Lightstream Resources Ltd. LSTMF

Moody downgrades , hope they're not right

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Rating Action: Moody's downgrades Lightstream's notes to Ca; declares distressed exchange

Global Credit Research - 06 Jul 2015

Approximately US$335 million of rated debt affected

Toronto, July 06, 2015 -- Moody's Investors Service (Moody's) has affirmed Lightstream Resources Ltd.'s (Lightstream) Caa2 Corporate Family Rating and negative outlook, revised its Probability of Default Rating (PDR) to Caa2-PD/LD (limited default) from Caa2-PD, downgraded the senior unsecured notes rating to Ca from Caa3 and raised its Speculative Grade Liquidity Rating to SGL-3 from SGL-4. The outlook remain negative. The PDR will be revised back to Caa2-PD after three business days. On July 2, 2015 Lightstream announced an agreement with certain note holders to exchange US$465 million of senior unsecured notes for approximately US$395 million in second-lien notes (unrated), in addition to issuing US$200 million of new second-lien notes. Moody's considers the transaction to be a distressed exchange, which also increases Lightstream's liquidity and subordinates the remaining US$335 million of senior unsecured notes to the new second-lien debt.

Downgrades:

..Issuer: Lightstream Resources Ltd

....Senior Unsecured Regular Bond/Debenture (Foreign Currency) Feb 1, 2020, Downgraded to Ca from Caa3

Upgrades:

..Issuer: Lightstream Resources Ltd

.... Speculative Grade Liquidity Rating, Upgraded to SGL-3 from SGL-4

Outlook Actions:

..Issuer: Lightstream Resources Ltd

....Outlook, Remains Negative

Affirmations:

..Issuer: Lightstream Resources Ltd

.... Probability of Default Rating, Affirmed Caa2-PD /LD (/LD appended)

.... Corporate Family Rating (Foreign Currency), Affirmed Caa2

RATINGS RATIONALE

The Caa2 CFR primarily reflects Lightstream's high debt level and untenable capital structure, very low leveraged full-cycle ratio (LFCR), and a declining reserves and production base. Lightstream has a base decline rate that requires significant sustaining capex to maintain production which it currently cannot afford.

The SGL-3 rating reflects adequate liquidity through mid-2016. As of March 31, 2015 and pro forma for the new US$200 million second-lien notes issuance in mid-July, Lightstream will have no cash and about C$350 million available under its C$750 million revolving credit facility due June 2017. We expect C$50 million of negative free cash flow through mid-2016, which will be funded under its revolving credit facility. We expect Lightstream to be well in compliance with its sole financial covenant. If Lightstream is successful in selling its remaining core Bakken properties then the proceeds would go to repay secured debt, including drawings under the revolver, and there would be a reduction in the commitment level, although some additional liquidity might be created in transaction.

The senior unsecured notes are rated Ca, two notches below the Caa2 CFR, reflecting the amount of priority-ranking debt in the capital structure in the form of the new second-lien notes and secured revolver. Moody's believes that the Ca rating is more appropriate for the senior unsecured notes than the Caa3 rating suggested by Moody's Loss Given Default Methodology based on our fundamental view of recovery, as the notes rank behind about C$1.5 billion of priority ranking debt.

The negative outlook reflects Lightstream's declining production from lower investment and untenable capital structure.

The rating could be upgraded if Lightstream can maintain production and interest coverage above 1.5x.

The rating could be downgraded if there is any further deterioration in liquidity.

Lightstream, a Calgary, Alberta-based oil and gas exploration and production company, is focused on developing light oil resources in the Saskatchewan Bakken formation and the Cardium formation in central Alberta.

The principal methodology used in these ratings was Global Independent Exploration and Production Industry published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Moody's has not provided advisory services but may have provided Ancillary or Other Permissible Service(s) to the rated entity, its related third parties and/or the party that requested the rating within the past two years (including during the most recently ended fiscal year). Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's credit rating agency in Canada" on the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Paresh Chari
Analyst
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
[phone]

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
[phone]

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
[phone]

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