Comstock may refinance first lien debt if second lien debt converted

By Devika Patel

Knoxville, Tenn., Nov. 8 – Comstock Resources, Inc. hopes that the conversion of its second lien notes will improve the company’s balance sheet so that it can potentially refinance its first lien notes at better rates. The recent debt exchange gave the company more operating cash to invest and reduced its interest burden by $37 million annually.

“On Sept. 6, we completed the debt exchange transaction we launched on Aug. 1,” chairman and chief executive officer M. Jay Allison said on the company’s Tuesday conference call announcing third quarter earnings.

“Ninety-eight percent of our bond owners participated in this par-for-par exchange.

“The primary impact of the exchange was to free up our operating cash to invest in our very successful, high return Haynesville shale drilling program.”

The exchange cut cash interest by $37 million a year, he added, and a further $75 million can be paid in kind at the company’s option.

“Even after the exchange offer,” Allison continued, “we are very, very mindful of continuing to protect our liquidity and improve our balance sheet.

“During the down cycle, we retired $237 million of our senior notes, generating annual interest savings of $21 million with total interest savings to maturity of $83 million.”

Including its undrawn credit facility and the available pay-in-kind interest of the company’s first lien bonds, Comstock has a total liquidity of $152 million.

Allison added that Comstock has already obtained approval for the conversion of the second lien notes.

“At a special meeting of our stockholders, that we just concluded moments ago, our stockholders approved the transaction allowing the future conversion of the second lien notes,” Allison said Tuesday.

President and chief financial officer Roland O. Burns added that the conversion of the second lien notes is critical to getting the company’s balance sheet back in shape so that Comstock can consider refinancing its first lien notes to a lower interest rate.

“The next step to getting the balance sheet back in great shape is the conversion of the second lien bonds. When that happens, it puts our overall borrowing ability back to where we can potentially refinance our first lien bonds to something in a lower range.”

Debt exchange

On Aug. 1, the company began an exchange offer and consent solicitation in which it offered senior secured toggle notes due 2020 for all of its outstanding notes.

Comstock Resources was offering

• $1,000 of 10% senior secured toggle notes due March 15, 2020 and warrants for 1.5 common shares for each $1,000 principal amount of its $700 million of 10% senior secured notes due 2020. The 10% senior secured toggle notes due 2020 will pay interest at the rate of 10% in cash or 11% in kind. The warrants are exercisable at $0.01 per share;

• $1,000 of 7¾% convertible secured PIK notes due April 1, 2019 for each $1,000 principal amount of its $288,516,000 of 7¾% senior notes due 2019; and

• $1,000 of 9½% convertible secured PIK notes due June 15, 2020 for each $1,000 principal amount of its $174,607,000 of 9½% senior notes due 2020. The total amount of PIK interest was limited to $75 million.

The amounts include an early tender premium of $50 principal amount of the respective new notes per $1,000 of notes.

On Sept. 7, Comstock said investors had tendered for exchange nearly 98% of its senior secured toggle notes due 2020 in the offer. It also received the needed consents to amend the note indentures for the senior notes tendered in the exchange offer.

Investors had tendered for exchange $697,195,000, or 99.6%, of the 10% senior secured notes due 2020; $270,557,000, or 93.8%, of the 7¾% senior notes due 2019; and $169,747,000, or 97.2%, of the 9½% senior notes due 2020.

In exchange, Comstock issued the following amount of new notes:

• For the 10% notes, $697,195,000 principal amount of new 10% senior secured toggle notes due 2020 and warrants exercisable for 1,917,342 shares of common stock;

• For 7¾% notes, $270,557,000 principal amount of its new 7¾% second-lien convertible pay-in-kind notes due 2019; and

• For 9½% notes, $169,747,000 principal amount of its new 9½% second-lien convertible PIK notes due 2020.

The company also paid accrued interest in cash.

Comstock Resources previously said a successful exchange will free up its cash flow from operations to allow it to restart its Haynesville shale drilling program. Restarting the drilling will in turn allow the company to increase its natural gas production and proved oil and gas reserves and consequently benefit from improving natural gas prices.

Comstock Resources is a Frisco, Texas, oil and natural gas exploration and production company.

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