OAK Oaktree Capital Group LLC

By Matt Jarzemsky 

Investors targeting struggling energy companies are learning a painful lesson: Bankruptcy isn't always the bottom.

Falling oil and natural-gas prices are continuing to hammer energy companies that are restructuring under chapter 11 protection, stinging debt investors such as Apollo Global Management LLC, Brookfield Asset Management Inc., Cerberus Capital Management LP, Oaktree Capital Group LLC and Silver Point Capital LP.

Those funds specialize in picking through bonds and loans to find ones that trade at too deep a discount and could rebound or be converted into equity as their issuers are restructured. But the strategy has turned in bad results this year, showing how hard it has been for investors to time the bottom of the energy bust.

Investors snapped up the deeply discounted loans and bonds of companies nearing or under bankruptcy protection, including oil-and-gas producer Samson Resources Corp. and Energy Future Holdings Corp., the Texas power company formerly known as TXU Corp., thinking they were near their lowest point. Yet they have continued to fall along with oil and gas prices.

"Being too early was, in retrospect, a flaw in how [distressed-energy investments] got executed," said David Fann, chief executive of TorreyCove Capital Partners LLC, which advises institutions that invest in private-equity funds.

Representatives for the investment firms declined to comment.

The falling loan prices indicate that investors are taking a dim view of the companies' prospects after exiting bankruptcy protection. In the case of Energy Future and Samson, loan holders are set to take ownership stakes in the companies after they leave chapter 11.

The investments could recover and even deliver profits for funds that have the ability to wait years for a turnaround. But for now, they mark a setback for the first wave of trades tied to the collapse in energy prices, which distressed-debt investors had heralded as their first big investment opportunity in a multiyear stretch of low corporate defaults and bankruptcies.

Slumping natural-gas prices stung investors who bought the debt of Samson Resources, which filed for bankruptcy protection in September. Silver Point and Cerberus, along with Anschutz Investment Co., spent months negotiating a deal to back Samson's bankruptcy plan, which would give them ownership of the Tulsa, Okla., company after it cleans up its finances in chapter 11.

But gas prices fell after Samson filed for bankruptcy protection, scuttling the company's original bankruptcy plan. In October, a lawyer for the company told a bankruptcy judge that Samson is in talks toward a new debt deal that "will not be as attractive" to holders of the loan, bids for which have fallen 94% this year, according to data provider Markit.

A $16 billion slice of loans issued by an Energy Future unit hurt most by low natural-gas prices has fallen 49% this year, among the biggest losses of U.S. corporate loans of more than $1 billion during the period, according to Markit.

Loan holders and senior bondholders are set to take ownership of the generation business when it emerges from chapter 11 protection. As of Oct. 19, Apollo, Brookfield, Oaktree and Fortress Investment Group LLC held a combined $9.5 billion of the unit's $24.4 billion loan and bond debt set to convert to ownership, according to court papers. It is unclear what they paid as the debt has long traded at a discount.

The unit, Texas Competitive Electric Holdings, sells electricity at market rates that rise and fall in tandem with gas prices. This year's 25% drop in natural-gas prices has dimmed the unit's outlook, prompting investors to sell the loan.

The investors declined to comment.

Some investment firms are doubling down on bets.

Apollo has been buying more of the Energy Future loan, according to a person familiar with the matter, setting itself up for better returns if the generation business rebounds after the company exits bankruptcy protection.

The strategy has worked for the private-equity firm in the past. Apollo's timely purchases of the debt of chemical producer LyondellBasell Industries NV led to big profits after the company got out of bankruptcy.

Apollo purchased Energy Future senior debt after the power company's 2007 buyout by KKR & Co., TPG and Goldman Sachs Group Inc. As of October, Apollo controlled $2.78 billion of the loans, according to court papers.

Write to Matt Jarzemsky at matthew.jarzemsky@wsj.com

(END) Dow Jones Newswires

December 02, 2015 16:45 ET (21:45 GMT)

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