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Related Issuers
Rating Action:

Moody's confirms FS Energy and Power Fund's long-term senior secured rating of Ba3, concluding review; outlook is negative

11 Sep 2020

New York, September 11, 2020 -- Moody's Investors Service (Moody's) has confirmed FS Energy and Power Fund's (FSEP) long-term corporate family and senior secured debt ratings of Ba3. This rating action concludes the review for downgrade that was initiated on 23 March 2020, following the downgrade of FSEP's ratings to Ba3 from Ba2, and continued on 11 June 2020.

Following the confirmation, the rating outlook is negative, reflecting FSEP's weak asset quality and ongoing vulnerability to oil price volatility as a result of the coronavirus pandemic given the company's concentration in energy investments. Moody's regards the coronavirus panemic as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety.

Confirmations:

..Issuer: FS Energy and Power Fund

....Corporate Family Rating, Confirmed at Ba3

....Senior Secured Regular Bond/Debenture, Confirmed at Ba3

Outlook Actions:

..Issuer: FS Energy and Power Fund

....Outlook, Changed to Negative from Rating Under Review

RATINGS RATIONALE

Moody's said the ratings confirmation was based on the recent improvement in FSEP's financial strength, supported by the stabilization in oil prices around $40/barrel (bbl) since July 2020 after averaging $30/bbl during the second quarter of 2020. FSEP has benefited from modest improvements in the fair value of its investments and its Asset Coverage Ratio (ACR) cushion, as well as in its liquidity and funding profiles, following recent asset sales and amendments to its financing arrangements.

FSEP's investments were marked at 67% of cost as of 30 June 2020, up from 64% at 31 March 2020, but down from 84% at 31 December 2019. The modest improvement in fair values during the second quarter resulted in an increase FSEP's ACR to 231%, from 217% as of the prior quarter end. FSEP must maintain a regulatory minimum ACR of 200%, per its election, as permitted under the Small Business Credit Availability Act, passed in 2018. As a result, FSEP's capital buffer or ACR cushion, which is the difference between its actual ACR and the minimum statutory asset coverage requirement, expressed as a percentage of the minimum required asset coverage, improved to 16% from 9%.

Although asset sales led to significant realized losses in the second quarter, the cash proceeds improved FSEP's liquidity position and enabled the company to pay in full its Goldman Sachs credit facility. FSEP also renegotiated key amendments to its JP Morgan credit facility, including permanently reducing the minimum shareholders' equity FSEP is required to maintain as of the end of each fiscal quarter to $900 million from $1.5 billion; gaining capacity for up to $150 million in commitment increases, upon FSEP's request and with lender participation; and expanding its borrowing base capacity by permitting the inclusion of certain performing preferred stock in the borrowing base.

Despite these improvements, Moody's has assigned a negative outlook to FSEP following the ratings confirmation because of the company's weak asset quality and ongoing vulnerability to oil price volatility given its energy concentration. FSEP is more exposed to oil price volatility than other rated business development companies (BDCs) because it invests primarily in private US energy and power companies, with significant exposure to exploration and production (E&P) companies. Although FSEP has reduced its exposure to E&P companies in recent years, E&P investments still accounted for a meaningful 48% of FSEP's total portfolio as of 30 June 2020.

The decline in oil prices in March and April of this year, driven by an acute oil demand dislocation caused by the coronavirus pandemic and the lack of production cuts by the OPEC+ countries, severely stressed the E&P sector, which lead to significant deterioration in FSEP's asset quality. The company's percentage of nonaccrual investments (at fair value) increased to a high 11.0% as of 30 June 2020 from 2.1% as of 31 December 2019, although it remained relatively steady in the second quarter.

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact of the pandemic on oil price volatility and, consequently, FSEP's credit quality.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the negative outlook, an upgrade of FSEP's ratings is unlikely over the next 12-18 months. FSEP's ratings could be upgraded if asset quality and profitability improves, allowing the company to rebuild a significant ACR cushion above its 200% minimum requirement.

FSEP's ratings could be downgraded if Moody's determines that the company is likely to incur further substantial realized or unrealized losses that meaningfully reduce FSEP's ACR cushion, potentially leading to a covenant breach under the company's credit facilities. The ratings could also be downgraded if FSEP's liquidity position deteriorates significantly.

The principal methodology used in these ratings was Finance Companies Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187099. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Joseph Pucella
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Ana Arsov
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

​
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