Banks Add On To Quicksilver Facility
September 25, 2008
Nearly two months after Credit Suisse and Bank of America syndicated a $700 million second-lien term loan and $300 million in senior notes for Fort Worth, Texas-based natural gas and crude oil producer Quicksilver Resources, the banks have upped the total size of the $1 billion credit facility to $1.2 billion at the company’s request.
Quicksilver can increase the size of its facility to $1.45 billion if need be, so there could be even more debt issued. It couldn’t be determined what the breakdown of the new debt would be.
The banks syndicated the $700 million second lien in late July at Libor plus 450 bps, with an OID of 98.
The proceeds from the second lien were meant to help fund Quicksilver's purchase of oil-producing properties within the Barnet Shale, an area of land north of Dallas, whereas the proceeds from the bonds were meant to pay down a portion of its existing debt, which was roughly $838 million at the end of 2007.
If the past is any indicator, any new debt the banks issue will most likely garner a lot of interest from investors. After the second lien broke for trading, the price on the secondary increased to 99 from 98. While average prices on Markit’s LCDX index last week fell to the low 90s from 97.5, where they were before Lehman Brothers filed for bankruptcy and Bank of America acquired Merrill Lynch, Quicksilver’s second lien has held its ground.
At the end of the day Wednesday, the average mark-to-market bid on the second lien was 97.62, while the asking price was 98.38, according to the Loan Syndications and Trading Association/Reuters Loan Pricing Corp. Credit Suisse and Bank of America on June 25 issued $475 million in 8.25% senior notes due 2015.
The bonds priced at par but have since slipped, hitting 95.938 as of the end of the day Tuesday.
Standard & Poor’s has assigned a B+ rating to the second lien and a recovery rating that anticipates a 10% to 30% retrieval of principal in the event of a default.
The rating agency cited the small probability that Quicksilver will be able to pay off its debt given its modest cash flow. Moreover, the agency said it viewed the acquisition as aggressive both because of the high purchase price and because Quicksilver had an ambitious internal growth plan without the deal.
The ratings also reflect the company's weak business profile, aggressive financial risk profile and its participation in a competitive, capital-intensive and highly cyclical industry. S&P added that the aggressive financial profile takes into account the company’s ambitious drilling program, which will exceed cash flow given current commodity prices.
The outlook was lowered to stable from positive. The negative views are offset by the company’s extraordinary reserve replacement program (about 780% of production was replaced in 2007) and by its favorable cost structure, as competitive operating costs are very low.
The company also has a long reserve life of 20 years, which gives it a measure of operating and financial flexibility. As of Dec. 31, Quicksilver's debt to Ebitda was 5.1x, almost a 40% increase from three years ago. However, its revenues last year reached $561 million, a 33% increase from 2006’s revenues.
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