Warren Resources, Inc. continues to engage in discussions with its first lien lender, second lien lender and an ad hoc group of unsecured noteholders, regarding a restructuring of its debt obligations, which may occur as an out-of-court restructuring or pursuant to a bankruptcy court proceeding. In either event, Warren has focused such discussions on its preference for a consensual restructuring with these stakeholders. The lender under Warren’s first lien credit facility has made a proposal for a viable post-restructuring capital structure that would be acceptable to Warren because it would result in deleveraging the company by converting a substantial amount of its debt to equity. Warren has presented this proposal to the lender under its second lien credit facility and to the holders of more than 95% in principal amount of its unsecured notes. However, an agreement among all three categories of creditors has not been reached. Consequently, Warren is evaluating strategies to expedite achievement of a comprehensive restructuring of its capital structure, including the possibility and features of a voluntary bankruptcy proceeding.
In light of the possible necessity of a bankruptcy proceeding, Warren’s board of directors recently named James A. Watt as Warren’s Chief Restructuring Officer, to serve in that position in addition to his other positions as the company’s President and Chief Executive Officer.
Dominick D’Alleva, Chairman of Warren’s board of directors, commented, “We are hopeful that Mr. Watt will be able to bring all parties together to complete an out-of-court restructuring or a prepackaged or pre-negotiated bankruptcy filing, but if our creditors fail to reach a timely agreement, we look to Jim’s leadership and extensive restructuring background to guide us through a bankruptcy proceeding on terms that are acceptable to our first lien lender and that preserve and maximize value available for our stakeholders.”
As of March 31, 2016, Warren’s first lien creditors held debt of approximately $235 million in principal amount, second lien creditors held debt of approximately $52 million in principal amount, and investors held approximately $167 million principal amount of Warren’s unsecured senior notes. On March 31, 2016, Warren’s cash position was $16.85 million, of which $10.04 million is in a restricted account under the control of the lender under its first lien credit facility.
Warren elected to not make the approximately $7.5 million interest payment due February 1, 2016 on its unsecured senior notes. The applicable 30-day grace period for such interest payment has expired, and consequently an event of default under the indenture governing such notes has occurred and is continuing. This status gives the indenture trustee and the holders of not less than 25% in aggregate principal amount of the unsecured notes the right declare the entire principal amount of the notes plus accrued and unpaid interest due and payable. In addition, this status has resulted in events of default under Warren’s first lien credit facility and its second lien credit facility, entitling the administrative agents and lead lenders thereunder to declare all obligations under those credit facilities to be immediately due and payable. However, thus far, no such acceleration of Warren’s debt obligations has occurred.
Warren’s advisors with respect to its debt restructuring are Andrews Kurth LLP (as restructuring counsel) and Jefferies LLC (as financial advisor).
Warren Resource's latest 10-K filing lists Wilmington Trust as the administrative agent for the first lien credit agreement and Cortland Capital Market Services as the adminstrative agent on the second lien facility.
The annual interest rate on borrowings under the First Lien Credit Facility is 8.5% plus LIBOR for the applicable LIBOR period (with a minimum LIBOR rate of 1%) and is payable quarterly in arrears on the next to last business day of each March, June, September and December. At present, the interest rate is 9.5%.
The annual interest rate on borrowings under the Second Lien Facility is 12%, with interest payable semi-annually in arrears on each April 20 and October 20. On the first three semi-annual interest payment dates, beginning with April 20, 2016, the Company may elect to pay up to all of such interest (6% per semi-annual period) by capitalizing accrued and unpaid interest and adding the same to the principal amount of the second lien loans then outstanding. For the subsequent three semi-annual interest payment dates, beginning with October 20, 2017 and ending October 20, 2018, the Company may elect to pay up to one quarter of such interest (1.5% per semi-annual period) by capitalizing accrued and unpaid interest and adding the same to the principal amount of the Second Lien Loans then outstanding. As of December 31, 2015, the Company had approximately $52.2 million outstanding borrowings under the Second Lien Credit Facility which consists of $51 million in original borrowing and $1.2 million in accrued unpaid interest. The Company has accounted for this transaction as a troubled debt restructuring in accordance with authoritative guidance, whereby no gain was recognized on the retirement of debt, and a premium on the face value of the debt will be amortized over the life of the instrument.
Warren Resources, Inc. is an independent energy company engaged in the acquisition, exploration, development and production of domestic oil and natural gas reserves. Warren’s activities are primarily focused on oil in the Wilmington field in the Los Angeles Basin in California, natural gas in the Marcellus Shale in Pennsylvania, and the Washakie Basin of Wyoming.