Halcón Resources enters debt exchange agreements

Analysts comment on higher cost third-lein paper

Halcón Resources Corp. (NYSE: HK) has entered into privately negotiated exchange agreements with certain holders of its outstanding unsecured debt securities as part of its efforts to deleverage the company's balance sheet.

On August 25, the Bakken/Three Forks-focused company received a continued listing standard notice from the New York Stock Exchange. The NYSE requires that the average closing price of a listed company's common stock not be less than $1.00 per share for a period of 30 consecutive trading days.

On Thursday night, the Houston-based company agreed to issue approximately $1.02 billion aggregate principal amount of new 13% third lien senior secured notes due 2022 in exchange for roughly $1.57 billion in unsecured debt ($497.2 million in 9.75% notes due 2020, $774.7 million in 8.875% notes due 2021; and $294.3 million in 9.25% notes due 2022).

In a statement, Floyd C. Wilson, chairman and CEO of Halcon said, "Not only do these exchanges result in a material reduction to our long-term debt, they also effectively improve our leverage profile by almost a full turn and reduce our annual cash interest expense by approximately $12 million. We remain steadfast in our mission to continue improving our balance sheet and are confident we will emerge from this downturn a much stronger company."

Analysts comment
While the transaction is “a positive step,” said Global Hunter Securities analysts in a note to investors Friday, “the reduction of >$0.5B of senior debt comes at the price of higher cost third-lien paper and results in only a $12MM improvement in annualized interest costs (~$331MM drops to ~$319MM). Our estimated forecast of HK’s net debt/EBITDA in FY16 remains elevated at ~5.5x.”

Wunderlich Securities analysts were more positive in their view Friday morning. “Given the company’s focus on reducing its debt and debt metrics, we think taking off the $550 million and basically one turn from an EBITDA multiple basis looks rather strong,” they noted.

The analysts acknowledged the coupon uptick from the 8.875%–9.25% range to 13%, but zeroed-in on other factors.

“Given where HK’s debt has been trading and its push to lower the debt level, we think this transaction is quite positive as it achieves HK’s goals while not diluting shareholders. We feel there is no shortage of investors looking to get out of the energy patch (if they haven’t left already) and so a deal like this shows HK’s ability to improve its balance sheet,” they said.

Bottom line for Wunderlich analysts: “With the debt level down $550 million, a solid hedge book, and good assets, we believe HK remains an interesting play given that it trades at just 2x 2016E P/CFPS versus peers at 3x and the recent deal helps lower its EV/EBITDA multiple as well.”

Following the news, Standard & Poor's downgraded Halcon's corporate credit rating to an SD from a B-, lowered its senior unsecured note rating to 'D' and rated its third-lien notes'CCC.'

"Noteholders agree to receive approximately $1 billion new secured notes for approximately $1.5 billion of existing unsecured notes," said Standard & Poor's credit analyst Ben Tsocanos in a statment, noting that S&P views the transaction as a "distressed exchange because investors receive less than what was promised on the original securities."

Halcon expects to close the debt exchanges within 10 business days with an amendment to its senior secured revolving credit facility to, among other things, permit the issuance of the new notes and reduce the borrowing base by $50 million to $850 million.

Jefferies LLC and JP Morgan Securities LLC acted as placement agents to Halcon for the debt exchanges.

Mid-morning Friday, shares of the company were up over 12%.

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