Low market trading prices on the bonds portend poor recoveries for unsecured creditors on default
NEW YORK – Two oil and gas producer defaults have propelled the energy high-yield default rate to a record 13 per cent, surpassing the 9.7 per cent mark set in 1999, according to Fitch Ratings.
Ultra Petroleum Corp. and Midstate Petroleum Company on Friday and Saturday, respectively, added $3.1 billion to the mushrooming high-yield energy bond default volume tally, as well as $1.5 billion of credit facility defaults.
Fitch has a 2016 energy sector default forecast of 20 per cent and included both of these filings in the annual forecast.
Current bond trading prices of approximately $0.15 for Ultra’s $850 million 6.125 per cent bonds due 2024 and $450 million 5.75 per cent bonds due 2018 indicate the market’s expectation of below-average bond recoveries.
Ultra Petroleum cited persistently low natural gas pricing that left it with an unsustainable capital structure as reason for filing.
The company plans to use the bankruptcy process to renegotiate unprofitable contracts as well as reduce its $3.7 billion of total bank and bond debt obligations.
The $999 million reserve-based credit facility (RBL) at subsidiary borrower Ultra Resources was essentially fully drawn at the time of filing, following a $216 million draw in February 2016.
Ultra’s bankruptcy was expected as it followed the expiration of grace periods for interest payments on notes, nonpayment of certain pipeline transportation fees, bank covenant violations and de-listing of the common shares.
Midstates Petroleum’s filing affects approximately $1.8 billion of total debt and is based on a pre-arranged plan support agreement with its lenders under the reserve-based revolving credit facility that represents approximately 80 per cent of first lien facility borrowings, along with certain other creditors holding approximately 74 per cent of second lien debt and 77 per cent in principal amount of the third lien debt.
The proposed plan incorporates some secured debt paydowns and equity conversion of debt that is junior to the first lien debt. Low commodity prices triggered a liquidity crunch at the company.
Low market trading prices on the bonds portend poor recoveries for unsecured creditors.
Midstates’s unsecured $294 million, 10.75 per cent senior unsecured bonds, due 2020, and $348 million, 9.25 per cent senior unsecured bonds, due 2021, were bid at $1.875 and $1.75, respectively.
The $625 million, 10 per cent second lien notes, due 2020, were bid at $44.625 and the $524 million, 12 per cent third lien notes, due 2020, were bid at eight cents on the dollar.
Midstates, like Ultra borrowed up to the remaining maximum RBL borrowing base in the months leading up to bankruptcy.
Midstates drew $249 million under its $750 million RBL in Feb. 2016 to build cash in advance of the bankruptcy filing and the April 2016 re-determination.
Full draws of RBLs ahead of restructuring and re-determinations have occurred among some of the most distressed E&P companies as they plan to enter restructuring with this cash liquidity.
Linn Energy and W&T Offshore are two other E&P companies that recently fully utilized RBLs.
Neither Ultra nor Midstates had institutional term loans in its capital structures, which is common among E&P companies. Instead, they had RBLs, which are typically provided by banks, and bond debt.