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Ameritox Ltd: Major Losses Incurred In Restructuring But Questions Remain

|Includes: Oaktree Strategic Income Corporation (OCSI), OCSL
  • August 10, 2016: On the Fifth Street Senior Floating Rate (FSFR) Conference Call a few more details were provided about Ameritox Ltd.
  • The Company's debt had been placed on non accrual in the prior quarter. Only a year ago, all investments held by BDCs in the Company were marked close to par.
  • In April 2016, the lenders (including Fifth Street Finance (FSC) and FSFR restructured the investment outside of bankruptcy court (in conjunction with the sponsor group) and swapped debt for new loan facilities and equity in the troubled Company. Here is the quote from the CC:
  • "During the June quarter, we removed Ameritox from non-accrual but continued to suffer markdowns of the investment. In April, our portfolio management team worked closely with the company and its sponsor owners to restructure the investment, and we exchanged our debt investment for debt and equity securities on the restructured entity. As equity holders in Ameritox, we may experience more volatility around the mark-to-market of this investment".
  • FSFR had $21.3mn outstanding to Ameritox as of March 2016 (see page 10 of the 10-Q), all in the form of senior debt, and had already marked the position to $12.5mn at fair value. During the IIQ the BDC recorded an $8.7mn Realized Loss and now has a $6.3mn First Lien Term Loan with a 9% yield (thanks to a 1% floor) and 3% PIK payment, due in 2021.
  • There is an additional $9.6mn invested in two Preferred issues and common stock of the Company. We don't believe the Preferred is paying any income on a current basis.
  • In toto FSFR has $15.9mn at cost in the restructured Ameritox. However, business performance continues to be challenged, and FSFR has written down the value of the new positions to $13.5mn already.
  • BDC Credit Reporter calculates that interest income at FSFR will be reduced by about $1.2mn a year (even more in cash terms) by the restructuring, which is 4 cents in annual investment income per share. Any recoupment of capital lost by dint of an increase in the equity or Preferred remains speculative at this stage. We will review impact on FSC at a later date, but appears to be substantially higher in absolute dollars.
  • BDC Credit Reporter says: "Ameritox remains on our Worry List. Further write-downs are possible and the investment remains a material exposure for FSFR at 4.2% of net equity. There is upside possibility here but we are more concerned about further downside".
  • We add:" Another example of BDC lenders believing they have ability to turn around under-performing portfolio companies. Proof of the pudding will show up in the quarters ahead".
  • Final word: "This is a big set-back for the Fifth Street Asset Management platform due to the large amount of capital deployed from multiple funds, the significant amount of the Realized Losses and current income losses incurred already in what were mostly billed as senior secured loans, and the speed of the deterioration in the credit."
  • BDC exposure: Moderate (between $50mn-$100mn). Split between two related Fifth Street public BDCs: FSFR and FSC, as per Advantage Data.
  • Source: Advantage Data (advantagedata.com)
  • FSC, FSFR

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.