Republished From the BDC Credit Reporter

Maintained at CCR 5. Restructuring Likely. Large Losses Possible.

We are making this article available to all to showcase the sort of content the BDC Credit Reporter has on offer and on the hope that you will join us a – still only $50 a month. You can cancel at any time, but you won’t want to because the BDC credit picture is getting ever more complicated and the BDC Credit Reporter is the only publication dedicated to untangling what is happening at every notable underperforming company out there : those likely – like Thrasio – to materially impact your favorite BDC’s net asset value, earnings and distributions.

We’ve written about Thrasio Inc. twice before. In our most recent article dated August 21, 2023, we downgraded the company from CCR 3 to CCR 4 on the back of June 2023 valuations provided by multiple BDCs. In the interim, some lenders have placed the 2026 First Lien Term loan they hold on non-accrual when reporting IIIQ 2023 results, while others have not. We downgraded the company to CCR 5 as a result.

Now the IVQ 2023 has rolled around and the first of nine BDCs with exposure to Thrasio has reported its results and offered up a brief description of what is going on. Here is what Oaktree Specialty Lending (OSCL) had to say on its recent conference call:

 …Thrasio, an Amazon Marketplace aggregator. This is a company that capitalized on elevated demand during the pandemic, which required growing its operations and increasing leverage. Recently, it has faced operational challenges related to supply chain delays and inventory as well as reduced Amazon traffic. The company entered forbearance on our loan during the first [fiscal] quarter, and we are engaged with the management team and other lenders to develop a new path and the best possible outcome, potentially including a restructuring.

OCSL holds both first lien debt  ($45.7mn) and preferred ($38.5mn). This quarter, the former was discounted (39%) and (71%) respectively. A quarter before, the debt was written down only (5%) and the preferred (17%).

The company has been on bankruptcy watch since September 2023 but nothing has happened as yet. The whole “Amazon aggregating” sector – once a “Big Thing” that raised $16bn in capital is now “dead” – according to a trade publication.

We are even more skeptical about recovery rates in any bankruptcy or restructuring than we were before. Last time we wrote, we estimated losses would be in the (25%-50%) range. This is being increased to (50%-75%) range based on the latest info, which is important given both the number of BDCs involved and the amount of BDC capital invested at cost: $221mn. At the outer edge of the potential loss range that means realized losses could reach ($166mn). Several other BDCs including BlackRock TCP (TCPC); BlackRock Investment (BKCC) and Monroe Capital (MRCC) continued through September 30 2023 to treat the same debt as performing. We estimate that ($23mn) of annual interest income is going to be, or has been, interrupted.

Not to be dramatic but this threatens to be a credit bloodbath with OCSL at risk of the greatest loss – around ($60mn) – and above-average losses for BKCC, TCPC, BCSF, and GSBD.  We’ll provide a further update when a “realization event” occurs which should be soon enough.