Exco Resources, Inc. Discloses Possibility of Going Concern Warning $XCO

In a new 8-K filing regarding its tender offer and consent solicitation for notes:

In connection with the Tender Offer and Consent Solicitation, the Company also made the following disclosure about its financial condition. 

The Company’s liquidity and ability to maintain compliance with debt covenants have been negatively impacted by the prolonged depressed oil and natural gas price environment, levels of indebtedness, and gathering, transportation and certain other commercial contracts. As of June 30, 2016, the Company was in compliance with the financial covenants under its Revolving Credit Facility; however, utilizing the output of the current corporate model and based on the Company’s current estimates and expectations, the Company does not believe it will be able to comply with all of the covenants under its Revolving Credit Facility. In particular, the Company anticipates that, within the next twelve months, the Company will not be in compliance with the required current ratio of at least 1.0 to 1.0 as of the end of any fiscal quarter. This ratio will also be impacted negatively by further reductions to the Company’s borrowing base, if any, that could occur during its September redetermination process. 

If the Company is successful in the Tender Offer, the purchases are expected to be funded primarily with the borrowings under the Revolving Credit Facility. There can be no assurances regarding the success or extent of the purchases of the Notes as part of the Tender Offer. Furthermore, the next borrowing base redetermination under the Revolving Credit Facility is scheduled to occur on or about September 1, 2016. The lenders party to the Revolving Credit Facility have considerable discretion in setting the Company’s borrowing base, and the Company is unable to predict the outcome of any future redeterminations. 

If the Company is not able to meet its debt covenants in future periods, the Company may be required, but unable, to refinance all or part of its existing debt, seek covenant relief from its lenders, sell assets, incur additional indebtedness, or issue equity on terms acceptable to the Company, if at all, and may be required to surrender assets pursuant to the security provisions of the Revolving Credit Facility. Therefore, the Company’s ability to continue its planned principal business operations would be dependent on the actions of its lenders or obtaining additional debt and/or equity financing to repay outstanding indebtedness under the Revolving Credit Facility. These factors raise substantial doubt about the Company’s ability to continue as a going concern. 

The Revolving Credit Facility and the Company’s senior secured second lien term loans (the “Second Lien Term Loans”) require the Company’s annual financial statements to include a report from the Company’s independent registered public accounting firm without an explanatory paragraph related to the Company’s ability to continue as a going concern. If the substantial doubt about the Company’s ability to continue as a going concern still exists at December 31, 2016 or if the Company fails to comply with the financial and other covenants in the Revolving Credit Facility or the Second Lien Term Loans, the Company would be in default under such agreement. Any event of default may cause a default or accelerate the Company’s obligations with respect to its other outstanding indebtedness, including the 2018 Notes and 2022 Notes, which could adversely affect the Company’s business, financial condition and results of operations.