ANNUAL REPORT 2011 - Connacher Oil and Gas

AR 2011
PG 31
NEW NOTES
We issued US$550 million face value 8.5% Senior Secured Second Lien Notes due August 1, 2019 and CAD$350 million face value 8.75% Senior
Secured Second Lien Notes due August 1, 2018 at par and capitalized transaction costs of $17.6 million relating to their issuance.
Interest is payable semi-annually on February 1 and August 1 each year the New Notes are outstanding. The New Notes are secured on a second
priority basis by liens on all of the company’s existing and future property, excluding certain pipeline assets in the USA.
Proceeds received from the sale of collateralized assets (excluding oil and gas properties for which no reserves have been assigned) are required to
be re-invested in existing oil and gas properties, to acquire new oil and gas properties or to repay the Facility. If such proceeds are not used for these
purposes within one year, the company is required to make an offer to repurchase the New Notes at par to the extent such proceeds exceed $25
million plus any re-invested and repaid amounts. Following an offer to purchase the New Notes in connection with an asset sale, the company may
redeem all or part of the US-dollar denominated New Notes at 108.5 percent and Canadian-dollar denominated New Notes at 108.75 percent with
any remaining asset sale proceeds. As of December 31, 2011, all asset sale proceeds have been re-invested in our oil and gas properties.
Provisions in the indenture allow the company to redeem the New Notes as follows:
• at any time prior to August 1, 2014, the company may redeem up to 35 percent of the US-dollar denominated New Notes at a price of 108.5
percent and up to 35 percent of the Canadian-dollar denominated New Notes at the price of 108.75 percent with proceeds of equity offerings of
at least $10 million;
• at any time prior to August 1, 2015, the company may redeem some or all of the New Notes at their principal amount plus a make whole premium
plus applicable interest;
• after August 1, 2015, the US-dollar denominated New Notes may be redeemed at redemption prices ranging from 104.25 percent, reducing to
100 percent on August 1, 2017 and thereafter; and
• after August 1, 2015, the Canadian–dollar denominated New Notes may be redeemed at redemption prices ranging from 104.375 percent
reducing to 100 percent on August 1, 2017 and thereafter.
In the event of a Change of Control of the company, the holders of the New Notes have the right to require the company to purchase the New Notes
at a price of not less than 101 percent of the principal amount to be repurchased.
The company repurchased US$783.5 million face value of the outstanding 11 ¾% First Lien Senior Notes and 10 ¼% Second Lien Senior Notes
(the “Old Notes”) (representing 99% of the Old Notes outstanding) for cash consideration of US$854.7 million (CAD$835.9 million). The company
determined that this transaction resulted partially in a modification and partially as an extinguishment of debt. Accordingly, the company recorded
$36.1 million as a discount on the New Notes and approximately $61.9 million was expensed in the consolidated statement of operations. The
repayment of US-dollar denominated Senior Notes in 2011 also resulted in the realization of a foreign exchange gain of $11.6 million.
The company redeemed remaining amounts outstanding relating to the Second Lien Senior Notes, 10 ¼% in January 2012.
CREDIT FACILITY
On May 31, 2011, the company entered into an Amended and Restated Senior Secured Revolving Credit Facility. The Facility provides for revolving
credit financing of up to $100 million, subject to borrowing base availability, including sub-facilities for letters of credit, swingline loans and borrowings
in Canadian dollars and U.S. dollars. The Facility has an accordian feature whereby the Company can increase the Facility to $125 million. All
outstanding loans under the new Facility are due and payable in full on May 31, 2014.
In the case of Canadian dollar drawings, borrowings under the new Facility bear interest at a rate per annum equal to the Canadian Prime Rate plus the
applicable margin; in the case of US dollar drawings at US Base Rate plus the applicable margin. The applicable margins for borrowings under the new
Facility are subject to steps up and steps down based on average ratings of the company’s debt as published by Moody’s and Standard and Poors.
In addition to paying interest on outstanding principal under the new Facility, the company is required to pay a standby fee in respect of the unutilized
commitments thereunder, which fee will be determined based on utilization of the new Facility with rates established in the Facility in a similar manner
to the interest margins. The company must also pay customary letter of credit fees equal to the applicable margin. As of December 31, 2011, the
Company’s interest rate on the new Facility was approximately 6.5%. The new Facility contains a requirement to maintain a ratio of consolidated total
debt to total capitalization of under 75% (with convertible debt treated as equity and with up to $120 million added to equity for IFRS conversion
adjustments) and borrowings under the new Facility cannot exceed two times trailing adjusted EBITDA.
All obligations under the new Facility are unconditionally guaranteed by the company, are secured by substantially all of the assets of the company,
including a first priority security interest on all current and future property, with the exception of certain pipeline assets in the USA.
As of December 31, 2011, the company had letters of credit outstanding under the Facility of $2.2 million. No other amounts were owed under
the Facility.