Cardinal Resources Secures Financing for Ukraine Operations

Cardinal Resources has secured a US$38 million bridge financing facility from Silver Point Finance.

The bridge facility will be used to:

  • refinance the US$8 million in PIK Notes issued on 1st December 2005 by Cardinal to Silver Point;
  • enable Cardinal to reinstate its net profit interest in the Rudivsko-Chernovozavodske (RC) Field back up to 45% by settling the capital expenditure account of Cardinal's Joint Activity Agreement (JAA) with JSC Ukrnafta (Ukrnafta);
  • reinstate Cardinal's rights to a 45% net profit interest in and reimburse Ukrnafta for costs related to the current drilling of four new development wells within the RC Field; and
  • settle fees and expenses relating to the transaction and provide for general corporate and capital expenditure purposes.

Cardinal has a contractual right to increase its net profit interest in the RC Field held through a JAA with Ukrnafta from 14.9% back up to 45% by settling its outstanding balance in the JAA capital account. Since Cardinal's position in the JAA was diluted down to 14.9%, Ukrnafta has, with Cardinal's approval, commenced the drilling of the new four development wells in the RC Field.

With sufficient funds in place, Cardinal will resume negotiations in the New Year with Ukrnafta to reinstate its net profit interest in the RC Field and in the four development wells, on terms to be agreed by Cardinal and Ukrnafta.

Commenting on today's announcement, Robert J. Bensh, Cardinal's Chairman and Chief Executive Officer said, "This financing enables Cardinal to move into a new phase of development. Reinstating our interest in the RC Field would generate a substantial increase in reserves and production and value for Cardinal stakeholders. In addition, this creates a significant opportunity for Cardinal in Ukraine to substantially increase reserves and production through additional farm-ins or acquisitions, moving the Company closer to its goal of aggregating reserves in the range of 100-200 million barrels of oil equivalent (MMBOE)."

Summary Terms of Financing Agreement

Cardinal has issued US$38 million in two-year Bridge Payment-in-Kind (PIK) Notes to Silver Point. The Bridge PIK Notes will carry a coupon of 15% with quarterly interest payable in cash or by issue of further PIK Notes (on the same terms) at Cardinal's option.

As part of this financing, a recently-formed, UK intermediate holding company owned by Cardinal, under which Cardinal's assets are held Cardinal Resources Finance Limited (Cardinal Finance) has issued to Silver Point warrants to subscribe for approximately 32.2% of Cardinal Finance, before adjustment to take account of inter-company balances, (at a price equivalent to 27.5p if such shares had been issued at the parent company level) for a period of five years. The holders of the warrants will have pre-emption rights over new share issues by Cardinal Finance and tag along rights in the event of any sale of Cardinal Finance. The warrants will also have a put option to sell the warrants to Cardinal in the event of a change of control of Cardinal.

Issuance of the Bridge PIK Notes provides the note holders (Silver Point) with the right to appoint two Directors to the Board of Cardinal and Cardinal Finance for as long as the Notes are outstanding. Silver Point has not yet exercised its right to appoint such Directors.

Cardinal has the right to redeem the notes in full after one year, subject to an early redemption fee, unless refinanced by Silver Point or its affiliates. Subject to shareholder and regulatory approval, it is intended that the US$38 million Bridge PIK Notes will be refinanced with Silver Point by an issue of five-year Senior PIK Notes before expiry of the two-year term and that the Cardinal Finance warrants will be cancelled and reissued as warrants in Cardinal Resources plc upon issuance of the Senior Notes. If the Senior PIK Notes are not issued within six months from today, interest payments on the Bridge PIK Notes will rise from 15% to 20% per annum and then another 1% per annum for every quarter thereafter until maturity.

The US$8 million PIK Notes, issued on December 1, 2005, were refinanced in this new two-year facility but Silver Point retained the 4,389,875 Cardinal warrants already issued.

Cardinal Resources plc is an independent oil and gas production and exploration company with assets in Ukraine. Cardinal is an experienced operator in the country focused on expanding its existing operations through the farm-in or acquisition of additional upstream oil and gas assets that can be further developed through the application of modern technology and expertise.

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