Cano Petroleum was able to obtain relaxed covenants on its revolver, allowing it to fund an acquisition through its existing bank deal. Jeff Johnson, ceo, said the company's ability to pay for the acquisition through its credit facility allowed it to avoid raising capital in the equity markets, which he said would have been difficult because of volatile market conditions in the exploration and production sector.
Cano closed on its $24 million acquisition of oil and gas properties in the Texas Panhandle in June. Johnson said the company knew it would trigger debt to EBITDA covenants in its credit facility by funding the acquisition through its bank deal, but lead banks Union Bank of California and Natexis Banques Populaires relaxed its covenants.
"Our cash flow was not there to meet debt to EBITDA covenants," Johnson said. "We needed some breathing room and were able to relax [covenants] to a level that is pertinent to our business model."
The amendment shortens the maturity of the company's $100 million senior credit facility and $15 million subordinated credit facility to November 2008 from November 2009. It also introduces a debt to EBITDA ratio of 5 to 1 for each fiscal quarter ending on or after March 31, 2007.
"We would have gone into technical default based on our EBITDA had we not gotten the amendment," said Johnson. "Union Bank of California was very good to work with. They understand our business model. They realized it was a good acquisition." Pricing on the facilities was bumped up one percentage point to LIBOR plus 2 1/2-3 1/4% on the senior facility and LIBOR plus 6 1/2% on the subordinated facility. The LIBOR rate on the senior facility increases as the company draws down on the revolver. Currently $52 million is drawn on the facility at a rate of LIBOR plus 3%.