TODAY S PANEL DAVID S. MEYER PARTNER, RESTRUCTURING DARIN W. SCHULTZ PARTNER, FINANCE

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2 TODAY S PANEL DARIN W. SCHULTZ PARTNER, FINANCE dschultz@velaw.com DAVID S. MEYER PARTNER, RESTRUCTURING dmeyer@velaw.com

3 DISCUSSION TOPICS Commodity Prices, Bankruptcies, and Workouts 04 Oil and Gas E&P Loan Market Trends 09 Oilfield Services Loan Market Trends 14 Midstream Loan Market Trends 22 Coal Loan Market Trends 27 Acquisition Finance Loan Market Trends 31 Direct Lending/Alternative Lending Loan Market Trends 36

4 COMMODITY PRICES, BANKRUPTCIES, AND WORKOUTS

5 COMMODITY PRICES, BANKRUPTCIES, AND WORKOUTS Commodity Prices Then and Now: Oil: WTI prices above $100/barrel through early and mid-2014 By January 2016, below $30/barrel Current prices in the mid-to-high $40/barrel to low $50/barrel range Natural Gas: Henry Hub spot prices as high as $7.00+/MMbtu in January/February of 2014 By March of 2016, around $1.50/MMbtu Current prices in the $3.00/MMbtu range

6 COMMODITY PRICES, BANKRUPTCIES, AND WORKOUTS Commodity Prices Then and Now: Coal: Central Appalachia prices around $64.50/short ton in January 2014 Prices steadily declined to below $40/short ton in October 2016 prior to the election Current prices in the $52/short ton range Note that Central Appalachia prices were above $130/short ton in 2008.

7 COMMODITY PRICES, BANKRUPTCIES, AND WORKOUTS Bankruptcy/Workout Activity: Well over 100 oil and gas E&P companies have filed for bankruptcy protection since late 2014 Well over 100 oilfield services companies have filed for bankruptcy protection since late 2014 By contrast, less than two dozen midstream bankruptcy filings since late 2014 Texas and Delaware are key filing locations Pace of new bankruptcy filings is declining Hundreds of other energy companies have consummated out-of-court restructurings and workouts or obtained lender relief

8 COMMODITY PRICES, BANKRUPTCIES, AND WORKOUTS Where we stand today: As a result of bankruptcies, workouts, lender concessions, and the divestiture of troubled portfolio companies, many energy companies have current debt loads that have been right-sized for the current commodity price environment Others are still struggling with debt levels and may face bankruptcies or workouts if lenders are unwilling to continue to extend financial accommodations Commercial bank lenders were hesitant to extend rescue financings, but commercial lending in the energy space has remained active overall.

9 OIL AND GAS E&P LOAN MARKET TRENDS

10 OIL & GAS E&P LOAN MARKET TRENDS Borrowing Base redeterminations: Initially, pain was delayed as a result of hedging coverage Lenders wanted to avoid mutually assured self-destruction Mortgage Requirements Trending up to 85-90% of present value of proved reserves Title Requirements Trending up to 85% of present value of proved reserves Minimum hedging requirements becoming more common Pricing still relatively borrower friendly in the upper-middle and large cap space; 2-3% or % range, based on borrowing base utilization or leverage

11 OIL & GAS E&P LOAN MARKET TRENDS Fees: Upfront fees in the bps/year range for a commercial bank deal (best efforts) Arrangement fees in the 50 bps to 75 bps range (best efforts) DACAs/Control Agreement becoming almost universal Anti-cash hoarding provisions less common; replaced by solvency reps made at each credit event

12 OIL & GAS E&P LOAN MARKET TRENDS Borrowing Base increases continue to require 100% lender approval Borrowing Base decreases and reaffirmations require 2/3 lender approval Sales/hedge unwinds exceeding 5% of the Borrowing Base result in a redetermination while 5% still most common, starting to see some 7.5% triggers Restricted payments still tightly limited. In sponsor-backed acquisition financings seeing unlimited restricted payments if leverage is 2.5x/2.75x and liquidity is in the 15-20% range; or restricted payments up to 10% of contributed capital if leverage is 3.0x and liquidity is 10%

13 OIL & GAS E&P LOAN MARKET TRENDS Leverage ratios at 4.0x very common Ability to net out unrestricted cash is scrutinized and highly negotiated Starting to see more net debt calculations (subject to a cap, however) Current ratio of 1.00x is the fairly common second financial ratio, but still see interest coverage ratios LIBOR floors becoming less common; LIBOR cannot be less than zero, though

14 OILFIELD SERVICES LOAN MARKET TRENDS

15 OILFIELD SERVICES LOAN MARKET TRENDS Oilfield services companies have been some of the hardest hit as a result of the commodity price collapse in late 2014 Immediate drop-off in revenues when drilling activities declined Extreme competition led to cut-throat pricing simply to maintain market share Bankruptcies, workouts, mergers, and private equity acquisitions became commonplace Many debt burdens were either formally discharged or were repaid at a deep discount to par

16 OILFIELD SERVICES LOAN MARKET TRENDS Prior to the commodity price collapse many OFS companies enjoyed cash-flow based revolvers and term loans with traditional financial covenants (e.g., leverage; interest coverage; current ratios) EBITDA levels at or below zero posed early challenges for how to refinance OFS companies Asset-based lending structures have filled this void Return to safety for commercial banks through monitored borrowing bases Financial covenant reprieve for weary borrowers

17 OILFIELD SERVICES LOAN MARKET TRENDS What comprises an ABL borrowing base? Eligible accounts receivables normally 85 to 90% advance rates Eligible unbilled accounts receivables normally 75-85% advance rates, but subject to a borrowing base cap Eligible inventory if relevant to a particular borrower, lesser of 65-80% of cost or market value and 85% of NOLV, subject to a BB cap (if not relevant to a borrower, maybe as low as 50% of cost or market value) Eligible equipment roughly 50-60% of lower of cost or market value, but higher if based on recent appraisal values Inventory/Equipment advance rates highly negotiated

18 OILFIELD SERVICES LOAN MARKET TRENDS Accounts Receivable Eligibility: Concentration limits for a particular account debtor 20-35% of all AR, but slightly higher (30-40%) if certain account debtor credit ratings are present Kickout of all of an account debtor s AR if more than 50% of such account debtor s AR is ineligible Subject to a number of other standards exclusive security interests, not overdue by more than a certain number of days, does not exceed a credit limit for such account debt determined by the lenders Similar eligibility based structure for inventory/equipment For lenders, ABLs are a safer, responsive form of lending

19 OILFIELD SERVICES LOAN MARKET TRENDS Only financial covenant is a springing fixed charge coverage ratio, triggered by an event of default or low borrowing availability (below roughly 15-20% of the BB) Once triggered, availability must be above the applicable trigger level for consecutive days to remove the financial covenant compliance requirement Springing cash dominion (lock boxes), enhanced borrowing base reporting (weekly instead of monthly), and additional field exams and inventory/equipment appraisals (two times a year instead of one time a year) also exist

20 OILFIELD SERVICES LOAN MARKET TRENDS Despite the de-emphasized financial covenant structure, EBITDA add-backs for restructuring costs, transaction costs, business optimization costs, and run rate cost savings are common Payment Conditions tests are used for purposes of making restricted payments and investments Based on either pro forma availability, or a combination of pro forma availability and pro forma FCCR DACAs/Lock Boxes required to permit cash dominion Solvency representation required at each credit event

21 OILFIELD SERVICES LOAN MARKET TRENDS Pricing still borrower friendly in the % to % range, based on a FCCR grid or a borrowing base/commitment utilization grid Upfront fees in the 50 bps to 75 bps range for a 5 year commercial bank deal (best efforts) Arrangement fees in the 50 bps range (best efforts), but lower if existing bank syndicate exists All-in (upfront and arrangement) fees of around 100 bps for a best efforts deal is a solid result for a borrower

22 MIDSTREAM LOAN MARKET TRENDS

23 MIDSTREAM LOAN MARKET TRENDS Midstream companies have been relatively insulated from the commodity price downturn Midstream often last to be affected because of firm commitment/take-orpay structures with producers What happens as producers start to declare bankruptcy? Update regarding Sabine running with the land issue

24 MIDSTREAM LOAN MARKET TRENDS Midstream finance terms are more borrower friendly and still largely reflective of pre-commodity price decline loan market terms Development projects in the Delaware/Permian Basins are fueling need for new financings Cash flow revolvers and traditional term loans remain go-to financings Still see x leverage ratios, with potential acquisition step-ups of 0.5x Interest coverage ratios in the 2.5x range

25 MIDSTREAM LOAN MARKET TRENDS Material project EBITDA adjustments in the 15-20% range Negative covenant flexibility still high; borrower-friendly restricted payment rights distribute broadly defined available cash as long as no default/event of default and pro forma financial covenant compliance (i.e., MLP style distributions remain) Tighter deals will require a x leverage ratio and a relatively modest 10-15% availability/liquidity cushion

26 MIDSTREAM LOAN MARKET TRENDS Upfront fees in the 50 bps to 62.5 bps range (best efforts) for a 5 year facility Arrangement fees in the bps range for high-end sponsor backed deals with existing banking relationships or in the bps range for other economically solid deals Pricing remains borrower friendly in the 2-3% or perhaps % range, usually based on a leverage ratio grid DACAs are more customary now Solvency reps often required at each credit extension

27 COAL LOAN MARKET TRENDS

28 COAL LOAN MARKET TRENDS Almost 50% of US coal now comes from companies that have declared bankruptcy in the last four years Of the 5 largest U.S. producers: Peabody Energy declared bankruptcy in 2016 Arch Coal declared bankruptcy in 2016 Cloud Peak Energy Alpha Natural Resources declared bankruptcy in 2015 Murray Energy Regulatory issues receive much media and political attention, but abundant domestic natural gas production has transformed the coal landscape

29 COAL LOAN MARKET TRENDS President Trump is easing Obama-era coal regulations (e.g., Interior Department s Stream Protection Rule removed; ongoing administrative review of the Clean Power Plan with an aim toward replacing the same; and ending President Obama's freeze on issuing new leases for coal mining on government-administered property) From a financing perspective, many U.S. commercial lenders are backing away from financing coal-fired power plants in the U.S. International coal-fired power plants in developing countries are still capable of receiving U.S.-sourced financing

30 COAL LOAN MARKET TRENDS Coal still a major source of U.S. electricity, but general unease regarding financing the sector Economic uncertainty in the coal sector has led to a fractured, bespoke loan market Various coal companies will have: Reserve-based credit facilities governed by a borrowing base Cash flow based revolvers Amortizing term loans Exit or debtor-in-possession credit facilities unique to the company s status following bankruptcy Private note issuances to holders such as insurance companies and pension/retirement funds

31 ACQUISITION FINANCE LOAN MARKET TRENDS

32 ACQUISITION FINANCE LOAN MARKET TRENDS As commodity prices began to fall in late 2014, oil and gas E&P companies were hesitant to divest assets despite severe liquidity needs Wait and see approach maybe prices will rebound? No one wants to be the example cited for selling at the bottom of the market Through much of 2015 when it was clear that commodity prices were not going to rebound and acquisition and divestiture activity may be in order, the market of willing buyers was limited

33 ACQUISITION FINANCE LOAN MARKET TRENDS A&D activity in 2016 and the first half of 2017 has been robust The perceived stigma of selling at current commodity price levels has waned Private equity funds have addressed many problems posed by existing portfolio companies Opportunistic capital has been raised/reserved and is ready to be deployed Most of the acquisition finance deals we have seen have been focused on oil and gas E&P and the underlying buy/sell transactions are frequently structured as asset deals

34 ACQUISITION FINANCE LOAN MARKET TRENDS Fully underwritten acquisition finance trends: Many current deals are being structured as RBL only Joint RBL/term loan structures were seen early on in the down-cycle, but lender appetite for revolving debt has returned Equity commitments at 45-50% of purchase price Relatively limited market flex rights: Pricing flex usually in the 100 bps range Ability to require tighter leverage ratios or increased pro forma availability/liquidity to make unlimited restricted payments Flex periods run for 60 days after closing (unless a successful syndication has been achieved sooner)

35 ACQUISITION FINANCE LOAN MARKET TRENDS Fully underwritten acquisition finance trends, cont: Pricing in the 2-3% or % range, based on borrowing base utilization or leverage Upfront fees in the 75 bps to 100 bps range for a 5 year commercial bank deal Structuring/arrangement fees of 1.50 to 1.75%; possibly another bps just to the lead-left arranger No return to top-of-the-market, sponsor-backed credit documents like in early 2014 Base credit agreement being used generally aligns with V&E s standard form of RBL credit agreement Sponsors are starting to win certain concessions, however

36 DIRECT LENDING/ ALTERNATIVE LENDING LOAN MARKET TRENDS

37 DIRECT LENDING/ALTERNATIVE LENDING LOAN MARKET TRENDS Traditional commercial banks are under increased regulatory pressures, especially in the oil and gas E&P space Leveraged lending guidelines issued in 2013 by the Federal Reserve, FDIC, and OCC: Leverage above 6x, inability to repay debt over a 5-7 year period, and over reliance on enterprise value/intangible assets as a source of repayment are red flags In March 2016, guidance specific to the oil and gas sector was released: Leverage above 3.5x, debt-to-capital ratios above 50%, and total committed debt greater than 65% of undiscounted proved reserves are red flags

38 DIRECT LENDING/ALTERNATIVE LENDING LOAN MARKET TRENDS Direct/alternative lenders are not restricted by these regulations Benefits to the borrower of working with direct/alternative lenders include: Often does not involve syndication or marketing of the financing, so increased closing certainty Given that leveraged lending guidelines don t apply to direct lenders, higher leverage is possible and deal structures can be more bespoke (first/second liens; mezz debt; structurally subordinated holdco loans; equity kickers overriding royalty interests, net profit interests, common equity issuances, penny or strike-price warrants, etc.)

39 DIRECT LENDING/ALTERNATIVE LENDING LOAN MARKET TRENDS Restrictions on the borrower of working with direct/alternative lenders: Term loans are typical since revolver mechanics are difficult for direct lenders to administer Higher interest rates than commercial bank lending; sometimes PIK interest in whole or in part Call protections frequently exist (hard-call or soft-call) Covenant restrictions will be tighter than commercial bank deals (i.e., less negative covenant flexibility/baskets until borrower de-levers; potentially more need to obtain costly lender consents)

40 DIRECT LENDING/ALTERNATIVE LENDING LOAN MARKET TRENDS Restrictions on the borrower of working with direct/alternative lenders, cont: Increased informational and financial reporting Board seats held by direct lenders or board observation rights Annual/quarterly management calls Approved plans of development/capital expenditure plans

41 DIRECT LENDING/ALTERNATIVE LENDING LOAN MARKET TRENDS Who are we talking about? Players in the energy space include Apollo, HPS, Angelo Gordon, Chambers, Ares, Goldman Sachs, EIG, TPG, Magnetar, and others Market share is growing Consider direct lending vs. preferred equity structures

42 THANK YOU Austin T Beijing T Dallas T Dubai T Hong Kong T Houston T London T Moscow T New York T Palo Alto T Richmond T Riyadh T San Francisco T Taipei T Tokyo T Washington T