Comstock Resources evaluates debt exchange option, taps firm to track down bondholders

28 July 2016

by Madalina Iacob, Alexander Gladstone, and Kyle Younker

 

Comstock Resources is evaluating a series of liability management transactions, including a potential swap of unsecured debt into second lien bonds and/or equity to delever its balance sheet, said two sources familiar. The company is working with Ipreo to scour the market for the holders of the unsecured notes, said one of the sources and a third source.

 

Like its peers over the past year, the company has engaged in various debt swaps and open market repurchases aimed at reducing its interest expense and improving liquidity. Before that, Comstock was also one of the first oil producers to tap the high yield market in March of 2015 when oil prices were on the rise. The company issued a USD 700m 10% first lien note due 2020, which last traded at 82.5 on 26 July, according to MarketAxess.

 

Its USD 178m 9.5% senior unsecured notes due 2020 last traded at 45.37 on 27 July, while the USD 288m 7.75% unsecured bonds traded at 46 today up from 45.5 on 25 July.

 

In order to issue second lien bonds the company would need to tap a USD 200m junior lien basket that is embedded in the first lien notes. The company would also need approval from the unsecured noteholders given that the indenture governing the two tranches of unsecured notes does not allow for the issuance of additional senior debt.

 

The company tried to accomplish a similar swap in the past months but a significant cross-holder of the first and unsecured bonds did not agree to expand the unsecured basket at that time, said the first source familiar. That deal contemplated offering holders a blended consideration of equity, second lien notes and cash, said the first source. The company consulted with Jefferies for that transaction, said sources.

 

Nevertheless, management has already executed multiple exchanges of unsecured notes and taken out roughly USD 234m of unsecured notes as of 4 May, resulting in savings of USD 20.3m, according to a press release.

 

Comstock CEO Jay Allison telegraphed on the 1Q16 earnings call on 4 May that the company will continue to pursue bond repurchases and execute debt exchanges to chip away at its “harsh” interest expense burden. Apart from that, management doesn’t exclude getting additional capital from third party investors, along with the sale of natural gas assets and joint-ventures for its Haynesville and Bossier assets.

 

The company’s all-in-cash liquidity position stood at USD 89.3m as of 31 March. Comstock terminated its revolver last year with proceeds from the first lien notes. The company is on track to burn roughly USD 109m of cash for full-year 2016, which implies the annualized USD 14.7m 1Q16 EBITDAX figure, a capex midpoint of USD 59m and USD 110m in interest expense.

 

Calls to Comstock, Ipreo and Jefferies were not returned.