Posts for FS Energy And Power Fund

Global Jet Capital: Update

Aircraft leasing company Global Jet Capital published an article about its current business and prospects in a trade publication AIN Online. Highlights include the claim that  “in 2019 alone, Global Jet Capital is on pace for $800 million in new business” and it’s “seeing a 20 percent year-over-year jump in business aviation leasing and financing business“.

Global Jet Capital ..is paving the way for this growth by expanding its global presence, including the additions of fully functioning offices in Zurich and Hong Kong earlier this year. These offices joined existing facilities in Danbury, Connecticut; Boca Raton, Florida; and Mexico City.

Also propelling growth is its continued access to funding, including its third successful asset-backed security, bringing total assets securitized to over $2.1 billion.

The firm also continued to reinforce its leadership team, including the recent naming of financing veteran Stefan Abbruzzese as chief commercial officer. This enabled Dave Labrozzi to shift into the new role of vice chairman

Given that the company – established in 2014 – is privately owned, we rarely learn about such new developments. However, keeping an eye on Global Jet is important because BDC exposure is very, very high: $466mn. Yet back in 2014, when GSO Blackstone first brought FS Investment into the credit, outstandings were just $1mn ! (Subsequently KKR has replaced GSO Blackstone). What’s more, the investment is exclusively in junior capital (sub debt and preferred) and concentrated in 4 FS-KKR Capital BDCs – publicly traded FSK and FSIC II, FSIC III and FS Energy & Power. (FSIC II and FSIC III will shortly be publicly traded). All that capital is under a bigger mountain of senior secured debt from third parties. The junior debt held is all in PIK form and yields 15.0% annually, which means income at risk is very high: $53mn. Finally, the last time the BDC exposure was valued the Preferred was discounted (90%).

We’re glad to hear that Global Jet is performing well – if their press release is to be believed – but regular monitoring is required as there is so much at stake. We have had a CCR 3 (Watch List) rating since IIIQ 2018, which will likely remain, whatever the valuation, given the size of the risks involved.

Abaco Energy Technologies: Repays 2020 Term Loan

The BDC Credit Reporter tracks under-performing BDC-financed companies. However, any given company on our list may have debt or equity investments that are performing normally and some that are not. That’s just to explain that Abaco Energy Technologies – which is rated CCR 3 on our five point scale – repaid its 2020 Term Loan, but remains under-performing. The debt – which is publicly traded – had been valued at or close to par in recent years and has been now been called in as of mid-October 2019. (As usual, that’s a bitter-sweet proposition for the lenders, who’ve been involved since 2014. The sweet is getting repaid in full. The bitter is losing a high yielding first lien loan priced at LIBOR + 950 bps).

Notwithstanding the debt pay-off Abaco remains on our Under Performers List as the two non-listed BDCs which held the 2020 debt also have common stock and preferred invested in the company. To confuse matters more, the equity is valued – as of September 2019 – at a (62%) discount to cost. However, the BDCs also hold a preferred position, valued at 880% of cost. In fact, the fair market value of the common and preferred combined is greater than its cost. (The preferred was added in mid-2017 in some sort of restructuring and has obviously gained greatly in relative value).

Nonetheless, we continue to be worried about the future of Abaco for three reasons. First, the values of both common and preferred were marked lower in the latest period. That’s a two quarter “trend”. Second, S&P and Moody’s downgraded the company in the year, based on concerns about the ability to repay the Term Loan and a Revolver – both subsequently accomplished – but also about its fundamental performance. Now Moody’s has withdrawn its ratings with no debt to evaluate but that does not change the fact that Abaco remains a small company with a “narrow product scope”. Finally, just in case we need to be explicit, the company operates in an industry segment under considerable strain at the moment and with no reprieve in sight.

So we are maintaining a CCR rating of 3 for FS Energy & Power and FS Investment Corp II‘s $12mn of equity and preferred exposure at cost. Remember that FS Investment Corp II may shortly become a public company. Still, the amount of capital at risk is modest by comparison with the size of these two BDCs and given that no income is being generated, there is little to lose if Abaco’s future performance deteriorates.

Ferrellgas Partners: In Default ?

On October 15, 2019 Ferrellgas Partners published its full year results. For the last quarter of the fiscal year, the giant propane distributor reported a net loss of ($72mn) and Adjusted EBITDA of $4mn, while interest expense and maintenance capital expenditures and the gains from minor assets sales were $41mn. Or, in other words, the company is performing very badly. The stock price dropped by a third, to close at $0.65.

If that wasn’t enough, the 10-K reveals a dispute between the company and its senior lender TPG Specialty Lending . The latter is claiming that by not delivering certain financial information within a prescribed period, the company is in default under its credit agreement – even though the said information was subsequently forwarded. Moreover TPG believes the auditor’s opinion contains language suggesting doubt about Ferrellgas remaining a “going concern”. The company reads the document differently. In any case the parties have not agreed and the lender is expected – both by Ferrellgas and us – to take further action. That might include attempting to force an involuntary bankruptcy.

The company has been headed south for some time, so we’re not surprised about the poor results – or the likely bankruptcy – but only about the manner in which the company and its secured lender have fallen apart, which will add to the complexity. Total BDC exposure is very high: $101mn. Of that $82mn at cost is held by TPG Specialty (TSLX) in the senior secured debt, nominally to mature in 2023 but which the company is now carrying as a short term liability. See pages 52-53 of the 10-K. FS Energy and Power Fund holds two junior tranches of the debt for the remainder. TSLX is very confident that its senior secured status will ensure no loss under most imaginable circumstances. Still, there’s $8.3mn of investment income in play. We hope that TSLS – which has a very good track record of financing troubled businesses in just the right way – knows what they’re doing where propane assets are concerned.

Bellatrix Exploration: Files For Bankruptcy Protection, Up For Sale

On October 2, 2019 publicly traded Canadian oil and gas company Bellatrix Exploration – burdened with heavy debt – threw in the towel and sought bankruptcy protection in its home country. A court will now supervise a restructuring of some kind, which includes the possibility of the sale of some or all the assets of the business. Here is what the company’s chief executive said:

Bellatrix has for an extended period of time focused on its key strategic priorities of reducing debt levels, improving liquidity and strengthening its financial position, including transactions completed by the Company in 2018 and 2019 to, among other things, provide additional needed liquidity and to reduce its overall senior note and convertible debenture obligations,” said Brent Eshleman, President and Chief Executive Officer of Bellatrix. “In light of industry challenges facing the Western Canadian oil and natural gas sector, including prolonged and continued poor natural gas and natural gas liquids prices, we believe that the commencement of the CCAA restructuring proceedings at this time will provide the Company with the time and stability required to continue operating our business while we work to implement the Strategic Process and achieve an outcome that is in the best interests of Bellatrix and our stakeholders.”

 This must be bad news for the four BDCs with $96mn of exposure to Bellatrix in the form of second lien and equity. All are part of the FS-KKR complex. $8.2mn of annual interest income is about to be suspended. The Biggest Loser of the four BDCs is non-listed FS Energy & Power, which has four-fifths of the exposure.

We don’t know what the ultimate resolution might be but there is a reasonable risk – given that all BDC exposure is junior on the balance sheet – that there will be a 100% write-off. Should that occur, the fact that the BDCs managers marked the debt as of June 2019 at a very slight discount will result in a large capital loss; not to mention the loss of substantial income. Publicly traded FS-KKR (FSK), though, should only be modestly impacted as its investment cost is “only” $6.0mn and FMV $5.8mn as of June 2019.

In a bigger picture sense, the failure of Bellatrix is a reminder – if one was needed – that the E&P sector in North America remains under pressure. The Calgary-Herald – while discussing the Bellatrix situation – mentioned other difficulties encountered by producers in the region of late:

In April, junior gas company Trident Energy Corp. announced it was shutting its doors. Last month, the City of Medicine Hat, which owns its own energy division, said it will shut more than 2,000 of its 2,600 natural gas wells over the next three years. Tristan Goodman, president of the Explorers and Producers Association of Canada, said in an interview there is no question the industry is in crisis. He said additional bankruptcies and insolvencies in the sector are a possibility.

For the BDC Credit Reporter’s prior posts about Bellatrix, starting as far back as April 17, 2019, click here.

Bellatrix Exploration: Announces IIQ 2019 Results

On August 7, 2019 Canadian oil and gas company Bellatrix Exploration announced IIQ 2019 results. This followed the restructuring of the company’s balance sheet, as we’ve discussed previously on April 17 and June 5 2019. There were no fireworks in the latest results. Nonetheless, despite the $110mn reduction in debt, the company remains vulnerable to market conditions. We noted in the press release that debt to EBITDA is at 4.3x, not that far off the maximum covenanted multiple of 5.0x.

The company retains a Corporate Credit Rating of 3. Total exposure at June 30 2019 was $95.9mn, mostly in second lien debt due in 2023 and valued close to par. All outstandings are held by FS-KKR Capital funds, with the bulk retained by FS Energy & Power ($72mn). No immediate cause for concern – which is why Bellatrix is on our Watch List – but given the hit and miss nature of the business and its exposure to global energy markets, this credit will continue to be worth watching.

Ultra Resources: Offer To Exchange Junior Debt Extended

On June 17, 2019 publicly traded gas exploration company Ultra Petroleum Corp (UPL) issued a press release announcing the extension of an offer to exchange the 7.125% Senior Notes due 2025 of its wholly owned subsidiary, Ultra Resources, Inc. for up to $90.0 million aggregate principal amount of new 9.00% Cash / 2.50% PIK Senior Secured Third Lien Notes due 2024, aka the Third Lien Notes. Unaffected directly is the only BDC with exposure – FS Energy & Power – whose investment of $45mn at face value is in the $975mn April 2024 senior secured Term Loan. That’s one of multiple debt facilities in this heavily leveraged company, with nearly $2.0bn in debt, even after shedding both Term loan and Revolver outstandings, as detailed in the latest 10-Q and on the IQ 2019 Conference Call. Thankfully, the BDC’s debt sits at the top of the capital structure, just under a Revolver, whose balance was only $38mn. Whether the exchange happens or not, though, the company will remain on our Watch List, given the large amount of debt and the fact that the price of Ultra’s common stock has dropped to an all-time low. The stock used to trade at over $15.0 a share, but is now at $0.35. There is close to $3.0mn of investment income at risk for FS Energy & Power.

Bellatrix Corporation: Completes Restructuring

On June 4, 2019 Canadian oil exploration company Bellatrix  announced the completion of its restructuring plan, which we wrote about in an earlier post on April 17, 2019. The press release provides useful summary details of the various components of the recapitalization but also addresses the 2023 second lien debt, which accounts for the $106mn BDC exposure to 4 different FS-KKR Capital BDCs, both traded (FSK) and non-traded. The deal is a partial debt for equity swap with lenders reducing the oil company’s total debt load by $110mn.

Bellatrix Exploration: Schedules Restructuring Meeting

Publicly traded Canadian gas explorer Bellatrix Exploration is once again seeking to restructure its debt-heavy balance sheet. A Canadian court has allowed a meeting of debt and equity holders to be scheduled for May 15, 2019. At the meeting a complex arrangement of debt exchange, forgiveness and additional issuance, and the issuance of new stock, will  be voted on by the different classes of stakeholders. The Company appears to have garnered broad – but not conclusive – support for its plans. If the recapitalization occurs any immediate leverage or cash flow concerns will be alleviated. If not approved, the potential outcome is hard to evaluate but is unlikely to be positive for most of the parties. BDC exposure is high at $105mn and all concentrated in the second lien 2023 Term Loan. For our View of the credit risks involved see the Company File.