Tullow - comment

More important than the rating movements, described below, was the purchase of shares by the CFO of Tullow, which was reported yesterday. This coincided with a non-executive also buying. The amounts are small, £10k and £67k respectively, but disappointedly neither the CFO nor the non-executive are restricted. This would imply they are not making much progress on the Kenya farm down or the sales of Espoir field in Côte d’Ivoire. 

Moody’s views Tullow’s bond buy-back as a distressed exchange, constituting a default, and therefore appended a limited default to the ratings. This will be removed after three business days. As Moody’s pointed out, the buyback represents c.7% of the outstanding debt of Tullow and therefore we can’t see the logic of marking this transaction down as limited default on the bonds. 

Separately, S&P has downgraded the senior bonds to CCC+, with the sub-bonds one notch lower at CCC. This is a downgrade of 1 notch on both bonds. S&P has not downgraded due to the bond tender and highlighted the fact the buyback was done in the form of an unmodified Dutch auction, meaning investors could choose the price they believed was fair or decline the offer. However, the downgrade reflects the higher possibility of further buybacks below par, and S&P may consider further buybacks as tantamount to default and would likely downgrade the notes to F and lower the issuer credit rating to selective default. 

We feel the buybacks were the right option for the Company and we would expect further buybacks in late H2. However, the likelihood of a selective default from both rating agencies may give the management some pause for concern.