Fitch Expects U.S. Upstream Sector M&A Activity to Pick Up; Bond Covenants to Play Key Role in Deals

Business Wire, June 23, 2009

CHICAGO -- Lower commodity prices have caused enterprise values to drop significantly across the U.S. upstream sector, pressuring smaller, more highly levered producers and those with significant exposure to North American natural gas, according to a new report issued today by Fitch Ratings. Because of cash stresses and uneven access to capital markets, Fitch anticipates that M&A activity in the upstream sector will pick up as larger, more conservatively financed names with strong balance sheets and solid access to capital markets take advantage of these conditions to acquire properties or companies. As such, bond covenants may play a larger role in how these M&A deals play out.

The current capital constrained market has caused financing considerations to assume new importance. As a result, the restrictions that bond covenants impose on potential acquirers are of heightened interest. In particular, the presence of financially restrictive covenants within a target's outstanding debt, including change of control provisions and asset sale restrictions, may limit the financial or operational flexibility of an acquirer, all else equal. Conversely, firms with relatively light covenant restrictions or restrictions which apply to only a small portion of debt outstanding may not significantly limit the flexibility of an acquirer. Most important to note is the change of control covenant, which offers significant protections to bondholders and can be costly in terms of liquidity insofar as it may force the repurchase of notes outstanding in the event of a takeover.

To access the full report 'Covenant Considerations and Upstream M&A', please visit the Fitch web site at www.fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.