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…
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.
As expected, coal miner BlackHawk Mining has formally filed for Chapter 11. The company – thanks to a pre-agreed restructuring plan with most of its creditors – promises to exit bankruptcy within the next 60 days. For a full discussion, see our earlier article on the subject.
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.
Another BDC portfolio company prepares to file for Chapter 11. This time, the filer is Blackhawk Mining, LLC, which operates coal mines in two states. Given other bankruptcies going on in this sector, the news is not entirely unsurprising. Still, the two BDCs involved – FS-KKR Capital (FSK) and Solar Capital (SLRC) valued their $11.2mn in senior debt positions at 3/31/2019 at par. That’s unlikely to continue, even though management and creditors have a pre-packaged plan ready and expect to be operating normally in 60 days. The plan involves reducing debt by 60%, which may entail a debt for equity swap for senior lenders – including the two BDCs – and all the challenges of owning a “dirty fuel” company at the wrong point in history. Income – running at an annual pace of $1.2mn for FSK and SLRC – is likely to drop by more than half. Neither BDC will be greatly affected given the relatively small exposure each holds, but the setback does beg the question as to how both BDCs investment committees could have green lighted (as recently as 2018) such commodity loans. Blackhawk brings to 20 the number of BDC portfolio companies currently in bankruptcy and the total capital invested at cost to $578mn, according to the BDC Credit Reporter’s calculations.
Here we go again: another coal miner is in deep trouble. The Wall Street Journal, and multiple other publications, report that “struggling coal miner” Foresight Energy LP has decided to miss making a scheduled bond interest payment and is preparing to restructure its balance sheet. On the other side, lenders and bond holders have hired specialist financial advisers for the negotiations ahead.
There are 4 BDCs – all non listed – with $22.4mn exposure to the troubled coal miner: Business Development Corporation of America (BDCA), and three FS-KKR entities, Corporate Capital Trust II, FSIC II and FSIC III. All are in the 2022 Term Loan and all are looking at a significant unrealized depreciation write-down in the coming quarter. As of June 2019, the debt was valued at a (18%) discount by the most conservative valuation. At time of writing on October 1, 2019 Advantage Data’s middle market real-time loan pricing shows the discount has risen to (46%). That’s , at least, an extra ($6mn) write-down from the mid year number. Annual income at risk is $1.8mn. Also very likely a little way down the road is a debt for equity swap of some kind and some sort of material realized loss.
We note – wryly – that the debt at Foresight was valued close to par all the way through the IQ 2019 valuations, suggesting the lenders involved were not expecting the upcoming financial crisis. Only in the IIQ of 2019 was the debt written down sufficiently to be automatically added to our under-performing list as the Watch List level (CCR 3).
As most everyone must know, the coal mining sector has been in trouble for some time, and the recent trend is for ever greater problems. In the few months we’ve been publishing the BDC Credit Reporter, we’ve written about Murray Energy and Blackhawk Mining. One is considering Chapter 11 and the other is already there. As we’ve said before, why any BDC lender would invest in this notoriously challenging corner of the energy sector is beyond us. Admittedly, Corporate Capital Trust II has been involved for some time and might be able to argue that the risks have increased since writing their cheque. However BDCA only invested for the first time in the IQ 2019 and FSIC III in the IVQ of 2018.
TridentUSA is already in bankruptcy, and has been since February of this year. On September 26, 2019 the company settled two outstanding whistleblower lawsuits brought by the government, agreeing to pay out $8.5mn, as reported by the Baltimore Business Journal. “Trident provides mobile diagnostic services to residents of nursing homes. The company earns federal money to provide mobile x-rays to Medicare and Medicaid participants in the nursing homes. The whistleblowers had alleged that Trident had violated federal law by engaging in a kickback scheme, which led to a government investigation of Trident’s pricing arrangements and its costs to provide mobile x-rays at these facilities“.
In a round-about way, this settlement might be a Good Thing for the embattled company and facilitate its exit from Chapter 11. This report tells us nothing of the bigger picture.
For the BDCs involved, there is nowhere to go but up from here. Four well known public BDCs have $108mn in first and second lien loans to the company or its equally compromised sister entities. The exposure has been almost completely written off as of June 2019 and well over $10mn of investment income lost. The BDCs involved are all publicly listed: Solar Senior Capital (SUNS), Oaktree Strategic Income (OCSI), Gladstone Capital (GLAD) and the biggest player of all Ares Capital (ARCC).
Trident is one of a series of significant healthcare failures due to some kind of fraud that we’ve come across of late. Most recently, we discussed Oaktree Medical Centre in a similar vein on these pages. In recent memory, but before the advent of the BDC Credit Reporter, there have been at least two other similar cases of healthcare fraud or other catastrophic difficulty involving BDC lenders. One notable example would be RockDale BlackHawk. Maybe we should ask harder questions about the due diligence capabilities of the BDC underwriters or are stories like these just the exceptions to the rule ?