CASE PROFILE: Pacific Drilling free falls into Chapter 11 without a deal despite months of negotiations with creditors - Debtwire

CASE PROFILE: Pacific Drilling free falls into Chapter 11 without a deal despite months of negotiations with creditors

05 July 2022 - 03:25 am UTC

Following months of restructuring talks with its creditors, Pacific Drilling has filed for Chapter 11 protection without a plan in place to reorganize its assets.

Struggling to weather the extended downturn in oil prices, the offshore driller is trying to rework approximately USD 3bn in liabilities. Proposals with an ad hoc group of secured creditors centered on the equitization of some of the company’s debt. But with no deal in hand and the first maturity of its debt just weeks away, the company looked to bankruptcy for time to finish putting together a plan.

The company filed its petition on Sunday (12 November) in the US Bankruptcy Court for the Southern District of New York. Judge Michael Wiles has not yet scheduled a first-day hearing.

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CLICK HERE to view all Pacific Drilling Chapter 11 filings on Debtwire Dockets.

The company

Founded in 2006, Pacific Drilling is an offshore driller specializing in ultra-deepwater and well construction services. The company has its principal executive offices in Luxembourg, and its operational headquarters in Houston, Texas.

The debtor owns all seven of its drillships, which consist of:
 

  • The Pacific Bora, on contract with Erin Energy in Nigeria through February 2018 at a dayrate of USD 150,000
  • The Pacific Santa Ana, on contract with Petronas in Mauritania through May 2018 at a dayrate of USD 265,000
  • The Pacific Sharav, on contract with Chevron in the US Gulf of Mexico through September 2019 at a dayrate of USD 550,000
  • The vessels Pacific MistralPacific SciroccoPacific Khamsin and Pacific Meltem are not currently under contract and are on hold in Spain

The debt

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The descent

Pacific Drilling’s financial troubles are due to the “cyclical and volatile” offshore industry, in flux with a drop in prices that has negatively affected the company for the past three years, CEO Paul Reese said in his first-day declaration. With lower prices making deepwater projects less attractive for customers, the company cut its operating expenses from USD 123.8m for 4Q14 to USD 58.9m for 3Q17, more than halving its workforce in the same period, from 1,606 to 797.

The company entered talks with its bank lenders in May 2016 to ease financial covenants on the facilities and to attempt a more fulsome restructuring with all creditor groups. The bank lenders agreed to waive certain financial covenants for the first two quarters of 2017.

Having previously committed to certain additional orders for new rigs, the company also began to negotiate with shipyards to delay final deliveries so as to postpone further cash outlays. In particular, Pacific faced the problem of having to accept delivery of new vessels which would be uncontracted upon arrival, and would thus have be stacked, creating a significant burden on liquidity.To preserve cash, Pacific began reducing general and administrative expenses, and idled a number of rigs.

In March of 2016, Debtwire first reported that Pacific had engaged Evercore as a restructuring advisor while various creditors started to engage their own advisors and counsel. An ad hoc group of first lien lenders engaged Moelis and Milbank Tweed as financial advisor and legal counsel, respectively. A group of secured bondholders engaged Houlihan Lokey and Paul Weiss. Meanwhile a group revolver lenders with crossholdings in other debt tranches engaged Shearman & Sterling as counsel, while a group of “pure” revolver lenders tapped White and Case.

Pacific’s complex collateral sharing arrangement between different secured debt facilities created a nuanced matrix of intercreditor tensions, an issue that was explored in-depth in a Debtwire legal analysis piece published in late September 2016.

By mid-2017, Pacific entered into discussions with the various creditor constituencies, and floated a proposal that outlined restructuring terms. However, the ad hoc group of secured bondholders represented by Houlihan Lokey and Paul Weiss announced that they had a blocking position and had decided to resist the proposed consent solicitation, pushing for better economics.

Pacific Drilling reported in a 16 October 8-K filed with the Securities and Exchange Commission that it had been exchanging restructuring offers with the ad hoc secured creditor group, consisting of holders of the 5.375% notes due 2020, and the 7.25% notes due 2017. On 6 September, Pacific Drilling proposed to extend the maturity on its revolver from 2018 to 2023 and its senior secured credit facility from 2019 to 2024. The company would equitize the remaining debt while holding on to 17.5% of the equity and receiving warrants to purchase up to an additional 10%.

The ad hoc group responded with a counterproposal that would give current equity holders just 2.75% of the reorganized equity, plus the warrants. Pacific Drilling’s final reported proposal would have given current equity holders 10% of the reorganized equity while conducting two rights offerings for USD 100m each to generate more equity funding.

The last round of discussions ended on 16 October without a deal.

The advisors

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CLICK to view the org chart

 

The case is In re: Pacific Drilling SA, number 17-13193, in the US Bankruptcy Court for the Southern District of New York.

CLICK HERE to view the petition.
CLICK HERE to view the first day declaration.
CLICK HERE to view the chief restructuring officer’s declaration.
CLICK HERE to view the cash collateral motion.

by Pat HolohanJoshua Friedman and Alexander Gladstone