April 10, 2023
Chase Industries does business as Chase Doors and is "part of the Senneca Holdings family of brands. Senneca Holdings is a designer and manufacturer of a broad portfolio of specialty doors for commercial and industrial applications and enclosures". This is one of those BDC-financed underperformers that we both know both a little and a lot about, which makes evaluating possible credit losses difficult. Nonetheless, we're going to give it the old college try because of the several BDCs involved, the nearly $53mn in exposure and because we expect a "realization event" is coming this year. (That last statement is mostly a guess).
For history buffs, we know that the company has been on one BDC's books or another since 2012. (The long-departed public BDC MCG Capital was once a lender). Over the eleven years, there have been 3 different PE owners of the business. Through 2019, everything seemingly went to plan to judge by what we've read and by looking at the BDC valuations.
However, from 2020 first some second lien loans and then first lien loans were placed on non-accrual by the BDCs involved - Goldman Sachs BDC (GSBD); Golub Capital (GBDC) as well as non-traded Goldman Sachs Private Middle Market Lending and Golub Capital BDC 3. (To confuse matters, Bain Capital Specialty Finance - or BCSF - has not placed its first lien loan on non-accrual, but has been more aggressive than its peers in discounting the debt value).
We're now going into the third year of non-performance and - here's the guess - we expect something to be resolved in 2023. Should that occur, the BDCs most at risk are GSBD and its non-traded sister fund. They have $21.2mn of second lien exposure, already drastically written down to $3.5mn, or (83%). The first lien debt held by the other BDCs has been discounted between (6%) and (16%). That BCSF income still accruing income is doing so in a Pay-In-Kind manner, which means no one is receiving cash interest income.
When a realized loss does come, we estimate the second lien will be written off entirely and the restructuring that we expect might see a haircut of (20%) on the first lien loans. If we're right - and we may be too conservative - the total loss would reach about ($27mn) - roughly half the aggregate cost. The worst hit would be the two Goldman BDCs, with GSBD at risk of losing $9.7mn from a loan that was inherited from Goldman Sachs Middle Market Lending, which merged some time ago into the public player.
Here's the sort of good news: Because BDC exposure is spread out over 5 different entities and significant unrealized write-downs have been taken already, there should be little in the way of incremental asset value loss. Moreover, with everyone but BCSF not booking income for some time, any resolution could free up capital that could be proactively re-deployed elsewhere at a time when loan yields are remarkable. (How BCSF might disentangle all this is too complicated for us to consider).
Now we have to wait all year to see if this long-standing problem credit gets resolved in 2023 which - as we've sought to show - could be a hidden blessing.