Linn Energy (LINE) (LNCO) seems to be heading closer and closer to bankruptcy after each passing day. The company recently announced that it had settled with its Senior Secured Second Lien Notes, delivering the mortgages associated with this debt. This would be in theory good news as it means the company is no longer in default under the terms of these notes. However, things are hardly ever that simple with Linn Energy.
Included in the same press release was language that suggested that Linn Energy and its Second Lien noteholders are in negotiations regarding a potential restructuring, including a chapter 11 bankruptcy filing. This is obviously not good news.
What does this mean?
What this means is that Linn Energy is playing hardball with its unsecured lenders. With ~$10 billion in debt, much of which is tied up in the credit facility, it is unlikely that anyone, including the Second Lien holders, are coming away with anything more than pennies on the dollar if the company enters bankruptcy.
Linn Energy seems to want to force its lenders to lower its debt pile and avoid bankruptcy. As it was put in the 8-K filing, the negotiations are on the way for a comprehensive "consensual restructuring". Linn Energy made it clear that its options were limited and if these talks fail that a Chapter 11 filing is in order.
Odds of a non-chapter 11 restructuring are increasing
If Linn Energy were to somehow strike a deal and get its lenders to significantly lower its debt pile, then this increases the odds of it surviving. Though, there is a big catch.
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 massive unexpected tax liabilities.
For example, if Linn Energy were to lower its debt via a restructuring by $1 billion, this would result in $2.83 per unit of CODI. By $3 billion would result in $8.50 per unit of CODI. By $5 billion would result in $14.17 per unit in CODI.
Needless to say, this would not be ideal for Linn Energy unitholders. This was the primary reasons why the company is offering to exchange one unit of "LINE" for one share of "LNCO", allowing unitholders to move over from the LLC to a C-Corp.
Though, things over at LNCO are hardly much better. The tax liability of a restructuring would merely shift over to the corporate level. This would spare the individual stakeholders, but greatly increasing LNCO's taxes.
Keep in mind that LNCO was already more or less broke -- it only had cash on hand of $11 million versus a $30 million cash tax bill as of the end of 2015. With its only assets being Linn Energy units, LNCO does not have any cash flow to pay these current and future liabilities.
It is hard to see how this news is a positive for Linn Energy. Sure, they are no longer in default. But, some sort of restructuring is in the works, either "consensual" or via bankruptcy court, both of which would be bad news for the equity. I simply do not see a scenario where Linn Energy's stock has any real value.
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