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.