California Resources: Considering Chapter 11

This should not really be a surprise: California Resources is considering filing Chapter 11. So says Bloomberg in an article on March 27, 2020. The company itself does not rule out the possibility after an attempt to restructure the oil company’s $5bn in debt failed and given oil prices dropping to next to nothing.

For the only BDC with exposure – in the 2022 First Lien debt – the chances are a restructuring and/or realized loss is coming. That BDC is non-listed Business Development Corporation of America (BDCA) which has advanced $12.1mn at cost and last valued its position at a (11%) discount. That debt is currently trading – according to Advantage Data’s Syndicated Loan module – at a (70%) discount. The stock price of the public company is trading at an all-time low. After all, this is the Worst Of Times for energy producers from almost every perspective. BDCA’s loss could range from ($7mn) to a complete ($12.1mn)

This may prove another reminder that BDCs have no business lending – at almost any level or in any form – to oil and gas producers given the huge volatility in the price of oil and gas. The former has swung from over $100 a barely to a projected sub-$10 level. How can any lender be safe (and this BDCA loan is only priced at L + 475bps) with that backdrop ?