I noted before that Abraxas Petroleum (AXAS) faced major challenges in trying to deal with its second-lien term loan, which matures in November 2022. Subsequent news points to a very high likelihood of the second-lien term loan lenders (Angelo Gordon) ending up owning most/all of Abraxas.
Abraxas's credit facility lenders are trying to reduce their exposure, and its cash flow is likely going toward paying down its credit facility for the foreseeable future. Meanwhile, in return for waiving events of default and amending its second-lien term loan credit agreement, Abraxas has agreed to pay Angelo Gordon an additional $10 million as well as give it warrants for 19.9% of the company.
Credit Facility Amendments
Abraxas's credit facility amendment calls for its borrowing base to be reduced from $135 million to $102 million. It also calls for Abraxas to make monthly mandatory prepayments of its credit facility debt from excess cash (with a corresponding reduction to its borrowing base) and imposes additional restrictions on the company's capital expenditures.
AXAS's second-lien term loan amendment allows for its second-lien interest to be paid-in-kind now, either via additional second-lien debt or in Abraxas common shares. It also increases the interest rate for interest payable in-kind by 400 to 500 basis points, which would make it LIBOR +13% to +14% now.
As well, Abraxas now needs to pay an additional $10 million to Angelo Gordon at the maturity of its second-lien term loan and has also given Angelo Gordon warrants equal to 19.9% of its fully diluted common equity at an exercise price of $0.01.
Debt Situation
Abraxas finally filed its 2019 10-K report, although its Q1 2020 10-Q report remains outstanding. Abraxas reported having $96 million in credit facility debt at the end of 2019, which rose to $102 million in June. It also had an $18 million working capital deficit at the end of 2019 (excluding derivatives) and it is uncertain how that has changed since then.
Paying the second-lien interest in-kind should help Abraxas generate additional cash flow to pay down its credit facility. However, with Abraxas's market capitalization at around $40 million, it would need to issue 35% additional shares per year to pay the interest with new shares (if it went that route at its current share price).
This results in a situation where Angelo Gordon could own a majority of Abraxas's common shares by the time the second-lien term loan matures in 2022, and also have Abraxas owe it $110 million.
Notes On Valuation
Abraxas's common shares appear to have minimal value due to the high likelihood that the second-lien term loan can't be paid back in November 2022. Abraxas already had to pay LIBOR + 9% interest to get the $100 million second-lien term loan in the first place in a mid-to-high $50s WTI oil environment. To deal with the second-lien term loan now, it will need to find at least $110 million in new funds while having diminished proved developed producing reserves (compared to late 2019) as it is spending minimal capex for the foreseeable future. This is a situation where Abraxas probably needs $70 WTI oil to avoid handing the company to the second-lien term loan lenders.
Conclusion
It appears that Angelo Gordon will essentially own Abraxas in the end. With a minimal capex budget and paying its second-lien interest in-kind, Abraxas should be able to pay down its credit facility debt substantially over the next couple years, perhaps reducing it to around $50 million by the time its second-lien term loan matures.
However, by November 2022, Abraxas will owe Angelo Gordon either $110 million (with Angelo Gordon potentially already owning over half of Abraxas's common equity by that time) or around $145 million (with Angelo Gordon owning around 20% of Abraxas's common equity).
Thus it seems very likely that Angelo Gordon will control Abraxas by November 2022. Although Abraxas's common shares have a low price of under $0.25 per share, its shares still aren't cheap due to the subordination to its debt.
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