Forest Oil Amends Loan to Loosen Debt Restrictions Before Breach

Forest Oil Corp. agreed with lenders to cut the borrowing capacity on a credit line in exchange for loosening restrictions that the energy producer had expected to breach after burning cash for 12 straight quarters.

The deal reduces the amount Forest can borrow under the loan by 25 percent to $300 million, the company said in a statement yesterday. The lenders agreed to increase the amount of debt they allow the company to take on relative to its cash flow. That measure can now increase to as much as 5.75 times the company’s earnings before interest, depreciation and amortization through Sept. 30, up from 5 times, according to the company.

Forest said in a regulatory filing in February that without amendments, it had expected to breach the threshold as soon as this quarter. The Denver-based company burned $55.5 million of cash in the fourth quarter, according to data compiled by Bloomberg. Chief Financial Officer Victor Wind estimated in a Feb. 26 call with analysts and investors that borrowing ability under the credit line would fall $50 million. The company’s management chose to lower capacity by twice that, and “believes that the $300 million size provides them with adequate liquidity,” Citigroup Inc. analysts Marisa Moss and Farah Zakir wrote in a note yesterday.

Shifting Strategy

Larry Busnardo, the head of investor relations, didn’t immediately return a telephone message seeking comment.

The total size of the credit line also shrank to $500 million, from $1.5 billion, Forest said in a regulatory filing today. The lenders’ cap on the company’s leverage ratio will decline by 0.25 each quarter after the period ended Sept. 30, until reaching 4.5 at the end of next year.

Forest’s bonds have recovered since falling to the lowest price since 2009 last month, after it said it would re-evaluate its Eagle Ford properties, the South Texas assets on which it pinned its strategy, and shift the bulk of 2014 capital spending to another unit.

Forest’s $577.9 million of 7.25 percent senior unsecured notes due in June 2019 have climbed to 88.5 cents on the dollar to yield 10.1 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s up from 83.75 cents on March 4.

Shares have dropped more than 45 percent this year to $1.92 as of 9:47 a.m. in New York.

Forest, rated B3 by Moody’s Investors Service and B- at Standard & Poor’s, said it will slow drilling in Eagle Ford, where it competes with some of the largest, most sophisticated international energy explorers to tap the biggest U.S. shale oil deposit. The Eagle Ford has been one of the drivers of the North American oil-production renaissance, attracting billions of dollars in drilling and acquisitions.

Before it's here, it's on the Bloomberg Terminal.