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PetroQuest Energy skips Interest Payments, Warns Ch. 11 Possible

PetroQuest Energy has deferred $14.2 million in interest payments due Aug. 15 to holders of its 2021 notes.

According to a Form 8-K filing with the SEC, lenders under the company’s loan agreement have agreed to forbear from calling default until 11:59 p.m. EDT on Sept. 14, 2018 following the non-payment.

Holders of the company’s $275 million of 10% second-lien senior secured PIK notes due 2021 and $9.4 million of 10% second-lien notes due 2021 have entered into a customary 30-day grace period.

The independent energy company recently retained Seaport Global Securities as its financial advisor and Porter Hedges as legal advisor to assist in analyzing and evaluating alternatives with respect to its capital structure.

The advisor hire and missed interest payment comes as the issuer’s option to make PIK interest payments on the $274.6 million of 2021 notes at 1% cash/9% in-kind expired.

The company said is it seeking alternatives, which could include private debt exchanges and filing for protection under Chapter 11 of the U.S. Bankruptcy Code.

The PIK bonds were placed in 2016 as part of a distressed exchange after the company missed an interest payment on its then-outstanding unsecured bonds, which it later made good on as a consequence of the exchange.

CCC+ PetroQuest Energy is an independent energy company engaged in the exploration, development, acquisition, and production of oil and natural-gas reserves in Texas and Louisiana. The company’s common stock trades on the OTCQX market under the symbol PQUE. — Rachelle Kakouris

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Pacific Drilling, Lenders Spar Over Chapter 11 Progress, Exclusivity

pacific drillingSenior lenders of Pacific Drilling are keeping up their pressure on the company to reorganize sooner rather than later, objecting to the company’s requested 120-day extension of its exclusive periods to file and solicit acceptance to a reorganization plan, despite the company’s offer to agree to mediation in the Chapter 11 case in exchange for the extension.

The battle over exclusivity evidences the continuing breakdown of trust between the parties in the case, at least insofar as the senior lenders are concerned. Lenders have maintained since the case was filed that the company was merely seeking to delay the case and was not acting in good faith to develop a reorganization plan.

The company’s secured lenders late last month sought to force the company into mediation, but the company argued that mediation would be premature at this relatively early stage of the case, and the bankruptcy court overseeing the case denied the secured noteholders’ motion.

In connection with its requested exclusivity extension filed late last month the company said it would now be willing to engage in mediation with secured lenders, provided, among other things, that the senior creditors agreed to the exclusivity extension.

But senior noteholders would not bite, suggesting that the company’s offer to engage in mediation was insincere.

In a March 14 objection to the proposed exclusivity extension, an ad hoc group of secured noteholders noted that while the company “promised serious plan negotiations beginning in January,” it was not until the filing of its exclusivity motion last week that the company agreed to a mediation process.

“If past is prologue,” the ad hoc group asserted, “the debtors have not—and thus will not—show diligence, and extending exclusivity will not advance the cases.”

Beyond rejecting the company’s mediation offer, the ad hoc group charged that the company had “squandered” its first four months in Chapter 11 and “cannot point to any progress [it has] made to show cause to extend exclusivity.”

The ad hoc noteholder group further said, “What makes this failure even more egregious is the comparative simplicity of the task at hand: a balance sheet restructuring to be negotiated among well-organized creditor groups with experienced counsel.”

The company argued in its exclusivity extension motion last week that “after a contentious start to the Chapter 11,” it has “been working hard to jump-start meaningful restructuring negotiations.” The company also asserted that “a lot has been going on in these cases, mostly out of court,” citing numerous telephone conversations and face-to-face meetings with creditors, its development of a business plan, and its efforts to resolve various contingencies, including an arbitration case in London that could add $350 million to the company’s unrestricted cash and eliminate a $336 million unsecured claim against the company.

But the ad hoc noteholder group was not buying that, either.

“It was not until months after the cases were filed, and as their 120-day exclusivity period drew to a close,” the group said in its objection, “that the debtors even retained experts and began to put together a business plan.”

Wilmington Trust, the agent bank under the company’s senior secured credit facility, made a similar argument, reiterating its concern that the company and its equity sponsor, Quantum Pacific, were simply seeking to delay the case in the hope that changing market conditions would ultimately create value for an equity recovery in the case.

Meanwhile, lenders under the company’s prepetition revolver and Citibank, the agent under the company’s RCF, did not formally object to the extension, since doing so would, under the cash collateral orders entered in the case, endanger adequate protection payments to RCF lenders.

Still, Citibank said in its response to the motion, “The [bankruptcy] court … should be under no illusion that the agent supports the debtors’ request to extend their exclusive periods within which to file, and solicit acceptances on, a plan of reorganization.”

Similarly, an ad hoc panel of RCF lenders said in a court filing, “The absence of an objection to the motion should not be construed as affirmative support for an extension of exclusivity and that the RCF group has concerns regarding the progress of these cases.”

A hearing on the exclusivity extension is set for March 21. — Alan Zimmerman

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NRG Energy Scraps $870M High Yield Bond Deal

Electric power concern NRG Energy has pulled an offering for $870 million of 10.25-year (non-call five) notes, according to a company statement. The cancellation was “in response to broader market conditions.”

Citi, Credit Agricole CIB, and Deutsche Bank were bookrunners on the deal, which sources say saw initial price talk at 5.75%. Proceeds would have been used to finance a tender offer for its $869 million of 6.625% notes due 2023, which has also been withdrawn.

Risk-on sentiments have waned in the high-yield market as of late, with U.S. high yield funds recording an outflow of $622 million for the week ended Nov. 8, following last week’s $1.2 billion withdrawal. Another sign of weakening was reflected in the Nov. 9 reading of LCD’s flow-name high-yield bonds, which showed the average bid for the 15-name sample dipping 114 bps, to 97% of par, for a new year-to-date low.

NRG’s would-be bond sale is the first to be pulled since Charter Communications scrapped its offering in June. — Jakema Lewis

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Negative Earnings Growth for US Leveraged Loan Issuers; First Time Since 2009

quarterly EBITDA growth loan issuers

Downshifting profit growth in 2016 reached stall speed for leveraged loan issuers early this year, putting pressure on credit metrics at a time when market participants are increasingly alert to signals of a developing negative inflection for the credit cycle.

First-quarter earnings for S&P/LSTA Leveraged Loan Index issuers that publicly file financial results revealed the first negative year-on-year aggregate reading for EBITDA since recession dynamics settled over the global economy during the first half of 2009, according to LCD.

quarterly EBITDA growth energy loan issuers

The first-quarter results were far from uniformly doom-and-gloom, however, as the negative 1.25% reading for 1Q EBITDA was net of noisy and wide-ranging results, by sector basket.

Even so, the readings were slightly negative on net (negative 1%) when stripping out volatile oil and gas inputs from the sample, and included more dour results from retail and media credits, where distress ratios have disproportionately climbed over the last year ($$).

High-level commentary from speakers at the Milken Institute Global Conference earlier this month generally keyed on the notion that profit growth—while below the heights recorded during the recovery period over the first half of this decade—would likely prove resilient over the quarters ahead, given relative strength in credit metrics now, versus at the same point in prior credit cycles, bolstered by still-accommodative—if tightening—monetary policy.

Indeed, S&P Global’s Bob Keiser notes that corporate America writ large posted a smart 15% year-to-year increase in first-quarter earnings across the S&P 500, and projections suggest continued growth into 2018. But this sample prominently includes results from oil-and-gas players, many of which reported big year-to-year improvements on the bottom line in 1Q17 amid more stable commodity-price progressions, relative to the desperately weak comparisons from 1Q16.

When stepping back from the oil story, the slip in profits to start 2017 extends a bright-line trend for loan issuers. The negative first-quarter print across the S&P/LSTA Index, compared with 7.1% growth in the first quarter of last year and 4–6% growth rates over the last three quarters of 2016, marks a steady deceleration from quarter averages of 7% in 2015, 9% in 2014, and 13% over the recovery period from 2010–2013.

Flow-of-funds analysis ($$) by S&P Global for the concluding quarter of 2016 had already showcased a glaring jump in the financing gap for U.S. companies (the difference between capital spending and what is covered by internal cash generation), as a nascent uptick in capital spending—in part due to O&G credits increasing their outlays as commodity prices stabilized—dovetailed with tumbling profit growth.

outer edge credit statistics

A high financing gap is unsustainable without a pullback in spending or a substantial increase in borrowing, which may put leverage trends for some of the more at-risk loan issuers under a harsh spotlight in a low- or negative-growth environment for earnings. Indeed, issuers with “outer-edge” debt/EBITDA ratios of greater than 7x swelled to 22.56% of the sample in the latest quarter, up more than four percentage points from 4Q16 and versus 21.15% a year earlier, marking the highest proportion since 4Q14. – John Atkins

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Chesapeake Energy Upsizes Leveraged Loan by $500M, Tightens Interest Rate

Joint bookrunners Goldman Sachs, Citi, and MUFG have upsized Chesapeake Energy’s first-lien, last-out term loan to $1.5 billion, from $1 billion, and tightened pricing, according to market sources. Pricing was expected later today.

Price talk for the five-year loan is now L+750 with a 1% LIBOR floor, offered at par. Recall initial guidance including a spread range of L+750–775 and an OID of 99. The loan is non-callable for two years, with a first call at par plus 50% of the coupon, stepping to 25% and par.

chesapeake energy logoProceeds from the deal will be used to fund a tender offer for up to $500 million of the borrower’s outstanding bonds in terms of purchase price. The tender prioritizes the company’s shortest-dated bonds. It will redeem up to $400 million (purchase price) of its 6.35% euro senior notes due 2017, 6.5% senior notes due 2017, and 7.25% senior notes due 2018.

Up to $250 million will be spent on the second-priority floating-rate senior notes due 2019 and the third-priority notes, which comprise the following paper: 6.625% senior notes due 2020; 6.875% senior notes due 2020; 6.125% senior notes due 2021; 5.375% senior notes due 2021; 4.875% senior notes due 2022; and 5.75% senior notes due 2023.

The new debt will be secured against the same collateral that is tied to the company’s revolver. In case of default, payments to new term loan creditors will waterfall down after the revolver is repaid. The loan will carry an unconditional guarantee from Chesapeake’s directly and indirectly held wholly owned domestic subsidiaries, with the same guarantee in place for the revolving credit.

Agencies assigned issue ratings of B–/Caa1 and the recovery rating from S&P Global Ratings is 1. S&P Global also downgraded the corporate rating to CC, from CCC. Moody’s affirmed the corporate rating at Caa2. Outlooks are negative and positive, respectively. — Jon Hemingway/Rachel McGovern

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Chesapeake Energy Launches $1B Leveraged Loan Backing Bond Tender Offer

Chesapeake Energy has launched a $1 billion first lien, last-out loan to syndication. Goldman Sachs (left lead), Citi, and MUFG are joint bookrunners on the transaction.

The five-year deal is expected to price in the middle of this week, and the proceeds will be used to finance a tender offer for up to $500 million of the borrower’s outstanding bonds in terms of purchase price.

chesapeake energy logoThe new debt will be secured against the same collateral that the company’s revolver is tied to. In case of default, payments to new term loan creditors will waterfall down after the revolver is repaid. The loan will carry an unconditional guarantee from Chesapeake’s direct and indirectly held wholly-owned domestic subsidiaries, with the same guarantee in place for the revolving credit facility.

The tender prioritizes the company’s shortest-dated bonds. It will redeem up to $400 million (purchase price) of its 6.35% euro senior notes due 2017, 6.5% senior notes due 2017, and 7.25% senior notes due 2018.

Up to $250 million will be spent on the second priority floating-rate senior notes due 2019 and the third priority notes, which comprise the following paper: 6.625% senior notes due 2020; 6.875% senior notes due 2020; 6.125% senior notes due 2021; 5.375% senior notes due 2021; 4.875% senior notes due 2022; and 5.75% senior notes due 2023. The full tender announcement can be found here.

The new facility and tender offer follows better-than-expected second-quarter earnings from the energy firm, which pushed some of its outstanding debt higher on Aug. 4. As reported, the 8% second-lien exchange notes due 2022 jumped two points to start the session, at 93/93.5, and were later quoted at 92/93, with trades at 92. The 6.625% unsecured notes due 2020 traded as high as 80 following the results, versus 77 before publication, trade data show. — Rachel McGovern

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Energy Future to Sell Oncor to NextEra in Deal Valued at $18.4B

NextEra Energy said today that it would acquire Energy Future Holdings’ 80% interest in its regulated utility, Oncor, in a deal valued at $18.4 billion.

Nextera logoIn connection with the deal, NextEra and Energy Future entered into a reorganization plan support agreement providing for, among other things, the spin-off of the company’s T-side, Texas Competitive Electric Holdings (TCEH), pursuant to a reorganization plan that will result in a partial step-up in the tax basis of certain TCEH assets, and NextEra’s acquisition of Oncor through the purchase of the company’s so-called E-side, specifically 100% of holding company Energy Future Holdings (EFH).

As reported, EFH owns intermediate holding company Energy Future Intermediate Holdings (EFIH), which directly controls the company’s stake in Oncor.

According to a Form 8-K filed this morning with the Securities and Exchange Commission, the company said the purchase price would consist “primarily of cash.”

NextEra, meanwhile, said in a news release that it would fund $9.5 billion of the purchase price to be used “primarily for the repayment of EFIH debt,” adding, “Of that amount, it is expected that certain creditors will be paid primarily in cash, with the remainder in NextEra Energy common stock.” NextEra said that the amount of NextEra stock ultimately issued to EFIH creditors would be determined based on, among other things, the estimated cash on hand at EFH upon closing and the volume weighted average price of NextEra common stock for a specified number of days leading up to the closing.

NextEra said it would generate the funding from “a combination of debt, convertible equity units, and proceeds from asset sales,” but also noted that the transaction was not subject to any financing contingency.

NextEra said that under the reorganization plan contemplated by the transaction, the EFIH DIP facility, with about $5.4 billion outstanding, would be paid in full, “using cash financed by a non-EFH/Oncor NextEra Energy affiliate upon closing.” NextEra also said the contemplated E-side reorganization plan would “extinguish all EFH and EFIH debt that currently exists above Oncor.”

According to bankruptcy court filings, that includes, among other things, a first-lien and second-lien facility at EFIH, unsecured toggle notes at EFIH, and unsecured debt at EFH.

The deal is subject to regulatory approvals, most notably by the Texas Public Utility Commission, the Federal Energy Regulatory Commission, and the Federal Trade Commission, as well as the completion of the contemplated TCEH reorganization and spin-off, which would occur in September if all goes according to plan.

As reported, certain PUC rulings in connection with the company’s prior plan to sell Oncor to Hunt Consolidated that would have reduced the financial benefits accruing to that deal’s investors from a planned REIT conversion, caused that deal to fall apart last April.

The transaction is required to close by March 26, 2017, subject to a 90-day extension under certain conditions, according to the Form 8-K. NextEra said it expects the deal to close during the first quarter of 2017.

The agreement specifically permits the company to continue to solicit acquisition proposals for Oncor, and even following approval of the merger agreement by the Wilmington, Del., bankruptcy court, to continue discussions on an alternative transaction with any parties with which it was already in active negotiations at the time of such bankruptcy court approval, or with any third party that submits an unsolicited proposal “reasonably likely to lead to a superior proposal.”

The agreement carries a break-up fee, however, of $275 million, if the company completes an alternative transaction. — Alan Zimmerman

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NRG Energy Readies $1.9B Leveraged Loan

An arranger group led by Citigroup and Morgan Stanley is launching via a lender call tomorrow at 11 a.m. EDT a $1.9 billion B term loan for NRG Energy, sources said.

No additional details were available.

NRG in 2013 placed a $2.022 billion B term loan due July 2018 that cleared at L+200, with a 0.75% LIBOR floor. Term loan outstandings stood at $1.95 billion as of March 31, according to an SEC filing.

Princeton, N.J.–based NRG Energy, rated BB/Ba3, is an integrated wholesale power-generation and retail electricity company. — Chris Donnelly

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C&J Energy Enters into Forbearance Agreement Following Covenant Breach

C&J Energy Services entered into a forbearance agreement with its lenders after the company’s temporary limited waiver agreement with respect to its covenant violation expired on May 31.

As reported, C&J Energy recently engaged Kirkland & Ellis and Fried Frank as legal advisors and Evercore as financial advisor to explore strategic alternatives, which could include a refinancing or restructuring of its capital structure to address its liquidity issues and high debt levels or a potential Chapter bankruptcy filing, according to the company’s 10-Q filing.

The company’s B-1 term loan due 2020 (L+550, 1% LIBOR floor) was marked at 66.5/69.5 this morning, from 65/68 yesterday, according to sources. The B-2 term loan due 2022 (L+625, 1% floor) is marked at 66/69, versus 64.5/67.5 yesterday.

C&J Energy, which fell out of compliance with the minimum-cumulative-consolidated-bank-EBITDA covenant governing its credit agreement, said lenders have agreed to forbear from exercising default remedies or accelerating any indebtedness through June 30 as a result of the covenant violation or any default that results from the non-payment of interest.

The company said it will continue discussions with its creditors regarding the company’s debt and capital structure.

The loans were syndicated in March via a Citi-led arranger group to back the purchase of the Nabors unit. The B-1 loan was issued at 86 and the B-2 tranche at 84.

Bank of America Merrill Lynch is administrative agent.

NYSE-listed C&J Energy Services is an independent provider of premium hydraulic fracturing, coiled tubing, wireline, pump-down, and other complementary oilfield services with a focus on complex, technically demanding well completions. The company is rated CCC–/Caa3 with negative outlook on both sides. — Rachelle Kakouris

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Vanguard Natural Resources Latest Oil Company to Cut Loan Borrowing Base

Vanguard Natural Resources disclosed that it has cut its revolver’s borrowing base by $475 million, to $1.325 billion, via an amendment, which also included a one-time current ratio waiver for the second quarter of 2016 and an increase in mortgage requirements.

As of May 26, the company had $1.424 billion outstanding under the revolver and roughly $4.5 million of outstanding letters of credit. Therefore, the borrowing base cut resulted in a deficiency of roughly $103.5 million. Vanguard will seek to cure the deficiency through six equal monthly installments of roughly $17.3 million beginning on June 27.

S&P Global Ratings in January lowered the Vanguard’s corporate credit rating to CC, from B–. In March, Moody’s downgraded Vanguard’s corporate rating to Caa3, from B3.

Vanguard Natural Resources is a publicly traded limited liability company focused on the acquisition, production, and development of oil and natural gas properties. The company trades on the Nasdaq under the ticker VNR. — Richard Kellerhals

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