MD America Energy: Emerges From Bankruptcy

Now that Sixth Street Specialty Lending (TSLX) has reported IVQ 2020 results, we’ve learned about what has happened to its troubled energy company, MD America Energy. We last wrote about the company in December 2020 when bankruptcy was filed. At the time, we projected – from what we knew at the time : “We are expecting the BDC will book a realized loss of ($5mn-$8mn), probably in the IVQ 2020“.

This is what TSLX’s management said on its February 17, 2021 conference call:

In December, we also removed our first lien loan in an E&P company, MD America, from nonaccrual status following the company’s emergence from Chapter 11. During Q4, our $13.6 million fair value loan was restructured into a $9 million first lien loan and a $3.9 million equity position. We believe the company’s new capital structure is more appropriately suited for today’s commodity price environment“. 

The 10-K shows TSLX has booked a realized loss of ($4.0mn). Still, the BDC – as of September 2020 – had invested $17.9mn, but now has a new Term Loan – with a maturity of 2024 – with a par value of $9.0mn, yielding 9.25%. The prior debt – due in 2023 – had a par value of $18.1mn and its yield was 10.0% before going on non accrual. This means TSLX is permanently losing ($1mn) of annual investment income. The BDC will have to hope the $3.9mn in the equity of SMPA Holdings – the new entity – will be worth something one day. If not – and assuming this new debt gets repaid – TSLX will have lost half its investment in the energy company.

We are upgrading MD Energy/SMPA Holdings from CCR 5 to CCR 3. You will not be surprised that we are keeping the company on the underperformers list given the sector in which it operates and its recent failure. We can’t help worrying that the $3.9mn equity stake has an element of being a can kicked down the road. Even the new senior debt cannot be considered safe with three years till repayment. We’ll check back in next quarter with TSLX to see what progress the restructured company is doing.