Energy Companies Buy Time by Paying Debt Interest With More Debt

  • Holders are offered PIK notes, common stock to cut debt
  • Oil and coal companies need breathing room as credit shrinks

W&T Offshore Inc., struggling with dozens of drillers, producers and miners to ride out the energy industry’s prolonged slump, offered to give its bondholders a 45 percent stake in the company plus new debt that’s allowed to skip cash payments.

Owners of W&T’s $900 million of 8.5 percent senior notes due 2019 can swap them for as much as 62.1 million shares of common stock, $202.5 million of second-lien notes due 2020 and $180 million of unsecured notes due 2021, the Houston-based oil explorer said Monday in a filing. The so-called pay-in-kind toggle notes can pay interest by issuing more debt securities, rather than cash. Separately, Foresight Energy LP set terms on its own debt swap today that could help the coal-mining company adjust to depressed prices.

Debt swaps in the energy industry may be regaining momentum after banks tightened credit to cash-strapped borrowers earlier this year. Companies in the sector exchanged at least $10 billion of distressed debt in last year’s fourth quarter, according to Bloomberg Intelligence. The pace slowed to just $1.2 billion in the first quarter, when investors were speculating about a recovery in energy prices.

“I don’t know that it necessarily clears the decks and is enough to keep them alive in the long term; that depends on oil prices,” said Spencer Cutter, a BI credit analyst, regarding W&T’s outlook. “But it buys them time. I don’t think the lenders would be willing to put in new capital if they thought there was a chance the company was still going to go under in the near term.”

Pressure Grows

Representatives of W&T didn’t immediately respond to requests for comment. More than $40 billion of energy debt was affected by bankruptcy filings in the first half of 2016, with at least 18 energy companies that have publicly traded debt filing for bankruptcy, BI data show.

Terms of W&T’s swap call for holders to get the common shares plus $202.5 million of new second-lien exchange notes due May 2020, with the company having the option to pay interest in kind by issuing more debt at a 10.75 percent rate for 18 months after issuance, or otherwise 9 percent in cash. Holders also would get $180 million of new unsecured notes due June 2021 with interest paid in kind at 10 percent for the first two years or else 8.5 percent in cash. The offer expires Aug. 29.

‘Question Mark’

At least 95 percent, or $855 million, of the existing 2019 notes must be tendered by the Aug. 29 expiration date. Holders of about 63 percent of the outstanding notes had agreed to tender at the time of the announcement, according to the filing.

“They’ve got the supporting creditors on board, so it’s that remaining 32 percent of the bonds that are the question mark,” Cutter said. “If they can’t get 95 percent of bondholders to go along with it, then what happens?”

The company was among at least 11 oil and gas producers that were left overdrawn on credit lines earlier this year after banks re-evaluated their financial health.

“Clearly, we recognize we have a debt issue that needs to be solved,” Chief Executive Officer Tracy Krohn said in a March 9 conference call discussing the driller’s fourth-quarter results.