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.

Men’s Wearhouse: Earnings “Mixed”. Dividend Cut.

On September 11, 2019 publicly traded Tailored Brands (ticker: TLRD) – owner of Men’s Wearhouse and other clothing businesses – reported “mixed” second quarter 2019 earnings, according to a news report . Adjusting for a special one time item, EPS is down a fifth from a year ago and sales are off 4%. Most indicative of all, the company has suspended its dividend “to pay down debt”.

There is only one BDC with exposure: Barings BDC (BBDC). We placed the senior loan on the under-performing list from the IIQ 2019, when the BDC discounted the value of the debt by (12%) from (5%) previously. BBDC’s exposure started in IIIQ 2018 and this was expected to be a super-safe loan judging by pricing (L + 325%). Annual investment income of just under $0.600mn is ultimately at risk.

The latest news is likely to cause a further unrealized write-down in the next earnings release, unless the valuation folk take comfort from the savings in cash flow to come from the dividend elimination. We note the 80% drop in TLRD’s stock price in the space of a year and we worry. The credit is rated a CCR 3 (Watch List), but could be headed lower before the year is out.

Mallinckrodt Plc: Bankruptcy Possible – Analyst

On September 3, 2019, one of the 15 analysts covering publicly traded opioid pharmaceutical manufacturer Mallinckrodt Plc (ticker: MNK) suggested a bankruptcy filing is”possible”, according to a financial publication. This sounds plausible as the company has “more than $5 billion of debt, most of which will start to come due in 2020, according to Bloomberg“. The publication added that “the company recently announced that it borrowed the final $95 million¬†on its revolving credit line, meaning that it has no more capacity to borrow“. Showing how dire conditions have become Reuters reported the company has hired restructuring firms, including two of the usual suspects in this situation, Latham & Watkins and Alix Partners.

Of all that $5.0bn of debt, there is only $11.2mn at cost held by a BDC, and that’s Barings BDC (BBDC). This was supposed to be a “safe as houses” position for BBDC, priced at just LIBOR + 2.75%. At June 30, 2019 the position was valued at 90% of cost. However, based on Advantage Data’s real time loan pricing we know this debt is now trading at 77 cents on the dollar and could drop lower given the many lawsuits pending against the business and the myriad uncertainties facing the segment, even if a restructuring becomes possible.

Should Mallinckrodt Plc end up in bankruptcy or restructured, the NAV or income loss to BBDC will be modest but will be one of the first credit reverses since the new external manager took over and renamed Triangle Capital (TCAP).

Serta Simmons Bedding: Corporate Reorganization Completed

On August 19, 2019 a trade publication indicated that Serta Simmons Bedding had recently undertaken a major organizational restructuring. This was revealed by a senior executive of the firm.

Not by itself earth shattering news, but when associated with the recent devaluation of Barings BDC’s (BBDC) debt position in the company, now discounted from cost by (29%), after being only written down (8%) at 2018 year-end underscores that not all is well. Not helping was the departure on April 17, 2019 of Serta’s CEO and the July 2019 placing the debt on Fitch’s “Loans Of Concern” (similar to the BDC Reporter’s Worry List).

We are currently giving the company a Corporate Credit Rating of 4, in our 1-5 scale. The only BDC with exposure is BBDC with $2.7mn at cost, $3.0 at par and $1.9mn at FMV as of June 2019. The amount of investment income at risk – under $0.200mn – is modest, due to the low interest rate charged.

Caesars Entertainment: To Be Sold

Caesars Entertainment, according to news reports, is being put up for sale. There are reportedly two potential suitors so far and the enterprise value is said to be $24bn. The only BDC with exposure to the company is BBDC, which only added its senior secured exposure in a Term Loan maturing in 2024 and paying LIBOR + 275 bps in the IIIQ 2018. If a deal does go through, this debt – which is Performing – is likely to be repaid before long.