On October 29, 2019 our sister publication the BDC Credit Reporter reported on the Chapter 11 filing of coal miner Murray Energy, whose debt defaults had been in forbearance.
We are re-publishing the full post below because there are 6 BDCs involved – including one in the public markets : FS KKR Capital or FSK– and total exposure at cost is over $50mn.
Those numbers make the Murray news – which was admittedly no great surprise – material to our readers.
At June 2019, the valuation of the BDC debt – drawn from June 2019 portfolio valuations – were very close to or above par.
The exception was $13mn in 2022 Term debt held by non-listed Business Development Corporation of America (BDCA) and Cion Investment.
That debt was already discounted by a third back in June 2019.
The discount on this institutionally traded debt has now doubled, ensuring a further loss will be recorded if the BDCs involved still hold the paper.
FSK’s exposure is material: $18.9mn in the 2/12/2021 Term Loan, priced at LIBOR +900 bps, or just under 11.0%.
We’ll be curious to see – once all the dust settles – whether FSK’s un-discounted value of that debt turns out to be appropriate.
One More For The Books
In any case, this is the biggest BDC-financed company bankruptcy in weeks – see the BDC Credit Reporter for a useful list in the Data Room section.
More To Come ?
Unfortunately, a quick review of Advantage Data’s records suggest that there are several other coal-related candidates for default or bankruptcy.
We’re still compiling a complete list, which will be added to the BDC Credit Reporter shortly and found on our Twitter timeline on the front page of the BDC Reporter.
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Back on September 13, we wrote when first posting about Murray Energy: “We 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 October 29, 2019 the coal company filed for Chapter 11 protection.
Given that we have already quoted ourselves once, here is what we said about BDC exposure at the time, which remains the most up to date picture we have:
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.
This was a useful first test of our Bankruptcy Imminent list, on which Murray Energy had been placed since October 4, 2019, when we were told the company’s banks were in forbearance. Like snow in May, loan forbearances rarely stays around for long – unless you’re Greece.
We won’t speculate too much about the way forward at this stage or try to evaluate how much more capital the existing BDC lenders might advance and what ultimate credit and investment income losses might look like. We’ll wait till more is heard about Murray’s exit plans and just how bad its financial position is. Even if the coal giant does successfully leave Chapter 11, with coal industry fundamentals headed ever further downwards, any remaining BDC exposure post-bankruptcy will remain on the under-performing list.
From the BDC Credit Reporter
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