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.

“People are in the shock phase right now,” Cohen, who’s based in New York, said in a telephone interview. The company “repeatedly” told bondholders they would be paid a premium as a result of the merger.

While Sabine will own a majority of the combined companies, the revised deal terms limit its “ultimate” voting power to 49.9 percent, just short of triggering the change-of-control provision for Denver-based Forest Oil’s $800 million of bonds, according to Covenant Review. Station Casinos avoided paying bondholders a change-of-control premium in its 2007 buyout by Colony Capital because the private-equity firm’s majority stake was “non-voting,” according to Cohen.

‘Common’ Occurrence

At that time, “people said that’s a one-time thing and it would never happen again,” said Cohen. “The question is, does this become more common?”

Ash Spiegelberg, a spokesman for Forest Oil at Brunswick Group, didn’t immediately comment. Julie Hamilton Oakes, a spokeswoman for Sabine’s owner First Reserve Corp. at Prosek Partners, declined to comment about the merger.

Forest Oil’s $578 million of 7.25 percent notes due 2019 traded at 46.5 cents on the dollar to yield 30 percent at 4:12 p.m in New York, tumbling from as high as 100.6 cents on May 6 when the merger agreement was announced, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt’s down 45 percent since Dec. 15, the day before the completed merger was announced with revised terms eliminating the need to repay bondholders at 101 cents.

Forest Oil said as recently as Nov. 10 in a filing with the U.S. Securities & Exchange Commission that it would pay bondholders under the change of control provision. Forest said in a July 10 statement that the merger would trigger change-of-control provisions and entitle holders to receive 101 percent of the bonds.

Bridge Loan

Sabine will own 73.5 percent of the Houston-based company and control five of the seven seats on its combined board, according to a Dec. 16 statement.

A $850 million loan financing provided by Barclays Plc and Wells Fargo & Co., which would have been used to repay Forest’s $800 million of bonds under the change-of-control offer, is no longer necessary under the revised terms, according to the statement.

Forest’s $222 million of 7.5 percent notes due in September 2020 dropped to 44 cents on the dollar to yield 27 percent at 2:13 p.m. in New York, according to Trace. They traded at 102.5 cents on May 6.

The banks don’t have to fund the “bridge” loan and bondholders aren’t getting “remotely” what they expected, said Cohen.

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