S&P: Comstock Resources Inc. Upgraded To 'CCC+' On Debt Restructuring; Outlook Negative; Various Rating Actions Taken On Debt
At the same time we assigned a 'CCC+' issue-level rating to the company's new 10% first-lien secured toggle notes. The recovery rating is '3', reflecting our expectation for meaningful (50% to 70%, upper half of the range) recovery in the event of default. We also assigned a 'CCC-' issue-level rating to the company's new 7.75% and 9.50% second-lien convertible payment-in-kind (PIK) notes. The recovery rating is '6', reflecting our expectation for negligible (0% to 10% recovery) in the event of default.
We also raised our issue-level rating on the company's remaining outstanding 10% senior secured notes to 'CCC-' from 'D'. We revised the recovery rating on these notes to '6', reflecting our expectations of negligible (0% to 10% recovery) in the event of default, from '2'. In addition, we raised our issue-level ratings on the company's 7.75% and 9.50% senior unsecured notes to 'CCC-' from 'D'. The recovery rating on these notes remains '6'.
"The rating actions on Comstock are in conjunction with the Sept. 6, 2016, close of their comprehensive debt exchange and our assessment of the company's revised capital structure and credit profile," said S&P Global Ratings credit analyst Aaron McLean.
The 'CCC+' corporate credit rating reflects our view that the company's debt levels are unsustainable under our current price assumptions. The recent debt exchange frees up approximately $37 million of interest payments per year related to the PIK feature on the second-lien notes and the potential for an additional $75 million tied to the PIK toggle feature on the first-lien notes that will help the company fund a new two-rig drilling program starting in October 2016. However, given our current price assumptions, we expect that liquidity constraints may lead the company to reduce its capital spending and that production could subsequently grow less than expected over the next 12 to 24 months.
The negative outlook reflects our expectation that Comstock's liquidity will deteriorate under our current pricing assumptions as the company outspends internally generated cash flows in 2017 and could be forced to seek additional debt restructuring if the second-lien convertible notes are not converted to equity.
We could lower the ratings if we foresaw a specific scenario of default within 12 months or the likelihood of further debt exchanges we would view as distressed increased.
We could raise the outlook to stable if Comstock is able to maintain adequate liquidity and reduce leverage to levels we view as sustainable. Such a scenario would be likely if commodity prices increased and business conditions improved.