S&P Cuts Outlook on EXCO Resources (XCO) to Negative

Standard & Poor's Ratings Services affirmed its 'B-' corporate credit rating on EXCO Resources Inc. (NYSE: XCO), and revised the outlook to negative from stable. At the same time, we affirmed our 'B+' issue-level rating on the company's senior secured bank debt and our 'CCC' issue-level rating on its senior unsecured notes.

"The outlook revision reflects our belief that EXCO's capital structure could become unsustainable in the next couple of years, given our expectation that commodity prices will remain depressed for longer than previously expected," said Standard & Poor's credit analyst Christine Besset. "We believe that development opportunities yielding satisfactory rates of returns have diminished and that the company's growth prospects for production and cash flow generation have weakened," said Ms. Besset.

As a result, Standard & Poor's expects the company's leverage to remain elevated for a longer period of time than previously anticipated. In addition, although we characterize liquidity as "adequate," it will likely deteriorate within the next 12 to 24 months unless the company finds additional external funding, including asset sales or capital markets transactions. We view EXCO's business risk profile as "vulnerable," as defined in our criteria. We consider the company's financial risk profile to be "highly leveraged."

The negative outlook reflects our belief that EXCO's capital structure could become unsustainable next year as we expect commodity prices to remain weak for longer than previously expected and liquidity will likely deteriorate in 2016 unless the company finds additional financing. We could lower the rating if we viewed debt leverage as unsustainable or liquidity deteriorated such that we viewed it as "less than adequate."

We could return the rating outlook to stable if we believed that EXCO could generate EBITDA sufficient to cover annual interest charges of about $110 million and maintenance capex of about $250 million, which would most likely occur if commodity prices recovered materially.

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