Private Credit: Khoros' Potential Default Sprinkled Across Private Credit

NEW YORK--(BUSINESS WIRE)--KBRA DLD, a division of KBRA Analytics, announced on August 9 that it had moved Khoros, LLC (Khoros, formerly known as Lithium Technologies, LLC), a private equity (PE) sponsor-backed portfolio company, to its widely circulated Default Radar Red List.¹ The inclusion on the Red List directly followed the news that Goldman Sachs BDC had lowered its fair value (FV) mark on Khoros’ first lien loan to 50, from 92.5. This markdown was preceded by earlier action from Sixth Street Specialty Lending Corp, which similarly lowered the FV on the loan to 76.8, from 91.3. As of their Q2 reporting date, all public business development companies (BDC) that held the Khoros loan have significantly reduced their marks on the loan, and most now report the loan as nonaccrual in their quarterly disclosures (see Appendix A). The KBRA-rated transactions that have exposure to Khoros’ first lien debt include three rated BDCs and two private funds transactions. Khoros’ loan had also been present in two recurring revenue loan structured credit transactions, all of which sold their positions before the end of Q2 2024.

The firm was taken private in 2017 and was then known as Lithium Technologies, LLC, and after a 2018 merger with Spredfast, Inc., the company was rebranded as Khoros. Today, Khoros operates as a global customer engagement software company that provides social media management tools and analytics to customers in industries including technology, telecommunications, financial services, transportation, retail, and media. However, since 2023, Khoros had experienced declining financial performance, which necessitated ongoing discussions with its lenders around the possibility that it may be out of compliance with its annual recurring revenue financial covenants.

KBRA does not currently expect Khoros’ potential default or restructuring to impact any of the outstanding ratings in which its debt provides collateral because of the size, diversity, and reserve levels of the relevant portfolios. However, KBRA will closely monitor the recovery value for senior secured lenders and the relative orderliness of this potential restructuring, as this situation, among others, will continue to serve as an important harbinger for how stressed portfolio companies are managed in the maturing private credit industry. KBRA has increased its focus on transactions or entities that hold exposure to both Khoros and to Pluralsight to monitor the combined impact of ultimate loss levels, as well as any other potential nonaccruals (see Private Credit: Impact of Pluralsight's Potential Restructuring Will Be Widely Dispersed and No Effect on Ratings Expected).

As of Q2 2024, Khoros’ first lien loans appear in three KBRA-rated BDCs with an FV of approximately $128 million and in two other non-KBRA rated public BDCs with an FV of $44 million. While individual investment exposures to Khoros’ loan in KBRA-rated BDCs continue to be low relative to the size of those entire portfolios, some BDCs with exposure to both Pluralsight’s and Khoros’ loans now have nonaccruals at cost in excess of 5%.² We continue to monitor nonaccrual percentages across our rated BDCs and other public BDCs for early signs of stress. Across our structured credit portfolio, Khoros’ first lien loans do not appear in any KBRA-rated transactions; however, as recently as Q1 2024 two recurring revenue loan structured credit securitizations had exposure to Khoros’ debt. However, by Q2 2024, these securitizations exited the position or restructured the initial debt, as these transactions no longer show exposure to Khoros’ debt in their respective portfolios. Lastly, across our funds portfolio, Khoros’ first lien loans appear in two transactions in which the loan represents less than 1% of the respective transaction’s total market value.

1. Default Radar is a monthly tracker that identifies worrisome credits for potential defaults in the U.S. direct lending space. Credits are flagged Red or Orange depending on severity of the situation (the most troublesome are flagged Red). Issuers appearing on either list are not guaranteed to default, which KBRA DLD defines as bankruptcies, missing a payment, or engaging in a distressed debt exchange/restructuring. Quarter-end reporting periods will show more activity than monthly additions. Several factors are considered for inclusion, such as FVs. In general, issuers marked below 80 are contenders for Red status; those ranging between 80-90 are contenders for Orange status. Other factors include nonaccrual status, fair values over time, maturity date, spread, and industry.
2. We note that Pluralsight is currently engaged in a restructuring negotiation that should result in lenders assuming an equity claim over the company. Once the negotiation is completed, the existing loan will most likely be retired and a new capital structure will be in place. In that scenario, the extinguished Pluralsight loan that currently exists in the BDCs will no longer be marked as nonaccrual.

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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