CASE PROFILE: Seadrill dives into Chapter 11 with lender-backed RSA - Debtwire

CASE PROFILE: Seadrill dives into Chapter 11 with lender-backed RSA

13 September 2017 - 12:00 am

Seadrill Limited made its long-awaited entry into Chapter 11 Tuesday (12 September) with a restructuring support agreement (RSA) that envisions a USD 1bn capital contribution from an investment group led by billionaire CEO John Fredriksen, and Centerbridge Credit Partners.


The company is joined by 85 affiliates in bankruptcy, though several others are not filing. The RSA has been signed by 97% of the company’s bank lenders, the commitment parties, and subsidiaries of Ship Finance International Limited (SFL), which are owed long-term capital lease obligations. But the debtors have so far been unable to bring a majority of their unsecured bondholders into the deal.


Under the RSA, the banks would extend their maturities by about five years, get rid of near-term amortization obligations and implement additional covenant relief. The debtors say the RSA should not have a material impact on operational obligations to employees, customers and trade vendors.


Seadrill hopes to emerge from Chapter 11 in less than a year. Its first-day hearing is set for Wednesday (13 September) afternoon before Judge David Jones of the US Bankruptcy Court for the Southern District of Texas.


CLICK HERE to view all Seadrill Limited Chapter 11 filings in DebtwireDockets.






The company


Formed in 2005, Seadrill is one of the largest offshore drilling contractors in the world. Norwegian shipping and energy tycoon Fredriksen holds 24% of the company’s common equity. The remainder is publicly held.


The company and its affiliates own or lease 51 drilling rigs, of which the debtors control 32, according to a first-day declaration from CFO Mark Morris. Seadrill’s largest customers include Brazilian national oil company PetrobrasTotal SA GroupExxonMobil CorpLLOG Exploration Company and Statoil ASA. The debtors’ current contract backlog is about USD 2.8bn, according to Morris. As of the petition date, 17 of the debtors’ rigs are not under contract.


The debtors employ around 3,760 people across 22 countries. The entire Seadrill enterprise slashed its workforce by more than half over the past few years. It also reduced rig and operating costs from USD 1.61bn to USD 1.02bn and general expenses from USD 248m to USD 234m between 2015 and 2016, according to Morris.


Seadrill owns 70.4% of debtor North Atlantic Drilling Limited (NADL) and 50.1% of debtor Sevan Drilling Limited. The remaining common stock of both entities is publicly traded. Seadrill also holds 66.2% of non-debtor Asia Offshore Drilling Limited (AOD), the remainder of which is controlled privately by Mermaid Maritime Public Company Limited.


Seadrill holds interests in several other companies, including a 46.6% interest in non-debtor Seadrill Partners LLC.







The debt


Seadrill owes USD 5.7bn on 12 first lien bank facilities and USD 2.3bn on six series of unsecured bonds. Though the entire Seadrill enterprise has more than USD 15bn in funded debt, only USD 8bn belongs to the debtors.





Seadrill owes an additional USD 60m under a Dankse Bank guarantee facility.


The debtors also owe USD 1.8bn on four contracts for the construction of new rigs, with purchase obligations over several years. (The full Seadrill enterprise owes USD 4bn under 14 contracts.)


Seadrill also owes USD 1.1bn in long-term lease capital obligations under three sale-leaseback agreements with subsidiaries of SFL, which is 36% owned by Fredriksen’s investment vehicle, Hemen Holdings.




The descent


The beleaguered offshore driller has been negotiating for almost two years with its lenders, bondholders and new money investors to address its over-levered capital structure amid the continued downturn in commodity prices. The company’s current debt load is the result of a spending spree during the days when oil prices were soaring in the above-USD 100 per barrel range.


Seadrill repeatedly issued new debt to fund new builds and acquisitions in a thriving oil and gas market – in 2013 and 2014, Seadrill Limited tapped the market at least six times. But after unsuccessful attempts to issue new bonds and refinance in the second half of 2014, the company suspended its dividend and placed rigs in master limited partnerships to cut taxes and issue debt more cheaply. Revenues and EBITDA began to drop.


By mid-2015, weaknesses in Seadrill’s capital and corporate structure had been exposed. The company had a sizeable cash burn trajectory, with new rig spending commitments and USD 2.3bn of debt related expenses due in 2015, and another USD 1.5bn due in 2016. Guarantees provided a few months earlier to NADL came back to haunt the company; it now had an additional burden on the capital structure.


In addition, large cap exploration and production companies like BP were cancelling contracts and pulling back on spending as oil prices continued to fall. Seadrill’s contract book and backlog began to shrink, free cash flow was projected for the negative and EBITDA continued to drop as contract volatility increased and day-rate pressures continued.


Covenants restricted the company from issuing more debt to shore up liquidity. In October 2015, credit rating agencies began to downgrade the credit and its subsidiaries. The following month, Seadrill Partners saw an ad hoc group of lenders seek advice from law firm Kasowitz Benson Torres to pressure the company to put an end to dividend upstreams to its parent.


By the end of 2015, Seadrill had tapped financial advisors to help address USD 517m in debt maturing in 2016. The roster of advisors grew to include Alvarez & Marsal, Houlihan Lokey, Morgan Stanley, Kirkland & Ellis and Slaughter & May, as market speculation ran wild on what Fredriksen would do to save the company.


Around this time, Seadrill planned to announce an USD 11bn debt restructuring plan before July 2016. Meanwhile, lenders brought on Lazard and White & Case.


In March 2016, Seadrill’s bondholders began to organize around the possibility of a debt swap that would exchange USD 1bn bonds coming due September 2017 into a more senior debt instrument. The group hired Moelis and Akin Gump.


Talks between the company, its bank lenders, and bondholders focused on a comprehensive restructuring that would be predicated on the willingness of bank lenders to extend near-term maturities and swap the 2017 bonds into a new second lien note of up to USD 700m in size.


During this time, the company managed to extend the maturities of USD 2.85bn in credit facilities to December 2016 and beyond, and to rework its leverage covenant, among other relief. Seadrill aimed to conclude its restructuring by year-end 2016. As negotiations continued, EBITDA and revenues dropped at least 25% YoY for each quarter reported in 2015 and 2016.


In May 2016, the company announced a privately negotiated debt-for-equity exchange with certain holders of its 2017 notes, reducing the outstanding principal by USD 55m. The company did a further exchange of USD 50m in June 2016.


With no clear plan on the horizon, a group of senior lenders for Seadrill Partners organized and hired Milbank Tweed and PJT Partners around October 2016.


By November, as oil prices were not improving and stability was far on the horizon, Seadrill pushed back its original December 2016 target to complete a restructuring to April 2017. The company said it was making progress on an agreement with the banks and was in talks with bondholders and potential providers of new capital.


At the outset of 2017, restructuring negotiations broke down. The company, on one hand, was pushing for maturity extensions for both bonds and loans, USD 1bn of new money in the form of a second lien bond largely provided by Fredriksen, and a reduction in cash amortization and interest. The bondholders, on the other, sought to swap unsecured debt for a combination of equity and convertible bonds. Under that proposal, a second lien loan would be funded by the ad hoc bondholder group and underwritten by Fredriksen.


Seadrill continued to push back its deadline to come up with a plan, as covenant amendments and waivers on revolving credit facilities were extended through the spring and summer. Over the last few months, company officials and advisors met with bank lenders to negotiate a plan resting on the USD 1bn contribution.


During a 2Q17 earnings call in August, the company announced the plan terms.


The company was able to ring-fence certain non-majority owned affiliates and avoid cross-defaults triggered by a Chapter 11 filing at the parent level.


The RSA/plan





Under the RSA, the debtors will bring in USD 1.06bn in new capital, rework their bank facilities to fend off near-term amortization obligation and extend maturities, equitize unsecured bonds, and reorganize the company’s corporate structure.


Seadrill’s rig-owning entities would be transferred to a new RigCo holding company, where the rigs and earnings from their operation will continue to serve as collateral under the re-worked bank facilities, according to court papers. The restructuring would also result in the formation of a new entity, NSNCo, which would issue new secured notes and hold the debtors’ interests in certain non-consolidated entities, non-rig owning debtor entities and certain new secured note collateral.


The new RigCo and NSNCo would fall under the umbrella of a new intermediate holding company, which would be a direct subsidiary of the reorganized Seadrill.


The bank maturities would be extended for an average of five years while amortization obligations from the petition date through 31 December 2019 would be eliminated, with payments beginning 1 January 2020. Financial covenants would be put on hold for three and a half years, ending 31 March 2021, subject to a USD 650m RigCo minimum liquidity requirement that would scale back over time. The RSA also includes the permanent waivers of certain other financial covenants.


The USD 1bn capital commitment would include a USD 200m direct equity investment, for which the investors would receive 25% of the reorganized equity. Fredriksen and Centerbridge would put up USD 125m of that figure and the syndication parties USD 50m. The rest would come from a USD 25m rights offering to general unsecured creditors, backstopped by Fredriksen.


The remainder of the capital commitment would come through the issuance of USD 860m in new, seven-year, 12% secured notes. The interest rate is 8% PIK and 4% cash. Purchasers of the new notes would also take home 57.5% of the new equity. Existing shareholders of Seadrill would be entitled to 2% of the reorganized equity if the unsecured class votes in support of the plan, while shareholders of NADL and Sevan would be wiped out entirely.


If the unsecured bondholder class votes in favor of the plan, they will receive 15% of the new equity in addition to their subscription rights to participate in USD 85m of the new secured notes and the rights offering.








The commitment parties for the USD 1bn capital commitment hold about 40% of the unsecured bonds, 30% of which is held by the syndication parties. Morris said the debtors hope to bring more unsecured bondholders on board during the case.


The RSA also calls for the amendment of the three existing SFL lease agreements to provide a 29% deferral of lease payments over five years. The purchase obligations under the debtors’ new rig contracts are coming due soon, but the counterparties have not signed onto the RSA. The debtors hope to defer those purchase obligations.


The RSA includes “go-shop” marketing period in which the debtors may sign onto a better proposal and a fiduciary out that would allow the debtors to back out of the deal without incurring a breakup fee.


The company has USD 1bn in cash on hand and intends to fund its Chapter 11 case with cash collateral, not debtor-in-possession financing.


The debtors are conducting liquidation proceedings in Bermuda alongside the Chapter 11 case.


The RSA includes a 9 February 2018 disclosure statement approval milestone, a 9 June 2018 plan confirmation deadline and an 8 August 2018 effective date milestone.








CLICK HERE to view the petition.
CLICK HERE to view Morris’ declaration.
CLICK HERE to view Edward Mosley’s declaration.
CLICK HERE to view the RSA.
CLICK HERE to view the disclosure statement.
CLICK HERE to view the plan.