Gladstone restructures loans in Galaxy Tool, Tread; sells Funko

Gladstone Investment Corporation has restructured investments in Galaxy Tool and Tread Corp. in the recent fiscal quarter, exchanging debt holdings for equity, an SEC filing showed.

Gladstone Investment booked a realized loss of $10.5 million when the lender restructured its investment in Galaxy Tool. Debt to Galaxy Tool with a cost basis of $10.5 million was converted into preferred equity with a cost basis and fair value of zero through the restructuring transaction, the SEC filing showed.

Galaxy Tool, based in Winfield, Kan., manufactures tooling, precision components, and molds for the aerospace and plastics industries.

An investment in Tread included debt with a cost basis of $9.26 million. This was also converted into preferred equity. Gladstone Investment realized a loss of $8.6 million through the transaction.

Tread was Gladstone Investment’s sole non-accrual investment as of Sept. 30. As of Dec. 31, 2015, a revolving line of credit to Tread remained on non-accrual. Tread remains Gladstone Investment’s sole non-accrual investment.

Based in Roanoke, Va., Tread manufactures explosives-handling equipment including bulk loading trucks, storage bids, and aftermarket parts.

Also in the quarter, Gladstone Investment sold an investment in bobblehead and toy maker Funko, realizing a gain of $17 million. Gladstone Investment received cash of $14.8 million and full repayment of $9.5 million in debt as part of the sale.

Gladstone Investment Corporation, based in McLean, Va., is an externally managed business development company that trades on the Nasdaq under the ticker GAIN. The BDC aims for significant equity investments, alongside debt, of small and mid-sized U.S. companies as part of acquisitions, changes in control, and recapitalizations. — Abby Latour

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Lazard Taps Ziman to Bolster Restructuring Group

Lazard today announced that Ken Ziman will join the firm as a managing director in its restructuring group, effective March 1.

Ziman, who will be based in New York, was most recently deputy practice leader of corporate restructuring at Skadden where he represented companies in out-of-court restructurings and in-court proceedings, as well as lenders to and investors in troubled companies. — Rachelle Kakouris

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Bankruptcy: Arch Coal Files Chapter 11, has $275M DIP Loan

Arch Coal filed for Chapter 11 today in bankruptcy court in St. Louis, Mo., saying it had entered into a restructuring support agreement with an ad hoc group of lenders holding more than 50% of the company’s first-lien debt that would eliminate more than $4.5 billion from the company’s balance sheet.

The company’s Chapter 11 petition listed about $5.85 billion in assets and $6.45 billion in total debts.

The company said in a statement, however, that it would have “sufficient liquidity to continue its normal mining activities and to meet its obligations in the ordinary course,” noting that it has more than $600 million in cash and short-term investments, and that it “expects to receive” $275 million in DIP financing from the aforementioned ad hoc group of lenders. The company also said it expects that its securitization financing providers will continue the company’s $200 million trade accounts receivable securitization facility.

The road to Chapter 11
As reported, the company elected not to make a $90 million interest payment due to bondholders on Dec. 15, 2015, instead entering into a customary 30-day grace period in order to buy time to negotiate a restructuring with lenders.

As also reported, in late October the company was forced to cancel a proposed multi-tiered uptier exchange on four series of unsecured notes, which the company launched on July 3 in an effort to deleverage its balance sheet, after it failed to generate enough support amid a dispute between its lenders. Senior lenders had instructed the trustee under the company’s $1.9 billion first-lien facility not to cooperate with the exchange, arguing that it was not permitted under the MFN provisions of the company’s credit agreement.

Arch, of course, is just the latest coal company to succumb to the industry’s widely publicized woes, with names such as Alpha Natural Resources, Patriot Coal, and Walter Coal having preceded it to bankruptcy court. In this regard, it is worth noting that neither Patriot nor Walter was able to reorganize via a standalone reorganization plan, and both companies opted for Section 363 asset sales. ANR’s Chapter 11 is still pending.

According to a first day declaration filed in the case by company CFO John Drexler, however, Arch expects to return to viability through a reorganization plan. According to Drexler, “Unlike almost all other coal producers that have sought bankruptcy protection, Arch has no labor-related issues that need to be resolved in Chapter 11.”

Drexler continues, “There will be no Section 1113 or Section 1114 process [to reject labor contracts or pension plans] in these cases. Arch’s single-employer pension plan, which is frozen, is well funded, and is not expected to be affected in any way by or during these cases.”

Drexel said the company would therefore be able to focus its attention on marshaling its resources to reorganize, adding it is confident that it will be able to “leverage [its] superior low-cost thermal and metallurgical coal asset base and their highly-skilled management team and workforce to create substantial value for their stakeholders.”

Plan terms
Under the reorganization plan contemplated by the RSA, senior lenders would receive $145 million in cash, $326.5 million of new first-lien debt, and 100% of the reorganized company’s equity, subject to dilution on account of the management incentive plan and any distributions to unsecured creditors of equity and warrants.

The new first-lien debt would have a term of five years, with interest at L+900, with a 1% LIBOR floor, payable in cash (interest would be payable in kind if the company’s available cash, including under any working capital facility, falls below $375 million).

If unsecured creditors vote as a class to approve the plan, the holders of unsecured claims, along with holders of second-lien debt claims, would have the option to receive either 4% of the reorganized company’s equity and five-year warrants exercisable into 8% of the reorganized company’s equity (with those distributions proportionally reduced based on the amount of claims that opt for this recovery), or a pro rata share of the value of the company’s unencumbered assets, after giving effect to first-lien adequate protection claims, administrative costs, and priority payments (again, with any distributions proportionally reduced based on the amount of claims that opt for this recovery).

If unsecured creditors accept the proposed plan, first-lien lenders would waive their deficiency claims for purposes of receiving a distribution, but not for purposes of voting,

If unsecured creditors vote to reject the plan, then unsecured creditors (including holders of first-lien deficiency claims) would receive a pro rata share of unencumbered assets, again after giving effect to first-lien adequate protection claims, administrative costs, and priority payments.

The company’s covenant-lite term loan due 2018 (L+500, 1.25% LIBOR floor) is quoted around a 40 context this morning, versus 42/43 on Friday.

The DIP facility
The proposed DIP facility would consist of term loans that must be funded in not more than two draws within four months after the effective date of the facility. Any unfunded amounts are to be permanently canceled.

The facility will expire on the earlier of Jan. 31, 2017, or upon the effective date of a reorganization plan.

Interest would be at L+900, with a 1% LIBOR floor. The facility would carry a commitment fee of 5%, an unused commitment fee of 5%, and a commitment termination fee of 1%.

As for milestones, the company is required to deliver an updated business plan to DIP lenders within 60 days (by March 11) and file a reorganization plan and disclosure statement within 90 days (by April 10). The disclosure statement must be approved within 60 days of the filing of a plan, a reorganization plan must be confirmed within 90 days of disclosure statement approval, and the company must emerge from Chapter 11 within 15 days of plan confirmation.

Those milestones would put the outside date for Chapter 11 emergence at Sept. 22.

Davis Polk & Wardwell LLP is serving as legal advisor to Arch Coal, and PJT Partners is serving as financial advisor. — Alan Zimmerman/Rachelle Kakouris

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Bankruptcy: Walter Energy Urges Approval of Asset Sale to Stalking-Horse Bidder

Walter Energy said it did not receive any competing bids for the sale of its assets and that it would seek to proceed with a sale to its stalking horse bidder, Coal Acquisition LLC.

The deadline for bids was Jan. 4. A hearing to approve the sale is set for Jan. 6.

As reported, the company announced in November that it would pursue a Section 363 sale of substantially all of its assets, primarily its Alabama-based coal operations, due to the company’s deteriorating financial condition and “unexpected operational difficulties.” More specifically, the company said it would not have sufficient liquidity to fund operations “past early 2016, let alone through a protracted and contentious Chapter 11 case.”

In connection with the proposed asset sale, the company entered into a stalking-horse sales agreement with Coal Acquisition LLC, an entity composed of the company’s first-lien lenders, for a $1.25 billion credit bid (plus $5.4 million in cash) for most of the company’s assets.

The current entities that compose Coal Acquisition are Apollo Global Management, Ares Management, Caspian Capital, Fidelity Investments, Franklin Mutual Advisers, GSO Capital Partners, and KKR, according to court filings.

The company said in a Jan. 5 response to various objections to the sales process filed with the Birmingham, Ala., bankruptcy court that the company’s financial straits have not improved since its began the sales process in November.

“Given the debtors’ rapidly diminishing liquidity,” the company said in the filing, “their only alternative to the sale is to liquidate and immediately shut down the Alabama mines, with little hope that they would ever reopen.”

Excluded from the stalking-horse deal were certain non-core assets that the company also plans to sell. Since those assets were not a part of the stalking-horse bid, the company set extended deadlines for bids, which depending on the asset will occur on Jan. 12, Jan. 14, or Jan. 20. — Alan Zimmerman

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Leveraged Loan Default Rate Hits 9-Mos High in Dec. Thanks to Energy Sector

US leveraged loan default rate

In December, another default out of the oil patch — Energy & Exploration Partners — pushed 2015’s final US leveraged loan default rate to a nine-month high of 1.54% by amount and a two-year high of 1.19% by number, from 1.47% and 1.09%, respectively, in November.

In 2015, 11 issuers defaulted on a total of $12.5 billion of loans. Two loans accounted for more than half of the year’s default volume: Caesars Entertainment Operating Company at $5.4 billion, or 43%, and Millennium Health at $1.8 billion, or 14%. That skewed default volume away from the leveraged market’s most troubled sectors: Energy and Metals & Mining. These sectors, however, accounted for eight of 11 issuers that defaulted during the year. – Steve Miller

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Magnum Hunter Files Ch. 11; Enters Debt-for-Equity Deal With Lenders

Magnum Hunter Resources filed for Chapter 11 this morning in Wilmington, Del., the company announced, saying it had entered into a restructuring support agreement with lenders that hold roughly 75% of the company’s funded debt claims.

Specifically, the company said the parties to the RSA hold substantially all of the company’s first-lien debt, about 66.5% in principal amount of the company’s second-lien debt, and about 79% in principal amount of the company’s senior unsecured notes.

The company said the RSA provides for, among other things, a $200 million DIP multi-draw term loan DIP facility that would be backstopped by the lender parties to the RSA.

The company said the RSA contemplates the debt-to-equity conversion of substantially all of the company’s prepetition funded indebtedness and 100% of the contemplated DIP facility. The company also said the RSA provides for “a significant cash recovery” to vendors and trade claimants.

According to the Chapter 11 petition, the company listed total assets of $1.457 billion and total debts of $1.117 billion, including about $634.6 million of 9.75% unsecured notes due 2020.

As reported, that debt slipped three points this morning, to 33/35, on the news of the bankruptcy filing. The notes were quoted flat, or without accrued interest, sources said.

The company is an independent energy company engaged in the acquisition, production, exploration, and development of onshore oil and natural gas properties in the United States, with current operations principally located in the Marcellus Shale and Utica Shale regions of the Appalachian Basin, located in Ohio and West Virginia, and non-operating property interests in the Williston/Bakken Shale region of North Dakota.

The company said in its statement this morning, “Like many other exploration and production companies, Magnum Hunter’s operations have been significantly impacted by the recent and continued dramatic decline in both oil and natural gas prices, as well as natural gas liquids prices, and general uncertainty in the overall energy markets.”

Gary Evans, the company’s chairman and CEO, expressed confidence this morning in the company’s prospects, saying in the statement that the reorganization would be “a success and unprecedented in our industry,” and that he expects “the entire process to be efficient, cost effective, and quick.”

Kirkland & Ellis is the company’s legal counsel, with PJT Partners serving as the company’s financial advisor and Alvarez & Marsal as its restructuring advisor. — Alan Zimmerman

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Third Ave’s liquidating debt fund holds concentrated, inactive paper

The leveraged finance marketplace is abuzz this morning ahead of a conference call to address to a plan of liquidation for the Third Avenue Focused Credit mutual fund following big losses this year, mild losses last year, heavy redemptions, and now a freeze on withdrawals. The news was publicly announced last night by the fund, and there will be a call at 11 a.m. EST for shareholders with lead portfolio manager Thomas Lapointe, according to the company.

Market sources yesterday relayed rumors of a near-$2 billion redemption from the asset class, and as one sources put forth, “the odd thing was it was difficult to trace the money that left, what was sold, and where it went.”

That was followed up by last night’s whopping, $3.5 billion retail cash withdrawal from mutual funds (72%) and ETFs (18%) in the week ended Dec. 9, according to Lipper, although it’s not entirely clear if that figure—the largest one-week redemption in 70 weeks—can be linked to Third Avenue. (LCD subscribes to weekly fund flow data from Lipper, but cannot see inside the aggregate observation.)

Nonetheless, it’s worthy of a dive into the open-ended fund, which trades under the symbol TFVCX. The fund shows a decline of 24.5% this year, versus the index at negative 2.94%, after a 6.3% loss last year, versus the index at positive 2.65%, according to Bloomberg data and the S&P U.S. Issued High Yield Corporate Bond Index.

It’s an alternative fixed-income fund that’s “extremely concentrated,” and “hardly representative of a ‘high yield’ or ‘junk bond’ fund,” outlined Brean Capital’s macro strategist Peter Tchir in a note to clients this morning. He highlighted that Bloomberg analytics show a portfolio that’s almost 50% unrated, nearly 45% tiered at CCC or lower, and just 6% of holdings rated BB or B.

The holdings are all fairly to extremely off-the-run, hence the trouble selling assets to meet redemption, and thus, the liquidation. The remaining assets have been placed into a liquidating trust, and interests in that trust will be distributed to shareholders on or about Dec. 16, 2015, according to the company.

Top holdings follow, and none have traded actively or very much in size of late, trade data show:

  • Energy Future Intermediate Holdings 11.25% senior PIK toggle notes due 2018; recent trades in the Ch. 11 paper were at 107.5.
  • Sun Products 7.75% senior notes due 2021; recent trades were at 87.5, versus 90 a month ago and the low 70s a year ago.
  • iHeartCommunications 14% partial-PIK exchange notes due 2021; block trades today were at 30 and 32, from 27 last month.
  • New Enterprise Stone & Lime 11% senior notes due 2018; odd lots traded recently in the low 80s, versus mid-80s last month.
  • Liberty Tire Recycling 11% second-lien PIK notes due 2021 privately issued in an out-of-court restructuring; trades reported in the mid-60s.

Amid those any many others of a similar ilk, the fund also reports a holding in Vertellus B term debt due 2019 (L+950, 1% LIBOR floor). The chemicals credits put the $455 million facility in place in October 2014 as part of a refinancing effort, pricing was at 96.5, and it’s now at 78/82, sources said.

“Investor requests for redemption … in addition to the general reduction of liquidity in the fixed income markets, have made it impracticable for FCF going forward to create sufficient cash to pay anticipated redemptions without resorting to sales at prices that would unfairly disadvantage the remaining shareholders,” according to the company statement.

“In line with its investment approach, FCF has some investments in companies that have undergone restructurings in the last eighteen months, and while we believe that these investments are likely to generate positive returns for shareholders over time, if FCF were forced to sell those investments immediately, it would only realize a portion of those investments’ fair value given current market conditions,” the statement outlined.

Further details are available online at the Third Avenue Management website. — Matt Fuller

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Energy & Exploration Partners files Chapter 11; has $135M DIP Loan

Energy and Exploration Partners on Dec. 7 filed for Chapter 11 in bankruptcy court in Fort Worth, Texas, the company announced.

The company said it had a $135 million DIP facility from a group of its existing senior lenders.

The company said the filing would replace an involuntary Chapter 11 filed against its operating unit, ENXP Operating LP, by certain of its vendors.

In a statement issued late yesterday, the company said that Chapter 11 would provide it with “the greatest flexibility to continue its operations during the current period of depressed prices for oil and natural gas and adverse operating conditions.”

Hunt Pettit, the company’s founder and CEO, said in the statement, “We have taken this difficult, but necessary step in order to provide adequate time to complete ongoing discussions and processes with our lenders to restructure our balance sheet and create a strong financial foundation for the future.”

The company’s court filings were less prosaic. There, the company said it filed Chapter 11 “because it ran out of cash.”

Meanwhile, the company said in its statement, it “remains in ongoing, productive dialogue with its creditors and other stakeholders regarding the terms of the restructuring.”

Separately, the company also said in the statement that prior to the Chapter 11 filing it had reduced staff in light of an anticipated reduction in business activity in the current price environment. The list of reduced staff included a number senior executives, among them COO John Richards and CFO Brian Nelson.

The company said John Castellano of AlixPartners was named interim CFO, and that other roles would be covered by existing personnel during the restructuring process.

The DIP facility
The company said the proposed DIP facility would allow it to reorganize around current operations, rather than being forced into a “quick fire sale.”

Noting that it had run out of cash and that many vendors and suppliers had not been paid for 75–150 days and have “threatened to cease providing services unless they can be assured of prompt payments,” the company said in court filings that it was seeking immediate access to $40 million.

The company said that two competing groups of pre-petition lenders representing about 97% of the company’s first-lien debt (which has about $765.3 million in principal outstanding) “took part in an extremely competitive process to become the debtors’ DIP provider.”

According to the company, both groups “were willing to lend the same money for the same uses,” though the terms offered by each group were not identical. Ultimately, the company said, the DIP facility offered by a group known as the “Crossholder Group” provided a “superior overall financial package.”

The Crossholder Group holds roughly 42% of the company’s first-lien debt, according to court filings, compared to the competing ad hoc group of lenders, which holds 55% of the first-lien debt. But, the filings show, the Crossholder Group also holds about 71% of the company’s 8% convertible notes due 2019, of which there is roughly $375 million outstanding.

Among the members of the Crossholder Group are GoldenTree Asset Management, Beach Point Capital Management, Ensign Peak Advisors, KLS Diversified Asset Management, and Oaktree Capital Management, which are backstopping the facility.

Credit Suisse AG is the administrative and collateral agent for the facility.

The company said it also reached out to potential third-party DIP lenders, contacting six. Of the six, the company said, five showed interest, four signed confidentiality agreements, and three submitted preliminary term sheets, although ultimately none of the third-party lenders were interested in providing financing on a junior or unsecured basis behind the company’s pre-petition first-lien debt.

Meanwhile, in negotiating terms with the two competing lender groups, the company said it “put a premium on a financing that allowed the company the ability to propose and consummate a Chapter 11 plan of reorganization in a reasonable timeframe,” adding, “Given the debtors had never marketed their assets prepetition, and given the current dislocation of the market, the debtors strongly believed that, in their business judgment, an expedited sales process was not the best path for maximizing value for all stakeholders.”

Under the proposed DIP, all first-lien lenders other than the backstop parties will have the right to participate in 49% of the DIP, with the backstop parties providing the remainder of the facility (along with any unallocated portions of the 49%).

The DIP is structured as a multiple-draw senior secured term loan. Following the initial $40 million interim draw, there would be a second draw of $30 million upon final bankruptcy court approval of the facility; a third draw of $15 million on the date that the company’s liquidity falls below $10 million; and a final draw of $15 million on the date that the company’s liquidity again falls below $10 million.

Once those draws are exhausted, the company would be able to borrow the remaining $35 million under certain additional conditions.

The facility, which matures in one year, is priced at L+775, with a 1% LIBOR floor, and would be issued with a 2% OID on the first $100 million. The last $35 million, if funded, would also be issued with a 2% OID.

As for milestones, the DIP facility must be approved within 45 days of the petition date (Jan. 21, 2016), the company must file a proposed reorganization plan and disclosure statement within 90 days of the petition date (March 6, 2016), the bankruptcy court must approve the disclosure statement within 120 days of the petition date (April 5, 2016), the bankruptcy court must confirm the proposed reorganization plan within 150 days of the petition date (May 5, 2016), and the plan must go effective on the date that is the earlier of 15 days after the plan is confirmed or 240 days from the petition date (Aug. 3, 2015).

The facility contains a process, however, for the milestone deadlines to be extended with the consent of lenders and creditors six times by 30 days each.

The milestone deadlines also provide that if the Crossover Group and backstop lenders do not agree to extend the deadline for filing a proposed reorganization plan and disclosure statement, the company can alternatively commence a sale process of substantially all of its assets under Section 363.

A hearing on the proposed DIP facility, as well as other first-day matters, is scheduled for later this afternoon. — Alan Zimmerman


Garrison moves Speed Commerce, Forest Park Medical to non-accrual

Two of Garrison Capital’s investments, Speed Commerce and Forest Park Medical Center, were on non-accrual status in the recent quarter.

The investment in Speed Commerce comprised a $12 million term loan due 2019 (L+1,100 PIK, 1% floor) as of Sept. 30, a 10-Q showed. The fair value was marked at $9.7 million as of Sept. 30, and it accounted for 3.9% of assets.

In November 2014, Garrison Loan Agency Services was agent on a $100 million credit facility. Proceeds backed an acquisition of Fifth Gear and refinanced debt. Speed Commerce, based in Texas, provides web design and warehouse logistics services.

Nasdaq-listed Speed Commerce announced in April it hired Stifel, Nicolaus & Company as an advisor to explore a possible recapitalization or a sale of the company. Lenders have amended the loan several times, culminating on Nov. 16, when lenders agreed to a covenant requiring a sale of the company by Dec. 11.

Garrison Capital’s non-accrual investment in Forest Park included a lease to the San Antonio, Texas hospital and a $1.95 million term loan. The hospital has filed for bankruptcy due to a liquidity shortfall stemming from delays in obtaining third-party insurance contracts, and has hired an advisor to sell the facility.

Garrison Capital’s net asset value per share totaled $14.92 as of Sept. 30, compared to $15.29 as of June 30.

Garrison management attributed nearly half of the decline to a restructuring of SC Academy. Last quarter, that investment, a loan to Star Career Academy, was the lone non-accrual investment in the portfolio.

Star Career Academy, based in Berlin, N.J., provides occupational training for entry-level employment in health fields, cosmetology, professional cooking, baking and pastry arts, and hotel and restaurant management.

Garrison Capital is an externally managed BDC that invests in debt securities and loans of U.S. middle market companies. Shares trade on Nasdaq under the ticker symbol GARS. For additional analysis of Garrison Capital’s investment portfolio, see also “ActivStyle, Connexity loans added to Garrison Capital portfolio,” LCD News, Nov. 17, 2015. — Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, distressed debt, private equity, and more


Ares Corp. details 3Q15 portfolio stats, books $1.5B in new deals

Ares Corp. (NASDAQ: ARCC) booked $1.52 billion in new business during the third quarter, at an average interest rate of 7.8%, the lender detailed in its 10-Q filing yesterday alongside earnings. Exits totaled $1.34 billion, for net new investments of $183 million.

The 7.8% is 20 bps inside second-quarter investments, reflecting the better market conditions that borrowers enjoyed prior to the post-Labor Day correction. Spreads have since widened and should build up the average for fourth-quarter deals. In October, management said it funded $305 million in new investments for the fourth quarter at an average yield of 11.4%, while exiting $152 million at 8%.

First-lien commitments took a 75% share of third-quarter transactions, up from 37%, as ARCC shifted bookings away from the SSLP fund as that joint-venture with GE Capital winds down. Second-liens accounted for 21% of investments, down from 28% in the second quarter.

As of Oct. 29, the lender said it has $630 million in its backlog, which includes transactions that are approved, mandated or have a signed commitment that has been issued and that ARCC believes likely to close. There is an additional $425 million in the pipeline, which includes transactions that are in process, but have no formal mandate or signed commitment.

Portfolio stats
ARCC’s overall portfolio grew to $8.7 billion in assets, from $8.6 billion. The number of investments increased by nine, to 216. Average EBITDA per company is $58.8 million. As of June 30, 66% of the borrowers in ARCC’s portfolio generated less than $55 million of EBITDA.

Petroflow lifted ARCC’s loans on non-accrual status to 2.3% ($195 million) of the portfolio at cost, from 1.7%. Petroflow is one of three companies that ARCC considers true oil-and-gas-related investments, which account for roughly 3% of the portfolio. ARCC’s Petroflow investment is a first-lien position that was originated in July last year prior to the dramatic decline in oil prices. ARCC said it is working with the company and lender group to restructure Petroflow’s balance sheet. The principal investment totals $53.2 million. ARCC booked the 12% paper at a cost of $49.7 million, and the deal is now marked at a fair value of $37.9 million.

BDCs were not excluded from stock market volatility in the third quarter. ARCC’s stock slid to a 14% discount to NAV, from a 2% gap in the previous quarter. The stock closed the third quarter at $14.48, versus a book value of $16.79. The stock has since rebounded, to $15.49, to narrow the discount to 8%. By comparison, the BDC sector as a whole is trading at a roughly 15% discount. — Kelly Thompson