Second lien lenders may recover less than 9% in energy Chapter 11 cases

Ascent Resources Marcellus Holdings and Fieldwood Energy sought court protection with less than a week and a half of each other.

Two portfolio companies of FS Investment Corporation (FSIC) vehicles are set to seek approval of in-court restructuring plans in the coming weeks, proposals that would leave creditors, including the Philadelphia-based business development companies (BDCs), with a projected recovery of less than 9 percent.

Both supported by private equity sponsors, First Reserve-backed Ascent Resources Marcellus Holdings and its subsidiaries, Ascent Resources – Marcellus and Ascent Resources Marcellus Minerals, will ask a federal bankruptcy judge in Wilmington, Delaware, on 21 March to confirm its reorganisation plan, while Riverstone Energy-backed Fieldwood Energy will ask a federal judge in Houston to do the same on 2 April.

FS’s BDCs – which are currently managed by FS Investments and sub-advised by Blackstone credit arm GSO Capital Partners – are second lien lenders to each of the companies, according to Thomson Reuters BDC Collateral database. Both firms declined to comment.

For their stakes in Ascent, FS and the other lenders would receive a recovery of 3.4 percent-6.8 percent, while the Fieldwood workout would give them a recovery of 8.35 percent, bankruptcy court documents showed.

Those numbers are projections and not final figures and it is not unheard of for creditors to end up with larger recoveries than initially estimated. In one high-profile case, the 2001 bankruptcy of Enron Corporation, general unsecured creditors received at least 53 cents on the dollar rather than the 17 cents initially estimated by the firm’s Chapter 11 plan.

Ascent and Fieldwood sought court protection with less than a week and a half of each other, with the former filing on 6 February, and the latter filing on 15 February.

Ascent Resources Marcellus Holdings

The FS BDCs that are Ascent creditors are the publicly traded FSIC and the private vehicles FSIC II, FSIC III, FSIC IV and FS Energy and Power Fund, as of 30 September. The firm is scheduled to report its fourth-quarter earnings after markets close on 1 March.

The bankrupt energy business listed $1 billion to $10 billion in liabilities, some of which is related to a $1.5 billion refinancing.

FS’s position is part of a $650 million loan that was the revolver portion of that refinancing, according to Thomson Reuters LoanConnector. The loan was priced at LIBOR plus 2.75 percent. JPMorgan served as the lead left bookrunner and administration agent, the term sheet showed. Five other financial institutions also served as the deal’s syndication agent.

Under the proposed plan, FSIC would hold almost all its portion of 3.44 percent of the equity in the reorganised holding company along with warrants.

First lien term loan lenders will receive almost 96.56 percent of the new equity in the reorganised holding company along with a set of warrants and their portion of an exit financing, a first lien term loan, according to court documents.

The loan could be up to $60 million and would be a five-year facility priced at LIBOR plus 6.5 percent. First lien lenders are projected to recover between 64.6-81.5 percent or their claim.

Fieldwood Energy

The specific FS vehicles that invested in Fieldwood include FSIC II, FSIC III and FS Energy and Power Fund are all among the second lien creditors, the same database showed.

FS and the other second lien term loan lenders will receive 20.25 percent of Fieldwood’s new equity and subscription rights to purchase 75 percent of the new equity at $525 million.

First lien term loan lenders will receive their pro rata share of the first lien exit facility, while first lien last-out term loans will get their pro rata share of the second lien exit facility.

The debtor sought court protection with an agreement of 75 percent of first lien term loan lenders, 72 percent of the first lien last-out term loan, 77 percent of its second lien term loan lenders and Riverstone, according to a statement announcing the filing. Together, the three groups are owned $3.29 billion, according to the company’s reorganisation plan.

The debtor listed between $1 billion-$10 billion in liabilities, which include leveraged loan debt stemming from a $3.75 billion purchase of Apache Corporation’s Gulf of Mexico business, which was followed by an add-on acquisition of additional Gulf of Mexico property from SandRidge Energy.

The initial September 2013 loan that backed the Apache acquisition is due 30 September 2020 and is priced at a 1.3 percent LIBOR floor plus 7.13 percent.

Term sheets show that the deal was later amended twice: once in February 2014 to add a $200 million incremental term loan B and a $425 million term loan to fund the purchase from SandRidge and once in May 2016 to accomplish several things, including upsizing term loan commitments, according to LoanConnector.