4/28/2022: Dunn Paper has been in financial difficulties in recent months due to “declining profitability and elevated leverage”, as admitted by the company in a press release. In March 2022, an interest payment on senior debt was missed, which required the borrower to enter into a forbearance agreement with some of its lenders. A new credit facility has been received, although the amounts and terms are not known. (For a brief explanation of Dunn Paper, see a company description at the bottom of this post).
The above notwithstanding – on April 26, 2022 – a specialist publication – quoting anonymous sources – indicated second lien lenders are banding together; hiring counsel and seeking to push for a sale of the company. As you’d expect details are sparse. However, we imagine several BDCs might be represented in this group of second lien lenders. Prospect Capital (PSEC), Southwest Capital (CSWC) and a non-traded BDC all have second lien exposure to Dunn. (PSEC is also in the first lien debt).
Dunn has been underperforming only quite recently – since IIIQ 2021 – when all the BDCs involved started to write down the value of the second lien debt. As of the IVQ 2021, the biggest discount was applied by CSWC: (16%). All in all, BDC exposure amounts to a relatively modest $21mn, with PSEC holding $16mn, including $4mn in first lien exposure. Until the latest news, we rated Dunn CCR 3 on our 5 point investment rating scale. Now, Dunn has been moved – due to its failure to make an interest payment – to CCR 5.
The yield on the second lien debt was being charged at just over 10%, suggesting total annual income forgone on the second lien debt is ($1.7mn), and another ($0.3mn) on the first lien.
Dunn’s weak financial performance – according to their own reports – seems to derived from the supply chain and related inflationary increase of input costs. That might mean what ails the business might be salvageable by a restructuring or the sale to the right party. The PE sponsor recently brought back “Founder” Brent Earnshaw as CEO, amidst other senior executive changes. That must give some hope to the second lien lenders that a full recovery – or something very close to one – is a realistic prospect. We get the impression from reading between the lines that this troubled situation will be resolved within a relatively short period.
We will continue to track the public record and ascertain what valuations PSEC and CSWC ascribe to their respective positions when IQ 2022 results are published. Neither BDC, though, has yet set a date for reporting their most recent results. At the moment, we expect neither the interruption of income nor any realistic prospective loss to be material for the BDCs involved, and there’s always a chance this will be resolved without any significant loss.
About Dunn Paper
Dunn Paper is a leading manufacturer and supplier of advanced paper, tissue, and packaging products for use in food, medical, and specialty markets. The company operates 7 paper mills across the United States and Canada and focuses on eco-friendly specialty paper and tissue. Dunn Paper also works with top converters allowing their sustainable paper products to have thousands of potential applications. The company’s first mill opened in 1924, and in 2016 the company was acquired by Arbor Investments, a specialized private equity firm with a focus on premier companies in food, beverage, and related industries.Dunn Paper Press Release April 22, 2022