Tuesday, May 5, 2015

Sabine Enters Forbearance Agreement with Lenders

Sabine Oil and Gas announced this afternoon that it yesterday entered into a forbearance agreement on its revolving credit facility with its lenders, led by Wells Fargo.  Simply stated, the agreement postpones the banks from "exercising remedies" until June 30, 2015 for Sabine missing the April interest payment as well as upcoming borrowing base deficiency payments, and for its technical default caused by its auditor failing to declare the company a "going concern."  It may not sound like much, but the "going concern" wording itself could potentially crater the company by causing a domino effect of defaults.  Typically, lenders are a little more patient, though.

A forbearance usually comes at a cost, in this case tightening some borrowing covenants and mortgaging some unencumbered assets, but the price probably won't be anything like the pound of flesh the other debt holders will want to extract.  Since this forbearance covers the revolver, it takes care of some short-term problems, but the company has larger issues on the horizon with some pissed-off debt holders who were displeased about the Sabine/Forest Oil merger that was announced last year.  But with the forbearance, at least they have a little more time to come to some sort of ...arrangement (cue the sound of cracking knuckles).  The deal was too complicated for my little brain to understand, never mind explain, but here is the drawing:

Old Sabine/Forest:

New Sabine/Forest:

Bottom line:  forbearance means Sabine lives to fight another day, but the path doesn't get any easier.  Stranger things have happened, though.  A forbearance gives the company time to negotiate with its lenders, but will it also give oil prices time to go higher and maybe save the company's equity holders?  With oil "surging" past $60, the optimism may be rising, but the vultures are still circling.

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