Comstock recap blitz lines up as a tough sell in light of flagging equity value, choppy HY market

Comstock’s multi-pronged recapitalization deal aims to throw the natural gas producer a lifeline by pushing out near-term maturities, cutting its debtload and providing much-needed new capital for exploration. But after a recent asset sale yielded minimal cash to support debt reduction, convincing second lien holders to take a tender offer that’s mostly stock could be a tough sell – as could garnering support for a new bond issuance, noted two bondholders and three additional buysiders.

The market has already taken a skeptical view of the borrower’s ongoing liability management offensive. Common shares and second lien convertible notes have declined in value since the company’s 2 April announcement that it plans to offer holders of USD 483m across two tranches of second lien convertible notes due 2019 and 2020 the chance to swap into a mix of common shares and cash. The capital will be provided in part with proceeds from well divestitures, an equity infusion from Jerry Jones, the Dallas Cowboys owner, and an unsecured bond set to launch later this month.

Comstock equity traded today at USD 5.60, down 23% from USD 7.31 before the press release. Its USD 295m second lien converts due 2019 traded at 85 yesterday, down from 92.5 before the announcement, while the USD 187m second liens due 2020 last traded on Monday at 93.

The second lien tender offer provides holders of the USD 483m in notes a combination of USD 152m in cash (31.4%) and 45.3m shares, for an implied consideration of roughly 102 cents on the dollar at the previously authorized effective conversion price of USD 7.50 per share. That’s the price at which Jones has agreed to inject USD 75m in new equity.

Adding to the criss-crossing mix of capital structure play-calling is an above-par tender for first lien bonds. But even the targeted USD 697m 10% first lien notes due 2020, which Comstock offered to tender at 105.25 in cash, have traded down below the takeout price since the deal announcement. The bonds changed hands today at 102.375, compared to 105.125 in their opening trade on Monday, according to MarketAxess.

The asset sale component stems from the company’s long-fought effort to find a buyer for its Eagle Ford assets. The plan since last fall was to use proceeds to support a refinancing. But management ultimately inked a deal to sell only the producing wells, for USD 125m, rather than the whole package.

“The value for what they sold wasn’t terrible, but they just couldn’t get someone to pay for the proved undeveloped reserves,” a bondholder said. Instead, the buyer of the proved assets, USG Energy Producer Holdings, agreed to enter a joint venture with Comstock targeting the undeveloped assets.

“Some of the assets are in basins where there’s other acreage up for sale, and that type of supply really depresses prices,” added another bondholder.

A heftier cash component to the second lien tender would make the offer more attractive to some holders, several of the sources said. But with limited pro forma liquidity – USD 61m in cash and USD 164m in revolver availability – the issuer has few levers to pull, they said.

“I was a little disappointed that there wasn’t a higher cash component [to the exchange], either from the sale of the acreage or the equity injection, hence the volatile price action in the bonds,” said the second bondholder.

Meanwhile the stock price is also critical to the deal’s completion, since any equity dilution over 19.9% requires stockholder approval, per NYSE regulations, sources pointed out. The stock has hovered around either side of USD 6.00 per share over the last few days, implying a value delta of around USD 70m or 14 cents on the dollar compared to the USD 7.50 conversion price. If, as a result, second liens push for additional equity consideration, a revamped deal could run the risk of triggering a shareholder vote, sources said.

The second lien PIK bonds were issued in September 2016 as part of a debt exchange in one of Comstock’s several piecemeal restructuring transactions over the last several years. The company has not enacted a full balance sheet restructuring or Chapter 11 process during that time like many of its peers have.

Jigsaw puzzle

Orchestrating the exchange could all be for naught if Comstock can’t fill the books on a new USD 600m unsecured note offering, sources cautioned. The high yield market has proven somewhat choppy in recent weeks for credits backed by a risky story.

Case in point, McDermott recently endured a bumpy syndication and ultimately priced its six-year USD 1.3bn unsecured note to yield 11.865% – or more than 300bps wider than initial whispers. McDermott is buying Chicago Bridge & Iron, with the combined company providing industrial and construction services, including significant business in the oil & gas end markets.

Comstock’s pro forma capital structure will consist of the new notes, a USD 26m unsecured stub note and a USD 300m revolver (USD 136m drawn at close). Pro forma leverage is around 3.5x, based on the company’s projected 2018 EBITDAX of USD 217m.

The recap will allow Comstock to cut two turns of leverage from its balance sheet, thanks to the second lien exchange, and to bring free cash flow to roughly neutral territory – given USD 152m in 2018 capex and USD 65m in debt service – compared to its slight cash burn currently, sources noted. While that’s an improvement, enticing new investors to buy into the bonds may require hefty pricing, sources acknowledged.

For relative value, investors point to Covey Park and Vine Oil & Gas, both of which have assets in the Haynesville region and provide pricing bookends for Comstock.

Vine’s CCC+/Caa2 USD 530m 8.75% unsecured notes due 2023 last traded on 23 March at 94.25 yielding 10.2%, according to MarketAxess.

Vine has a riskier credit profile than Comstock, but has high growth potential, so Comstock’s bonds could price inside of Vine’s current yield, one of the sources said. Vine’s leverage is around 4.3x, or about a turn higher than Comstock’s pro forma metric, and it has more secured debt sitting above the bonds, one of the sources noted.

On the higher-quality end of the spectrum, Comstock’s bonds should offer a premium over Haynesville operators like Covey Park and Range Resources, buysiders noted. Covey Park’s B/B3 USD 625m 7.5% unsecured notes due 2025 changed hands today at 99.5 yielding 7.6%, according to MarketAxess. Range’s shorter-dated BB+/Ba3 741m 5% senior unsecured notes due 2023 trade at 96 for a 5.93% yield.

“It’s going to cost [Comstock],” said one buysider. “It’s not as bad as McDermott, but still a significant coupon.”

As with many commodity-linked deals, timing can play a make-or-break role. Comstock may have missed its most logical window to push through a deal, as oil and natural gas prices have both come off highs reached earlier this year. Henry Hub natural gas futures are currently trading at USD 2.70/BTU for one-month delivery, compared to USD 3.20 in January.

The bond is expected to launch in the next few weeks, sources said. Proceeds, as well as revolver borrowings and proceeds from the equity issuance and asset sales, will fund the tender for the first lien notes and cash component of the second lien note tender. The company aims to close all aspects of the refinancing by May 2018.

Comstock didn’t respond to a request for comment.

2018 Debtwire

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