn. Furthermore, there is considerable valuation downside here as the BDC’s most recent valuation was at par. The company has defaulted on its Term Loan debt with the BDC but was granted a so-called standstill agreement “pursuant to which the Company agreed to forbear and not to exercise, any and all remedies available under its Loan and Security Agreement“. The standstill was to last till May 31 but has now been extended to June 12. For anyone interested in further details, or our initial assessment of the potential loss involved for HRZN, please subscribe to the BDC Credit Reporter.

Underperformers Removed

Our research has found that two companies are no longer on the underperformers list. In both cases, the BDCs involved seem to have sold off their positions. The first was in WeWork Companies. As of the IVQ 2022, both Portman Ridge (PTMN) and non-traded Apollo Debt Solutions had exposure of $7mn and $100mn respectively, valued at cost. The Credit Reporter had rated the co-working giant down to CCR 3 in 2022 as the news about the company’s prospects and balance sheet has gotten progressively worse. Nonetheless, both BDCs valued their positions close to par, suggesting no harm, and no foul occurred.

The other exit was Byju’s Alpha, which had recently been rated CCR 3. The Indian ed-tech company has been in the headlines of late as its owners seek to restructure its balance sheet and refinance portions of its debt. Two Oaktree BDCs – including Oaktree Specialty (OCCL) – had advanced $12mn ($7mn at OCSL) in the form of first lien debt due 2026. As of IQ 2023 that debt no longer shows up in either BDC’s portfolio list. A small loss might have been incurred as the latest valuation was at an (18%) discount. Any loss, though, would be immaterial to both BDCs.

Downgraded

The only material credit downgrade was applied to IMV Inc., which filed for Canadian bankruptcy protection in May. The only BDC exposure is to HRZN, which had the following to say on its latest conference call;

 IMV is publicly traded biotechnology company that traded on NASDAQ. They’re located in Canada. They filed for what is essentially a kind of a Chapter 11 bankruptcy in the U.S., it’s called Company’s Creditors Arrangement Act, AACC — CCAA. And that gives them some protections relative to their ongoing operations. They did not inform us ahead of the filing. We have been in, obviously, discussions with them. They are — we — they have announced and even in their filing that they are looking at strategic alternatives, and they were doing that well before their filings.

So this is a company that we’ve been working pretty closely with. Again, they did not inform us of their filing on Monday, we found out with the rest of the world. But if you look at — if you happen to go to their website and look at their technology, they’ve actually had some very positive data on their clinical trials. And so they’re just at this inflection point where there is interest in their technology, but they believe that — and this is, again, not discussed with us, but they believe the best way to get a strategic deal probably done over time was through this process. And so that is, as we understand it, why they decided to go this route

As of IQ 2023, HRZN had advanced $17.4mn to the company – almost all in the form of first-lien debt. At that point, the debt was carried as performing and discounted only (3%). Now, ($2.4mn) of annual investment income is suspended due to the filing and the adequacy of the BDC’s valuation will shortly be tested as IMV seeks a buyer. For HRZN, and for the venture debt sector, both IMV and Evelo Biosciences will be well worth watching in the weeks ahead.

Upgraded

We did not upgrade any underperforming companies this week.

Credit Updates

There was bad news coming out of non-performing (i.e. CCR 5) David’s Bridal this week. The famous wedding dress company is in bankruptcy and looking for a buyer for its business. No one is coming through, and the chances of liquidation are growing. A large number of store leases are being put up for sale this month and most of the remainder may follow shortly. If David’s Bridal gets closed down in this way, the recovery for the only BDC lender involved – CIon Corporation (CION) – is likely to be poor. Admittedly, CION is already valuing its $25.4mn exposure at $10.7mn as of IQ 2023. Now there’s a prospect the final value might be even lower, but that is just a guesstimate by the BDC Credit Reporter.

Finally, there’s Better Place Forests, which has been on non-accrual since the IVQ 2022. The company has an unusual business…” Creating North America’s first conservation memorial forests for families who choose cremation. Our mission is to inspire everyone to leave a meaningful legacy for the planet and the people they love“. For reasons unknown, the company has been troubled. In IQ 2023, the second of two first-lien loans – both to HRZN – was added to non-accrual. The valuation was also decreased: to $5.2mn. How this ends we cannot say, but we’ll continue to look out for updates.

Week Ahead

As we do every week, we’ll be checking the public record for any significant news about the several hundred underperforming BDC-financed companies we track. More proactively, we’ll be continuing our quest to bring our credit records for every BDC up to date. At the moment, we’re focused on the venture-debt sector. There are 5 BDCs that focus on this part of the debt markets – much in the news these days. As mentioned, we’ve completed our review of HRZN and will be moving on to Trinity Capital (TRIN); Runway Growth Finance (RWAY); and Hercules Capital (HTGC). We’ll begin, though, with TriplePoint Venture Growth (TPVG) because the BDC announced a number of credit reverses in IQ 2023. That caused its stock price to drop sharply. We’ll be interested to see if investor concern is warranted.