Oil Driller Missing First Bond Payment Marks Junk’s Fast Decline

(Bloomberg) -- A Colorado oil producer is giving debt investors a lesson in the risks of lending to companies that staked their future on the U.S. shale boom.
Less than seven months after raising $175 million in a junk-bond offering, American Eagle Energy Corp. said Monday that it wouldn’t make its first interest payment on the debt. Instead, it hired two advisers -- Canaccord Genuity Group Inc. and Seaport Global Holdings LLC -- to negotiate with bondholders on a plan to restructure its debt, according to three people with knowledge of the situation who asked not to be named because the matter is private. The holders of the notes are left to consider how to maximize recovery of their investment, either by giving the company more time to try to become profitable or by pushing the company into default.
With the price of U.S. crude down 52 percent since July, American Eagle and other small energy production companies with significant debt loads are struggling to service obligations to creditors who were willing to lend them money just a few months ago. The energy sector represents about 14 percent of the high-yield bond market, and analysts expect defaults to increase this year as more companies are forced to scale back operations and record losses on oil reserves previously valued at much higher prices.

“American Eagle Energy’s small scale and relatively high drilling costs made it the one of the first victims of the drop in energy prices,” said Spencer Cutter, a credit analyst at Bloomberg Intelligence. “It was also unfortunate that oil prices dropped so much soon after the bond was issued, causing it to skip its first-ever interest on the debt.”

No Coupon

The oil and gas producer, which operates in North Dakota’s Bakken shale, has 30 days to make the $9.8 million interest payment before triggering a default on the 11 percent bonds due September 2019.
The rare occurrence of an issuer missing its first interest payment is referred to by people in the bond industry as NCAA, or no coupon at all, Cutter said.
Marty Beskow, a spokesman at American Eagle Energy, didn’t respond to e-mailed messages and telephone calls seeking comment. Scott Davidson, a spokesman at Canaccord, and Tanya Alvear, a spokeswoman at Seaport Global, declined to comment.
The Littleton, Colorado-based company stopped drilling in November and suspended its 2015 capital plan because of the drop in oil prices, the company said in a statement Monday. West Texas Intermediate crude, the U.S. benchmark, traded near $51 a barrel on Thursday, down from more than $107 in June.
The driller’s financial problems became apparent to lenders in December when its ability to borrow on a revolving line of credit, which initially let the company borrow as much as $60 million, was canceled, according to a company statement on Dec. 31. To raise cash, American Eagle Energy closed out hedge positions that protected it from falling oil prices, raising $13 million that represented 414,000 barrels of oil at an average price of $89.59 each, according to a Dec. 31 filing.
The company’s first-lien bonds, which are secured by the company’s assets, had fallen to 42 cents on the dollar as of Feb. 26 in New York, according to Trace, the bond-price reporting system by the Financial Industry Regulatory Authority. It traded at par in September.