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Vine Oil & Gas, LP -- Moody's upgrades Vine's CFR to Caa1; Stable outlook

·16 min read

Rating Action: Moody's upgrades Vine's CFR to Caa1; Stable outlook

Global Credit Research - 08 Jan 2021

New York, January 08, 2021 --

Moody's Investors Service, ("Moody's") upgraded Vine Oil & Gas, LP's (Vine) Corporate Family Rating (CFR) to Caa1 from Caa3, Probability of Default Rating (PDR) to Caa1-PD from Caa3-PD, and the senior unsecured notes rating to Caa2 from Ca. The rating outlook was changed to stable from negative.

On Dec 30, 2020, Vine announced the extension of its reserves-based lending (RBL) credit facility's maturity to January 2023 and an amendment to reduce the facility size to $300 million from $350 million. Furthermore, the facility's size will be reduced to $100 million in step phases by January 2023. At the end of first quarter 2022, the facility size will be $240 million. Vine's RBL facility is a fixed borrowing base in lieu of semi-annual borrowing base redeterminations. The company also retired its $150 million superpriority loan by entering into a new 2nd lien term loan of $150 million maturing in December 2025. The company's previous $280 million 2nd lien revolving credit facility was subordinated to a 3rd lien, upsized to $330 million and the maturity date extended to March 2023. The company's current capital structure consists of $300 million of senior secured 1st lien RBL facility ($240 million drawn as of September 30, 2020), $150 million of 2nd lien term loan (fully drawn), $330 million of 3rd lien credit facility (fully undrawn as of September 30, 2020) and $910 million of senior unsecured notes due in April 2023.

"Vine's cash flow outlook has improved significantly as the company reinforced its commodity hedge book taking advantage of improved natural gas fundamentals, positioning the company for debt reduction as cash flow certainty is enhanced. The prospect of debt reduction through free cash flow and modest improvement in cash margins through cost structure optimization contribute to Vine's ratings upgrade and stable outlook" commented Sreedhar Kona, Moody's senior analyst.

Upgrades:

..Issuer: Vine Oil & Gas, LP

.... Probability of Default Rating, Upgraded to Caa1-PD from Caa3-PD

.... Corporate Family Rating, Upgraded to Caa1 from Caa3

....Senior Unsecured Notes, Upgraded to Caa2 (LGD5) from Ca (LGD5)

Outlook Actions:

..Issuer: Vine Oil & Gas, LP

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

Vine's CFR upgrade to Caa1 reflects Moody's view of Vine's improved cash flow outlook in light of its strong hedge book and the prospect of free cash flow generation and debt reduction. The RBL amendment and refinancing of the superpriority loan into a second lien facility have not only somewhat simplified the capital structure, but have also mandated provisions for the company to reduce debt by paying off RBL balance while the RBL commitment size progressively declines in scheduled step phases. Improved natural gas fundamentals will position Vine to continue to hedge a significant portion of its production on a rolling basis, contributing to the cash flow stability.

Vine's Caa1 CFR reflects its relatively low but improving production level and proved developed reserves scale. Vine's credit profile is constrained by its high financial leverage as measured by its debt to proved developed (PD) reserves ratio, which at the end of fourth quarter 2019 was close to $20 per boe. Vine's cash flow metrics will improve mostly supported by its strong hedge book that provides substantial certainty of cash flow through 2021 and beyond. Vine also benefits from its productive acreage in the Haynesville/ Mid-Bossier formations and its low finding and development costs contributing to solid capital efficiency.

Vine's access to public debt capital markets continues to be strained posing some refinancing risk for its unsecured notes maturing in 2023. Additionally, Vine's ratings are also constrained by the possibility of utilizing its 3rd lien credit facility for open market purchases of the notes at a significant discount to the par value.

Governance risks considered include Vine's private ownership and financial strategy geared towards delivering equity returns. Given Vine's highly levered balance sheet and required capital spending, the possibility of cash distributions to equity-holders is restricted , although Moody's views the potential for a distressed exchange exists.

Vine's senior unsecured notes are rated Caa2, one notch below the CFR, reflecting the notes' subordination to Vine's amended senior secured RBL facility, the new $150 million second lien term loan and $330 million third lien credit facility, all of which benefit from a priority lien on the collateral.

Vine's liquidity is adequate reflecting its cash flow support from strong hedges, high reliance on its revolver and ability to maintain covenant compliance. As of September 30, 2020, Vine had a cash balance of $41 million and $110 million availability under its $350 million RBL revolving credit facility. However, pro forma for the RBL facility amendment on December 30, 2020, the facility's size is reduced to $300 million and hence reducing the availability to $60 million under the revolver. Over 90% of Vine's expected production for 2021 is hedged at above $2.50 per Mcf of Henry Hub natural gas price. Vine's hedge book extends well beyond 2021 and goes into 2024. Moody's expects Vine to use its operating cash flow to meet its cash needs including capital spending through 2021. Maintenance financial covenants include a 4x consolidated total net leverage ratio (stepping down to 3.5x beginning with quarter ending at June 30, 2021), last twelve months leveraged free cash flow of at least $0 and minimum liquidity of $40 million. Moody's expects the company to maintain compliance under its covenants. All of the company's assets are pledged as collateral under the 1st, 2nd and 3rd lien facilities.

The stable rating outlook reflects our view that the company will generate significant free cash flow aided by its strong commodity hedge book and will apply the cash flow towards debt reduction.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Vine's ratings could be downgraded if the company's refinancing risk remains high or if the liquidity weakens. The ratings could also be downgraded if Moody's expects lower recovery prospects for Vine's debt holders.

Vine's ratings are unlikely to be upgraded in the near-term. The ratings could be upgraded if the company refinances its unsecured notes and mitigates its refinancing risk, while sustaining its retained cash flow to debt ratio above 20% and maintaining adequate liquidity. The company's must also maintain sustainable capital structure.

The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Plano, Texas, Vine Oil & Gas LP is a natural gas-focused private independent exploration and production company formed in 2014, in partnership with its private equity sponsor, The Blackstone Group L.P. (Blackstone).

REGULATORY DISCLOSURES

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.

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These ratings are 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_1243406.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Sreedhar Kona 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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