What could possibly go wrong with financing fracking with with junk bonds? I mean, fracking means prosperity forever and this boom was supposed toÂ be endless. Except for when the price of oil crashes and overly-leveraged drilling companies can’t make debt payments. Then they file for bankruptcy and all those junk bonds, which can sometimes Â be used as leverage for other dicey “investments” crater in value, causing unexpected and unintended consequences. The bankruptcies have just started too…
One company, American Eagle Energy, couldn’t even make its first interest payment! Junk bonds like theirs are probably nearly worthless now, and were bought by bond funds and may even be in your retirement fund. Woo-hoo!
One thing we know already: after years in the desert, restructuring advisors are licking their chops.
The company has $13.6 million in negative working capital, only $25.9 million in cash, and its $60 million revolving credit line has been maxed out.
But here is the thing: the company sold these bonds last August! And this was supposed to be its first interest payment.
It’s the new waterless fracking method! How environmentally-friendly is that? Oh, wait…
A week later, GASFRAC filed for bankruptcy in Alberta, where it’s based, and in Texas – under Chapter 15 for cross-border bankruptcies. Not long ago, it was a highly touted IPO, whose “waterless fracking” technology would change a parched world. Instead of water, the system pumps liquid propane gel (similar to Napalm) into the ground; much of it can be recaptured, in theory.
Gotta love those theories. Or it could be the company was just a sleazy hustler selling snake oil to the rubes. I hope you don’t have to drink water that was near the napalm wells or have any of their now worthless bonds in your retirement accounts or investment funds.
But hey, the investment banks made good money underwriting this slop. And they probably shorted the bonds long ago.