Some cash-strapped U.S. oil and gas companies are considering creating an unusual layer of debt as a way of surviving the rout in oil and gas prices, Maritime Professional reported today. Severely distressed companies may issue so-called 1.5-lien debt, sandwiched between the first- and second-liens, to raise new capital. Investors with a stomach for risk would get a better yield than for the top debt, and have a stronger claim than junior creditors if the company filed for bankruptcy. Companies could also create a new, middle layer of debt to swap with existing bondholders, offering them the option of giving up principal to jump the queue for repayment in the event of a bankruptcy. Only six companies have done 1.5-lien deals over the past several years, according to Moody's Investors Service. The swap would make sense for companies like Chesapeake Energy Corp. because its bonds maturing in 2017 and 2018 are trading at depressed levels, analysts said. However some credit-rating agencies view the exchange of new 1.5-lien secured notes for existing senior unsecured and 2nd lien secured notes as a distressed exchange and a limited default depending on their definition of default.
