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Shale Company Defaults On $175 MM In Bonds Without Making Even One Coupon Payment

It was just this past June when a report on Seeking Alpha quizzically asked, "Can American Eagle Energy Corporation Fly High Like An Eagle Over The Next Months?"

 

The answer, it turns out, is no.

According to a Bloomberg report, the Colorado oil producer, whose stock is now trading at a very sub-eagle $0.20, or about $6MM in market cap (the stock was at $6.00 when the Seeking Alpha report came out) has announced it will not make even one coupon payment on its bonds issued less than seven months ago.

Bloomberg reports that after raising $175 million in a junk-bond offering, American Eagle Energy Corp. said Monday that it wouldn’t make its first interest payment on the debt. And instead of fulfilling its naive bondholders dreams that they will collect an 11% annual coupon for the next 5 years and then get repaid in full, the company hired bankruptcy advisers, Canaccord Genuity and Seaport, to negotiate a restructuring plan with the bondholders. Said bondholders now have two options: give the company more time to try to become profitable (i.e., hope that oil somehow soars from here) or push it into default, and become the new equity holders following a debt for equity.

None of this should be a surprise to anyone, and certainly not our readers, whom we warned on October 14 that "If The Oil Plunge Continues, "Now May Be A Time To Panic" For US Shale Companies." We should have added bondholders of shale companies to the list of panickees.

“American Eagle Energy’s small scale and relatively high drilling costs made it the one of the first victims of the drop in energy prices,” said Spencer Cutter, a credit analyst at Bloomberg Intelligence. “It was also unfortunate that oil prices dropped so much soon after the bond was issued, causing it to skip its first-ever interest on the debt.”

It won't be the last. Recall that just over a month ago we laid out a matrix created by Goldman showing which shale companies will be the next to pop. AEE wasn't even on the list:

 

As for AEE, its existing shareholders are now wiped out, while the yield-scrambling debt investors instead of pocketing a solid 11% yield for 5 years are now looking at an 80% loss - the $175MM 11%s of 2019 were trading at 20 cents of par at last check.

And since the company won't have any cash to repay anyone, the bondholders will end up with the equity, the problem is that this is equity in a company which even post restructuring, will be unviable absent oil returning back to the $80+ ballpark (the first-lien debt trades at 40 cents on the dollar).

Marty Beskow, a spokesman at American Eagle Energy, didn’t respond to e-mailed messages and telephone calls seeking comment. Scott Davidson, a spokesman at Canaccord, and Tanya Alvear, a spokeswoman at Seaport Global, declined to comment.

It is somewhat ironic that Canaccord was also one of the bond deal underwriters...

The Littleton, Colorado-based company stopped drilling in
November and suspended its 2015 capital plan because of the drop in oil
prices, according to a statement Monday. West Texas Intermediate crude,
the U.S. benchmark, traded near $51 a barrel on Thursday, down from more
than $107 in June.

What is perhaps most odd is that American Eagle Energy actually had downside oil hedges: the only problem, they were not nearly enough!

The driller’s financial problems became apparent to lenders in December when its ability to borrow on a revolving line of credit, which was initially as much as $60 million, was canceled, according to a company statement on Dec. 31. To raise cash, American Eagle Energy closed out hedge positions that protected it from falling oil prices, raising $13 million that represented 414,000 barrels of oil at an average of $89.59 each, according to a Dec. 31 filing.

The company was insolvent 2 months later.

And since AEE is effectively in default without making a single coupon payment, all those bond traders who were alive in a happier and far less centrally-controlled time and recall the infamous case of Movie Gallery, which was the last such instance to issue debt only to go bankrupt without making even one payment (Goldman was the underwriter) can raise a toast to happier times and recall how that snowy day in early 2007 during the Movie Gallery roadshow which coincided with the peak of the last credit bubble, was the true harbinger (before even the subprime blow up) of the financial system collapse that would ensue just over a year later.

The question now is: is American Eagle Energy this generation's Movie Gallery?