Linn Energy Reaches Agreement with Second Lien Creditors

 | Apr 06, 2016 | 11:49 AM EDT
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Linn Energy (LINE) announced another step to tackle its hefty debt load on Tuesday.

The troubled Texas-based master limited partnership said that it reached a settlement agreement with holders of its 12% senior secured second lien notes maturing in 2020.

Holders of the 2020 notes and Linn Energy, along with Linn Energy subsidiaries -- other than Berry Petroleum -- agreed to start "good faith negotiations" with one another throughout Linn Energy's restructuring, which may also include a chapter 11 reorganization.

Linn Energy also agreed to deliver the mortgages, which are the collateral for the notes, to the collateral trustee. Under terms of the initial agreement with the bondholders, Linn Energy was supposed to deliver the mortgages by Feb. 18, 2016, but it decided to elect its 45-day grace period before doing so.

A settlement being reached on the 2020 notes bears some significance, as the notes are relatively new. They were issued as part of an exchange offering in November, in which holders of several unsecured senior notes were able to make a small move up the claims totem pole in the event of a Linn Energy default. The notes have priority over unsecured senior indebtedness of the company, but they have second-priority to claims on Linn Energy's other assets.

In Tuesday's press release, Linn Energy also addressed its ongoing exchange offering. Real Money reported last month that Linn Energy announced the offering in an effort to help investors in the MLP avoid the possible tax liabilities they would incur if Linn Energy's debts were cancelled in a restructuring process.

If investors were to participate in the exchange, they would receive one share of LinnCo (LNCO) stock for one unit of Linn Energy. To be sure, the exchange itself would also create a taxable event, though perhaps one that is less severe than investors receiving cancellation of debt income, which is taxed at ordinary income tax rates.

Linn Energy and LinnCo have urged investors to consult with a tax professional to determine if participating in the exchange is appropriate for their tax situation.

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