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Sixth Street Specialty Lending: Portfolio Company Files Chapter 11

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Preamble

Two credit articles about Sixth Street Specialty Lending (TSLX) in one day ? What are the odds ?

We wrote earlier about the J.C Penney transaction, slouching towards a conclusion by year’s end, in which TSLX is a lender and may – or may not – result in a realized loss.

The BDC Credit Reporter has just written about Energy Alloys, LLC, to which TSLX is also the sole BDC lender.

As the article shows, the company just filed for Chapter 11 on September 9.

BTW, this seems to be the first BDC-financed portfolio company to file for court protection in September.

The uncertainty about whether TSLX will end up writing any of this debt off is even greater than at J.C. Penney’s, as the article suggests.

What seems clearer is that TSLX – with the Penney, Energy Alloy and Nieman Marcus situations getting resolved – will be clearing the deck of the bulk of its most troublesome borrowers by year end. 

If investors hate uncertainty, much of the unknown surrounding TSLX should be resolved by year-end, unless some new questionable credit problems arise.


 

Energy Alloys, LLC: Files Chapter 11

According to multiple news reports, Energy Alloys, LLC filed for Chapter 11 on September 9, 2020. The company bills itself as “the only 100% oil and gas focused supplier of specialty metals to the global oilfield industry“, so you can imagine how the business ended up in Chapter 11. Energy Alloys has operations both in North America and around the world, but in its bankruptcy filing claimed just $10mn- $50mn in assets and $100mn-$500mn in liabilities. Curiously GSO Blackstone – the credit arm of Blackstone- has been the owner since 2011.

What this all means for the only BDC lender to the company – Sixth Street Specialty Lending (TSLX) – is not clear. As of June 30, 2020, the BDC had $18.3mn lent at cost in an asset-based Term Loan to the company, which was valued at par. TSLX had made the following disclosure in an earnings press release dated July 23, 2020: “As a result of the challenging commodity price environment, Energy Alloys, our second largest energy exposure at quarter end, is pursuing an out-of-court wind-down of the business through a liquidation of its assets. Post quarter end, we received a paydown on half of our principal position on Energy Alloys and expect to be fully repaid by Q4“.

No mention there of a bankruptcy filing which leads is to believe conditions may have worsened since July. Or – possibly – this was all part of the unwinding plan for the troubled business. Up in the air is whether TSLX will receive that last $9mn or so in outstandings in the IVQ 2020 or not. This might impact both income – which was still being accrued through the IIQ 2020 – and the expected repayment in full. We should learn more when TSLX reports IIIQ 2020 results in October, but a final settling of accounts may take till the end of the year or longer if the company lingers in bankruptcy.

As is often the case TSLX zigged when most other lenders would have zagged, booking the debt to Energy Alloys as recently as III 2019, but before the oil price meltdown and everything that has followed. The BDC points to its highly collateralized status as the reason for its comfort, carrying its position at par through its short history. The ultimate outcome of this transaction will tell us whether the uber confidence TSLX demonstrates in these difficult credit situations are justified. However, even if a loss does get booked at the final hurdle, the amount is modest by comparison with the BDC’s billion dollar net worth and should not materially impact future results.

We are downgrading the company from CCR 4 to CCR 5. Energy Alloys was on our Weakest Links list previously.

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