Wed 02/07/2018 15:41 PM
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In connection with Jones Energy’s offering of new $450 million secured notes, the Anadarko-focused exploration-and-production company with more than $700 million in debt is not pledging its 22,500 net acres in the Merge play in Oklahoma as collateral. Instead, the company will pledge the equity of its subsidiaries that hold the Merge assets as collateral for the five-year senior secured first lien note offering, according to a preliminary draft of the offering circular reviewed by Reorg Research. On Jones’ first-quarter earnings call in May 2017, CEO Jonny Jones said he was “confident in the Merge's potential to become the flagship asset in the Jones portfolio.”

Jones hopes to price the new notes by Friday, with “whispers” on the coupon in the low 9% area, according to multiple sources.

According to the draft offering circular, the indenture governing the new secured notes will grant Jones the flexibility to unrestrict subsidiaries that hold its Merge assets, which as a result will not be subject to many of the new indenture’s terms. Most significantly, the subsidiaries owning Merge assets may be designated to be unrestricted subsidiaries, in which case the Merge assets would not constitute collateral for the new notes. However, the draft says the equity of the subsidiaries that hold the Merge assets would be pledged as collateral. The draft said this offering will be structured so as to optimize the company’s development of the Merge assets.

The draft offering circular suggests that the indenture will include an investments basket permitting the investments, comprising Merge assets to an unrestricted subsidiary. However, unrestricted subsidiaries owning Merge assets (referred to as unrestricted SCOOP/STACK subsidiaries) are subject to additional covenants.

If a third party owns more than 50% of the voting stock of any unrestricted SCOOP/STACK subsidiary or if the company ceases to own equity in each unrestricted SCOOP/STACK subsidiary entitled to at least 40% of the dividends or distributions, then the company will be obligated to offer to repurchase the notes at 101.

Furthermore, unrestricted SCOOP/STACK subsidiaries are subject to additional limitations, including ones that (i) prohibit them from incurring any debt other than certain revolver debt, (ii) limit their ability to issue certain capital stock, (iii) limit their ability to transfer certain interests in oil and gas leases and (iv) limit their ability to conduct asset sales.

As such, even though the Merge assets may not constitute collateral for the first lien notes, covenants specific to the unrestricted SCOOP/STACK subsidiaries may afford noteholders some protection from value leakage from such entities.

The company said it also intends to amend its revolving credit agreement in connection with the transaction to permit up to $700 million of the new first lien notes offered herein, along with other secured notes, and to permit the subsidiaries holding Merge assets to be designated as unrestricted (subject to the termination of the revolving commitments).

According to the press release announcing the offering, Jones will use part of the net proceeds to repay borrowings under its senior secured revolving credit facility.

The company did not respond to a request for comment by press time.

Also this week, Jones announced the addition of three new directors to its board including Scott McCarty, a partner at Q Investments. According to the press release, McCarty is joining the board “in connection with an agreement entered into between Q Investments and the Company pursuant to which Q Investments has agreed not to nominate a director for the 2018 annual meeting.”

In September, Q sent a letter to Jones’ board, calling on it to “explore all strategic alternatives,” including the sale of the company. The letter said the company is “hamstrung” due to its “exceedingly high leverage.” The letter also said that “recent M&A activity surrounding the company’s Merge acreage is encouraging … The potential transactions available to the company are broad and range from selling significant assets, raising DrillCo financing, to merging the business with a company that has a much stronger balance sheet.”

As Reorg wrote in December, CEO Jonny Jones, a third-generation oilman, has bet the future of his eponymous company on success in the Merge. Previously focused on the western Anadarko in the Texas Panhandle, Jones acquired its initial Merge position in August 2016 through the purchase of approximately 18,000 net acres from American Energy Partners. At the time, Jones estimated that the acreage contained about 330 million barrels of oil equivalent. Jones has on numerous occasions described the Merge acquisition as “transformative.”

However, delineation of the play is enormously capital-intensive and does not result in an immediate addition to proven reserves. Delineation is set to continue through 2019, with full-scale development arriving in 2020, according to a development plan presented by the company at a Capital One conference on Dec. 6.

Jones said earlier this week that it was cutting 2018 capex by about 40%. The circular for the new secured notes highlights other liability management actions the company could take including the repurchase of senior notes at a price well below par or an exchange of some of its senior notes for new second lien notes. The indenture would allow the incurrence of additional junior lien debt, the draft says, subject to a fixed-charge coverage ratio.

Credit Suisse is the sole bookrunner, according to the reviewed draft. The notes, which would mature on March 15, 2023, would have a two-year non-call period after which they would be callable at par plus three-quarters of the coupon, a $101 put on a change of control, and an equity clawback of up to 35% in the first two years. The road show began Tuesday, with pricing expected Friday, said sources.

Other amendments to the revolver in the circular include a reduction of the borrowing base to $50 million, allowing investments not to exceed $75 million in the Jones subsidiaries that hold the Merge assets and a suspension of certain maintenance covenants. The draft indicates that Jones has obtained commitments from its lenders for these amendments.
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