DBRS Limited (DBRS Morningstar) downgraded Source Energy Services Canada LP and Source Energy Services Canada Holdings Ltd.’s (together, the Co-Issuers) Issuer Rating to Selective Default (SD) from CCC (low) and Senior Secured First Lien Notes (the Senior Notes) rating to Default (D) from CCC (low). Additionally, DBRS Morningstar discontinued the Recovery Rating on the Senior Notes. The rating actions remove the ratings from Under Review with Negative Implications, where they were placed on March 26, 2020. The downgrades follow the announcement by the ultimate holding company of the Co-Issuers, Source Energy Services Ltd. (Source or the Company), that the Court of Queen’s Bench of Alberta has issued an interim order with respect to Source’s proposed recapitalization transaction (the Transaction) announced on October 7, 2020 (see “DBRS Morningstar Comments on Source Energy Services Ltd.’s Proposed Recapitalization Transaction” dated October 9, 2020). The Transaction involves, among other things, exchanging the Senior Notes issued by the Co-Issuers in the aggregate principal amount of approximately $157.71 million due December 15, 2021, along with all accrued and unpaid interest, for a combination of (1) new senior secured first lien notes (New Senior Notes) of $125 million due March 15, 2025, plus accrued interest on the Senior Notes to and including June 15, 2020; and (2) the issuance of new common shares of Source, constituting approximately 62.5% of the common shares outstanding on a fully diluted basis, immediately following completion of the Transaction.
DBRS Morningstar considers the proposed terms of the exchange under the Transaction as disadvantageous to the Senior Note holders. As a result, based on the assumption of approval, the exchange for New Senior Notes is considered a distressed exchange and the ratings of the Senior Notes have been downgraded to D. Given that the proposed transaction does not affect any other obligations of the Company, and Source will continue to satisfy its obligations to customers, suppliers, employees, and governmental authorities in the ordinary course of business, DBRS Morningstar has downgraded the Issuer Rating to SD.
The proposed Transaction will be implemented through a corporate Plan of Arrangement under the Canada Business Corporations Act with the shareholder’s and Senior Note holder’s meeting scheduled for November 27, 2020. Source has entered into support agreements pursuant to which approximately 74% of the Senior Note holders and approximately 45% of the common shareholders have agreed to support the Transaction.
DBRS Morningstar notes that the Transaction, if successfully completed, will improve the Company’s credit profile with improved liquidity and more financial flexibility. DBRS Morningstar will likely reassess the Issuer Rating at close of the Transaction based on the Company’s revised capital structure and business plan.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries (August 17, 2020), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), DBRS Morningstar Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 24, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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