All bad things must come to an end, and that includes a stay under court protection for coal producer Foresight Energy, which has just received approval by the judge of its exit plan from Chapter 11 on June 24, 2020.
“The Plan provides for the reduction of over $1 billion of Foresight’s existing indebtedness…Additionally, pursuant to the Plan, Foresight will emerge from chapter 11 with $225 million in secured exit facility loans (the “Exit Facility”), $75 million of which will convert to equity 60 days following the closing of the Exit Facility, and will have approximately $60 million in cash liquidity”.
As of March 31, 2020 only one BDC still had any exposure: non-traded Business Development Corporation of America (BDCA for short). The BDC has $6.4mn invested in debt, the largest portion of which was on non accrual and discounted (65%). We assume that unrealized loss will be crystallized and may be higher or lower now the final numbers are known. We also expect – but cannot confirm – BDCA will be participating in the add-on facilities, increasing its total capital committed. If so, that will leave BDCA both lender and investor in the recast company in what remains a very tough industry.
Even with any extra funds added, this is a relatively modest investment for the BDC. (The FS-KKR organization which had much more exposure through three of its funds got out shortly after Foresight filed for bankruptcy, greatly reducing BDC sector outstandings, but taking a realized loss).
The disappointing part is that “first lien secured debt” in what was a substantial enterprise has resulted in such a large percentage of capital loss. Like with oil & gas producers and energy services companies we have severe doubts about the appropriateness of lending into the coal space, a declining industry wrapped in an unfriendly regulatory environment. What could possibly go wrong ? Thankfully our data suggests BDC exposure is now limited to a handful of names and well under $50mn at cost. Maybe the word is getting out ?