Afren takes action to protect liquidity, continues merger talks

Afren plc has provided an update regarding the review of its capital structure, liquidity, and funding requirements. In light of the significant dislocation in the industry and related financing markets resulting from the rapid decline in oil prices, the company’s board has been reviewing the funding and liquidity requirements of the business and is seeking to address how it manages the overall leverage position of the company.

Afren had a cash balance of $235 million as of Dec. 31, 2014. Liquidity available to the company is significantly lower as a result of restricted and segregated cash balances in place to address operational requirements. The company’s near-term cash flow is also impacted by capital expenditure incurred in late 2014 before operational changes had been implemented to adapt to the current lower oil price environment.

Afren has initiated negotiations with the lenders of the $300 million Ebok debt facility with a view to obtaining a deferral of the $50 million amortization payment due on Jan. 31. In addition, the board is considering whether to utilize a 30-day grace period under its 2016 bonds with respect to $15 million of interest due on Feb. 1 while the review of the capital structure and funding alternatives is completed.

These actions are being taken to protect the immediate liquidity position of the company while it seeks funding to address its additional requirements. Afren has been advised that an ad hoc committee of its largest bond holders has been formed. The company has initiated discussions with the advisers to the committee regarding the immediate liquidity and funding needs of the business.

The board has reviewed its business plan with the aim of minimizing its funding requirements in the current oil price environment to focus on the development of the company’s core assets in Nigeria. Assuming that Afren’s current debt structure remains unchanged, there is an equity funding requirement that is likely to be significant and in excess of the company’s current market capitalization. New funds will be required to meet interest and principal repayments, working capital, and a reduced capital expenditure program. The company will be having discussions with its existing stakeholders and new third-party investors regarding recapitalizing the company.

The board is implementing efficiency and cost optimization measures to improve its liquidity position. Alvarez & Marsal has been engaged to provide services as chief restructuring officer.

Afren is also still discussing with Seplat Petroleum Development Co. a possible combination with Afren, but Afren says  there can be no certainty that an offer will be made. Afren notes that, in accordance with Rule 2.6(a) of the Code, by no later than 5 p.m. on Jan. 30, Seplat must either announce a firm intention to make an offer for Afren under Rule 2.7 of the Code or announce that it does not intend to make an offer for Afren, in which case the announcement will be treated as a statement to which Rule 2.8 of the Code applies. This deadline can be extended in accordance with Rule 2.6(c) of the Code.

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