| Long Term Debt, Net And Notes Payable To Founder | 7. LONG-TERM DEBT, NET AND NOTES PAYABLE TO FOUNDER
Long-term debt, net and notes payable to founder consists of the following (unaudited) :
June 30,
December 31,
2016
2015
(in thousands)
Credit Facility
$ 293,935
$ 152,000
Senior Secured Term Loan
125,000
125,000
Senior Notes, net of discount
448,853
448,598
Unamortized deferred financing costs
(6,290)
(7,823)
Total long-term debt, net
$ 861,498
$ 717,775
Notes payable to founder
$ 26,348
$ 25,748
Credit Facility. On February 3, 2016, we entered into an Agreement and Amendment No. 13 (the “Thirteenth Amendment”) to the senior secured revolving credit facility (“credit facility”) with Wells Fargo Bank, National Association, as administrative agent, and the lenders signatory thereto. The Thirteenth Amendment, among other things: (a) permits us to enter into exchanges of outstanding senior notes for a third lien term loan, (b) permits us to draw the remaining borrowing base availability under the credit facility into a controlled account with such funds not being treated as debt for the purposes of leverage ratio compliance so long as they remain in the controlled account, (c) permits us to dispose of oil and natural gas properties pursuant to the joint development agreement with BCE-STACK Development LLC (“BCE”), (d) requires that twice a month we transfer available cash in excess of $25 million to the controlled account, and (e) increases the maximum leverage ratio for the fiscal quarters ending June 30, 2016 and September 30, 2016 from 4.00 to 1.00 to 4.50 to 1.00. On June 16, 2016, we entered into an Agreement and Amendment No. 14 (the “Fourteenth Amendment”) to the credit facility which, among other things: (a) reaffirmed borrowing base at $300 million until the next scheduled redetermination, and (b) increased the applicable margins to be applied based on the utilization of the borrowing base. On March 16, 2016, we borrowed $141.9 million under the credit facility, which represented the remaining undrawn amount that was available under the credit facility. As required by the terms of the credit facility, the borrowings were deposited into an account controlled by the administrative agent and is recorded on our consolidated balance sheet under “Short-term restricted cash.” As of June 30, 2016, we have approximately $121.9 million remaining in the controlled account. Such funds will not be treated as debt for the purposes of leverage ratio compliance so long as they remain in the controlled account. These funds are available to be used for general corporate purposes.
The credit facility is secured by substantially all of our oil and natural gas properties and is based on our proved reserves and the value attributed to those reserves. The borrowing base is currently $300 million and the principal amount is payable on the maturity date of October 13, 2017 . The credit facility borrowing base is redetermined semi-annually in May and November. The credit facility bears interest at LIBOR plus applicable margins between 2.50% and 3.50% or a “Reference Rate,” which is based on the prime rate of Wells Fargo Bank, N. A., plus a margin ranging from 1.50% to 2.50% , depending on the utilization of our borrowing base. The weighted average rate on outstanding borrowings was 4.06% as of June 30, 2016 and 2.87% as of December 31, 2015. The letters of credit outstanding as of June 30, 2016 were approximately $6.1 million .
The credit facility contains customary covenants including, among others, defined financial covenants, including minimum working capital levels (the ratio of current assets plus the unused borrowing base, to current liabilities, excluding assets and liabilities related to derivative contracts) of 1.0 to 1.0, minimum coverage of interest expense of 3.0 to 1.0, and maximum leverage of 4.5 to 1.0, which will decrease to 4.0 to 1.0 for the quarter ended December 31, 2016. The interest coverage and leverage ratios refer to the ratio of earnings before interest, taxes, depreciation, depletion, amortization, and exploration expense (“EBITDAX”, as defined more specifically in the credit agreement) to interest expense and to total debt (as defined), respectively. Financial ratios are calculated quarterly using EBITDAX for the most recent twelve months.
As of June 30, 2016 , we were in compliance with all financial covenants of the cred it facility. The borrowing base is subject to scheduled semi-annual and other elective collateral borrowing base redeterminations based on the value of our oil and natural gas reserves as determined by the lenders under our credit facility, and other factors deemed relevant by our lenders. Recent declines in prices for oil and natural gas may cause our banks to reduce the borrowing base under our credit facility when it is next redetermined.
Senior Secured Term Loan. On June 2, 2015, we entered into a second lien senior secured term loan agreement (the “Term Loan Facility”) with Morgan Stanley Energy Capital Inc ., as administrative agent, and the lenders party thereto, pursuant to which we borrowed $125 million. The net proceeds of approximately $121 million from the Term Loan Facility, after payment of transaction-related fees and exp enses, were used to pay down outstanding amounts under our existing credit facility. The Term Loan Facility matures on April 15, 2018 . The principal amount is payable at maturity . On February 3, 2016, we entered into the first amendment to the Term Loan Facility (the “First Amendment”). The First Amendment: (a) permits us to enter into exchanges of outstanding senior notes for a third lien term loan, (b) allows us to dispose of oil and natural gas properties pursuant to the joint development agreement with BCE, (c) requires that twice a month we transfer available cash in excess of $25 million to a controlled account, with such funds in the controlled account to not be treated as debt for the purposes of leverage ratio compliance so long as they remain in the controlled account, and (d) increases the maximum leverage ratio for the fiscal quarters ending June 30, 2016 and September 30, 2016 from 4.5 to 1.0 to 5.0 to 1.0.
Borrowings under the Term Loan Facility bear interest at adjusted LIBOR plus 8.00% . The covenants in the Term Loan Facility require, among other things, maintenance of certain ratios, measured on a quarterly basis, as follows: (i) current assets to current liabilities of at least 1.0 to 1.0, (ii) debt to EBITDAX of no more than 5.0 to 1.0 (decreasing to 4.5 to 1.0 for the quarter ended December 31, 2016), (iii) PV-9 of total proved reserves to total secured debt of at least 1.5 to 1.0, and (iv) EBITDAX to interest expense of at least 2.5 to 1.0. Obligations under the Term Loan Facility are guaranteed by certain of the Company’s subsidiaries and affiliates and are secured by second priority liens on substantially all of our subsidiaries assets that serve as collateral under the credit facility. As of June 30, 2016 , we were in compliance with all financial covenants of the Term Loan Facility.
We have the option to prepay all or a portion of the Term Loan Facility at any time. The Term Loan Facility is subject to mandatory prepayments of 75% of the net cash proceeds from asset sales, subject to a limited right to reinvest proceeds in capital expenditures, or an initial public offering. Such prepayments are subject to a premium of between 3% declining to 1% prior to the maturity date. No such prepayment has occurred as of June 30, 2016.
Senior Notes. We have $450 million in outstanding registered senior notes due October 15, 2018 that carry a stated interest rate of 9.625% and an effective rate of 9.7825% at June 30, 2016 . Interest is payable semi-annually each April 15th and October 15th . The senior notes are unsecured and are general obligations, and effectively rank junior to any of our existing or future secured indebtedness, which includes the credit facility and the Term Loan Facility. The senior notes are unconditionally guaranteed on a senior unsecured basis by each of our material subsidiaries. The balance is presented net of unamortized discount of $1.1 million and $1.4 million at June 30, 2016 and December 31, 2015, respectively.
The senior notes contain an optional redemption provision that began on October 15, 201 5 allowing us to retire the principal outstanding, in whole or in part, at 102.406% . Additional optional redemption provisions allow for retirement at 100.0% beginning on October 15, 2016.
Under the terms of the indenture for the senior notes, if we experience certain specific change of control events, unless we have previously or concurrently exercised our right to redeem all of the senior notes under the optional redemption provision, such holder has the right to require us to purchase such holder’s senior notes at 101% of the principal amount plus accrued and unpaid interest to the date of purchase.
Notes Payable to Founder. We have notes payable to our founder (“Founder Notes”) that bear simple interest at 10% with a balance of $26.3 million and $25.7 million at June 30, 2016 and December 31, 2015, respectively. The maturity date was extended on March 25, 2014 from December 31, 2018 to December 31, 2021 . Interest and principal are payable at maturity. Our founder may convert t he notes into shares of common stock of our Class B partner, High Mesa, Inc. (“High Mesa”), upon certain conditions in the event of an initial public offering.
These Founder Notes are unsecured and subordinate to all debt. In connection with the March 25, 2014 recapitalization of our Class B partner described in Note 11, the Founder Notes were amended and restated to subordinate them to the paid in kind (“PIK”) notes of our Class B partner. The Founder Notes were also subordinated to the rights of the holders of Class B units to receive distributions under our amended partnership agreement and subordinated to the rights of the holders of Series B preferred stock to receive payments.
Interest on the Founder Notes amounted to $0.6 million for each of the six months ended June 30, 2016 and 2015 and $0.3 million for each of the three months ended June 30, 2016 and 2015 . Such amounts have been added to the balance of the Founder Notes.
Deferred financing costs. As of June 30, 2016 , the Company had $7.9 million of deferred financing costs related to the credit facility, Term Loan Facility and senior notes, which are being amortized over the respective terms of the related debt instrument. Deferred financing costs of $6.3 million related to the Term Loan Facility and senior notes are netted with long-term debt on the consolidated balance sheet as of June 30, 2016 in accordance with ASU No. 2015-03, which we adopted in the fourth quarter of 2015. Deferred financing costs of $1.6 million and $1.2 million related to the credit facility are included in deferred financing costs, net on the consolidated balance sheets at June 30, 2016 and December 31, 2015, respectively . Amortization of deferred financing costs recorded for the six months ended June 30, 2016 and 2015 was $2.0 million and $1.5 million, respectively. Amortization of deferred financing costs recorded for the three months ended June 30, 2016 and 2015 was $1.0 million and $0.8 million, respectively. These costs are included in interest expense on the consolidated statements of operations. |
