BJ Services Company: Files Chapter 11

Reuters reports that oil field services company BJ Services Company has filed for Chapter 11 on July 20, 2020. The company reported assets and liabilities between $500mn and $1.0bn. Right away, management will be seeking to sell core assets – such as its cementing business – to pay down its debts. Not helping the situation for BJ Services is an admitted “cash crunch”.

Four BDCs have $25.3mn in exposure at cost in the company as of March 31, 2020: Crescent Capital (CCAP); Monroe Capital (MRCC); Garrison Capital (GARS) and non-traded Monroe Capital Income Plus. The BDCs were all in the same 2023 first lien term loan, and marked their positions at par or at a discount of only (4%). Given the industry which BJ operates in; the sizeable liabilities and the liquidity crisis, it seems unlikely that the current high valuation can be maintained in bankruptcy. However, we have no clear idea yet how this debt might fare once everything is settled. We can calculate, though, that ($1.8mn) of investment income on an annual basis will be suspended.

The BDC most at risk of loss is CCAP, which owns about half the outstandings and which is involved in a last out arrangement, which should result in a bigger eventual capital loss.

Frankly, the BDC Credit Reporter has been caught flat footed by BJ’s bankruptcy. The company was carried as performing (CCR 2) in our database because of the near-par valuation by all its lenders. In retrospect, the fact that a oil services firm like this one should stumble is no great surprise. In any case, we have leapfrogged the company’s rating down three levels to CCR 5, or non performing. We’ll be reverting with more details on how the bankruptcy might play out for the BDC lenders involved once we learn more about the company’s plans.

As a parting thought, we do wonder why any BDC would lend to an oil services company – even a giant one – given the well known wreckage of so many similar businesses since 2014. This debt was booked in 2019. Perhaps the recovery the BDC lenders will ultimately achieve will prove us wrong but – if past is prologue – expect that losses will be material and for a loan that was priced at a modest LIBOR + 7.00%.