On August 12, 2019 – but only noted by us on September 17 – Basic Energy Services, Inc. was downgraded by Moody’s to Caa1 at the corporate level. The company provides a variety of oil services, a segment that’s been in the doldrums of late. The summary view from the ratings giant was as follows: “The downgrade of Basic’s ratings to Caa1 reflects slow recovery in the business amid a decelerating market outlook, that we expect will keep financial leverage high”, commented Elena Nadtotchi, Moody’s Senior Credit Officer. ‘The company’s cash balances support its liquidity position, while Basic is cutting costs and reduces investment in 2019’.“
BDC exposure, though, is limited to one non-traded fund: Guggenheim Credit Income Fund. The BDC has $2mn invested in the 2023 first lien debt, and had valued its position at a (21%) discount as of June 2019, down from the quarter before. The debt was only booked in the third of 2018 but has been sliding in value ever since. Moody’s value this debt even lower than the corporate at Caa2.
We checked Advantage Data’s real-time bond pricing and found that the current discount is (27%), suggesting a potential unrealized write-down is coming in the third quarter 2019 results. If a default does occur, Guggenheim is at risk of annual investment income interruption of $2.2mn. A default does not seem likely in the short run, but nor does a full recovery barring a sea change in industry conditions. We have a CCR 3 (Watch) rating , with a downward trend.