Seadrill Limited – Files Comprehensive Restructuring Proposal to Include $750mn of “Single Silo” Takeback Debt, $300mn of New Money (Upsized from $200mn), 99% of Emerged Equity to Senior Lenders

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April 1, 2021 – As required by their March 9th final cash collateral order [Docket No. 253], the Debtors have now provided a comprehensive restructuring proposal to the coordinating committee of secured lenders (the “CoCom”) and the ad hoc group of certain prepetition secured parties (the “Ad Hoc Group”); a redacted copy of which they have also filed with the Court [Docket No. 294]. As the notice makes clear, "the parties have not agreed to this proposal."

Proposal Overview

The “Company Proposal” contemplate $750.0mm of takeback debt and $300.0mm of new senior money allocated in a single silo facility, and an option for a full repayment of the Asia Offshore Drilling ("AOD") facility.

Secured Facilities:

  • Secured Credit Facilities to receive $750.0mn of takeback debt allocated to the Existing Secured Credit Facilities [with ability to participate in a $[300.0]mn new money raise offered to holders of the Existing Secured Credit Facilities]
  • Principal amount of takeback debt subject to reduction through AOD election mechanism described below
  • 99% of the restructured equity allocated to the Secured Credit Facilities (subject to dilution from equity kicker for new money and MIP)
  • Net scrap proceeds for the identified rigs (per the March Business Plan) are paid in cash to original facility lenders

Allocation of Takeback Debt and Equity

  • Takeback Debt: Allocated first based on the sum of (i) each silo’s NPV of firm + expected contracted backlog and (ii) total projected cash at emergence, and then on remaining rig value, which is calculated as the rig value less NPV of firm + expected contracted backlog
  • Equity Allocation: Equity is allocated dollar-for-dollar on the basis of any remaining rig value, which is calculated as the rig value less allocated takeback debt. Any remaining allocation of equity is calculated pro rata on the basis of each silo’s nominal debt outstanding

Facility Highlights

New Money:

  • Principal: [$300.0mn]
  • Maturity: [December 15, 2026]
  • Security: First-lien security in respect of all existing asset level collateral and common collateral package.
  • Guarantee: Guaranteed by Seadrill Ltd and RigCo and any other RigCo Group member in accordance with guarantor construct under existing facilities

Pari Passu First Lien Debt Basket

  • Principal: $100.0mn uncommitted facility pari passu with new money

Takeback Debt:

  • Principal: $750mm, subject to reduction through AOD Election Mechanism 
  • Maturity: June 15, 2027
  • Interest: L + 2.5% cash-pay + 5% PIYC, determined with reference to minimum RigCo liquidity (RigCo liquidity is defined as unrestricted RigCo cash plus undrawn new money) of $400m, payable quarterly
  • Repayment: $10.0mn quarterly amortisation beginning Q1 2023 with additional cash sweep mechanism
  • Security: Second-lien security in respect of all existing asset-level collateral and common collateral package.
  • Guarantee: Guaranteed by Seadrill Ltd and RigCo and any other RigCo Group member in accordance with guarantor construct under existing facilities.
  • Facility Structure:
    • Takeback debt to be allocated as part of a single facility and, together with the new money, be documented in one facility agreement based on existing facility agreements.
    • New money and takeback debt to benefit from common collateral package comprising the existing asset level collateral plus existing common collateral as well as Seadrill Ltd and RigCo guarantees.
  • Minimum Liqudity Covenant: Higher of $75.0mn and 5% of gross interest bearing debt at all times, based on unrestricted cash.
  • Cash Sweep:
    • 75% of excess RigCo liquidity (defined above) above $500.0mn to be swept to outstanding repayment of principal for takeback debt
    • Cash sweep tested quarterly from Q1 2023
  • Equitisation:
    • RigCo deficiency claim to be converted to 99% equity in Seadrill Limited, subject to dilution from equity kicker for new money and MIP.
    • Anti-dilution and pre-emption rights for equitising RigCo lenders to be agreed.
    • Residual equity to current shareholders set at 1%, provided unsecured creditors and shareholders vote as a class in support of the transaction
  • Refinancing: New money and $750.0mn takeback debt can be refinanced on an individual basis.
  • MIP:
    • MIP to be determined by the new Board of Directors, who will set the remuneration and incentive package for executive directors and management.
    • Existing employment related contracts to be honoured.

Benefits of Company Proposal:

  • Total debt is reduced to $750mm in the Company Proposal, as compared to $1,600mm in prepetition discussions. New money is increased to $300.0mn from $200.0mn
  • The allocation methodology is revised to appropriately reflect contracted revenues and cash
  • The AOD cash takeout mechanism helps facilitate implementation

Benefits of Single Silo Structure:

The Company is proposing a single facility structure because it believes that there are significant benefits associated with doing so, such as:

  • Cash management, governance issues, and conflicting interests are minimised, resulting in a simplified organisational structure
  • There are a limited number of legal entities and relationships between entities (including transfer pricing rules), which lowers the cost of administration
  • Complications associated with managed rigs that have contracts flowing through common entities are reduced
  • Assuming proper documentation, future M&A activity is not significantly impacted (note: other restructured drilling companies do not have multiple silos)

Allocations by Silo:

  • The total recoveries (estimated net scrap proceeds + allocated takeback debt + allocated equity) by silo are shown below under various illustrative total values
    • AOD lenders have the option to elect cash for the full amount of their claim in lieu of their allocations
  • Debt allocations rely first on the sum of (i) NPV of contracted backlog (firm and expected contracts) and (ii) projected cash upon emergence in September 2021(1), and then on remaining rig value (rig values as outlined in 17 March 2021 Revised CoCom Restructuring Proposal less NPV of contracted backlog), which accounts for each silo’s earning power and expected future contribution to the reorganised Company
  • Equity is allocated dollar-for-dollar on the basis of any remaining rig value (calculated as rig value less allocated takeback debt) such that each rig receives a full consideration in debt and equity on the basis of its rig value. Any remaining equity is allocated pro rata to each facility’s nominal claim
    • [Redacted]‒
    • Equity allocation does not include any allocation to new money lenders, which could dilute the recoveries shown
  • See Appendix [also redacted] for recoveries per lender

Recoveries by Silo:

The total recoveries (estimated net scrap proceeds + allocated takeback debt + allocated equity) by silo are shown below under various illustrative total values. NB:
(i) AOD lenders have the option to elect cash for the full amount of their claim in lieu of their allocations and (ii) Debt outstanding shows the amounts as of filing.

Background

Prepetition Indebtedness

At filing the Debtors had the following indebtedness:

Collateral

The following table shows just how silo-ed the Debtors 12 credit facilities are and why the Debtors ultimately failed to build consensus across their senior lender group:

Prior Bankruptcy

On September 12, 2017, the Debtor’s affiliate, Seadrill Limited and 85 affiliated entities (collectively, the “Seadrill Limited Debtors”) filed petitions in the United States Bankruptcy Court for the Southern District of Texas and the then debtors emerged on July 2, 2018. Except with respect to the case of Seadrill Limited, Case No. 17-60079 (DRJ), each of the Seadrill Limited Debtors’ cases was closed prior to the 2021 filings. That last case has now also been closed.

In a press release announcing emergence from that earlier bankruptcy, Seadrill stated: "The Plan has equitized approximately $2.4 billion in unsecured bond obligations, more than $1 billion in contingent newbuild obligations, substantial unliquidated guaranty obligations, and c. $250 million in unsecured interest rate and currency swap claims, while extending near term debt maturities, providing the Company with over $1 billion in fresh capital and leaving employee, customer, and ordinary trade claims largely unimpaired.

On the Effective Date, the Company will have approximately 100 million New Common Shares outstanding.  The New Common Shares will be allocated as set forth below, in accordance with provisions of the Plan and issued on the Effective Date:

  • 14.25% of the New Common Shares issued to holders of unsecured claims against the Company and certain of its chapter 11 debtor affiliates;
  • 23.75% of the New Common Shares issued to participants in the $200 million equity investment under the Plan;
  • 54.625% of the New Common Shares issued to participants in the $880 million new secured notes investment under the Plan;
  • 1.9% of the New Common Shares issued to holders of existing common equity interest in the Company as of the Effective Date, an effective exchange ratio of approximately 0.0037345 New Common Shares per each Existing Share, and
  • 5.475% of the New Common Shares issued as a structuring fee to certain of the new money investors."

The Slide Back into Chapter 11

The Debtors have been limping along under a series of short forbearance agreements since the middle of September 2020; also the point at which they engaged their current team of legal and financial advisors. Negotiations with lenders as to shifting interest to PIK and renegotiating covenants (ie, net leverage and debt service coverage) had been going on for more than a year before that, with those negotiations ultimately shifting to an unsuccessful effort to develop a consensus around a full-blown restructuring.

On December 16, 2020 the lenders in their "AOD facility" (under which Asia Offshore Rig 1 Limited, Asia Offshore Rig 2 Limited and Asia Offshore Rig 3 Limited are borrowers) "utilised" (ie grabbed) $97.2mn of AOD’s cash contained in restricted accounts to repay a corresponding amount of the $210.0mn outstanding under that facility. These lenders are also amongst those who comprise the "Ad Hoc Lender Group;" whose apparent unwillingness to support a proposed restructuring and refusal to extend their own forbearance agreement is apparently what ultimately pushed the Debtors into Chapter 11 (with AOD facility borrowers seeking shelter first, see further below).

On January 15th, the Debtors announced that they would not make the semi-annual 4% cash interest payment (there was also a 2% PIK element to the interest which was nominally made) due on that date in respect of their 12.0% senior secured notes due 2025 (the “Notes,” issued in connection with the earlier bankruptcy).

On February 7th, the Debtors announced that those Asian affiliates that were AOD facility borrowers had filed for Chapter 11 (in the same bankruptcy Court as the present filing), noting that: "As a consequence of the Chapter 11 filings, the forbearance agreement announced by the Company on 3 February 2021 in respect of nine out of the group's twelve senior secured credit facility agreements has terminated [these are the forbearance agreements first arranged on September 15, 2020]." These February 7th cases are to be administered with those filed on February 10th.

Not included with the Debtors are those 29 affiliates (collectively, "Seadrill Partners") which filed (again, same Court) on December 1, 2020; these cases are to be administered separately The  Debtors do not intend to seek joint administration of these chapter 11 cases with the Seadrill Partners Cases.

The Debtors have struggled, however, to build the requisite consensus amongst their senior secured lenders who have provided financing to the Debtors across 12 silo-ed credit facilities and hold "disparate views…about the proper approach to this restructuring."

The Debtors provide [Docket No. 25]: “Seadrill has been engaged in active negotiations with creditors across its capital structure for the better part of the last year, including with a coordinating committee of various lenders under the Company’s 12 secured credit facilities (the ‘CoCom,’ and such lenders, the ‘SCF Lenders’), an ad hoc group of SCF Lenders (the ‘AdHoc Lender Group’), and an ad hoc group of holders of 12.00% senior secured notes due 2025 (the ‘NSN Group,’ and together with the CoCom and the Ad Hoc Lender Group, the ‘Secured Lenders’). 

Despite Seadrill’s prepetition efforts to build consensus for a restructuring transaction, as of the date hereof, the parties have not agreed on the terms of a comprehensive, consensual restructuring in large part because of the different debt holdings of the CoCom and the Ad Hoc Lender Group and the disparate views those groups hold about the proper approach to this restructuring. Most of Seadrill’s secured debt lays in 12 distinct silos, each with its own individual rigs as collateral (and an interest in certain common collateral made up primarily of cash). The CoCom and the Ad Hoc Lender Group control different silos and, given the respective holdings, even if Seadrill reached a comprehensive deal with one of the CoCom or the Ad Hoc Lender Group, neither group of creditors has sufficient holdings to deliver the consent of each of the 12 silos. This inherent conflict between the CoCom and the Ad Hoc Lender Group led directly to the timing of Seadrill’s filing. 

Over the past several weeks, Seadrill was nearing an agreement with the CoCom on the terms of a proposed restructuring. But the Ad Hoc Lender Group opposed the plan and refused to provide a forbearance for the facilities it controlled, including the AOD Facility. Thus, despite Seadrill’s continuous efforts, the Company was left in a default without a forbearance on certain facilities, and faced the threat of enforcement by the Ad Hoc Lender Group. To avoid such enforcement and the accompanying destruction of value, the Debtors have filed chapter 11 petitions to obtain the benefit of the automatic stay while they continue to operate their business and negotiate with their various stakeholders in an effort to maximize the value of the estates."

Significant Shareholders

  • Hemen Holding Ltd: 27.09%
  • King Street Capital Management LP: 6.7% (at the end of 2019 and now apparently below the 5% reporting threshold)

About the Debtors

According to the Debtors: “From shallow to ultra-deep water, in both harsh and benign environments, the Debtors set the standard in offshore drilling. The Debtors safely unlock oil and gas resources, helping their customers to deliver energy around the world. The Debtors’ customers include super-major and major oil & gas companies, state-owned national oil companies, and local independent offshore exploration and production companies."

The Debtors latest 20-F adds: "We are an offshore drilling contractor providing worldwide offshore drilling services to the oil and gas industry. Our primary business is the ownership and operation of drillships, semi-submersible rigs and jack-up rigs for operations in shallow to ultra-deepwater in both benign and harsh environments. We contract our drilling units to drill wells for our customers on a dayrate basis. Typically, our customers are oil super-majors, state-owned national oil companies and independent oil and gas companies. 

Through a number of acquisitions of companies, second-hand units and newbuildings, we have developed into one of the world's largest international offshore drilling contractors. We own 35 drilling rigs and we manage and operate 20 rigs on behalf of Seadrill Partners, SeaMex, Sonangol, Sonadrill and Northern Drilling.

We are recognized for providing high quality operations, in some of the most challenging sectors of offshore drilling. We employee 4,538 employees across the globe. We are incorporated in Bermuda, and have worldwide operations based on where activities are conducted in the global oil and gas industry."

Seadrill Limited is an exempted company limited by shares and is listed under the Symbol "SDRL" on the New York Stock Exchange ("NYSE") and the Oslo Stock Exchange ("OSE"). Its registered offices are located at Par-la-Ville Place, 4th Floor, 14 Par-la-Ville Road, Hamilton HM 08, Bermuda.

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