VPROP Operating LLC: In Default

Ares Capital (ARCC) reported its IVQ 2019 results on February 12, 2020 and held a Conference Call. Included in the latter was substantial disclosure about a new non-accruing loan: VPROP Operating LLC (also known as Vista Proppants and Logistics). At some point in the last three months of 2019, the company’s debt became non-performing. According to Advantage Data records and ARCC’s 10-K , total BDC exposure – all ARCC’s – was $158.400mn at cost. At the end of 2019, an equity investment of $9.7mn had been written to zero and the 2021 Term Loan,in which the rest of the exposure lies, was discounted (25%). Fair market value dropped to $111.1mn, from $150.8mn the quarter before. ARCC has lost for the time being ($17.3)mn of annual investment income.

VPROP has been an Ares investment since the IVQ 2017 in an almost unchanged amount. Till the IIQ 2019 there were no signs of strain in the quarterly valuations. Then, the equity investment – which had been trading at a premium – moved to a (22%) discount. In the IIIQ 2019, the equity discount doubled and the 2021 Term Loan was ever so slightly written down. Now the equity is fully written down and the debt is deeply discounted and no income is being received.

ARCC’s manager let listeners know that the company was hurt in 2019 by oversupply in the business of selling sand to Texas fracking companies, which led to the default. The company is working with its creditors – including ARCC – on an unspecified “restructuring”. We’d guess that means some sort of “debt for equity swap” where lenders such as ARCC receive all or some of the stock in the privately held company. Unfortunately, the general state of the oil services industry – in which VPROP neatly fits – is poor. So patching together a structure that gives the company a chance to succeed with a new capital structure is tough. However, there’s very little information about the company in the public record so we may have to rely on ARCC for further updates on the progress of the reshaping of VPROP.

For our part, we have downgraded the company from a Corporate Credit Rating of 3 on our scale to a 5, which means non performing. There’s plenty of room for the valuation to drop further yet, but we have no way of evaluating which way performance might go. It should be noted, though, that the amounts “lost” so far, both in book value and income, are some of the highest we’ve seen inflicted on a single BDC, even one with over $14bn in portfolio investments. We will revisit the company whenever we gain additional information.