Press Release: Fitch: Halcon Filing Drives US HY E&P TTM Default Rate to 30.7%
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Fitch Ratings-New York-28 July 2016: Yesterday’s Chapter 11 filings by Halcon Resources Corporation (Halcon) and Atlas Resource Partners LP propelled Fitch’s exploration and production (E&P) subsector US high-yield (HY) bond trailing 12-month (TTM) default rate to 30.7% and the energy sector TTM rate to 16%, says Fitch Ratings. Energy is the largest industry in the Fitch default index and accounts for approximately 17% of the $1.5 trillion total HY bonds outstanding. Fitch has a 30%-35% full year 2016 E&P HY default forecast, which included both the Halcon and Atlas filings.
Halcon’s prepackaged bankruptcy filing was done to facilitate a debt to equity swap. The plan, already approved by requisite creditors, was negotiated in a restructuring support agreement and signed by certain debt holders on May 18. If approved by the bankruptcy court, it will eliminate $1.8 billion of debt and $222 million of preferred stock and result in a more sustainable capital structure in a low oil price environment.
Halcon had approximately $2.9 billion of total debt at the end of first-quarter 2016 consisting of $157 million of reserve-based revolver borrowings, $1.8 billion of secured second and third lien notes and $913 million unsecured notes. Halcon drew down its reserve-based revolving credit facility on July 25 and, as a result, currently has $359 million of cash on hand. The company plans to repay the prepetition revolver borrowings with proceeds from a $600 million DIP facility ($500 million initial availability). At the conclusion of the bankruptcy process, the DIP, in turn, would be converted to an exit facility.
The plan provides full recovery for holders of secured revolver debt via the DIP rollup and also for holders of second lien notes with their plan distributions made in the form of reinstatement of the prepetition second lien issue.
The 13% third lien noteholders are the fulcrum security. Holders are to receive $50 million of cash and 76.5% of the new common equity, which would provide approximately 50% recovery on their claims.
The unsecured notes would convert into 15.5% of the new equity and holders also get $37.6 million of cash and warrants providing a 21% recovery rate per the disclosure statement dated June 20.
As of the filing date, Halcon’s 13% of the $1.02 billion of third lien notes were bid at $0.545 and the senior unsecured (three series) were bid at an average of $0.20625.
Halcon had significant above-market hedges set to roll off in 2017 that locked in prices of more than $80 per barrel, declines in production revenues and cash flows loom when these volumes are sold at market. Despite efforts ranging from per-barrel cost improvements, capex cuts to preserve liquidity, below par debt exchanges and a bond issue maturity extension to 2020 from 2017, a balance sheet restructuring was necessary to compete more effectively in a lower oil price environment.
Atlas Resources, a much smaller company than Halcon, also filed bankruptcy on Wednesday. Under a restructuring plan announced July 25, the company would reduce debt by $900 million in bankruptcy. The proposed plan would convert $668 million of senior notes into 90% of the new common equity. The revolver debt would be paid using proceeds of hedge position liquidations and a new $440 million reserve-based revolving facility would be put in place at exit. Second lien debtholders would reduce the cash coupon on the debt in exchange for a 10% equity stake. Existing common and preferred unit holders would get $0 distributions under the plan.
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