Legacy Reserves: Planning For Bankruptcy

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Summary

Legacy is planning on filing for bankruptcy, having negotiated a restructuring support agreement with its secured lenders.

It is still negotiating for support from unsecured noteholders, although the proposed restructuring support agreement likely includes a valuation that at least slightly impairs the second-lien debt.

Common equity seems likely to be cancelled in the end.

The recent decline in oil prices has likely significantly reduced the potential recovery for the unsecured notes.

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Legacy Reserves (LGCY) is planning on filing for bankruptcy, having negotiated a restructuring support agreement with its credit facility and second-lien (GSO Capital Partners) lenders. This comes as no surprise, given Legacy’s high debt levels and its inability to gain a lengthy extension to its credit facility maturity.

So far, there is only a limited amount of information about the restructuring support agreement, although it appears to call for Legacy’s unsecured debt and most/all of its second-lien debt to be converted into equity. Legacy also mentioned that GSO “has committed to ensure that at least $200 million of new equity is invested into the Company”.

Effect On The Unsecured Notes

The news that Legacy’s restructuring agreement was announced with the support of its credit facility and second-lien lenders (but not the support of unsecured noteholders yet) indicates that the recovery for the unsecured notes is likely to be fairly low.

The restructuring agreement probably includes a company valuation that would leave the second-liens as the fulcrum security. To a certain extent, valuation estimates can be made to show a desired result, but the recent fall in oil and gas prices certainly makes it easier to come up with a valuation that shows the second-liens as at least slightly impaired.

For example, at current forward 12-month strip prices (and Q1 2019 production levels), Legacy’s unhedged EBITDAX may be around $220 million. A 4.0x multiple on that would value the company at around $880 million, slightly less than the $902 million in secured debt that it reported having at the end of Q1 2019.

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