March 16, 2016 / 12:15 AM / 2 years ago

Linn Energy creditors at risk of collateral damage

WILMINGTON, Del., March 15 (Reuters) - Linn Energy LLC said on Tuesday that it did not fully secure a bond swap with the agreed collateral, creating a major headache for its creditors if the oil and gas producer seeks bankruptcy protection.

Linn offered mortgages on a large majority of its oil and natural gas properties to creditors, including funds managed by Franklin Templeton Investments, as collateral last year. It did so to persuade them to accept a 50 percent loss on unsecured debt amounting to $2 billion.

Linn now has until early April to hand over the mortgages under a 45-day grace period. But its financial situation is fragile and the company said bankruptcy may be unavoidable after it skipped interest payments on its debts on Tuesday.

If Linn fails to deliver the mortgages and then files for bankruptcy, the debt holders may have to go to court to get the collateral they thought they had secured, said Ted Gavin, the founder of Gavin/Solmonese, a restructuring consulting firm.

“That said, they would have an uphill fight from a disadvantageous position,” said Gavin. “As we saw in the mortgage crisis and the wave of bankruptcies that followed, possession of documents matters when you’re trying to assert a secured claim.”

A spokesperson for Linn declined to comment. Requests for comment to Franklin Templeton were not immediately returned.

For those creditors who did not participate in the swap and retained their original unsecured paper, Linn’s failure to hand over the collateral could be welcome news in the event of a bankruptcy because there would be fewer creditors that must be paid ahead of them, according to a person familiar with the matter.

The bond swap deal, one of at least 10 that oil and gas exploration and production companies pursued as they tried to cut debt and reduce expenses, gave Linn some breathing room as oil prices lingered below $40 a barrel.

Linn’s creditors, holding $2 billion of the company’s unsecured debt, turned in their holdings for $1 billion of new debt.

Since Linn issued the new debt in the swap in November, the bonds have plummeted in value, to about 15 cents on the dollar on Tuesday.

With about $10 billion in debt, if Linn files for bankruptcy it would be the largest to date in the current oil rout. (Editing by Carmel Crimmins; Editing by Tom Brown)

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