The BDC Credit Reporter has written three times before about Bakken oil and gas operator Spotted Hawk Development. Since our last article in June, the company has been restructured yet again. This has required the only BDC with debt exposure (and a 38% equity interest) – Apollo Investment (AINV) – to convert one of its debt tranches to equity and another tranche was written off. This resulted in a ($44.4mn) realized loss, or roughly one third of the amount the BDC had invested in the company.
Currently, AINV has one debt tranche of $24.7mn valued slightly above par and current on its 12% interest. The debt matures at the end of June 2022. Two tranches of equity with a cost of $45.5mn is valued at $6.7mn. The total FMV of AINV’s position is $32.2mn. (At its peak in 2020 AINV had $116mn invested at cost in the business).
We get the impression from AINV’s latest conference call that some sort of liquidity event for Spotted Hawk is planned in the next 12 months. Here’s a quote from AINV’s IIQ 2021 conference call that is relatively explicit on the BDC’s motivations.
This latest restructuring may have been arranged to facilitate that purpose. How this plays out will be important for the BDC’s net asset value and income.
If AINV receives $32mn – as per the latest valuation – the income generated from re-investing the proceeds will not make any difference as AINV’s new investments yield about 9% (or lower), which would generate the same income as currently from the 12% Spotted Hawk Term Loan. NAV would not change either. However, if this turns out to be a write-off, AINV will lose ($2.9mn) of annual investment income and take a further ($0.5) per share hit to net asset value per share. Given that something is LIKELY to happen in the next few quarters, we have the company as Trending. However, whether the trend will be positive or negative is hard to handicap. Oil prices are high, but that did not help in prior periods, so the outcome is unclear.
For the moment, Spotted Hawk remains rated CCR 5. We’ll report back if we hear any news or when the IVQ 2021 AINV results are published.