California Resources: Files Chapter 11

Yet another BDC-financed portfolio company in the energy sector has filed for Chapter 11. As long expected, California Resources Corp is using bankruptcy as part of a restructuring process that will see $5bn of “of debt and mezzanine equity interest ” eliminated; a $1bn Debtor In Possession facility put into place; a $450mn Rights Offering made and a new $200mn post-bankruptcy loan arranged, according to the Wall Street Journal. The huge numbers involved underscore that this is a very large bankruptcy.

From a BDC perspective, though, this is a minor item. Only one BDC is involved with the company: non-traded Business Development Corporation of America (BDCA for short) with $10.6mn invested at cost in first lien debt due in 2022. This was supposed to be a “safer” investment when booked in the IVQ 2017 and is priced at LIBOR + 475bps. The position is already discounted (38%) as of March 31, 2020. We expect BDCA might be involved in the next phase so capital at risk may increase. First, though, the BDC will likely need to book a realized loss and lose out on half a million dollar of annual investment income. We wouldn’t be surprised if the final loss is greater than what’s been reserved for so far.

As for the BDC Credit Reporter, we are downgrading the company from CCR 4 to CCR 5. California Resources comes off our Weakest Links list now the projected default has occurred. This is the third BDC-financed company bankruptcy in July.