Expro, the UK oil and gas services group, is facing a ticking restructuring countdown clock, with about USD 20m in interest payments due on its term loan B and revolving credit facilities, and a grace period for reporting financials that expires in mid-December. In this cross-border Special Report, Debtwire’s legal analyst team from both sides of the Atlantic considers the workout routes potentially available to the troubled group. While a UK scheme of arrangement remains a feasible option for the debtor, the US-based lenders who are driving the process are pushing for a US Chapter 11 filing, presumably to take over the company through a cram-down plan.
Background – in brief
Amid challenging times for the oil and gas sector, UK-based Expro set off jitters when it delayed reporting its 2Q17 financials earlier in November, taking advantage of a 30-day grace period under its loan documents. Whether the group meets a ~USD 20m cash interest payment due in days will be telling, and the market awaits a restructuring announcement. Based on the credit agreement, interest on the TLB falls due on 4 December (the next business day after 2 December). The company has five business days after the due date to make the payment.
Expro’s cash position fell to USD 90m at the end of June after burning USD 40m in just one quarter. Saddled with high cash interest on its debt per year, plus a capex forecast of USD 45m and annual cash taxes of around USD 25m, Expro also has limited availability to tap its revolver to address the upcoming cash interest payment due to covenant constraints. Thus, Expro is widely expected to run out of cash soon unless EBITDA recovers, and will likely need to address its balance sheet imminently.
The group’s debt stack includes:
• a revolving credit facility (RCF) split into a USD 150m revolver and USD 25m in letters of credit (USD 125m drawn as of June 2017)
• a USD 1.3bn term loan B (TLB): and
• USD 16.3m of mezzanine debt.
The RCF and TLB are subject to a credit agreement that is governed by New York law. Subsidiaries Expro Finservices S.à r.l. (a Luxembourg entity) and Expro US Finco LLC (a Delaware entity) are borrowers under the agreement, while the UK parent Expro Holdings UK 3 Limited is a guarantor (in addition to other subsidiary guarantors).
The RCF and TLB are secured on a pari passu basis and substantially all of the assets that Expro holds an ownership interest in are encumbered/pledged on company indebtedness. The mezzanine debt is secured by the same collateral but is junior to the RCF and TLB. Note however that there is a private inter-creditor agreement that could impact the respective priority rights of Expro’s creditors, including with respect to pension and swap obligations.
Various stakeholders have now organised, with Expro bringing in Paul Weiss to lead restructuring talks and Lazard as financial adviser. A group of term loan holders have mandated Rothschild and Davis Polk, as reported. Holders of the term loan include Fidelity Management, Oak Hill Advisor, Greywolf Capital, Angelo Gordon, Blue Mountain Capital, Alcentra, Investcorp, Marble Point Capital, KKR’s CLOs, Western Asset Management, Apollo and Allianz Global.
Bank lenders to the revolver have gradually pared down their exposure at a deep discount, as reported. The lender group includes HSBC as agent plus Citi, Deutsche Bank, and BNP Paribas as lenders, with original lender Barclays recently selling out. Distressed funds have taken positions in the RCF, including Elliott Management and Apollo.
The USD 16.3m mezzanine debt stub is all that remains after the company’s 2016 out-of-court restructuring that saw approximately USD 784m of mezz debt equitized into a 70% ownership stake in the company. That exchange significantly reduced the equity ownership stake of the company’s PE sponsors—Goldman Sachs Capital Partners, Arle Capital Partners Limited, and AlpInvest Partners B.V.
The company’s equity is, thus, concentrated in the hands of a few holders: Goldman Sachs (through both initial sponsor Goldman Sachs Capital Partners and former mezz lender Goldman Sachs Mezzanine Partners), KKR Credit, Highbridge, Park Square and Arle Capital, in addition to AlpInvest and a few other former mezzanine creditors.
On top of the mezzanine debt exchange, Expro has a history of using equity infusions to deal with its balance sheet issues. Equity holders have injected approximately USD 700m since 2011, including USD 250m by the sponsors in 2011, a further USD 350m by sponsors in June 2015 that partially paid down the mezzanine debt by USD 300m, and USD 100m of equity cures in 2017, just months after the mezzanine debt equitization. Under the term loan agreement, it is only allowed to make four equity cures throughout the life of the term loan B (entered into in 2014) and these would be restricted to two cures in each year.
Restructuring on the horizon
While raising funds through the incurrence of additional debt would be permitted under the loan agreement, it seems exceedingly unlikely given the company’s high leverage. Moreover, current equity holders’ ability and willingness to put in additional capital remains an open question.
With a potential restructuring looming, some creditors are angling for a US Chapter 11 filing, instead of a scheme of arrangement on the group’s home turf. Both venues are viable in-court restructuring options, as the company has significant connections to those locales.
The company is headquartered in the UK, has meaningful operations there, plus the Expro parent company is incorporated in England and Wales too. On the US side, the company has significant operations in the US and Gulf of Mexico, regional offices in Texas and Louisiana, and subsidiaries incorporated in Delaware, including one of the credit agreement borrowers and certain guarantors.
It is easy to see why the company’s secured creditors would want Expro to file for Chapter 11 protection in the US. Specifically, they would favour Chapter 11 if they were looking to take over the equity through a cram down plan of reorganization.
Under the US bankruptcy code, a reorg plan can be approved by the court over the objections of dissenting classes that vote against the plan if at least one class of impaired creditors (here, for example, the TLB lenders) vote in favour of the plan—assuming the plan also does not discriminate unfairly and is fair and equitable (ie follows the absolute priority rule). This would mean that if the company reaches a deal with its term loan lenders that gives them the equity (perhaps, in addition to some new paper), then the votes of the current equity holders (or the stub mezzanine debt) could effectively be overruled. Note that unlike in the UK, a class is deemed to vote in favour of a US Chapter 11 plan when at least two-thirds in dollar amount of that class and one-half of the number of creditors in that class vote in favour of the plan.
The recent trading prices of the TLB and RCF—low-to-mid 50s and low-to-mid 60s, respectively—indicates that if the company were forced to file for Chapter 11, it would be hard to envision recoveries for the mezzanine debt or equity holders. As a result, the secured lenders might play hardball over the circa USD 20m interest payment in December and force the company to make a difficult decision about making that payment or choosing to file for bankruptcy with an additional USD 20m on hand—possibly forestalling the eventual need of seeking DIP financing if an in-court restructuring proves to be the best option.
If the lenders’ leverage wins out, they will likely end up with the company; however, with the RCF and TLB sitting in pari passu positions in relation to the collateral, there could be a battle brewing between those creditor groups (subject to significant cross-holdings limiting that fight). If TLB holders are meaningfully impaired through a reorg plan, they might also seek similar impairments from the RCF lenders.
Nonetheless, equity holders are not without leverage and are unlikely to go down without a fight, unless they deem Expro not worth further investment. If equity holders are willing to continue to invest money into the company, two potential options are (1) to continue to make equity cures outside of Chapter 11, hoping energy prices pop significantly during that extended runway, or (2) to participate in a Chapter 11 rights offering open to equity holders that sets aside a portion of the reorganized company for pre-petition stock holders.
In the latter case, the company would likely need to reach a comprehensive deal with its creditor and equity constituencies, culminating in a pre-pack or pre-arranged filing—another potential benefit of using the Chapter 11 system.
Similarly, equity holders could utilize the threat of new money investments to cut a better deal with the company’s creditors (likely the TLB) that could see the TLB partially equitized (and include a resolution of the cUSD 20m interest payments). This would fall in line with past out-of-court restructurings Expro has engaged in. While this potential resolution might be kicking the can down the road once again, it could ease the company’s short term constraints and help further right-size the balance sheet as the energy markets continue to stagnate.
Nonetheless, despite all of the various leverage points, a free fall Chapter 11 filing could be Expro’s fate if it decides that it is in the company’s best interests not to make the cUSD 20m interest payments now and is unable to reach a comprehensive deal with its lenders prior to the deadline. In that case, the company would use the protection of Chapter 11 to get all parties to the negotiating table.
While a US Chapter 11 seems the more likely route in the present case, the group will have no doubt weighed the possibility of a UK scheme of arrangement. Schemes can have advantages over US proceedings, ie cost and the fact that a scheme is not a formal insolvency procedure, meaning reduced stigma, among other things.
The UK scheme enables a “compromise or arrangement” between a company and its creditors (or any class of them). It requires the approval of a majority in number representing 75% in value of the scheme creditors (or of each class of them) who vote) and the court must sanction it. If it ticks these boxes, it will bind all creditors subject to it – including any who do not vote or vote against it.
Schemes have been widely used by non-UK companies to restructure their debt. The borrowers are incorporated in Luxembourg and Delaware. However, the English court will only sanction a scheme in relation to a foreign company if it has a ‘sufficient connection’ with England.
Case law has examined what constitutes a ‘sufficient connection’ and has established that an overseas company can manufacture such a connection by moving its centre of main interests (COMI) to England, or changing the governing law and jurisdiction of the relevant finance documents to English law, among other things. In cases such as the present, a COMI shift would be desirable, for example if a debtor were to seek to have its scheme recognised in the US, having its COMI in England would make it increasingly likely that the scheme would be recognised as a ‘foreign main proceeding’ pursuant to Chapter 15 of the US Bankruptcy Code, meaning the company would benefit from an automatic stay on creditor action. While various overseas debtors to date have successfully taken these steps to enable them to take advantage of the UK scheme, there would be numerous considerations including possible tax implications of COMI shifting and the level of consent required to change the governing law under the finance documents.
Other hurdles Expro would have to overcome to utilise a UK scheme include satisfying the court via expert evidence that the scheme would be likely to have ‘substantial effect’ (ie, achieve its purpose). This includes considering whether the scheme will be recognised and effective in any relevant foreign jurisdictions, which here would include the US and Luxembourg.
Further, due to the ongoing uncertainty surrounding the application of Chapter II of the EU Judgments Regulation to schemes, in practice, the court must be content that it has jurisdiction over scheme creditors as well as the debtor, which often involves requiring at least one creditor being UK-domiciled or proving that the scheme creditors have submitted to the English court’s jurisdiction.
As with many other recent cases, it appears that Expro could arrange its affairs to meet the criteria for a scheme, should it wish to.
Expro is facing a bevy of restructuring options as it continues to face the headwinds that continue to affect the energy markets. As part of its calculus, the company is likely weighing in-court and out-of-court solutions, potential international court venues (including what state to file in if Chapter 11 is preferred), and the merits of its creditor and equity constituencies. It is also worth keeping an eye on the significance of the secured creditors’ leverage over the company and whether fractures emerge between the term loan and revolving lenders. But most importantly, with approximately two weeks to go until the expiration of the financial filing grace period and days before the due date for the cash payment of cUSD 20m in interest, this is a situation that could heat up quickly, and absent broad consensus across creditor classes and with lender appetite for reorganized equity, a US Chapter 11—in one of its many forms—appears imminent.
 The loan information comes from publicly filed SEC documents. Note, however, there have been subsequent amendments to the loan documents that have not been publicly filed and the intercreditor agreement and other related documents are also private.
You can access Debtwire’s latest research report HERE.
Debtwire’s Special Report comparing UK schemes of arrangement with US Chapter 11 proceedings is available HERE.
Expro has brought in Paul Weiss to lead talks and has appointed Lazard as financial adviser. A group of term loan holders has mandated Rothschild as financial adviser and Davis Polk as legal counsel.
Dawn is a former practising restructuring and insolvency lawyer. Prior to joining Debtwire as a Legal Analyst, Dawn practised with DLA Piper UK LLP and Stevens & Bolton LLP, as well as working in legal know-how for LexisNexis. Dawn’s experience includes advising lenders, insolvency practitioners, directors and creditors in relation to insolvency and restructuring issues. Dawn worked on several large scale restructurings.
Joshua Friedman is a former practicing restructuring attorney. Prior to joining Debtwire, Joshua practiced in the New York offices of Kramer Levin Naftalis& Frankel LLP. He has represented various constituencies in several high-profile restructurings, including Hostess Brands, General Motors, CapmarkFinancial Group, and Lehman Brothers.
Any opinion, analysis or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.