Announcement: Moody's says Comstock's add-on bonds to repay revolver borrowings does not affect ratings
Global Credit Research - 14 Aug 2020
New York, August 14, 2020 -- Moody's Investors Service ("Moody's") commented today that Comstock Resources, Inc.'s (Comstock) $200 million add-on to its 9.75% senior unsecured notes due 2026 does not affect its ratings or stable outlook, including Comstock's B3 Corporate Family Rating (CFR) and Caa1 senior unsecured notes ratings. The proceeds will be used to repay borrowings on the company's revolver, improving Comstock's liquidity.
Comstock's 7.5% senior unsecured notes due 2025 and 9.75% senior unsecured notes due 2026 are rated Caa1, one notch below the CFR, reflecting their effective subordination to the secured revolving credit facility due 2024 (unrated) which has a priority claim to the company's assets.
Comstock's B3 CFR reflects basin concentration in the Haynesville Shale and a natural gas focus amid the low natural gas price environment. Proximity to Henry Hub drives low basis differentials for its natural gas production and the Haynesville has solid gathering and pipeline infrastructure providing no takeaway capacity concerns. Comstock is prioritizing free cash flow generation in 2020 and 2021 over production growth. Moody's expects positive free cash flow through 2021 to support debt reduction via repayments of revolver borrowings. Longer-term, the large amount of proved undeveloped reserves will require significant capital investment to drive sustained production growth. Comstock's hedge position will partially protect cash flow from low natural gas prices and reduce exposure to volatile prices more generally. The company has no near-term debt maturities with its revolver not maturing until 2024 and its bonds due in 2025 and 2026. Comstock benefits from the support of its majority-owner, Jerry Jones, who has invested a significant amount of equity in the company.
Comstock's SGL-3 rating reflects Moody's view that Comstock will maintain adequate liquidity through 2021. Comstock's revolver matures in 2024 and has a $1.4 billion borrowing base. As of June 30, 2020, the company had $12 million of cash and $800 million drawn on its revolver. The application of the proceeds from the notes offering to repay revolver borrowings will increase available borrowing capacity. The revolver has financial covenants comprised of a maximum leverage ratio and minimum current ratio. Moody's expects that financial covenants could limit the company's access to less than the full revolver availability, but that the effective availability will be sufficient to meet the company's liquidity needs.
The stable outlook reflects Moody's expectation that Comstock will generate positive free cash flow and further reduce leverage while maintaining adequate liquidity.
Factors that could lead to an upgrade include consistent positive free cash flow generation while growing both production and reserves; lower leverage and retained cash flow to debt sustained above 25%; and a leveraged fully cycle ratio above 1.5x.
Factors that could lead to a downgrade include higher leverage, including retained cash flow to debt falling below 15%; EBITDA/interest below 3x; or deterioration of liquidity.
Comstock, headquartered in Frisco, Texas, is a publicly traded independent exploration and production company with operations focused in the Haynesville Shale.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.
Jonathan Teitel, CFA Asst Vice President - 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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