Oil Concern Tries to Restructure

Investors in high yield issuer Michael Petroleum may end up with the majority of the equity if they accept a deal from management. The Houston-based company is negotiating with its bondholders a possible swap deal that would essentially give the investors 93% of the company, sources said last week.

The company has a $135 million, 11.5% junk issue outstanding that has experienced trouble along with much of the oil industry in recent months. The issue is trading in the 60s, investors said, which actually is not as low as some other oil names.

But the issuer reportedly has no more room left in a bank line of credit since the borrowing base was reduced in March, and is now paying the "default rate of interest," investors said. Furthermore, the company is unlikely to make its $7.7 million debt payment due on Oct. 1 and the company is looking for alternatives for short-term capital, sources said.

Last week, company officials met with bondholders that represented more than 50% of the outstanding debt to propose the swap deal whereby noteholders would end up with the lion's share of the company. Management would only hold 7% of the company after the deal if it is accepted, analysts said.

The proposal, even though it would alleviate the short-term pressure, is not being well received by everybody. Standard & Poor's said it considered the exchange offer to be "tantamount to a default" and consequently the rating agency said it plans to lower the corporate rating to single-D. It also lowered its corporate credit and senior unsecured debt rating to CC from CCC minus.