Annual report pursuant to Section 13 and 15(d)

Borrowings

v3.22.0.1
Borrowings
12 Months Ended
Dec. 31, 2021
Debt Disclosure [Abstract]  
Borrowings Borrowings
The Company’s borrowings consisted of the following:
As of December 31,
2021 2020
(In thousands)
6.25% Senior Notes due 2023
$—  $542,720 
6.125% Senior Notes due 2024
460,241  460,241 
Senior Secured Revolving Credit Facility due 2024 785,000  985,000 
9.00% Second Lien Senior Secured Notes due 2025
319,659  516,659 
8.25% Senior Notes due 2025
187,238  187,238 
6.375% Senior Notes due 2026
320,783  320,783 
8.00% Senior Notes due 2028
650,000  — 
Total principal outstanding 2,722,921  3,012,641 
Unamortized premium on 6.25% Senior Notes
—  2,917 
Unamortized premium on 6.125% Senior Notes
2,373  3,236 
Unamortized discount on Second Lien Notes (14,852) (41,820)
Unamortized premium on 8.25% Senior Notes
2,477  3,240 
Unamortized deferred financing costs for Second Lien Notes (2,910) (3,931)
Unamortized deferred financing costs for Senior Notes (15,894) (7,019)
Total carrying value of borrowings (1)
$2,694,115  $2,969,264 
(1)    Excludes unamortized deferred financing costs related to the Company’s senior secured revolving credit facility of $18.1 million and $23.6 million as of December 31, 2021 and 2020, respectively, which are classified in “Deferred financing costs” in the consolidated balance sheets.
Senior Secured Revolving Credit Facility
The Company has a senior secured revolving credit facility with a syndicate of lenders (the “Credit Facility”) that, as of December 31, 2021, had a maximum credit amount of $5.0 billion, a borrowing base and elected commitment amount of $1.6 billion, with borrowings outstanding of $785.0 million at a weighted-average interest rate of 2.65%, and letters of credit outstanding of $24.0 million. The credit agreement governing the Credit Facility provides for interest-only payments until December 20, 2024 (subject to remaining springing maturity dates of (i) July 2, 2024 if the 6.125% Senior Notes due 2024 (the “6.125% Senior Notes”)
are outstanding at such time, and (ii) if the Second Lien Notes, as defined below, are outstanding at such time, the date which is 182 days prior to the maturity of any of the 6.125% Senior Notes, 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 agreement matures and any outstanding borrowings are due. 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.
On May 3, 2021, the Company entered into the fourth amendment to its credit agreement governing the Credit Facility, which, among other things, (a) reaffirmed, as of the date of the fourth amendment, the borrowing base and the elected commitment amount of $1.6 billion; and (b) permits, subject to certain liquidity and free cash flow metrics, the prepayment, repurchase or redemption, commencing on April 1, 2021, of up to an aggregate amount of $100.0 million of Junior Debt (as defined in the credit agreement governing the Credit Facility), which includes the Senior Unsecured Notes (as defined below) and the Second Lien Notes (as defined below).
On November 1, 2021, the Company entered into the fifth amendment to its credit agreement governing the Credit Facility, which, among other things, reaffirmed, as of the date of the fifth amendment, the borrowing base and elected commitment amount of $1.6 billion.
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 of capitalized amounts” in the consolidated statements of operations.
Second Lien Notes
Exchange. On November 5, 2021, the Company closed on its transaction with Chambers Investments, LLC (“Kimmeridge”), a private investment vehicle managed by Kimmeridge Energy Management, LLC, to exchange $197.0 million of its outstanding Second Lien Notes for a notional amount of approximately $223.1 million of the Company’s common stock. The value of equity to be delivered was based on the optional redemption language in the indenture for the Second Lien Notes. The price of the Company’s common stock used to calculate the shares issued was based on the 10-day volume-weighted average price as of August 2, 2021 and equated to 5.5 million shares. As a result of the Second Lien Note Exchange, the Company recognized a loss on the extinguishment of debt of approximately $43.4 million in its consolidated statement of operations for the year ended December 31, 2021, calculated as the notional amount of common stock issued less aggregate principal amount of Second Lien Notes exchanged, net of a pro-rata write-off of associated unamortized discount of $16.9 million and fees incurred.
Issuance. On September 30, 2020, the Company issued (i) $300.0 million in aggregate principal amount of 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”). 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 8 - Derivative Instruments and Hedging Activities” and “Note 9 - Fair Value Measurements” for further discussion of the September 2020 Warrants.
On November 2, 2020, in connection with the Senior Unsecured Notes exchange described below, the Company issued (i) $216.7 million in aggregate principal amount of 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”) and (ii) 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 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 —  %
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 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 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 Second Lien Notes may require the Company to repurchase all or a portion of the 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
8.00% Senior Notes. On July 6, 2021, the Company issued $650.0 million aggregate principal amount of 8.00% Senior Notes due 2028 (the “8.00% Senior Notes”) in a private placement for proceeds of approximately $638.1 million, net of underwriting discounts and commissions and offering costs. The 8.00% Senior Notes mature on August 1, 2028 and interest is payable semi-annually each February 1 and August 1, commencing on February 1, 2022.
At any time prior to August 1, 2024, the Company may, from time to time, redeem up to 35% of the aggregate principal amount of the 8.00% Senior Notes in an amount of cash not greater than the net cash proceeds from certain equity offerings at the redemption price of 108.00% of the principal amount, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption, if at least 65% of the aggregate principal amount of the 8.00% Senior Notes remains outstanding after such redemption and the redemption occurs within 180 days of the closing date of such equity offering. Prior to August 1, 2024, the Company may, at its option, on any one or more occasions, redeem all or a portion of the 8.00% Senior Notes at 100.00% of the principal amount plus an applicable make-whole premium and accrued and unpaid interest. On or after August 1, 2024, the Company may redeem all or a portion of the 8.00% Senior Notes at redemption prices decreasing annually from 104.00% to 100.00% of the principal amount redeemed plus accrued and unpaid interest. Upon the occurrence of certain kinds of change of control, the Company must make an offer to repurchase all or a portion of each holder’s 8.00% Senior Notes for cash at a price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest.
Redemption of 6.25% Senior Notes. On June 21, 2021, the Company delivered a redemption notice with respect to all $542.7 million of its outstanding 6.25% Senior Notes due 2023 (the “6.25% Senior Notes”), which became redeemable on July 21, 2021. The Company used a portion of the net proceeds from the 8.00% Senior Notes to redeem all of its outstanding 6.25% Senior Notes and the remaining proceeds to partially repay amounts outstanding under the Credit Facility. The Company recognized a gain on extinguishment of debt of approximately $2.4 million in its consolidated statements of operations for the year ended December 31, 2021, which was primarily related to writing off the remaining unamortized premium associated with the 6.25% Senior Notes.
Senior Unsecured Notes Exchange. On November 13, 2020, the Company closed on the 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”) 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 Second Lien Notes, as further described above.
The Company assessed the debt exchange to determine whether it should be accounted for pursuant to the FASB’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. The Company recognized a gain on the extinguishment of debt of $170.4 million in its consolidated statement of operations for the year ended December 31, 2020, 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 associated unamortized debt discount of $9.1 million, which was based on the November 2020 Second Lien Notes’ allocated fair value on the exchange date.
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 annually from 104.594% to 100% of the principal amount 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. 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.
Since July 1, 2021, the Company may redeem all or a portion of the 6.375% Senior Notes 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 governing the Credit Facility 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: (1) commencing on March 31, 2020 and for each quarter ending on or prior to December 31, 2021, a Secured Leverage Ratio (as defined in the credit agreement governing the Credit Facility) of no more than 3.00 to 1.00 and (2) commencing March 31, 2022 and for each quarter ending thereafter, a Leverage Ratio (as defined in the credit agreement governing the Credit Facility) of no more than 4.00 to 1.00; and (3) a Current Ratio (as defined in the credit agreement governing the Credit Facility) of not less than 1.00 to 1.00. The Company was in compliance with these covenants at December 31, 2021.
The credit agreement governing the Credit Facility and the indentures governing the Company’s 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).