Southwestern Energy Covenants Analysis:
Covenant Tear Sheet, Debt Document Summaries
Southwestern Energy’s Debt Documents
Southwestern Energy engages in exploration, development and production of natural gas, natural gas liquids and oil in the Appalachian and Haynesville natural gas basins in the United States.
The company has recently expanded
through acquisitions, including: (1) the acquisition of Montage Resources in November 2020, which expanded the company’s presence in the Appalachian region and was paid for using Southwestern common stock; (2) the acquisition of Indigo Natural Resources in September 2021, which expanded the company’s presence in the Haynesville region and was paid for with a combination of debt assumption, cash and common stock; and (3) the acquisition of GEP Haynesville in December 2021, which expanded the company’s Haynesville operations and was funded through new senior notes due 2032 and a $550 million term loan agreement.
The company’s capital structure as of Dec. 31, 2021, is shown below, pro forma for the Jan. 24, 2022, redemption of its remaining senior notes due 2022 using borrowings under its revolving facility. The RBL was amended and restated on April 8 to, among other things, extend the maturity date. The company did not disclose the amount outstanding on the new RBL, so we have assumed that the amount outstanding under the prior RBL was carried over and that letter-of-credit usage has remained constant.
- Financial covenants - The RBL contains two financial covenants, and the term loan contains a third. The RBL requires that:
- The “Current Ratio” - the ratio of current assets (including RBL availability but excluding noncash derivative assets) to current liabilities (excluding current maturities of long-term debt and noncash derivative obligations) - may not be less than 1x; and
- The net leverage ratio (with cash netting limited to the lesser of 10% of the commitments and $150 million) cannot be greater than 4x.
Southwestern was in compliance with both covenants as of Dec. 31, with an estimated Current Ratio of 1.6x and a net leverage ratio of 3.0x.
The term loan requires that starting with the quarter ended March 31, 2022, the collateral coverage ratio, which compares the company’s proved developed producing PV-10 value, net of derivative mark-to-market value, to all outstanding secured debt and secured debt commitments, may not be less than 2x. Although this covenant was not tested as of Dec. 31, using disclosed after-tax PV-10 of $18.73 billion as of Dec. 31 and the disclosed mark-to-market value of the company’s derivatives position as proxies, we estimate that the company would have been in compliance with a ratio of 6.9x.
- Debt and lien capacity - The RBL is currently the most restrictive debt document when it comes to permitting additional debt and secured debt. The RBL currently permits $185 million of additional secured debt under general debt and lien baskets each sized at the greater of $50 million and 1.25% of ACNTA, plus an additional $350 million in the form of incremental term loans under the existing term loan credit agreement or new pari or junior lien term loans but that must be incurred on or prior to Nov. 1, 2022.
The RBL also permits unsecured debt as long as such debt is incurred by a loan party and the company is in pro forma compliance with the financial covenants. The 4x net leverage ratio covenant currently permits the company to incur an additional $1.7 billion of debt.
The term loan contains the same matching general debt and lien baskets as the RBL and permits an additional $350 million of term loans as incremental or incremental equivalent debt, but it also permits additional secured debt as long as the gross leverage ratio is not greater than 4x and the collateral coverage ratio is at least 2x. This provides the company with a further $1.68 billion of secured debt capacity. The term loan also permits unsecured debt as long as the gross leverage ratio is not greater than 4x.
Combined with the RBL restrictions, the credit agreements permit $535 million of additional pari first lien secured debt plus $1.68 billion of additional unsecured debt.
The senior notes contain liens covenants but no debt covenants. Although the liens covenant under each series of notes only restricts the company’s ability to incur liens on “Principal Property” (generally, interests in productive land, pipelines and other distribution facilities in the United States, and stock of subsidiaries), the covenant does not apply unless the amount of all secured debt (not just debt secured by Principal Property, but excluding debt secured by permitted liens), plus all attributable debt from certain sale-leasebacks involving Principal Property, exceeds the greater of $2 billion and 25% of ACNTA ($3.7 billion, as of Dec. 31). The senior notes therefore permit $2.49 billion of additional secured debt (assuming revolver draws remain constant) before liens on Principal Property are restricted and are therefore not currently as restrictive as the credit agreements with respect to debt incurrence.
- Structurally senior debt - Nonguarantors’ ability to incur structurally senior debt is highly restricted under Southwestern’s debt documents. While the notes permit unlimited unsecured debt and the term loan permits nonguarantors to use the 4x gross leverage ratio unsecured debt basket, the RBL only permits nonguarantors to incur debt using its general debt basket, which is capped at $185 million.
- Investments, restricted payments - The senior notes do not contain any restrictions relating to investments or restricted payments. Both the RBL and term loan permit unlimited investments and restricted payments as long as certain “Payment Conditions” are met, though the conditions are different under each agreement.
The term loan Payment Conditions require that the gross leverage ratio is not greater than 3.25x and the collateral coverage ratio is at least 2x; both conditions are currently met. The RBL Payment Conditions require that availability is at least 20% of the RBL commitments and that the net leverage ratio is not greater than 3x. The availability condition is met, but the company may not be in compliance with a 3x net leverage ratio. Using the company’s reported adjusted EBITDA, we estimate the company’s total net leverage ratio to be 3.04x, out of compliance with the RBL Payment Conditions. However, given how close the estimated current ratio is to the 3x threshold, it is possible this net leverage test could be met on a pro forma basis as a result of revolver paydowns, increased cash or addbacks permitted by the RBL’s definition of adjusted EBITDA.
Other than the Payment Condition baskets, the term loan and RBL provide no general-purpose restricted payment capacity. Each agreement does provide $555 million of general investment capacity pursuant to a basket permitting investments not to exceed the greater of $150 million and 3.75% of ACNTA.
- Senior note purchases - The RBL restricts prepayments of the senior notes, junior lien term loan debt and any debt incurred using the RBL’s unsecured ratio debt basket. Southwestern is therefore not able to purchase its senior notes in the open market unless it can meet an exception.
The broad exception to the RBL’s prepayments covenant permits such payments as long as the “Payment Conditions” are satisfied. As discussed above, although the availability condition is met, the company may not be in compliance with a 3x net leverage ratio and therefore currently may not be able to use this exception.
The term loan only restricts the company’s ability to prepay subordinated debt.