Here’s how Struggling Oil & Gas Companies are Dealing with Debt

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Numerous oil and gas companies have become hard pressed for cash during this ongoing oil-price crisis. Some of these companies have attempted to stave off debt obligations by releasing a new tier of debt. 1.5 lien, as the new debt would be called, offers investors a higher yield and rights to collateral assets in the event of bankruptcy. Such deals are not usually seen and typically only occur when a market is in a crunch.

Many investors who have already invested in the company are likely to be dismayed by this issuance of new debt. Some investors may have had their claim on collateral affected, or are receiving a lower yield, and are not happy that they are losing out to newer investors. It is also a rather clear sign that a company is desperate for cash and is trying to push off obligatory payments. This can be bad for the image of the firm, which can cause more damage to the perceived value of the company.

These investment vehicles, although offering attractive returns, are quite risky, as one must consider that they are investing in a struggling company within a larger suffering economic environment. The rewards are enticing, but it still remains to be seen if any investors are game for such risky investment vehicles. Few companies have tried this in the past, so it is hard to say if these companies will see success in restructuring their debt.

Cliffs Natural Resources was the latest company to attempt such a restructuring, and managed to pull of a 1.5 lien debt issuance in February. It reduced the company’s debt by about $300 million.

Article written by HEI contributor Timothy McNally.

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