Afren defaults on bond interest payment as restructuring talks continue, Fitch downgrades

Embattled oil explorer Afren has decided to default on its bond interest payments in order to preserve cash, sending its shares plunging and its credit rating downgraded on Wednesday.

The company, which is likely lose its place in the FTSE 250 in the current quarterly review, said it had decided not to pay $15m of interest due on 1 February 2015 under its 2016-expiry notes.

Afren said this will not result in an immediate obligation to repay the 2016 notes or any cross-default under its 2019 or 2020 notes or its other debt facilities after receiving assurances from an ad-hoc committee of bond holders holding approximately 55% of its 2016 bonds and 44% of the 2016, 2019 and 2020 notes.

This committee assured that it has "no current intention to take enforcement action".

Afren's management said this agreement had been made "in the hope and expectation" that an agreement can shortly be reached between the company and its key stakeholders on the terms of restructuring that would preserve Afren and its business as a going concern for the benefit of all stakeholders.

The default decision was made in order to preserve cash while a review of the company's capital structure and funding alternatives is completed.

Afren stated that if any agreement with bond holders is reached, a broader restructuring is likely to result in the new funding and/or the issue of new equity which will substantially dilute the interests of the company’s current shareholders.

On Monday, management obtained a further two-month deferral of the $50m amortisation payment due to the lenders of its $300mm Ebok debt facility due on 31 January.

Credit agency Fitch downgraded Afren's long-term issuer default rating 'restricted default' from 'C', following the company's default on its USD15m coupon payment under its 2016 notes, noting the company's lower oil production, higher gross leverage, recently reduced reserves and need for new management, let alone the high liquidity risk.

The company's senior secured rating was affirmed at 'C'/'RR6. A C rating means the overall credit risk is exacerbated by the expected low level of recoveries should a default occur.

Broker Westhouse pithily dismissed hopes for the company, noting that "even if the debt agreement is reached, there is going to be a material dilution" and maintained its 'sell' recommendation.