Comstock pulls tenders for toggle notes, 7.75%, 9.5% PIK convertibles

By Susanna Moon

Chicago, April 26 – Comstock Resources, Inc. is has withdrawn the tender offer for its senior secured toggle notes due 2020, 7.75% convertible secured pay-in-kind notes due 2019 and 9.5% convertible secured PIK notes due 2020.

When the offers were withdrawn, the tender had not been met, including the issue of 10 million shares of common stock at a price of $7.50 per share in a privately negotiated transaction; the sale of assets in a privately negotiated transaction for a purchase price of about $125 million; entry into a new $300 million revolving bank credit facility; and the issue of about $600 million principal amount of new senior notes, according to a company announcement.

The company began tendering for the notes on April 2 and the offers were set to end on April 27.

Instead, Comstock is now planning to retire these notes after the acquisition of some North Dakota properties with a new revolving bank credit facility and new senior notes, according to a separate announcement.

Comstock is holding talks with the owner of the Dallas Cowboys Football Club Ltd., Jerry Jones, to make a substantial investment in the company.

Under a letter of intent with Arkoma Drilling LP and Williston Drilling, LP, Comstock said it will acquire interests in oil and gas properties located in North Dakota for $620 million in exchange for common stock in the company.

There is no debt associated with the properties. Arkoma will receive about 88.6 million newly issued shares of Comstock common stock based on an agreed upon share price of $7.00 per share. After the deal, Arkoma will own about 84% of the company's pro forma outstanding shares.

The acquisition is subject to the parties entering into a definitive purchase agreement, which will in turn require the approval of the issue of the common stock by the company's stockholders.

Arkoma is owned by Jerry Jones and his family.

“The Arkoma investment in Comstock will allow us to refinance and simplify our capital structure and equip us with all the tools to substantially grow stockholder value,” M. Jay Allison, chief executive officer of Comstock, said in a company statement.

“The proved reserve value and related cash flows from the North Dakota properties when combined with our properties will support the refinancing of our debt as well as fuel an expanded drilling program in the Haynesville shale. The strong balance sheet resulting from the combination will allow us to play offense after spending the last three years on defense.”

Comstock has also entered into the previously announced strategic drilling venture with Arkoma with a 20% carried interest and a two-year term. Comstock will offer at least $75 million of opportunities in the first 12 months and $100 million in the second 12 months.

Tender details

The early tender price was set at $1,052.50 in cash per $1,000 principal amount of notes tendered by the early deadline of 5 p.m. ET on April 13 and the base price was to be $1,002.50 in cash per $1,000 principal amount.

Holders also would have received accrued interest up to but excluding the settlement date.

Along with the tender, Comstock was soliciting consents from a majority of holders to release the collateral, to amend the redemption provisions and to eliminate most of the covenants and some events of default. In the case of the collateral release only, consents are required from holders of two-thirds of the notes.

For the convertibles, the total amount for each $1,000 principal amount was set as follows:

• For the $295,464,697 of 7.75% convertibles due 2019, $1,000 consisting of 87 conversion shares, or $652.50 conversion shares and $347.50 cash; and

• For the $187,062,044 of 9.5% convertibles due 2020, $1,000 consisting of 100 conversion shares, or $750.00 conversion shares and $250.00 cash.

The value of the conversion shares is based on a conversion price of $7.50.

Comstock also was soliciting consents from a majority of holders to amend notes to change some of the conversion features of the notes as follows:

• To change the threshold price to the greater of $7.50 and the numerical average of the daily volume weighted average prices of the shares over the 15 consecutive trading days immediately preceding the notes expiration date;

• To change the conversion rate to an amount of shares per $1,000 principal amount equal to the greater of 87 for the 2019 notes or 100 for the 2020 notes and $1,000 divided by the amended threshold price; and

• To eliminate the daily VWAP condition to conversion and to provide for a mandatory conversion event requiring the conversion of all notes other than those accepted under the tender offer and other than convertible notes called for redemption before the conversion date into shares to occur on the convertible notes settlement date at the amended conversion rate.

The amendments also would have modified the redemption provisions to allow the company to redeem the convertibles on three-day notice, compared with the 30-day notice period currently required.

The company planned to redeem at a price of par “a sufficient portion” of the notes after the tender and before the mandatory conversion that would result in the holders not participating in the tender receiving for each $1,000 principal amount of the 2019 notes 87 shares and an amount of cash equal to $1,000 less 87 times the amended threshold price and of the 2020 notes 100 shares and an amount of cash equal to $1,000 less 100 times the amended threshold price.

Any 2020 notes that are redeemed would have been redeemed effective on June 15.

BofA Merrill Lynch (888 292-0070 or 980 388-4813) and Deutsche Bank Securities Inc. are the dealer managers and solicitation agents. BofA Merrill Lynch is the dealer manager and solicitation agent for the tender for the first-lien notes. D.F. King & Co., Inc. (877 732-3619, 212 269-5550 or crk@dfking.com) is the depositary and information agent.

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

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