Fieldwood Energy: IIIQ 2020 Update

Dedicated readers with an interest in the “energy-calypse” (trademark pending) will remember that we last wrote about Fieldwood Energy LLC on August 4, 2020. That was when the E&P producer achieved a Chapter Twenty Two – filing for Chapter 11 protection twice. The first time was in 2018. At that point there were three BDCs with $13.3mn in exposure to the company’s debt. Leading the pack was Barings BDC (BBDC) with $10mn, followed by non-traded Monroe Capital Income Plus Corp and NexPoint Capital with just over $3mn invested between them.

We promised at the time to circle back to Fieldwood once we hear about whether the court is in agreement with the proposed plan and when we can evaluate what the company’s balance sheet – and business prospects – might look like going forward“. However, the most interesting news since our last article is that BBDC has thrown in the towel – not unreasonably given the circumstances – and booked a realized loss in the IIIQ 2020 from the disposition of its investment. The BDC did not explicitly spell out what the realized loss was but we know that the $10.063mn at cost had an FMV of $1.817mn at June. This suggests the loss was somewhere between ($8mn) and ($10mn). Given that there was no interest forthcoming as the debt was on non accrual from the IIQ, income is unaffected. BBDC booked ($21mn) in net realized losses in the quarter, so this was a material setback, even if expected.

The other two non-traded BDCs continue to have exposure to Fieldwood. The company has arranged a $100mn DIP facility and is seeking to sell its assets. As far as we can tell, the business remains under court protection. From the BDC Credit Reporter’s standpoint, this has become a “non material” company given that the remaining FMV is only $0.75mn.

Whatever the final outcome – and prospects do not look encouraging – this is yet another example – if any were needed – that lending to E&P companies is fraught with risk and not appropriate in almost any situation and at any position in the capital structure.

Fieldwood Energy: Files Chapter 11

With all the sense of inevitability of an ancient Greek drama, yet another energy company has filed for bankruptcy protection. This time it’s Fieldwood Energy, LLCa premier independent E&P company in the Gulf of Mexico“.  Based on the company’s press release, the company already has a formal restructuring plan to submit to the bankruptcy court, agreed to by two-thirds of its senior lenders. Once again a company and its creditors are looking to the “debt for equity swap” as the solution for what ails the business. Also – as per the usual – Fieldwood has arranged a Debtor-In-Possession (“DIP”) facility and is using cash on hand to fund liquidity needs while going through the bankruptcy process. The amount of the DIP, though, is not given.

There are three BDCs with exposure – all in the first lien debt – to Fieldwood: $13.3mn. The only public BDC is Barings BDC (BBDC), which also has the only material exposure: $10.1mn. The rest is held by non traded Monroe Capital Income Plus and NexPoint Capital. The loan – now on non accrual -is priced at just LIBOR + 525 bps, suggesting lenders believed this was a “safe” energy loan (to our minds a clear oxymoron) when first booked back in 2018.

However, the investment has been in trouble for some time, rated as underperforming as far back as IQ 2020, long before Covid-19 drastically reduced market demand for fossil fuels. The BDC Credit Reporter has been writing about the company since April 15, 2020 and had already downgraded Fieldwood to a CCR 4 rating, and placed the name on our Weakest Links list. Now the company has been downgraded to CCR 5 and added to the Bankruptcy list.

For BBDC this is a telling reminder that no energy loan is safe in a world where oil can trade at $100 a barrel one day and at next to nothing a few years later. These single focus businesses cannot handle almost any amount of debt when their main product is subject to such drastic fluctuations. In this case BBDC, and the other lenders, look likely to be left with equity of dubious value and may have to stump up more funds with no great confidence that this time the right capital structure has been found.

We’ll circle back to Fieldwood once we hear about whether the court is in agreement with the proposed plan and when we can evaluate what the company’s balance sheet – and business prospects – might look like going forward.

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.