7. DEBT

In January 2014, we executed a loan agreement with the International Finance Corporation (“IFC credit facility”) for a $65.0 million revolving credit facility, that is secured by the assets of our Gabon subsidiary, VAALCO Gabon (Etame), Inc. The borrowing base under the IFC credit facility is based upon our proved reserves and risk adjusted probable reserves and is re-determined semi-annually by the IFC: as of June 30 and December 31. In addition, the borrowing base may be adjusted pursuant to certain non-scheduled redeterminations. The borrowing base was re-determined effective December, 31, 2015 at $20.1 million, with $15.0 million drawn at December 31, 2015. In addition, the IFC communicated to us that if we were to seek additional drawdowns before the next redetermination date (as of June 30, 2016), the IFC could elect, under the terms of the loan agreement, to conduct an interim redetermination, which it believes could result in a borrowing base of less than $20.1 million if commodity prices are lower than they were at December 31, 2015. Therefore, we currently have very limited borrowing capacity under our revolving credit facility.

Under the debt agreement the senior tranche decreases by $6.25 million and the subordinated tranche decreases by $1.88 million every six months beginning June 30, 2016 through December 2019. The proceeds from any borrowings under the facility are required to be used for (i) the construction of two new platforms and associated facilities in the Etame field and the Southeast Etame and North Tchibala fields; (ii) the drilling, completion and production of wells for the aforementioned fields; (iii) upon approval, the Ebouri Project; and (iv) the costs associated with modifying the FPSO to support the new platforms, all of which are located in the Etame Marin block offshore of the southern coast of Gabon.

Interest is paid quarterly at a rate of LIBOR plus a spread of 3.75% for the senior tranche and 5.75% for the subordinated tranche. We pay commitment fees on the undrawn portion of the total commitments.  Commitment fees for the lenders are equal to 1.5% of the unused balance of the senior tranche of $50.0 million and 2.3% of the unused balance of the subordinated tranche of $15.0 million when a commitment is available for utilization. In 2015 and 2014, the interest rate on outstanding borrowings, excluding commitment fees, was 4.09% and 4.32%. Interest expense incurred, including commitment fees on the available balance, was $1.5 million and $1.2 million for 2015 and 2014.

We capitalize interest and commitment fees related to expenditures made in connection with exploration and development projects that are not subject to current depletion. See Note 3. Interest and commitment fees are capitalized only for the period that activities are in progress to bring these projects to their intended use. For 2015 and 2014, $0.8 million and $1.2 million of interest expense was capitalized.

In May 2015, the IFC credit facility was amended to remove the affirmative covenant that we maintain a debt to equity ratio at or below that of 60:40, which lifted a restriction on borrowing capacity. Under the amended IFC credit facility agreement, we are required to maintain a ratio of our net debt to EBITDAX (as defined in the credit agreement) of not more than 3.0 to 1.0. Forecasting our compliance with the financial covenant in future periods is inherently uncertain. Factors that could impact our debt to EBITDAX in future periods include future realized prices for sales of oil and natural gas, estimated future production, returns generated by our capital program, and future interest costs, among others. We are in compliance with all financial covenants as of December 31, 2015.

The credit agreement governing the IFC credit facility contains additional customary non-financial covenants that, among other things, restrict our ability to pay dividends, restrict our ability to buy and sell assets, limit our ability to make acquisitions or investments, and restrict our ability to incur additional indebtedness. In addition, the credit agreement contains administrative requirements, including but not limited to providing financial statements, compliance certificates, and other documents to the IFC under prescribed timelines.

Subject to any cure periods, the consequences of non-compliance with our debt covenants generally include, but are not limited to, the ability of the IFC to accelerate our obligation to repay amounts outstanding.