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Antonvb: I saw the link, but it predates the Jan trading update, recent asset sales, higher oil, and CEOs statement a few weeks back that TLW can repay the debt. Why would he have said this if he was looking down the barrel of a pending default or a destressed debt exchange. The bond covenants are incurrence not maintenance based, so provided TLW pays bond interest and principal on time and does not default the (maintenance based) RBL covenants (or those in any other material financing agreement), bondholders can organize all they want but cant do much. TLW does not even need bondholder consent to call the 2022s early, as the right to call them (at par plus accrued interest) has been in place since 15 April 2020 . My thesis is that they use cash to repay the convert, takeout the 2022s with a new bond and put in place a new (maybe smaller) RBL. If you have a market access to refi as I think they have, why you would default or look at a distressed debt exchange or a pre-pack bankruptcy as your link suggests?
Convert trades by appointment only. Last recorded trade I saw was 8 Feb at a price of 91.
Michaeliz1, glad to hear local authorities are not the target market for a TLW bond. But you are flat wrong about other investors. A few data points:
+ Bluebay, Ashmore, Blackrock, PIMCO, GMO, Fidelity, CapRe, to name a few, have dedicated funds that buy credits like TLW. Many already know TLW (through good and bad times).
+ The market tells you there is interest: over the past 5 months TLW 25s have traded from 40s to 80 this week: remove the uncertainty over the RBL and refi the 2022s, and it tracks back to par.
+ In March 2018 when issued the 2025 bond was rated B3/B- and it was oversubscribed.
+ TLW can get the bond rating back to B3/B- by (i) terming out the RBL, (ii) downsizing the RBL and give security to the new bondholders (a good thing IMO as TLW painfully discovered in a downcycle that RBL redeterminations cut a company's access to finance just when it needs it most) and (ii) refinancing the 22s.
Michaeliz1: Thanks. I did look at the lower production (74,900 v 84,800) and lower realised price per barrel ($50.8 v $62.4). Still think EBITDAX can get to c $900m.
Ratings are rear view mirror. Dynamic changes with the refi. TLW can get back to B3/B- on a refi announcement. Moody's has said 'Tullow's ratings could be upgraded should a sustained recovery in the economic environment boost operating profitability and FCF generation, allowing the group to strengthen its liquidity profile and permanently reduce Moody's-adjusted gross leverage below 5x. A rating upgrade will also require addressing of the 2022 bond maturity.' All these get addressed with an early refi of the 22s next month.
Increasingly, I think TWL will report full compliance with the RBL, no waivers. If so, it is a game changer. Here is the logic.
RBL Gearing Covenant: TLW must report net debt < 3.5x consolidated EBITDAX for the 12-months ended 31 Dec 2020. We know FY20 net debt was $2.4 bn (source: 27 Jan update), so to comply, EBITDAX must be $686m or more. We also know 2020 full year revenue will be c.$1.4 bn, or 83% of 2019 revenue. Haircut 2019 EBITDAX ($1.4bn) by 83% and it is still c. $1.1 bn well inside the covenant. Not a straight read across I know, there will be adjustments. But 2019 EBITDAX can fall by around 50% and meet the covenant. At H1 20, LTM EBITDAX was $1,012m, c.62% of the H1 19 number, still within the covenant. So TLW may surprise and comply with the 3.5x max gearing.
The Liquidity Forecast: TLW must ‘demonstrate to the reasonable satisfaction of the relevant majority of its lenders under the RBL Facility that it has, or will have, sufficient funds available to meet the Group’s financial commitments for a period of 18 months.’ (source: Shareholder Circular June 20). ‘Relevant majority’ is not defined but probably lenders holding 2/3rd of commitments, plus the International Finance Corp (IFC).
18 commercial banks were in the RBL, some may have sold out. IFC is in a parallel tranche. I cannot find the hold amounts, but reasonable to assume each has $100m, so TLW needs c. 12 to say yes.
IFC (part of the World Bank) will say yes - not in the business of defaulting companies that are key for countries like Ghana. IFC will not participate in the next renewal of the RBL (post 2019 World Bank will not lend to upstream oil and gas projects).
So, the commercial banks. With higher oil (spot and forward) offsetting lower 2021 production, (presumably) more collars/hedging in place at or above $50/bbl, cash on hand from assets sales (including $300mm to repay the July convert), odds extremely high TLW gets 12 votes. Unreasonable for a lender to say no. Plus, bond markets are open to TLW to refinance the $650m 2022s. There are at least 5 capital market banks in the RBL group that must be pitching this refinance: TLW just needs 1 to write a highly confident letter to TLW saying it can be done.
No RBL covenant breach will be a game changer as it means the 2021 covert holders and 2022 bondholders cannot do anything. Management is in the driving seat.
I hope management drives to tap the bond market right after results to refinance the 2022s and prepay some of the RBL. TLW has 120 days from 31 December before their financials go stale, so end April, but I bet they are lined up to go in March. Conversations with bondholders probably focused on asking as many to tender their 22s for cash or roll into a new bond. Conversations with the RBL lenders probably centered on terming out the existing RBL in return for downsizing it.
Golfer59: the rise in bonds is important for 2 reasons. As TLW bonds rally back to par it: (i) implies a lower probability of default, and so (ii) reopens market access to TLW to refinance the 2022 bond into a new bond maturing, say in 2026. Increasingly, the bond market believes this outcome: e.g. TLW 25s have risen from mid 60s to mid-70s over the past month, encouraging. But the implied yield to maturity is c 15%, a distressed yield implying a high probability of default. The default risk is reinforced by the risky CCC+ rating. But the rating is ow backward looking (predates higher oil and asset sales), so needs to be reset.
Regardless, in a refinancing TLW would want to pay something close to the current coupon of 7%. So how to get there? I think TLW has arrived: the recent asset sales and oil price have opened access to the bond market to refinance the 2022s as long as two conditions are met: (i) first, YE results need to be published (legally TLW can’t issue if financials more > 120 days), which is why their hands are tired until early March, and (ii) the RBL banks either agree to refinance the RBL and term it out in tandem with the new bond, or reset the covenants so they are not tripped every 6 months.
Though not certain, both are now likely.
Akker: Wrong again. Cite your source, if you have one which I doubt.
If you are Aker Energy circling TLW to grow your footprint offshore Ghana, make your takeover offer now, after the refinancing it will cost you a lot more.
Akker: 2021 is not the issue, only on that we agree.
TLW can deal with the 2022s and the RBL next month, and take the debt overhang off the table.
Here is one example: last week NGL Energy Partners LP raised $2.05 billion in 5-year 7.5% senior secured notes. NGL is a mess: balance sheet at c. 6x leverage etc. Used the cash to takeout its entire $1.7 billion RBL and a $250.0 million term loan. Was rated 'CCC+' before the deal, S&P raised the rating to 'B'. TLW is a far stronger position: it has bond market access, and has a window between results and mid May to issue.
No insight into what drives the shorts, but a comprehensive refi solves the debt for the next 5 years, removes the risk of D4E, so clears the way for management to get institutions to focus on the growth investment case, something they have not been able to do for the past few years. If oil behaves and the execute the plan the SP will re-rate.
On the call yesterday the CEO said something which did not make sense: ‘We will be able to repay the debt … The discussions from our perspective really are about matching debt maturities to the timing of cashflow. That’s the problem we’re trying to solve’.
Well, if you can pay your debt when it falls due no need to speak to your banks and bondholders. What is going on?
It makes a lot of sense if you look at it from the perspective that TLW plans a ‘big bang’ that will refinance ALL debt maturing in the next 4-years, so the first debt repayment is only in March 2025. Likely it will take the following form:
1. TLW repays the $300 mm convertible in July with cash (or a new convertible).
2. Tullow puts in place a new RBL for 5 years, with a covenant package that works for the business plan and does not require waivers every 6 months, with no amortization for 2 years. TLW need to reset the covenants anyway to re-access the bond market. The trade-off will be a higher RBL margin and downsizing the $1.8 billion RBL capacity using cash from recent asset sales. I expect the scale of reduction is the big negotiation point, with banks pushing for something closer to $1 billion. Banks may also want more collars executed to hedge 2021 and 2022 oil production = or >$50/bbl.
3. Full year results are out on March 10th, TLW hits the bond market soon thereafter (has until end April) with fresh financials and raises at least $650 mm in a new 5-year bond. This takes care of the $650mm April 2022 bond maturity (TLW can offer the holders a switch into the new bond). TLW will also look to upsize the issue, say to $1bn and use the excess to reduce the RBL down to c $1 bn. Banks happy.
4. No debt maturities before March 2025. S&P and Moody’s will see this as positive and upgrade to B-/B3 which will allow Tullow keep pricing discipline on the new bond.
5. No needs for a rights issue; management can get back to delivering the capital markets day business plan.
For what its worth, I did send the analysis to their IR team, with a case study on a US oil and gas company with a similar rating and debt wall and more messed-up balance sheet that successfully completed a refinancing just 2 weeks ago. Have to believe banks are all over TLW pitching this.
A D4E very likely triggers an event of default across the capital structure, and management no longer in control. I don't think it is necessary: the bond markets are open even for CCC rated issuers like Tullow.
Much of the TLW commentary focuses on default risk: TLW’s bank covenants require it to show it can pay the wall of debt due over the next 18-months ($300m convert in July, $650 bond April 2022 and $211m RBL commitment reductions each 6 months from April). TLW also must meet a leverage test (net debt/EBITDAX <3.5 times) calculated in June and December each year. Management has said there are ‘material uncertainties that may cast significant doubt the Group will be able to continue as a Going Concern’.
The commentary argues this wall of debt will swamp the balance sheet and so a rights issue, forced debt exchange, or a restructure scheme are inevitable. All this assumes debt markets are closed to TLW: after all, the 2022 bond trades at 82 a yield of 25%. I think this assumption is wrong. Here is why.
The leverage test is a relatively easy fix: the RBL banks increased the headroom to 4.5x before and I expect will do so again. TLW has cash to pay the $300 mm convert in July. This leaves the $650 m April 22 bond. Tullow will have accumulated c $300 million at current oil prices to repay around half by next April. I think bond markets today will be receptive to TLW issuing a new 5-year secured, second lien bond (the RBL has the first lien) to fund the repayment of the rest. TLW can offer holders of the $650 m bonds the option to tender these bonds for cash now or exchange into the new issue at par.
I think an announcement of a new senior secured bond would immediately rerate the existing bonds and the 2022s would jump closer to par, so TLW would not pay anything like 25% on the new bond. Against a backdrop of a recovering oil market, TLWs reboot plan for the business and TLW offering to pay a higher, but not crazy coupon (say 8%), this new bond will be attractive.
If there is enough demand for new issue, TLW could raise more cash and prepay more of the RBL, making it easier for the banks to increase the covenant headroom to 4.5x or agree to limit the covenant to a senior leverage test only.
Done properly, this should trigger a rerating of Tullow from Caa1 to B3 because the business would have no meaningful debt maturities before Nov 2024 and plenty of time to build up cash.