NEW YORK--(BUSINESS WIRE)--Linn Energy LLC's (Linn) bankruptcy filing on Wednesday affects more than $9 billion of total debt and helped push the May TTM energy high yield bond default rate to nearly 13%, up from 10.7% at the end of April, according to Fitch Ratings. The May TTM exploration & production (E&P) subsector default rate has now been driven to a record 24%. Fitch forecasts the E&P high yield bond rate to finish at 30%-35% at year end.
Filings by Linn and Penn Virginia this morning propelled the overall May TTM high yield bond default rate to 4.2%. Fitch is projecting the overall rate to finish 2016 at 6%, and had expected both of these filings in the annual forecast.
Linn's nearly $5 billion of unsecured notes have poor recovery prospects, which would share the new common equity with second lien noteholders under a reorganization plan based on the restructuring support agreement (RSA) dated May 11. The $0.12 bid prices on nearly $4 billion of unsecured notes (seven separate series, including Berry Petroleum) as of May 11. The $1 billion of 12% second lien notes due 2020 that were issued in November 2015 in an unsecured for secured exchange were bid at $0.19125, also indicating a likelihood of relatively low equity values in the reorganization.
Borrowings of $3.49 billion under the asset-based revolver (ABL) and term loan facility would be paid in full under a reorganization plan modeled on the RSA. A portion of the distribution to holders would be made in cash with the balance converted into $2.2 billion of new ABL revolver and term debt at exit.
Linn recently borrowed approximately $919 million under its ABL, which had fully utilized the facility and built up cash liquidity prior to the filing, as did Subsidiary, Berry Petroleum Company LLC's $900 million credit facility. Linn has no plans to seek a DIP facility.
Linn is among a number of leveraged energy defaulters in the current wave that negotiated RSAs prior to bankruptcy filing in anticipation of a quick restructuring of debt in court. This morning's filing by Penn was also based on an RSA and other examples include Energy XXI, Ltd., Goodrich Petroleum, Paragon Offshore plc and Samson Investment Co.
Linn's unsustainable capital structure resulted from significant debt added to pursue an aggressive acquisition strategy and a reliance on hedge positions to support high run-rate leverage metrics. Linn made more than 60 acquisitions in the past 10 years, and the inability to renew hedges at profitable levels amid low market prices ultimately led to an unsustainable leverage profile.
Linn is structured as an LLC but has the tax and distribution characteristics of a master limited partnership, with a business model that operates in the upstream oil and gas production segment of the energy sector rather than in the midstream space and has greater exposure to commodity prices despite strategy to maintain significant hedge positions (approximately $1.8 billion as of Dec. 31, 2015). Upstream production cash flows are more volatile and are less able to sustain high leverage than midstream companies, which generally exhibit more stable cash flow profiles.
Yesterday's default followed the company's announcement that it was exploring strategic alternatives for its capital structure and had retained financial and legal advisors to assist with the strategic plan in early February 2016.
Additional information is available on www.fitchratings.com.
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