Yet another energy-related company files for bankruptcy protection. This time it’s Covia (full name Covia Holdings Corporation). The company “is a leading provider of diversified mineral solutions“. We’ve written about Covia twice before and this outcome was not a surprise as the company had been rated CCR 4 by the BDC Credit Reporter since April 16, 2020. According to its press release, Covia has entered into a restructuring plan which will reduce $1bn of debt and fixed costs while still maintaining $250mn in cash resources to support operations. Given the liquidity and the pre-agreed “debt for equity swap” (the details of which we don’t fully understand as yet) Covia hopes to be in and out of bankruptcy court in short order. We shall have to see.
Typically, Oaktree Specialty Lending (OCSL) does not invest in the energy sector but made an exception – now regretted – for Covia. The BDC has $7.9mn invested in the company’s 2025 Term Loan, first booked in the IIQ 2018. At March 31, 2020 OCSL already had the debt placed on non accrual and the position discounted by a conservative (53%). This position first slipped onto the underperformers list in the IVQ 2018 and was rated CCR 3 and discounted (22%) before Covid-19 came along and brought the energy sector to its knees. In that regard Covia is yet another First Wave credit – a company already in trouble before the virus. Moody’s had a B3 rating on the company in November 2019.
For OCSL, with its income from Covia already interrupted and the valuation close to or lower than the market value of the 2025 Term debt, the impact of this bankruptcy should be minimal. However, we don’t yet know if any investment income will be forthcoming post-bankruptcy and whether the BDC will have to ante up some new funds as part of the restructuring. More will be learned shortly. Nonetheless, this story is mostly notable that yet another BDC-financed company has filed for bankruptcy in June, which is turning out to be a record month in all the wrong ways.
Addendum: A reader brought to our attention after the initial publication of this article that Oaktree Strategic Income (OCSI) also has $6.9mn invested at cost in Covia as of March 31, 2020. The debt is held in the BDC’s JV, and treated in the same way as OCSL: placed on non accrual and with the same discount. The exposure did not show up in our search, so we apologize for the miss. Even databases can miss out sometimes.
We hear that Covia Corp. – “a minerals and materials supplier for industrial and energy markets” – has been engaged in drastic cost cutting in the wake of the Covid-19 crisis “designed to reduce overhead expenses by about $25 million from 2019 levels”. The company had been struggling even before Covid-19 – and lower oil prices came along – due to its status as a supplier to the energy sector.
We initiated the company on the Underperformers list back on January 1, 2020, with an initial Corporate Credit Rating of 3. With the latest news and with the 2025 Term Loan trading at a (55%) discount compared to (22%) at year end 2019, we have downgraded the outlook to CCR 4 from CCR 3. We’re not yet placing the company on our Weakest Links list – companies deemed highly likely to become non performers shortly – but it’s early days yet. The stock it at risk of being delisted from the NYSE and trades at just $0.45. A year ago that was $6.25…
The only BDC with exposure to publicly traded Covia remains Oaktree Specialty Lending (OCSL) with a cost of $7.9mn and a current value probably close to $3.5mn. That means an unrealized loss of ($2.6mn) is likely to be booked at the end of the IQ 2020. Income at risk – should Covia default – is about $0.400mn a year. We’ll check back after OCSL reports IQ 2020 results or earlier if anything new transpires.
Covia Holdings – a publicly traded “provider of mineral-based material solutions for the Industrial and Energy markets” – announced a series of financial measures intended to improve its “financial flexibility” on December 31, 2019. The most material development was the arrangement of an $85 million committed credit facility from PNC Bank. The new facility is secured by the Company’s U.S. accounts receivable. At the same time the company voluntarily canceled its $200 million revolving standby credit facility that contained restrictive covenants.
The above measures – and other actions taken as outlined in the company’s press release – are supposed to improve future results and provide liquidity. Nonetheless, substantial worries remain given Covia’s recent poor financial performance and exposure to the energy market. In fact, we added the company to the Under Performers List back in IVQ 2018, with a CCR of 3, based on a reduction in the value of the 2025 Term Loan held by the only BDC lender – Oaktree Specialty Lending or OCSL – to a discount of (28%). Subsequently the value of that debt has fluctuated, closing as of December 31 2019 of (24%).
We retain hope that the company can pull itself out of its doldrums, but note that debt to Adjusted EBITDA is very high (in excess of 10x by our estimate) and that the debt contains no covenants. The fact that Covia is raising new debt by essentially carving out valuable balance sheet assets to maintain liquidity is more worrying than reassuring for existing lenders who are essentially being pushed down the priority repayment scale.
At September 30, 2019 OCSL’s exposure – all in the 2025 Term Loan – amounted to $7.9mn, and $0.5mn of investment income is at risk. That’s a modest exposure for the public BDC (0.5% of its portfolio) and – apparently – not in any imminent danger. This article initiates our coverage in the BDC Credit Reporter. We’ll be checking back in periodically as new results are published.