More information regarding these properties can be found in the Operations section of the Company's website at www.cazapetro.com and in the Company's Annual Information Form which is available on the Company's website and in the Company's public filings at www.sedar.com.
Description of the Notes
Availability Period: Following the initial Advance, the Company may draw additional Advances up to US$30,000,000 until August 23, 2014, if at the time of the Advance the Company meets specified minimum production and drilling cost requirements for previous wells drilled under the program that were financed with funding from the Notes. In addition to these funds, the Company will have the ability to reinvest cash flow from program wells back into the drilling program. After the Company has exhausted the initial US$50,000,000 commitment under the Agreement, the Note Holder and the Company may agree to increase the commitment up to a maximum US$100,000,000.
Term: Outstanding Notes mature and are payable on May 23, 2017.
Interest Rate: The Notes bear interest at a floating rate of one-month LIBOR (with a floor of 2%) plus 10% per annum, payable monthly. In an event of default under the Agreement, additional interest will be payable at a default rate of 5% per annum, but only during the period of default.
Costs: A structuring fee, based on a percentage of the principal amount of each Note, is payable out of the proceeds of the Notes at the time of each Advance pursuant to a separate fee letter.
Financial and Performance Covenants: The Agreement provides for customary covenants. The Company is also required to comply with covenants, which are tested quarterly, providing for specified interest coverage ratios beginning in the quarter ending September 30, 2013, and asset coverage ratios and minimum production, beginning in the quarter ending March 31, 2014. In addition, the Company is required to maintain a limit on expenditures for general and administrative costs.
Prepayment: The Notes may be prepaid at the option of the Company at any time. The Notes are subject to mandatory prepayment from the proceeds of the sale of assets and from funds received from transactions outside of the ordinary course of business. Additionally, if in any period the Company fails to comply with any financial or performance covenant, 75% of net cash flow must be used to prepay the Notes. Any prepayment of Notes is subject to: (i) payment of a make-whole amount if the prepayment is made prior to 24 months after the closing of the Agreement, and (ii) a prepayment premium of up to 3%, varying based on the date of prepayment, if prepaid prior to 36 months after closing.
Security: The Notes are secured by first-priority security interests in all of the Company's assets.
Overriding Royalty Interests: At closing, the Company conveyed to the Note Holder a 2% overriding royalty interest, proportionately reduced to reflect the Company's working interest, in its properties in Eddy and Lea Counties, New Mexico. Under the Agreement, the Company is also required to convey a proportionately reducible 2% overriding royalty interest in each lease acquired with proceeds from the Notes. Upon full repayment of the Notes, the overriding royalty interests will convert to a 25% net profits interest in each property, proportionately reduced to reflect the Company's working interest as provided in the Agreement, which will reduce to a 12 1/2% net profits interest at such time as the Note Holder achieves specified investment criteria pursuant to the Agreement.
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