We’ve written about Great Western Petroleum twice before, and each time the situation at the refiner was dismal. The first time – in April 2020 – we had just downgraded the company to CCR 4, even though the valuations applied by its only BDC lender – FS Energy & Power – were optimistic. Then in September, we updated the situation after a much heralded restructuring fell through. Third time’s the charm because Great Western has a new restructuring in place and the situation is looking better for the company. Fitch Ratings has just placed the business on “Credit Watch Positive” and is talking about upgrading its debt ratings. Click here for all the details. That’s just as well because as of September 2020 FS Energy’s $95mn of total invested capital (in 2021 and 2025 debt and in preferred) was discounted about (40%).
However, when we get into the details of the proposed restructuring that Fitch is cheering on, we notice some of the devilish consequences. First, the $46mn in preferred held by FS Energy is going to be converted to common stock. That will represent a hit to income as the BDC has been accruing into income preferred distributions at an annual yield of 15.5%.
The 2025 note holders – and the BDC has $13mn outstanding out of $75mn in that tranche – will be pushing out their repayment by a year, on the same terms as the new second lien debt being raised as part of the restructuring.
The only immediately good news from FS Energy’s standpoint is that it’s $36mn of debt due in September 2021 should be refinanced by the new arrangement. Given that this debt is discounted by (40%) that should be a positive for the BDC even if a 9.0% yielding instrument will be leaving the portfolio.
Of course, we don’t have the full picture. We don’t know if FS Energy will be participating in the new second lien loan which might ratchet back up its exposure. Furthermore, although business fundamentals have improved this remains a “speculative credit” by most measures and FS Energy will be involved for many more years to come.