WPX Debt Debacle Spurs Investors to Call for Tighter Terms

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Bondholders are calling on each other to keep companies and their bankers accountable for loosely written debt documents after they found themselves defenseless against a redemption of WPX Energy securities at below-market prices.

The Credit Roundtable, an industry group for bondholders, says that covenants dictating when issuers are able to buy back debt after staging an equity offering need to be strengthened, according to an open letter Friday. Holders take the language to mean a company raises cash through a public or private share sale.

But Devon Energy Corp. argues that its all-stock merger with WPX qualifies, and it’s calling WPX bonds at prices that could stick some recent buyers with losses and leave others feeling shortchanged.

“This highlights how ambiguous covenants in bond documentation can create flexibility for a company to choose to transfer wealth from debt holders to shareholders,” the Credit Roundtable said in the letter.

Words Matter

While creditors can’t do much about it now, bondholders contend that a repeat can be avoided if the covenant language is tightened to specify that issuing equity means raising new capital.

This would preclude the use of a stock swap, and more broadly help ensure that companies stick to the intended spirit of the documentation instead of stretching it to fit what’s legally within their rights.

“It’s only after something like this happens that bondholders realize that the wording was not clear enough for them to be able to have any recourse,” Louise Pitt, secretary to the board of the Credit Roundtable, said in an interview. “In an environment in which yield is scarce and covenants are more lenient toward issuers, this is a reminder to the buy side to advocate for stronger covenants where relevant,” said Pitt, who is head of credit research at RPIA in Toronto.

Redemption Pain

Devon is planning to redeem $700 million of WPX notes due in 2027, 2028 and 2030 -- 35% of the combined principal outstanding. The bond documents say the company can do this if it raises equity, but holders say Devon’s interpretation to include the all-stock merger will leave them shortchanged, since the notes will be called at a price well below where they traded prior to the redemption notice.

The 2028 bonds, for example, can be redeemed at 105.875 cents on the dollar, but they were quoted as high as 108.875 the day before Devon’s March 11 statement announcing the redemption. They changed hands for almost 111 cents in January and will be redeemed by March 26.

Devon didn’t try to disguise the point of the transaction. Chief Financial Officer Jeff Ritenour called it an “important step” in the company’s plan to return value to shareholders.

©2021 Bloomberg L.P.

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