Lightstream Resources: To File For Bankruptcy

• September 21, 2016: Canadian energy company Lightstream Resources, Ltd. has announced its intention to seek bankruptcy court protection.
• The long troubled oil & gas company sought a court sanctioned process after failing to arrive at an agreement with its creditors that has been going on for months.
• The Company has about U.S. $1.2bn in debt outstanding, and was seeking to convert $1bn into equity, as part of a debt-for-equity swap .
• The Company reported a loss of Canadian $945mn in 2015, and production and EBITDA have been dropping sharply, both due to lower prices and lower capex investment.
• The BDC Credit Reporter has reviewed the most recent financial statements , and other materials.
• Highlights: Revenues dropped in the quarter ended June by 50%, Adjusted EBITDA by two-thirds and Funds Flow From Operations by 94%.
• Using first half of 2016 actual results, EBITDA after capex running at $90mn annual rate and Debt to EBITDA After Capex at well over 12x.
• Production, revenues and Adjusted EBITDA After Capex all expected to decrease further in second half of 2016.
• First Lien Secured Debt accounts for 20% of all indebtedness, “Senior Secured” (Second Lien) Notes over 50% and Unsecured Notes and Trade Payables  the remainder. See page 22.
• The Senior Secured Note Holders had been prepared to convert their debt into equity in the Company, and were offering junior creditors a small interest for a similar conversion. A new Revolver was projected to be arranged, perhaps from additional funds provided by the Senior Secured Note Holders.
• Press reports indicate somewhere between two-thirds and 80% of existing debt would have been eliminated under the re-organization plan.
• BDC Exposure is Moderate at $75mn. All exposure is held by funds associated with FS Investment . All held in Senior Secured Second Lien Notes.
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• A year ago, unsecured debt holders-including all BDCs mentioned above-exchanged Subordinated Notes due 2020 for current Senior Secured Notes due 2019, and funded $200mn in new capital to fund partial pay-down of Revolver outstandings.
• Other unsecured lenders were unhappy with the transaction and sued.
• As of June 2016, the FS Investment funds have written down exposure to Company by just 9% (see above).
• The BDC Credit Reporter says: “We understand that GSO Blackstone (which managers the FS Group funds) and funds affiliated with Apollo Global have been doubling down in Lightstream Resources (as in so many other energy deals) to gain control of the company, rather than forcing an asset sale and recording a Realized Loss from the net proceeds. That’s part of a much bigger strategy by asset management organizations to remain invested in oil and gas through the cycle, which may yet prove to be the wisest move to maximize investment returns.”
• Adds:” However, we’re surprised at the very minimal write-down taken on the misnamed Senior Secured Debt which sits behind hundreds of millions of first lien debt, and at a time when the Company’s financial performance-all publicly available information-is deteriorating. Moreover, the debt was placed on non-accrual in August.”
• Projects: “We would expect-given the above-a much larger Unrealized Loss to be recorded in the upcoming September 2016 results. However, there appears to be a disconnect between the quarterly valuation by FS Investment and the realities on /in the ground. Currently the 2019 debt is trading at a 25% discount, according to Advantage Data, which both provides BDC investment data and corporate bond info”.
• Concludes::”How Lightstream’s re-structuring will end is unknown now that Canadian bankruptcy protection has been resorted to. New liabilities and costs could be incurred which will reduce even further the value of the Senior Secured Notes, and there may be a greater deterioration in the Company’s operations. The “Lend To Own” strategy which the Second Lien lenders have adopted may yet require additional capital (to pay down or even replace the First Lien lender to the tune of several hundred million dollars) and the time frame involved may prove much longer than the nominal 2019 repayment date on the current Notes.”
• We have a Corporate Credit Rating of 5 for the Company, which indicates we expect material Realized Losses to occur at some point in the future.
• FS Energy & Power, FSIC III, FSIC II, FSIC.