Midstates Petroleum Co. had its corporate credit rating cut to “selective default” from B- by Standard & Poor’s after the oil-and-gas explorer swapped portions of its unsecured debt for third-lien notes.
The ratings firm lowered Tulsa, Oklahoma-based Midstates as it views the transaction as a distressed exchange because “unsecured debt investors received a value of less than what was originally promised on the senior unsecured notes,” S&P analysts led by Michael Tsai wrote Friday in a report.
Midstates said Thursday it issued $504 million in third-lien secured notes maturing no later than 2020 in exchange for a combined $630 million of its 10.75 percent notes due October 2020 and 9.25 percent bonds maturing June 2021.
“When you want to go from unsecured to secured that’s a sign you’re not confident of the company’s ability to repay all of its debt,” Bloomberg Intelligence analyst Spencer Cutter said by telephone. “With secured debt you move up the food chain and may get more money back if the company does have to restructure.” Funds of Franklin Resources Inc. held the largest stake in the unsecured notes at the end of March, according to data compiled by Bloomberg based on information filed by funds that publicly disclose holdings. Stacey Coleman, a spokeswoman for San Mateo, California-based Franklin, declined to comment on the asset manager’s holdings in Midstates.
S&P reduced Midstates’ lowered the recovery rating on the remaining unsecured debt to 6 from 5. The ratings firm said the addition of a third secured class of debt puts holders of the lower-tiered notes at risk of losing as much as their entire investment should Midstates default.
Midstates also said it issued $625 million in 10 percent senior secured notes due in 2020, some of which it used to repay borrowings under its credit line, according to a statement.
An amendment to the Midstates’ revolving credit facility, which reduced its borrowing base to $253 million, helped clear the way for the debt swap and will provide future covenant flexibility, according to Thursday’s statement.
The company’ 9.25 percent bonds, which have lost more than half their value in the past year amid a rout in oil, added 2 cents on the dollar to 46.50 cents.