Fieldwood Energy LLC: Downgraded by Fitch

Not very surprisingly, Fitch Ratings has downgraded the corporate and debt ratings of Fieldwood Energy, LLC. According to a May 13, 2020 release the corporate rating has been dropped from CCC to C. As you’d expect, the company is having trouble in the energy space and has entered into a forbearance agreement with lenders under its three most senior debt agreements. Effectively, the company is already on non accrual.

The BDC Credit Reporter is not much surprised as we’ve had the company rated as underperforming with a CCR 4 rating since IQ 2019. That rating implies we expected that a loss was more likely than a full repayment and that seems to be the case here. The two BDCs with an aggregate of $12.4mn invested at cost in the company’s 2021 Term Loan are Barings BDC (BBDC) and non-traded NexPoint Capital. BBDC still had its $10.1mn of debt outstanding accruing income at 3/31/2020 but that was already discounted (69%). Currently, the debt trades at a (85%) discount in the market, so more pain is on the way. NexPoint, with less capital on the line, has not reported results but had marked the debt at a (15%) discount at year end 2019 AND held a small portion of the second lien debt due in 2022. That will result in a larger write-down shortly .

At this stage this looks like a (almost) complete wash out for both BDCs and a loss of about ($0.900mn) of investment income. Neither BDC will be hugely impacted by the likely loss but the BDC Credit Reporter is surprised that either fund is even involved with this borrower. Fieldwood was already a troubled credit back in 2017 for what is now FS-KKR Capital, and had to be restructured. As recently as IIIQ 2018 BBDC joined in the current debt. The very next quarter the debt began to be written down and the quarter after that was added to our underperformers list…

For the moment we are maintaining the company’s CCR 4 rating and its presence on our Weakest Links list of companies expected to shortly default. However, we expect a shift to CCR 5 before long.

Fieldwood Energy: Downgraded by Fitch

E&P company Fieldwood Energy was downgraded by Fitch Ratings from B- to CCC. “Fitch also downgraded the first-lien secured term loan to ‘B’/’RR1’ from ‘BB-‘/’RR1’ and the second-lien term loan to ‘CCC-‘/’RR5’ from ‘B+’/’RR2’. The Rating Outlook was revised to Negative from Stable“. The ratings group is worrying about the company’s liquidity, as its debt facilities are fully drawn, and much else besides.

We’ve not written about Fieldwood before on these pages but have had the name on our Underperformers list since IQ 2019 with a CCR 3 rating. As of year-end 2019, the first lien Term Loan was already discounted (17%) and the second lien by (40%). As of April 15, 2020 the first lien is trading at a (70%) discount and the second at (92%). This does not bode well with the company needing a restructuring or capital infusion.

There are two BDCs with exposure, but nothing too great. The biggest lender is Barings BDC (BBDC) with $10mn invested in the first lien. With both first and second lien is non-traded NexPoint with $2.4mn. In total that $12.46mn at risk. We expect a debt for equity swap is the most likely short term outcome. That would result in the likely write-off of the second lien debt and – using the latest numbers – a two-thirds or greater realized loss for the first lien debt. That will impact the $0.9mn of income being generated here. BBDC will probably have to write-off ($7mn) or more and wait around for some time to see if Fieldwood Energy can find a long term way out of this situation.

We’ve not done a lot of analysis given i) the relatively small amounts involved; ii) the very fluid situation so we offer those predictions only as a rough estimate. There will be a restructuring of some sort soon and we will have an opportunity to take a closer look. At the moment, though, we’ve downgraded Fieldwood to CCR 4 from CCR 3 and we’ve added the name to our growing list of companies we expect to become non performing in the future.