Spotted Hawk Development: Debt Placed On Non-Accrual

Oil & gas production company Spotted Hawk Development – which has faced difficult conditions for years and has already endured one major restructuring – is faring even worse under the current oil price drop. According to its lender-owner Apollo Investment (AINV) “the company has reduced expenses and capital expenditures to necessary maintenance items and temporarily curtailed production“.

AINV also disclosed on its IQ 2020 conference call that of the three debt facilities outstanding to Spotted Hawk, two are now on non-accrual, up from one previously. This time a $45.5mn Term Loan with an interest rate of 4.0% has been moved to non-performing. That’s $1.8mn of annual investment income that AINV will not be receiving. That leaves just one 2021 loan trache with a face value of $24mn and an interest rate of 12.00% still generating income for AINV. Understandably enough one has to wonder if that last tranche can remain income generating ($2.9mn annually) for much longer. The company has been benefiting from price hedges on its production but those expire – according to AINV – shortly…

Overall, AINV has invested $114.8mn in Spotted Hawk in an attempt to rescue an investment that began in 2012 with just $24mn. If the business fails, AINV stands to lose up to ($47.2mn) and that remaining loan income. With the BDC manager clearly not interested in adding new rescue capital under virtually any scenario, the chances of failure seem high.

The investment – one of those “legacies” left over from an earlier strategy by a different management team – illustrates both the risks involved in lending/investing in oil & gas and of serving as both owner and lender to a cash strapped company. That has turned AINV into the investor of last resort on multiple occasions and caused a small credit mistake to grow into a very big one and the second largest in the BDC’s portfolio. Many BDCs have learned to avoid energy investments but the more complex matter of serving as lender-owner remains unsettled. Yet, in the quarters ahead we will see many more of the latter than of the former and will have an opportunity to revisit whether the BDCs involved have demonstrated whether they know “when to hold them and when the fold them“.