Forest Oil debt cut down after merger terms change; Linn Energy wraps asset sale, bonds weaken

By Stephanie N. Rotondo

Phoenix, Dec. 16 – Forest Oil Corp. was the nom du jour in the distressed bond market Tuesday as the company announced revised terms of its merger with Sabine Oil & Gas LLC.

The terms were not ideal for bondholders, however, and they reacted by pushing the company’s debt down as much as 40 points.

Meanwhile, Linn Energy LLC’s debt was also weak, even after the company said late Monday that it had closed on an asset sale that brought in $1.95 billion.

But the recent rout in oil prices has hurt Linn particularly badly, given that its recent spending spree helped it rack up more debt than any other U.S. oil producer of its size.

Funds from the latest asset sale will be used to reduce debt in order to put investors at ease.

Late in the day, American Apparel Inc. announced that it had finally ousted founder Dov Charney as chief executive officer.

Charney was suspended in July amid allegations of “willful misconduct.” Charney tried to take control back from the board of directors by partnering with Standard General LP.

But Standard General was unable to find a balance with Charney and reportedly supported the board’s decision to fire him.

The board had conducted an investigation before coming to the decision, forming a “suitability committee” to look into the matter.

“Based on this investigation, the special committee determined that it would not be appropriate for Mr. Charney to be reinstated as CEO or an officer or employee of the company,” American Apparel said in a statement.

Charney was offered a contract consultant position but declined to take it.

Paula Schneider will take over as CEO but will not be a member of the board.

The bonds had not yet reacted to the news as of late Tuesday.

Forest bonds get sawed

Forest Oil bondholders took down the company’s debt in response to a revised merger agreement with Sabine Oil & Gas that was unfavorable to debtholders.

One trader said, “The bonds were way down,” seeing the 7¼% notes due 2019 decline over 38 points to end at 47.

He noted that the paper had traded into the low-40s earlier in the day.

Another trader said the debt “traded off significantly.” He said the bonds were “down roughly 40 points, going out in the high-40s.

“It did trade into the low-40s before rebounding slightly,” he said.

Forest Oil first announced its combination with Sabine in May. But since then, “market dynamics have changed considerably but the logic for combining these two complementary companies has not,” said David Sambrooks, the combined company’s chief executive officer, in the statement.

As such, terms were revised so that no change of control would occur, allowing both companies to avoid triggering a change-of-control provision.

That provision would have required Forest Oil to buy back its bonds at 101% of par.

Leaving the debt outstanding will save the companies at least $100 million in transaction and interest expenses over the next three years, according to the statement. It also meant that the entities could forgo an $850 million loan from Barclays plc and Wells Fargo & Co.

Linn powers down

Linn Energy wrapped up a $1.95 billion asset sale of its Granite Wash and Cleveland fields in Texas and Oklahoma, the company announced late Monday.

Come Tuesday, the bonds did not appear to be impressed.

A trader said the 6¼% notes due 2019 fell over 2 points to 74, while the 6½% notes due 2019 lost just over a point to end at 73½.

Another market source pegged the 7¾% notes due 2021 at 72 bid, down 2½ points.

“Linn traded down a couple points,” said another trader.

Proceeds from the sale will be used to repay in full a $1.3 billion term loan, the only remaining interim financing from its $2.3 billion acquisition from Devon Energy Corp. Remaining funds will be used to reduce borrowings under a revolving credit facility.

Furthermore, the company said that once the term loan is repaid in full, lenders will redetermine borrowing capacity, increasing the borrowing base to $4.5 billion.

The $1.4 billion base for Linn’s wholly owned subsidiary, Berry Petroleum Co. LLC, will be reaffirmed.

In an interview with Bloomberg, Linn’s Clay Jeansonne, vice president of investor relations, said that the company is currently delaying the release of its 2015 budget due to declining oil prices. However, the plan will likely include some sort of freeze in spending – the company has spent about $5 billion since 2013 – and a reduction in debt.

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