HIGHLIGHTS: There was only one Alert on the day, but with a considerable amount of BDC investment exposure involved (see below).
"WHO IS RIGHT ?"
Navistar International reported earnings for the quarter, and then held a Conference Call and offered up an investor presentation.
The BDC Credit Reporter had written a post on June 2 about anticipated higher EBITDA and earnings in advance of the release, quoting Zacks.
The actual earnings release was met with great excitement by investors in the publicly-traded truck manufacturing company, as earnings were up from a loss making position and EBITDA for the quarter was much higher than the prior year result.
However, as the Spotlight article we wrote on the BDC Reporter shows, we were not enthusiastic about the outlook for the Company longer term based on our review of the 10-Q, earnings, presentation and Conference Call.
(Subsequently, a credit analyst from Citi quoted in Barron's came to very similar conclusions).
INTERNAL RATING DOWNGRADE
The BDC Credit Reporter is developing its own rating system for all companies in our 600+plus Master List of under-performing credits. In this case, we downgraded our internal rating from WATCH (which implies we are just monitoring but don't expect a Realized Loss to ultimately occur) to WORRY (which means we believe the chances of investors not receiving all their capital back at the conclusion has greatly increased).
The main reasons involved are the cyclical nature of the business (heavy truck manufacturing); the Company's own projections for lower sales, EBITDA and cash for the rest of 2016; a weaker business environment both domestically and abroad, the very high levels of debt (over 7x EBITDA adjusted for maintenance capital expenditures) and the several years left to run before the maturity of the obligations.
Currently,though, the Company is current on all its obligations.
According to Advantage Data, there are 3 BDCs with about $50mn in exposure to Navistar, mostly in the 2021 Subordinated Notes referenced by the Citi analyst. All the BDCs involved are affiliated with the Franklin Square asset management firm. The biggest exposure is FSIC III-which holds both the Subordinated and a First Lien position-with $37mn at cost. The only publicly held BDC: FS Investment Corp or FSIC has a modest $7.5mn invested at cost.
The BDCs have written down the Subordinated Notes at fair value by approximately a fifth at March 31, 2016. The Senior Debt is carrierd at par.
MARK DOWN ?
Notwithstanding the huge jump in the stock price after the earnings release, the outlook for all the debt positions appear to have worsened and may result in a lower valuation mark at June 30, 2016. We will check and report back in late July.
HERE TO STAY
This is a credit which we expect will be on the BDC Credit Reporter's Master List of under-performing investments for years to come given the very high leverage, low to negative free cash flow generation and cyclical business model.
Disclosure: I am/we are short FSIC.