Halcon bond covenants weak to moderate; demand strong; bonds rise in trading

By Cristal Cody

Tupelo, Miss., Oct. 23 - Halcon Resources Corp.'s new 8.5-year senior notes (B3/CCC+) that priced on Tuesday came with weaker bond covenants, similar to its deal in June, but demand rose for the issue and the bonds traded higher in the secondary market, according to informed sources.

The Houston-based oil and gas exploration and production company sold an upsized $750 million of 8 7/8% notes due May 15, 2021 at 99.247 to yield 9%, at the tight end of talk of 9% to 9¼%. The deal, announced on Monday, was upsized from $700 million.

In the secondary market, the notes were quoted soon after pricing at 101 bid, 101.5 offered and later at 101.25 bid, a trader said.

"Everyone wants yield, yield, yield," the trader said.

On June 29, Halcon also sold $750 million of 9¾% senior notes due 2020 with similar restrictive covenants, said Covenant Review, an independent credit research firm.

The new issue's "restricted payments covenant has glaring flaws that may allow the company to build dividend capacity based on the $750 million of convertible preferred equity of the company that will be issued ... for the acquisition of the Williston Basin Assets, as well as the accumulated basket build capacity that has built up under the restricted payments covenant for the 2020s," Anthony Canale, an analyst with Covenant Review, said in a report.

The issue has a special mandatory redemption at par if the Williston Basin Assets acquisition is not completed by the end of the year.

Other covenants also contained concerns, including that the "liens covenant is a disaster" and would allow all debt that may be incurred to be secured, Canale said.

Also, the asset sales covenant would allow Halcon to use the proceeds of asset sales "to repay senior unsecured debt (including a convertible note owed to the company's largest shareholder) before repaying the notes," Canale said in the report.

Moody's Investors Service said in a report that the issue overall offered "moderate" covenant quality. The notes provided moderate protection for debt incurrence, but scored weak in investments in risky assets and the weakest for liens subordination risk, the agency said.

The issue also has a weak change-of-control put because of the ratings downgrade condition, Moody's said.

The "put will trigger in four of five standard events but will not trigger in a direct stock merger with a company that doesn't have a controlling shareholder," Moody's said.

Other highlighted provisions on the issue include that the high-yield covenants will be permanently terminated if the notes are upgraded to investment-grade by two agencies and there is no default, Moody's said. The covenants will not be reinstated if the company is later downgraded to non-investment-grade.

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