29 February 2016, New York — Highly-leveraged U.S. energy companies are struggling to carry out debt swaps as part of their survival strategy because plummeting oil and gas prices make investors either avoid such deals or demand tougher terms.
Last year, at least, 10 exploration and production companies, including California Resources Corp (CRC.N), managed to ease the financial pressure by persuading investors to accept some losses on their bond holdings in return for new debt that often matures later and offers better collateral.
Yet since prices tumbled further early this year, investors have grown more worried that some firms may not survive the rout. They see no point in accepting debt with potentially better collateral if it could mean nothing once the firm hits the wall.
The deepening slump also means that producers need to offer more attractive terms – higher interest payments and more collateral – to win over investors and avoid the brutal equity wipeout that happens in most bankruptcies.
“Investors are less desperate now since they’ve already taken a lot of the pain,” said Roopesh Shah, global chief of Goldman Sachs’ restructuring group.
“They have less downside they’re trying to protect,” he said. Shah said debt exchanges were still viable but needed to offer better protection and potential gains for investors.
That is a tall order for producers, which must conserve cash to make it through the price slump, and whose ability to issue new debt is limited by provisions in bond documents that tie debt to commodity prices.
Pennsylvania-based Eclipse Resources Corp (ECR.N) that acquires and develops oil and natural gas properties in Ohio, canceled a debt exchange launched in January. Denbury Resources Inc (DNR.N), a Texas company with operations in the Rocky Mountains and along the Gulf of Mexico Coast, pulled a debt swap even after sweetening the deal for investors.
“Ultimately we terminated because it wasn’t attractive enough for us,” said Denbury spokesman Ross Campbell, adding that the company is still deciding whether to try another swap. Eclipse declined to comment.
Chesapeake Energy Corp’s (CHK.N) and Vanguard Natural Resources LLC’s (VNR.O) exchange offers saw limited demand. Only about 20 percent of holders of Chesapeake bonds due in 2017 and 2018 took up the offer, even after Chesapeake doubled the amount of new debt it planned to issue. About 30 percent of eligible potential bondholders took part in Vanguard’s exchange.
The companies did not respond to requests for comment.
With survival options dwindling, Roughly a third of U.S. oil producers, or 175 firms, is at risk of slipping into bankruptcy this year, according to a study by Deloitte, the auditing and consulting firm. About 40 hit the wall last year.
The deepening downturn has jeopardized other survival strategies, including selling assets to raise cash or buying back debt.
When California Resources, a spin-off of Occidental Petroleum Corp (OXY.N), launched its debt exchange in November, it offered creditors 80 percent of face value – a premium of 11 to 23 percent – plus a hefty bump in the interest rate. The company, which declined to comment, more than doubled the total amount of old debt investors could trade in.
In its canceled exchange, Eclipse Resources offered investors half of face value for bonds that had already cratered to 30 cents on the dollar, and a virtually unchanged coupon on the proposed new bonds.
Some swaps turned out to be disastrous for debtholders, which may be deterring others. New debt issued by Halcon Resources Corp (HK.N) in an exchange now trades below 15 cents on the dollar, after the exploration and production company completed another swap that offered investors higher security. The new California Resources debt has also plummeted, to close to 20 cents on the dollar.
As the crisis ripples through the energy sector, larger companies will also consider debt exchanges until now mainly pursued by small producers, bankers said.
At least two firms are now seeking debt swaps. Rex Energy Corp (REXX.O) offers its creditors higher coupon and a second lien debt that comes ahead of unsecured debt plus equity for their holdings. Alta Mesa Holdings LP [ALMEH.UL] proposes to swap bonds for secured term loans. Rex declined to comment, and Alta Mesa did not respond to requests for comment.
Swaps are not a silver bullet for issuer either. Linn Energy LLC (LINE.O), whose bondholders agreed to an exchange last year, drew down a revolving credit line this year, a sign of potential trouble ahead.
The company did not immediately return a request for comment.
*Jessica DiNapoli; Editing – Carmel Crimmins & Tomasz Janowski – Reuters