Over the weekend, we saw the first casualty of low oil prices as WBH Energy went into bankruptcy [4]. Today, Bloomberg reports,Resolute Energy Corp. has been forced by low oil prices to borrow at distressed levels. The Denver-based company, which we previously highlighted as having a 4.5x Debt/EBITDA (there are a lot higher), managed to procure a new $150 million 2nd term loan from Highbridge Capital (mostly used to roll old debt). The cost of funding: 11% coupon plus 5% upfront (and a guaranteed 25% return for the lender if Resolute pays it back early). At that cost of funding, it is no wonder that Resolute's bonds remain, to borrow a Charlie Evans phrase, catastrophically priced.
Current 5Y Resolute bond yields are hovering between 32% and 27%...
[5]
As Bloomberg reports,
Highbridge Capital Management funds committed to lend $142 million of the $150 million second-lien term loan.The same individual who signed the credit agreement on behalf of Highbridge also signed for the other two named lenders, indicating that Highbridge-managed funds may have underwritten the entire deal.
Highbridge is an alternative investment management firm owned by JP Morgan Asset Management.
Resolute Energy's $150 million second-lien term loan was priced to pay interest of Libor plus 10 percent, with a 1 percent Libor floor, ensuring that lenders would receive at least an 11 percent coupon in addition to a 5 percent upfront fee. Since Resolute received $134 million of net proceeds, the loan may also have priced at a discount to further increase the yield. If Resolute repays the loan early, it's obligated to include additional payments to ensure that the lenders receive at least 125 percent of their invested capital.
The company used net proceeds of $134 million to pay down its borrowing-base revolving credit facility. As the size of the borrowing base was reduced by $95 million to $330 million, the new loan increased Resolute's total liquidity by about $40 million to $60 million.
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In other words - to assuage fears, Shale companies must pay at least 25% to get funding - an entirely abhorrent cost of capital (unless oil suddenly rips to $300/bbl <sarc>)
Here's what Highbridge will own if it all goes pear-shaped...
[6]
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Of course, there are a lot more to come if funding costs remain at these levels of extreme. In December we illustrated the problem names [7] (in the publicly traded markets) among the most-levered energy companies in America...
[8]
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So for everyone worried about rising rates - don't! Because for the engine of US economic growth - The Shale Industry - rates have already risen to extremes that simply make everything non-economic...
[9]
