Note 4 - Long-Term Debt and Interest Expense

9 Months Ended

Sep. 30, 2016

Note 4 - Long-Term Debt and Interest Expense

Long-term debt as of September 30, 2016 and December 31, 2015 consisted of the following (in thousands):

	As of September 30, 2016			As of December 31, 2015
Bank loan
Principal amount	$	110,400		$	117,000
Less: unamortized discount and debt costs		(3,951	)		(4,568	)
Total long-term debt		106,449			112,432
Less: current maturities, net of current unamortized discount		(8,801	)		(8,180	)

Long-term debt, net of current maturities	$	97,648		$	104,252

Bank Loan and Credit Facility

The Deutsche Bank Facility

On May 18, 2015, Tamar Royalties, a newly formed, wholly-owned, special purpose subsidiary of the Company, entered into a term loan credit agreement (the “DB Facility”) with Deutsche Bank Trust Company Americas (“Deutsche Bank”), as facility agent for the lenders and as collateral agent for the secured parties, and with the lenders party thereto. The DB Facility provides for borrowings in the amount of $120,000,000 on a committed basis and is secured by, among other things, an overriding royalty interest in the Tamar Field, a natural gas field in the Mediterranean Sea, equal to 1.5375%, but is subject to increase to 2.7375% upon the Tamar project payout (the “Royalty Interest”). In connection with the DB Facility, and pursuant to a royalties sale and contribution agreement, the Company contributed the Royalty Interest to Tamar Royalties in exchange for all of the ownership units of Tamar Royalties. Pursuant to the terms of its governing documents, Tamar Royalties will be managed by N.M.A. Energy Resources Ltd, a related party of the Company, and an independent manager, Donald J. Puglisi.

Pursuant to the terms of the DB Facility, Tamar Royalties borrowed $120,000,000 in its initial borrowing under this facility. The initial borrowing under the DB Facility bears annual interest based on the LIBOR for a three-month interest period plus a spread of 2.75%. The $120,000,000 initial borrowing under the DB Facility will be repaid over eight (8) years commencing July 1, 2015, in accordance with an amortization profile based on projected cash flows from the Royalty Interest. Tamar Royalties’ obligations under the Facility are secured by a first ranking pledge of the shares of Tamar Royalties, first ranking pledge of all rights under the agreements creating the Royalty Interest, and a first priority security interest over the accounts created under the DB Facility.

So long as any amounts remain outstanding to the Lenders under the DB Facility, Tamar Royalties must, from and after the end of the Availability Period (as defined in the DB Facility), have a Historical Debt Service Coverage Ratio (as defined in the DB Facility) of not less than 1.00:1.00, a Loan Life Coverage Ratio (as defined in the DB Facility) of at least 1.1:1.00, and maintain a Required Reserve Amount (as defined in the DB Facility). The initial Required Reserve Amount was $4,680,000. In addition, Tamar Royalties is required under the DB Facility to hedge against fluctuations in LIBOR as reflected in Note 3 “Financial Instruments and Fair Value”.

On January 1, 2016 the Company made a payment in the amount of $2,750,000 consisting of $1,800,000 and $950,000 in principal and interest respectively.

On April 1, 2016 the Company made a payment in the amount of $3,347,000 consisting of $2,400,000 and $947,000 in principal and interest respectively.

On July 1, 2016 the Company made a payment in the amount of $3,362,000 consisting of $2,400,000 and $962,000 in principal and interest respectively.

On October 5, 2016 the Company made a payment in the amount of $3,400,000 consisting of $2,400,000 and $1,000,000 in principal and interest respectively.

The Company incurred debt costs in obtaining the DB Facility in the amount of $2,011,000 and $2,959,000 in fees that were retained by the lenders. These costs totaling $4,970,000 are recorded as a reduction of the principal loan balance and are being amortized over the life of the loan using the effective interest method. Amortization of these costs for the nine months ended September 30, 2016 totaled $617,000.

As of September 30, 2016, Tamar Royalties was in compliance with the financial covenants required under the DB Facility.

The Société Générale Facility

On June 30, 2015, Isramco Onshore LLC (“Isramco Onshore”), a newly formed, wholly-owned, subsidiary of Isramco, Inc. (the “Company”), entered into a secured Credit Agreement (the “SG Facility”) with The Société Générale, as Administrative Agent and Issuing Lender (“SG”), SG Americas Securities LLC, as Sole Bookrunner, Lead Arranger and Documentation Agent, and the lenders party thereto from time to time, as Lenders. The SG Facility provides for a commitment by The SG of $150,000,000, subject to an initial borrowing base of $40,000,000. The term of the SG Facility is four (4) years and the SG Facility is secured by certain onshore United States oil and gas properties. Pricing under the SG Facility is as follows: (i) EuroDollar Rate (as defined in the SG Facility) loans range from the EuroDollar rate plus 1.75% to the EuroDollar rate plus 2.75% depending on borrowing base utilization; and (ii) Reference Rate (as defined in the SG Facility) loans range from the Reference Rate plus 0.75% to the Reference Rate Spread plus 1.75% based on borrowing base utilization; and (iii) a quarterly commitment fee (as defined in the SG Facility) ranging from an annual rate of 0.38% to 0.5% of the undrawn borrowing base.

The SG Facility requires that Isramco Onshore hedge at least seventy-five percent (75%) of its crude oil production before borrowing under the SG Facility. As of September 30, 2016 and as of the date of issuance Isramco Onshore has not entered into such hedge agreements nor has it made a draw under the SG Facility. The Company has incurred $478,000 of financing costs in relation to this credit facility which have been capitalized as a long-term asset and is being amortized over the term on the agreement on a straight-line basis. Amortization of these costs for the nine months ended September 30, 2016 totaled $90,000.

Isramco Onshore has various financial and operating covenants required by the SG Facility, including, among other things, the requirement that, during the term of the SG Facility, Isramco Onshore must have a Minimum Current Ratio (as defined in the SG Facility) of not less than 1.00:1.00, a Maximum Leverage Ratio (as defined in the SG Facility) of not less than 4.00:1.00 and a Minimum Interest Coverage Ratio (as defined in the SG Facility) of at least 2.50:1.00. In addition, the SG Facility provides for customary events of default, including, but not limited to, payment defaults, breach of representations or covenants, bankruptcy events and change of control.

The Borrowing Base is subject to redetermination pursuant to the terms of the SG facility, including automatic semi-annual redetermination. To date the Company has not drawn on the borrowing base.

On August 18, 2016 as a result of semi-annual Borrowing Base redetermination the Borrowing Base under SG Facility has been reduced to zero. The Company expects that it will continue to keep the SG Facility open going forward, and the Company is in discussions with SG regarding the borrowing base under SG Facility.

Short-Term Debt

As of September 30, 2016 and December 31, 2015 outstanding debt from short-term insurance financing agreements totaled $0 and $1,422,000 respectively. During the nine months ended September 30, 2016, the Company made cash payments totaling $935,000 and wrote off short term debt of $487,000 against prepaid insurance. The Company also decreased its bank overdraft by $349,000.

Interest Expense

The following table summarizes the amounts included in interest expense for the nine months ended September 30, 2016, and 2015:

	Nine Months Ended September 30,
	2016			2015
	(In thousands)
Current debt, long-term debt and other - banks		$	3,615	$	1,248
Long-term debt – related parties			-		2,878

		$	3,615	$	4,126