Business Context and Reporting Period
This Form 8-K Current Report, dated June 1, 2018 (reporting events of May 28, 2018), details material definitive agreements entered into by Kimbell Royalty Partners, LP. The filing outlines a strategic acquisition of assets from Haymaker Minerals & Royalties, LLC and Haymaker Resources, LP, alongside a concurrent private placement of preferred equity and an amendment to the company's credit facility to fund the transaction.
Key Financial Metrics and Transaction Terms
- Acquisition Consideration: Total aggregate consideration of $210 million in cash plus 10,000,000 Common Units.
- Equity Financing: Issuance of 110,000 Series A Cumulative Convertible Preferred Units to affiliates of Apollo Capital Management, L.P. for gross proceeds of $110 million ($1,000 per unit).
- Debt Financing: Commitment for an upsized revolving credit facility of up to $200 million, with the Borrowing Base increased to $200 million.
- Preferred Unit Economics:
- Quarterly distributions of 7.0% per annum (cumulative).
- Conversion price of $18.50 per Common Unit.
- Redemption features targeting a Minimum IRR ranging from 13.0% to 15.0% depending on the timing.
- Credit Facility Terms: Applicable margin decreased by 0.25% across levels, resulting in margins of 1.00% to 2.00% for ABR Loans and 2.00% to 3.00% for LIBOR Loans.
Material Changes and Strategic Shifts
The filing announces a significant expansion of the Partnership's asset base through the Haymaker Transactions, expected to close in the third quarter of 2018 with an effective date of April 1, 2018. A material structural change is the Partnership's proposal to alter its U.S. federal income tax status from a pass-through partnership to an entity taxable as a corporation. This change is a condition of the financing and requires partner approval via an information statement under Regulation 14C.
Guidance, Risks, and Contingencies
- Closing Conditions: The Haymaker Transactions and the Preferred Unit issuance are interdependent; the closing of the private placement is conditioned on the concurrent closing of the Haymaker Transactions.
- Termination Rights: Agreements may be terminated if transactions are not consummated by July 27, 2018, or if certain breaches or governmental prohibitions occur.
- Lock-up Periods: Haymaker Sellers have agreed not to dispose of Common Units for 180 days following the closing.
- Registration Rights: The Partnership must file a shelf registration statement within 160 days of the closing to allow for the resale of Common Units issued to sellers and convertible from Preferred Units. Failure to do so may trigger liquidated damages.
- Financial Covenants: The amended credit agreement imposes limitations on incurring additional debt, issuing preferred equity (other than the Series A), and disposing of assets.
Investor Verification Checklist
- Verify the final closing date of the Haymaker Transactions and the effective date of the tax status change.
- Confirm the actual amount of cash consideration paid, noting it is subject to adjustments per the purchase agreements.
- Monitor the effectiveness of the Shelf Registration Statement within the 160-day window to avoid liquidated damages.
- Review the impact of the tax status change (partnership to corporation) on future distribution yields and tax liabilities for unitholders.
- Assess the utilization of the $200 million upsized credit facility and its effect on the Partnership's leverage ratios post-closing.