Sheridan Fund II Ratings Lowered To 'CCC-' From 'CCC+' On Liquidity Pressures; Outlook Negative

  • Sheridan Fund II is experiencing liquidity pressures from minimal working capital and elevated interest expenses. The fund has begun discussions with its creditor group to address what we view as an unsustainable capital structure.
  • As a result, we are lowering our issuer credit ratings on the Sheridan Fund II to 'CCC-' from 'CCC+'.
  • We are also lowering the issue ratings on the revolving credit facility and the senior secured term loan to 'CCC+' from 'B', and the issue rating on the subordinated term loan to 'CCC' from 'B-'.
  • The negative outlook reflects our view that we could lower the ratings if the fund enters into a restructuring agreement with its debtholders or if the company defaults on its interest payments as they come due.
NEW YORK (S&P Global Ratings) April 18, 2019--S&P Global Ratings said today it lowered its long-term issuer credit ratings on Sheridan Production Partners II-A, L.P., Sheridan Investment Partners II, LLC, and Sheridan Production Partners II-M, L.P. (collectively referred to as "Sheridan Fund II") to 'CCC-' from 'CCC+'. The outlook is negative.
At the same time, we lowered our issue ratings on the revolving credit facility and the senior secured term loan to 'CCC+' from 'B', and the issue rating on the subordinated term loan to 'CCC' from 'B-'. The recovery ratings on the revolving credit facility and the senior secured term loan are '1', indicating we expect very high (90%-100%, rounded estimate: 95%) recovery to creditors in the event of a default. The recovery rating on the subordinated term loan is '2', indicating our expectation for substantial recovery (70%-90%, rounded estimate: 75%) to creditors in the event of a default.
The downgrade reflects Sheridan Fund II's liquidity pressures from its elevated interest expenses. As of Dec. 31, 2018, cash and cash equivalents were $14.5 million, and cash interest expenses were $35 million in 2018. Furthermore, the fund made $58 million of paid-in-kind payments on its subordinated debt due 2024. Although this debt allows for pay-in-kind interest through December 2019, after that date, the coupon will step up to 15% if half of the interest is not paid in cash.
The negative outlook reflects our view that we could lower the ratings if the fund enters into a restructuring agreement with its debtholders, or if the company defaults on its interest payments as they come due. We see limited upside in the ratings at this time.
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