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BDC Exposure To Oil & Gas Field Services -Part II In A Series

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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-all: 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. We’ve already completed our analysis of SIC Code 3182 – Oil & Gas Explorers. Now we move onto Part II: SIC 1380: Oil & Gas Field Services


SIC 1380

The SIC description to 1380 is “Oil & Gas Field Services“.

The Advantage Data master file, which includes all companies ever financed by BDCs – lists 18 different names.

Active Names & Exposure

However, only 6 companies are currently active.

All the others have been repaid, sometimes years ago.

2 of the companies are funded exclusively by non-traded BDCS (FS Energy and FSIC II and FSIC III).

Total exposure at cost is $110mn and FMV $78mn.

Public Exposure

That leaves only 4 companies in this category that are currently funded by 3 public BDCs.

By our count, public exposure at cost is $86.5mn and FMV $64.9mn.

Let’s review the exposure by BDC:

GLAD

The mid-sized BDC Gladstone Capital (GLAD) has only one SIC 1380 company in portfolio, but it’s the biggest in size, and roughly half the entire public BDC exposure in this SIC code.

The company is Imperative Holdings Corp.

We have very little public information about the company and from GLAD.

Total exposure is $30.1mn and the FMV is $31.6mn, thanks to the Preferred being valued at a premium.

Most of the exposure, though, is a second lien debt position of $29.5mn, with a yield of L +10.3%.

Annual investment income is just over 3.0mn a year.

It’s hard to evaluate whether this credit should be of concern or not, notwithstanding the premium value.

TSLX

TPG Specialty (TSLX) – a BDC that has a differentiated investment approach – has two companies on its books in this category.

The first is MD America Energy, which is really an E&P company, judging from the public record.

The TSLX position of $18.8mn was carried at only a (1%) discount to cost – all in senior debt.

The income involved is $1.8mn.

This is what TSLX said in early 2019 about the company shortly after booking the loan:

Yes, so opportunistic [investment] , look, on upstream E&P we’ve historically done very well, ex-Mississippi Resources to be open and honest as we always are. But we have historically a lot of net P&L, even incorporating unrealized losses, realized losses in the sector. So look, we like to lend in today’s commodity price environment, not in a commodity price environment that’s 30% to 40% higher.

It’s hard to evaluate- without access to the company’s balance sheet and income statement and much other relevant data – how this business will fare under lower for longer oil prices.

The other company in this SIC is Mississippi Resources, a long standing under-performer for TSLX.

The BDC has $33.9mn invested at cost and has been involved since IIQ 2014, which tells you something by itself.

The exposure is in debt and equity and valued at $13.1mn.

Only the $8mn in debt is valued at par, and income involved is modest: $0.9mn.

The $25.9mn of junior capital at cost must be considered at risk, but would have no impact on income.

GARS

The final public BDC with exposure is Garrison Capital (GARS).

The only company is Cochon MWS Holding, with a cost of only $3.7mn and has a FMV of $1.5mn.

However, this is a non income producing position that was already questionable before the current crisis.

The exposure dates back – under different names – since 2015 and has been what we characterize as a “zombie” investment that sits on the BDc’s portfolio list mostly unchanged from quarter to quarter.

Last time we checked, though, the entity was debt free and should not have a default risk.


CONCLUSION

In absolute terms the number of companies in this SIC code is small, and even smaller if we consider public-BDC financed companies.

Likewise, the aggregate dollars at cost from the 3 BDCs involved is modest: $86.5mn and $63.6mn.

Both Mississippi Resources and Cochon Holdings were looking like no-hopers, were generating very little income and seemed likely to be resolved at a loss before the crisis.

The two newer credits: Imperative Holdings and MD America Energy, involve bigger dollars; more income; have been added more recently and could result in unrealized depreciation with the new oil patch conditions.

In all cases, outside information is sparse, but we’ll take what we can from the occasional disclosures on conference calls and the quarterly filings.

At this point, we have no reason to believe any of the 4 companies involved should become non-performing. (In any case, only 3 are income producing anyway).

In this SIC category,  at least , BDC exposure to energy is very limited, with little likely impact on either the sector or the individual BDCs involved – with the possible exception of GLAD – should credit quality ultimately greatly deteriorate.

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