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Forest Oil Seen Punishing Bondholders With Rarely Used Loophole

Forest Oil Corp.’s bondholders are being punished by a rarely used loophole that’s allowing the oil and gas producer to bypass repaying the debt above face value when a merger occurs, according to debt researcher Covenant Review.

Forest Oil’s bonds lost nearly half their value after the company revised its merger agreement with Sabine Oil & Gas LLC to eliminate an offer to redeem the debt at 101 cents on the dollar. The method used to get around the so-called change-of-control provision isn’t common in mergers and has been used just once during the last seven years, according to Adam Cohen, founder of Covenant Review.