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|Includes: ARCC, FS Investment Corporation (FSIC-OLD), HCAP, TCAP-OLD

HIGHLIGHTS: A relatively busy day for under-performing companies owned by Business Development Companies.


The top development was the not-unexpected, but long delayed, bankruptcy filing of oil and gas producer Warren Resources. Once again lenders and the Company management hashed out a debt-for equity-swap. First lien lenders will write-off most of their debt in return for most of the equity, and Senior Note Holders and second lien lenders write-off debt for a sliver of common stock. Public shareholders are wiped out.

There is considerable BDC exposure to Warren Resources but all concentrated in Franklin Square vehicles-all booked by GSO-Blackstone and spread among three different "FS" funds. Although all the Franklin exposure is in Senior Secured First Lien debt, there will be debt forgiveness involved, lower income and continued uncertainty about Warren Resources viability. This is a black eye for GSO-Blackstone, which has made many a bet on smaller energy companies, and seen many similar outcomes.


Less dramatic, but potentially telling, is the news reported by a local business magazine that a subsidiary of Eckler Industries-which is involved in the auto parts business-is being closed down. Staff are being fired, some rehired and the business consolidated into another parts subsidiary.

BDCs (Triangle Capital and Ares Capital) have substantial exposure to Eckler in several forms, all up and down the balance sheet. We added the Company to our Master List eons ago because the equity and Preferred have been essentially written off on a fair market value basis, suggesting under-performance. However, the First Lien and Subordinated debt in the Company is marked close to par, and all the loans are performing, so we have the Company only on Watch status. It's hard to tell if this consolidation will help or hurt the chances of lenders and investors in Eckler getting repaid.


Finally, sex shop chain owned by Peekay Acquisition recently announced yet another Forbearance Agreement with its lenders. The latter should have been paid off months ago, but the business and alternative sources of repayment have not being going well. The only BDC exposure is modest and with Harvest Capital (NASDAQ:HCAP) in the Senior Secured. A bankruptcy is still possible, and a Realized Loss. Just ask the Company's auditors who cannot offer up a "going concern" reassurance in their audited statements.


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Disclosure: I am/we are long HCAP, ARCC.

Additional disclosure: We are also short FSIC.