Templar Energy LLC #CC# Second-Lien Debt Rating Off CreditWatch Negative

Stocks and Financial Services Press Releases Friday February 12, 2016 09:20
NEW YORK--12 Feb--Standard & Poor's

NEW YORK (Standard & Poor's) Feb. 11, 2016--Standard & Poor's Ratings Services today affirmed its 'CC' issue-level rating on Templar Energy LLC's second-lien debt and removed it from CreditWatch, where we placed it with negative implications on Feb. 9, 2016. The recovery rating remains '5', indicating our expectation of modest (10% to 30%, upper half of the range) recovery in the event of a payment default. The 'CCC-' corporate credit rating and negative outlook are unaffected.

"The rating action follows our updated recovery analysis for Templar," said Standard & Poor's credit analyst Michael Tsai.

The valuation for Templar reflects the company's year-end 2015 PV-10 report, using our revised recovery price assumptions of $50 per barrel for West Texas Intermediate (WTI) crude oil, $3.00 per million British thermal unit for Henry Hub natural gas, and natural gas liquids priced at the historical 12-monthaverage realization.

The 'CCC-' corporate credit rating on Templar reflects our assessment of the increased risk the company will be overdrawn on its reserve-based lending facility when the borrowing base is redetermined in spring 2016. As of Sept. 30, 2015, the company had $450 million drawn on the facility and a current borrowing base of $560 million, which was lowered in November 2015 from $640 million. Since then, crude oil and natural gas prices have moved lower, which likely effect the price decks lenders will use to determine the borrowing base in the spring. Additionally, the continued expiration of hedges, which can support a higher borrowing base, will result in a negative bias during the next redetermination. With only about $26 million cash on hand as of Sept. 30, 2015, we expect the company would likely need to restructure debt with lenders and/or call down capital from its financial sponsor to avoid entering into a default.

We assess Templar's business risk as weak. We assess Templar's financial risk as highly leveraged, which reflects our projected credit measures and its financial sponsor ownership. We assess liquidity as less than adequate, which reflects the increased risk the company will be overdrawn on its reserve-based lending facility when the borrowing base is redetermined in spring 2016.

The negative outlook reflects the likelihood we would lower the rating if the company successfully executes an exchange or repurchase of its second-lien debt at discount, which we would likely consider distressed, or if the company is in breach of covenants on its reserve-based lending facility or if the borrowing base decreased such that the company would be overdrawn and are unable to pay down required amounts.

We could raise the rating if the company is able to successfully manage liquidity through the borrowing-base redetermination cycle, and we expect there would not be the likelihood of a distressed exchange.

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