Energy company Lonestar Resources kicks off October as the first BDC-financed company to file. However, the Chapter 11 was expected, and discussed in a prior article on September 15, 2020. In effect, the company is using the bankruptcy process to get a “debt for equity swap” deal done that was agreed on several weeks ago with most of its creditors. Under the plan, bondholders would receive 96% of the company’s new common stock.
We won’t dwell too much on the details because the only BDC lender with exposure – $23.2mn from FS Energy & Power – is in second lien debt and has already written down the fair value of its position (as of June 2020) to just $2.4mn. We won’t know till all the dust has settled what final value the BDC ascribes to any equity stake possibly received, but we’re not expecting much movement up or down.
Obviously, this is yet another BDC credit disaster from lending into the energy arena. However, that’s what FS Energy & Power was created to lend into, giving the manager little in way of attractive options,. Still, investing in the junior debt has almost always resulted in big or complete write-offs in this sector when things go wrong. In this case, the secured revolver lenders, though, are being paid out in full, with interest. What a difference a points of yield and a different position on the balance sheet can make…
We are downgrading – as long expected – Lonestar from CCR 4 to CCR 5. Shortly, we expect to see the company exit Chapter 11 and may re-rate the business to CCR 3. However, if FS Energy has no material stake, which we’ll find out shortly, we may drop further coverage.