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.
On August 26, 2019 the Wall Street Journal reported that the bankrupt company is seeking court approval to hire Hilco IP Services to sell items of its intellectual property. That may help paying some of the bills associated with the liquidation of the business but is unlikely to end up in the pockets of its three BDC lenders (THL Credit, Cion Investments and Sierra Income) with $37.4mn invested at cost.
As of June 2019, the FMV of the investments – probably based on the hope of some recovery like this – is at $0.800mn, or 2% of capital invested. Notwithstanding the prospective intellectual property sale, we expect all BDC investments to be effectively wiped out. A resolution should occur before year end.
Trade publication Retail Dive – quoting Debtwire – says troubled women’s accessories retailer Charming Charlie has brought in a financial adviser. In addition, the nationwide chain, which was recently recapitalized by THL Credit (TCRD), is seeking new capital, in the form of debt or equity. All this sounds worrying from a credit standpoint. To date, TCRD – alongside non-traded Cion Investments and Sierra Income – have been funding the company with debt and equity in an ambitious attempt to bring the business back to performing status. At March 31, 2019, the three BDCs had advanced $37mn at cost to Charming Charlie, mostly in debt and mostly still on non accrual. The exposure is valued at roughly half of cost. We worry that Charming Charlie, which only exited Chapter 11 in late April 2018, might do a “Chapter 22” and need to file again. This time, though, that might mean liquidation and a potential significant write-off for the lenders involved.
On April 18, 2019 two specialist lenders announced the closing of a $35.00mn asset-backed revolving line of credit for troubled mall retailer Charming Charlie, intended to finance working capital. The two lenders are White Oak Commercial Finance and Second Avenue Capital Partners. There are 3 BDCs with $37mn of debt and equity exposure to the Company, led by TCRD. At 12/31/2018, the 2023 Term Loan outstanding was on non-accrual. For what this financing might mean for the Company’s prospects see the Company File.