LinnCo (UNKNOWN:LNCO.DL) announced today that it had successfully completed its exchange offer for units of its parent company, LINN Energy (OTC:LINEQ). 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 LINN unit.
- 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 unit.
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.