Relevant Documents:
First Amendment to Credit Agreement, Dated Sept. 30, 2015
Linn Energy Seventh Amended and Restated Credit Agreement

A $100 million block of Chesapeake Energy’s $4 billion revolving credit facility came up for auction over the last week, quoted in the mid-70s, according to sources who spoke to Reorg Research. Although a trade was not consummated, the auction highlights a growing interest from hedge fund investors to buy into the revolvers of exploration-and-production companies. And while only a limited number of similar trades have been executed to date, that may change soon if commodity prices remain muted throughout the year, according to sources.

The lack of transactions is due in part to banks’ reluctance to cut their exposure and mark the loss, and to prohibitive language typically within credit agreements.

Revolver and term loan facilities often have provisions limiting lenders’ ability to sell their exposure, either as assignments or participations. Chesapeake’s revolver is no exception, and such provisions are found in section 13.6 of its credit agreement. Section 13.6(b) relates to assignments and, in addition to other requirements, it states that any:
 
“Lender may at any time assign to one or more assignees (other than (A) a Person other than a bank, investment bank, insurance company, mutual fund or other institutional lender, as such terms are used in the Indentures, or (B) an Ineligible Person) all or a portion of its rights and obligations under this Agreement ... with the prior written consent (such consent not be unreasonably withheld or delayed; it being understood that, notwithstanding the foregoing clause, the Borrower shall have the right to withhold or delay its consent to any assignment … (y) with respect to an assignment of Commitments to an entity other than a commercial bank or other financial institution customarily engaged in the business of making loans in the oil and gas industry) of: (A) the Borrower; provided that no consent of the Borrower shall be required for an assignment (1) to a Lender, an Affiliate of a Lender or an Approved Fund or (2) if an Event of Default under Section 11.1 or Section 11.5 has occurred and is continuing; and provided, further, that if the Borrower’s has not responded within ten (10) Business Days after the delivery of any written request for a consent, such consent shall be deemed to have been given … [.]”

This provision likely limits lenders’ ability to assign revolving commitments to hedge funds - while the borrower’s consent is generally required for assignments, and such consent may not be “unreasonably withheld or delayed[,]” the borrower is able to withhold its consent to any “assignment of Commitments to an entity other than a commercial bank or other financial institution customarily engaged in the business of making loans in the oil and gas industry)[.]” Such provisions may limit lenders’ ability to assign revolving commitments to hedge fund investors.

In comparison, section 13.6(c) that relates to participations affords lenders greater flexibility. Lenders are generally able to, “without the consent of the Borrower, the Administrative Agent, any Swingline Lender or any Letter of Credit Issuer, sell participations to one or more banks or other entities other than an Ineligible Person ... in all or a portion of such Lender’s rights and obligations under this Agreement[.]” Ineligible Person is narrowly defined to generally include (i) natural persons, (ii) defaulting lenders, (iii) the borrower itself and its affiliates and (iv) “any competitor of the Borrower which has been designated by the Borrower[.]”  As such, while these provisions likely limit lenders’ ability to sell participations to competitors of Chesapeake, it may afford them flexibility to sell participations to other potential investors.  

And while the trading remains thin, market participants are seeing more quotes for revolvers from some of the more-stressed exploration operators. The EXCO Resources $375 million revolver is quoted at 78-82, Halcon Resources’ undrawn $1.5 billion facility and LINN Energy’s $2.3 billion facility are both quoted at 70-75, and SandRidge Energy’s $500 million is quoted at 72-78, according to trader runs. It appears that those quotes do not represent specific blocks of paper.

Although oil prices have picked up considerably over the last week - jumping to $38.17 per barrel from $34.40 at the start of the month - that optimism may not last through the year, as operators continue to face liquidity concerns and covenant breaches. With the capital markets remaining largely cut off for some of the most troubled drillers, many of the most distressed companies have taken the pre-emptive measure to draw down their revolvers as a way to fund their way through an in-court restructuring, which will also trigger new questions and fights over control agreements in those scenarios.