Worst Junk-Bond Bet Wipes Out Junior Lenders of KKR's Samson

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  • Blackstone, Oaktreee among bondholders hit hard in meltdown
  • Unsecured notes lose 95% of their value as oil plunges

Few investors in the beleaguered energy industry have suffered more this year than those who purchased Samson Resources Inc.’s bonds.

Owners of Samson’s $2.25 billion of unsecured notes maturing in February 2020 have seen the value of their investments shrink 95 percent in 2015 through Friday to half a cent on the dollar. That’s the worst performance among issues in the Bloomberg High-Yield Corporate Bond Index, which is up 0.5 percent.

For distressed-debt investors Blackstone Group LP’s GSO Capital Partners and Oaktree Capital Group LLC, which bought the bonds at the beginning of the year, plunging oil prices not only took their toll on the securities, but they foiled a plan to profit from Samson’s woes.

Samson, majority-owned by private-equity firm KKR & Co., announced Aug. 17 it will file for bankruptcy by Sept. 16. The company will propose a reorganization that would leave the GSO-led bondholders with almost nothing and hand over control of the restructured business to a group of senior lenders including hedge fund Silver Point Capital LP and private-equity firm Cerberus Capital Management LP.

The junior bondholders were pummeled after Samson rejected their April proposal to help the company cut its total borrowing by exchanging some of its debt for equity, according to two people with knowledge of the matter. The bondholders, in return, would have been allowed to exchange the rest of their holdings for higher-ranking securities that would put them in the driver’s seat should Samson have to restructure in the future. This plan did not propose a bankruptcy filing.

As oil kept dropping, attention turned to holders of Samson’s $1 billion second-lien term loan led by Silver Point. That debt was likely to be the highest-ranking obligation that the Tulsa, Oklahoma-based oil-and-gas producer would be unable to pay back in full if it had to restructure its borrowings as its assets shrank.

A reorganization proposed by this group prevailed over the bondholders’ debt-swap plan.

The loans were most recently quoted at 20.63 cents on the dollar, down 58 cents this year, according to data compiled by Bloomberg.

“If energy prices were higher, the unsecured notes’ attempt to be exchanged into a smaller piece of more senior debt might have had a shot at success,” said Phil Brendel, a credit analyst at Bloomberg Intelligence. “But with natural gas price at this low level, the company likely saw the bondholders’ offer as an attempt to kick the can down the road rather than a permanent solution to their capital structure woes.”

Brian Maddox, a spokesman for Samson at FTI Consulting, Carissa Felger, a spokeswoman for Oaktree at Sard Verbinnen & Co., and Paula Chirhart at Blackstone declined to comment. Ross Lovern, a spokesman for Centerbridge at Kekst & Co., didn’t respond to e-mails and phone calls seeking comment.

GSO Proposal

The GSO proposal would have left 85 percent of the company’s equity in the hands of KKR and other owners, while the term lenders’ deal gives as much as 10 percent to Samson’s managers, according to an Aug. 17 regulatory filing. The accepted proposal also wipes out the $2.25 billion of notes that GSO, Oaktree and Centerbridge Capital Partners bought and raises at least $450 million in new equity and debt. The note holders get a consolation prize of no more than 1 percent of the new equity, and for that they have to support the deal.

“The junior investors were effectively removed from the bargaining table,” said Jonathan Landers, a restructuring lawyer at Scarola Malone & Zubatov LLP. “When the price of oil keeps going down and doesn’t seem to be coming back, it’s harder for junior creditors to argue with a straight face that their debt has any value at all.”

Crude oil plunged to $38.13 a barrel in New York on Monday, tumbling 38 percent since it reached this year’s peak in June as producers maintain output even after an oversupply pushed prices lower, Bloomberg data show.

Samson will join at least 10 companies in the sector to file for Chapter 11 this year. The oil plunge has already sent Hercules Offshore Inc., Sabine Oil & Gas Corp. and Quicksilver Resources Inc. to bankruptcy court.