As of December 31, 2017, the Fund owned about US$32.8 million worth of EXCO Resources (EXCO)’s 1.75 lien term loans (converted from the second-lien term loans held in Feb. 2017), with US$53.5 million in par value. This is the largest position in the portfolio, comprising more than 10% of the assets of the Fund (at market value).
We liked this security because it met our criteria for investing in the oil and gas sector. The criteria we considered in analyzing this type of investment include that the security should be:
- A very senior term loan or note;
- Issued by a company with a significantly limited ability to add senior or pari-passu debt to its capital structure; and
- Of a type that should the company restructure or go into bankruptcy, the recovery value of the bond is likely to be greater than the current price of the bond.
In addition to the security being very senior in the capital structure, we also hold the view that management seems to be making good decisions with respect to the allocation of capital in a tough environment.
On January 15, 2018, EXCO filed voluntary petitions for a court-supervised reorganization under Chapter 11 of the U.S. Bankruptcy Code in order to facilitate a restructuring of its balance sheet. EXCO Resources is saddled with very expensive transportation and other contracts. During a bankruptcy proceeding, those contracts that have a present value of, for example $200 million, could potentially be renegotiated to as low as $20 million. The longer that EXCO does not restructure through a bankruptcy, the more value is potentially eroded from the 1.75 lien term loans. As of now, we think the value of the EXCO 1.75 lien term loans should be about 80 cents to 100 cents on a dollar. On December 31, 2017, it was priced at 61.25 cents on a dollar.
From Francis Chou (Trades, Portfolio)'s 2017 Chou Associates Fund shareholder letter.
