Rosehill Resources: To File Chapter 11 By July 15

Energy company Rosehill Resources has revealed in its 10-Q filing dated July 2, 2020 its intention to file for Chapter 11 bankruptcy by July 15, 2020. This follows the entering into a Restructuring Support Agreement (“RSA”) on June 30 with certain of its lenders, creditors and preferred debt holders. As usual a “debt for equity swap” is the centerpiece of the RSA except that preferred stock will share in a tiny piece of the new equity and – in an unusual move – the Debtor In Possession (“DIP”) financing will convert into a major share of the common stock of the post-bankruptcy company. Liquidity is clearly very tight and should this gambit fail, the company could face a cash squeeze and be unable to fund its business.

There is only one BDC involved with Rosehill – non-traded BDC FS Energy & Power – which has $4.2mn advanced in the form of second lien and preferred, a tiny fraction of the company’s half a billion dollars in debt. The BDC’s exposure has already been written down by (66%) in the preferred but is valued close to par in the second lien. We expect a further loss will be forthcoming and conversion of the full amounts into new common equity. FS Energy may also contribute to the convertible DIP and/or the new debt facility envisaged after bankruptcy. The amount of income likely to be lost is under ($0.2mn) a year.

Given FS Energy & Power’s side, this RSA and planned bankruptcy will not be material. However, the transaction is a reminder of how great the percentage of loss can be on energy transactions and how new capital is constantly needed from the very same creditors who are being affected by the company’s business failure. As a result, it’s possible that Rosehill will remain in some form on the BDC’s books for years to come and the actual total dollar exposure increase.

The BDC Credit Reporter had already rated Rosehill Resources CCR 4 and added the name to our Weakest Links list, so no change there. We’ll circle back when bankruptcy actually occurs or when IIQ 2020 results are published.