Credit troubles continue to haunt the oil patch and – occasionally – still involve BDC lenders. On October 12, 2020 MD America Energy LLC – a Texas E&P company – filed Chapter 11. As per the usual, the company and its lenders have a plan. This would involve cutting the $117mn or so of debt on the balance sheet in half and giving the existing lenders control of the company’s equity in a now-standard debt for equity swap. New debt of $60mn would be issued as part of this transaction and management expects to be back operating normally before very long.
However, the existing owner of the company – Meidu Energy Corp – who lost out in court to the MD America lenders – is not happy about the outcome, and is suing. So consider all the above provisional until the litigation is resolved.
The only BDC lender with exposure – surprisingly enough – is Sixth Street Specialty Lending (TSLX), which has $18.6mn invested in a 2023 Term Loan about to be converted into equity and a likely part recipient of the new, smaller Term loan proposed. TSLX had written down its position by only (14%) as of June 2020. With the bankruptcy, some ($1.9mn) of annual interest income will be interrupted for an undetermined period. If the restructuring plan is accepted, when income does resume half will not be coming back, and TSLX will have to look to some auspicious future and to its new common shares in the company for future value. We are expecting the BDC will book a realized loss of ($5mn-$8mn), probably in the IVQ 2020, but also possibly next year given the litigation.
We are downgrading the company from CCR 3 – which only occurred in the IIQ 2020 – to CCR 5 and adding the name to our Bankruptcy list. In our self appointed role as Monday Morning Credit Quarterback, we don’t see why TSLX had to involve itself in this sector (already bitten by another problematic energy borrower: Mississippi Resources). Moreover, the data at the moment suggests the ultimate loss here might be more severe than reserved for in June – when the oil sector was already in deepest trouble. TSLX may yet prove us wrong, so we’ll wait, see and report back.