Wednesday, November 28, 2012

GMX Resources Update on Consent Solicitation With Respect to Its Senior Secured Notes Due 2017 ($GMXR)

Press release today,

"The consent solicitation includes a proposal to amend the Indenture to authorize and permit the issuance of a new series of senior secured notes due 2017 under the Indenture (the "New Notes") and require the Company to use the cash proceeds therefrom to repay, redeem, repurchase or otherwise acquire or retire for value the Company's 5.00% Senior Convertible Notes due 2013 (the "2013 Notes") outstanding on the date of issuance of the New Notes at or prior to their stated maturity date.

This press release does not set forth all of the terms and conditions of the consent solicitation. Holders of Existing Notes should carefully read the Company's Consent Solicitation Statement, dated November 16, 2012, as supplemented and amended by Supplement No. 1 thereto, dated November 28, 2012 (as so amended and supplemented (the "Consent Solicitation Statement"), and the accompanying materials for a complete description of all terms and conditions before making any decision with respect to the consent solicitation. [...]

The Company is offering to pay to each holder of Existing Notes as of the Record Date (as defined below) that validly delivers and does not validly revoke its consent on or prior to the Consent Date (as defined below) a cash consent payment of $5.00 per $1,000 principal amount of Existing Notes for which consents have been so delivered, subject to the conditions and terms set forth in the Consent Solicitation Statement. The record date for determining holders of Existing Notes entitled to consent and receive the consent payment is 5:00 p.m. New York City time on November 28, 2012 (the "Record Date"). The deadline for eligible holders' validly delivering consents has currently been set as 5:00 p.m. New York City time on Thursday, December 6, 2012 (the "Consent Date"). The payment of the consent fee will be made as soon as practicable following the Consent Date."
Interesting. I believe there are roughly $283mm of the 2017 notes outstanding, so the consent fee will cost a little over a million dollars. One way to look at that is almost 20k bbl of oil, which is a significant fraction of their production in any given quarter. (Q3 production was 53k bbl.)

You may recall our analysis of the refinancing deal, which is that the deal really meant refinancing the unsecured 2013 notes by selling $30 million in secured debt with a 15% PIK coupon for only $29.95 million, and then throwing in almost 16 million shares (20% of the company) for free (or slightly negative).

That was horrifically bearish but the equity price hasn't caught up yet (a pattern we've seen before). The key question is when all the new shares will hit the market. I'd guess that the recipients will start to sell them as soon as they receive them (do they want to be long the equity of a company that borrows secured on these terms, and has bonds trading at less than 50.

Once the consents are in [which should be a done deal], I'd imagine the company will do the refinancing deal pretty quickly, and I'd imagine the new shares would be issued at the same time the deal is funded. Maybe that will happen by mid-December? They certainly don't want to be less than 30 days from the 2013 maturity and not already have this cash in hand.

So at that point, I think the lenders receiving shares that are basically worthless and for which they paid nothing will blow them out.

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