The common shares of E&P company Cobalt International Energy, Inc. are listed on the NYSE, and, on 10 October the Exchange notified the company that it was not in compliance with NYSE listing standards because the company’s shareholders’ equity and average market capitalization for the preceding 30 trading days were each below the required USD 50m minimum amount. Failure to comply with the listing standards could lead to a delisting of the company’s common shares, which traded yesterday at USD 0.99 for a market capitalization of USD 29.6m. In this report, the Debtwire legal analyst team discusses the effects of the NYSE notice and the effects of a potential delisting on the company’s long-term debt.
Cobalt does not have any bank debt but has four series of notes: two series of secured notes and two series of unsecured convertible notes. Both series of convertible notes provide a put right at par upon a “Fundamental Change,” which includes a delisting of the company’s common shares.
Trading prices suggest that it might not be in the best interests of convertible noteholders to put their notes upon a delisting, which could hasten a bankruptcy filing and lead to minimal recoveries under the convertible notes. On the other hand, secured noteholders may be considering using a delisting to push the company into default, which would require a cross-default or cross-acceleration from the convertible notes. Both series of secured notes provide for a T+50bps make-whole if accelerated before 1 December 2018.
We conclude that it is unlikely secured noteholders could use a delisting to cross-trigger an Event of Default under the secured notes and obtain a make-whole in connection with the delisting, unless secured noteholders cross-hold 25% or more of any individual series of convertible notes.
The company’s capital structure was as follows as of 30 June 2017:
Both series of secured notes refinanced a portion of the then-existing convertible notes. With the refinancings, the company has exhausted capacity to incur additional first- and second-lien debt, and existing covenant restrictions do not permit 1.5-lien debt. Therefore, another refinancing of convertible notes with secured debt is likely not an option.
The NYSE notice has no immediate impact on any of the notes
The notice of noncompliance has no immediate impact on the company’s listing of its common shares and therefore no immediate impact on any of the notes, including the convertible notes’ put options, which are exercisable only after the shares are actually delisted.
Under NYSE rules, Cobalt has until 24 November (45 calendar days from 10 October) to submit a business plan demonstrating how it intends to regain compliance with the Exchange’s continued listing standards. During that period, the shares will continue to be listed. Assuming the Exchange accepts the business plan, Cobalt’s common shares will continue to be listed past 24 November, subject to quarterly monitoring for plan compliance.
But approval of the business plan is not a given. Earlier this year the company faced a potential delisting for failure to maintain a share price of at least USD 1.00, which it cured by a reverse stock split. And, according to Debtwire estimates, Cobalt has generated negative adjusted EBITDA since at least 2014.
The earliest date that a delisting could trigger a default is 30 days following a delisting, as discussed below.
If the common shares are ultimately delisted, the delisting would constitute a “Fundamental Change” under the convertible notes and trigger a put right for those notes.
Each series of convertible notes requires the company, within 30 calendar days of a delisting, to provide a Fundamental Change repurchase notice to convertible noteholders and, between 30 and 45 business days following the notice, repurchase any notes that are put.
Under each series of convertible notes, there are two separate Events of Default that could occur in connection with a delisting: Cobalt fails to provide the repurchase notice for that series or, upon a required repurchase, Cobalt fails to pay the principal of any notes of that series that are put.
In either case, convertible noteholders representing 25% of the outstanding principal of a defaulting series could immediately accelerate. Twenty-five percent of each of the convertible notes due 2019 and 2024 was USD 154.8m and USD 196.7m, respectively, as of 30 June, which, based on recent trading, equates to a market value of just USD 21.8m and 24.8m, respectively. At those prices, some secured noteholders may consider it worthwhile to take a 25% position.
Secured noteholders could take a smaller position than 25%, but, if the company failed to honor its repurchase obligations, those noteholders (or the trustee) may need to sue the company to enforce their repurchase rights. That approach also has less preferable implications under the secured notes, as discussed further below.
The convertible notes could not be amended to remove the risk that cross-holders could declare an Event of Default, because the convertible notes do not permit amendments or modifications to the company’s obligation to make repurchase payments if in any manner adverse to convertible noteholders. Nor do the notes permit an Event of Default to be waived if it results from a failure to repurchase notes when required.
If one series of convertible notes default and the other does not, an Event of Default would be cross-triggered under the non-defaulting series upon failure to pay the repurchase amount or upon acceleration of the defaulting series, subject to a 30-day cure period. A default under either series of convertible notes could also trigger a default under the secured notes, as discussed below.
Secured note cross-default/acceleration complications
If the Company’s common shares were ultimately delisted, that would not, by itself, accelerate or trigger an Event of Default under the secured notes. However, if, following a delisting, Cobalt failed to comply with its repurchase obligations under the convertible notes, an Event of Default could be triggered under the secured notes. In such case, holders representing 25% of the outstanding principal of any individual series of secured notes could immediately accelerate that series.
The relevant Event of Default provisions are identical under each series of secured notes and include a cross-default for “failure to pay principal” of the convertible notes and a cross-acceleration for non-payment defaults.
As discussed above, under the convertible notes, it would constitute a failure to pay principal if the company provides a repurchase notice but subsequently fails to repurchase any convertible notes that are put. In that scenario, a cross-default would be triggered under the secured notes.
However, if the company fails to provide a repurchase notice to convertible noteholders, then secured noteholders could not immediately claim a failure to pay principal on the convertible notes, because the Event of Default (EoD) under the convertible notes would not yet be a failure to pay principal but instead be an EoD for failure to provide a repurchase notice. Upon expiration of the repurchase timeline (30 calendar days plus 45 business days, following the delisting), secured noteholders could potentially claim that a failure to pay principal occurred under the convertible notes, though that would be a more difficult route than simply accelerating.
Accordingly, if secured noteholders think the NYSE will not accept Cobalt’s business plan and have an interest in forcing a default, it might make sense for secured noteholders to take a 25% position in any individual series of convertible notes, rather than risk the company choosing to skip the repurchase notice. Otherwise, it could be difficult for those holders to use a delisting to cross-trigger an Event of Default under the secured notes.
Finally, should secured noteholders push the company into default, the risk that a bankruptcy court would not award them their make-whole premium appears pretty low thanks to what we view as a very explicit make-whole trigger in the acceleration provisions themselves—clearing both the Second Circuit Momentive and Third Circuit Energy Future Holdings tests. Specifically, the secured notes’ acceleration provisions provide that:
“If the Notes are accelerated or otherwise become due prior to their maturity date, in each case, as a result of an Event of Default prior to December 1, 2018, the amount of principal of, accrued and unpaid interest and premium on the Notes that becomes due and payable shall equal 100% of the principal amount of the Notes redeemed plus the Applicable Premium in effect on the date of such acceleration, as if such acceleration were an optional redemption of the Notes accelerated plus accrued and unpaid interest.”
This language not only appears sufficiently explicit to pass the bar for the Momentive case but also skips the “optionality” question, as the acceleration provision here does not require optionality but instead requires acceleration to be treated as if it were an optional redemption. According to the redemption provisions, the make-wholes would be calculated at a T+50 discount rate, though the premium amount would be smaller than is typical, because each of the secured notes are callable at par after expiration of the make-whole period.
by Joseph Henry
Joseph (“Jody”) Henry is a member of Debtwire’s legal analyst team. Jody previously worked as an associate analyst at research firm Covenant Review and joined Acuris in 2015, where his coverage has focused on LBOs, refinancings, and out-of-court restructurings.
Any opinion, analysis, or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice, and subscribers should consult with their own legal counsel for matters requiring legal advice.