2016 a tough year for commodity-based businesses: report

Several alternative lenders have restructured oil and gas companies under Chapter 11 protection.

Default rates for two commodity-based sectors hit record highs in 2016, a year in which dozens of oil and gas firms sought bankruptcy protection, some of which had business development companies as creditors.

A Fitch Ratings report issued Wednesday showed the high-yield energy default rate hit 18.8 percent, while that number hit 17.4 percent for the metals and mining sector. Criteria for defaults were Chapter 11 filings, out-of-court distressed debt exchanges and missed interest payments.

While the document reviewed a grim 2016, Fitch expects 2017 to be much better, as the largest firms have already filed for bankruptcy. For instance, Linn Energy, which listed $4.86 billion in bond debt, according to the report, filed its Chapter 11 petition in May of last year.

FS Investment Corporation (FSIC) and Apollo Investment Corporation were among the BDCs whose portfolio companies went through a Chapter 11 case, in which the firms often ended up exchanging debt for equity.

SandRidge Energy and Warren Resources were two of FSIC’s portfolio companies that sought court protection. The Philadelphia-based BDC received post-reorganisation common equity along with convertible debt in SandRidge and reinstated first lien paper in Warren Resources. Pre-bankruptcy filing the BDC held senior secured bonds in former and a first lien loan latter.

Venoco and Osage Exploration two of the oil and gas companies Apollo invested in that went through Chapter 11. In the Venoco case, the BDC exchanged first and second lien debt for shares in the restructured company as well as warrants. In the Osage Chapter 11 case, the company auctioned off its assets.

Representatives for FSIC and Apollo were not able to speak on those cases or how the companies have performed post-bankruptcy emergence.

The Fitch report found that first lien debtholders received higher recoveries than unsecured creditors, who are lower in the repayment pecking order than those holding first lien claims. Specifically, across 73 first lien issuances in the cases Fitch examined, first lien creditors garnered an average recovery of 83 percent, compared with 30 percent for 48 unsecured claims. For second lien issuances, the average recovery rate was 45 percent.