On June 18, 2020, Chisholm Oil & Gas Operating LLC filed for Chapter 11. The oil & gas explorer, though, has a restructuring support agreement in place with its two lending groups and plans for an exit sooner rather than later. The lenders include the reserve-based lending facility and the holders of the 2024 Term Loan. The restructuring plan involves converting all the $517mn in debt to equity; issuing two new – smaller – debt facilities; use of cash collateral and various minor concessions to other creditors. We’ve skimmed the 107 page filing – which includes the reasons for why the company got into trouble in the first place – and are not fully convinced this will provide a lasting solution, but nobody is asking the BDC Credit Reporter.
We should say from the outset that this a Major non-performing asset with $295mn invested in Chisholm’s debt and equity, spread over 3 BDCs. Sweating most heavily right now will be non-traded FS Energy & Power with $226mn. Next is FS KKR Capital II (FSK) , which is newly public with $39mn. Sister BDC FS KKR Capital (FSK) has $16mn of debt. Admittedly, the bankruptcy was expected as the debt was placed on non-accrual as of the IQ 2020 and the total fair market value marked down to $124.0mn.
We fear, though, that – notwithstanding the restructuring plan which envisages a debt for equity swap – losses could increase further now that the bankruptcy has hit the proverbial fan. If we’re reading the plan right, the Term Loan holders will only be getting 3% of the restructured company’s equity because the secured debt is deeply underwater from an availability standpoint. $263mn is owed but the current availability is only $120mn…We expect most of the capital invested by the BDCs to be worthless. Unclear is whether the same BDC lenders will provide some portion of the new restructuring facilities. At the end of the day the BDCs could write off $250mn or more of the $302mn invested and lose out on all the $21mn or so in investment income that was being booked on an annual basis before the non accrual in the IQ 2020.
This the eighth BDC-financed company to file for bankruptcy protection in June and the 24th in 2020 and – by far – the largest in both those categories. We are maintaining our CCR 5 rating till bankruptcy is exited and realized losses are booked in the second or third quarter 2020, including potentially incremental losses of ($80mn) over the IQ 2020 level.
For all the BDCs involved this seems to a classic example of why not to get involved in energy lending. This transaction is notable because even the reserve-based lender – who often dodges any losses due to their low advance rate and secured status – has managed to get into trouble. What hope did the second lien lenders and equity investors (where the BDCs were concentrated) have ? The investment was not even particularly richly priced for the potential catastrophic losses: LIBOR + 550bps.
We’ll update readers when we receive further information.
Correction: This article was updated on June 22, 2020 to remove our mention of Main Street (MAIN) and HMS income as lenders to the company. In fact, their investment is in Chisholm Energy Holdings, LLC, a separate entity with HQ in a different state. We apologize for the error.