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Rating Action: Moody's assigns Ba1 rating to California Resources' junior secured DIP term loan facility
Global Credit Research - 03 Sep 2020
New York, September 03, 2020 -- Moody's Investors Service (Moody's) assigned a Ba1 rating to California Resources Corp. (DIP)'s (CRC) $650 million junior secured superpriority debtor-in-possession (DIP) term loan. On August 26, 2020, The US Bankruptcy Court for the Southern District of Texas approved up to $1.1 billion of aggregate DIP loans, consisting of up to $483 million of senior secured DIP facility and $650 million of junior secured DIP facility. The DIP facility, which was provided by certain of CRC's pre-petition term loan lenders, will support the company's liquidity needs during the Chapter 11 reorganization process. The DIP credit agreement has a maturity date of January 15, 2021. On July 15, 2020, CRC filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. Moody's subsequently withdrew all ratings on the company.
..Issuer: California Resources Corp. (DIP)
....Junior Secured Bank Credit Facility, Assigned Ba1
..Issuer: California Resources Corp. (DIP)
....Outlook, Assigned No Outlook
The Ba1 rating primarily reflects good coverage of the DIP facilities provided by the collateral package, the large amount of DIP financing relative to the $5.086 billion of pre-petition debt, structural features of the DIP facilities, and the rated DIP term loan's junior position to the senior DIP facility. The cause of bankruptcy as well as the nature and scope of the reorganization are also factored into the rating.
The junior secured DIP facility has super-priority status over administrative expense together with the Senior DIP facility, second-priority senior priming liens on all existing collateral securing the pre-petition revolving credit facility and term loans, and second-priority liens on all unencumbered assets. Moody's estimates the DIP facilities have strong total collateral coverage in excess of 3x the $1.1 billion principal amount of the DIP facilities, consistent with an "A" factor rating under Moody's Debtor-in-Possession Lending methodology. However, CRC's DIP term loan to pre-petition debt ratio at about 22% is relatively high.
The rating reflects favorable structural features of the DIP facility including the source of the financing (mostly new money for which some priming liens are needed), upstream guarantees from all principal operating units and most subsidiaries, and collateral protection for the rated loan achieved through mostly priming liens but with a predominantly junior priority position. The facility drawings are not subject to a borrowing base, but the large excess amount of collateral will likely result in the facility being fully covered by the collateral for the life of the facility, even if oil and natural gas prices decline significantly. The facility has covenants that require the company to maintain a minimum liquidity level and operate within defined budget variance tolerances.
In assessing the cause of the bankruptcy filing and the nature and scope of the reorganization, Moody's believes that the bankruptcy was due to elevated debt levels -- with which CRC was saddled at its spinoff in 2014 -- relative to depressed earnings, as well as low oil prices. Moody's views the reorganization as somewhat complex, involving multiple classes of debt. The company's properties are burdened by higher operating costs due to the energy intensity of its tertiary recovery operations, although the company has been able to realize significant cost reductions prior to and during the restructuring, which should improve margins post-emergence. CRC's reserves also face longer term pressure related to environmental and climate concerns that are more prevalent in California. Production will be considerably lower in 2020 and 2021 than 2019 levels, due to lack of investment as the company preserved capital in the low oil price environment leading up to its bankruptcy filing.
The principal methodology used in the rating was Debtor-in-Possession Lending published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
California Resources Corp., headquartered in Santa Clarita, California, operates exclusively in California and had production of 128,000 barrels of oil equivalent (boe) per day as of December 31, 2019.
This rating is assigned on a point-in-time basis, and will be withdrawn as soon as practicable, before which it is subject to monitoring.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
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This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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John Thieroff Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Steven Wood MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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