Murray Energy: Assessing Restructuring Options

e 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.

OCI Holdings: Increased In Value

On August 12, 2019 OHA Investment (OHAI) reported its IIQ 2019 results, which included a slight increase in the valuation of OCI Holdings, a health care provider. The Texas-based company remains on non-accrual, which began in October 2018. The subordinated debt is discounted (89%) to $2.5mn, and an equity stake written to zero. Why OCI, grappling with reimbursement challenges from the Texas government, merited this slight uptick in value was not explained by OHAI on its Conference Call.

With the upcoming transition of the OHAI portfolio to Portman Ridge Financial (PTMN), we’ll be keeping a close eye on what happens to this fallen angel in which the BDC has invested $26mn at cost and was once its largest investment at fair value. A rebound in the value is possible but so is a complete write-off. It’s PTMN shareholders who will reap the benefit or consequences.