Portfolio Update: In Progress

Posts for FS KKR Capital

Murray Energy: Lenders Seek To Acquire Company

As we’ve written about earlier, controversial coal company Murray Energy is in Chapter 11. According to Law360, though, progress is being made towards a plan that will get Murray out of Chapter 11. Apparently, senior lenders with $1.7bn of debt outstanding have clubbed together to offer themselves as a buyer for essentially all the company’s assets. Given that so much of business news is hidden behind a paywall – an ironic complaint from the publisher of the BDC Reporter with its own premium version – we don’t know many of the details.

Speculating, though, remains free. Should the senior lenders successfully become the buyers of the highly troubled company in a declining industry – the likely format is the exchange of much – if not all – existing debt for equity. Most likely, new monies would have to be advanced by those same lenders in some form as well. For the 6 BDCs involved with $52.5mn of debt exposure at September 30, 2019, that’s likely to mean no or little income forthcoming from capital already invested and the prospect of dipping into their pockets for more advances. The $5.7mn of investment income that was being collected before the filing is unlikely to be returning any time soon.

Most affected by the Murray Energy debacle is the FS-KKR complex with roughly $40mn of the BDC debt outstanding, led by FS-KKR Capital (FSK) with $18.9mn already at risk, according to Advantage Data.

How this all plays out remains up in the air, and is subject to further updates before Murray exits bankruptcy court protection. Even after that, given the industry in which the company operates, we imagine we’ll be discussing the company – possibly under a new name – for some time to come as its lenders seem to be digging in.

Sequential Brands: Reports IIIQ 2019 Results

In early November 2019, Sequential Brands Group , Inc. (SQBG) reported earnings, held a Conference Call and filed a 10-Q. As usual, and despite widening losses and the absence of a permanent CEO and the recent announcement by the Board of its intention to explore strategic options, the tone of management remained upbeat. Here’s an extract of what acting CEO and Chairman William Seedler said on the CC:

While we’re in the final stages of our CEO search, I’m pleased to fill in and join today’s call with Peter. The executive team has been hard at work executing on the plan to best position Sequential for long-term success…

First, the management team remains focused on driving revenue growth across the portfolio. …Second, we are well underway to rightsizing the cost structure of the business post the sale of Martha Stewart, which includes a significant reduction of our expenses. As management previously outlined, we expect an operating expense base of approximately $30 million before minority interest starting next year. This new optimized operating expense base reflects a significant reduction to the company’s current overhead, including corporate head count, SG&A and headquarter-related expenses. To that end, we’ve made significant progress on the sublease front. … We expect these savings to drive a significant and immediate margin improvement as we head into 2020. Third, we recently amended our lending agreement with KKR, which further improves our liquidity and cash flow and demonstrates the continued support of our lenders. With no upcoming debt maturities, we believe that the company has ample runway to focus on driving the business forward”.

We remain concerned nonetheless as Adjusted EBITDA in the latest quarter was $13.2mn, just covering interest of $13.0mn. Debt to EBITDA annualized was 8.3x… In fact, even debt to REVENUES is 4.4x ! Most importantly, liquidity, as per the 10-Q, includes just $5mn in cash and $24mn of availability under the company’s Revolver. Yet, last quarter Sequential registered ($18mn) in negative cash flow from continuing operations.

Frankly, we’ve been expecting “something to happen” at Sequential for months, since our first report in April of this year. We continue to rate the company CCR 4 (Worry List) and BDC exposure (concentrated in the FS-KKR group) huge at $292mn. Our jaundiced view is that the proverbial can is getting kicked down the road, judging by a second amendment to the lenders loan agreement in so many years. A bankruptcy filing could affect a whopping $281mn of BDC debt from 4 funds (one of which is Apollo Investment or AINV). That’s about $30mn of annual investment income at risk of – at least – interruption. We’re loath to add the credit to our Bankruptcy Imminent List given both that Sequential has survived for longer than we expected and the optimistic tone of the Chairman and the fact that there are only 6 weeks left in the current quarter. We’ll shortly see if we have become too lax in our assessment. In any case, it’s hard to imagine Sequential getting through another year without a bankruptcy or major restructuring event. As we are talking about the retail sector here – in an indirect way – it’s hard to see how the company or its lenders (who also own its almost worthless stock) come out of this undamaged. Unfortunately, neither AINV nor FSK even mentioned the company in their most recent Conference Calls, according to our review of the transcripts.

Murray Energy: Files For Chapter 11

Back on September 13, we wrote when first posting about Murray Energy: “We don’t want to bury the lead: Murray Energy is likely to file for bankruptcy or re-organize and the BDC lenders involved are going to absorb some rather large losses“. On October 29, 2019 the coal company filed for Chapter 11 protection.

Given that we have already quoted ourselves once, here is what we said about BDC exposure at the time, which remains the most up to date picture we have:

BDC exposure totals $52.4mn, spread over 6 BDCs. These include publicly traded FS-KKR Capital (FSK) and three sister non-traded BDCs funds (FSIC IIFSIC III and FSIC IV but not – surprisingly – FS Energy). Then there are two others: Cion Investment and Business Development Corporation Of America.The exposure is in two different loans, one which matures in 2021 and the other in 2022. The debt has been on our under-performing list since IVQ 2018 and is currently rated CCR 4 (Worry List), where the chances of an eventual loss are greater than a full recovery.

As of June 2019, the 2021 debt was carried at par but the 2022 debt was discounted by a third. Currently, though, the 2022 debt trades at twice that discount, suggesting holders are not optimistic. We wouldn’t be surprised to see the 2022 debt fully written off once the dust settles, which would result in ($8.5mn) of further losses and ($12.5mn) in Realized Losses, to be absorbed by Cion and BDCA. Less clear is what might happen to the 2021 debt, which still trades at par. We won’t speculate at this point but will point out that – overall – $5.5mn of annual investment income is at risk.

This was a useful first test of our Bankruptcy Imminent list, on which Murray Energy had been placed since October 4, 2019, when we were told the company’s banks were in forbearance. Like snow in May, loan forbearances rarely stays around for long – unless you’re Greece.

We won’t speculate too much about the way forward at this stage or try to evaluate how much more capital the existing BDC lenders might advance and what ultimate credit and investment income losses might look like. We’ll wait till more is heard about Murray’s exit plans and just how bad its financial position is. Even if the coal giant does successfully leave Chapter 11, with coal industry fundamentals headed ever further downwards, any remaining BDC exposure post-bankruptcy will remain on the under-performing list.

Frontier Communications: Hedge Fund Recommends Bankruptcy

The Frontier Communications saga continues with hedge fund and investor Robert Citrone recommending the company file for Chapter 11 bankruptcy sooner rather later. As the attached article reminds us, there’s an ongoing debate amongst “stakeholders” as to what the communications company should do to deal with its heavy debt load and uncertain future.

“Normally haste makes waste, but in this instance we believe haste limits waste,” Ormond said in the letter. “The further the delays in addressing the balance sheet and state of the business in a court-supervised process, the greater the risk to the corporation, operating assets, employees and surrounding Norwalk.”

Increasing subscriber losses and turnover, combined with limited financial guidance, will only lead to further deterioration in the business, according to the letter.

We have no view on whether to file or not is better, but the pressure does increase the chances of the former. We are adding Frontier to our Bankruptcy Imminent list. The company is already rated CCR 4 (Worry List). As a reminder BDC exposure is substantial at $61.7mn and valued close to par. A bankruptcy could have detrimental effects – but to varying degrees – on the 9 BDCs involved.

Global Jet Capital: Update

Aircraft leasing company Global Jet Capital published an article about its current business and prospects in a trade publication AIN Online. Highlights include the claim that  “in 2019 alone, Global Jet Capital is on pace for $800 million in new business” and it’s “seeing a 20 percent year-over-year jump in business aviation leasing and financing business“.

Global Jet Capital ..is paving the way for this growth by expanding its global presence, including the additions of fully functioning offices in Zurich and Hong Kong earlier this year. These offices joined existing facilities in Danbury, Connecticut; Boca Raton, Florida; and Mexico City.

Also propelling growth is its continued access to funding, including its third successful asset-backed security, bringing total assets securitized to over $2.1 billion.

The firm also continued to reinforce its leadership team, including the recent naming of financing veteran Stefan Abbruzzese as chief commercial officer. This enabled Dave Labrozzi to shift into the new role of vice chairman

Given that the company – established in 2014 – is privately owned, we rarely learn about such new developments. However, keeping an eye on Global Jet is important because BDC exposure is very, very high: $466mn. Yet back in 2014, when GSO Blackstone first brought FS Investment into the credit, outstandings were just $1mn ! (Subsequently KKR has replaced GSO Blackstone). What’s more, the investment is exclusively in junior capital (sub debt and preferred) and concentrated in 4 FS-KKR Capital BDCs – publicly traded FSK and FSIC II, FSIC III and FS Energy & Power. (FSIC II and FSIC III will shortly be publicly traded). All that capital is under a bigger mountain of senior secured debt from third parties. The junior debt held is all in PIK form and yields 15.0% annually, which means income at risk is very high: $53mn. Finally, the last time the BDC exposure was valued the Preferred was discounted (90%).

We’re glad to hear that Global Jet is performing well – if their press release is to be believed – but regular monitoring is required as there is so much at stake. We have had a CCR 3 (Watch List) rating since IIIQ 2018, which will likely remain, whatever the valuation, given the size of the risks involved.

Hilding Anders International: Hires CEO

Troubled Swedish mattress manufacturer Hilding Anders International (HA) has hired a new Chief Executive Officer, according to a press release. He will take his post at the beginning of 2020, transitioning with the help of the current CEO. The HA Group is one of the leading bedding and mattress companies globally, operating across the European, Russian and Asian markets.

HA is one of the largest non-performing companies that we track, with $158.7mn of debt and equity invested by FS-KKR Capital (FSK). One debt facility of the several held has been on non-accrual since the IVQ of 2014. More recently – as FSK noted in its most recent Conference Call transcript – another loan was added to three others already not paying their interest. That was notable given the loan’s size: $129mn at cost. FSK has written down its exposure to $75.2mn , a (42%) overall discount.

We don’t know the details of what’s wrong with the far flung business except that FSK referenced “headwinds in raw material input prices as well as competitor online offerings” in that most recent transcript. Nor can we say if the hiring of a new CEO will make a positive or a negative difference, or none at all. We just assume, though, that FSK – with so much at stake and reportedly “working intently” will be taking a great deal of interest given how much is at stake.

Murray Energy: Forbearance Extended Two Weeks

On October 16, 2019 Murray Energy announced that its lenders “amended a forbearance agreement regarding debt payments until Oct. 28 at 11:59 p.m. The company originally had until Oct. 14 at 11:59 p.m., but the deal allowed the agreement to be extended. Lenders have agreed to not exercise available remedies related to payments due on Sept. 30“. We had previously discussed the initial forbearance in a post on October 3.

The coal company took the opportunity to also announce its intention not to pay debt service due on two other debt agreements.

This only means that the day of reckoning – which is unlikely to be favorable to the company and its lenders – has been slightly delayed. Given the continuing weakness in the coal sector, we are not optimistic. However, we should note that the bulk of $52.4mn in BDC exposure is in the 2021 Term Loan, which continues to trade at only a (2%) discount to par.

However, non-listed Business Development Corporation of America and Cion Investment with $12.5mn of exposure in the 2022 Term Loan may be less sanguine. According to Advantage Data, that debt is trading at a (66%) discount. Last time the position was valued the discount was (33%), suggesting further unrealized write-downs are coming in the third quarter. If we get a Chapter 11 filing there’s $5.6mn of investment income at risk. A little further down the road: material Realized Losses.

Sequential Brands: To Sell Brands

On October 14, 2019 Sequential Brands, Inc. announced its intention to explore various strategic options, including a sale of some of its brands. Other alternatives were also mooted including a stock buyback; making an acquisition and “others”, but the sale is the most likely. The Chairman of the company said the decision was triggered by interest expressed by third parties in acquiring some of the company’s retail lines.

We’ve been tracking Sequential for some time and get the impression the Board is putting a good face on a bad situation. As we reported back on May 29, 2019, the company is under-performing financially and highly leveraged – a deadly combination. As noted on April 19, 2019 Sequential already sold two brands, but with little lasting impact. More recently, in another ominous sign, its CEO has resigned and Stifel has been hired to help explore its options.

Something is going to happen here before long but exactly what is unclear, though our money in on an asset sale or a bankruptcy filing. The lenders involved – which includes 4 BDCs and exposure at cost of $292mn – will be very interested in the outcome. All but $13mn of the BDC exposure is held by one of three KS-KKR BDCs, including $61mn by publicly traded FSK. The only unrelated BDC is Apollo Investment (AINV). The $10mn invested in the equity of the company – all by FS-KKR entities – seems a lost cause as Sequential’s stock price continues to reach new all-time lows and currently is a penny stock with a value just $0.27.

More important will be how the 2024 Term debt in which all the remaining BDC exposure lies- currently trading at a modest (3%) discount – will fare. The lenders will be hoping that Sequential will sell assets sufficient to pay off some or all its debt. That could happen, but nothing is for certain in the retail sector these days, so we’ll be staying tuned to what is likely to be a major news story in the weeks ahead, given the size of BDC exposure, and the urgent tone of the proceedings.

Murray Energy: Lenders Agree To Forebear

On October 2, 2019 coal producer Murray Energy announced by press release its intention not to pay principal and interest payments due on September 30, 2019. However, the company was also able to announce a majority of lenders under its most senior loan agreements agreed to “forbear”, or hold back from acting on the upcoming payment default. This is not much to write home about as the forbearance only lasts till October 14. We assume – as we wrote in an earlier update – that Murray will be using the extra time on the clock to complete its ongoing negotiations with stakeholders in an effort to keep from falling into involuntary bankruptcy proceedings.

For the 6 BDCs with $52.4mn invested at risk, this development does not move the valuation needle but suggests that some sort of resolution will be coming shortly. Very shortly. Judging by what little we know that will mean some sort of Realized Loss is likely, which is why Murray Energy is rated CCR 4 (Worry List), and could be at CCR 5 (Non Performing) within a fortnight. Back on September 13 we wrote that we expected to hear more about Murray Energy “before long”. After the latest news, the same prediction continues to apply.

Bellatrix Exploration: Files For Bankruptcy Protection, Up For Sale

On October 2, 2019 publicly traded Canadian oil and gas company Bellatrix Exploration – burdened with heavy debt – threw in the towel and sought bankruptcy protection in its home country. A court will now supervise a restructuring of some kind, which includes the possibility of the sale of some or all the assets of the business. Here is what the company’s chief executive said:

Bellatrix has for an extended period of time focused on its key strategic priorities of reducing debt levels, improving liquidity and strengthening its financial position, including transactions completed by the Company in 2018 and 2019 to, among other things, provide additional needed liquidity and to reduce its overall senior note and convertible debenture obligations,” said Brent Eshleman, President and Chief Executive Officer of Bellatrix. “In light of industry challenges facing the Western Canadian oil and natural gas sector, including prolonged and continued poor natural gas and natural gas liquids prices, we believe that the commencement of the CCAA restructuring proceedings at this time will provide the Company with the time and stability required to continue operating our business while we work to implement the Strategic Process and achieve an outcome that is in the best interests of Bellatrix and our stakeholders.”

 This must be bad news for the four BDCs with $96mn of exposure to Bellatrix in the form of second lien and equity. All are part of the FS-KKR complex. $8.2mn of annual interest income is about to be suspended. The Biggest Loser of the four BDCs is non-listed FS Energy & Power, which has four-fifths of the exposure.

We don’t know what the ultimate resolution might be but there is a reasonable risk – given that all BDC exposure is junior on the balance sheet – that there will be a 100% write-off. Should that occur, the fact that the BDCs managers marked the debt as of June 2019 at a very slight discount will result in a large capital loss; not to mention the loss of substantial income. Publicly traded FS-KKR (FSK), though, should only be modestly impacted as its investment cost is “only” $6.0mn and FMV $5.8mn as of June 2019.

In a bigger picture sense, the failure of Bellatrix is a reminder – if one was needed – that the E&P sector in North America remains under pressure. The Calgary-Herald – while discussing the Bellatrix situation – mentioned other difficulties encountered by producers in the region of late:

In April, junior gas company Trident Energy Corp. announced it was shutting its doors. Last month, the City of Medicine Hat, which owns its own energy division, said it will shut more than 2,000 of its 2,600 natural gas wells over the next three years. Tristan Goodman, president of the Explorers and Producers Association of Canada, said in an interview there is no question the industry is in crisis. He said additional bankruptcies and insolvencies in the sector are a possibility.

For the BDC Credit Reporter’s prior posts about Bellatrix, starting as far back as April 17, 2019, click here.

Acosta Holdco: Payment default expected

We’re a few days late on this major story: Acosta Inc. – a leading marketing company to major brands – is about to miss a scheduled bond payment on October 1 2019, according to the Wall Street Journal. The company has been in trouble for some time and has hired a turnaround adviser and recently been downgraded by Moody’s.

Now a restructuring is underway, which appears to be arranged in conjunction with the company’s many bank lenders and bond investors. “ The Jacksonville, Fla.-based company, owned by private-equity firm Carlyle Group , has notified its lenders and bondholders they should sign nondisclosure agreements to enter into formal restructuring negotiations in advance of an expected credit default“, according to “people familiar with the matter“.

The immediate challenge for Acosta, which is squeezed for cash, is a $31 million coupon payment due on Oct. 1 to bondholders that own $800 million in unsecured debt maturing in 2022. BDC exposure, though , is in its 9/26/2021 Term Loan. Aggregate debt at cost is $40.1mn, all held by 5 BDC funds – both listed and non-listed – controlled by KS-KKR Capital. For example, FSK has $19.1mn of debt outstanding. Total income at risk for the group is $2.1mn as the debt is priced at only LIBOR + 325 bps.

Given that the Carlyle Group is the sponsor and as you can tell by the pricing, this was supposed to be a “safer” loan, given that the income barely covers the BDCs cost of debt capital. Unfortunately, the company has been under-performing – by our standards – since the IIQ 2017. At June 2019 the debt was discounted by as much as (59%) on the various BDCs books. As of today – according to Advantage Data’s real-time loan pricing records – the discount has increased to (67%) and could go lower.

We expect the debt to be shown as on non accrual in the upcoming IIIQ FS-KKR portfolios when earnings are released and to be written down to the market level, which should cut the fair market value by at least $6mn. We’re likely to see a restructuring done relatively quickly – if past experience is any guide – and a realized loss is likely to follow but we don’t have sufficient information to estimate the extent. This is almost certainly going to be another reverse for the FS-KKR organization. Curiously FSK, FSIC III and FSIC IV appear to have jumped in relatively recently – perhaps ill advisedly seeking a bargain. Total BDC exposure jumped from $13.4mn at the end of 2017 to the $40.1mn current level. That’s a tripling of Acosta debt held.

Frontier Communications: Makes Scheduled Debt Payments

Those are sighs of relief you’re hearing. On September 16, 2019 the Wall Street Journal reported that Frontier Communications was making its scheduled debt payments. This would not normally be news, but many investors were – apparently – concerned the troubled and highly leveraged communications company might choose to file for Chapter 11 or a restructuring instead.

That’s good news of a kind, but the problems at Frontier continue, so this may be more respite than anything else. (We’ve written about the company multiple times previously. Here’s a link to the list of articles). There is $62mn of debt outstanding at 8 different BDCs and over $5mn of annual investment income at risk. The exposure is carried as of June 2019 at close to par, so if anything negative happens to Frontier in the future the impact will be material from a BDC perspective (and much more so in the high yield bond market). For the moment lenders and shareholders can breathe easy. Tomorrow, though, is another day.

Vivint Smart Home: To Merge Into SPAC

On September 16, 2029 Vivint Smart Home, a subsidiary of APX Group Holdings, which is owned by Blackstone announced it is being acquired by Mosaic Acquisition Corp., a publicly traded special purpose acquisition company (“SPAC”), backed by Fortress Investment Group, itself a subsidiary of Softbank. The existing investors will throw in another $100mn of equity to add to the $2.3bn already invested and Fortress affiliates will fund another $125mn. According to the press release discussing the merger: “With an agreed initial enterprise value of $5.6 billion, Vivint is anticipated to have revenues of $1.3 billion for fiscal year 2020E and Adjusted EBITDA of $530 million, implying an Adjusted EBITDA multiple of approximately 10.5x”.

According to Lisa Abramowicz at Bloomberg, this boosted the bonds of APX, which had been trading at a discount.

BDC exposure to Vivint is substantial ($137mn), spread across 4 different debt instruments and with valuations ranging from par to a discount of (20%). The debt is very recent, added during the IVQ 2018, and was added to our under-performers list only in the IIQ 2019 as Moody’s downgraded the company and BDC valuations dropped measurably, many beneath the 90% FMV to cost we consider a useful trigger in the absence of any other information.

All the BDC debt is held by FS – KKR Capital entities including its public vehicle (FSK) and 4 non-traded funds. This merger should result in an upgrade of the debt values but we don’t know if Mosaic will be refinancing the debt or assuming the obligations. We get the impression this is more of a capital infusion than anything else, and expect some debt may get repaid while the rest might be retained. Anyway, good news for the FS-KKR Capital group in the short run. In the long run, though, we’ll have to see if Vivint’s ambitions for domination of the “secure home” market can live comfortably with its capital structure. We’ll be leaving the Corporate Credit Rating at 3, but the trend is positive.

Constellis Holdings: Sells Assets To Improve Liquidity

According to the Wall Street Journal’s crack Pro publication, Constellis Holdings – a troubled leading defense contractor with multiple operations – has sold a training facility for $40mn. More than the amount involved – which is modest by comparison with the debt on the company’s balance sheet – we noted that the WSJ article indicated the sale was undertaken to “avert a liquidity crunch”.

We added Constellis to the under-performing list (CCR 3) only in the IIQ 2019, as reported in a post on August 17, 2019 and based in downward valuation changes, rating downgrades and changes in the C-suite. As we become more familiar with the Apollo Global-owned private company, we recognize that Constellis should have been a candidate for our concern some time before. The drawdown of US forces in Afghanistan and Iraq, which has been going on for some time, is one negative factor; along with a major restructuring of its business underway, discussed by its CEO in a recent article in a defense trade publication.

The sale of the training facility by itself will not be sufficient to right the ship, and we’ll be keeping a close eye on developments at the company in the months ahead. Given the over $100mn invested by 9 BDCs – especially 4 FS-KKR entities – this deserves watching.

Murray Energy: Assessing Restructuring Options

We don’t want to bury the lead: Murray Energy is likely to file for bankruptcy or re-organize and the BDC lenders involved are going to absorb some rather large losses. On September 10, 2019 the Wall Street Journal’s bankruptcy publication reported that the privately-held coal miner had hired Kirkland & Ellis and Evercore to assess restructuring options.

That follows a recent downturn in the short term prospects for the U.S. coal industry, according to Moody’s and as reported by S&P… That’s not to mention the obvious secular decline in the prospects for coal mining and coal usage. Previously in 2019 , the rating groups had downgraded the company’s debt to SD or Selective Default, so the writing has been on the wall.

BDC exposure totals $52.4mn, spread over 6 BDCs. These include publicly traded FS-KKR Capital (FSK) and three sister non-traded BDCs funds (FSIC II, FSIC III and FSIC IV but not – surprisingly – FS Energy). Then there are two others: Cion Investment and Business Development Corporation Of America.The exposure is in two different loans, one which matures in 2021 and the other in 2022. The debt has been on our under-performing list since IVQ 2018 and is currently rated CCR 4 (Worry List), where the chances of an eventual loss are greater than a full recovery.

As of June 2019, the 2021 debt was carried at par but the 2022 debt was discounted by a third. Currently, though, the 2022 debt trades at twice that discount, suggesting holders are not optimistic. We wouldn’t be surprised to see the 2022 debt fully written off once the dust settles, which would result in ($8.5mn) of further losses and ($12.5mn) in Realized Losses, to be absorbed by Cion and BDCA. Less clear is what might happen to the 2021 debt, which still trades at par. We won’t speculate at this point but will point out that – overall – $5.5mn of annual investment income is at risk.

In any case, we expect we’ll be discussing Murray Energy again in the weeks ahead.

Blackhawk Mining: Court Approves Chapter 11 Plan

On September 4,2019 coal company Blackhawk Mining received approval from the bankruptcy court of its restructuring plan, opening the door for a return to normal status. We’ve written about Blackhawk 4 times previously, and have expected this relatively expedited trip through bankruptcy land.

According to the news report:

The plan will eliminate more than 60 percent of Blackhawk’s total debt and provide for more than $50 million in incremental liquidity and the restructuring transaction will be effectuated with no disruption to the company’s employees, vendors, customers or landlords, the release stated.

Under the plan, Blackhawk’s $639 million first-lien term loan will be discharged and lenders will receive 71 percent of the company’s equity and a newly issued $375 million first-lien term loan.

Blackhawk’s $318 million second-lien term loan will also be discharged and lenders will receive 29 percent of the company’s equity”.

For the two BDCs with the $10.5mn of first lien exposure (FS-KKR Capital or FSK and Solar Capital or SLRC) , this means a realized loss is likely to be booked soon and we’ll be learning exactly how the new exposure – a mix of debt and equity – will look like. Looking forward, coal mining continues to be a challenging business so even if whatever debt remains gets placed back on “performing” status, the BDC Credit Reporter will continue to carry all ongoing investments as under performing for the foreseeable future.

In terms of capital outstanding and investment income at risk, the amounts risked by FSK and SLRC are modest. However, we continue to wonder how the investment committees of these BDCs could convince themselves that investing in coal mining – even in early 2018 when the loans were first taken on – was a good idea from an underwriting standpoint. Industries that used to be the province of specialist lenders have become targets for generalist lenders like these two well known and respected public BDCs. Now those same lenders have become owners…

BlackHawk Mining: Post Bankruptcy Financing Approval

On August 13, a news report indicated that troubled coal miner BlackHawk Mining has received bankruptcy court approval for $240mn of post-petition financing. That’s important as it suggests the company may shortly complete the restructuring of its debt and leave Chapter 11 status behind. For the two BDCs involved with $10.5mn of exposure at cost – as discussed in our earlier post on July 18, 2019 – that might mean the conversion of some portion of its debt to equity and new loan advances. We’re a little confused as to why both FS-KKR Capital (FSK) and Solar Capital (SLRC) still carry the debt as accruing at June 2019 and at full value. Neither BDC discussed the miner in their most recent Conference Calls. We’ve got more to learn obviously.

Bellatrix Exploration: Announces IIQ 2019 Results

On August 7, 2019 Canadian oil and gas company Bellatrix Exploration announced IIQ 2019 results. This followed the restructuring of the company’s balance sheet, as we’ve discussed previously on April 17 and June 5 2019. There were no fireworks in the latest results. Nonetheless, despite the $110mn reduction in debt, the company remains vulnerable to market conditions. We noted in the press release that debt to EBITDA is at 4.3x, not that far off the maximum covenanted multiple of 5.0x.

The company retains a Corporate Credit Rating of 3. Total exposure at June 30 2019 was $95.9mn, mostly in second lien debt due in 2023 and valued close to par. All outstandings are held by FS-KKR Capital funds, with the bulk retained by FS Energy & Power ($72mn). No immediate cause for concern – which is why Bellatrix is on our Watch List – but given the hit and miss nature of the business and its exposure to global energy markets, this credit will continue to be worth watching.

Blackhawk Mining: More Details Of Restructuring Plan

As noted in an earlier post, coal miner Blackhawk Mining is preparing to file a pre-packaged Chapter 11. The BDC Credit Reporter’s main interest is estimating the impact on the two BDCs involved : FS-KKR Capital (FSK) and Solar Capital (SLRC), both with roughly equal shares in the first lien debt with an aggregate cost of $11.2mn. We’ve learned additional details about the plan going forward: “On the effective date of the plan, the company’s $639 million first lien term loan will be discharged and lenders will receive 71 percent of the company’s equity and a newly issued $375 million first lien term loan”. That suggests 40% of the first lien debt will be written off and swapped. That will reduce the nearly $1.5mn of investment income received by $0.600mn between the two BDCs. How the BDCs will value the equity is unknown, but a Realized Loss is probable. In addition, we have learned that:  “To further strengthen the business, the company will receive $50 million of new money debtor in-possession financing from certain of its lenders that will be part of the exit facility for the company”. Chances are FSK and SLRC will be part of this financing as well, increasing their exposure to the troubled miner. The lenders will be reassuring themselves that after the restructuring is done that “based upon the company’s current projections, pro forma leverage will be less than 2.0x debt to EBITDA and in line with industry peers”. We would add that any industry where standard debt/EBITDA leverage is only 2.0x is highly risky and the lenders/investors involved are far from being out of the woods. One could argue – with greater capital potentially deployed and much of the exposure soon to be in equity, and with lower investment income forthcoming, FSK and SLRC have gone only deeper into those woods.