Item 1.01. Entry into a Material Definitive Agreement.
Underwriting Agreement
On March 16, 2021, Centennial Resource Production, LLC (“CRP”), a wholly owned subsidiary of Centennial Resource Development, Inc. (the “Company”), the Company, as a guarantor, and the Subsidiary Guarantors (as defined below and, together with the Company, the “Guarantors”) entered into an underwriting agreement (the “Underwriting Agreement”) with Citigroup Global Markets Inc., J.P. Morgan Securities LLC and Jefferies LLC, as representatives of the several underwriters named therein (the “Underwriters”), agreeing, subject to customary conditions, to issue and sell (the “Offering”) $150,000,000 principal amount of CRP’s 3.25% Exchangeable Senior Notes due 2028 (the “Notes”) to the Underwriters. In addition, pursuant to the Underwriting Agreement, CRP granted the Underwriters an option, which is exercisable within 30 days after March 16, 2021, to purchase up to an additional $22,500,000 principal amount of Notes solely to cover over-allotments. The Offering was completed on March 19, 2021.
The Underwriting Agreement contains customary representations, warranties and agreements by CRP and the Guarantors and customary conditions to closing, obligations of the parties and termination provisions. Additionally, CRP and the Guarantors have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”), or to contribute to payments the Underwriters may be required to make because of any of those liabilities. Furthermore, CRP and the Guarantors have agreed, subject to certain exceptions, not to offer or sell any shares of Company common stock or securities convertible into or exchangeable for Company common stock for a period of 60 days after the date of the Underwriting Agreement without the prior written consent of Citigroup Global Markets Inc.
Certain of the Underwriters and their respective affiliates have from time to time performed, and may in the future perform, various financial advisory, commercial banking and investment banking services for the Company, CRP and their affiliates in the ordinary course of business for which they have received and would receive customary compensation. In particular, affiliates of certain of the Underwriters are lenders under CRP’s revolving credit facility, and, as a result, will receive a portion of the net proceeds from the Offering in such capacities. In addition, in the ordinary course of their various business activities, the Underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investments and securities activities may involve securities and/or instruments of the Company, CRP and their affiliates.
The above description of the Underwriting Agreement is a summary and is not complete. A copy of the Underwriting Agreement is filed as Exhibit 1.1 to this Current Report on Form 8-K, and the above summary is qualified by reference to the terms of the Underwriting Agreement set forth therein.
Indenture and Notes
The Notes were issued pursuant to, and are governed by, an indenture (the “Base Indenture”), dated as of March 19, 2021, between CRP and UMB Bank, N.A., as trustee (the “Trustee”), as supplemented by a first supplemental indenture (the “Supplemental Indenture,” and the Base Indenture, as supplemented by the Supplemental Indenture, the “Indenture”), dated as of March 19, 2021, among CRP, the Guarantors and the Trustee.
The Notes will be CRP’s senior, unsecured obligations and will be (i) equal in right of payment with CRP’s senior, unsecured indebtedness; (ii) senior in right of payment to CRP’s indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to CRP’s secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent CRP is not a holder thereof) preferred equity, if any, of CRP’s subsidiaries. The Notes will be fully and unconditionally guaranteed, on a senior, unsecured basis, by the Company and its subsidiaries that currently guarantee CRP’s outstanding senior notes (the “Subsidiary Guarantors”).
The Notes will accrue interest at a rate of 3.25% per annum, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2021. The Notes will mature on April 1, 2028, unless earlier repurchased, redeemed or exchanged. Before January 3, 2028, noteholders will have the right to exchange their Notes only upon the occurrence of certain events. From and after January 3, 2028, noteholders may exchange their Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. CRP will settle exchanges by paying or delivering, as applicable, cash, shares of the Company’s Class A common stock, par value $0.0001 per share (“Company common stock”), or a combination of cash and shares of Company common stock, at CRP’s election. The initial exchange rate is 159.2610 shares of Company common stock per $1,000 principal amount of Notes, which represents an initial exchange price of approximately $6.28 per share of Company common stock. The exchange rate and exchange price will be subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the exchange rate will, in certain circumstances, be increased for a specified period of time.
