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.

Constellis Holdings: Added To Under-Performing List

With the publication of the IIQ 2019 valuations by 8 BDCs with $107mn in various forms of debt exposure (2022-2024 and both senior and second lien), we’ve added Constellis Holdings to our under-performers list with an initial rating of CCR 3 (Watch List). The debt has been discounted between (6%-30%) from 0% to (5%) in the prior quarter.

This is not surprising as there has been a massive number of changes in senior management in recent months and downgrades from both S&P and Moody’s in the spring, worried about high leverage; cash flow losses and operational challenges. For the BDC sector, this is very big exposure in aggregate, with annual income of approx. $9mn at risk should the company default down the road. With that said $90mn of the debt is held by the three FS-KKR non traded BDCs (FS II-III and IV), which are intending to go public under one banner before long. How Constellis plays out will be of above average interest at FS Investment-KKR in the quarters ahead.

Fusion Connect: Schedule For Chapter 11 Exit

According to Informa, Fusion Connect has filed its bankruptcy plan with the court and hopes to get a hearing by October 1st and – if all goes well – exit Chapter 11 shortly thereafter. The plan includes a very large debt swap/forgiveness that is said to cut total borrowings from $680mn to $380mn. Currently, the restructuring appears to have the first lien lenders gaining control of the business in return for writing off a goodly portion of their debt. The two BDCs involved – CM Finance (CMFN) and Garrison Capital (GARS) have $18mn invested at cost, but that liability may have increased as senior lenders provided DIP financing. That original debt is on non accrual and won’t – in any form – be paying interest till the IVQ 2019. That’s three quarters without LIBOR + 7.25%. Moreover, a write-off of some kind must be coming.  We’ll learn more when CMFN and GARS report IIQ 2019 portfolios. The valuations are likely to be close to the final, if all goes to plan. See our prior posts on June 12, 2019  and April 17, 2019.

Fusion Connect: Further Details On Post Bankruptcy Financing

The Company filed for Chapter 11 on June 3. On June 11, in an article from the Global Legal Chronicle we learned that “ad hoc group of lenders also backstopped Fusion’s debtor-in-possession financing facility in the aggregate principal amount of $59.5 million, which consists of $39.5 million of new money term loans”. This suggests that the two BDCs with $18mn in senior debt exposure  –  CMFN and GARS – have increased their exposure to what was till very recently a fast growing enterprise, cobbled together from multiple acquisitions. It’s still too early to determine how this will all play out. The business may yet be sold or the existing lenders may be involved in a debt for equity swap. In either case, income from the pre-petition debt is going to be interrupted for months, and some sort of realized loss is likely. At 3/31/2019, the discount to cost that the BDCs were using ranged between (12%) and (17%). However, any income and return from the DIP financing should be money good.

Fusion Connect: Lenders Agree To Standstill Agreement

Publicly traded Fusion Connect has entered into a Forbearance Agreement with its Revolver lenders and 70%+ of first lien lenders. As the press release states : “Under the terms of the Forbearance Agreement, these first lien lenders have agreed not to exercise the remedies available to them related to Fusion’s decision not to make its scheduled principal payments due on April 1 and 2, 2019 and certain other defaults under the Company’s credit agreement. The Forbearance Agreement extends until April 29, 2019 unless certain specified events occur”.  In the interim, the Company has hired turnaround advisers and appropriate legal counsel in an effort to restructure the balance sheet out of bankruptcy. However, the odds are stacked against the highly leveraged business. See the Company File for the BDC Credit Reporter’s View. The two BDCs with $18mn in exposure appear to be in a first lien loan due in 2023. The publicly traded debt – valued by the BDCs at close to par at 12/31/2018 – currently trades at a (25%) discount). That suggests CMFN and GARS are likely to have to write down their debt by close to $5mn or more in the IQ 2019 results and face the risk of additional Realized and Unrealized Losses. The most immediate impact is likely to be interruption of interest income: $1.1mn on an annual basis for CMFN and $0.7mn for GARS.

Lionbridge Technologies: Sued By Rival Company For $700mn

On April 11, 2019,TransPerfect – the world’s largest language provider by revenue – filed a complaint in the Southern District of New York against rival Lionbridge Technologies and its owner, private equity firm HIG. TransPerfect is seeking at least  $700m in damages and compensation. For all the details, see the press release. We have no way to determine who will win the lawsuit or any terms that might be involved. Nonetheless, the amount is sufficiently large – and with recent experience of companies losing major cases in court and being financially crippled thereby in mind – we’ve decided to add Lionbridge Technologies to our Watch List, with a CCR 3 rating.  Till this news – and using IVQ 2018 values – there are three BDCs with $31mn in first lien and second lien debt exposure, all carried at par. We’ve also opened a Company File, which we’ll keep updated as this issue wends its way through the courts.