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The answers to my questions on avoiding a distressed debt exchange and the refinancing were helpful. It's clear TLW does not need the consent of existing debtholders to get the refinancing done. They just need to get on and launch a new bond/convert, which I still expect will happen before the end of April.
I wonder if TLW is looking to about to announce a new convertible bond with the investors going long the convert and selling TLW shares as a hedge which is having an adverse impact on the SP .... ? Short term negative, but long term positive as it takes the refinancing risk off the table.
TLW hedged 39,000 bopd (about 62% of 2021 production) buying puts with an average a floor price of $48.12/b. If oil is below this price at expiry, the bank counterparty will pay TLW the difference between spot and $48.12. If the price is above, the put expires worthless. Puts cost, so to pay the premium TLW sold calls at an average price of $66.47/b. If oil is above at expiry, TLW will pay the bank counterparty the difference between spot and $66.47/b and so Tullow has capped the upside on c. 62% of its 2021 production at $66.47/b.
TLW did hedge a further 1,000bopd with a call spread: downside protection at or below $50/b capped at $72.8/b but with a further call bought back at $82.8. So unlimited upside above $82.8/b.
TLW could buy back the calls sold at $66.47/b but since the oil price has increased since it put the hedges on, the cost of will be more: from what I can see a December 21 call at $66.5 costs over $5/b. The alternatives: buy more higher (and cheaper) calls in the $80s if you think the price will rip, or just sell no more calls so TLW has full upside on the c 38% of its production still unhedged.
@stretch100: expect the corporate ratings to be upgraded from CCC+/Caa1 to B-/B3 (and maybe a notch higher) once they announce a new bond to refinance the 2022s, sometime in the next month. Terming out the 2022s is the only issue on the agencies concern list to be addressed, and with the results out today management is now able to market a new bond.
Better disclosure in the results about the way out of the covenant trap and the 2022 refi.
First, management has told the banks TLW meets the liquidity forecast test 'On 26 February 2021 the Group submitted a Liquidity Forecast Test to the lenders in respect of the February 2021 RBL redetermination. The Directors concluded that the information submitted to the lenders under the RBL Facility ... fulfilled the requirements of the Liquidity Forecast Test.' Banks still need to sign it off but impossible to imagine a majority can refuse, especially with leverage coming in at 3x, well within the 3.5x covenant.
Second, TLW finally confirmed it is considering a refinancing (rather than just a distressed debt exchange) 'The Group’s management has therefore commenced discussions with its existing and potential new creditors, the objective of which is to raise new funding and/or agree certain amendments to the terms ...' I expect TLW will announce plans to issue a new 5- or 7-year bond to refinance the 2022s (and maybe prepay a large chunk of the RBL) before the end of the month, and once done will put to bed any issues around the going concern.
@antonvb: extending the maturity is the goal, but the best way to achieve it is through a refinancing and an early repayment of the 2022s, the worst way would be through a forced restructuring.
TLW should also take a hard look at the RBL - it has only caused headache over the past year. TLW would be better off IMO eliminating it (or reducing it to say $500mm) and replacing it with a bond with no maintenance covenants.
@MatchKing: TLW also has a tranche of 3-way hedges to capture some oil price upside: for example, at June 2020 they had 12k bopd hedged with a floor of $56.42, paid for by selling a cap at $77.82, but TLW also bought back a call at $87.68, so they have gave away upside on this tranche between $77.82 and $87.68.
Will be interesting to see next week how much more of these 3-way hedges they will execute for 2021 (12k bopd is only c20% of 2021 production).
12,000 $56.42 $77.82 $87.68
@Oiluser. TLW has cash to repay the $300m convert in July, so the convert is not an issue. The concern is the $650 million bond due in April 2022. TLW has an odd, forward looking, liquidity coverage test in its bank RBL where it needs to demonstrate 18-months in advance that it will have enough $$ to repay all debt due over this period. Management provided a base case and downside case to the banks showing there is a shortfall and the banks have yet to sign off a waiver. If they don't there will be an RBL default by the end of April.
My thesis is TLW has market assess to refinance the 2022 bond and will do so via a new bond after results and before end April. Once they do, the issue goes away. Management might also announce next week that the majority of bank have now signed off the liquidity test since the forward oil curve today is far higher than the numbers provided even in base case, in which case the issue also goes away. One of these outcomes is very likely, and will rerate TLW equity, debt and credit rating.
But you have to be aware that management confirmed this week TLW ‘commenced discussions with its creditors with the objective of agreeing certain amendments to the terms, including the maturity date, of some or all of the RBL Facility, the Convertible Bonds, the 2022 Senior Notes and the 2025 Senior Notes, that would enable the Group to pass the Liquidity Forecast Test'. This is a way of saying there may be a default and is a highly unusual statement made only by companies that considering a distressed debt exchange, debt for equity swap or similar. Bear in mind bondholders do not have maintenance covenants, so they cant do anything unless there is a default under the RBL which would trigger a cross default into the bonds. The statement by management is almost as if TLW wants to given them rights! If you give them rights they will demand a chunk of the equity, fees etc. I still see this as a low probability given recent rally in oil and I struggle to see RBL banks defaulting TLW on a hypothetical forward looking covenant, but the risk is not zero given the statement from management this week.
@TheRunningMan: the RNS dealt with the redetermination, not the Liquidity Forecast Test. This remains outstanding and needs a majority of lenders to sign it off. The fact that TLW could not nail this down at the same time as the redetermination shows a majority of banks as of today are not across the line.
@OhhAhhCantona: If it is a new bond or convert with a voluntary exchange/switch from the 2021 convert or the 2022 & 25 bonds, great. But the circular is specific about amending the maturity date of the EXISTING debt. TLW will need 90% of the bond holders to change the maturity, a high bar which is why you generally only see it discussed when the alternative is bankruptcy. This is why I was surprised as TLW is nowhere that point. The Cine point is interesting as there is a reference to shareholder approval being required.
@antharry: we got the confirmation in the circular today: 'management has therefore commenced discussions with its creditors' to amend terms including the maturity date. That is highly unusual. It is a road that leads to a distressed debt amendment and a selective default rating, neither of which are share price positive. Best interpretation is this is a plan B, and plan A is TLW refinancing the 2022s after the results next week, though telling the market you countenance maturity extensions on your debt does not set a great backdrop to TLWs efforts to raise new debt.
Android101: not an audit expert but my read is if the banks waive the test, then the auditors can sign it off. As far as I have read the liquidity test is only in the RBL, not the convert or bonds. TLW Board still have to say the business is a going concern, but this should be easy with the current bus plan, oil price and an informed view on ability to refi the 2022s.
@rafflesintheuk01: The restructure is not a risk related to the transaction. It is related to how TLW solves its bigger liquidity issue, and TLW is very clearly and very deliberately flagging to the market it may need to restructure its debt. That is not something any company says lightly.
@OhhAhhCantona: Am not so sure. I asked the company last week about the S&P ratings statement and to confirm there is no risk of a distressed bond exchange - so far no denial. My base case is that they can refinance in these markets and they should hit the market right after results. But there is a reason they put they wording in the circular today. Unless you are considering it why raise it? Makes no sense to trigger event a technical default on the capital structure. I honestly wonder if they are getting best advice here and being told the downside risks they are running.
@toothache, try https://www.tullowoil.com/investors/results-reports-and-presentations/
Some uncomfortable disclosure in the TLW shareholder circular posted today (https://www.tullowoil.com/application/files/9616/1467/8250/21-7653-1_Walnut_Circular_OKTP_v1.pdf). TLW Board is still of the opinion that it does not have sufficient working capital for its present requirements based on the current 18-month look forward RBL Liquidity Forecast Test. The shortfall is US$365 million under the reasonable worst-case scenario (average oil price of US$45/bbl in 2021 and US$47.5/bbl in 2022 financial year), and there is still a shortfall (unquantified) under the TLW base case (US$50/bbl in 2021 and US$55/bbl in 2022). This happens because it assumes TLW cannot refinance the April 2022 bond.
What is new and worrying is that TLW is not just asking the RBL banks to grant a waiver of the Liquidity Forecast test (a reasonable request given the outlook for oil prices and a strong case it can refinance the 2022 bonds). It now seems management are actually entertaining a distressed debt amendment to the entire capital structure.
The circular says management have ‘commenced discussions with its creditors with the objective of agreeing certain amendments to the terms, including the maturity date, of some or all of the RBL Facility, the Convertible Bonds, the 2022 Senior Notes and the 2025 Senior Notes, that would enable the Group to pass the Liquidity Forecast Test, which is currently in progress, with, if necessary, such amendments being approved by Shareholders.’ (Circular pages 76 and 77).
To even think about restructuring the convert and bonds rather than pushing to refinance as quickly as possible is nuts, It will do long-term market damage to TLW’s future market access.
It must be banks are refusing to agree to waive the liquidity test unless some pain is inflicted on the convert and bonds. But to do this simply to meet a paper exercise in forecasting future oil prices is shortsighted.
I question what advice PJT is giving TLW, and why are they not pushing harder to solve this by calling the 2022s early with a bond refinancing done right after the results next week.
The reason S&P has TLW on 'CCC+' credit watch negative is fear of a distressed bond exchange. If you want to permanently trash your debt market access this is the road to follow.
My concern: having come all this way over the past year TLW will mess it up with talk of debt restructure. If its bad for debtholders invariably its worse for equity.