S&P Cuts Halcón Resources (HK) to 'SD' Following Debt Exchange Deal
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On Aug. 28, 2015, Standard & Poor's Ratings Services lowered its corporate credit rating on Oklahoma City-based Halcón Resources (NYSE: HK) Corp. to 'SD' (selective default) from 'B-'.
We also lowered the issue-level rating on the company's senior unsecured notes due 2020, 2021, and 2022 to 'D' from 'CCC'. The recovery rating on the senior unsecured notes remains '6', reflecting our expectation of negligible (0% to 10%) recovery in the event of a conventional default. We affirmed the 'CCC+' issue-level rating on the company's senior secured second-lien notes due 2020. The recovery rating on the senior secured second-lien notes remains '5', reflecting our expectation of modest (lower half of the 10% to 30% range) recovery in the event of a conventional default.
In addition, we are assigning a 'CCC' issue-level rating to Halcón's proposed $1 billion senior secured third-lien note offering. The recovery rating on these notes is '6', reflecting our expectation of negligible (0% to 10%) recovery in the event of default.
"The downgrade follows Halcón's announcement that it reached an agreement with holders of portions of its senior unsecured notes to exchange the notes for new senior secured third-lien notes," said Standard & Poor's credit analyst Ben Tsocanos. "Noteholders agree to receive approximately $1 billion new secured notes for approximately $1.5 billion of existing unsecured notes," he added.
We view the transaction as a distressed exchange because investors receive less than what was promised on the original securities. We also note that the exchange reduces its approximately $3.65 billion of debt by about $500 million, improving financial leverage. We project debt to EBITDA to be about 4.1x at the end of 2015 and reach 5.6x in 2016.
We expect to review the corporate credit rating incorporating our assessment of the new capital structure and credit protection measures and review the issue-level ratings when we assess the likelihood of further debt exchanges as low. Our analysis will incorporate the company's improved liquidity position, while still taking into account the challenging operating environment and high, though improved, leverage.
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