We learn from a recent Seeking Alpha article (Trapping Value on February 21, 2021) that NGL Energy Partners LP (ticker: NGL) has recently refinanced its debt. As part of the agreement with the public company’s new lenders, all common and preferred dividends have been suspended. Admittedly, the suspension is supposedly only temporary and the payouts will resume once a target leverage is met. Still, given the pressures in the oil patch, we don’t suggest shareholders should hold their breath.
For the only BDC with exposure – FS Energy & Power – this looks like a body blow from what we can tell. That’s because the BDC has $173mn invested at cost in equity and preferred, of which $166mn is in the latter and yielded 14.3% from distributions. Our calculator indicates that’s ($23.7mn) of annual dividend income lost. A glance at the non-traded’s BDC IIIQ 2020 financial statements indicates that’s equal to 13% of total investment income and over 50% of Net Investment Income.
We had already rated NGL CCR 4 but now downgrade the company to CCR 5, given this was a yield producing investment. If this settled out today we’d expect the BDC to lose (25%-50%) of its investment, but that’s not happening, giving NGL – buoyed by its debt refinancing – the chance to fight on. However, this is a Major investment by our standards (over $100mn) and will be of concern to the manager of the BDC and its shareholders.
We’ve written about Great Western Petroleum twice before, and each time the situation at the refiner was dismal. The first time – in April 2020 – we had just downgraded the company to CCR 4, even though the valuations applied by its only BDC lender – FS Energy & Power – were optimistic. Then in September, we updated the situation after a much heralded restructuring fell through. Third time’s the charm because Great Western has a new restructuring in place and the situation is looking better for the company. Fitch Ratings has just placed the business on “Credit Watch Positive” and is talking about upgrading its debt ratings. Click here for all the details. That’s just as well because as of September 2020 FS Energy’s $95mn of total invested capital (in 2021 and 2025 debt and in preferred) was discounted about (40%).
However, when we get into the details of the proposed restructuring that Fitch is cheering on, we notice some of the devilish consequences. First, the $46mn in preferred held by FS Energy is going to be converted to common stock. That will represent a hit to income as the BDC has been accruing into income preferred distributions at an annual yield of 15.5%.
The 2025 note holders – and the BDC has $13mn outstanding out of $75mn in that tranche – will be pushing out their repayment by a year, on the same terms as the new second lien debt being raised as part of the restructuring.
The only immediately good news from FS Energy’s standpoint is that it’s $36mn of debt due in September 2021 should be refinanced by the new arrangement. Given that this debt is discounted by (40%) that should be a positive for the BDC even if a 9.0% yielding instrument will be leaving the portfolio.
Of course, we don’t have the full picture. We don’t know if FS Energy will be participating in the new second lien loan which might ratchet back up its exposure. Furthermore, although business fundamentals have improved this remains a “speculative credit” by most measures and FS Energy will be involved for many more years to come.
Energy company Lonestar Resources kicks off October as the first BDC-financed company to file. However, the Chapter 11 was expected, and discussed in a prior article on September 15, 2020. In effect, the company is using the bankruptcy process to get a “debt for equity swap” deal done that was agreed on several weeks ago with most of its creditors. Under the plan, bondholders would receive 96% of the company’s new common stock.
We won’t dwell too much on the details because the only BDC lender with exposure – $23.2mn from FS Energy & Power – is in second lien debt and has already written down the fair value of its position (as of June 2020) to just $2.4mn. We won’t know till all the dust has settled what final value the BDC ascribes to any equity stake possibly received, but we’re not expecting much movement up or down.
Obviously, this is yet another BDC credit disaster from lending into the energy arena. However, that’s what FS Energy & Power was created to lend into, giving the manager little in way of attractive options,. Still, investing in the junior debt has almost always resulted in big or complete write-offs in this sector when things go wrong. In this case, the secured revolver lenders, though, are being paid out in full, with interest. What a difference a points of yield and a different position on the balance sheet can make…
We are downgrading – as long expected – Lonestar from CCR 4 to CCR 5. Shortly, we expect to see the company exit Chapter 11 and may re-rate the business to CCR 3. However, if FS Energy has no material stake, which we’ll find out shortly, we may drop further coverage.
According to Debtwire, E&P company Lonestar Resources has agreed upon a restructuring agreement between the various creditors of the company in which the unsecured debt holders will gain “the bulk” of the equity going forward. The WSJ says $390mn in debt and preferred will be written off in the arrangement. The BDC Credit Reporter last wrote about Lonestar Resources on July 6, 2020 when the company missed an interest payment.
The only BDC with exposure remains FS Energy & Power, with $23.2mn invested in the junior debt, which was valued at $2.4mn as of June 2020. The debt was still accruing income at that point. We expect the debt is now on non-accrual and will be converted into non-income producing equity in return for a small stake. Some ($2.5mn) of annual investment income will be lost. It’s hard to estimate what the final value of the capital will be, but is likely to be close to the June number, which means FS Energy will b e booking a ($20mn) realized loss.
FS Energy has been involved with Lonestar since 2014, according to Advantage Data. Values have fluctuated all over the place all over those six years but the latest drop in value began pre-Covid in the IIIQ 2019 and has just gotten worse and worse with every quarter. If nothing else this restructuring creates some hope that the business can continue operating and – at some time – the BDC might recoup some of its capital. That day, though, could be many years away.
Once a company agrees a restructuring plan and files for bankruptcy, a quick exit is often in the cards. That seems to be the case for energy player Denbury Resources, who has just had its pre-packaged Restructuring Plan blessed by its bankruptcy judge. According to a company press release: “The Plan received the overwhelming support of the Company’s stakeholders, receiving high consensus across all voting classes and unanimous acceptance from second lien and convertible noteholders. The Company expects to successfully complete its financial restructuring and emerge from Chapter 11 in mid-September“.
The key element in the Restructuring Plan is that the company’s $1.2bn in pre-filing term debt will be converted into equity, in a standard “debt for equity swap”, where lenders become the new owners. As a result, we expect FS Energy & Power – the only BDC with exposure – will become an equity owner of the company when it emerges from Chapter 11 status later in the month and that will be reflected in the IIIQ 2020 results of the BDC.
As of the IIQ 2020, the BDC valued its debt at $17.1mn versus a cost of $42.1mn, suggesting a realized loss of at least ($25.0mn) will be booked. It’s possible the BDC will also be involved in any new financing added to the restructured balance sheet. Otherwise, though, the chances are this becomes a small equity, non income producing, stake that may or may not have value in the future.
We will circle back when the company formally emerges from Chapter 11 and when FS Energy & Power reports IIIQ 2020 results. In the interim, we’re upgrading the company from CCR 5 to CCR 3 prospectively, given the favorable capital structure envisaged. At this stage, more BDC-financed companies seem to be getting off the mat – typically by way of restructuring agreements like these but also from liquidations – than are newly filing for bankruptcy. Still, the damage to the investment income of the BDCs involved has been done.
We’re writing this story based on one tweet from Debtwire claiming that Great Western Petroleum’s planned debt exchange has fallen through and the beleaguered company is being helped by a major bank to find a private credit alternative. If correct – and we have no reason to doubt the author or the publication, that will be yet another setback for the company’s attempts to reshape its balance sheet and increases the risk of a Chapter 11 filing.
We first wrote about Great Western on April 26 2020 when first downgrading the company from CCR 3 to CCR 4 on news of the now-failed restructuring. At that point, the only BDC lender – FS Energy & Power – had only discounted its junior capital positions by a modest (7%) to (10%). Now with two more quarters of reported results our skepticism about those values has been – partly – vindicated. As of the IIQ 2020, preferred held is discounted (35%) and one of its two subordinated debt holdings maturing in 2021 is discounted by (38%). On the other hand, another subordinated debt position maturing in 2025 is valued at only (1%) below cost. These values may be based on an expectation of the restructuring occurring as planned.
As in our earlier post, given the strains on the industry and the junior status of all the BDC lender’s capital, we continue to believe a complete realized loss is possible and made all the more likely by the latest, hot off the bad news presses. With $93.3mn invested at cost, this a material exposure for much battered FS Energy & Power. We continue to believe a default is likely, retaining the company on our Weakest Links list.
Naturally enough, a few days after we remarked that BDC-financed company bankruptcies had slowed to a seeming halt, a major Chapter 11 filing occurs. In this case, Arena Energy L.P. filed for bankruptcy protection on August 21, 2020. According to the Wall Street Journal, the company has already agreed on a sale to PE-group Lime Rock Partners and management. The existing lenders have mostly signed off on the sale. Apparently, the term loan lenders, who are junior to the reserve-based secured lenders, will receiving a mere 2% of their $439mn in debt back.
This is sad, but not unexpected news, for the three BDCs involved- all part of the FS-KKR Capital organization: non-traded FS Energy & Power and twin public entities FS-KKR Capital (FSK) and FS-KKR Capital II (FSKR). In total, the BDCs funded $179.5mn, all in second lien debt, and which used to be priced at LIBOR + 12.00%. The debt has underperforming and on non accrual since the IQ 2020, reflecting a very sharp drop in fortunes in a brief period. This is debt that dates back to 2015, and when GSO Blackstone was managing these BDCs. Unfortunately, new external manager KKR has not been able to rescue this unfortunate investment in the years since taking over.
If the 2% recovery rate is correct, the BDCs will have to take a further unrealized loss in the next quarter because the existing position was written down (86%). Either in the IIIQ or IVQ 2020 we expect the lenders will have to book a final realized loss of approx ($175mn) ! Also lost is the near ($22mn) of annual investment income being booked through the IVQ 2019. This is a significant reverse by any measure, with FS Energy absorbing about two-thirds; then FSKR with $54mn at cost and finally FSK at $9mn. The almost 100% loss is deeply disconcerting and suggests the lenders – whether they recognized it or not – were investing more like a PE group than a lender but with a capped return and an unlimited downside. Finally, this proves the BDC Credit Reporter’s oft-made point that energy lending is an oxymoron and an inappropriate asset for an industry with a predominantly retail investor base.
We had already rated the company a CCR 5, and expect to see the name removed from the books of all the BDCs involved by year-end.
On July 30, 2020 energy company Denbury Resources filed Chapter 11. The move was expected as we had added Denbury to the Weakest Links list earlier in the month. As is so often the case these days, the company had negotiated a restructuring plan in advance with most of its creditors and expects a quick exit from Chapter 11, with a much de-leveraged balance sheet.
BDC exposure continues to be limited to FS Energy & Power – the non traded, energy specialist BDC that has been taking it on the chin time after time during this most difficult period for its chosen sector. As of June 2020, the BDC’s exposure has dropped from the prior quarter. Off the books – and presumably written off – is $12.0mn in second lien debt due in 2024. What remains is $42.1mn in Term debt due 2022 and already written down by (59%). Between the two facilities, the BDC will be losing ($4.8mn_ of annual investment income. Going forward, we expect the debt will be converted to common stock, which means the loss of income could be permanent, but leaves a potential long term equity upside.
We have downgraded the company to CCR 5 from CCR 4; removed Denbury from the Weakest Links list and added an outcome expectation of a debt for equity swap, all of which is reflected in the BDC Credit Reporter’s database.
As projected by the company back in early July – and covered by the BDC Credit Reporter on July 6 – shale driller Rosehill Resources has filed for Chapter 11 on July 27, 2020 in Texas. At the time, Rosehill believed the filing would come by mid-July but has delayed till now.
In the absence of any new information, we’ll just re-purpose what we wrote on July 6 about BDC involvement in the company: “There is only one BDC involved with Rosehill – non-traded BDC FS Energy & Power – which has $4.2mn advanced in the form of second lien and preferred, a tiny fraction of the company’s half a billion dollars in debt. The BDC’s exposure has already been written down by (66%) in the preferred but is valued close to par in the second lien. We expect a further loss will be forthcoming and conversion of the full amounts into new common equity. FS Energy may also contribute to the convertible DIP and/or the new debt facility envisaged after bankruptcy. The amount of income likely to be lost is under ($0.2mn) a year.Given FS Energy & Power’s side, this RSA and planned bankruptcy will not be material“.
With Rosehill, the number of BDC-financed company bankruptcies increases to seven in the month of July to date. Five have been in the energy sector broadly defined.
According to the Wall Street Journal, energy company Lonestar Resources Ltd. has failed to make an interest payment on one of its bonds: “The Fort Worth, Texas-based shale driller said the payment was due on $250 million in 11.25% senior bonds due in 2023. The missed payment starts a 30-day grace period before the company is considered to be in default”. Naturally enough, this has resulted in speculation as to whether the company will file for bankruptcy protection or take some other form of evasive action to remain a “going concern”. The company has over half a billion dollars in debt.
This is bad news – albeit not unexpected – for the only BDC with exposure: FS Energy & Power, which has $33.2mn invested at cost in subordinated debt, already written down to $7.6mn as of March 31, 2020. The company has been underperforming since IIIQ 2019, but has been on the BDC’s books since 2014.
The company was initially rated CCR 3 by the BDC Credit Reporter but was downgraded – due to the write-down of one third of its debt value – to CCR 4 in the IVQ 2019. With the latest news, we’ve added Lonestar to the Weakest Links list because some sort of blow up seems inevitable in the short run.
Having had a look at the company’s financial results through the first quarter 2020 we expect that the capital invested by FS Energy is likely to be almost completely written off when the dust settles. Also likely to be interrupted – probably forever – is the $3.8mn of annual investment income currently forthcoming. That will be a significant loss for the BDC, already facing multiple similar credit setbacks.
Energy company Rosehill Resources has revealed in its 10-Q filing dated July 2, 2020 its intention to file for Chapter 11 bankruptcy by July 15, 2020. This follows the entering into a Restructuring Support Agreement (“RSA”) on June 30 with certain of its lenders, creditors and preferred debt holders. As usual a “debt for equity swap” is the centerpiece of the RSA except that preferred stock will share in a tiny piece of the new equity and – in an unusual move – the Debtor In Possession (“DIP”) financing will convert into a major share of the common stock of the post-bankruptcy company. Liquidity is clearly very tight and should this gambit fail, the company could face a cash squeeze and be unable to fund its business.
There is only one BDC involved with Rosehill – non-traded BDC FS Energy & Power – which has $4.2mn advanced in the form of second lien and preferred, a tiny fraction of the company’s half a billion dollars in debt. The BDC’s exposure has already been written down by (66%) in the preferred but is valued close to par in the second lien. We expect a further loss will be forthcoming and conversion of the full amounts into new common equity. FS Energy may also contribute to the convertible DIP and/or the new debt facility envisaged after bankruptcy. The amount of income likely to be lost is under ($0.2mn) a year.
Given FS Energy & Power’s side, this RSA and planned bankruptcy will not be material. However, the transaction is a reminder of how great the percentage of loss can be on energy transactions and how new capital is constantly needed from the very same creditors who are being affected by the company’s business failure. As a result, it’s possible that Rosehill will remain in some form on the BDC’s books for years to come and the actual total dollar exposure increase.
The BDC Credit Reporter had already rated Rosehill Resources CCR 4 and added the name to our Weakest Links list, so no change there. We’ll circle back when bankruptcy actually occurs or when IIQ 2020 results are published.
According to a Seeking Alpha article by Elephant Analytics on July 4, 2020 energy company Denbury Resources Inc. is likely to file for Chapter 11 after working out a restructuring plan. The author points to a skipped interest payment on June 30 and the drawing down of the company’s revolver, thus loading up on cash. The SA author believes that a restructuring will result in second lien lenders receiving essentially the entire ownership of the company, with more junior debt and equity holders being wiped out.
There is only one BDC lender in Denbury: non-traded, specialist fund FS Energy & Power. The BDC holds two different tranches of second lien debt, one maturing in 2022 and the other in 2024, with an aggregate cost of $54.1mn. The writing about Denbury has been on the wall for some time and the debt has already been discounted to $12.3mn, a (77%) drop. Now the BDC seems likely to lose ($4.8mn) of investment income and end up with common stock in a largely de-leveraged Denbury.
The BDC Credit Reporter was already rating the company CCR 4. However, we’ve now added the company to the Weakest Links list given that a payment default seems almost certain. We wouldn’t be surprised if we find the BDC has already placed Denbury on non accrual in the quarter ended June 2020. If not, that should occur in the current quarter (IIIQ 2020).
This promises to be yet another significant loss for the $2.5bn FS Energy & Power Fund, which has accumulated total losses both realized and unrealized of ($2.0bn) as of March 31 2020. We’ll circle back if and when a bankruptcy occurs or we hear more from the BDC.
On June 18, 2020, Chisholm Oil & Gas Operating LLC filed for Chapter 11. The oil & gas explorer, though, has a restructuring support agreement in place with its two lending groups and plans for an exit sooner rather than later. The lenders include the reserve-based lending facility and the holders of the 2024 Term Loan. The restructuring plan involves converting all the $517mn in debt to equity; issuing two new – smaller – debt facilities; use of cash collateral and various minor concessions to other creditors. We’ve skimmed the 107 page filing – which includes the reasons for why the company got into trouble in the first place – and are not fully convinced this will provide a lasting solution, but nobody is asking the BDC Credit Reporter.
We should say from the outset that this a Major non-performing asset with $295mn invested in Chisholm’s debt and equity, spread over 3 BDCs. Sweating most heavily right now will be non-traded FS Energy & Power with $226mn. Next is FS KKR Capital II (FSK) , which is newly public with $39mn. Sister BDC FS KKR Capital (FSK) has $16mn of debt. Admittedly, the bankruptcy was expected as the debt was placed on non-accrual as of the IQ 2020 and the total fair market value marked down to $124.0mn.
We fear, though, that – notwithstanding the restructuring plan which envisages a debt for equity swap – losses could increase further now that the bankruptcy has hit the proverbial fan. If we’re reading the plan right, the Term Loan holders will only be getting 3% of the restructured company’s equity because the secured debt is deeply underwater from an availability standpoint. $263mn is owed but the current availability is only $120mn…We expect most of the capital invested by the BDCs to be worthless. Unclear is whether the same BDC lenders will provide some portion of the new restructuring facilities. At the end of the day the BDCs could write off $250mn or more of the $302mn invested and lose out on all the $21mn or so in investment income that was being booked on an annual basis before the non accrual in the IQ 2020.
This the eighth BDC-financed company to file for bankruptcy protection in June and the 24th in 2020 and – by far – the largest in both those categories. We are maintaining our CCR 5 rating till bankruptcy is exited and realized losses are booked in the second or third quarter 2020, including potentially incremental losses of ($80mn) over the IQ 2020 level.
For all the BDCs involved this seems to a classic example of why not to get involved in energy lending. This transaction is notable because even the reserve-based lender – who often dodges any losses due to their low advance rate and secured status – has managed to get into trouble. What hope did the second lien lenders and equity investors (where the BDCs were concentrated) have ? The investment was not even particularly richly priced for the potential catastrophic losses: LIBOR + 550bps.
We’ll update readers when we receive further information.
Correction: This article was updated on June 22, 2020 to remove our mention of Main Street (MAIN) and HMS income as lenders to the company. In fact, their investment is in Chisholm Energy Holdings, LLC, a separate entity with HQ in a different state. We apologize for the error.
Ultra Petroleum, which is owned by Ultra Resources Inc., filed for Chapter 11 on May 14, 2020. The BDC Credit Reporter had anticipated as much a month ago, on April 16. As is de rigueur in this industry, the only parties willing to support the gas driller were its existing lenders who will be swapping a huge amount of debt for equity and the hope that the business can yet be revived. According to the Wall Street Journal, informed by court filings “Ultra’s existing lenders are providing a $60 million loan to the company when it exits bankruptcy. The company also plans to raise $85 million from senior lenders through a rights offering, which will fund recoveries for the company’s other creditors“. About 80% of the company’s debt is to be written off/swapped.
The only BDC lender remains non-traded FS Energy & Power. Since we last wrote, though, the total amount invested by the BDC has risen slightly now that IQ 2020 results are out: to $57.3mn at cost and $32.9mn at FMV. We’re not quite sure what happens to the debt the BDC holds going forward but some sort of realized loss is coming – probably ($25mn-$30mn). Income, too, will be interrupted to the tune of $2.7mn. The parties hope to be out of bankruptcy within 3 months with their packaged plan.
For our part, the BDC Credit Reporter will be downgrading the company to a CCR 5 – non performing – status – from CCR 4. We’ll also remove Ultra from the Weakest Links list now that the default that we anticipated has occurred. Management will blame the market conditions brought on by Covid-19 but Ultra was first written about on these pages in mid-2019. All the debt on the books made the company a bankruptcy waiting to happen. The current crisis has only accelerated the inevitable and made more difficult the recovery. Although we don’t know the exact amount of the likely realized loss to come, the investment also demonstrates that a so-called “First Lien secured loan” is no protection against a major loss in the oil space. For FS Energy this has been a lesson learned and relearned in recent months.
Time for a “frac holiday“. That’s what people in the oil business unironically call sending drilling crews home, as Reuters informs us in a broader article about trouble at Oasis Petroleum on April 28, 2020. The E&P company has decided to stop all drilling in the Bakken. As you’ll have undoubtedly heard, U.S. oil producers are closing down production due to very low prices and Oasis is joining in. That’s obviously not good for the company’s finances and the servicing of its $2.7bn debt load. To add insult to injury – but not unexpectedly – Moody’s has downgraded the debt, and the outlook, of the company as well.
This is not good news for the only BDC with exposure – FS Energy & Power – which holds $13.0mn in subordinated notes – according to Advantage Data quoting 12/31/2019 records -which was valued close to par. Now that same debt is trading at a (90%) or so discount. We are leapfrogging the company’s credit rating from CCR 2, which is performing, to CCR 4, which means we believe the likelihood of ultimate loss is greater than that of recovery. Oasis is also being added to our Weakest Links list as a default seems imminent. Given that the BDc’s debt is junior in the balance sheet, we currently expect a complete write-off of the position, but we’ve more homework to do to confirm as much. About $0.900mn of investment income would be lost.
Based on two different rating groups downgrades in the past few days, the BDC Credit Reporter is itself downgrading Great Western Petroleum from CCR 3 to CCR 4. First, there was the evaluation from Moody’s on April 7 and then that of Fitch on April 22, 2020. We won’t rehash the multitude of facts and figures in both reports, but will say that we expect a restructuring to occur before too long because of the abysmal market conditions. Further – and more controversially – because the BDC exposure is in the more junior parts of the company’s capital (preferred and second lien debt) – we project a full loss of the $91.2mn invested by the only BDC with exposure: FS Energy & Power.
With the company’s Revolver borrowing base soon to be reset based on the lowest oil prices in modern history and so many of the company’s peers going to the wall, it’s hard to project that – at the end of the day – the junior stakeholders will be anything but wiped out. At best, the preferred will get erased and the junior debt turned into some modicum of an equity stake with little immediate value. That’s how bad things are in the oil patch.
At 12/31/2019, FS Energy & Power discounted all its positions by only (7%) to (10%). Clearly, much has changed in the interim, as the Moody’s and Fitch ratings demonstrate. The BDC Credit Reporter – unlike those groups which are paid by the issuer and need to be ultra cautious before re-rating companies – can give its candid assessment of where we will end up rather than where we are at this interim stage. We’ve also added Great Western to our Weakest Links list, presuming a Chapter 11 or restreucturing will occur before long. Liquidity may have been OK at year end 2019 but the subsequent drop in oil prices, which is still underway, may squeeze availability before long and at a time when capital of any kind is impossible to come by.
We should find out during the course of 2020 if our prediction is too harsh or just realistic. For FS Energy & Power, with so many troubled credits due to its specialization, this must rank as one of the most worrying ones. The BDC has already had to make onerous concessions to its own lenders, and is taking steps to conserve liquidity. Should the BDC stumble, that could further complicate the situation.
The long and winding road for Canadian oil and gas company Bellatrix Exploration seems to have reached an end. In a press release on April 24, 2020 the company announced its sale to a subsidiary of Return Energy Inc. “for cash consideration of $87.4 million plus the assumption of certain liabilities at closing”. This follows a sales process conducted under court supervision in Canada. The BDC Credit Reporter has been writing about Bellatrix since June 2019 when the company completed a restructuring. That didn’t take and Bellatrix was in bankruptcy from December 2019. For all our articles, click here.
You’ll see that since the last time we wrote BDC exposure – all in the FS KKR platform – has increased from $96mn to $111mn. We don’t have the details, but we expect that the incremental monies where a Canadian version of debtor in possession financing and the new monies will likely be repaid in full. Overall, we expect that the three related BDCs involved (which includes publicly traded FS KKR Capital or FSK for a modest amount ) will write off ($96mn). That’s the amount in junior debt and equity owned. However, we’ll need final confirmation when the BDCs involved (which also includes FS Energy and FS KKR Capital II– both non listed) report results, either in the IQ 2020 or the IIQ.
Time for a post mortem, although we may be getting ahead of ourselves and may be unfairly exaggerating the losses the FS KKR organization will be booking. Still, this unfortunate episode does underscore one of the BDC Credit Reporter’s favorite mantras which all BDCs should repeat to themselves regularly: don’t lend or invest in the oil and gas industry. It’s a simple enough dictum and one that many other lenders have learned the hard way in the last 50 years.
We’ve been around since the oil price first jumped up after the Arab oil embargo in 1973 and seen the devastation caused by non-specialized lenders trying to convince themselves that with enough collateral; hedges; field diversification etc. a “safe” loan structure can be arranged in what has proven to be the most cyclical industry one could possibly imagine. KKR will justly point out that this was a credit inherited from GSO Blackstone, which was very bullish on the energy sector before everything fell apart in 2014. Nonetheless, the damage to all 3 sets of shareholders KKR is now in co-captaincy of is severe and – from our perspective – unnecessary.
Bankrupt Whiting Petroleum Corporation has negotiated a standard debt for equity swap. As spelled out in a press release, the company will be exchanging over $2.3 billion in debt for a 97% equity interest in the oil and gas explorer. Existing equity investors in the public company get to keep the remaining 3% and the opportunity to subscribe for more.
There is only one BDC with exposure, specialist non-traded BDC FS Energy & Power. The BDC has invested $5.2mn in the 2021 subordinated bond that is being swapped out. At 12/31/2019 the value of the position was discounted by only (2%). With this resolution, we expect FS Energy will take a realized loss of up to (90%), based on what the 2021 debt is trading for in the bond market. Lost is ($0.310mn) of investment income, but there may be some remote hope that whatever speck of a restructured Whiting Petroleum the BDC holds onto will be worth something one of these days. The company remains technically non Performing, until the bankruptcy court blesses the restructuring plan. However, given the certainty of that outcome, we’ve already upgraded the investment to performing status.
However, because the investment in Whiting is now non material by our standards, we’ll be discontinuing coverage once we see the final FS Energy & Power treatment in the IIQ 2020 results.
Ultra Resources, which owns Ultra Petroleum, appears about to file Chapter 11. The oil & gas explorer announced IVQ 2019 results that included that death knell to solvency: a “going concern” question mark. Also, the company admitted to not having delivered financial results to its lenders and being in default under its financing arrangements. Worse, the press release included the following:
“We expect that we will be precluded from making additional draws on the Credit Agreement unless a waiver is obtained. If we do not obtain a waiver or other suitable relief from the lenders under the Credit Agreement and the Term Loan Agreement before the expiration of a 30-day grace period, an event of default under each of the Credit Agreement and Term Loan Agreement would occur, which would allow the lenders to accelerate the loans outstanding under the Credit Agreement and Term Loan Agreement. At this time, we do not expect to obtain a waiver of this requirement and we do not currently have sufficient liquidity to repay such indebtedness were it to be accelerated”.
There is just one BDC with exposure to publicly traded Ultra Resources, whose stock trades for less than a dime, as we discussed in our prior article: FS Energy & Power. The non-traded BDC has $57.1mn invested in the 2024 Term Loan, with a fair market value of $40.5mn at year-end 2019. The investment has been on the underperformers list since IIQ 2019, with a Corporate Credit Rating of 3. We are downgrading Ultra to a CCR 4 rating, and adding the name to a growing list of (very) likely names to become non-performing. That would cost the BDC $2.9mn in annual investment income. However, some recovery is possible given the senior nature of the debt. The dire state of the oil market, though, does not make us hopeful. We’ll defer any estimate of recovery till we get the dire details from an actual filing.