The new manager was selected to execute an investment strategy as a lender to middle market companies across industries, away from NGP’s traditional focus on smaller upstream energy companies.
“We are well positioned to both maximize the value of the current portfolio and to deploy capital to increase the earnings of the company over time. We intend to do both,” said Bob Long, CEO of the BDC, which is now called OHA Investment.
OHA has $8 million of cash and a $72 million bank credit facility to increase the portfolio.
The original company was formed as a BDC investing in small and mid-size private upstream energy companies, but expanded in 2012 to invest in middle market companies across sectors. The plans to change management was unveiled in July.
As of Sept. 30, some 70% of the portfolio was invested in oil and gas, exploration and production assets, and 4% in coal services. The remaining 26% was spread among three middle market companies in other sectors. Most investments are structured as debt.
“Over time, we expect to substantially diversify the portfolio, so that energy assets do not represent such a major concentration,” Long said.
The transaction greatly compresses the timeframe needed to ramp up a BDC.
However, the new manager will need to deal with some legacy trouble spots. These, along with the portfolio’s sector concentration, may have accounted for some of the lagging share performance under the BDC’s previous management.
One such holding is ATP Oil & Gas, which filed a Chapter 11 liquidation plan in May. ATP’s troubles stem from the blowout of BP’s Macondo well in April 2010 and the ensuing moratoria on drilling and related activities in the Gulf of Mexico, which prevented ATP from bringing six development wells into production.
OHA’s unrecovered investment on that company totaled $27.7 million as of Sept. 30. In addition, OHA had received aggregate production payments of $30.1 million, subject to a disgorgement agreement. Both of these amounts are subjects of litigation disputes.
The company has spent $4.5 million on legal and consulting fees to help enforce overriding royalty interests formerly operated by ATP and currently operated by Bennu Oil & Gas, which is a newly formed company owned by the DIP lenders.
But this is one of the new manager’s specialties.
“OHA brings deep experience in distressed credits and complex litigation, having made over $8 billion of distressed investments over the last 20 years,” Long said.
During the recent quarter, OHA booked a $3.9 million write down for an investment in a $10.8 million term loan in Contour Highwall Mining, reducing its value to $7.5 million. The coal miner missed interest payments in September and October, and OHA is in talks with the borrower over a potential restructuring.
Away from the energy and coal, OHA’s investments include an $18 million second-lien 13% (2% PIK) term loan due 2018 to specialty paper company Nekoosa Coated Products; $9 million of 12.75% subordinated notes due 2018 for medical supplier KOVA International; and $15 million of 12% subordinated notes due 2018 to home health services company OCI.
A new board was put in place at the BDC. It comprises two senior managers from Oak Hill Advisors, Glenn August, the CEO and company founder, and Robert Okun, Oak Hill’s chief investment officer of U.S. credit.
There are also three independent directors: Stuart Oran, a partner of a middle-market private equity firm Liberty Hall Capital; Jim Stern, the chairman of Cypress Group; and Frank Tannura, former CEO of Packaging Dynamics and of iVEX Packaging.
As part of the transfer from NGP Investment Advisor as the external manager, an affiliate of Oak Hill Advisors agreed to buy $5 million of common stock in the BDC.
On Sept. 30, the private equity sale of $1 million was completed for $8.53 per share following shareholder approval of the transaction. As of Nov. 6, the Oak Hill Advisors affiliate had purchased $1.7 million of shares in the open market, at an average price of $6.38, and has a year after the agreement to complete the remaining purchases, totaling $4 million at prices equal to net asset value.
The ticker changed to OHAI from NGPC as of Sept. 30. Shares in OHAI were trading at $6.45 as of midday today. –Abby Latour