5.  DEBT

We have a loan agreement with the IFC for a $65.0 million revolving credit facility, which 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 and March 31, 2016. 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 IFC credit facility.

Under the IFC credit facility, 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 net 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 March 31, 2016. However, based upon the current covenant calculations, we would not be able to draw up to the $20.1 million and remain in compliance.

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 borrowed amounts approximate fair value because the interest approximates current market rates for similar instruments. Interest is paid quarterly at a rate of LIBOR plus a spread of 3.75% and 5.75% for the senior tranche and subordinated tranche, respectively. 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. 

The interest rate on outstanding borrowings, excluding commitment fees, was 4.36% and 4.32% in the quarters ended March 31¸ 2016 and 2015. Interest expense incurred, including commitment fees on the available balance, was $0.5 million and $0.5 million for the quarters ended March 31¸ 2016 and 2015.

We capitalize interest and commitment fees related to expenditures made in connection with exploration and development projects that are not subject to current depletion. Interest and commitment fees are capitalized only for the period that activities are in progress to bring these projects to their intended use. No interest expense was capitalized for the quarter ended March 31, 2016. For the quarter ended March 31¸ 2015, $0.2 million of interest expense was capitalized.