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.

SolAero Technologies: Acquired By New Investor Group

On April 16, 2019, SolAero Technologies, ” a leading provider of satellite solar power and structural solutions” , announced by press release a new financing arrangement which will cede control of the business to a new group of investors/lenders. The new group includes the Carlyle Group, GSO Capital Partners LP, First Eagle Private Credit LLC and Ares Management Corporation.

This allowed the company to restructure its debt – most of which was on non accrual. Based on a review of the IIQ 2019 10-Q, the only BDC with exposure – TCG BDC (CGBD) – seems to have booked an interim Realized Loss of ($9.1mn) and been left with $22mn of debt and equity in the restructured entity. The debt is carried at par, but we’re still keeping the company on the under-performing list with a Corporate Credit Rating of 3, till we see real improvements in the business. Solar has been a graveyard for capital and this story is only half told.

As is often the case where CGBD is concerned, none of the above was discussed on the latest (IIQ 2019) Conference Call or in any earlier communication with shareholders. Unfortunately, asset managers that have sprung out of private equity origins can be close mouthed about sharing investment details with public shareholders. It just goes against all their training. All the better for justifying the BDC Credit Reporter to our readers , so we’re not complaining.

Dimensional Dental Management: Placed On Non Accrual

On August 6, 2019, TCG BDC (CGBD) reported IIQ 2019 results, including placing its first lien debt to dental services chain Dimensional Dental Management on non accrual. This debt has been on the books since IQ 2016, and on the under-performing list from IIIQ 2018. We have no information from CGBD as to what’s going wrong in the PE-owned company, but a (37%) discount, up from (15%) just a quarter before, suggests a loss is more likely than not when the smoke clears. CGBD has already been deprived of $3.0mn of annualized investment income, and could yet lose some substantial portion of the $33.3mn at cost, currently valued at $20.9mn.

Indra Holdings: Valuation Reduced. Placed On Non Accrual

With the release of TCG BDC’s (CGBD) 10-Q on August 8, 2019, we see that the first lien debt held by the Carlyle BDC has been placed on non-accrual and written down on an unrealized basis by (57%). Ares Capital (ARCC), which has both first and second lien debt outstanding – also on non accrual in both case – has discounted the former by (42%) and (94%). All this augurs badly for the two BDCs. If all continues to go poorly for Indra – which owns clothes manufacturer Totes Isotoner – the second lien loan ($65mn at cost) and most of the senior debt ($25mn) could become a Realized Loss, and relatively soon. At least, this troubled debt will no longer have any income impact on either BDC going forward. Nonetheless, if things don’t turn around for Indra, these loans – on the books since 2014 – promise to be major reverses for ARCC and CGBD and for their credit underwriting track records.