Halcon Resources Swap Could Signal Coercive Exchanges, S&P Warns

Halcon Resources Corp.’s debt-for-equity swap this week signals the energy producer might coerce bondholders into future exchanges in which they lose money, Standard & Poor’s said.

The oil explorer agreed this week to convert into common stock $116.5 million of its 9.75 percent bonds maturing in July 2020 owned by two Franklin Resources Inc. funds. While S&P said that exchange wasn’t harmful to the manager of Franklin Templeton mutual funds, it said the company could engineer more dangerous transactions.

“We believe that the deal indicates that Halcon might enter into additional exchanges that we would view as distressed in order to reduce its substantial debt burden,” the rating company said in a April 10 report.

S&P reduced Halcon’s rating two steps further into junk and assigned it a negative outlook because of the possibility that later transactions give investors “less than the promised amount on the original securities,” according to the report. It grades Halcon CCC+, which means the company is “currently vulnerable to nonpayment.”

The exchange this week allowed the Franklin funds to convert unsecured bonds trading at about three-quarters of their face value into 65.5 million shares at $1.78 each.

The 9.75 percent notes rose 1.5 cents at 11:07 a.m. in New York to 78 cents on the dollar after gaining more than a cent yesterday on the second-heaviest trading volume ever, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. At 78 cents, the notes yield 16.1 percent.

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