INTRODUCTION

In the absence of much other market moving BDC news, we’re re-publishing two articles from the BDC Credit Reporter about the unfolding troubles at a portfolio company of multiple BDCs: Securus Technologies. In a year with several spectacular credit setbacks Securus may end up ranking quite high, and might especially impact two public BDCs that have already taken quite a beating where losses are concerned. To the BDC Credit Reporter, this was a self-inflicted credit wound – one that the BDCs could have avoided at the outset by keeping their wallets in their pockets. We will let our readers decide for themselves if they agree, or not:

Securus Technologies: Exploring Bankruptcy Options

Remains Rated 5 & Important Underperformer

December 11, 2024

The last time we wrote [see article below] about Securus Technologies (aka Aventiv Technologies) we were skeptical about reports that the private equity group which owns the prison telephony company had found, or would find, a buyer. That was a common sense prediction that has proven to be correct. We’ve now heard from Bloomberg Law that:

Aventiv informed lenders that it didn’t meet a December milestone to find a buyer for an amount that would have at least repaid the company’s debt, said the people, who asked not to be identified discussing a private matter.

A three-person committee will oversee the restructuring process, through which the company could either be sold or taken over by lenders under Chapter 11, according to other people familiar with the matter…

In our last article, we mused as to whether lenders would be ready to take on the mantle – and responsibilities of ownership – if offered:

This is not just a matter of an over-leveraged business needing to be right-sized. The company’s raison d’etre – supplying telephony to inmates in prisons for a fee – is under attack. Both governmental authorities and social activists are questioning the high fees charged. Yet, it’s clear that the company is not sufficiently profitable and only growing modestly. We even wonder if lenders will really want to become owners of this poisoned chalice if no buyer is found…

We wonder still, but the answer will be with us soon. As we’ve noted before, there are many BDCs involved and many, many dollars. At cost, total BDC exposure comes to $124mn, and the public BDCs involved are BlackRock TCP Capital (TCPC); Cion Investment (CION); MidCap Financial (MFIC) and Prospect Capital (PSEC). Two non-traded BDCs are also lenders. As of the IIIQ 2024, the debt has been valued at $95mn. However, we note that CION, MFIC – and most especially PSEC, which has the most to lose – have discounted their second lien by (15%)-(28%). By contrast, TCPC – also a second lien lender – is the only one to treat the loan as non-performing and is using a (67%) discount. We expect the second lien could be completely written off.

Even where the first lien held by BDCs (again where PSEC has a large position), we have to wonder whether the 1% premium to (4%) discounts applied are realistic. In a sale or even a debt-for-equity swap a greater degree of loss might occur. We don’t want to sound like the Grinch but Securus might end up being worth less than a fifth of the amounts advanced, with PSEC and TCPC most at risk – two BDCs most in need of a break right now.

Securus Technologies: Sales Deadline Approaches

Remains Rated CCR 5 And Important Underperformer

October 18, 2024

On October 17, 2024 there was an article in Bloomberg. (which was updated today) about developments at Securus Technologies (currently named Aventiv) which was supposed to be reassuring, but has left the BDC Credit Reporter more concerned than ever about the prison telephony company. It’s public knowledge that the PE sponsor – Platinum Equity – has been required by the company’s lenders in a March 2024 agreement to find a buyer for the business by December 2024 or face bankruptcy – and a possible debt-for-equity swap. Moreover, $1.0bn of first lien debt is due November 1 according to Bloomberg, which by our calendar is just a few days away. The lenders have already advanced $40mn to the company recently to prop up its finances so we imagine nerves are getting frayed for everyone involved.

In September, Securus met one of its covenants by apparently receiving a buyout bid from an interested purchaser that would – at least – cover “the debt” – as per Bloomberg. (Unclear is whether “the debt” is just the senior debt or the full debt stack of $1.7bn). Bloomberg is now reporting – “according to people familiar with the situation who asked not to be identified discussing a private matter ” – that “there’s been interest from multiple parties to purchase the prison-phone company”.

Rather than being reassuring, this latest leak – and the attendant news that Securus/Aventiv is reporting “slight revenue and earnings growth for 2024 so far” – leaves us more concerned than ever that this is not going to work out for the company – and more importantly – for the BDC lenders involved. This is important because there are many public BDCs involved and – making things worse – most of their advances are in second lien debt. At cost, total BDC exposure comes to $122mn, and the public BDCs involved are BlackRock TCP Capital (TCPC); Cion Investment (CION); MidCap Financial (MFIC) and Prospect Capital (PSEC). Two non-traded BDCs are also lenders. As of the IIQ 2024, the debt has been valued at $87mn.

Our concern – and we’re editorializing here – is that no buyer will appear at the last minute and bankruptcy will follow. Nor will that be the end of the story. This is not just a matter of an over-leveraged business needing to be right-sized. The company’s raison d’etre – supplying telephony to inmates in prisons for a fee – is under attack. Both governmental authorities and social activists are questioning the high fees charged. Yet, it’s clear that the company is not sufficiently profitable and only growing modestly. We even wonder if lenders will really want to become owners of this poisoned chalice if no buyer is found…

We might be wrong because our information is patchy but our self-appointed job is to point out potential credit trouble ahead and Securus/Aventiv fits the bill. At the moment, we’re assuming losses – should they occur – will be in the 75%-100% range for the second lien debt and 0%-25% for the first lien (which is reportedly trading at a discount of only 5% in the market at the moment). Most of this debt – except for $25mn of second lien debt held by TCPC – was still carried as performing at mid-year. That means a huge amount of interest could be added to non-accrual if this plays out as we fear. Likewise, the potential aggregate realized loss could reach ($100mn) – 80% of cost.

We are retaining the CCR 5 rating and the Important Underperformer designation and will circle back to Aventiv as soon as we hear something new. We hope our pessimism is unfounded because this might be a nasty reverse, albeit one that could have been avoided. The company’s questionable business model has been public knowledge for years, even under its prior PE. It’s all very well for BDC lenders to see themselves as not being “woke” but common sense would have suggested that a business with so much “baggage” might be worth skipping when there are so many other lending opportunities out there.

Re-published from the BDC Credit Reporter