Wed 07/07/2021 12:06 PM
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Relevant Items:
Covenants Tear Sheet, Debt Document Summaries
Laredo Petroleum’s Debt Documents

Laredo Petroleum is an energy company focused on the acquisition, exploration and development of oil and natural gas properties in the Permian Basin. On May 7, the company entered into purchase agreements with Sabalo Energy pursuant to which the company agreed to purchase certain oil and gas properties in the Midland Basis for an aggregate purchase price of $714.3 million. This acquisition was consummated on July 1.

Also on May 7, the company entered into the sixth amendment to its credit agreement, which provides for a $725 million revolving facility. The company also has two series of unsecured notes outstanding. The capital structure as of March 31, 2021, is shown below for reference:
 
 
Covenant Conclusions
 
  • Cash sweep - Beginning Oct. 30, 2020, if Laredo Petroleum’s consolidated cash balance exceeds $50 million as of the end of any calendar week, it must effect a mandatory prepayment of the revolver in an amount equal to such excess.
     
  • Financial covenants - The credit agreement contains two financial covenants: a 1x current ratio covenant (which looks at the ratio of current assets, including undrawn revolver commitments, to current liabilities) and a 3.75x total leverage ratio (with cash netting limited to $50 million if any revolving loans are outstanding and otherwise unlimited). As of March 31, the company was in compliance with both covenants.

    As illustrated below, while the company is currently in compliance with the 1x ratio of current assets to current liabilities, because its current liabilities exceed its current assets by $26 million, the company will need to ensure that at least $26 million of its revolver is undrawn or that the proceeds remain on its balance sheet.
     
 
  • Annualized EBITDAX - Because the acquisition of Sabalo Energy occurred prior to Aug. 1, 2021, EBITDAX for the quarters ending Sept. 30, 2021, Dec. 31, 2021, and March 31, 2022, will be annualized.
     
  • Debt and lien capacity - Under its credit agreement, Laredo Petroleum has no additional secured debt capacity beyond fully drawing on its revolver. It can incur $20 million of unsecured debt pursuant to a general debt basket and unlimited unsecured senior notes, as the notes do not have any scheduled amortization, do not mature prior to the date that is 180 days after the revolver maturity date, and are on market terms. The senior notes permit unsecured debt as long as the fixed charge coverage ratio is at least 2.25x, in addition to allowing up to $1 billion of secured credit facility debt.
     
  • Restricted payments, investments and note redemptions - Restricted payments, investments and redemptions of senior notes share a $100 million general basket in the credit agreement that is available if the following conditions are met:
     
    • No default or event of default;
       
    • Undrawn commitments are at least 35% of total commitments;
       
    • In pro forma compliance with current ratio; and
       
    • Pro forma total leverage ratio is not greater than 2x (for restricted payments), 2.5x (for investments/redemptions) or 2.75x (for up to $50 million of redemptions from and after Oct. 22, 2020).
       
This is the only available basket for restricted payments and senior note redemptions. Certain business-related investments and intercompany investments are also permitted.

As of March 31, with a total net leverage ratio of 2.46x (using LTM EBITDAX disclosed by the company), the company can use this basket for investments and note redemptions but not for restricted payments. The senior notes, however, may restrict the company’s ability to use the entire $100 million for investments. A $50 million general restricted payments basket and a general investments basket for the greater of $20 million and 1% of ACNTA likely limit general investments to $70 million.
 
  • Agent clawback provisions - The credit agreement contains agent clawback provisions meant to protect Wells Fargo should it make erroneous payments to lenders. The provisions allow the agent to claw back any payments it determines in its sole discretion were made erroneously. It also requires lenders to waive any claim to such payments, including the “discharge for value” defense.

--Alisha Turak
 
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