Debt

The carrying value of our total debt is summarized as follows:



(in thousands)	December 31, 2015			December 31, 2014
EXCO Resources Credit Agreement	$	67,492		$	202,492
Exchange Term Loan	641,172			—
Fairfax Term Loan	300,000			—
2018 Notes	158,015			750,000
Unamortized discount on 2018 Notes	(932		)	(5,957		)
2022 Notes	222,826			500,000
Deferred financing costs, net	(18,294		)	(16,019		)
Total debt, net	1,370,279			1,430,516
Less amounts due within one year	50,000			—
Total debt due after one year	$	1,320,279		$	1,430,516



	December 31, 2015
(in thousands)	Carrying value			Deferred reduction in carrying value			Unamortized discount/deferred financing costs		Principal balance
EXCO Resources Credit Agreement	$	67,492		$	—		$	—	$	67,492
Exchange Term Loan	641,172			(241,172		)	—		400,000
Fairfax Term Loan	300,000			—			—		300,000
2018 Notes	157,083			—			932		158,015
2022 Notes	222,826			—			—		222,826
Deferred financing costs, net	(18,294		)	—			18,294		—
Total debt	$	1,370,279		$	(241,172	)	$	19,226	$	1,148,333

Terms and conditions of each of these debt obligations are discussed below.

Recent transactions

On October 26, 2015, we closed a 12.5% senior secured second lien term loan with certain affiliates of Fairfax Financial Holdings Limited ("Fairfax") in the aggregate principal amount $300.0 million (“Fairfax Term Loan”). We used the proceeds from the Fairfax Term Loan to repay outstanding indebtedness under the EXCO Resources Credit Agreement. We also closed a 12.5% senior secured second lien term loan with certain unsecured noteholders in the aggregate principal amount of $291.3 million on October 26, 2015 and $108.7 million on November 4, 2015 (“Exchange Term Loan,” and together with the Fairfax Term Loan, “Second Lien Term Loans”). The proceeds from the Exchange Term Loan were used to repurchase a portion of the outstanding 7.5% senior unsecured notes due September 15, 2018 ("2018 Notes") and 8.5% senior unsecured notes due April 15, 2022 ("2022 Notes") in exchange for the holders of such notes agreeing to act as lenders in connection with the Exchange Term Loan. The exchange was accounted for as a troubled debt restructuring pursuant to FASB ASC 470-60, Troubled Debt Restructuring by Debtors. We have determined that the future undiscounted cash flows from the Exchange Term Loan through its maturity were less than the carrying amounts of the retired 2018 Notes and 2022 Notes. As a result, we have adjusted our carrying amount of the Exchange Term Loan to equal the total future cash payments, including interest and principal, which resulted in a net gain on the restructuring of debt of $165.1 million included in Gain on restructuring and extinguishment of debt in our Consolidated Statements of Operations. Subsequently, all cash payments under the terms of the Exchange Term Loan, whether designated as interest or as principal amount, will reduce the carrying amount and no interest expense will be recognized. As such, our reported interest expense will be less than the contractual payments throughout the term of the Exchange Term Loan.

In the fourth quarter of 2015, we repurchased $40.8 million in principal of the 2018 Notes through open market purchases with $12.0 million in cash. The open market repurchases resulted in a $28.2 million net gain on extinguishment of debt which is included in Gain on restructuring and extinguishment of debt in our Consolidated Statements of Operations. The net gain included an acceleration of the related deferred financing costs and notes discount. Additionally, in February 2016, we repurchased $9.5 million and $39.9 million in principal of the 2018 Notes and 2022 Notes, respectively, with $6.7 million in cash. See further discussion of the Second Lien Term Loans and the 2018 Notes and 2022 Notes repurchases below.

EXCO Resources Credit Agreement

At December 31, 2015, the EXCO Resources Credit Agreement had $67.5 million of outstanding indebtedness, $375.0 million of available borrowing base and $300.9 million of unused borrowing base, net of letters of credit. The maturity date of the EXCO Resources Credit Agreement is July 31, 2018. The interest rate grid for the revolving commitment under the EXCO Resources Credit Agreement ranges from LIBOR plus 225 bps to 325 bps (or alternate base rate ("ABR") plus 125 bps to 225 bps), depending on our borrowing base usage. On December 31, 2015, our interest rate was approximately 3.3% on the revolving commitment.

As of December 31, 2015, we were in compliance with the financial covenants (each as defined in the EXCO Resources Credit Agreement), which required that we:


•	maintain a consolidated current ratio of at least 1.0 to 1.0 as of the end of any fiscal quarter;

•

maintain a ratio of consolidated EBITDAX to consolidated interest expense ("Interest Coverage Ratio") of at least 1.25 to 1.0 as of the end of any fiscal quarter. The consolidated interest expense utilized in the Interest Coverage Ratio is calculated in accordance with GAAP; therefore, this excludes cash payments under the terms of the Exchange Term Loan, whether designated as interest or as face amount, that reduce the carrying amount and are not recognized as interest expense; and


•	not permit our ratio of senior secured indebtedness to consolidated EBITDAX ("Senior Secured Indebtedness Ratio"), to be greater than 2.5 to 1.0 as of the end of any fiscal quarter. Senior secured indebtedness utilized in the Senior Secured Indebtedness Ratio excludes the Second Lien Term Loans and any other indebtedness subordinated to the EXCO Resources Credit Agreement.

On October 19, 2015, we entered into an amendment to the EXCO Resources Credit Agreement that, among other things, reduced the borrowing base from $600.0 million to $375.0 million, effective upon the issuance of the Second Lien Term Loans. The amendment also amended the EXCO Resources Credit Agreement such that, upon our incurrence of second or third lien debt, including the Second Lien Term Loans, the revolving commitments under the EXCO Resources Credit Agreement were automatically reduced to $375.0 million. The Second Lien Term Loans limit the issuance of priority lien indebtedness to a maximum of $500.0 million without prior written consent of the administrative agent of the Fairfax Term Loan. In addition, the amendment provides that, with respect to the issuance of any second or third lien debt following the incurrence of the Second Lien Loans, if the issuance of such debt causes the aggregate principal amount of our second or third lien debt to exceed $900.0 million, the borrowing base will be further reduced. The requirement to comply with the leverage ratio maintenance covenant (as defined in the EXCO Resources Credit Agreement) was terminated as a result of the amendment.

The borrowing base under the EXCO Resources Credit Agreement remains subject to semi-annual review and redetermination by the lenders pursuant to the terms of the EXCO Resources Credit Agreement, and the next scheduled redetermination of the borrowing base is set to occur in March 2016.

The majority of our subsidiaries are guarantors under the EXCO Resources Credit Agreement. The EXCO Resources Credit Agreement permits investments, loans and advances to the unrestricted subsidiaries related to our joint ventures with certain limitations, and allows us to repurchase up to $200.0 million of our common shares, of which $7.6 million has been repurchased to date. The 16,621 shares and 38,821 shares repurchased in 2015 and 2014, respectively, were tendered by employees to satisfy minimum tax withholding amounts for restricted share awards.

Borrowings under the EXCO Resources Credit Agreement are collateralized by first lien mortgages providing a security interest of not less than 80% of the engineered value, as defined in the agreement, in our oil and natural gas properties covered by the borrowing base. We are permitted to have derivative financial instruments covering no more than 100% of forecasted production from total Proved Reserves, as defined in the agreement, for any month during the first two years of the forthcoming five-year period, 90% of forecasted production from total Proved Reserves for any month during the third year of the forthcoming five-year period and 85% of forecasted production from total Proved Reserves for any month during the fourth and fifth years of the forthcoming five-year period.

Second Lien Term Loans

Each of the Second Lien Term Loans matures on October 26, 2020 and bears interest at a rate of 12.5% per annum, which is payable on the last day in each calendar quarter. The Second Lien Term Loans are guaranteed by substantially all of EXCO’s subsidiaries, with the exception of certain non-guarantor subsidiaries and our jointly-held equity investments with BG Group, and are secured by second-priority liens on substantially all of EXCO’s assets securing the indebtedness under the EXCO Resources Credit Agreement. The Second Lien Term Loans rank (i) junior to the debt under the EXCO Resources Credit Agreement and any other priority lien obligations, (ii) pari passu to one another and (iii) effectively senior to all of our existing and future unsecured senior indebtedness, including the 2018 Notes and the 2022 Notes, to the extent of the collateral.

The agreements governing the Second Lien Term Loans contain covenants that, subject to certain exceptions, limit our ability and the ability of our restricted subsidiaries to, among other things:


•	pay dividends or make other distributions or redeem or repurchase our common shares;


•	prepay, redeem or repurchase certain debt;


•	enter into agreements restricting the subsidiary guarantors’ ability to pay dividends to us or another subsidiary guarantor, make loans or advances to us or transfer assets to us;


•	engage in asset sales or substantially alter the business that the we conduct;


•	enter into transactions with affiliates;


•	consolidate, merge or dispose of assets;


•	incur liens; and


•	enter into sale/leaseback transactions.

In addition, the term loan agreement governing the Exchange Term Loan prohibits us from incurring, among other things and subject to certain exceptions:

•

debt under the EXCO Resources Credit Agreement in excess of the greatest of (i) $375.0 million plus an amount equal to six and two-thirds percent of the aggregate principal amount of our outstanding indebtedness under the EXCO Resources Credit Agreement for over-advances to protect collateral, (ii) the borrowing base under the EXCO Resources Credit Agreement or (iii) 30% of modified adjusted consolidated net tangible assets (as defined in the agreement);


•	second lien debt in excess of $700.0 million; and


•	unsecured debt where on the date of such incurrence or after giving effect to such incurrence, our consolidated coverage ratio (as defined in the agreement) is or would be less than 2.25 to 1.0.

The term loan agreement governing the Fairfax Term Loan prohibits us from incurring, among other things and subject to certain exceptions:


•	debt under the EXCO Resources Credit Agreement in excess of $375.0 million plus an amount equal to six and two-thirds percent of the aggregate principal amount of our outstanding indebtedness under the EXCO Resources Credit Agreement for over-advances to protect collateral, provided that such indebtedness may not exceed $500.0 million, unless we obtain consent from the administrative agent;


•	second lien debt, other than the Exchange Term Loan, in excess of (i) $400.0 million prior to December 31, 2015 and(ii) an amount to be agreed upon with the administrative agent after December 31, 2015;


•	junior lien debt, unless such debt is being used to refinance the 2018 Notes or the 2022 Notes or the terms and conditions of such junior lien debt are approved by the administrative agent; and


•	unsecured debt, unless we obtain consent from the administrative agent.

In connection with the Second Lien Term Loans, on October 26, 2015, EXCO entered into an intercreditor agreement governing the relationship between EXCO’s lenders and the holders of any other lien obligations that EXCO may issue in the future and a collateral trust agreement governing the administration and maintenance of the collateral securing the Second Lien Term Loans.

2018 Notes

The 2018 Notes are guaranteed on a senior unsecured basis by a majority of EXCO’s subsidiaries, with the exception of certain non-guarantor subsidiaries and our jointly-held equity investments with BG Group. Our equity investments with BG Group, other than OPCO, have been designated as unrestricted subsidiaries under the indenture governing the 2018 Notes.

In the fourth quarter of 2015, EXCO repurchased an aggregate $551.2 million of the 2018 Notes in exchange for certain holders of the 2018 Notes to act as lenders under the Exchange Term Loan. Additionally, we repurchased $40.8 million in principal amount of the 2018 Notes with $12.0 million in cash through open market purchases in the fourth quarter of 2015. Additionally, in February 2016, we repurchased $9.5 million in principal amount of the 2018 Notes with $2.2 million in cash. The 2018 Notes repurchased will be canceled by the trustee following customary settlement procedures. As a result of the repurchases, the aggregate principal amount of outstanding 2018 Notes was reduced to $148.5 million as of February 25, 2016. Interest accrues at 7.5% and is payable semi-annually in arrears on March 15th and September 15th of each year.

The indenture governing the 2018 Notes contains covenants, which may limit our ability and the ability of our restricted subsidiaries to:


•	incur or guarantee additional debt and issue certain types of preferred shares;


•	pay dividends on our capital stock or redeem, repurchase or retire our capital stock or subordinated debt;


•	make certain investments;


•	create liens on our assets;


•	enter into sale/leaseback transactions;


•	create restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to us;


•	engage in transactions with our affiliates;


•	transfer or issue shares of stock of subsidiaries;


•	transfer or sell assets; and


•	consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries.

On November 25, 2015, the Company obtained the requisite consents to amend the indenture governing the 2018 Notes. Following the receipt of the requisite consents, EXCO entered into a supplemental indenture which, among other things, eliminated the reduction in the amount of secured indebtedness permitted under the EXCO Resources Credit Agreement upon principal payments which results in a permanent reduction in borrowing capacity of EXCO. As a result, the amount of secured indebtedness permitted under the EXCO Resources Credit Agreement cannot exceed the greater of $1.2 billion or a calculation based on the value of our assets.

2022 Notes

The 2022 Notes were issued at 100.0% of the principal amount and bear interest at a rate of 8.5% per annum, payable in arrears on April 15 and October 15 of each year. On November 4, 2015, EXCO completed a repurchase of $277.2 million of the 2022 Notes in exchange for certain holders of the 2022 Notes to act as lenders under the Exchange Term Loan. Additionally, in February 2016, we repurchased $39.9 million in principal amount of the 2022 Notes with $4.5 million in cash. The 2022 Notes repurchased will be canceled by the trustee following customary settlement procedures. As a result of the note repurchase, the aggregate principal amount of outstanding 2022 Notes was reduced to $182.9 million as of February 25, 2016.

The 2022 Notes rank equally in right of payment to any existing and future senior unsecured indebtedness of the Company (including the 2018 Notes) and are guaranteed on a senior unsecured basis by EXCO’s consolidated subsidiaries that are guarantors of the indebtedness under the EXCO Resources Credit Agreement. The 2022 Notes were issued under the same base indenture governing the 2018 Notes and the supplemental indenture governing the 2022 Notes contains similar covenants to those in the supplemental indenture governing the 2018 Notes.

The foregoing descriptions are not complete and are qualified in their entirety by the EXCO Resources Credit Agreement, the indenture governing the 2018 Notes and 2022 Notes and the agreements governing the Second Lien Term Loans.

Deferred Financing Costs

In the fourth quarter of 2015, we adopted ASU 2015-03 and ASU 2015-15 and reclassified deferred financing costs related to the 2018 Notes, 2022 Notes and Second Lien Term Loans from an asset to a contra-liability account on our Consolidated Balance Sheets and reflected the change retrospectively in the table above. Deferred financing costs related to the EXCO Resources Credit Agreement will be classified as an asset as allowed by ASU 2015-15.

Liquidity and covenants

While we believe our existing capital resources, including our cash flow from operations and borrowing capacity under the EXCO Resources Credit Agreement, are sufficient to conduct our operations through 2016 and into 2017, there are certain risks arising from depressed oil and natural gas prices and declines in production volumes that could impact our liquidity and ability to meet debt covenants in future periods. Our ability to maintain compliance with our debt covenants may be negatively impacted when oil and/or natural gas prices remain depressed for an extended period of time. Reductions in our borrowing capacity as a result of a redetermination to our borrowing base could have an impact on our capital resources and liquidity. The borrowing base redetermination process considers assumptions related to future commodity prices; therefore, our borrowing capacity could be negatively impacted by further declines in oil and natural gas prices. Accordingly, our ability to effectively execute our corporate strategies and manage our operating, general and administrative expenses and capital expenditure programs is critical to our financial condition, liquidity and our results of operations.

If we are not able to meet our debt covenants in future periods, or if our borrowing base is significantly reduced, we may be required but unable to refinance all or part of our existing debt, sell assets, borrow more money or raise equity on terms acceptable to us, if at all, and may be required to surrender assets pursuant to the security provisions of the EXCO Resources Credit Agreement and the Second Lien Term Loans. Further, failing to comply with the financial and other restrictive covenants in the EXCO Resources Credit Agreement, 2018 Notes, 2022 Notes and the Second Lien Term Loans could result in an event of default, which could adversely affect our business, financial condition and results of operations.