According to the Wall Street Journal, energy company Lonestar Resources Ltd. has failed to make an interest payment on one of its bonds: “The Fort Worth, Texas-based shale driller said the payment was due on $250 million in 11.25% senior bonds due in 2023. The missed payment starts a 30-day grace period before the company is considered to be in default”. Naturally enough, this has resulted in speculation as to whether the company will file for bankruptcy protection or take some other form of evasive action to remain a “going concern”. The company has over half a billion dollars in debt.
This is bad news – albeit not unexpected – for the only BDC with exposure: FS Energy & Power, which has $33.2mn invested at cost in subordinated debt, already written down to $7.6mn as of March 31, 2020. The company has been underperforming since IIIQ 2019, but has been on the BDC’s books since 2014.
The company was initially rated CCR 3 by the BDC Credit Reporter but was downgraded – due to the write-down of one third of its debt value – to CCR 4 in the IVQ 2019. With the latest news, we’ve added Lonestar to the Weakest Links list because some sort of blow up seems inevitable in the short run.
Having had a look at the company’s financial results through the first quarter 2020 we expect that the capital invested by FS Energy is likely to be almost completely written off when the dust settles. Also likely to be interrupted – probably forever – is the $3.8mn of annual investment income currently forthcoming. That will be a significant loss for the BDC, already facing multiple similar credit setbacks.