Linn Energy: Buying Time

| About: Linn Energy, (LINEQ)

Summary

Linn Energy barely avoids a default by making $60M in interest payments on its senior notes before the 30-day grace period ended on April 15.

Though, the company is instead delaying $58M on some other senior notes with another 30-day grace period ending May 15.

The company also a secures a short-term delay of default on its credit facility until May 11.

By doing this, Linn Energy buys itself some valuable time in order to negotiate a likely restructuring.

If anything, Linn Energy (LINE) (LNCO) sure is crafty. The company has just announced that it made $60 million interest payments on its senior notes due March 15 on April 14, just barely within the 30-day grace period and barely avoiding a default. Though, the company has instead elected to exercise yet another the 30-day grace period, this time for $58 million in interest payments due April 15. This pushes the event of default date back to May 15.

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Robbing Peter to pay Paul

Linn Energy has also secured some concessions from its lender group to avoid a default on its credit facility. The borrowing base, which is fully tapped, will stay intact until May 11, yet again buying some much needed time.

On April 12, 2016, LINN entered into the Eighth Amendment to its Sixth Amended and Restated Credit Agreement among LINN, Wells Fargo Bank, NA, as administrative agent (the "Agent"), and the lenders party thereto. The Eighth Amendment provides:

  • An agreement that certain specified events will not become defaults or events of default until May 11, 2016;

  • The borrowing base will remain constant until May 11, 2016, subject to reductions based on sales of assets or termination of hedge agreements; and

  • LINN, the Agent and the lenders will negotiate in good faith an agreement in furtherance of a restructuring of the capital structure of LINN.

Likewise, Linn Energy's subsidiary Berry Petroleum has also secured a delay of default on its credit facility, which is also fully tapped. Though, the main difference from the above is that Berry will now have access to $45 million in cash that was previously restricted. Now we know how Linn Energy likely funded the interest payment on April 14.

What does this all mean?

A few takeaways:

Linn Energy is clearly doing all it can to buy some much needed time. The negotiations with its lender group are ongoing. If these fail, a Chapter 11 filing is the next step. All parties are likely trying to avoid entering bankruptcy court.

This move is similar to the one made earlier this month where Linn Energy delivered the mortgages associated with the Second Lien Notes. This in effect avoided a default. As I noted in a recent article, Linn Energy appeared to be playing hardball with this certain group of lenders as without these mortgages their rights were not much higher than the unsecured paper in the event of a default and bankruptcy filing.

It is uncertain what sort of strategic alternatives are open to Linn Energy besides a Chapter 11 filing. Though, something is clearly up--where there is this much smoke there is fire. The odds of some sort of non-Chapter 11 agreement have increased. Expect a short-covering rally in response.

If Linn Energy does lower its debt this way, the company would book cancellation of debt income ("CODI), which would flow down proportionally to unitholders and may result in unexpected tax liabilities. This is why Linn Energy is offering to exchange one unit of "LINE" for one share of "LNCO", allowing unitholders to basically move over from the LLC to a C-Corp and avoiding the tax liability.

Conclusion

As of this writing, shares of Linn Energy are up ~25% in premarket trading. This is likely some short covering as many traders are short the stock. This move, while most certainly a mixed bag, is still good enough for some momentum guys to try to squeeze the shorts out.

Nevertheless, this does not mean I think there is any real value in Linn Energy's equity. As noted above, it is uncertain what sort of "strategic alternatives" are open besides a Chapter 11 filing.

Any move towards a ""consensual restructuring" would likely result in a reduction of its debt burden and unwelcome CODI tax issues for its unitholders. Things over at LinnCo are hardly much better, with that company essentially broke and unable to pay the tax liabilities from 2015, much less any from 2016.

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