S&P Downgrades PetroQuest Energy (PQ) to 'CC' Amid Launch of Exchange Offer

Standard & Poor's Ratings Services lowered its corporate credit rating on PetroQuest Energy Inc. to 'CC' from 'B-'. The outlook is negative.

We also lowered the issue-level rating on the company's $350 million 10% senior unsecured notes due September 2017 to 'CC' from 'B-'.

"The downgrade follows PetroQuest's announcement that it has launched an exchange offer to existing holders of its $350 million senior unsecured notes for cash and a new issue of 10% senior secured second-lien notes due 2021," said Standard & Poor's credit analyst Daniel Krauss.

The company is offering to repay noteholders 25% of par value in cash, and offering an exchange of new second-lien senior secured notes for the remaining portion of unsecured notes at 90% of par. The closing date is expected to occur by the middle of February 2016.

We view the transaction as a distressed exchange because investors will receive less than what was promised on the original securities. Additionally, in our view, the offer is distressed, rather than purely opportunistic, given the current challenging operating environment, and meaningful upcoming debt maturities. The company's revolving credit facility matures on Feb. 19, 2017, if any portion of the company's senior unsecured notes are outstanding at that date.

The outlook is negative. Once the transaction has closed, we expect to lower the corporate credit rating to 'SD' (selective default) and the issue-level rating on the $350 million notes to 'D'. We would then review the ratings based on the new capital structure and consider an upgrade when there is more certainty that the company is no longer pursuing distressed exchanges. We also expect to rate the new second-lien notes when there is more detailed information about the resulting capital structure.

We could raise the ratings if the transaction does not close.

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