Item 1.01
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Entry into a Material Definitive Agreement.
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Securities Purchase Agreement
On February 16, 2017, Gastar Exploration Inc. (the Company) entered into a Securities Purchase Agreement (the Purchase
Agreement) with certain purchasers (the Purchasers) affiliated with Ares Management, L.P. (Ares), pursuant to which the Company will issue and sell for cash to the Purchasers (i) $125,000,000 aggregate principal
amount of its Convertible Notes due 2022 (the Notes) sold at par, which Notes, subject to the receipt of approval of the Companys stockholders, will be convertible into common stock, par value $0.001 per share of the Company (the
Common Stock) or, in certain circumstances, cash in lieu of Common Stock or a combination thereof as described below and (ii) 29,408,305 shares of Common Stock for a purchase price of $50 million. In addition, an affiliate of Ares
has agreed to concurrently loan the Company $250 million pursuant to a first-lien secured term loan (the Term Loan) sold at par. The Company expects to complete the above financings later this month, subject to the finalization of
security and collateral documentation and the satisfaction of customary closing conditions. Proceeds from the sale of the Notes, the Common Stock and the Term Loan will be used to fully repay and redeem the Companys existing $70.4 million
revolving credit facility and its $325 million senior secured notes due May 2018.
The Common Stock was priced based on a 30-trading day
volume weighted average trading price (the VWAP) determined on the date immediately prior to the signing date of the Purchase Agreement. The 30-day VWAP as of February 15, 2017 was $1.7002, which resulted in the agreement to issue
29,408,305 shares of Common Stock to the Purchasers, or approximately 18.8% of the shares of the Companys 156,715,833 shares of Common Stock issued and outstanding as of January 31, 2017.
The Notes will be issued for cash at par and will bear interest at 6.0% per annum. Subject to receipt of stockholder approval within four
months of the closing date (the Closing) of the above financings (the Requisite Stockholder Approval), the Notes will be convertible at the option of the holder into shares of Common Stock based on an initial conversion rate
of 452.4355 shares of Common Stock per $1,000 principal amount of the Notes (which is equivalent to an initial conversion price of $2.2103 per share, or 30% above the VWAP of the Common Stock for the 30 trading days prior to execution of the
Purchase Agreement), subject to certain adjustments and the issuance of additional make-whole shares under circumstances specified in the Indenture governing the Notes (the Indenture). Subject to certain limitations, the
Company will have the right to settle its conversion obligations on the Notes in Common Stock, or in cash or a combination thereof. If the Company obtains the Requisite Stockholder Approval, then the Company will have the right to redeem the Notes
(i) on or after the second anniversary of the Closing if the Common Stock trades above 150% of the conversion price for periods specified in the Indenture; and (ii) on or after March 1, 2021 without regard to such condition, in each case at par
plus accrued interest. The Notes will mature on March 1, 2022, unless earlier repurchased, redeemed or converted in accordance with the terms of the Indenture prior to such date. The interest rate, conversion rate and other financial terms of
the Notes were determined by negotiations between the Company and the Purchasers. The interest rate on the Notes will be subject to an increase in certain circumstances if the Company fails to comply with certain obligations under the Registration
Rights Agreement (as defined below), or in the case of certain issuances of Common Stock at below the initial reference price of $1.7002 per share.
If stockholders do not approve the conversion rights of the Notes into Common Stock within four months of the Closing, the Notes will not be
convertible and the interest rate on the Notes will increase in increments to 15% per annum, and will not be redeemable by the Company prior to maturity except upon payment of a make-whole redemption premium.
The Notes will be secured by a second-priority lien on substantially all of the assets of the Company and will include covenants restricting
the Companys ability to, among other things, incur debt, grant liens, pay dividends, engage in transactions with affiliates and other customary covenants of high yield debt securities.
The Common Stock proposed to be sold in the above described financing and the shares of Common Stock issued upon conversion of the Notes will
be subject to certain registration rights under a Registration Rights Agreement (the Registration Rights Agreement) that will be executed upon Closing. The Registration Rights Agreement will include a plan of distribution permitting the
Purchasers to sell the covered Common Stock by
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various means, including in open market sales from time to time, pursuant to underwritten offerings or in negotiated sales. The failure to (i) file a registration statement prior to a date
which is four months from the Closing of the financings above, (ii) have the registration statement declared effective within four months of the filing date for the Companys 2016 Annual report on From 10-K or (iii) thereafter, with
certain exceptions, maintain the effectiveness of the registration statement, will result in additional interest accruing on the Notes for so long as they are outstanding. The Company will be required to cooperate in a maximum of four underwritten
offerings under the Registration Rights Agreement at the expense of the Company (other than underwriting discounts).
The Term Loan will
be secured by a first-priority lien on substantially all of the assets of the Company and will include covenants restricting the Companys ability to incur debt, grant liens, pay dividends, engage in transactions with affiliates and other
customary covenants of a credit facility of its type (subject to certain exceptions). The maturity date of the Term Loan will be March 1, 2022 and will bear interest at 8.5% per annum, payable on a quarterly basis. In addition, the Term
Loan will be subject to an interest make-whole and repayment premium, such that any repayment or prepayment of the loans thereunder prior to the stated maturity date shall be subject to the payment of a repayment premium, and depending
on the date of such repayment or prepayment, the applicable interest make-whole amount, with the amount of such repayment premium decreasing over the life of the Term Loan.
The Company does not expect that the covenants or other provisions of the Term Loan or the Notes will restrict the payment of dividends on the
Companys outstanding preferred stock through July 2018, and, thereafter, such payments will be subject to satisfaction of certain financial conditions. Any future dividends on such preferred stock, however, remain subject to declaration by the
Company, and there is no assurance that the Company will declare and pay any future dividends, even if it is permitted to do so under the terms of the Term Loan or the Notes.
Pursuant to the Purchase Agreement and so long as the Purchasers beneficially own at least 15% of the Companys Common Stock (excluding
shares issuable upon conversion of the Notes), the Purchasers will be entitled to nominate two directors to an expanded eight member board of directors of the Company. If the Purchasers beneficially own 5% or more, but less than 15% of the
Companys Common Stock (excluding shares issuable upon conversion of the Notes), the Purchasers will be entitled to nominate one director to the board of directors of the Company.
The issuance of Common Stock and the Notes will be consummated as a private placement to accredited investors (as that term is
defined under Rule 501 of Regulation D), exempt from registration under the Securities Act of 1933, as amended (the Securities Act), in reliance upon Section 4(a)(2) of the Securities Act and Regulation D Rule 506, as a transaction
by an issuer not involving a public offering.