Gulf Keystone Petroleum pleads for bondholder backing

Bondholders will decide the future of Gulf Keystone Petroleum. And today the heavily indebted Kurdistan oil company is urging them to back a plan to effectively tidy the business up for sale.

Gulf said a fortnight ago that it is in talks with potential buyers of the business or assets, and that it was also looking at funding alternatives, including an equity raise. But to do this it must first remove what's called the Book Equity Ratio (BER) put option - the ratio of book equity to total assets - an atypical covenant in high yield debt instruments.

If the BER is below 0.4 when it reports its 2014 financial year - and it will be due to an expected impairment of its Akri-Bijeel asset at the end of last year - and remains there until the end of April, Gulf is currently required to offer to buy back the $250 million 13% guaranteed notes due 2017 at 101% plus interest at the end of September.

Clearly, that will put further strain on the balance sheet and "could undermine its efforts around the corporate actions and could deter third parties from engaging with it in connection with the corporate actions".

"We believe that it is appropriate to seek the removal of the Book Equity Ratio Put Option in order to progress and complete a number of strategic and funding options," says Gulf finance chief Sami Zouari.

Amending the trust deed constituting the notes would certainly make things easier. Gulf is offering noteholders who agree to the changes by 5pm on 23 March $5 in cash for each $1,000 in principal amount of the notes outstanding. Those who consent by 1 April, the expiration date, get $1.50 for each $1,000.

"The company has confidentially discussed the consent solicitation with a number of significant noteholders, and, based on the noteholders' responses during those discussions, expects them to be supportive," says Gulf, which will hold a meeting in London on 7 April to either pass or reject the Extraordinary Resolution.

The call for this meeting will "strike terror into the hearts of investors," says industry veteran Malcolm Graham-Wood. "Today's action is I suspect, a way for GKP to hang on in there and bondholders need to ensure that this does not lead to further massive value erosion that has already had a negative impact on what is still a fantastic asset."

Westhouse Securities has a warning for shareholders, too. "We have previously flagged the risk of covenant breach for GKP," says the broker. "The negotiations could result in relaxation, but the need for equity means dilution for existing shareholders and in my view there are better stocks to get exposure to Kurdistan such as Genel Energy (GENL LN; Buy)."

Gulf also took the opportunity to confirm it now has $90.4 million of cash and is preparing to resume production from the Shaikan field, suspended in mid-February, and crude oil export deliveries by truck to the Turkish coast. Talks are also ongoing with the Kurdistan Regional Government's Ministry of Natural Resources to establish a regular payment cycle for crude oil export sales and to finalise an early pipeline access solution for the Shaikan crude.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.