Quicksilver Faces Loan Cascade as Cash Shrinks: Distressed Debt

Jul 25, 2014 4:53 pm ET

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July 25 (Bloomberg) -- Pressure is mounting on Quicksilver Resources Inc. to refinance $350 million of notes and avert a cascade of maturing debt it has little chance of repaying as the unprofitable natural-gas producer’s cash dwindles.

The company, which operates in the U.S. and Canada, must refinance or retire at least $250 million of its 7.125 percent senior subordinated bonds by Jan. 15, 2016, to avoid triggering early maturities of more than $1 billion of higher-ranked debt, according to credit agreements. With analysts projecting losses this year and next, Quicksilver will burn through its cash in less than 12 months, according to data compiled by Bloomberg.

Quicksilver, which has suffered from a 46 percent decline in gas prices since selling the subordinated bonds in 2006, has few avenues to refinance securities now yielding 17.65 percent. While junk-rated companies have borrowed record amounts of money as central banks suppressed interest rates, only one U.S. company has issued debt with a yield of 15 percent or more in the past three years, data compiled by Bloomberg show.

“They need to do something sooner rather than later,” said Matthew Duch, lead money manager at Bethesda, Maryland- based Calvert Investments Inc., which oversees about $12 billion including Quicksilver bonds. “If they wait, they will be running out of options.”

Using Equity

Quicksilver is “currently evaluating our options to refinance the 7.125 percent notes,” David Erdman, a spokesman for the Fort Worth, Texas-based company, said in an e-mail.

Senior bondholders have given the company approval to refinance the subordinated note with senior debt, Anthony Canale, an analyst at Covenant Review, said by telephone. Covenants governing its $625 million second-lien term loan due June 2019 prohibit Quicksilver from selling senior obligations because the ratio of such debt to earnings is too high.

The company’s $1.99 billion of total debt is about 11.1 times its earnings before interest, taxes, depreciation and amortization of $178.3 million over the 12 months ended March 31, according to data compiled by Bloomberg.

Chief Financial Officer John Regan said on a May 6 conference call to discuss first-quarter results that Quicksilver may use equity to help lower its leverage. Since then, the shares have fallen 27 percent to $2.05 at 1:16 p.m. in New York.

Without refinancing the subordinated notes by the deadline, $803 million of second-lien bonds and loans due 2019 would instead mature in January 2016. That would in turn trigger a springing maturity on a revolving loan, which would come due on October 2015 instead of April 2016. The revolver had $207.7 million outstanding on March 31, according to a May 12 regulatory filing.

Subordinated Incentive

Holders of the subordinated debt have an incentive to offer refinancing terms the company would accept because they would be the first creditors to lose money in a bankruptcy. The bonds have fallen to 85.25 cents on the dollar from 97.75 in February, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

New subordinated bonds usually offer yields similar to those of the existing securities. Since 2011, Education Management Corp. is the only U.S. company to issue at least $100 million of bonds with yields of 15 percent or more. The for- profit provider of post-secondary courses issued a callable, step-up security last year.

The springing maturities are a measure to protect senior creditors if lower-ranking debt can’t be addressed in a timely manner. Quicksilver, which consumed $170 million of cash in the 12 months ended March, was left with $168 million, data compiled by Bloomberg show.

‘Simple One’

Quicksilver had planned to retire the subordinated debt in June 2013 with money from a $675 million unsecured bond, regulatory filings show. The subordinated bond remained outstanding after the company cut the new unsecured bond to $325 million.

The company, which was the target of a management buyout that failed in 2011, saw its stock-market value plummet to $372 million yesterday from as high as $2.75 billion in 2010.

Its business has been hurt by depressed natural gas prices. Sales peaked at $944 million in 2011, and analysts project they will fall to $463 million this year and slightly below that in 2015. Net income, which was $162 million last year, is forecast to turn to an $87 million loss this year, followed by a $59 million deficit in 2015.

From the senior creditors’ point of view, the idea is simple, said Covenant Review’s Canale. “We don’t want the company to default, but you need to refinance the sub debt with the sub debt because we don’t want anyone to trump us,” he said.