(Bloomberg) -- Ordinarily in any big U.S. bankruptcy, there's a group of creditors that can stroll into the courtroom with debt backed by collateral and the peace of mind that they'll be first in line to get repaid.
Then there's Ultra Petroleum Corp. In the case of the energy producer's bankruptcy, no one is first.
Ultra Petroleum went into Chapter 11 in April listing $3.76 billion in funded debt, none of it secured by the driller's more-than $1 billion in assets. That put senior bank lenders on the same level as unsecured bondholders and sent some lenders running for the exits.
Banks led by JPMorgan Chase & Co. didn't demand collateral when they lent to the company in October 2011. The price of oil was jumping and lenders were eager to win energy business amid the U.S. shale boom.
“The bottom line is that it's unusual,” Bloomberg Intelligence analyst Spencer Cutter said. “Without collateral, they're in the same pool as the other unsecured creditors and they all just have to work together now.”
The senior lenders held an unsecured, $1 billion revolving loan. They have sold much of the loan to distressed-debt funds including Oaktree Capital Group LLC and Anchorage Capital Group, according to people familiar with the matter. Some of the banks have fully exited their positions, said the people, who asked not to be identified discussing private transactions.
Representatives for JPMorgan, Oaktree and Anchorage declined to comment on Ultra Petroleum's bankruptcy, as did Citigroup Inc., another senior lender. A representative for lender Deutsche Bank AG didn't respond to messages seeking comment. Sandi Kraemer, a spokeswoman for Ultra Petroleum, declined to comment.
Get Out
The banks got out when the company went into Chapter 11 amid concerns that, given their uncertain precedence and the driller's low asset values, they'd be forced to exchange their debt for equity in a reorganized Ultra Petroleum, rather than cash, according to the people. Their departure has set up what promises to be a contentious fight over which remaining creditors get paid first, and how much.
“When unsecured loans go sour, regulated bank lenders often try to cut their losses as quickly as possible,” said Lewis Grimm, an attorney at Jones Day who specializes in debt financing. “If they're not senior secured, it can really impact the recovery prospects.”
Unknown Risk
When the loan was issued in October 2011, crude traded for about $82 a barrel and was headed to $100. Natural gas, which makes up most of Ultra Petroleum's portfolio, traded around $3.60 per million British thermal units and rose as high as $3.92 by the end of October. But even with energy prices climbing, it was an aggressive move by the banks. Ultra Petroleum hadn't yet been graded by any of the major credit raters, according to data compiled by Bloomberg.
Banks typically look to secure loans to unrated companies because of the unknown level of risk, according to Cutter.
“A bank's default assumption is, well, you don't have ratings because you're not investment-grade, so we're going to treat you like you're not investment-grade and we're going to get collateral,” he said.
By comparison, JPMorgan issued a $6.75 billion unsecured revolver in 2011 to ConocoPhillips maturing in 2019. ConocoPhillips has an investment-grade rating and a market capitalization of more than $54 billion. So why was Ultra Petroleum, nowhere near the size of Conoco, given the same latitude?
More Debt
The banks may have thought the Ultra Petroleum revolver's maximum-leverage covenant was sufficient to protect their position, said Cutter. But the driller's debt ratio never rose enough to trigger the covenant. High energy prices made oil companies attractive to lenders at the time, and it's possible the bank structured a borrower-friendly deal to beat out competition and set the stage for future business with the company, he said.
Even after energy prices began their tumble in 2014, Ultra Petroleum was able to raise $850 million of unsecured bonds, an instance of investors searching for yield in a time of vanishingly low interest rates, said John Castellano, a turnaround specialist at AlixPartners. A similar scenario is playing out today as negative rates push investors to take on more risk and pass up typical protections to find income-generating investments.
“It's irrational exuberance,” Castellano said.
Ultra Petroleum drew on the revolver not long before bankruptcy, giving it sufficient liquidity to make interest payments while various creditor groups negotiated unsuccessfully to address the company's onerous debt.
Valuation Fight
The matter is now in the Houston bankruptcy court, and the outcome may boil down to the company's valuation. The judge gave Ultra Petroleum extra time to devise a plan without having to face contending proposals, but that “exclusivity” period expires March 1 -- or Jan. 16 if the company doesn't provide an adequate business plan by the start of December.
With the banks out of the picture, the fight has become a tug-of-war between the operating company creditors, who include the new holders of the revolver as well as the unsecured bondholders at that level, and the holding company creditors, who only get paid after the operating company creditors. An equity committee has also been formed, in case there's enough value in Ultra to cover all its debts and leave something for shareholders.
Equity investors and holding company bondholders support Ultra Petroleum's exclusivity in hopes the company will allow some value to trickle down to them. Some of the operating company creditors, however, are pushing for a market-value test that could result in a sale of the company and cede less value to the lower-ranking creditors.
Varying Assets
Within that operating company group, it's still unclear how value will be divided between holders of the revolver and the seemingly equal unsecured bondholders. In theory, the two groups ought to receive the exact same thing, but varying assets could make up their packages of equivalent value, Cutter said.
By selling when they did, the banks may have missed out on a big payday. Ultra Petroleum's 5.75 percent notes due 2018 traded at 81.5 cents on the dollar on Oct. 5, despite being lower on the capital structure than the bank loan and unsecured bonds issued by operating company Ultra Resources. Even Ultra Petroleum's stockholders, who would be the last to get paid in any scenario, have seen their shares rise to about $4.99 from a pre-Chapter 11 low of close to 20 cents. The rising price of oil -- crude on Thursday climbed above $50 a barrel in New York for the first time since June -- is helping.
Still, a drawn-out valuation fight could burn cash that would otherwise go to creditors.
“All the constituents will want to know exactly how the value was arrived at, and how the size of the pie can get divvied up among creditor groups,” Castellano said. “That becomes expensive.”
The case is In re Ultra Petroleum Corp., 16-32202, U.S. Bankruptcy Court, Southern District of Texas (Houston)
--With assistance from Dawn McCarty To contact the reporter on this story: Emma Orr in New York at eorr6@bloomberg.net. To contact the editors responsible for this story: Nabila Ahmed at nahmed54@bloomberg.net, Andrew Dunn, Dan Wilchins
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