BDC Credit Reporter View

In recent months heavily indebted oil & gas producer SandRidge Energy Inc. went through a major ownership change by negotiating a pre-packaged bankruptcy with its lenders. That has reduced debt by $3.7bn, leaving the balance sheet almost debt-free and with $500mn in liquidity. The October 2016 restructuring caused the prior lenders to acquire virtually all the common stock of the Company. $90mn in BDC exposure pre-dated the bankruptcy and was at all at the senior level and on non-accrual at September 2016. The debt has been written down 65% at September 30th, just days before the bankruptcy conclusion. We understand all this debt will be written off and converted to equity. Presumably that will result in a major Realized Loss for the 4 BDCs involved (see Table) of $60mn or so. Subsequent to quarter end, the Company lost out in a bid to acquire new assets at a discount from a former JV partner,and has reduced capital expenditures for the remainder of 2016 and 2017 in response to weak market conditions, which has resulted in additional staff lay-offs. On the IIIQ 2016 earnings Conference Call on November 8th, management guided to lower production, lower capex and lower EBITDA in 2017, while keeping costs in check. Liquidity is very good, though. Given the above, we expect the BDCs may write-down their new equity stake in the Company at the IVQ 2016, so the Credit Trend is projected down. Given the challenges ahead, the BDC Credit Reporter's Credit Rating has been changed from 5 (where a Realized Loss is considered highly likely) to a 4, and to a Performing status now the restructuring has been completed. The Company may not face financial challenges in the short term, but there is no guarantee the business will improve and that the remaining investment value will even return to the value imputed at the time of emerging from bankruptcy. No income is expected to be forthcoming from this investment.