In a not unexpected development, Foresight Energy filed for voluntary Chapter 11 on Tuesday March 10, 2020 after patching together an agreement amongst an ad hoc group “holding more than 73% of the approximately $1.4 billion in claims under each of the Partnership’s first lien credit agreement and second lien notes”. As part of the package a $100mn DIP facility and cash on hand will finance the business while in bankruptcy and a new $250mn debt facility repay the $100mn and the business going forward once an exit occurs from the protection of the bankruptcy court. Moreover, the company’s CEO will remain in place as lenders become owners in yet another debt for equity swap with an uncertain eventual income. (Foresight, after all, “is a leading producer and marketer of thermal coal).
[FYI: Foresight is an affiliate of Murray Energy Corp. – another BDC portfolio company – the nation’s largest privately owned coal company, which itself filed for chapter 11 in October 2019 and which owns a stake in Foresight. The company has been in deep trouble for many months but blamed the coronavirus – clearly Covid-19 is not catch on as a term – for causing a global recession and triggering the bankruptcy. No mention of the leper-like unpopularity of its sole business activity: coal mining ].
From a BDC perspective, this is a relatively small size exposure at cost: $26.6mn and all in the company’s 2022 debt, which was discounted by just under (50%) at September 30, 2019 – the last quarter we have data for. Also, all the BDCs involved are non-traded: Business Development Corporation of America; FS Investment II and FS Investment III and CCT II. The last 3 BDCs are all controlled by KKR-FS Investments. The debt was already on non accrual as of the IIIQ 2019, costing the BDC lenders just over ($2.0mn) a year of investment income.
Consider this just a placeholder article till we learn more about what role – if any – these BDC lenders are playing in the new Foresight. Whatever happens, though, some sort of loss in the short term is likely to be booked in the IQ or IIQ 2020. Longer term, skeptical observers have to wonder if coal businesses can survive in any corporate wrapper over the long term and whether any new monies the BDCs might invest to become owners is like grabbing that great table on the Titanic on the night of the iceberg.
Update 4/11/2020: Not unexpectedly, the lenders to the bankrupt company have agreed to a “debt for equity swap” to assist in the restructuring. Who exactly is involved and how much equity a lender receives for a troubled company in a troubled sector remains to be determined.