Think

Oaktree vehicles hold Windstream’s prepetition debt

Although a pair of competing industry conferences took many buysiders out of pocket in the first part of last week, high-yield activity roared back to life late in the week via a procession of drive-bys, while loan arrangers launched a trio of large LBO deals off the pipeline as the secondary market continued to move higher. Several secondary situations also kept market participants on their toes, what with Windstream Services filing for bankruptcy, Neiman Marcus disclosing the framework of an extension/exchange plan and issuers releasing a flurry of earnings reports.

A very busy week ahead for BDC investors including fast moving prices; eleven new earnings releases and the vote on whether Medley Capital will merge into Sierra Income. We pledge to keep readers updated as a critical week unfolds.

Earnings:  This is going to be a busy week for BDC earnings as the season rolls on.  We’re already blanching at the prospect, with 11 separate releases coming. Far and away the most important will be the report by FS KKR Capital (FSK). This will be the first time since the merger with Corporate Capital Trust (ex-CCT), and after a name and ticker change. More importantly, we’re going to hear more about the ever huger BDC’s credit status. Reviewing the filing and listening to the Conference Call should tell investors whether the ambitious folk at this unusual arrangement between a firm best known for raising capital and another for investing capital will be successful at lending capital. To be honest, our impression from reviewing the portfolios at both entities (CCT and FSK) for some time now is that management is going to be in turnaround mode for some time to come. Much of that – if we’re right – can be laid at the underwriting taken by FS Investment’s prior partner in leveraged lending GSO Blackstone, which was not shy about taking some very large positions on behalf of the shareholders of multiple FS Investment funds in what now appear to have been some dicey propositions. KKR – now in charge of day to day investment management – re-underwrote those assets when taking over and adding their initials to the door and will have to be responsible for the consequences, if not the original credit decisions. However, KKR will benefit from being in control of many of the debt tranches through the multiple funds now under their co-tutelage with FS Investment, which will aid any work out efforts (but also prolong the time it will take to determine the final outcome). Also worth mentioning – as Oaktree Specialty Lending did last week  (OCSL) when discussing their own escape from under two troubled portfolio companies – is that the LBO market remains flooded with private equity buyers with huge untapped resources; hungry lenders of all stripes and an economy which is humming along (despite all the “next recession is around the corner” talk). As OCSL’s management noted, with a little luck and those favorable conditions, FSK may be able to dig itself out of the hole dug by another party, but which they enthusiastically adopted.

Amynta add-on deal would boost margin on debt held by Ares Capital Corp.

Last week’s holiday-abbreviated calendar offered little action in the primary markets—loan arrangers launched a mere six deals for a paltry $3.2 billion of volume, while high-yield offered a string of well-received, refinancing-related drive-by deals. However, the week offered real drama as market participants digested the fallout from the bombshell news that Windstream Services lost a default ruling to Aurelius Capital Management. That ruling cast a long shadow over the nearly $10.5 billion of debt issued by Windstream and spinoff Uniti Group.

Who’s Next ?:  Clearly, the capital markets for both debt and equity are open for business where public Business Development Companies are concerned.  Admittedly, there’s not been a flood of new capital raised but New Mountain Finance(NMFC) once again undertook a secondary stock offering at a premium to book value (even if that required some subsidizing by the External Manager) and Gladstone Capital (GLAD) entered into an equity distribution arrangement with Jefferies. On the fixed income side of the street,  mid-sized BDC Fidus Investment (FDUS) launched a second Baby Bond not long after Saratoga Investment (SAR) piled on additional issuance to its own second Baby Bond offering, while Prospect Capital (PSEC) indefatigably continued to issue InterNotes, albeit in relatively small sizes. That’s all happened just in the month of February. Also worth mentioning – but less subject to the enthusiasms of the capital markets – multiple BDCs have been not only extending but expanding their secured debt financings, including TPG Specialty (TSLX) and Hercules Capital (HTGC).