Embattled China Oil Firm Tries to Avert Distress in Bond Tender

(Bloomberg) -- The Chinese oil exploration group MIE Holdings Corp. is seeking to buy more time to repay bondholders as it tries to avert further financial distress, and is willing to almost double its debt-servicing costs to do so. The company has bled cash in the past 12 months, among explorers and industry firms that have found the going tough after crude fell from highs at the end of last year. The tender offer is a better outcome for existing holders, compared to a scenario of an outright default where the recovery amount would be extremely low, according to Leonard Law, an analyst at Lucror Analytics in Singapore. Bondholders could face weak recovery prospects if the company were unable to repay them at the original maturity of the debt. As unsecured creditors, they would stand behind a queue of secured and priority-ranking creditors with 3.16 billion yuan ($472 million) of claims on the group, according to Fitch Ratings.

Exchange Offer Details

MIE is offering to exchange its existing $315.9 million of 7.5 percent notes due on April 25 with new three-year notes paying 13.75 percent annual coupon, according to terms announced on Friday.

Traders have pushed down the price of those notes every month since April 2018 into distressed levels. This follows an earlier move to amend a put option on HK$340 million ($43.3 million) of convertible bonds from Jan. 26 to March 15.

The debt exchange requires no less than 90 percent acceptance level, and comes with an upfront partial cash repayment incentive and a pledge to buy back the new notes from the open market with free cash flow.

Key Insights

But the company’s cash position ahead remains to be seen, as the industry continues to struggle.

Credit markets have already shown mounting concern about the company, amid the broader backdrop of default woes among Chinese borrowers.

Now, noteholders will have to decide whether the extra yield they’d get if they agree to the exchange would be worth essentially making a longer-term commitment to the company.

Most investors in separate MIE bonds had spurned a distressed buyback offer in 2017, and wound up getting repaid in full at maturity the following year. But, as credit strains have increased since, noteholders face a different calculus this time.

“Unlike the previous tender offer exercise in 2017, this is not considered a selective default as there is no haircut on the principal,” said Law at Lucror, which has dropped coverage on MIE and has no recommendation on its bonds.

“That said, MIE’s operating profile remains poor and its liquidity is inadequate," he said. “The company is likely to remain distressed in the absence of a significant surge in oil prices.”

2019-03-01 03:34:06.917 GMT

By David Yong