Pacific Drilling S.A. (2020) – Court Confirms Drillship Operator’s Prearranged Plan of Reorganization; Debtors Expect to Emerge by Year End Minus $1bn of Funded Debt

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December 21, 2020 – The Court hearing the Pacific Drilling SA cases issued an order confirming the Debtors' First Amended Plan of Reorganization [Docket No. 266].

On October 30, 2020, Pacific Drilling S.A. and 18* affiliated Debtors (NYSE: PACD; “Pacific” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Texas, lead case number 20-35212. At filing, the Debtors, an operator of seven drillships (with the lead Debtor organized under the laws of the Grand Duchy of Luxembourg), noted estimated assets of $2,166,943,000 and estimated liabilities of $1,142,431,000.

* The affiliated Debtors count excludes certain Debtors (the "Zonda Debtors") who remain active debtors in the Debtors' earlier bankruptcy in United States Bankruptcy Court for the Southern District of New York. Any claims asserted against the Zonda Debtors that make it into these cases will be classified as general unsecured claims. Objections related to the treatment of these claims were rejected by the Court in its confirmation order.

In a December 16th press release anticipating the confirmation, the Debtors stated, “The Plan, if confirmed by the Bankruptcy Court, will de-lever the Company’s balance sheet by eliminating over $1 billion of funded debt obligations and provide the Company with access to additional liquidity to operate going forward through an $80,000,000 senior secured delayed draw term loan exit facility. The Company expects to emerge by year-end with approximately $180 million of liquidity, consisting of new capital in the form of the exit facility and approximately $100 million of cash and cash equivalents on hand.”

2017 Bankruptcy

On November 17, 2017, Pacific Drilling and 21 affiliated Debtors filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 17-13193, with approximately $3.0 billion in funded debt. In a November 19, 2018 press release announcing their (excluding the Zonda Debtors) emergence from Chapter 11, the then debtors noted that, “In connection with emergence from bankruptcy, the Company raised $1.5 billion in gross proceeds in new capital, consisting of $1.0 billion of new secured notes and $500 million of equity….Pursuant to the Plan, the Company equitized approximately $1.85 billion in pre-petition debt associated with the Company’s Term Loan B, 2017 Notes and 2020 Notes, and paid in full approximately $1.2 billion of debt related to its pre-petition senior secured credit facility, revolving credit facility and the post-petition debtor-in-possession financing.”

Plan Overview

The Debtors' memorandum of law in support of Plan confirmation [Docket No. 240] provides: “Months of arm’s-length, and often difficult, negotiations between the Debtors and the Ad Hoc Crossover Group culminated in that certain Restructuring Support Agreement, dated as of October 30, 2020 (the ‘RSA’) and paved the way for these ‘pre-negotiated’ cases (the ‘Chapter 11 Cases’) and the Plan to preserve as much value in the Debtors’ business as possible in these challenging times. While such value is not enough to fully satisfy the outstanding Prepetition First Lien Notes, the Plan provides a limited equity recovery to the holders of the Prepetition Second Lien PIK Notes and maintains the Debtors’ business as a going concern for the benefit of numerous stakeholders including vendors, customers and employees. Notably, the Plan eliminates over $1 billion of funded debt obligations by equitizing all amounts outstanding under the Prepetition First Lien Notes and the Prepetition Second Lien PIK Notes, thereby positioning the Debtors for success by eliminating cash interest expenses and achieving future positive cash flows."

The Disclosure Statement [Docket No. 110] adds: “The Plan provides for a comprehensive restructuring of the Debtors’ prepetition obligations, preserves the going-concern value of the Debtors’ businesses, maximizes all stakeholder recoveries and protects the jobs of the Company’s most critical employees. 

The anticipated benefits of the Plan include, without limitation, the following:

  • (a) consensual use of Cash Collateral to enable the Debtors to continue to operate in the ordinary course of business during the Chapter 11 Cases (as defined below) and avoid value-destructive litigation;
  • (b) conversion of approximately $750 million of First Lien  Notes Claims (exclusive of accrued  and unpaid interest) to 91.5% of the New PDC Equity, subject to dilution; 
  • (c) conversion of approximately $326 million of Second Lien Notes Claims (exclusive of accrued and unpaid interest) in exchange for (i) 8.5% of the New PDC Equity, subject to dilution, and (ii) issuance of New 2L Warrants to the Holders of Second Lien Notes Claims;
  • (d) prompt emergence from Chapter11;(e)access to new capital in the form of the Exit Facility in the aggregate principal amount of up to $80 million, and backstopped by the Backstop Parties, which will enable the Debtors to continue their business after emerging from Chapter 11; 
  • (f) elimination of the Debtors’ entire prepetition cash interest burden to enable the Debtors to obtain positive free cash flow as drillships return to operation; and
  • (g) positioning the Debtors to participate in industry consolidation with a substantially improved balance sheet.”

Restructuring Support Agreement

On the Petition date, the Debtors entered into a restructuring support agreement (the “RSA” attached to the Disclosure Statement, with RSA Term Sheet, at Exhibit B) with “Consenting First Lien Creditors” holding more than 72% in principal amount of the First Lien Notes claims and “Consenting Second Lien Creditors” holding more than 73% in principal amount of the Second Lien Notes claims. The RSA Term Sheet attaches (i) the Exit Facility Term Sheet (Exhibit B), (ii) a Governance Term Sheet (Exhibit C) and (iii) an Employee Matters Term Sheet (Exhibit D). The brief Governance Term Sheet notes that “Required Consenting First Lien Creditors shall select 4 out of 5 members of the Board.”

The following is a summary of classes, claims, voting rights and projected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement, see also the Liquidation Analysis below)

  • Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 3 (“First Lien Notes Claims”) is impaired and entitled to vote on the Plan. The projected amount of claims is $786.5mn and estimated recovery is 82%. Each Holder of a First Lien Notes Claim will receive (a) its pro rata share of 91.5% of the New PDC Equity, subject to dilution on account of the equity issued, if any, pursuant to the Management Incentive Plan cash sufficient to satisfy any accrued and unpaid Indenture Trustee fees and expenses pursuant to the First Lien Notes Indenture and the New 2L Warrants and (b) cash sufficient to satisfy any accrued and unpaid Indenture Trustee fees and expenses pursuant to the First Lien Notes Indenture.
  • Class 4 (“Second Lien Notes Claims”) is impaired and entitled to vote on the Plan. The projected amount of claims is $349.1mn and estimated recovery is 32%. Each Holder of a Second Lien Notes Claim will receive: (a) its pro rata share of (i) 8.5% of the New PDC Equity, subject to dilution on account of the equity issued pursuant to the Management Incentive Plan, if any, and the New 2L Warrants; and (ii) the New 2L Warrants and (b) cash sufficient to satisfy any accrued and unpaid Indenture Trustee fees and expenses pursuant to the Second Lien Notes Indenture.
  • Class 5 (“General Unsecured Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. Holders of Claims in Class 5 will receive no recovery on account of such Claims. On the Effective Date, all such Claims will be cancelled, released, extinguished, and discharged. For the avoidance of doubt, General Unsecured Claims will include any direct or derivative Claims held by or asserted through the Zonda Debtors.
  • Class 6 (“Section 510(b) Claims”) is impaired, deemed to reject and not entitled to vote on the Plan.
  • Class 7 (“Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. 
  • Class 8 (“Intercompany Interests”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. 
  • Class 9 (“Existing Lux Beneficial Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.

Releases

The amended Disclosure Statement also adds language to reinforce the fact that the three classes deemed to reject are not included in the definition of “Released parties” and that their consent to third-party releases is deemed NOT to have been given.

A paragraph reads: “For the avoidance of doubt, Holders of Claims and Interests in Classes 5, 6 and 9 are not included in the definition of “Releasing Party,” and such Holders are not deemed to have consented to the Third-Party Releases contained in this Plan. Accordingly, such Holders are not provided with an opportunity to opt out of such releases.”

Voting Results

On December 16, 2020, the Debtors' claims agent notified the Court of the Plan voting results [Docket No. 221], which were as follows:

  • Class 3 (“First Lien Notes Claims”): 138 claim holders, representing $644,677,054.81 (or 99.98%) in amount and 97.87% in number, accepted the Plan. 3 claim holders, representing $133,945.19 (or 0.02%) in amount and 2.13% in number, rejected the Plan.
  • Class 4 (“Second Lien Notes Claims”): 82 claim holders, representing $219,560,031.00 and 100% in number, accepted the Plan.

Zonda Debtors

Two of the entities that were Debtors in the 2017 bankruptcy proceedings remain active as debtors and debtors-in-possession in those ongoing proceedings — Pacific Drilling VIII Limited and Pacific Drilling Services, Inc. (together, the “Zonda Debtors”). The Zonda Debtors are not debtor entities in the current chapter 11 cases of the Debtors. 

In an October 20, 2020 press release, the Debtors announced that a London court had denied their application to appeal a $320.0mn (excluding an estimated $100.0mn of interest) arbitration award announced in January 2020. That award was granted to Samsung Heavy Industries Co. Ltd. (“SHI”) in relation to a contract for the construction and sale of the “Pacific Zonda.” The Debtors’ Disclosure notes: “For the avoidance of doubt, General Unsecured Claims will include any direct or derivative Claims held by or asserted through the Zonda Debtors.” That class is slated to receive no recovery.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Harris Declaration”), James Harris the Debtors’ Chief Financial Officer, detailed the events leading to Pacific’s Chapter 11 filing. The Harris Declaration provides: “Since January 2020, international economies and financial markets — particularly, the oil and gas markets and, consequently, the offshore drilling industry — have been disrupted by (a) the global health crisis caused by the COVID-19 pandemic and (b) the impact from the failure of OPEC and a group of oil producing nations led by Russia to reach an agreement as to oil production cuts.

Oil producers have responded to the lower demand for oil and lower oil prices by cutting their 2020 capital budgets, with Pacific Drilling’s clients generally cutting their budgets and cancelling or delaying until 2022 work that had been scheduled or awarded to Pacific Drilling for 2020.

The impact of these market conditions on Pacific Drilling’s business has been direct and significantly negative. Prior to the COVID-19 pandemic and oil market share war, Pacific Drilling had four of its seven drillships operating for customers during the first quarter of 2020, and was mobilizing a fifth rig, the Pacific Meltem, for an anticipated Gulf of Mexico contract.

The Pacific Bora and the Pacific Sharav completed their projects in early April 2020, and contract opportunities that Pacific Drilling had expected to materialize in the form of follow-on work for the Pacific Sharav and the Pacific Bora, and the anticipated project for the Pacific Meltem, were all delayed until at least 2021. The Pacific Santa Ana was operating through the first quarter of 2020 on a project for Petronas that was suspended due to the COVID-19 pandemic on March 29, 2020, and is now on stand-by until January 1, 2021 at 35% of its contractual dayrate. In addition, certain contracts for the Pacific Khamsin and Pacific Sharav have been cancelled in exchange for the payment of termination fees.”

Prepetition Indebtedness

As of the Petition date, the Debtors had funded indebtedness totaling approximately $1.076bn

Debt Instrument

Maturity Date

Outstanding Principal Amount

First Lien Notes

October 1, 2023

$750.0mnn

Second Lien PIK Notes

April 1, 2024

$326.0mn

Total

 

$1,076.0mn

Significant Shareholders

  • FMR LLC: 6.4302%
  • TOR Asia Credit Master Fund LP: 6.0025%
  • Quantum Pacific (Gibraltar) Ltd. : 5.1101%

Key Documents

The following documents were attached to the Disclosure Statement [Docket No. 110]

  • Exhibit A: First Amended Joint Plan of Reorganization
  • Exhibit B: Restructuring Support Agreement (and exhibits thereto)
  • Exhibit C: Liquidation Analysis
  • Exhibit D: Valuation Analysis
  • Exhibit E: Financial Projections
  • Exhibit F: Corporate Organizational Chart

The Debtors filed Plan Supplements at Docket Nos. 202 and 249 which attached the following documents:

Docket No. 202

  • Exhibit A: Exit Facility Documents
  • Exhibit B: Listing of New Members of Board of Reorganized PDC
  • Exhibit C: New 2L Warrants Agreement
  • Exhibit D: Amended and Restated Limited Liability Company Agreement of Reorganized PDC
  • Exhibit E: New Organizational Documents
  • Exhibit F: Restructuring Transaction Steps
  • Exhibit G: Retained Causes of Action
  • Exhibit H: Schedule of Other Secured Claims and Other Priority Claims
  • Exhibit I: Schedule of Rejected Executory Contracts and Unexpired Leases

Docket No. 249

  • Exhibit A: Revised Amended and Restated Limited Liability Company Agreement of Reorganized PDC
  • Exhibit A-1: Redline of the Amended and Restated Limited Liability Company Agreement of Reorganized PDC
  • Exhibit B: Revised Exit Facility Documents
  • Exhibit B-1: Redline of the Exit Facility Documents
  • Exhibit C: Revised Restructuring Transaction Steps
  • Exhibit C-1: Redline of the Restructuring Transaction Steps
  • Exhibit D: Revised 2L Warrants Agreement
  • Exhibit D-1: Redline of the 2L Warrants Agreement

Liquidation Analysis (see Exhibit C to Disclosure Statement [Docket No. 110] for notes)

About the Debtors

According to the Debtors: “With our best-in-class drillships and highly experienced team, Pacific Drilling is committed to exceeding our customers’ expectations by delivering the safest, most efficient and reliable deepwater drilling services in the industry. Pacific Drilling’s fleet of seven drillships represents one of the youngest and most technologically advanced fleets in the world.”

The Disclosure Statement adds: “Pacific Drilling is an international offshore drilling contractor whose primary business is to contract its fleet of seven high-specification drillships to drill wells for clients in the global offshore oil exploration and production industry. Pacific Drilling’s industry-leading operational performance is grounded in its core values, emphasis on client relationships, and entrepreneurial culture. Pacific Drilling is committed to exceeding its clients’ expectations by delivering the safest, most efficient and reliable deepwater drilling services in the industry.”

Prepetition Corporate Structure

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