In an effort to shield investors from potential tax liabilities in the event of a debt restructuring, LinnCo (LNCO) announced an exchange offering earlier this week.
Under the terms of the exchange offer, which expires on April 18, Linn Energy (LINE) investors will be able to exchange their Linn Energy units for shares of LinnCo.
As reminder, Texas-based Linn Energy is an oil and gas exploration and production company with operations throughout the U.S. LinnCo, which is also based in Texas, was created to facilitate Linn Energy's ability to raise equity for growth and acquisitions. Shares of Linn Energy and LinnCo trade for $0.49 and $0.43, respectively.
The exchange offering was launched to allow Linn Energy investors to maintain an economic interest -- should they want to -- in the company while (potentially) avoiding cancellation of debt income that could be triggered if Linn Energy restructures its debts.
The tax treatment to Linn Energy investors is due to the company being organized as a master limited partnership. MLP investors are known as unitholders instead of shareholders. However, the more important distinction is that taxable events such as gains, losses, income, deductions and credit are allocated directly to unitholders. (Under a corporate structure, those events are allocated to the corporation.)
While unitholders who participate in the exchange are expected to avoid cancellation of debt income, participation in the exchange could constitute an up-front taxable event. As such, unitholders may have passive losses to offset the potential tax liability, according to a presentation Linn Energy prepared to explain the offering.
Although unitholders may avoid tax liabilities by participating in the exchange, Linn Energy cautioned that LinnCo is not necessarily "safer" than Linn Energy.
"It is possible that either or both Linn Energy and LinnCo could seek protection under Chapter 11 of the U.S. Bankruptcy Code, and it is possible that LinnCo shares and Linn Energy units could be severely diluted or even eliminated in such proceedings," Linn Energy said in the presentation.
The measures LinnCo and Linn Energy are taking follow Linn Energy's announcement in February that it was exploring "strategic alternatives to strengthen the balance sheet." In March, it delayed releasing its 2015 financials because the statements were expected to include a going-concern qualification, which would violate its debt covenants and could accelerate demands on its outstanding debt. Indeed, when the company released its 10-K for 2015 on March 15, the going-concern qualification was included, which started a 30-day clock for Linn Energy to obtain a waiver from its lenders under its credit facility.
While investors have options available to them should they want to stay invested, Linn Energy also addressed the fact that customers may elect to cash out.