S&P: Vanguard Natural Resources LLC Upgraded To 'CCC-' From 'SD' On Senior Unsecured Note Exchange; Outlook Negative
We also raised the issue-level rating on the company's senior unsecured debt to 'CCC-' from 'D', and revised our recovery rating to '4' from '5', indicating our expectation of an average recovery (30% to 50%, lower half of the range) in the event of default.
"The rating action follows Vanguard's partial exchange of its 7.875% unsecured notes maturing in 2020 for new 7% senior secured second-lien notes maturing in 2023 at less than par," said S&P Global Ratings analyst David Lagasse. "We viewed this transaction as a distressed exchange."
The ratings on Vanguard reflect our assessment of the company's modest-size reserve base, broad geographical diversity, high debt leverage, weak liquidity, and current overdraft on its credit facility.
The outlook is negative, reflecting the potential for a liquidity shortfall if the company's borrowing base is lowered again in the fall or if it breaches financial covenants and the facility becomes due. The outlook also reflects the potential for amendments to or restructuring of debt obligations that we would consider distressed.
We could lower the ratings if we expect liquidity to be insufficient to fund interest expense or other obligations as they come due, which would most likely occur if market conditions remained weak and the company was unable to come to an agreement with its banks. In addition, we would lower the ratings if the company commences a debt restructuring we view as distressed.
We could raise the ratings if the company improves liquidity and we assess the likelihood of additional exchanges as low. This could occur if the company were able to maintain its current borrowing base, obtain covenant relief, or execute additional asset sales to pay down its credit facility, most likely in conjunction with improved natural gas prices and cash flows.