Finance & Investing | Debt | Capital Markets

LINN Enters Settlement with Noteholders; $1.0B Outstanding

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LINN Energy, LLC has entered into a settlement agreement with certain holders of the Company’s $1.0 billion of outstanding 12 percent Senior Secured Second Lien Notes due 2020, which collectively hold more than two-thirds of the outstanding principal amount of the Second Lien Notes. Under the terms of the Settlement Agreement, the Company delivered the mortgages associated with the Second Lien Notes and is no longer in default under the Indenture governing the Second Lien Notes.

The Settlement Agreement provides that LINN and the Second Lien Note holders will commence good faith negotiations with each other regarding the terms of a potential comprehensive and consensual restructuring of the Company’s indebtedness, including a potential restructuring under a chapter 11 plan of reorganization. The Company expects to continue operations throughout this process.  The Settlement Agreement has been filed on Form 8-K with the U.S. Securities and Exchange Commission. 

Potential Tax Liabilities and Exchange Offer

As previously announced, LinnCo, LLC has commenced an offer to exchange each outstanding unit of LINN for one LinnCo share. 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. LinnCo believes that many LINN unitholders may benefit by participating in the Exchange Offer.  However, because the tax situation of each LINN unitholder is unique, LinnCo recommends that each LINN unitholder consult with such unitholder’s own individual tax advisor to determine whether it is in such unitholder’s best interest to participate in the Exchange Offer.

Unitholders of LINE are required to pay taxes on their share of LINE’s taxable income, including their share of ordinary income and capital gain upon dispositions of properties by LINE or cancellation of debt, even if they do not receive any cash distributions from LINE. In 2015, debt restructuring resulted in approximately $1.7 billion of cancellation of debt income. If LINN were to restructure additional debt in 2016, this will result in additional CODI allocated to each outstanding LINE unit. CODI is not itself an additional tax due but is an amount that must be reported as ordinary income by the unitholder, potentially increasing such unitholder’s tax liabilities. The amount of any such tax liability resulting from allocations of CODI will vary depending on each unitholder’s individual tax circumstances.

LinnCo is a limited liability company that has elected to be treated as a corporation for United States federal income tax purposes. LinnCo’s federal taxable income is subject to a corporate level tax.  A LinnCo shareholder is subject to income tax on taxable dividends received or on any gains from the holder’s sale of LinnCo shares. However, a LinnCo shareholder will not be required to include an allocated share of LinnCo’s income (including any cancellation of debt income), gains, losses, or deductions in computing the holder’s own taxable income.

LinnCo’s obligation to accept for exchange the LINN units validly tendered in the Exchange Offer is subject to the effectiveness of the registration statement on Form S-4 filed with the U.S. Securities and Exchange Commission on March 22, 2016, of which the Prospectus is a part, and the lack of legal prohibitions.