California Resources Clinches $2.8 Billion Bond Swap Pact

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California Resources Corp., an oil producer that’s ensnared by the plunge in crude, clinched a deal with bondholders to swap unsecured obligations with up to $2.8 billion of secured debt.

Creditors tendered almost $1 billion more notes to the exchange than the company was willing to buy, Los Angeles-based California Resources said in a statement Friday.

Bondholders are eager to exchange their debt because they don’t want to own securities that will be subordinated to the notes created by the exchange, according to Spencer Cutter, an analyst at Bloomberg Intelligence.

The unsecured bonds accepted for the exchange will be acquired for 80 cents on the dollar in return for new, second-lien debt due in 2022 with an 8 percent coupon. The company sought tenders for three classes of notes with coupons ranging from 5 percent to 6 percent and maturities from 2020 to 2024.

"You will be incentivized to offer as many of the bonds as you have in hopes you get as much of the new secured debt as you possibly can, because that’s going to help mitigate your losses," Cutter said. "If you don’t go along with it, you know you’re going to take a hit. You might as well go along with it to minimize whatever that hit is going to ultimately be."

California Resources, which was spun off by Occidental Petroleum Corp. last year, has slashed its workforce, halted dividend payments and put oil fields up for sale in an attempt to deal with a $6.48 billion debt burden. The company was dubbed “worthless” by hedge fund BlueMountain Capital Management LLC in June and saw its ratings cut in September by Moody’s Investors Service to four levels below investment-grade, with a "negative" outlook.

‘Defensive Play’

The company’s $2.25 billion of 6 percent notes due in 2024 traded Thursday at 43.125 cents on the dollar to yield 19.845 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s a 55.6 percent drop from an April high.

Debt exchange offerings from companies in the exploration and production industry have become more frequent as the outlook for the sector has soured in the past year, and the expectation is that there will be more similar deals, said Kenneth Duffel, an analyst at KDP Asset Management.

"A lot of investors are becoming more defensive and moving into something senior in the capital structure," Duffel said. "They’re protecting their interests -- it’s a more defensive play. If there is a lower for much longer, going into 2017, 2018, 2019, defaults are certainly going to rise exponentially."