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.

AAE Acquisition: Details On Realized Loss

On Tuesday August 6, 2019 Capitala Finance (CPTA) on its Conference Call gave further details about the change of fortunes at equipment lifting company AAE Acquisition, which resulted in a ($20.4mn) Realized Loss. Apparently the company was up for sale but no buyers came through and the first lien lender foreclosed. CPTA was in the second lien and equity, which had been only mostly written down in the first quarter 2019. As a result, 100% of the investment was written off once and for all and $1.2mn of investment income (all previously in PIK at a 6.0% rate) lost. That’s about 2.5% of the BDC’s investment income as of March 2019 (annualized) and – for a sense of proportion rather than a calculation – 7.5% of Net Investment Income. This is a black eye for CPTA, especially given the surprise write-off. We did have the company – due to the valuation – on our under-performing list from the IQ 2019, but this was a surprise to us as well.

Bluestem Brands: Reports Latest Results

On June 18, 2019 multi-unit retailer Bluestem Brands reported results for the quarter ended May 3, 2019. We reviewed the earnings press release, and the Conference Call transcript on Sentieo (not yet linkable).  Notwithstanding lower sales in the period compared to a year earlier, the company reported progress in “turning around” the business in several areas. Adjusted EBITDA was barely positive but that’s an improvement over ($12.6mn) a year earlier. Most importantly, from a credit standpoint the company was nowhere near triggering the several key metrics imposed by its senior lenders. Nonetheless, the burden of total debt has remained unchanged over the past several quarters, and its principal Term debt becomes due in late 2020. We have a CCR 4 Credit Rating, which remains unchanged. There are 4 BDCs with $29mn in exposure – all in the 2020 Term debt. In the IQ 2019, the unrealized depreciation was reduced in the BDC valuations and may receive a modest boost in the IIQ, based on these results. Nonetheless, the retailer is far from being out of the woods.

Bluestem Brands: Reports Unaudited Consolidated Fourth Quarter Fiscal 2019 Earnings Results

The troubled e-commerce retailer published quarterly and annual results for the period ended February 1 and 2, 2019.  Despite closing down several brands and taking one-time losses, the Company’s Adjusted EBITDA and key bank covenants, as well as liquidity, all appear better. May stop the gradual erosion in BDC debt values underway since late 2016, which peaked in IVQ 2018. We updated the Company file and the BDC Credit Reporter’s views accordingly. For all the details, see the Company File.