Magnum Hunter Resources has increased the borrowing base on its senior credit facility from $480 million to $525 million and the maximum commitment amount from $500 million to $750 million. "With today's commodity prices we are generating more free cash flow and you can pay down bank debt more easily than bonds," said Howard Tate, v.p. of finance for the exploration company. The level of the borrowing base is dependent on the valuation by the lenders of the assets pledged, which are primarily oil and gas reserves.
The deal was originally established as a $350 million facility with Deutsche Bank in 2002 to back the acquisition of Prize Energy. The increased facility will now be used to close on a $40 million acquisition of properties and provide a cushion to cover seasonal and cyclical cash shortages. Tate added that even though the line has been significantly increased, the company does not anticipate adding to its debt levels. He explained that in the exploration business commodity prices are volatile and since Magnum Hunter is below investment-grade, rating agencies, counterparties and vendors look to liquidity. "We use bank debt because it's cheaper and more flexible," he said. However, he pointed out that the firm does have $200 million in high-yield bonds and equity was issued this year to fund the EnCana acquisition. But, he stated, "For the foreseeable future this is what we are going to stay with. This is the right time to have more bank debt."
The Royal Bank of Scotland and Calyon joined the lending group that now consists of eighteen banks. Tate said the two have had a relationship with Hunter for a while, though not on the lending side. The banks kept in touch with Hunter and the company cultivated the banks, so when the lending increase was needed, the banks were brought in, explained Tate. "This has been a mutual relationship." John Grandstaff at Calyon and Robert Poirrier at RBS are the point people, he added.
Other banks that were already in the syndicate and have management roles are Deutsche Bank, BNP Paribas, Bank of America, Bank of Montreal, Fortis Capital Corp., Bank of Scotland and Bank of Nova Scotia.