Introduction

There’s understandable panic in the credit markets about the impact of much lower oil prices on companies involved in that very broad catch: the energy market. BDC investors are no exception, probably remembering how the the drop in the oil price from mid-2014 caused a bear market in prices that lasted till February 2016 (20 months) and saw the sector’s prices drop (37%). From 2014, many energy companies financed by BDCs failed and many others were restructured, typically in debt-for-equity swaps. Most BDCs that had been involved in the sector in one way or another swore off investing in the the field in the future, while others argued that by taking a long term perspective capital advanced might be recouped or increased in value. More recently some BDCs have been dipping their toes back in some segments of the energy market; pointing to their collateral values or other factors to justify investing new capital in an industry that for some time was almost universally shunned for new advances in the post 2014 period.

The BDC Reporter – using the resources of the BDC Credit Reporter and Advantage Data’s comprehensive database of every BDC-portfolio company ever financed and every facility – has decided to seek to quantify current BDC exposure to the different segments of the energy space. We are using SIC codes to divide up the work. We’ve identified 7 energy-related SIC codes which cover everything from crude oil and gas exploration to drilling oil services and natural gas liquids. Only 5 of the SIC codes have material BDC portfolio companies (i.e. more than 5 companies). We’ll be focusing on those 5 SIC groups. This is time consuming work, so we’ll roll out each group as we undertake the research.

SIC 1382

We are beginning with SIC 1382 – “Oil and gas field exploration services”.

Over the years, the BDC sector – both public and non-traded players – have been involved with 71 different companies with this SIC code.

However, at the moment, there are just 18 companies in which BDCs have capital invested.

Public Only

Our focus is on the public BDCs.

There are 9 companies in which public BDCs have debt or equity invested.

To keep matters in perspective, we deduct any company where BDC exposure has under $2mn of FMV exposure.

That brings the number of companies where public BDCs have material exposure to 7.

We calculate that the amount of capital invested at cost is $363mn and $215mn at FMV.

BDC Lenders

There are just 6 public BDCs involved.

Only one of those of have more than one SIC 1382 company in portfolio.The other 5 have only one portfolio company each.

PSEC

Let’s review the larger exposures by BDC:

60% of the total exposure of public BDCs at cost is held by Prospect Capital (PSEC)  – left over from an earlier strategic interest in the sector which dates back many years.

PSEC has 3 companies in this SIC code but only 1 is material.

That’s CP Energy Services, which is actually a combination of several PSEC energy investments held under one roof.

The cost is $221mn and the FMV $100mn.

$72mn of  the exposure is in debt, the rest in equity.

The former is valued close to par – and is paying a double digit interest yield –  while $150mn is in the form of equity and valued at $33mn.

If the debt goes on non accrual, PSEC could lose between ($8.5mn) and ($9.0mn) of annual income.

That’s under 1.5% of the BDC’s annual investment income.

The complete write-off of the remaining FMV of $103mn would reduce NAV Per Share by ($0.28) or (3.2%).

We have no way to evaluate what is likely to happen where this closely-held entity is concerned.

PSEC may very well choose to fund shortfalls, if any.

PNNT

PennantPark Investment (PNNT) – another BDC that went full throttle into energy before 2015 – has just 1 material portfolio company in this SIC code.

That’s ETX Energy, previously New Gulf Resources, booked in IIQ 2014.

Currently, the capital left in the company costs $34mn – all in non income producing equity – is valued at $19.3mn.

If that was written off, the NAV Per Share loss would be ($0.27). 

ARCC

Biggest BDC, Ares Capital (ARCC) has one investment in a SIC 1382 company: Birch Permian, which raised $1bn in 2018.

ARCC’s cost is $73.00mn, priced just over 10%.

The BDC booked the deal only in mid-2019.

For what it’s worth, as we write this the debt trades only (4%) down and was carried at a premium by ARCC as of 12/31/2019.

Still, this is a second lien facility in a Permian oil & gas driller…

If income was interrupted, it would reduce ARCC’s BDC by just (0.5%).

The Rest

Besides the above and in descending order of FMV three other public BDCs have exposure to this SIC code:

Those are Main Street Capital (MAIN) in Laredo Energy VI; FS-KKR Capital (FSK) with exposure to Velvet Energy and Barings BDC (BBDC) in Seadrill Ltd.

All those positions are valued at $11mn or below.

The first two are valued at cost but Seadrill was already at a discount of nearly 50% at 12/31/2019.

There is nearly ($0.8mn) of income at risk, but not a material threat to BBDC’s investment income or book value: less than (1.0%).

CONCLUSION

This is just one SIC code in one sector currently in the headlines.

However,  public BDC exposure to this segment of the industry is greatly reduced from the 2014-2016 period.

With only 6 of 45 public BDCs with any exposure, the reverberations across the sector should be modest if this industry segment tanks on lower oil prices as the pundits are warning.

As we’ve shown, even the potential worst case impact on the BDCs that are involved should not be more than modest.

Nonetheless, why any non-specialized lender – which includes all the BDC industry – would even countenance making a loan in such a cyclical and volatile industry remains a question.