Image source: LINN Energy LLC.
announced today that it had successfully completed its exchange
offer for units of its parent company,
. It's a move both entities are making in order to potentially
save LINN Energy holders from a big tax hit if the company
undergoes a major debt restructuring. However, LinnCo noted
that just 29% of the total number of LINN Energy's outstanding
units were tendered and accepted. That low acceptance rate, as
well as a follow-on offering period, suggests that the offer
wasn't a success at all.
What's going on?
About a month ago, LinnCo announced that it was offering to
exchange units of LINN Energy for shares of LinnCo in a 1-to-1
ratio. It was doing so for the following two reasons:
- To permit holders of LINN Energy units to maintain their
economic interest in LINN Energy through LinnCo, whose only
assets are the units it owns of LINN Energy.
- The exchange would allow LINN Energy unitholders to avoid
future taxable income and loss, including cancellation of
debt income, or CODI, that could result from a future debt
restructuring at LINN.
It's that second purpose of the exchange that's most
pertinent at the moment because LINN Energy has a mountain of
debt that it's attempting to address through restructuring.
Potential restructurings could include debt exchanges such as
the ones the company has done in the past, which have
reduced its net debt
by a total of $1.8 billion thus far and triggered some CODI for
unitholders last year. It also includes a potential
restructuring under Chapter 11 bankruptcy, which LINN has
warned could trigger substantial CODI for unitholders.
In the investor presentation that the company put together
for the initial exchange offering, LinnCo provided the
following potential CODI allocations to each outstanding LINN
Energy unit based on the debt forgiven:
- If LINN Energy restructures $1 billion in debt, then
$2.83 per unit in CODI would be allocated to each outstanding
- If $3 billion in debt were restructured, $8.50 per unit
in CODI would be allocated.
- At $5 billion, that number would balloon to $14.17 per
In order to avoid this potentially big tax hit, investors
could swap their LINN Energy units for LinnCo shares, and
because LinnCo is a C corp, its investors wouldn't have this
tax burden passed through to them.
Given the increasingly likelihood that LINN Energy will undergo
a major debt restructuring in the near future, LinnCo is now
extending its exchange offer for another month to the 71% of
LINN Energy investors who have yet to tender their units. That
roughly coincides with the company's looming deadline with
creditors, which have given it until May 11 before they'll
reduce its borrowing base. That said, the company doesn't have
a whole lot of time to find an alternative debt reduction
solution outside of restructuring in Chapter 11.
Despite that tight deadline the bulk of LINN's unitholders
have yet to agree to the exchange, which certainly complicates
things for the company. While the exchange was offered for the
benefit of unitholders,
The Wall Street Journal
did note earlier this year that LINN was exploring exchange
options because "Linn hopes helping investors sidestep a tax
hit could reduce the chance that they will band together and
complicate a potential bankruptcy, according to people familiar
with the matter."
With investors not buying into the initial exchange offer,
it certainly muddies the waters even more for LINN, which is
why LinnCo is offering another chance to exchange. However, it
seems to be clear that unitholders don't see the benefit of the
exchange given the increasingly unlikelihood that they'll get
nothing in a Chapter 11.
LINN Energy and LinnCo are running out of options as they slide
ever closer to a Chapter 11 bankruptcy filing, which could come
as early as next month given the deadline with creditors.
That's leaving few palpable options for long-suffering
investors who might not be left with any salvageable value.
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Was LinnCo LLC's Exchange Offer Really a
originally appeared on Fool.com.
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