Document:

Exhibit 10.6

 

[JPMorgan Chase Bank
Letterhead]

 

Apr 20, 2006

 

Our L/C No.:
XXXX-XXXXXX

 

	
   

  	
  Issue Date:

  	
  April 20,
  2006

  
	
   

  	
  Expiry Date:

  	
  April 21,
  2007

  

 

Merrill Lynch Capital, a division of Merrill
Lynch 

Business Financial Services Inc., as Administrative Agent, 

its successors and assigns (“Beneficiary”)

222 North LaSalle Street, 16th Floor

Chicago, Illinois  60601

 

Ladies and Gentlemen:

 

We hereby establish our Irrevocable Transferable Letter of Credit in
Beneficiary’s favor for the account of Clayton Williams Energy, Inc. for
the account of Larclay, L.P. (“Applicant”), 6 Desta Drive, Suite 6500,
Midland, Texas 79705, in the aggregate amount of USD $19,000,000.00, effective
immediately and expiring at our office with the close of business on the Expiry
Date.

 

This Credit cannot be modified or revoked without Beneficiary’s
consent.

 

Funds under this Credit are available to Beneficiary against
presentation to us, by tested telex or authenticated SWIFT, in person, by mail,
by messenger delivery or by facsimile transmission, to our offices at 300 South
Riverside Plaza, 7th Floor, Mail Code IL1-0236, Chicago, IL
60606-0236, Attn: Standy Letter of Credit Dept., of Beneficiary’s sight draft
indicating our Credit number XXXX-XXXXXX and Beneficiary’s signed and dated statement
reading as follows:  “We hereby certify
that the amount of the drawing represents indebtedness owed under that certain
Term Loan and Security Agreement dated April 21, 2006 (the “Loan Agreement”)
among Larclay, LP, as Borrower, the Lenders from time to time party to the Loan
Agreement, and Merrill Lynch Capital, a division of Merrill Lynch Business
Financial Services, Inc., as Administrative Agent for Lenders”.

 

Demands presented by telefacsimile (“fax”) to fax number 312-954-0203,
or alternately to fax number 312-954-2457 acceptable, under telephone
pre-advice to 312-954-1910, or alternately to 1-800-634-1969 provided that the
original draft, statement and Letter of Credit shall be simultaneously
forwarded by overnight courier service to our office at 300 S. Riverside

 

 

 Plaza, 7th Floor,
Mail Code IL1-0236, Standby Letter of Credit Unit, Chicago, IL 60606-0236;
provided further that the failure of the courier service to timely deliver
shall not affect the efficacy of the demand.

 

The document(s) required must be received by fax on or before the
expiry date on this instrument in accordance with the terms and conditions of
this Letter of Credit.

 

Except as stated herein, our undertaking is not subject to any
requirement or qualification. Our obligation under this Credit is our
individual obligation and in no way contingent upon reimbursement with respect
thereto, or upon our ability to perfect any lien or security interest.

 

Partial and multiple drawings are permitted. The amount available from
time to time under this irrevocable Credit shall be the original amount set
forth above, less the sum of any drawings honored by us hereunder. All banking
charges are the responsibility of the Applicant.

 

This irrevocable Credit is transferable to any assigns or successors in
title to Beneficiary’s interests as Administrative Agent, and any such
successor or assign shall be deemed the Beneficiary hereunder, and shall be
entitled to draw against the Credit in accordance with the terms hereof. Each
letter of credit issued upon any such transfer may be successively
transferred to any successor Administrative Agent. This Letter of Credit is
transferable in whole but not in part, and except as expressly stated herein,
is transferable in accordance with the ICC Publication No. 500. Any
transfer request must be presented to us with the attached form together
with the original Letter of Credit. Transfers to designated foreign nationals
and /or specially designated nationals are not permitted as being contrary to
the U.S. Treasury Department or Foreign Assets Control Regulations.

 

We hereby engage with Beneficiary that drawings in compliance with the
terms and conditions of this Credit shall be honored by us and payment shall be
effected in accordance with Beneficiary’s instructions within three business
day after the date of Beneficiary’s telex/SWIFT or other demand as contemplated
herein if presented at our office at 300 South Riverside Plaza, 7th
floor, Mail Code IL1-0236, Standby Letter of Credit

 

2

 

Unit, Chicago, IL 60606-0236 on or before the expiration date of this
Letter of Credit.

 

This Letter of Credit is subject to the Uniform Customs and
Practices for Documentary Credits (1993 Revision), International Chamber of Commerce
Publication No. 500 (the “Uniform Customs”), except that Article 13(b) shall
not be included in this reference to the Uniform Customs. Notwithstanding Article 17
of the Uniform Customs, if this Credit expires during an interruption of
business as described in Article 17, we hereby specifically agree to
extend the validity of the Credit and thereby undertake to honor drawings and
effect payment thereof for thirty (30) days after the date of resumption of
business. and in the event of any conflict, the laws of the State of Illinois
will control, without regard to principles of conflict of laws.

 

Please address all correspondence regarding this Letter of Credit to
the attention of the Standby Letter of Credit Unit, 300 S. Riverside Plaza, 7th
Floor, Mail Code IL1-0236, Chicago, IL 60606-0236, including the Letter of
Credit number mentioned above. For telephone assistance, please contact the
Standby Client Service Unit at 1-800-634-1969, select Option 1, and have this
Letter of Credit number available.

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  JPMorgan
  Chase Bank, N.A.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Authorized
  Signature

  

 

3Exhibit 10.7

 

	
  

  	
  UNCONDITIONAL LIMITED GUARANTY

  

 

FOR VALUE RECEIVED,
and in order to induce the Lenders (as defined in the Loan Agreement, set forth
below) to advance moneys or extend or continue to extend credit to or for the
benefit of, or enter into any other financial accommodations with LARCLAY, L.P., a limited partnership organized
and existing under the laws of the State of Texas (with any successor in
interest, including, without limitation, any successor by merger or by
operation of law, herein collectively referred to as “Borrower”) under: (a) that
certain TERM LOAN AND SECURITY AGREEMENT dated of even date herewith by and
among MERRILL LYNCH CAPITAL, A DIVISION OF MERRILL LYNCH
BUSINESS FINANCIAL SERVICES INC. as administrative agent (the “Administrative
Agent”), for itself and each of the Lenders, and Borrower (as the same may hereafter
be amended, restated, supplemented, or otherwise modified from time to time, “Loan
Agreement”; capitalized terms, to the extent not otherwise defined herein,
shall have the meanings assigned to such terms in the Loan Agreement), (b) any
“Loan Documents”, as that term is defined in the Loan Agreement, and (c) all
present and future amendments, restatements, supplements and other evidences of
any extensions, increases, renewals, modifications and other changes of or to
the Loan Agreement or any Loan Documents (together with the Loan Agreement and
Loan Documents, collectively, the “Guaranteed Documents”), and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the undersigned, CLAYTON WILLIAMS ENERGY, INC.,
a corporation organized and existing under the laws of the State of Delaware (“Guarantor”),
hereby unconditionally guarantees to
Administrative Agent for its benefit and the benefit of the Lenders (i) the
prompt and full payment when due (after giving effect to any applicable grace
period), by acceleration or otherwise, of all sums now or any time hereafter
due from Borrower to Administrative Agent and the Lenders under the Guaranteed
Documents, and (ii) the prompt, full and faithful performance and
discharge by Borrower of each and every other covenant of Borrower set forth in
the Guaranteed Documents (collectively, “Obligations”). Guarantor
further agrees to pay all reasonable costs and expenses (including, but not
limited to, court costs and reasonable attorneys’ fees) paid or incurred by
Administrative Agent and/or Lenders in enforcing this Guaranty. Notwithstanding
the foregoing, or anything to the contrary contained in this Guaranty or in any
other Loan Document, but subject to the sentence following the below table of
Maximum Guaranteed Amount, Guarantor’s guarantee of the Obligations under this
Guaranty shall be expressly limited to (1) the amount set forth in the
table below under the heading “Maximum Guaranteed Amount” during the period of
time indicated in the table below under the heading “Period” in such table, plus (2) to the extent incurred, all
reasonable costs and expenses (including, but not limited to, court costs and
reasonable attorneys’ fees) paid or incurred by Administrative Agent and/or
Lenders in endeavoring to enforce this Guaranty:

 

 

	
  Period

  	
   

  	
  Maximum Guaranteed Amount

  	
   

  
	
  From and
  including [the date the Guaranty is signed—when the Letter of Credit is
  released] through and including March 31, 2008:

  	
   

  	
  $

  	
  19,500,000

  	
   

  
	
  From and
  including April 1, 2008 through and including March 31, 2009:

  	
   

  	
  $

  	
  17,550,000

  	
   

  
	
  From and
  including April 1, 2009 through and including March 31, 2010:

  	
   

  	
  $

  	
  15,795,000

  	
   

  
	
  From and including
  April 1, 2010 through and including the Maturity Date:

  	
   

  	
  $

  	
  14,215,500

  	
   

  

 

If a Default exists on
the last day of a Period found in the above table, the Maximum Guaranteed
Amount shall not reduce from the level in effect on such date unless and until
such time as such Default has been cured or waived.

 

Guarantor acknowledges
that Administrative Agent and the Lenders are relying on the execution and
delivery of this Guaranty in advancing moneys to or extending or continuing to
extend credit to or for the benefit of Borrower.

 

This Guaranty is
absolute, unconditional and continuing and shall remain in effect until all of
the Obligations shall have been fully and indefeasibly paid, performed and
discharged. At the option of Administrative Agent, upon the occurrence of a
Bankruptcy Event, Guarantor shall immediately pay all guaranteed Obligations
(subject only to the limitations as to Maximum Guaranteed Amount) irrespective
of whether the maturity of the same have been accelerated or are otherwise then
immediately due and payable. To the extent Administrative Agent or Lenders
receives payment with respect to the Obligations, and all or any part of
such payment is subsequently invalidated, declared to be fraudulent or
preferential, set aside, required to be repaid by Administrative Agent or
Lenders or is repaid by Administrative Agent or Lenders pursuant to a
settlement agreement, to a trustee, receiver or any other person or entity,
whether under any bankruptcy law or otherwise (a “Returned Payment”),
this Guaranty shall continue to be effective or shall be reinstated, as the
case may be, to the extent of such payment or repayment by Administrative
Agent or Lenders, and the indebtedness or part thereof intended to be
satisfied by such Returned Payment shall be revived and continued in full force
and effect as if said Returned Payment had not been made.

 

The liability of
Guarantor hereunder shall in no event be affected or impaired by any of the
following, any of which may be done or omitted by Administrative Agent
from time to time, without notice to or the consent of Guarantor: (a) any
renewals, amendments, restatements, modifications or supplements of or to any
of the Guaranteed Documents, or any extensions, forbearances, compromises or
releases of any of the Obligations or any of Administrative Agent’s rights
under any of the Guaranteed Documents; (b) any acceptance by
Administrative Agent of any collateral or security for,

 

 

or other
guarantees of, any of the Obligations; (c) any failure, neglect or omission
on the part of Administrative Agent or any Lender to realize upon or
protect any of the Obligations, or any collateral or security therefor, or to
exercise any lien upon or right of appropriation of any moneys, credits or
property of Borrower or any other guarantor, possessed by or under the control
of Administrative Agent, the Lenders or any of their Affiliates, toward the
liquidation or reduction of the Obligations; (d) any invalidity,
irregularity or unenforceability of all or any part of the Obligations, of
any collateral security for the Obligations, or the Guaranteed Documents; (e) any
application of payments or credits by Administrative Agent or any Lender; (f) the
granting of credit from time to time by Administrative Agent or Lenders to
Borrower in excess of the amount set forth in the Guaranteed Documents; or (g) any
other act of commission or omission of any kind or at any time upon the part of
Administrative Agent, the Lenders or any of their Affiliates or any of their
respective employees or agents with respect to any matter whatsoever. Neither
Administrative Agent nor any Lender shall be required at any time, as a
condition of Guarantor’s obligations hereunder, to resort to payment from
Borrower or other persons or entities whatsoever, or any of their properties or
estates, or resort to any collateral or pursue or exhaust any other rights or
remedies whatsoever.

 

No release or discharge
in whole or in part of any other guarantor of the Obligations shall
release or discharge Guarantor unless and until all of the Obligations shall
have been indefeasibly fully paid and discharged. Guarantor expressly waives
presentment, protest, demand, notice of dishonor or default, notice of
acceptance of this Guaranty, notice of advancement of funds under the Guaranteed
Documents and all other notices and formalities to which Borrower or Guarantor
might be entitled, by statute or otherwise, and, so long as there are any
Obligations or Administrative Agent or any Lender is committed to extend credit
to Borrower, waives any right to revoke or terminate this Guaranty without the
express written consent of Administrative Agent.

 

So long as there are any
Obligations, Guarantor shall not have any claim, remedy or right of
subrogation, reimbursement, exoneration, contribution, indemnification, or
participation in any claim, right, or remedy of Administrative Agent or any
Lender against Borrower or any security which Administrative Agent now has or
hereafter acquires, whether or not such claim, right or remedy arises in equity,
under contract, by statute, under common law, or otherwise. Subject to the
foregoing, upon payment of all the Obligations, Guarantor shall be subrogated
to the rights of Administrative Agent and the Lenders against Borrower, and
Administrative Agent agrees to take at Guarantor’s expense such steps as
Guarantor may reasonably request to implement such subrogation.

 

Administrative Agent and
Lenders are hereby irrevocably authorized by Guarantor at any time during the
continuance of an Event of Default under the Loan Agreement or any other of the
Guaranteed Documents or in respect of any of the Obligations, in its sole
discretion and without demand or notice of any kind, to appropriate, hold, set
off and apply toward the payment of any amount due hereunder, in such order of
application as Administrative Agent may elect, all cash, credits,
deposits, accounts, financial assets, investment property, securities and any
other property of Guarantor which is in transit to or in the possession,
custody or control of Administrative

 

 

Agent, any Lender
or Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”),
or any of their respective agents, bailees or Affiliates.

 

Guarantor will maintain,
and cause each of its Subsidiaries to maintain, a system of accounting
established and administered in accordance with generally accepted accounting
principles, and furnish to Administrative Agent:

 

Within 120 days after the
close of each of its fiscal years, an unqualified (except for qualifications
relating to changes in accounting principles or practices reflecting changes in
generally accepted accounting principles, and required or approved by Guarantor’s
independent certified public accountants) audit report certified by independent
certified public accountants acceptable to Administrative Agent, prepared in
accordance with generally accepted accounting principles on a consolidated
basis for Guarantor and its Subsidiaries, including a consolidated balance
sheet as of the end of such period, related profit and loss and reconciliation
of surplus statements, and a statement of cash flows, in each case in
comparative form the figures for the previous fiscal year, accompanied by
any management letter prepared by said accountants;

 

Within 60 days after the
close of each of the first three (3) fiscal quarters of each fiscal year
of Guarantor, for Guarantor and its Subsidiaries, consolidated unaudited
balance sheets as at the close of each such period and consolidated profit and
loss and reconciliation of surplus statements and a statement of cash flows for
such fiscal quarter and for the period from 
the beginning of such fiscal year to the end of such fiscal quarter, all
certified by its Chief Financial Officer; and

 

At the same time as
delivered to the administrative agent or lenders under the Credit Agreement, a
copy of each compliance certificate required pursuant to the Credit Agreement. For
purposes hereof, “Credit Agreement” means that certain first lien Amended and
Restated Credit Agreement, dated as of May 21, 2004, as amended, by and
among Guarantor, Southwest Royalties, Inc. (successor by merger to
CWEI-SWR, Inc.), the guarantors referred-to therein, JPMorgan Chase Bank,
N.A., as Administrative Agent, and the lenders named therein or from time to
time party thereto, as amended, modified, renewed, refunded, replaced or
refinanced or otherwise restructured in whole or in part from time to
time, whether by the same or any other agent, lender or group of lenders. Documents
required to be delivered pursuant hereto (to the extent any such documents are
included materials otherwise filed with the United States Securities and
Exchange Commission) may be delivered electronically and if so delivered,
shall be deemed to have been delivered on the date (i) on which Guarantor
posts such documents, or provides a link thereto on Guarantor’s web site on the
Internet at the web site address listed below its signature hereon or (ii) on
which such documents are posted on Guarantor’s behalf on an Internet or
Intranet web site, if any, to which each Lender and Administrative Agent have
access (whether a commercial, third-party web site or whether sponsored by
Administrative Agent);  provided that (i) Guarantor
shall deliver paper copies of such documents to Administrative Agent or any
Lender that requests Guarantor to deliver such paper copies until a written
request to cease delivering paper copies is given by Administrative Agent or
such Lender and (ii) Guarantor shall notify Administrative Agent and each
Lender (by telecopy or electronic mail) of the posting of any such

 

 

documents. Guarantor
further hereby irrevocably authorizes Administrative Agent and each of its
Affiliates, including without limitation MLPF&S, to at any time (whether or
not an Event of Default shall have occurred) obtain from and disclose to each
other any and all financial and other information about Guarantor, subject to
the confidentiality provisions of the Loan Agreement.

 

No delay on the part of
Administrative Agent or any Lender in the exercise of any right or remedy under
the Guaranteed Documents, this Guaranty or any other agreement shall operate as
a waiver thereof, and, without limiting the foregoing, no delay in the
enforcement of any security interest, and no single or partial exercise by
Administrative Agent or any Lender of any right or remedy shall preclude any
other or further exercise thereof or the exercise of any other right or remedy.
This Guaranty may be executed in any number of counterparts, each of which
counterparts, once they are executed and delivered, shall be deemed to be an
original and all of which counterparts, taken together, shall constitute but
one and the same Guaranty. This Guaranty shall be binding upon Guarantor and
its successors and assigns, and shall inure to the benefit of Administrative
Agent, the Lenders and its successors and assigns. If there are more than one
guarantor of the Obligations, all of the obligations and agreements of
Guarantor are joint and several with such other guarantors.

 

This Guaranty shall be
governed by the laws of the State of Illinois. WITHOUT
LIMITING THE RIGHT OF ADMINISTRATIVE AGENT TO ENFORCE THIS GUARANTY IN ANY
JURISDICTION AND VENUE PERMITTED BY APPLICABLE LAW: (I) GUARANTOR AGREES THAT
THIS GUARANTY MAY AT THE OPTION OF ADMINISTRATIVE AGENT BE ENFORCED BY
ADMINISTRATIVE AGENT IN EITHER THE STATE OF ILLINOIS OR IN ANY OTHER
JURISDICTION WHERE GUARANTOR, BORROWER OR ANY COLLATERAL FOR THE OBLIGATIONS OF
BORROWER MAY BE LOCATED, (II) GUARANTOR IRREVOCABLY SUBMITS ITSELF TO
JURISDICTION IN THE STATE OF ILLINOIS AND VENUE IN ANY STATE OR FEDERAL COURT
IN THE COUNTY OF COOK FOR SUCH PURPOSES, AND (III) GUARANTOR WAIVES ANY AND ALL
RIGHTS TO CONTEST SAID JURISDICTION AND VENUE AND THE CONVENIENCE OF ANY SUCH
FORUM. GUARANTOR FURTHER WAIVES ANY RIGHTS TO COMMENCE ANY ACTION AGAINST
ADMINISTRATIVE AGENT OR ANY LENDER IN ANY JURISDICTION EXCEPT IN THE COUNTY OF
COOK AND STATE OF ILLINOIS. ADMINISTRATIVE AGENT, LENDERS AND GUARANTOR HEREBY
EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER
PARTY WITH RESPECT TO ANY MATTER RELATING TO, ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THIS GUARANTY AND/OR ANY OF THE TRANSACTIONS WHICH ARE THE
SUBJECT MATTER OF THIS GUARANTY. Wherever possible each provision of
this Guaranty shall be interpreted in such manner as to be effective and valid
under Applicable Law, but if any provision of this Guaranty shall be prohibited
by or invalid under such law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating the

 

 

remainder of such
provision or the remaining provisions of this Guaranty. No modification or
waiver of any of the provisions of this Guaranty shall be effective unless in
writing and signed by both Guarantor and an officer of Administrative Agent. Each
signatory on behalf of Guarantor warrants that he or she has authority to sign
on behalf of Guarantor, and by so signing, to bind Guarantor hereunder.

 

Dated as of                           ,
200    .

 

CLAYTON WILLIAMS ENERGY, INC.

 

 

	
  By:

  	
   

  	
   

  
	
   

  	
       Mel
  G. Riggs

  	
   

  
	
   

  	
       Senior
  Vice President and Chief Financial Officer

  	
   

  
				

 

 

Address of Guarantor:

 

6 Desta Drive

Suite 6500

Midland, Texas 79705

www.claytonwilliams.com

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