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 September 4,2019 coal company Blackhawk Mining received approval from the bankruptcy court of its restructuring plan, opening the door for a return to normal status. We’ve written about Blackhawk 4 times previously, and have expected this relatively expedited trip through bankruptcy land.
According to the news report:
“The plan will eliminate more than 60 percent of Blackhawk’s total debt and provide for more than $50 million in incremental liquidity and the restructuring transaction will be effectuated with no disruption to the company’s employees, vendors, customers or landlords, the release stated.
Under the plan, Blackhawk’s $639 million first-lien term loan will be discharged and lenders will receive 71 percent of the company’s equity and a newly issued $375 million first-lien term loan.
Blackhawk’s $318 million second-lien term loan will also be discharged and lenders will receive 29 percent of the company’s equity”.
For the two BDCs with the $10.5mn of first lien exposure (FS-KKR Capital or FSK and Solar Capital or SLRC) , this means a realized loss is likely to be booked soon and we’ll be learning exactly how the new exposure – a mix of debt and equity – will look like. Looking forward, coal mining continues to be a challenging business so even if whatever debt remains gets placed back on “performing” status, the BDC Credit Reporter will continue to carry all ongoing investments as under performing for the foreseeable future.
In terms of capital outstanding and investment income at risk, the amounts risked by FSK and SLRC are modest. However, we continue to wonder how the investment committees of these BDCs could convince themselves that investing in coal mining – even in early 2018 when the loans were first taken on – was a good idea from an underwriting standpoint. Industries that used to be the province of specialist lenders have become targets for generalist lenders like these two well known and respected public BDCs. Now those same lenders have become owners…
On August 13, a news report indicated that troubled coal miner BlackHawk Mining has received bankruptcy court approval for $240mn of post-petition financing. That’s important as it suggests the company may shortly complete the restructuring of its debt and leave Chapter 11 status behind. For the two BDCs involved with $10.5mn of exposure at cost – as discussed in our earlier post on July 18, 2019 – that might mean the conversion of some portion of its debt to equity and new loan advances. We’re a little confused as to why both FS-KKR Capital (FSK) and Solar Capital (SLRC) still carry the debt as accruing at June 2019 and at full value. Neither BDC discussed the miner in their most recent Conference Calls. We’ve got more to learn obviously.
As expected, coal miner BlackHawk Mining has formally filed for Chapter 11. The company – thanks to a pre-agreed restructuring plan with most of its creditors – promises to exit bankruptcy within the next 60 days. For a full discussion, see our earlier article on the subject.
As noted in an earlier post, coal miner Blackhawk Mining is preparing to file a pre-packaged Chapter 11. The BDC Credit Reporter’s main interest is estimating the impact on the two BDCs involved : FS-KKR Capital (FSK) and Solar Capital (SLRC), both with roughly equal shares in the first lien debt with an aggregate cost of $11.2mn. We’ve learned additional details about the plan going forward: “On the effective date of the plan, the company’s $639 million first lien term loan will be discharged and lenders will receive 71 percent of the company’s equity and a newly issued $375 million first lien term loan”. That suggests 40% of the first lien debt will be written off and swapped. That will reduce the nearly $1.5mn of investment income received by $0.600mn between the two BDCs. How the BDCs will value the equity is unknown, but a Realized Loss is probable. In addition, we have learned that: “To further strengthen the business, the company will receive $50 million of new money debtor in-possession financing from certain of its lenders that will be part of the exit facility for the company”. Chances are FSK and SLRC will be part of this financing as well, increasing their exposure to the troubled miner. The lenders will be reassuring themselves that after the restructuring is done that “based upon the company’s current projections, pro forma leverage will be less than 2.0x debt to EBITDA and in line with industry peers”. We would add that any industry where standard debt/EBITDA leverage is only 2.0x is highly risky and the lenders/investors involved are far from being out of the woods. One could argue – with greater capital potentially deployed and much of the exposure soon to be in equity, and with lower investment income forthcoming, FSK and SLRC have gone only deeper into those woods.
Another BDC portfolio company prepares to file for Chapter 11. This time, the filer is Blackhawk Mining, LLC, which operates coal mines in two states. Given other bankruptcies going on in this sector, the news is not entirely unsurprising. Still, the two BDCs involved – FS-KKR Capital (FSK) and Solar Capital (SLRC) valued their $11.2mn in senior debt positions at 3/31/2019 at par. That’s unlikely to continue, even though management and creditors have a pre-packaged plan ready and expect to be operating normally in 60 days. The plan involves reducing debt by 60%, which may entail a debt for equity swap for senior lenders – including the two BDCs – and all the challenges of owning a “dirty fuel” company at the wrong point in history. Income – running at an annual pace of $1.2mn for FSK and SLRC – is likely to drop by more than half. Neither BDC will be greatly affected given the relatively small exposure each holds, but the setback does beg the question as to how both BDCs investment committees could have green lighted (as recently as 2018) such commodity loans. Blackhawk brings to 20 the number of BDC portfolio companies currently in bankruptcy and the total capital invested at cost to $578mn, according to the BDC Credit Reporter’s calculations.
We have found out – belatedly and thanks to an excellent article by Business Insider– that a BDC-funded company – Falcon Transport – closed down abruptly in late April. We had no idea because the company was carried at full value on Solar Capital’s (SLRC) books at 3/31/2019, with $12mn in first lien debt. This will be a hit to income, given that the debt was priced at closed to 11%, which will cost SLRC $1.3mn in annual investment income. Moreover, with the entire trucking industry going the way of the retail sector in the past two years and the energy sector back in 2014-2015, the chances of a resurrection seem slim. Now claims are being made of mismanagement by the private equity group which controlled the company. We’re guessing, but chances seem high for a very large write-off when the dust settles. We’ve added Falcon Transport – better late than never – to our list of bankrupt BDC portfolio companies. Despite the recent exits of Hexion Inc. (restructured and recapitalized) and Z Gallerie (assets acquired), there are still 19 names, with a cost of $565mn in the bankruptcy category.