Linn Energy LLC has completed its first exchange offer for the holders of soon-to-be worthless shares, who are trying to avoid a tax hit as the company moves toward a bankruptcy filing.
Linn announced Tuesday that 29% of outstanding Linn units, as they are known under the company's tax structure, have been swapped for shares of Linn's sister company LinnCo LLC. More than 103 million units were exchanged on a one-to-one basis for the LinnCo stock, which was trading below $1 a share on Tuesday and has received a delisting threat from Nasdaq. Linn also announced Tuesday that it was beginning a second exchange offer, this one to expire May 23, to allow more Linn unit holders to become LinnCo shareholders.
Linn said "the purpose of the exchange offer is to permit holders of Linn units to maintain their economic interest in Linn through LinnCo, an entity that is taxed as a corporation rather than a partnership, which may allow Linn unitholders to avoid future allocations of taxable income and loss, including cancellation of debt income, that could result from future debt restructurings or other strategic transactions by Linn."
Essentially, Linn unit holders stand to take a double hit when Linn files for bankruptcy, which the company said it may do as soon as next month. The unit holders could lose their equity and then take a tax hit, triggered by the debt Linn is able to cancel in bankruptcy. The share exchange could help them avoid at least the tax hit.
Unit holders that participate in the second exchange, ending in May, could still be able to avoid the majority of the trouble, Linn said, which will occur when Linn's restructuring plan takes effect, rather than when it files for bankruptcy.
The issue for Linn stems from its status as a master limited partnership, or MLP, rather than a corporation. This was a popular arrangement among energy companies when oil prices were soaring but a dangerous status for investors now that so many energy companies are considering debt restructurings.
Linn's MLP status allowed income to flow straight through to investors without the Internal Revenue Service taking a cut at the corporate level, allowing Linn to distribute billions of dollars in cash to investors. But now, investors with potentially worthless units may owe taxes on debt that is forgiven in a bankruptcy.
As distress has spread through the oil and gas industry, which has been crippled by persistently low prices, many are watching Linn's attempt to restructure and resolve issues related to this MLP structure. There is no guarantee that these exchanges will successfully protect Linn's investors.
Earlier this month, the company announced a settlement with bondholders that it said would likely result in a bankruptcy filing during the next three months. Under the agreement, the bondholders and Linn have agreed to resume negotiations on the terms of a debt-restructuring plan, likely to be executed through a chapter 11 bankruptcy filing. If no deal is reached before Linn files for bankruptcy, the bondholders have agreed to support Linn's request for bankruptcy-court approval of a plan that would seek to replace their bonds with $1 billion in new bonds and release certain collateral securing the current bonds.
The Houston-based company focuses its exploration and production efforts throughout the U.S.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to http://dbr.dowjones.com)
Write to Stephanie Gleason at email@example.com