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

By Susanna Moon

Chicago, April 2 – Comstock Resources, Inc. is tendering 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.

The company is tendering for any and all of the first-lien toggle notes until April 27, according to a company announcement.

The early tender price will be $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 will be $1,002.50 in cash per $1,000 principal amount.

Holders also will receive accrued interest up to but excluding the settlement date.

Along with the tender, Comstock is 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 will be 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.

The tender offer for the convertibles will remain open until 11:59 p.m. ET on April 27.

Holders also will receive accrued interest up to but excluding the settlement date.

Comstock said it is also 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 modify 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 plans 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 will be redeemed effective on June 15.

Tendered notes may be withdrawn before the end of the offer, with settlement expected to occur on the fifth business day after the expiration.

Separate from the proposed convertible amendments, on April 2, the company gave notice to the holders that it increased the conversion rate for the 2019 notes to 99.71 shares per $1,000 principal amount. The change, along with the corresponding drop in the threshold price to $10.03, is effective April 17 and will remain effective for 20 days. If the proposed amendments become effective, they will override the reduced threshold price, the release noted.

As a condition to the tender offers and the related consent solicitations, the company said it plans to issue 10 million shares of common stock at a price of $7.50 per share in a privately negotiated transaction, to sell assets in a privately negotiated transaction for an aggregate purchase price of about $125 million, to enter into a new $300 million revolving bank credit facility and to issue about $600 principal amount of new senior unsecured notes.

BofA Merrill Lynch (888 292-0070 or 980 388-4813) and Deutsche Bank Securities 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.

Separately on Monday, Comstock “announced a series of related transactions in support of a comprehensive refinancing of substantially all of its existing debt.”

The transactions consist of obtaining a $75 million cash common stock investment with a new strategic carried drilling venture by Jerry Jones; monetizing its Eagle Ford shale production; arranging a new $300 million four-year bank credit facility; offering to retire the company's convertible second-lien secured PIK notes where investors would receive a package of cash and stock representing par value; offering to purchase the company's first-lien secured notes for cash; and expected offering of $600 million of new senior unsecured notes, the release said.

“This refinancing will simplify our capital structure and allow us to focus on growing stockholder value,” M. Jay Allison, chief executive officer of Comstock, said in the company’s press release.

“The resulting lower interest expense and benefits of the new drilling venture will allow us to increase drilling activity and grow production while spending within our operating cash flow.”

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

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