Comstock unsecureds align with new counsel, hold call to bolster organization

09 August 2016

by Paunie Samreth, and Madalina Iacob

 

The ad-hoc group of Comstock Resources unsecured bondholders has been active behind the scenes this week, holding several organizational calls with legal counsel Morrison Foerster to lay the groundwork for pushback against the company’s exchange offer, said three sources familiar with the matter.

 

The group mobilized following the company’s recent launch of a tender offer. Counsel Morrison Foerster replaced Davis Polk as the group’s size grew with more large holders of the unsecured notes joining the cause, two of the sources continued.

 

The holders, who own positions in the company’s USD 288.5m 7.75% senior unsecured note due 2019 and USD 175m 9.5% senior unsecured note due 2020, are working on a term sheet that would form the basis for a negotiation with the company to sweeten the terms of the tender offer. Another group of first lien holders is also organized with Akin Gump and Centerview and may also strategize a pushback against the offer, the sources added.

 

The company’s current proposal offers to swap the unsecureds into a second lien convertible PIK note, and exchange the first liens into a new first lien 11% note that will PIK for two interest payments, or up to USD 75m. Despite the capital structure trading at distressed levels, the exchanges for both the unsecured and first lien notes do not contemplate a principal haircut. Instead, the company hopes to take advantage of cost savings through the PIK features on the new bonds as a way to save money and use the fund to cover drilling expenses.

 

Unsecured bonds want to boost the current equity conversion price to USD 12.31 from the USD 9.24 price proposed by the company. The USD 9.24 price implies a roughly 70-cent recovery for the unsecured bonds, whereas some holders are pressing for a price north of USD 12, which would bring bond recovery to par, said the first source. On the other hand, first lien holders would be looking for to additional warrants north of the 2% level that is included in the current deal. On top of that, first lien holders are also aiming to increase the collateral package and tight up covenants, said the first source.

 

The 7.75% unsecured notes due 2019 traded at 50.75 today, down from 51 on 8 August, according to MarketAxess. The 10% first lien notes due 2020 changed hands today at 85 up from 84.87 yesterday, according to MarketAxess.

 

Comstock common shares traded at USD 4.13 today for a USD 50.78m market cap.

 

Messages left for officials at MoFo and Comstock were not returned.