There are numerous portfolio companies that BDCs finance which are privately-held and for which there is little or no public information. We are reliant on whatever the BDC involved is willing to divulge about what is going on. A prime example is Maxus Capital Carbon (aka Carbonfree Chemicals), a chemical plant that was financed by Apollo Investment (AINV) starting back in 2013. The initial funding was a $60mn Term Loan, due in 2019, and with a 13.0% interest rate.

Something seems to have gone wrong with Maxus/Carbonfree (aka Skyonics) as AINV had to ante up a $6mn Subordinated Loan as well in late 2017 and more capital in 2018. As far as we can tell the obligations have been extended and or increased or repriced at least 4 times up until September 2019. At that point, AINV had $63mn in debt to the company and $9mn invested in equity. The debt had an interest rate of 5%, which was being paid in PIK form and had a 2021 maturity. The equity was written to zero. In round numbers, AINV had $72mn invested and an FMV of $56mn.

Now we learn – if only in a response to a question from an analyst on the latest AINV Conference Call – that Maxus has been restructured again. The debt has been extended to 2024 – still at the same rate- but has been reduced in amount to $30mn and valued at par. AINV now has equity in an affiliated company as well in Carbonfree Chemicals SA, with a cost of $14.3mn and an FMV of $10.2mn. Here’s how AINV’s CEO Howard Widra explained the various trade-offs associated with this Brave New World for Maxus:

“Basically what was running this project both to produce profit as well as to build off an IP value of sort of a carbon-free technology. Our restructure basically changed our deal to sort of align us directly with that equity investor. So we had — we both had debt on our operating company, if you will, and we had ownership in the IP that is monetizable in other places, we believe, and has raise money at a good valuation. And so what we have done in terms of sort of the stability of the — so one, we’ve diversified our collateral, if you will. So we basically, the position now has both the previous collateral had before, which is this plant, and it also has this IP, which is separately — has separate value. That’s one. And two, because of that and because of allocating a portion of the value to that equity, the debt that the operating company is forced to carry is now much lower. So the cash flow profile of that entity is — it’s easy for it to service that debt. It’s still driven by a commodity price. So it can still have some variability on its ability but it now has less debt, so it has a much lower burden of debt. Also, no PIK, you don’t want to accrue anymore. So it’ll be — it’ll have something like $33 million of debt that will pace steadily that it could cover, which is far less than it had covered before. And then we have the separate pool of value. And so we view it as meaningfully de risked from where it was before. Obviously, we’re rolling down as well. So there’s let debt. There’s less debt to service and there’s more collateral”.

Evaluating whether the restructuring is fair or foul is impossible for us to do. Too complicated. We feel we’re on stronger ground with the following assertions of fact: First, interest income from Maxus will be greatly reduced going forward given the smaller amount of debt outstanding, costing the lender about ($1.6mn) of annual investment income. Second, AINV booked a Realized Loss of ($9mn) in the IVQ 2019 on this investment. The BDC also booked unrealized depreciation of ($2.9mn).

Notwithstanding all the above, it’s not clear that the underlying business is viable or capable of generating a return, so we are retaining Maxus on the Under Performers List – where it’s been since IVQ 2016 – and with a CCR rating of 4 (Worry List). With $55.2mn remaining in value, and $1.6mn of investment income still in doubt, this complex tale is far from over.When we learn more – and what – will probably be dependent on what AINV is willing to divulge.