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Summit Midstream: Review Of The Debt Situation, Simplification Shenanigans


  • Summit Midstream bond prices remain in the tank, elevating going concern talk.
  • The Simplification Transaction, while crafty, benefits the GP more than the LP when it comes down to it.
  • Given the degrading earnings outlook, I do not expect the current common equity and preferred to survive upcoming maturities. This will, eventually, be a zero.
  • This idea was discussed in more depth with members of my private investing community, Energy Income Authority. Get started today »

For those investing in "blue chips", having to deal with reading hundreds of pages in lending documents, analyzing financial covenants, and contemplating lender/borrower game theory was never something that they were used to having to do. Unfortunately, in the pursuit of high dividends and deep value plays in a low yield world, many investors have found themselves involved in companies or partnerships where these discussions matter and are relevant. Summit Midstream (NYSE:SMLP) was not an uncommon high income recommendation in past years, largely because it screened so cheaply versus peers. What many have discovered as the equity has lost more than 90% of its value in the past two =or so years was that discount was there for a reason: poorly-positioned assets with a deceptive valuation created by the deferred purchase price obligation ("DPPO"), essentially an "IOU" to the general partner for assets Summit Midstream counted on its financial statements but had not yet fully paid for. I've covered these issues in the past publicly (" Summit Midstream, Future Concerns Outweigh Near Term Value") and in more detail privately over the past two years. Given some deep misunderstandings on the implications of recently closed simplification transaction and high insolvency risk, I felt it necessary to cover this publicly once again.

The Debt Situation

Corporate debt, at a high level, is pretty simple. Once you make the decision to borrow, you either pay it all off before it comes due or you refinance. For Summit Midstream, the nearest dated unsecured bond maturity (CUSIP 86614WAC0) matures in August of 2022. Those bonds, even after the sketchy simplification transaction outlined further along, trade at 48% yield to maturity. That signals a high level of duress and is a clear signal that the market appetite is not there for a typical rollover of the debt at normal rates (5 - 10% interest rates). Whenever you get these kinds of distressed situations, economically interested

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This article was written by

Michael Boyd profile picture

Author of Energy Investing Authority

Top 1% Analyst According to TipRanks

I have a decade of experience in both the investment advisory and investment banking spaces, with stints in portfolio management, residential mortgage-backed securities, derivatives, and internal audit at various firms. Today, I am a full-time investor and "independent analyst for hire" here on Seeking Alpha.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (43)

legend.vs profile picture
There is a good chance they will get a lot of takers for the tender offer. A lot of people post COVID bought the bonds to flip them anyway, and it helps Summit buy debt for sixty cents on the dollar.
@Michael Boyd

Thoughts on recent earnings? Seems like they have quite a significant amount of "free cash flow" and are making headway with eliminating debt and preferred obligations. However, the biggest question is "is all of this too late"?
Lance Brofman profile picture
This looks pretty good? What am I missing?

Reports prelim 2Q adjusted EBITDA of $63 - $65M, and net income of between $46 - $68M.

adjusted EBITDA forecast for the full year to $250M - $260M.
Michael Boyd profile picture
They've constantly cut guidance.

What you're missing is when they fail to be able to roll the debt forward and the common gets nothing in a reorg.
ofirm profile picture
@Michael Boyd here is the question: why would the private

entities holding preferred go for a conversion to common, where

they be subjected to CODI? what do they know and what were

they promised?

There are many questions over here about the debt etc. the

company just bought back at 60c on the dollar a bunch of

unsecured notes and a smaller bunch of the gp secured as well.

If this is before bankruptcy, the entire gp transaction plus the

buyback could very easily be considered equal to creditor

preference. the fact that gp debt was bought implies to me that

the banks of the mlp revolver are the same as the ones on the

gp side. that implies that they have much more to lose in

chapter 11 (since over 20% of the combined balance is

bellow the mlp unsecured debt). I do not know (have not read

the lpa) what the gp status in bankruptcy would even be, but

I assume a good lawyer of the unsecured creditors (and there

should be more than enough value for them to get an official

committee) could make life very miserable for the gp lawyers

regarding those transactions.
vitullijoe profile picture
apparently the buyers today don't know that SMLP is going BK
Michael Boyd profile picture
Been a speculative rush into energy junk, including those who have already filed (e.g., WLL) or are on the edge of filing (CHK, XOG).

If you want to gamble with the masses that just opened RobinHood accounts, go for it. But, end of the day, when the music stops you don't want to be the one without a chair.
vitullijoe profile picture
good comment, just interesting to watch some of this stuff
@Michael Boyd

Time and again we see these manic phases in the market, where the absolute junk suddenly finds new found love. Look at HTZ, for example. Carl Icahn should have waited a bit longer to feed all these minnows!

It is beyond time to stay cautious. I have done nothing but write some out of the money covered calls opportunistically. Trouble is, everything you do, the very next moment, the market goes against your well thought out execution. Oh, well, there are times to buy and times to be on the sidelines. Clearly, it is latter as the buying reaches a climax.
Thoughts on GIC joining the Board?
Chamazza profile picture
Interesting onen SA writer likes Summit and a week later one SA writer pans it! Keep up the good work!
Yeah - but one writer does detailed research and has a very good track record on the energy sector and the other is pretty much the harbinger of bankruptcy...
hi mike, thanks for the info...........So they cant use current cash flows to buy back debt at a 82 % discount? 100 percent has to pay down revolver ? , sounds like a lawsuit in the making, the bank will have to allow unsecured note purchases to reduce financial metrics, and compliance, otherwise why dont they just kill them now? Also the cash flow up until the debt date will provide at least 400 million in debt pay down. They will just take this to the wire, sell ,the company for discount asset value to a buyer, the company does have a 16 dollar book value, now, so there is no chance of recovery and refinancing in the next two years 2 years. This should be interesting especially if there is a recovery in energy prices. why cant a buyer of one of there assets, just buy there debt and trade the face value of the debt for a purchase of a asset at a enormous discount for a buyer , company retires debt credit metric fixed, and problem solved? Sounds like i just fixed there problem, I want a fee lol.
Michael Boyd profile picture
Revolver does restrictions to limit repurchases of unsecured notes. Admittedly limited volumes as well, so would be hard for them to retire large amounts. That's not unusual when banks see distress, because unsecured notes do not create value for the senior lenders in most cases. Even debt repurchased at a significant discount does not help senior lender recovery; they'd rather the money be used to pay down their facility instead.
ofirm profile picture
@Michael Boyd since we do not know the asset coverage of the secured balance, we do not know how much the banks can let the company buy back without getting into the risky area. Keep in mind that usually the same lp lenders are also the lenders to the gp, so by limiting the buy backs they are kissing goodbye to the gp loan (which is outside of the lp direct debt). Keep in mind that in chapter 11 the unsecured can go after the repurchase of the Holdings' debt. the unsecured could also see if the unsecured repurchase of the lp was made only from certain holders or not. regardless of lack of fiduciary duties, this is very murky and problematic area. for that matter, the gp transaction itself is extremely problematic in case of eventual chapter 11.
hey Michael , I thought the revolver has restrictions, but they have retired 138 million in debt, any thoughts
@Michael Boyd
Isn't this a short of a lifetime to $0?
Michael Boyd profile picture
It'll take a little while still. Cost to borrow likely works against you, it's not particularly expensive now but has often been on the hard to borrow list with 20%+ annual lending rates.

With that said, I'm looking for an opportunity to re-short at some point.
after the past two days is as good as any!
synergen profile picture
Very detailed and illuminating. Thank you! Shows what to watch out for.
Bayou N. Sellioux profile picture
Michael - Thank you for sharing such an in-depth explanation of the complicated financial issues facing SMLP. Despite the monumental headwinds, this company seems to be getting quite creative in its recent attempts to reduce overhead and expenses, stay alive and fight for survival. Hope they make it!
vitullijoe profile picture
I understand all of the problems that SMLP has and why it may not have a future but why does the price of th units keep going Higher?
any thoughts on enlc ? seems to be rallying as if less bk risk.
Michael Boyd profile picture
Not my favorite, I prefer ENBL or WES if I'm looking for that kind of Mid-Con and SCOOP/STACK exposure. I don't hate ENLC here, although I think the GP issue with GIP is not really going to go away. They have a Term Loan underlying their ownership in ENLC, if the distribution gets cut too far and equity values slide, they would default on the loan and lose control of the partnership. Look to be okay on that now but will be tough to roll that in the future.
@Michael Boyd
With respect to your take on ENLC, yes, GIP is the big elephant in the room. They have to have some sort of income from ENLC to service their term loan, and distribution has been chopped twice down now to 25% of what it was last year. I am not sure what is left in ENLC stock value for them not to run into problems even at current prices. ENLC was sub $1 security briefly in March. GIP has a lot of money sunk in this venture and they will try very hard to make sure they try and salvage as much of their investment as they can, don't you think? I am not sure it is a lost cause, already. Do you think ENLC survives?
Michael Boyd profile picture
Pretty sure the distribution has been cut as far as she can go for them to maintain debt service compliance.

GIP obviously has pretty deep pockets and very involved in energy, and I would assume that they (most likely) would raise capital in another fund in order to bail out this particular venture of theirs. I think odds are they fight to protect what they have there.
Tavite profile picture
1. When the Term Loan Lenders get the collateral what is the most likely scenario of what they do with the 34.6mm units? Sell them? To whom?
2. Also, at this point the Term Loan Lenders would be the GP, right? As such wouldn't they have (total?) control over if and when SMLP goes into bankruptcy? If they still own 34.6mm units at that point, why would they enter into a bankruptcy arrangement where the units are wiped out? On the other hand if they sell the 34.6mm units before this time in a private transaction, I would think the buyer of those units would want some guidance/guarantees on if and when a bankruptcy might occur.
Michael Boyd profile picture
1) Banks are, in general, not in the habit of wanting to own these kinds of assets. They are lenders, not asset managers. Some of the larger banks have brought on staff to help handle these assets given an assumed jump in energy bankruptcies. Do not believe we have any idea who the counterparties are on the other side of the Term Loan quite yet. Overall, I would hazard a guess that they would probably look for a buyer. Likely buyer would be private equity if they could find one, I don't believe any public comps have any sort of overlap or interest. If they couldn't find buyers for a few of the assets unbundled, certainly more difficult to find a buyer willing to have interest in everything.

2) If the Term Loan lender has control of the GP, they certainly have a lot of power - but this goes into bankruptcy whether or not they want to if the unsecured debt cannot be rolled. The largest obstacle for SMLP is to refi the unsecured 2022s on decent enough terms that senior lenders on the Revolver are willing to roll their own massive obligation ($600mm+) forward on reasonable terms.
ofirm profile picture
@Michael Boyd anyway you look at it, they need the preferred converted plus they need the unsecured notes to be converted to a lower value by either recurrent repurchase with fcf (for the time they have until 2022) or a swap to higher security and lower face value new note (with unit issuance as well to make the bitter pill a bit less bitter...). needless to say now they have the $150M gp loan to deal with as well...not long here at all, but curious to see if the managers manage to survive the current equity (if they even want to do so...).Delaware non incorporated has become the most corrupt sector in the u.s quite corrupt corporate system.
Tavite profile picture
@ofirm Do you mind explaining for me why they need to do these things if they are headed for Chapter 11? (I understand why they would do them if they were attempting to avoid bankruptcy, but not if they have already determined to reorganize.)

Also, today they announced that only 2,515 preferred shares have been tendered for the conversion, which requires a minimum 30,000 shares to be valid, by this Friday. What do you make of this? What does it communicate if the preferred holders aren't willing to convert?
John Allen profile picture
No thoughts about giving up control of the whole thing to the term loan lenders? Why would they do that? I fully expect for them to keep that current. Otherwise the term loan lenders would have control and will divert all possible cash flow to them at least until they are paid off.
Michael Boyd profile picture
Literally no way for them to pay the DPPO. Where is the $180mm supposed to come from?

It's non-recourse to SMLP. Once the Term Loan is defaulted upon, that receivable is gone. They only get the collateral (GP + LP interests) once that occurs. At that point, yeah, the Term Lenders have control of the GP, but IDRs are so far removed they have no value, only way for the Term Loan lenders to get cash is to increase the distribution again. Currently suspended Prefs would be have to me made whole before that would happen.
Very well done. Be interested in a similar analysis if ENLC
John Allen profile picture
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