Junk-Debt Investors Fight for Scraps as U.S. Shale Rout Deepens

Asjylyn Loder

September 25, 2015 — 4:57 PM EDT

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It’s every U.S. shale investor for himself as the worst oil rout in almost 30 years drags down its latest victims.

Investors in $158.2 million of Goodrich Petroleum Corp.’s debt agreed to take 47 cents on the dollar in exchange for stock warrants for some note holders and a lien on Goodrich’s oil acreage, according to a company statement today. That puts them second in line if the Houston-based company liquidates its assets in bankruptcy and pushes the remaining holders of $116.8 million in
original bonds to the back of the pack.


"In the industry it’s called ‘getting primed,’" said Spencer Cutter, a credit analyst with Bloomberg Intelligence. "It’s every man for himself. They’re trying to get in and get exchanged, and if you can’t you’re getting left out in the cold."

Wildcatters attracted billions of dollars during the boom after years of near-zero interest rates sent investors hunting for returns in riskier corners of the market. U.S. high-yield debt has more than doubled since 2004 to $1.3 trillion while the amount issued to junk-rated energy companies has grown four-fold to $208 billion, according to Barclays Plc. Most of the companies spent money faster than they made it even when oil was $100 a barrel and are struggling to stay afloat with prices at $45.

‘Bursting’ Bubble

Goodrich didn’t name the bondholders who participated in the swap. The largest holder was Franklin Resources Inc., which owned about 24 percent of the bonds, according to data compiled by Bloomberg. Franklin has invested in the debt of other distressed drillers, including Halcon Resources Corp., SandRidge Energy Inc. and Linn Energy LLC.

This was Goodrich’s second exchange this month. Three weeks ago, the company swapped $55 million on convertible notes for bonds worth half as much. To sweeten the deal, it lowered the share price at which investors can turn their notes into stock to $2.

Investors who didn’t participate in Goodrich’s earlier exchange took another hit with today’s swap because it put holders of the new bonds ahead of them in liquidation. Prices fell four cents to 18 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.


Goodrich isn’t the only one. Earlier this month, Halcon paid about 65 cents on the dollar to investors in $1.57 billion of the company’s debt, in exchange for being third in line to get paid if the company fails. The Houston-based company is led by Floyd Wilson, who became a legend in the shale patch after selling his last company, Petrohawk Energy Corp., to BHP Billiton Ltd. for $15.1 billion four years ago.

Once again, the leftover unsecured bondholders lost value. The notes fell after the swap was announced Aug. 27, and are now trading at about 35 cents on the dollar from about 46 cents before the announcement.

"The bubble is bursting," Cutter said. "And if oil stays where it is, the worst is yet to come."

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So what's all that got to do with Templeton?

Maybe nothing. Maybe something. I think the term  "Junk-Debt" will be used more and more. . .until the "debt bubble" bursts. Just like the housing bubble burst and the .com bubble burst and all the other "bubbles" that burst. I think the "debt bubble" when/if it bursts will be the mother of all "bubbles". 

Let's revisit the woodchip boiler project that was installed at NRHS recently.  The cost ASSUMPTIONS on the payback period were based on the cost of heating oil at $3.59/gallon and a ton of wood chips $20/ton.

Those figures were touted as a certainty in order to get people to support the project. I was ridiculed for asking what the payback period would be if the price of oil dropped. I didn't know the price of oil was going to drop. I do know when you make ASSUMPTIONS, you need to figure the "what if" costs as well. In this case, if the price of oil drops and the price of wood chips increases, what is the payback period?  Anybody? Does anybody have that information?

Now for brief break :

So here we have the Town of Templeton without a bond rating, bringing a proposal for a new 50 million dollar elementary school before the voters in November.

So how will incurring more debt to the tune of 50 million dollars help Templeton restore its bond rating? How does that work specifically? Anybody? How does a town borrow money without a bond rating? Is there an accurate accounting of the $1,050,000 that the voters approved for the feasibility study? 

Enjoy your day!

Julie Farrell