Tuesday, November 7, 2017

Exco Resources, Inc. "Going Concern" Warning

As part of third quarter results:

The Company's ability to make future interest payments in common shares is subject to a Resale Registration Statement (as defined in the indenture governing the 1.5 Lien Notes or the credit agreement governing the 1.75 Lien Term Loans, as applicable) being declared effective by the SEC, which has not yet occurred. The Company's ability to pay interest in additional indebtedness is limited to $7 million due to limitations on its aggregate secured indebtedness within its debt agreements. EXCO's next quarterly interest payment of approximately $27 million, based on the paid in-kind interest rate of 15.0% on the 1.75 Lien Term Loans, is scheduled to occur on December 20, 2017, and is required to be paid in-kind pursuant to the terms of the indenture governing the 1.5 Lien Notes. Unless the Company amends its debt agreements or obtains a waiver or other forbearance from certain lenders, it will not be able to make its next interest payment on the 1.75 Lien Term Loans on December 20, 2017.

If the Company is unable to comply with the covenants under the Credit Agreement, or is unable to make scheduled interest payments on its debt, there will be an event of default. Any event of default may cause a default or accelerate the Company’s obligations with respect to other indebtedness including the 1.5 Lien Notes, 1.75 Lien Term Loans, 2018 Notes and 2022 Notes. If this occurs and the Company's indebtedness is accelerated and becomes immediately due and payable, its Liquidity would not be sufficient to pay such indebtedness and the Company may be forced to seek protection from creditors under the U.S. Bankruptcy Code.

These factors raise substantial doubt about the Company's ability to continue as a going concern. See further information on the risks related to EXCO’s ability to continue as a going concern in the Company’s periodic filings with the SEC.

The Company, together with the Audit Committee of the Board of Directors, is currently exploring strategic alternatives to strengthen the Company's balance sheet and maximize the value of the Company, which may include, but not be limited to, seeking a comprehensive out-of-court restructuring, or reorganization under Chapter 11 of the U.S. Bankruptcy Code. The Company's plans may include obtaining additional financing or relief from debtholders to support operations throughout the restructuring process, delevering its capital structure, and reducing the financial burden of certain gathering, transportation and other commercial contracts. At the direction of the Audit Committee, the Company has retained PJT Partners LP as financial advisors and Alvarez & Marsal North America, LLC as restructuring advisors. The Company is actively engaged in negotiations with its stakeholders to evaluate the feasibility of a consensual in-court or out-of-court restructuring. The Company continues to retain Kirkland & Ellis LLP as its legal advisor to assist the Audit Committee and management team with the strategic review process. If the Company is unable to restructure its current obligations under its existing outstanding debt, and address near-term liquidity needs, it may need to seek relief under the U.S. Bankruptcy Code.
The bond due September 2018 last traded in the high 20s, yield to maturity of 240%.

3 comments:

Anonymous said...

The principal purpose of issuing the 1.5 Lien Notes and Second Lien Term Loan Exchange was to alleviate our substantial cash interest payment burden and improve our Liquidity. Our initial expectation was to make PIK Payments in common shares on the 1.5 Lien Notes and the 1.75 Lien Term Loans throughout the remainder of 2017 and 2018. However, under our Registration Rights Agreement with the holders of the 1.5 Lien Notes and lenders of the 1.75 Lien Term Loans ("Registration Rights Agreement"), our ability to make PIK Payments in common shares is subject to a resale registration statement related to the common shares issued as PIK Payments and all of the shares underlying the warrants issued in connection with the 1.5 Lien Notes and 1.75 Lien Term Loans being declared effective by the SEC by October 11, 2017 ("Resale Registration Statement"). We did not anticipate the Resale Registration Statement would be declared effective as of October 11, 2017, and, as such, we provided a notice of a delay of effectiveness for the Resale Registration Statement to the holders of the 1.5 Lien Notes and lenders of the 1.75 Lien Term Loans, as permitted under the Registration Rights Agreement, extending the requirement for the Resale Registration Statement to be declared effective to no later than December 8, 2017. As of the date of the filing of this Quarterly Report on Form 10-Q, the Resale Registration Statement has not been declared effective and there is no assurance we will be able to satisfy this condition.

Anonymous said...

Even if the Resale Registration Statement is declared effective, the terms of the indenture governing the 1.5 Lien Notes and the credit agreement governing the 1.75 Lien Term Loans prohibit the issuance of common shares as PIK Payments if it would result in a beneficial owner, directly or indirectly, owning more than 50% of our outstanding common shares. Our common share price has been, and continues to be, volatile and has significantly decreased during 2017. If our common share price remains at the current levels or continues to decrease, we will have to issue a greater number of common shares to make PIK Payments on the 1.5 Lien Notes and 1.75 Lien Term Loans. This could prevent us from being able to pay interest in common shares due to the 50% ownership limitation. In addition, we may elect not to make PIK Payments because such issuances would contribute to an ownership change under Section 382 of the Internal Revenue Code that could limit our ability to use our net operating loss carryovers (“NOLs”) to reduce future taxable income. As of September 30, 2017, we had estimated NOLs of $2.4 billion.

Anonymous said...

The amount of PIK Payments made in additional 1.5 Lien Notes or 1.75 Lien Term Loans is subject to incurrence covenants within our debt agreements that limit our aggregate secured indebtedness to $1.2 billion. This amount is reduced dollar-for-dollar to the extent that we incur any additional secured indebtedness, including PIK Payments in additional indebtedness. Our ability to make future PIK Payments in additional indebtedness is limited to $6.9 million. Our next quarterly interest payment of approximately $26.9 million, based on the PIK interest rate of 15.0% on the 1.75 Lien Term Loans, is scheduled to occur on December 20, 2017, and is required to be paid in-kind pursuant to the terms of the indenture governing the 1.5 Lien Notes. Furthermore, the agreement governing the 1.75 Lien Term Loans restricts our ability to pay interest in cash, unless we have liquidity, on a pro forma basis, of at least $175.0 million.

As a result of the foregoing, unless we amend our debt agreements or obtain a waiver or other forbearance from certain lenders, we will not be able to make our next interest payment on the 1.75 Lien Term Loans on December 20, 2017. If we cannot make scheduled payments on our debt, we will be in default and holders of our outstanding notes and loans could declare all outstanding principal and interest to be due and payable, the lenders under the EXCO Resources Credit Agreement could terminate their commitments to loan money, and our secured lenders could foreclose against the assets securing their borrowings. Any event of default may cause a default or accelerate our obligations with respect to unsecured indebtedness, including our 2018 Notes and 2022 Notes, which could adversely affect our business, financial condition and results of operations.