Here we go again: another coal miner is in deep trouble. The Wall Street Journal, and multiple other publications, report that “struggling coal miner” Foresight Energy LP has decided to miss making a scheduled bond interest payment and is preparing to restructure its balance sheet. On the other side, lenders and bond holders have hired specialist financial advisers for the negotiations ahead.
There are 4 BDCs – all non listed – with $22.4mn exposure to the troubled coal miner: Business Development Corporation of America (BDCA), and three FS-KKR entities, Corporate Capital Trust II, FSIC II and FSIC III. All are in the 2022 Term Loan and all are looking at a significant unrealized depreciation write-down in the coming quarter. As of June 2019, the debt was valued at a (18%) discount by the most conservative valuation. At time of writing on October 1, 2019 Advantage Data’s middle market real-time loan pricing shows the discount has risen to (46%). That’s , at least, an extra ($6mn) write-down from the mid year number. Annual income at risk is $1.8mn. Also very likely a little way down the road is a debt for equity swap of some kind and some sort of material realized loss.
We note – wryly – that the debt at Foresight was valued close to par all the way through the IQ 2019 valuations, suggesting the lenders involved were not expecting the upcoming financial crisis. Only in the IIQ of 2019 was the debt written down sufficiently to be automatically added to our under-performing list as the Watch List level (CCR 3).
As most everyone must know, the coal mining sector has been in trouble for some time, and the recent trend is for ever greater problems. In the few months we’ve been publishing the BDC Credit Reporter, we’ve written about Murray Energy and Blackhawk Mining. One is considering Chapter 11 and the other is already there. As we’ve said before, why any BDC lender would invest in this notoriously challenging corner of the energy sector is beyond us. Admittedly, Corporate Capital Trust II has been involved for some time and might be able to argue that the risks have increased since writing their cheque. However BDCA only invested for the first time in the IQ 2019 and FSIC III in the IVQ of 2018.