DBRS Downgrades Southern Pacific Resource Corp.’s Issuer Rating to C and Security Rating to C (low)

DBRS Limited (DBRS) has today downgraded the ratings of Southern Pacific Resource Corp. (STP or the Company) as follows: (1) The Issuer Rating to C from CCC. (2) The Senior Secured Second Lien Notes (the Notes) to C (low) from CCC (low). DBRS has also changed the recovery rating of the Notes to RR6 from RR5. All ratings remain Under Review with Negative Implications.

On December 12, 2013, DBRS downgraded STP’s Issuer Rating to CCC from B (low) and the Senior Secured Second Lien Notes to CCC (low) from B (low). DBRS also changed the recovery rating of the Notes to RR5 from RR4 and placed all ratings Under Review with Negative Implications. These rating actions reflected the material change in the Company’s business risk profile following continued disappointing production results and the limited availability of liquidity to support operations.

On August 22, 2014, after the Company announced the conclusion of its strategic review process, DBRS reiterated that STP had limited liquidity and minimal operating cash flows to support the Company’s operations.

On December 4, 2014, after the Company announced another review of its capital structure and strategic alternatives, DBRS noted that the Company is expected to face a significant cash drain by the end of December 2014 and January 2015, as interest on STP’s five-year first lien term loan, Senior Secured Second Lien Notes and convertible unsecured debentures come due. Interest payments during that time horizon total approximately $20 million, which represents a significant portion of the Company’s current liquidity.

On December 30, 2014, STP announced it would not make the cash interest payment of approximately $5.175 million, due on December 31, 2014, of the Company’s outstanding 6% convertible unsecured subordinate debentures. The convertible debentures were issued pursuant to an indenture dated January 7, 2011, for an aggregate principal amount of $172,500,000 due June 30, 2016. Under the terms of the governing indenture for the convertible debentures, the Company has a 30-day cure period from the periodic interest payment date in order to make this cash interest payment before an event of default will occur.

The Company’s failure to satisfy the interest obligation prior to the exhaustion of the grace period is expected to result in a downgrade to D.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers and Rating Companies in the Oil and Gas Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.