Annual report pursuant to Section 13 and 15(d)

Borrowings

v3.20.4
Borrowings
12 Months Ended
Dec. 31, 2020
Debt Disclosure [Abstract]  
Borrowings Borrowings
The Company’s borrowings consisted of the following:
As of December 31,
2020 2019
(In thousands)
Senior Secured Revolving Credit Facility due 2024 $985,000  $1,285,000 
9.00% Second Lien Senior Secured Notes due 2025
516,659  — 
6.25% Senior Notes due 2023
542,720  650,000 
6.125% Senior Notes due 2024
460,241  600,000 
8.25% Senior Notes due 2025
187,238  250,000 
6.375% Senior Notes due 2026
320,783  400,000 
Total principal outstanding 3,012,641  3,185,000 
Unamortized discount on Second Lien Notes (41,820) — 
Unamortized premium for 6.25% Senior Notes
2,917  4,838 
Unamortized premium for 6.125% Senior Notes
3,236  5,344 
Unamortized premium for 8.25% Senior Notes
3,240  5,286 
Unamortized deferred financing costs for Second Lien Notes (3,931) — 
Unamortized deferred financing costs for Senior Notes (7,019) (14,359)
Total carrying value of borrowings (1)
$2,969,264  $3,186,109 

(1)    Excludes unamortized deferred financing costs related to the Company’s Credit Facility of $23.6 million and $22.2 million as of December 31, 2020 and 2019, respectively, which are classified in “Deferred financing costs” in the consolidated balance sheets.
Senior Secured Revolving Credit Facility
On December 20, 2019, upon consummation of the Merger, the Company entered into the senior secured revolving credit facility with a syndicate of lenders (the “Credit Facility”). The credit agreement governing the Credit Facility provides for interest-only payments until December 20, 2024 (subject to springing maturity dates of (i) January 14, 2023 if the 6.25% Senior Notes due 2023 (the “6.25% Senior Notes”) are outstanding at such time, (ii) July 2, 2024 if the 6.125% Senior Notes due 2024 (the “6.125% Senior Notes”) are outstanding at such time, and (iii) if the Second Lien Notes, defined below, are outstanding at such time, the date which is 182 days prior to the maturity of any of the 6.25% Senior Notes or the 6.125% Senior Notes, in each case, to the extent a principal amount of more than $100.0 million with respect to each such issuance is outstanding as of such date), when the Credit Facility matures and any outstanding borrowings are due. The maximum credit amount under the Credit Facility is $5.0 billion.
On December 31, 2020, the borrowing base and the elected commitment amount under the revolving credit facility was $1.6 billion, with borrowings outstanding of $985.0 million at a weighted average interest rate of 2.73%, and letters of credit outstanding of $25.2 million. The borrowing base under the credit agreement is subject to regular redeterminations in the spring and fall of each year, as well as special redeterminations described in the credit agreement, which in each case may reduce the amount of the borrowing base. The Credit Facility is secured by first preferred mortgages covering the Company’s major producing properties. The capitalized terms which are not defined in this description of the Credit Facility shall have the meaning given to such terms in the credit agreement.
On May 7, 2020, the Company entered into the first amendment to its credit agreement governing the Credit Facility. The amendment included, but was not limited to the following:
Established a new borrowing base as a result of the spring 2020 scheduled redetermination in the amount of $1.7 billion and reduced the elected commitments to $1.7 billion, which were subsequently revised as described below;
Permits the incurrence of, among other things, new second lien notes in 2020 exchanged for unsecured notes in an aggregate principal amount of up to $400.0 million without triggering a reduction in the borrowing base so long as any such second lien notes are subject to an intercreditor agreement providing that the liens securing the second lien notes rank junior to the liens securing the credit agreement;
Provides that testing of the Leverage Ratio is suspended until March 31, 2022, as of which testing date and the last day of each fiscal quarter ending thereafter, such ratio may not exceed 4.00 to 1.00;
Provides for testing of the Secured Leverage Ratio that may not exceed 3.00 to 1.00 on a quarterly basis beginning with the quarter ended March 31, 2020 through the quarter ending December 31, 2021; and
Provided that the testing of the Current Ratio was suspended until September 30, 2020, as of which testing date and the last day of each fiscal quarter ending thereafter, such ratio may not be less than 1.00 to 1.00
On September 30, 2020, the Company entered into the second amendment to its credit agreement governing the Credit Facility. The amendment, among other things, reaffirmed the $1.7 billion borrowing base as a result of the fall 2020 scheduled redetermination.
Also on September 30, 2020, the Company entered into the third amendment to its credit agreement governing the Credit Facility. The amendment included, but was not limited to the following:
Established a new borrowing base of $1.6 billion and reduced the elected commitments to $1.6 billion in connection with the issuance of the September 2020 Second Lien Notes and September 2020 Warrants, described below, and the ORRI Transaction;
Permitted the issuance of the $300.0 million of September 2020 Second Lien Notes as contemplated by the Purchase Agreement, described below, without triggering a reduction in the borrowing base;
Extends through the end of 2021 the time period during which second lien notes issued in exchange for unsecured notes may be issued without triggering a reduction in the borrowing base; and
If the Second Lien Notes are outstanding at such time, caused the maturity of the Credit Facility to spring forward to a date which is 182 days prior to the maturity of any of the 6.25% Senior Notes or the 6.125% Senior Notes, in each case, to the extent a principal amount of more than $100.0 million with respect to each such issuance is outstanding as of such date.
Borrowings outstanding under the credit agreement bear interest at the Company’s option at either (i) a base rate for a base rate loan plus a margin between 1.00% to 2.00%, where the base rate is defined as the greatest of the prime rate, the federal funds rate plus 0.50% and the adjusted LIBO rate plus 1.00%, or (ii) an adjusted LIBO rate for a Eurodollar loan plus a margin between 2.00% to 3.00%. The Company also incurs commitment fees at rates ranging between 0.375% to 0.500% on the unused portion of lender commitments, which are included in “Interest expense, net” in the consolidated statements of operations.
The Company terminated the Sixth Amended and Restated Credit Agreement to the Credit Facility (the “Prior Credit Facility”), which was entered into on May 25, 2017, upon entering into the Credit Facility described above. As a result of terminating the Prior Credit Facility, the Company recorded a loss on extinguishment of debt of $4.9 million, which was comprised solely of the write-off of unamortized deferred financing costs associated with the Prior Credit Facility.
Second Lien Notes
On September 30, 2020, the Company entered into a Purchase Agreement (the “Purchase Agreement”) where it issued (i) $300.0 million in aggregate principal amount of its 9.00% Second Lien Senior Secured Notes due 2025 (the “September 2020 Second Lien Notes”) and (ii) warrants for 7.3 million shares of the Company’s common stock, with a term of five years and an exercise price of $5.60 per share, exercisable only on a net share settlement basis (the “September 2020 Warrants”), for aggregate consideration of $294.0 million. The Company used the proceeds, net of issuance costs, of approximately $288.6 million to repay borrowings outstanding under the Credit Facility. The Company also entered into a registration rights agreement with the purchaser of the September 2020 Second Lien Notes.
Net proceeds were allocated to the September 2020 Warrants based on their fair value on the date of issuance with the remaining net proceeds allocated to the September 2020 Second Lien Notes. The fair value of the September 2020 Warrants was calculated by a third-party valuation specialist using a Black-Scholes-Merton option pricing model, incorporating the following assumptions at the issuance date:
Issuance Date Fair Value Assumptions
Exercise price $5.60
Expected term (in years) 5.0
Expected volatility 116.3  %
Risk-free interest rate 0.3  %
Dividend yield —  %
See “Note 9 - Fair Value Measurements” for further discussion.
The September 2020 Second Lien Notes will mature on the earlier of (i) April 1, 2025 and (ii) 91 days prior to the maturity date of any outstanding unsecured notes in a principal amount at or greater than $100.0 million and have interest payable semi-annually each April 1 and October 1, commencing on April 1, 2021.
The Company may redeem the September 2020 Second Lien Notes in accordance with the following terms: (1) prior to October 1, 2022, a redemption of up to 35% of the principal in an amount not greater than the net proceeds from certain equity offerings, and within 180 days of the closing date of such equity offerings, at a redemption price of 109.00% of principal, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption, if at least 65% of the principal will remain outstanding after such redemption; (2) prior to October 1, 2022, a redemption of all or part of the principal at a price of 100% of the principal amount redeemed, plus an applicable make-whole premium and accrued and unpaid interest, if any, to, but excluding, the date of redemption; and (3) subsequent to October 1, 2022, a redemption, in whole or in part, at redemption prices decreasing annually from 105.00% to 100% of the principal amount redeemed plus accrued and unpaid interest.
Upon the occurrence of certain change of control events, each holder of the September 2020 Second Lien Notes may require the Company to repurchase all or a portion of the September 2020 Second Lien Notes at a price of 101% of the principal amount repurchased, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.
Senior Unsecured Notes Exchange
On November 2, 2020, the Company entered into an Exchange Agreement (the “Exchange Agreement”) by and among the Company and certain holders (the “Holders”) of the Company’s 6.25% Senior Notes, 6.125% Senior Notes, 8.25% Senior Notes, and 6.375% Senior Notes (each as defined in this footnote and together the “Senior Unsecured Notes”). Upon closing on November 13, 2020, pursuant to the Exchange Agreement, the Company agreed to exchange $389.0 million of aggregate principal amount of the Senior Unsecured Notes held by the Holders for $216.7 million aggregate principal amount of newly issued 9.00% Second Lien Senior Secured Notes due 2025 (the “November 2020 Second Lien Notes” and together with the September 2020 Second Lien Notes the “Second Lien Notes”) at a weighted average exchange ratio of approximately $557 per $1,000 of principal exchanged. The November 2020 Second Lien Notes were issued under the Company’s indenture dated as of September 30, 2020. Pursuant to the Exchange Agreement, the Company also agreed to issue to the Holders warrants for approximately 1.75 million shares of the Company’s common stock, with a term of five years and an exercise price of $5.60 per share, exercisable only on a net share settlement basis (the “November 2020 Warrants”).
The Company assessed the debt exchange to determine whether it should be accounted for pursuant to Financial Accounting Standards Board’s Accounting Standard Codification (“ASC”) Topic 470-60, Troubled Debt Restructurings by Debtors, or pursuant to ASC Topic 470-50, Modifications and Extinguishments (“ASC 470-50”). This assessment requires judgments to be made with respect to whether or not an entity is experiencing financial difficulty. It was determined that the Company was not experiencing financial difficulty and could obtain funds at market rates similar to other non-troubled debtors, therefore the Company accounted for the exchange as an extinguishment of debt in accordance with ASC 470-50. As the November 2020 Second Lien Notes were issued with the November 2020 Warrants, the $216.7 million aggregate principal amount was allocated between the November 2020 Second Lien Notes and the November 2020 Warrants based on their relative fair values at the exchange date. This resulted in $207.6 million allocated to the November 2020 Second Lien Notes and $9.1 million allocated to the November 2020 Warrants. The Company recognized a gain on the extinguishment of debt of $170.4 million in its consolidated statement of operations, which consisted of the carrying values of the Senior Unsecured Notes exchanged less the aggregate principal amount of the November 2020 Second Lien Notes issued, net of the associated debt discount of $9.1 million, which was based on the November 2020 Second Lien Notes’ allocated fair value on the exchange date.
The fair value of the November 2020 Second Lien Notes was calculated by a third-party valuation specialist using a discounted cash flow model. Significant inputs into the calculation included the redemption premiums, described below, as well as redemption assumptions provided by the Company. The fair value of the November 2020 Warrants was calculated using a Black-Scholes-Merton option pricing model, incorporating the following assumptions at the issuance date:
Issuance Date Fair Value Assumptions
Exercise price $5.60
Expected term (in years) 4.9
Expected volatility 98.4  %
Risk-free interest rate 0.4  %
Dividend yield —  %
Senior Unsecured Notes
6.25% Senior Notes. The Company’s 6.25% Senior Notes, which were assumed upon consummation of the Merger, mature on April 15, 2023 and have interest payable semi-annually each April 15 and October 15. The Company may redeem all or a portion of the 6.25% Senior Notes at redemption prices decreasing from 103.125% to 100% of the principal amount on April 15, 2021, plus accrued and unpaid interest. Following a change of control, each holder of the 6.25% Senior Notes may require the Company to repurchase the 6.25% Senior Notes for cash at a price equal to 101% of the principal amount purchased, plus any accrued and unpaid interest.
6.125% Senior Notes. The Company’s 6.125% Senior Notes mature on October 1, 2024 and have interest payable semi-annually each April 1 and October 1. The Company may redeem all or a portion of the 6.125% Senior Notes at redemption prices decreasing from 104.594% to 100% of the principal amount on October 1, 2022, plus accrued and unpaid interest. Following a change of control, each holder of the 6.125% Senior Notes may require the Company to repurchase all or a portion of the 6.125% Senior Notes at a price of 101% of principal of the amount repurchased, plus accrued and unpaid interest.
8.25% Senior Notes. The Company’s 8.25% Senior Notes due 2025 (the “8.25% Senior Notes”), which were assumed upon consummation of the Merger, mature on July 15, 2025 and have interest payable semi-annually each January 15 and July 15. Since July 15, 2020, the Company may redeem all or a portion of the 8.25% Senior Notes at redemption prices decreasing annually from 106.188% to 100% of the principal amount redeemed plus accrued and unpaid interest. Following a change of control, each holder of
the 8.25% Senior Notes may require the Company to repurchase the 8.25% Senior Notes for cash at a price equal to 101% of the principal amount purchased, plus any accrued and unpaid interest.
6.375% Senior Notes. On June 7, 2018, the Company issued $400.0 million aggregate principal amount of 6.375% Senior Notes due 2026 (the “6.375% Senior Notes”), which mature on July 1, 2026 and have interest payable semi-annually each January 1 and July 1. The Company used the net proceeds from the offering of approximately $394.0 million, after deducting initial purchasers’ discounts and estimated offering expenses, to fund a portion of the Delaware Asset Acquisition described above.
The Company may redeem the 6.375% Senior Notes in accordance with the following terms: (1) prior to July 1, 2021, a redemption of up to 35% of the principal in an amount not greater than the net proceeds from certain equity offerings, and within 180 days of the closing date of such equity offerings, at a redemption price of 106.375% of principal, plus accrued and unpaid interest, if any, to the date of the redemption, if at least 65% of the principal will remain outstanding after such redemption; (2) prior to July 1, 2021, a redemption of all or part of the principal at a price of 100% of principal of the amount redeemed, plus an applicable make-whole premium and accrued and unpaid interest, if any, to the date of the redemption; and (3) subsequent to July 1, 2021, a redemption, in whole or in part, at redemption prices decreasing annually from 103.188% to 100% of the principal amount redeemed plus accrued and unpaid interest. Following a change of control, each holder of the 6.375% Senior Notes may require the Company to repurchase all or a portion of the 6.375% Senior Notes at a price of 101% of principal of the amount repurchased, plus accrued and unpaid interest, if any, to the date of repurchase.
Each of the Senior Unsecured Notes described above are guaranteed on a senior unsecured basis by the Company’s wholly-owned subsidiary, Callon Petroleum Operating Company, and may be guaranteed by certain future subsidiaries. The subsidiary guarantor is 100% owned, all of the guarantees are full and unconditional and joint and several, the parent company has no independent assets or operations and any subsidiaries of the parent company other than the subsidiary guarantor are minor.
Restrictive covenants
The Company’s credit agreement contains certain covenants including restrictions on additional indebtedness, payment of cash dividends and maintenance of certain financial ratios.
Under the credit agreement, the Company must maintain the following financial covenants determined as of the last day of the quarter, each as described above: (1) a Secured Leverage Ratio of no more than 3.00 to 1.00 and (2) a Current Ratio of not less than 1.00 to 1.00. The Company was in compliance with these covenants at December 31, 2020.
The credit agreement and the indentures governing our Senior Unsecured Notes also place restrictions on the Company and certain of its subsidiaries with respect to additional indebtedness, liens, dividends and other payments to shareholders, repurchases or redemptions of the Company’s common stock, redemptions of senior notes, investments, acquisitions, mergers, asset dispositions, transactions with affiliates, hedging transactions and other matters.
The credit agreement and indentures are subject to customary events of default. If an event of default occurs and is continuing, the holders or lenders may elect to accelerate amounts due (except in the case of a bankruptcy event of default, in which case such amounts will automatically become due and payable).