Covia: Files Chapter 11-Updated

Yet another energy-related company files for bankruptcy protection. This time it’s Covia (full name Covia Holdings Corporation). The company “is a leading provider of diversified mineral solutions“. We’ve written about Covia twice before and this outcome was not a surprise as the company had been rated CCR 4 by the BDC Credit Reporter since April 16, 2020. According to its press release, Covia has entered into a restructuring plan which will reduce $1bn of debt and fixed costs while still maintaining $250mn in cash resources to support operations. Given the liquidity and the pre-agreed “debt for equity swap” (the details of which we don’t fully understand as yet) Covia hopes to be in and out of bankruptcy court in short order. We shall have to see.

Typically, Oaktree Specialty Lending (OCSL) does not invest in the energy sector but made an exception – now regretted – for Covia. The BDC has $7.9mn invested in the company’s 2025 Term Loan, first booked in the IIQ 2018. At March 31, 2020 OCSL already had the debt placed on non accrual and the position discounted by a conservative (53%). This position first slipped onto the underperformers list in the IVQ 2018 and was rated CCR 3 and discounted (22%) before Covid-19 came along and brought the energy sector to its knees. In that regard Covia is yet another First Wave credit – a company already in trouble before the virus. Moody’s had a B3 rating on the company in November 2019.

For OCSL, with its income from Covia already interrupted and the valuation close to or lower than the market value of the 2025 Term debt, the impact of this bankruptcy should be minimal. However, we don’t yet know if any investment income will be forthcoming post-bankruptcy and whether the BDC will have to ante up some new funds as part of the restructuring. More will be learned shortly. Nonetheless, this story is mostly notable that yet another BDC-financed company has filed for bankruptcy in June, which is turning out to be a record month in all the wrong ways.

Addendum: A reader brought to our attention after the initial publication of this article that Oaktree Strategic Income (OCSI) also has $6.9mn invested at cost in Covia as of March 31, 2020. The debt is held in the BDC’s JV, and treated in the same way as OCSL: placed on non accrual and with the same discount. The exposure did not show up in our search, so we apologize for the miss. Even databases can miss out sometimes.