Based on two different rating groups downgrades in the past few days, the BDC Credit Reporter is itself downgrading Great Western Petroleum from CCR 3 to CCR 4. First, there was the evaluation from Moody’s on April 7 and then that of Fitch on April 22, 2020. We won’t rehash the multitude of facts and figures in both reports, but will say that we expect a restructuring to occur before too long because of the abysmal market conditions. Further – and more controversially – because the BDC exposure is in the more junior parts of the company’s capital (preferred and second lien debt) – we project a full loss of the $91.2mn invested by the only BDC with exposure: FS Energy & Power.
With the company’s Revolver borrowing base soon to be reset based on the lowest oil prices in modern history and so many of the company’s peers going to the wall, it’s hard to project that – at the end of the day – the junior stakeholders will be anything but wiped out. At best, the preferred will get erased and the junior debt turned into some modicum of an equity stake with little immediate value. That’s how bad things are in the oil patch.
At 12/31/2019, FS Energy & Power discounted all its positions by only (7%) to (10%). Clearly, much has changed in the interim, as the Moody’s and Fitch ratings demonstrate. The BDC Credit Reporter – unlike those groups which are paid by the issuer and need to be ultra cautious before re-rating companies – can give its candid assessment of where we will end up rather than where we are at this interim stage. We’ve also added Great Western to our Weakest Links list, presuming a Chapter 11 or restreucturing will occur before long. Liquidity may have been OK at year end 2019 but the subsequent drop in oil prices, which is still underway, may squeeze availability before long and at a time when capital of any kind is impossible to come by.
We should find out during the course of 2020 if our prediction is too harsh or just realistic. For FS Energy & Power, with so many troubled credits due to its specialization, this must rank as one of the most worrying ones. The BDC has already had to make onerous concessions to its own lenders, and is taking steps to conserve liquidity. Should the BDC stumble, that could further complicate the situation.