Is this good news or bad news for lender to Basic Energy Services, an oil services company ? On December 12, 2019 the publicly traded company with the ticker BAS but just delisted from the NYSE, announced its intention to sell “its pumping services assets (not inclusive of coiled tubing) in multiple transactions with expected proceeds of approximately $30 million to $45 million“. The proceeds – says the press release – “will fund the projected 2020 and 2021 capital budget of Agua Libre Midstream, the Company’s rapidly growing, high return-on-assets business“. No word about proceeds being used to pay down any debt.
We’ve had a look at the 10-Q for the company which shows that lenders are collateralized by the assets of the business in both an ABL and 2023 Term Loan that was originated in 2018. The only BDC exposure is in the latter, and resides in non-listed BDC Guggenheim Credit for $2.0mn. At September 30, 2019 the debt was written down on an unrealized basis by (26%). Currently, the institutionally traded loan is trading at a (33%) discount. Maybe the lenders are waiving the use of proceeds from the asset sale for debt repayment or we just don’t have the full picture. For our purposes, and till, we hear otherwise, we’re assuming none of the monies from the asset sales will repay debt.
Basic Energy has been on the BDC Credit Reporter’s under-performing list since the IVQ 2018, almost immediately after Guggenheim booked the investment and has been trending down in value ever since. We have a Corporate Credit Rating of 4 (Worry List). Unfortunately, even before the latest announcement, the company was burdened by very high debt to Adjusted EBITDA, once you adjust for maintenance capex: over 12x by our estimate. The asset sales – if they happen and at the amounts estimated – may not be sufficient to save the company given the amount of debt on the balance sheet and the negative trends in the oil services sector. We believe a default or reorganization is more likely than full recovery on the debt. We’ll continue to update the Basic Energy story, which should come to some sort of fork in the road long before the 2023 maturity of the Term Loan.