Oil Firm That Cut a Deal With Apollo Braces for New Debt Squeezeby and
Lightstream weighs bond deal as credit-line cut looms
High-yield deals rare in resource sector mired in slump
Just eight months after distressed-debt investors gave Lightstream Resources Ltd. a lifeline amid the worst oil-slump in a generation, the energy producer is warning investors it may need another.
The Calgary-based company is bracing for banks to cut its credit line after crude prices dropped to the lowest levels in more than a decade. With the bond market shut for the riskiest energy firms, that means it might need to work out yet another deal with distressed investors. A pair of funds run by Apollo Global Management LLC and Blackstone Group LP’s GSO Capital Management already agreed in July to exchange unsecured bonds for second-lien notes with a higher claim to the company’s assets, people with knowledge of the transaction said.
It’s the latest twist in a saga that’s already testing the limits of what North America’s debt-laden oil companies can do to survive the commodity rout. The company, which has C$344 million ($259 million) drawn from its credit line as of the end of last year, is still fighting lawsuits from bondholders left out of last year’s debt exchange. And now it faces the challenge of tapping a high-yield market where borrowing costs are about double what Lightstream paid when it leveraged up during the region’s shale boom.
“Even decent companies are going to see a cut to their borrowing bases, and this is a company that has declining production and reserves," said Paresh Chari, an analyst at Moody’s Investors Service in Toronto. "So you’d expect a pretty significant cut.”
One option available under its debt agreements would be to issue as much as C$750 million first-lien notes to pay down its credit line, Chief Financial Officer Peter Scott said on a March 4 conference call with investors. Such debt would rank higher than the second-lien notes that Apollo and GSO exchanged for in July, meaning it would grant holders a higher claim to the company’s assets.
“The bottom line is this is not very good unless you’re buying the new securities,” said Mark Wisniewski, a credit hedge-fund manager for Sprott Asset Management LP in Toronto. “If you own the second-liens or if you own the unsecured ones, you’re just in a place you don’t want to be.”
Apollo and GSO demanded a firewall against such a scenario when they agreed to the exchange last year, with the company giving the firms so-called most favored-nation status, according to a regulatory filing. If the company were to agree to pay first-lien creditors more than the 9.875 percent coupon it’s paying the second-lien investors, the clause requires the company to boost the yield on the lower-ranking notes to match it.
Representatives for Lightstream and GSO didn’t respond to requests for comment, while a spokesman for Apollo declined to comment.
The oil downturn has effectively shut out high-yield energy companies from the bond market. The only two high-yield deals that exploration and production companies have managed to get done this year, by PetroQuest Energy Inc. and Vanguard Natural Resources LLC, were debt exchanges where unsecured debt was swapped out at a discount for new securities with a higher claim on the borrower’s assets.
At the time of the company’s debt swap last year, Apollo and GSO were the two largest holders of the company’s unsecured debt, which it issued in 2012 when crude was trading for about $100 a barrel. Bondholders who were stuck holding the old notes were dealt significant losses, and two of them, hedge funds FrontFour Capital Group LLC and Mudrick Capital Management LP, sued Lightstream. The lowest-ranked notes trade at about 5 cents on the dollar.
With Lightstream facing the likelihood of negative cash flows this year, investors are questioning whether it has enough assets to cover existing debt, said Cody Kwong, an analyst at FirstEnergy Capital Corp. West Texas Intermediate, the North American benchmark crude, fell 2.7 percent to $36.19 at 8:39 a.m. in New York on Tuesday.
"Lightstream is currently putting about $14 from what it receives on every barrel it produces toward interest costs and that number will rise as its production falls in the oil slump," Kwong said by phone from Calgary. “Even if the interest costs stay flat, if your production is rolling over, the denominator gets lower and it gets worse and worse.”