September 30, 2016 / 1:17 PM / a year ago

DEA gets pushed wider in choppy high-yield market

LONDON, Sept 30 (IFR) - DEA Deutsche Erdoel is set to pay up to price a rare oil and gas E&P bond in euros on Friday, as credit markets reel from renewed jitters around Deutsche Bank's ability to weather impending fines.

The iTraxx Crossover index gapped out as much as 12bp to 344bp on Friday morning, before coming back in to 338bp by midday. And several new issues priced on Thursday traded down sharply, with Cabot's £350m 7.50% 2023 note collapsing to a 98 bid.

Against this softer backdrop, German oil and gas exploration and production company DEA is looking to place a 400m 6NC2.5 senior issue, setting price talk at 7.25%-7.50%.

Two investors said the deal was indicated in the high-6% yield range on Thursday but that buyers pushed for more given the weakening market on Friday.

"The markets are a little shaky, so we need to be compensated - it should have a seven-handle," said one, before price talk came out.

He added that the deal could struggle to find a "natural home" for euro-only funds unversed in the sector but that global high-yield managers could see a lot of value.

"There are US$400bn of comps in the US market - if you want to get this quality of operation when it comes to cost of production and diversity of assets in the dollar market, you're looking at only 5.50%-6% yields," he said.

DEA's production output is split 45%/55% between oil and gas, with its sites primarily located in Germany and Scandinavia. It is owned by LetterOne, the investment vehicle of Mikhail Fridman, German Khan, Alexey Kuzmichev and Peter Aven.

The investor also said that the buyside had successfully lobbied for "small document changes" around the company's ability to incur further debt.

"Recent E&P deals in the US have been extremely clear about what you can do in terms of incurring first-lien debt," he said.

"The documentation here wasn't bad, exactly, but they left it just ambiguous enough that distressed exchanges could happen."

A raft of distressed exchanges in the US oil and gas sector have seen existing bondholders primed by new first-lien debt, putting high-yield investors on alert for deficiencies in documentation.

A message sent by the deal's bookrunners on Friday indicated the final documents would include a "definition of Borrowing Base Facility (including associated Permitted Liens definition)" to counter these concerns.

A report from credit research firm Covenant Review published on Tuesday said DEA's original debt and liens covenants were "wildly off-market".

"They will allow the company's lenders to arbitrarily increase senior secured debt capacity under the notes without noteholder consent by allowing additional debt under one or more borrowing base facilities," analyst Scott Josefsberg said in the report.

A second investor said he had concerns around the fact that the company is looking to carry out more M&A, particularly as this could be funded by drawing on a reserve-based lending facility that is structurally senior to the bonds.

"Their target is to be 2x levered, but they're happy to go to 2.5x in an M&A scenario," he said.

"The RBL is US$2.3bn with a US$1bn accordion on top of that. It has a 3x leverage maintenance covenant, but there's still a significant amount of subordination that can occur."

The first investor said he was happy to give the company the flexibility to carry out M&A, however.

"It is the best environment in three decades to buy assets - of course they should be doing that."

Order books on the deal close at 3pm London time for pricing later on Friday, via joint bookrunners Deutsche Bank, Societe Generale, Citigroup, Credit Agricole, ING, Natixis and UniCredit. (Reporting by Robert Smith; Editing by Philip Wright)

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