Fitch: Swift’s Bankruptcy Filing Emblematic of Oil Patch Woes

Swift Energy Co.'s Dec. 31 chapter 11 filing adds to the growing wave of energy defaults and is representative of continued oil patch challenges, according to Fitch Ratings.

Swift's bankruptcy filing, affecting approximately $1.18 billion of debt, coincided with the expiration of a 30-day grace period for a missed interest payment at the start of the month. Liquidity problems were driven by persistently weak oil and gas prices that led to plummeting cash flows, borrowing base reductions and an inability to raise new capital or sell assets.

The December trailing 12-month energy sector high yield bond default rate stood at 7.2% with the addition of Swift's filing. Fitch has an 11% energy sector default rate forecast for 2016. The beleaguered energy sector is the largest in the US high yield index comprising about 17% of outstanding debt.

Swift had been in ongoing talks with senior noteholders regarding a restructuring of its balance sheet and reached a restructuring support agreement with bondholders on Dec. 31 that is based on a bankruptcy filing and reorganization as a going concern. The proposed reorganization plan, subject to claim holder and court approval, calls for all senior notes to convert to 96% of the new common equity and existing equity holders to retain 4% ownership of the new stock under the plan. The company intends to continue normal operations throughout the bankruptcy and to make all royalty and employee payments.

At year-end 2015, Swift's three unsecured bond debt issues that collectively totaled $875 million had an average bid of $0.07, which portends poor recoveries absent significant improvement in forward commodity prices before the reorganization date that would drive up the new equity value. The preliminary disclosure statement does not include the estimated recovery rate for the noteholder claims or a fundamental reorganization equity valuation.

The draft disclosure statement provides full recoveries to holders of the $330 million of loans outstanding under the well-secured asset-based loan (ABL) facility. As reserve values and market prices declined, the ABL lender group reduced the borrowing base twice in 2015 to $330 million from $375 million in the Fall reset. Covenants were also revised to provide some interest coverage and secured leverage ratio flexibility. In the prior semi-annual lender review, the facility's borrowing base was reduced to $375 million from $418 million. The disclosure statement also provides 100% for an estimated $50 million of trade claims.

Swift's EBITDA declined 73% to approximately $79 million for the first nine months of 2015 from $290 million during the same period in 2014. Significant interest burdens and capital spending compounded the low commodity price environment. An approaching $250 million unsecured debt maturity in June 2017 was another problem given the distressed trading price of the unsecured bonds of $0.07 and a lack of market access.

Throughout 2015, Swift attempted to close several strategic transactions to improve their capital structure and liquidity position. However, traditional credit transactions, drillco transactions with private equity (cash to drill in exchange for a share of production) and asset divestiture transactions were either unavailable or available on highly unfavorable terms because of the decline in oil and natural gas prices. Swift attempted to launch a $640 million first lien term loan B in June 2015 to pay down ABL borrowings and for other cash needs but was pulled due to unfavorable market conditions. In August, NYSE notified the company that it no longer met minimum standards for listing as the stock price fell below $1 for 30 consecutive days and would be delisted in six months if the noncompliance was not remedied.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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