INTRODUCTION

We are re-publishing our weekly “free” article from our sister publication – the BDC Credit Reporter. This post relates to the failure of an agtech “unicorn” – Bowery Farming – that Credit Reporter has been tracking for some time. The business began to stumble as far back as the IV 2022 and became non-performing in the IIIQ 2023.

This failure is interesting on a couple of levels. We’ve been surprised that FS-KKR Capital (FSK) took on his sort of venture borrower. It’s outside the ambit of what we’re accustomed to for the upper middle market, sponsor-backed focused BDC.

Also, the change in valuation over time is eye-popping even in these days of over-hyped companies. As PitchBook tells us this was once a very “hot” business:

[Bowery Farming] at its peak was valued at $2.3 billion, raised venture capital totaling over $700 million from a cohort of leading firms and A-list celebrities including Justin Timberlake, Natalie Portman and Lewis Hamilton. Promising to modernize the agriculture industry, Bowery partnered with grocery chains including Whole Foods, Amazon Fresh and Albertsons.

PitchBook

BDC managers are keen to tell us on every conference call that their loans don’t amount to more than 40% or so of the enterprise value of their borrowers. What is less discussed is how fragile that enterprise value can be, not only for start-ups like Bowery Farming but even for supposedly well established businesses that go down the drain. Not so long ago Ares Capital (ARCC) and Varagon had advanced $190mn to Center For Autism & Related Disorders. The latest value is nil following its bankruptcy.

Re-Printed From The BDC Credit Reporter

Bowery Farming Inc: Company Is Liquidated

We continue to believe that FSK and TRIN could both end up losing (100%) of their capital invested [ in Bowery Farming Inc.], which means that further losses of ($18mn) are possible even at this point. We estimate ($12.7mn) of annual interest is being forgone and has been since the IIIQ 2023 – i.e. coming up on a year.

We wrote the above two months about and – unfortunately – we appear to have been right. We are hearing from multiple sources, including PitchBook – that the company has “closed down”.

Bowery Farming, a leading agtech company backed by General Catalyst, GV, Temasek, and Fidelity Management, is ceasing all operations, according to a document seen by PitchBook and multiple company employees.

All of its employee sites, including its indoor farming facilities, will be closed and employees laid off effective immediately, according to the document.

…

The company told staff that it had been actively attempting to secure financing or sell the company, but that it was unsuccessful in reaching a deal.

An email to the company was returned with a notice that the account would be monitored through Nov. 30.

Trinity Capital (TRIN) – one of the two BDCs involved – has just reported IIIQ 2024 results and reduced the valuation of its $8.2mn investment at cost to $1.6mn. FS-KKR Capital (FSK) – with much more to lose – has not yet reported its latest results – has $74mn invested, but with a value of $15.3mn. Based on what we’ve read, we continue to believe the entire investment will go the way of all flesh.

Administratively, we are getting pro-active and re-rating the company from CCR 5 to CCR 6 – no longer a portfolio company – which should show up in the IVQ 2024 results of the two BDCs.

Once again a company that only recently had “unicorn status” has collapsed, bringing down not only the venture capitalists involved but also the lenders who – presumably – thought they were lending at a modest loan to value, but were actually at 100%. Neither the BDCs – nor the rest of us – should take comfort from the early valuation hype around start-up companies which has little correlation to long-term success. The bigger these unicorns are, the harder they can fall.

We’ve just updated TRIN’s non-accrual performance in the IVQ 2024 in our Credit Table. In the quarter ended September 2024 one company was removed from non-accrual. That was Nexii Building Solutions, which we’ve written about repeatedly – most recently on July 31, 2024. TRIN booked a near ($16mn) realized loss, but that was long expected. (Nexii remains on the TRIN books in a greatly restructured form with $4.8mn invested at cost and mostly in preferred and equity. We’re upgrading the company to CCR 3, but the position is non-material for TRIN but remains above $5mn for the other BDC involved – Horizon Technology Finance or HRZN).

TRIN added 2 new non-accruals in the most recent quarter. Both new arrivals, though, had a non-material value (ie. under $5mn). Next quarter, Bowery Farming will likely leave the non-accrual list. That will leave TRIN with 4 non-accruals – assuming no further additions – but only 1 Important Underperformer: NextCar Holdings, in which the BDC has invested $27.6mn and has valued at $13.6mn. NextCar is on our IIIQ 2024 update list, so stay tuned.