Fitch has downgraded the Long-Term Issuer Default Ratings (IDRs) of Lonestar Resources US, Inc. and Lonestar Resources America, Inc. (LONE) to 'D' from 'C' and affirmed Lonestar Resources America, Inc.'s first-lien revolving facility at 'CCC'/'RR1' and unsecured notes at 'C'/'RR5'.
Lonestar's ratings reflect their announced filing for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code on Oct. 1, 2020. The company has reached a Restructuring Support Agreement (RSA) with 100% of the RBL lenders and 83.8% of the senior unsecured note holders.
Fitch expects to withdraw its ratings 30 days after the petition date.
KEY RATING DRIVERS
Voluntary Chapter 11 Filing: On Sept. 14, 2020, LONE entered into a RSA with lenders representing 100% of their RBL lenders and 83.8% of senior unsecured noteholders. According to the RSA, RBL lenders will receive: cash payment of accrued and unpaid interest, revolving loans under the Exit RBL Facility (80% of the existing RBL loans), warrants to purchase up to 10% of new equity interests, and a second-out, senior-secured term loan (20% of existing RBL loans). Holders of the unsecured notes will receive 96% of the new equity interests, preferred equity holders will receive 3% of new equity interests with the remaining 1% of new equity interests allocated to current common equity holders.
On Oct. 1, 2020, pursuant to their RSA, LONE announced that it had filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of Texas (Houston). Plan recovery contemplates a $353 million enterprise value for a projected recovery of 31.5% on the senior unsecured notes.
Missed Interest Payment: On July 1, 2020, LONE announced its election not to make the approximately $14.1 million interest payment due on that date with respect to its 11.25% senior unsecured notes. Under the indenture governing the notes, LONE has a 30-day grace period to make the interest payment before triggering an event of default. The initiation of a grace or cure period following nonpayment of a material financial obligation resulted in the 'C' (Near Default) IDR, per Fitch's ratings definitions. On July 31, 2020, the company entered into a forbearance agreement with certain note holders of over 50% of the 11.25% Senior Notes.
Borrowing Base Deficiency: On July 2, 2020, LONE entered into a forbearance agreement with their credit facility lenders. Pursuant to this agreement, the borrowing base of the RBL was reduced to $225 million from $286 million, resulting in a $60 million deficiency.
Financial Maintenance Covenant Breach: At Dec. 31, 2019, LONE failed to satisfy the consolidated current ratio covenant under their revolving credit facility, triggering an event of default. While they received a waiver for this breach, LONE does not expect to be able to comply with this covenant over the next 12 months. Failure to reach an agreement with lenders or find alternative financing to resolve (likely) future default may result in the acceleration of revolver repayment which may cause default and acceleration of the 11.25% senior notes due 2023. Given the extreme headwinds posed by the coronavirus global economic shutdown and OPEC+ supply decisions facing the energy industry, Fitch believes alternative liquidity options such as incremental debt or equity issuance, or asset sales are unlikely to be viable financial alternatives.
Small, Liquids-Oriented Asset Base: LONE's acreage position is located within the crude and condensate areas of the Eagle Ford with production averaging 13,339 barrels of oil equivalent per day (boepd) for the 2Q20 (down from 15,187 boepd at YE19) was comprised of 70% liquids (down from 73% at YE19) realizing Louisiana Light Sweet (LLS)-based pricing which tends to trade at a premium to WTI. LONE's acreage is largely held by production (93%, YE19) and operated (84%, YE19), increasing capex flexibility. Due to their small size, LONE has operated with high annual production growth rates (around 35% in 2019, yoy) and while robust unit economics and hedge book offer protection to development spending (hedged netback of $14.00/boe, 2Q20), Fitch expects growth and capex to be moderated by the current commodity price weakness.
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that LONE's reorganized as a going-concern in bankruptcy. Fitch has assumed no administrative claim given the prepackaged cases.
Going-Concern (GC) Approach
The GC EBITDA assumption of $86 million considers a prolonged commodity price downturn (as described by Fitch's stress price deck) causing lower than expected production and cash flow and is consistent with the RSA valuation.
An Enterprise Value multiple of 4.1x EBITDA is applied to the GC EBITDA to calculate a post-reorganization enterprise value. The choice of this multiple considered the following factors:
The historical bankruptcy case study exit multiples for peer companies ranged from 2.8x-7.0x, with an average of 5.6x and median of 6.1x;
Fitch uses a multiple of 4.1x compared to the historical bankruptcy case study exit multiple because of the company's small size and cash flow uncertainty at Fitch's stress case price deck relative to peers.
The liquidation estimate reflects Fitch's view of transactional and asset-based valuations, such as recent transactions for the Eagle Ford basin on a dollar/acre basis. This data was used to determine a reasonable sales price for the company's assets.
The company's main driver of value is its acreage in the Western and Central regions of the Eagle Ford. LONE also has acreage in its more prospective Eastern region, which has been ascribed a lower valuation by Fitch.
The senior secured revolver is drawn at 100%, consistent with current borrowings (over 90%) as of April 6, 2020, and industry peers who have preemptively drawn the full balance.
The allocation of value in the liability waterfall results in recovery corresponding to 'RR1' recovery for the firstlien revolver and a recovery corresponding to 'RR5' for the senior unsecured notes.
Rating sensitivities are no longer applicable as the company has filed for bankruptcy.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
ENTITY/DEBT RATING RECOVERY PRIOR
Lonestar Resources US, Inc. LT IDR D Downgrade C
Lonestar Resources America, Inc. LT IDR D Downgrade C
LT C Affirmed RR5 C
LT CCC Affirmed RR1 CCC
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com