Once a company agrees a restructuring plan and files for bankruptcy, a quick exit is often in the cards. That seems to be the case for energy player Denbury Resources, who has just had its pre-packaged Restructuring Plan blessed by its bankruptcy judge. According to a company press release: “The Plan received the overwhelming support of the Company’s stakeholders, receiving high consensus across all voting classes and unanimous acceptance from second lien and convertible noteholders. The Company expects to successfully complete its financial restructuring and emerge from Chapter 11 in mid-September“.
The key element in the Restructuring Plan is that the company’s $1.2bn in pre-filing term debt will be converted into equity, in a standard “debt for equity swap”, where lenders become the new owners. As a result, we expect FS Energy & Power – the only BDC with exposure – will become an equity owner of the company when it emerges from Chapter 11 status later in the month and that will be reflected in the IIIQ 2020 results of the BDC.
As of the IIQ 2020, the BDC valued its debt at $17.1mn versus a cost of $42.1mn, suggesting a realized loss of at least ($25.0mn) will be booked. It’s possible the BDC will also be involved in any new financing added to the restructured balance sheet. Otherwise, though, the chances are this becomes a small equity, non income producing, stake that may or may not have value in the future.
We will circle back when the company formally emerges from Chapter 11 and when FS Energy & Power reports IIIQ 2020 results. In the interim, we’re upgrading the company from CCR 5 to CCR 3 prospectively, given the favorable capital structure envisaged. At this stage, more BDC-financed companies seem to be getting off the mat – typically by way of restructuring agreements like these but also from liquidations – than are newly filing for bankruptcy. Still, the damage to the investment income of the BDCs involved has been done.