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The proposed revamp of Bellatrix Exploration Ltd.’s balance sheet is expected to lead to a limited debt default, according to a top rating agency, capping off a five-year downward spiral for the struggling natural gas producer.

Once seen as one of Canada’s promising energy companies, worth about $2-billion at its peak in 2014, Bellatrix’s shares now trade for pennies. On Friday, the company proposed a recapitalization to address its debilitating leverage that would see $245-million worth of its debt swapped for new notes that mature at a later date, as well as some newly issued new shares.

The new shares will account for 83.5 per cent of the company’s total equity if the plan is approved, a proposal that would severely dilute existing equity holders.

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“If approved and completed as proposed, the transaction would likely lead to a limited default designation,” rating agency Moody’s Investors Service determined on Tuesday. Defaults are major events, and they can hinder a company’s chances of raising new capital, because investors grow cautious about being burned again.

The bulk of Bellatrix’s affected debt, which is scheduled to mature in 2020 and pays 8.5-per-cent annual interest, had already been rated as deeply speculative, or junk, by Moody’s. The new classification, however, confirms the bonds likely could not be repaid. The development follows the company’s five-year saga to dig itself out of a debt hole.

The development also reiterates how damaging debt can ultimately be. Before oil and gas prices started to crash in September, 2014, Bellatrix was seen as one of the best value plays in Canada’s junior energy market. However, as with a number of its peers, including MEG Energy, which benefited from precrash hype when investors paid little attention to leverage, Bellatrix’s debt burden came back to haunt the company.

More recently, Bellatrix has also suffered because Canada’s natural gas industry is facing a crisis. Alberta’s natural gas prices have traded at a deep discount to North American peers, largely because of skyrocketing supply in the United States. Natural gas comprises about three-quarters of Bellatrix’s total production.

Amid this crisis, Bellatrix is far from the only natural gas producer that is suffering. In January, Peyto Exploration and Development Corp. unveiled a new three-year vision that included slashing its dividend by two-thirds and curtailing production to buckle down for a prolonged era of depressed prices.

However, Bellatrix’s downfall illustrates the disconnect between many energy equity analysts and rating agencies in the early days of the energy crash. In May, 2015, Bellatrix announced a US$250-million high-yield debt offering and, at the time, rating agencies warned that the company operated in a volatile industry and that its operations were rather concentrated in just two regions – the Spirit River’s natural gas liquids and Cardium light oil.

Meanwhile, 17 equity analysts covered the natural gas producer at the time, and none had a “sell” rating on the company.

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Although the proposed recap will reduce Bellatrix’s debt by $110-million, or 23 per cent, and the company won’t have any maturities for non-revolving debt until 2023, equity analysts are much more skeptical about the company’s fortunes today. Canaccord Genuity analyst Anthony Petrucci called the proposal “highly dilutive but likely a necessary step," and lowered his target price to 30 cents. At its peak, Bellatrix traded at $11.27, after adjusting for a stock split.

Bellatrix’s shares closed at 26 cents on Tuesday. The company could not be reached for comment.

In its rating update Tuesday, Moody’s noted that despite a debt reduction, Bellatrix is expected to still have negative cash flow, adding that the company remains exposed to weak Alberta natural gas prices.

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