Long-Term Debt

On August 19, 2010, the Company issued $150 million in principal amount of its 10% Senior Notes due 2017. On July 3, 2013, the Company issued an additional $200 million in principal amount of its 10% Senior Notes due 2017 (collectively, the "2017 Notes").

On January 14, 2016, the Company announced the commencement of a private exchange offer (the "Exchange") and consent solicitation (the "Consent Solicitation") to certain eligible holders of its outstanding 2017 Notes. The Exchange closed on February 17, 2016, and in satisfaction of the tender of $214.4 million in aggregate principal amount of the 2017 Notes, representing approximately 61% of the outstanding aggregate principal amount of 2017 Notes, in the Exchange the Company (i) paid approximately $53.6 million of cash, (ii) issued $144.7 million aggregate principal amount of its new 10% Second Lien Senior Secured Notes due 2021 (the "2021 Notes") and (iii) issued approximately 1.1 million shares of its common stock. Following the completion of the Exchange, $135.6 million in aggregate principal amount of the 2017 Notes remain outstanding. The Consent Solicitation eliminated or waived substantially all of the restrictive covenants contained in the indenture governing the 2017 Notes.

The Exchange was accounted for as a troubled debt restructuring pursuant to guidance provided by FASB Accounting Standards Codification ("ASC") section 470-60 "Troubled Debt Restructurings by Debtors." The Company determined that the future undiscounted cash flows from the 2021 Notes issued in the Exchange through the maturity date exceeded the adjusted carrying amount of the 2017 Notes tendered in the Exchange. Accordingly, no gain on extinguishment of debt was recognized in connection with the Exchange. The excess of the future undiscounted cash flows from the 2021 Notes issued in the Exchange over the remaining carrying value of the 2017 Notes tendered in the Exchange of $13.9 million is reflected as part of the carrying value of the 2021 Notes. Such excess will be amortized under the effective interest method as a reduction of interest expense over the term of the 2021 Notes. At June 30, 2016, $13.0 million of the excess remained as part of the carrying value of the 2021 Notes and the Company recognized $0.9 million of amortization expense as a reduction to interest expense during the first half of 2016.

The indenture governing the 2021 Notes contains affirmative and negative covenants that, among other things, limit the ability of the Company and the subsidiary guarantors of the 2021 Notes to incur indebtedness; purchase or redeem stock; make certain investments; create liens that secure debt; enter into transactions with affiliates; sell assets; refinance certain indebtedness; merge with or into other companies or transfer substantially all of their assets; and, in certain circumstances, to pay dividends or make other distributions on stock. The 2021 Notes are fully and unconditionally guaranteed on a senior basis by certain wholly-owned subsidiaries of the Company.

The 2021 Notes are secured by second-priority liens on substantially all of the Company's and the subsidiary guarantors' oil and gas properties and substantially all of their other assets to the extent such properties and assets secure the Credit Agreement (as defined below), except for certain excluded assets. Pursuant to the terms of an intercreditor agreement, the security interest in those properties and assets that secure the 2021 Notes and the guarantees are contractually subordinated to liens that secure the Credit Agreement and certain other permitted indebtedness. Consequently, the 2021 Notes and the guarantees will be effectively subordinated to the Credit Agreement and such other indebtedness to the extent of the value of such assets.

The 2021 Notes bear interest at a rate of 10% per annum on the principal amount and interest is payable semi-annually in arrears on February 15 and August 15 of each year, beginning August 15, 2016. At June 30, 2016, $5.4 million had been accrued in connection with the August 15, 2016 payment and the Company was in compliance with all of the covenants under the 2021 Notes. Interest on the 2017 Notes is payable semi-annually on March 1 and September 1 and the 2017 Notes mature on September 1, 2017. At June 30, 2016, $4.5 million had been accrued in connection with the September 1, 2016 interest payment and the Company was in compliance with all of the covenants under the 2017 Notes.

During 2015, the Company adopted ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs", which changes the presentation of debt issuance costs in financial statements to present such costs as a direct deduction from the related liability rather than as an asset. As a result, the 2017 Notes are reflected net of $0.9 million and $3.0 million of related financing costs at June 30, 2016 and December 31, 2015, respectively. The 2021 Notes are reflected net of $1.2 million of related financing costs as of June 30, 2016.

The following table reconciles the face value of the 2017 Notes and 2021 Notes to the carrying value included in the Company's Consolidated Balance Sheet as of June 30, 2016 and December 31, 2015 (in thousands):



	June 30, 2016						December 31, 2015
	2017 Notes			2021 Notes			2017 Notes			2021 Notes
Face Value	$	135,621		$	144,674		$	350,000		$	—
Deferred Financing Costs	(855		)	(1,174		)	(2,992		)	—
Excess Carrying Value	—			13,024			—			—
Carrying Value	$	134,766		$	156,524		$	347,008		$	—

The Company and PetroQuest Energy, L.L.C. (the “Borrower”) have a Credit Agreement (as amended, the “Credit Agreement”) with JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A., Capital One, N.A., IberiaBank, Bank of America, N.A. and The Bank of Nova Scotia. The Credit Agreement provides the Company with a revolving credit facility that permits borrowings based on the commitments of the lenders and the available borrowing base as determined in accordance with the Credit Agreement. The Credit Agreement does not presently allow the Company to issue letters of credit thereunder. The credit facility matures on the earlier of June 4, 2020 or February 19, 2017 if any portion of the Company’s 2017 Notes remains outstanding as of such date which has not been refinanced with either permitted refinancing debt or permitted second lien debt with a maturity date no earlier than 180 days after June 4, 2020, all as defined in the Credit Agreement.

The borrowing base under the Credit Agreement is determined by March 31 and September 30 of each year and is based upon the valuation of the reserves attributable to the Company’s oil and gas properties as of January 1 and July 1 of each year. If the Company incurs any borrowings, or causes the lenders to issue any letters of credit, under the Credit Agreement (the “Financial Covenant Reinstatement Date”), two interim redeterminations would occur on July 31 and December 31 of each year commencing on the first July 31 or December 31 subsequent to the Financial Covenant Reinstatement Date. The Company or the lenders may also request two additional borrowing base re-determinations each year. Each time the borrowing base is to be re-determined, the administrative agent under the Credit Agreement will propose a new borrowing base as it deems appropriate in its sole discretion, which must be approved by all lenders if the borrowing base is to be increased, or by lenders holding two-thirds of the amounts outstanding under the Credit Agreement if the borrowing base remains the same or is reduced. As of June 30, 2016, the borrowing base and aggregate commitments of the lenders were both $22.5 million. The Company has no borrowings outstanding under (and no letters of credit issued pursuant to) the Credit Agreement.

The obligation of the lenders to make loans on the account of any borrowing or issue letters of credit under the Credit Agreement, include that (i) at the time of and after giving effect to the requested borrowing or issuance, the Company will be in compliance with the restrictive financial covenants described below, (ii) at the time of and after giving effect to the requested borrowing or issuance, there will be no Excess Cash, defined as any unrestricted cash and cash equivalents of the Company or any of its other Subsidiaries that exceeds $10 million, and (iii) after giving effect to the requested borrowing or issuance, the aggregate amount of borrowings outstanding under (and letters of credit issued pursuant to) the Credit Agreement will not exceed $5 million. In addition, the Company is obligated to make mandatory prepayments on each business day from and after the Financial Covenant Reinstatement Date in the amount of any Excess Cash on such day and, once the borrowings are fully prepaid, the Company is required to pay any Excess Cash to the administrative agent under the Credit Agreement to provide cash collateral for any outstanding letters of credit. The Company anticipates that, pursuant to the restrictive financial covenants described below, the Company will not be able to utilize the borrowing base for the foreseeable future.

The Credit Agreement is secured by a first priority lien on substantially all of the assets of the Company and its subsidiaries, including a lien on all equipment and at least 90% of the aggregate total value of the Borrower’s oil and gas properties. Outstanding balances under the Credit Agreement bear interest at the alternate base rate (“ABR”) plus a margin (based on a sliding scale of 1% to 2% depending on total commitments) or the adjusted LIBO rate (“Eurodollar”) plus a margin (based on a sliding scale of 2% to 3% depending on total commitments). The alternate base rate is equal to the highest of (i) the JPMorgan Chase prime rate, (ii) the Federal Funds Effective Rate plus 0.5% or (iii) the adjusted LIBO rate (subject to a floor of 0.0%) plus 1%. For the purposes of the definition of alternate base rate only, the adjusted LIBO rate for any day is based on the LIBO Rate at approximately 11:00 a.m. London time on such day. For all other purposes, the adjusted LIBO rate is equal to the rate at which Eurodollar deposits in the London interbank market for one, two, three or six months (as selected by the Company) are quoted, as adjusted for statutory reserve requirements for Eurocurrency liabilities. Outstanding letters of credit will be charged a participation fee at a per annum rate equal to the margin applicable to Eurodollar loans, a fronting fee and customary administrative fees. In addition, the Company pays commitment fees of 0.5% of the average daily unused amount of the commitments.

The Company and its subsidiaries are not presently, but will become, subject to certain restrictive financial covenants under the Credit Agreement after the Financial Covenant Restatement Date, including (i) a maximum ratio of total debt to EBITDAX (as of the last day of any fiscal quarter for the fiscal quarter period then ending) multiplied by four of 4.00 to 1.0 as of the last day of any fiscal quarter, (ii) a minimum ratio of consolidated current assets (including unused availability but excluding non-cash assets under ASC 815) to consolidated current liabilities (excluding non-cash obligations under ASC 815 and ASC 410 and, for the fiscal quarters ending September 30, 2016 and December 31, 2016, liabilities in respect of the Company’s 2017 Notes) of 1.0 to 1.0 as of the last day of any fiscal quarter and (iii) a minimum ratio of EBITDAX to total cash interest expense, determined on a four quarter basis as of the end of each fiscal quarter, of 3.0 to 1.0, as of the last day of any fiscal quarter, all as defined in the Credit Agreement.

The Credit Agreement also includes customary restrictions with respect to debt, liens, dividends, distributions and redemptions, investments, loans and advances, nature of business, international operations and foreign subsidiaries, leases, sale or discount of receivables, mergers or consolidations, sales of properties, transactions with affiliates, negative pledge agreements, gas imbalances and swap agreements. The Credit Agreement also currently prohibits the Company from declaring and paying dividends on its Series B Preferred Stock.