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January 12, 2022 – The Court hearing the Seadrill New Finance Limited cases confirmed the Debtors’ Prepackaged Plan of Reorganization in what was a one-day stay in bankruptcy for this particular cluster of Seadrill Limited companies which had not otherwise been included as debtors in the Seadrill Limited cases [Docket No. 62]. As has become a familiar pattern in respect of these ultra-fast (often just one-day) prepackaged Chapter 11 plans which are becoming something of a specialty for the U.S. Bankruptcy Court for the Southern District of Texas and its dynamic duo of Judges (Isgur and Jones), the Plan's confirmation comes over the objection of the U.S. Trustee assigned to the Debtors' cases who argues that the speed of these cases tramples due process with the "speed of these cases effectively shift[ing] the burden to the creditor body without the protections contemplated by the Bankruptcy Code….the Debtors’ confirmation schedule should be slowed to afford parties protections that safeguard due process and Bankruptcy Code compliance."
NB: See the latest of growing press coverage (here a strong piece by the FT) on the rise of the U.S. Bankruptcy Court for the Southern District of Texas in the niche (and highly lucrative) market for ultra-fast prepacks and the growing concern as to the propriety of their speed and related "forum shopping."
On January 11, 2022, Seadrill New Finance Limited and 11 affiliated Debtors (“Seadrill New Finance” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court for the Southern District of Texas, lead case number 22-90001 (Judge Jones). As noted above, the Debtors are subsidiaries of offshore drilling contractor Seadrill Limited which filed bankruptcy under a separately administered case on February 20, 2021. At filing, the Debtors noted estimated assets between $500.0mn and $1.0bn; and estimated liabilities between $500.0mn and $1.0bn. As standard with prepackaged plans, the Court waived requirements as to filing of Schedules A/B and statements of financial affairs (SOFA).
In a press release announcing the confirmation, the Debtors stated, “Confirmation of the Issuer’s Plan brings the Seadrill group one step closer to finalizing the comprehensive restructuring of the Seadrill group. The Issuer expects to emerge from chapter 11 in the near term. Seadrill’s chapter 11 plan of reorganization was confirmed by the Court in October 2021 and is anticipated to go effective in the first quarter of 2022."
The press release continues: "The Court confirmed the Issuer’s chapter 11 plan of reorganization (the ‘Plan’), which received nearly unanimous support from existing stakeholders. The Plan provides the Issuer with financial and strategic flexibility and stability by amending and extending the Issuer’s secured notes, effectuating a transfer of majority ownership of the Issuer from the wider Seadrill group to the secured noteholders, and facilitating the entry into management agreements with Seadrill for the continued provision of management services and operational support to the Issuer and its subsidiaries. The Plan also provides for the satisfaction of all trade, customer, and other non-funded debt claims in full in the ordinary course of business. Benefitting from both the new ownership structure and the continuity provided by the Seadrill group, the Issuer expects to continue to focus on maximizing value for all stakeholders from its portfolio of investments including the Seabras Sapura JV and the SeaMex group.
The key terms of the Plan include:
- the release by the holders of the Issuer’s 12.0% Senior Secured Notes due 2025 (the ‘Noteholders’ and the ‘Notes’, respectively) of all existing guarantees and security and claims (if any) with respect to Seadrill and its subsidiaries (excluding the Issuer and certain of its subsidiaries);
- the Noteholders receiving 65% of pro forma equity in the Issuer, with Seadrill Investment Holding Company (a subsidiary of Seadrill) retaining the remaining 35% of pro forma equity in the Issuer, which shall effect a separation of the Issuer and its subsidiaries (including the Seabras Sapura assets and the SeaMex group) from the consolidated Seadrill group;
- the Noteholders will have appointment rights in respect of 4 out of 5 of the Issuer’s directors on the board of the restructured Issuer’s group, with the remaining director to be appointed by Seadrill;
- new notes will be issued pro rata to Noteholderson amended terms including:
- maturity date: July 15, 2026
- interest: either (a) 9.0%, consisting of (i) 3.00% cash interest plus (ii) 6.00% PIK interest, or (b) 10.0% PIK, in each case payable quarterly
- call protection: redemption price:
- prior to July 15, 2022: 105%
- on or after July 15, 2022: 102%
- on July 15, 2023 and thereafter: 100%;
- the Noteholders will have a first priority right to fund any additional liquidity needs of the Issuer or its affiliates; and
- Seadrill will continue to provide certain management services to the Issuer’s group.”
Augmenting the overview in the confirmation press release, the Debtors' memorandum of law in support of Plan confirmation (the "Memorandum") [Docket No. 35] provides a top-level overview and some context as to how these filings fit into Seadrill's overall restructuring: "The NSNCo Group’s proposed one-day prepackaged case is the final component of the broader Seadrill Group’s comprehensive restructuring efforts. The NSNCo Group was established as part of the Seadrill Limited Debtors’ first chapter 11 restructuring as a set of holding companies that were wholly-owned by the Seadrill Limited Debtors. On the effective date of the first restructuring in 2018, the NSNCo Group issued $880 million of new secured notes (the 'Secured Notes') in exchange for cash. As collateral for the Secured Notes, the NSNCo Group owned interests in various joint ventures and minority-owned companies. Today, there is approximately $535 million in aggregate principal amount outstanding externally.
Following months of hard-fought negotiations among the NSNCo Group and an ad hoc group of holders under the Secured Notes (the “Ad Hoc Group”) regarding a standalone restructuring of the Secured Notes, NSNCo and the Ad Hoc Group entered into an RSA on July 2, 2021 setting forth the key terms of the restructuring transaction embodied in the Plan. With the support of approximately 82.3% of holders of the Secured Notes and NSNCo’s sole shareholder, the NSNCo Group elected to effectuate this restructuring pursuant to a prepackaged chapter 11 plan of reorganization with an expedited confirmation schedule on the terms set forth
in the Plan."
The Debtors' motion requesting that a combined Disclosure Statement and Plan confirmation hearing be held on January 12th [Docket No. 4] explains, "the Plan has been accepted by approximately 99.99% of the Secured Notes held by creditors that cast a ballot and the sole shareholder. The Plan contemplates amending and extending approximately $622.7 million of senior secured notes and issuing pro forma equity in Seadrill New Finance Limited ('NSNCo') to the senior secured noteholders (the 'Secured Noteholders') in an amount that will dilute the existing equity in NSNCo held by the sole shareholder, an NSNCo affiliate….
Having spent the better part of a year negotiating a restructuring transaction with an ad hoc group of Secured Noteholders, the Debtors and their economic stakeholders elected to effectuate this restructuring pursuant to a prepackaged chapter 11 plan of reorganization with an expedited Confirmation Schedule as the most effective and least costly option available.
Importantly, the Debtors are a relatively straightforward group of holding companies with ownership stakes in non-Debtor operating companies with constrained liquidity. To that end, there is no need for an expensive restructuring process — the Debtors, IHCo and the Secured Noteholders share a strong desire to implement the Plan in the most efficient and least costly restructuring process available. The parties explored multiple implementation alternatives, including schemes of arrangement in Bermuda and the United Kingdom with accompanying chapter 15 proceedings, but determined that a single-hearing chapter 11 case was the least costly option that would provide the greatest finality to the restructuring transactions.
Additionally, the timeline proposed in these chapter 11 cases would substantially marry the effective date of the NSNCo restructuring with the effectiveness of the larger Seadrill Limited restructuring. Accordingly, IHCo and the Secured Noteholders insisted on pursuing a potential one-day chapter 11 mechanism….
The Debtors have received overwhelming support for the Plan, which has been accepted by 99.99 percent in aggregate principal amount of Secured Notes Claims who voted and holders of approximately 100% in aggregate amount of outstanding Class 7 Interests."
The scheduling motion further states, "The Plan embodies a restructuring transaction that, among other things, provides that:
- holders of Allowed Secured Notes Claims will receive 65% of pro forma equity in NSNCo, with holders of Allowed Interests in NSNCo retaining the remaining 35%;
- the parties agree to new corporate governance arrangements for NSNCo, which are reflected in the Governance Term Sheet attached to the Disclosure Statement as Exhibit D;
- the issuance of the 2026 New Secured Notes to holders of Allowed Secured Notes Claims in principal amount equal to the amount of their Secured Notes Claims (without giving effect to any premium that may have become due and payable prior to the Petition Date), with such Secured Noteholders having a first priority right to fund any additional liquidity needs;
- up to $50 million of NSNCo cash will be used to redeem a portion of the 2026 New Secured Notes at par upon full repayment of an intercompany loan from NSNCo to the SeaMex Group, subject to certain minimum post-transaction liquidity requirements;
- pursuant to a new management services agreement, Seadrill Management Ltd. ('Seadrill Management') and/or certain of its affiliates will continue to operate the SeaMex Group’s assets;
- Seadrill Management and/or certain of its affiliates will enter into a new management services agreement with NSNCo to provide management services to the NSNCo Group;
- the Secured Noteholders will release all existing guarantees and security in and claims against the Seadrill Limited Debtors in the Seadrill Limited Cases;
- Allowed Other Secured Claims and General Unsecured Claims will be Reinstated, receive payment in full in Cash, or otherwise be Unimpaired under the Plan; and
- Allowed Other Priority Claims will be paid in full in cash.
The RSA also provided for the support for the Old SeaMex restructuring by certain of the Secured Noteholders, in their capacity as Old SeaMex’s funded debt creditors. Specifically, pursuant to the RSA, NSNCo agreed to commence a consent solicitation process to amend certain provisions of the Secured Notes Indenture to allow NSNCo to use net realization proceeds that have not previously been deemed to constitute “Excess Proceeds” under the Secured Notes Indenture for reorganization expenses and to advance funds by way of loans or other investments in the form of debt to Old SeaMex and its successors and its and their respective subsidiaries to meet their ongoing operating and administrative needs. At the close of solicitation on July 9, 2021, approximately 80% of the Secured Noteholders consented to the proposed amendment.
Key terms of the Old SeaMex restructuring envisaged by the RSA and are more fully described in the Disclosure Statement included:
- a refinancing of the SeaMex Group’s previous senior secured bank debt facility (the 'SeaMex Credit Facility') by the issuance of new senior secured notes; and
- an offer by NSNCo and certain of its subsidiaries to purchase the assets of Old SeaMex out of provisional liquidation, in exchange for the release of all or substantially all of the subordinated debt owed by Old SeaMex and certain of its subsidiaries to NSNCo and certain of its subsidiaries, and a novation of Old SeaMex’s guarantee of the SeaMex Credit Facility (as refinanced by the new senior secured notes referred to above)."
The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement):
- 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 (“Secured Notes Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $611,055,158.10 and estimated recovery is 100%. Each Holder will receive its Pro Rata share of: (i) the Reorganized NSNCo Equity Issuance; and (ii) the 2026 New Secured Notes.
- Class 4 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 5 ("Intercompany Claims") is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan.
- Class 6 ("Intercompany Interests") is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan.
- Class 7 ("Interests in NSNCo") is impaired and entitled to vote on the Plan. The aggregate amount of claims is N/A and estimated recovery is 35%. Each Holder will retain its Allowed Interest in NSNCo, subject to dilution on account of the Reorganized NSNCo Equity Issuance.
Proposed Key Dates
- Voting Record Date: December 8, 2021
- Solicitation Launch: December 8, 2021
- Voting Deadline: January 7, 2022
- Objection Deadline: January 7, 2022
- Petition Date: January 11, 2022
- Confirmation Hearing: January 12, 2022
The following exhibits were attached to the Disclosure Statement:
- Exhibit A: Plan of Reorganization
- Exhibit B: RSA
- Exhibit C: Corporate Organizational Chart
- Exhibit D: Governance Term Sheet
- Exhibit E: Financial Projections
- Exhibit F: Equity Registration Form
On January 11th, the Debtors filed a Plan Supplement [Docket No. 33] which attached the following exhibits:
- Exhibit A: Byelaws
- Exhibit A-1: Redline to Version Posted December 23, 2021
- Exhibit B: Identities of the Members of the New Board
- Exhibit C: Schedule of Retained Causes of Action
- Exhibit D: Amended Secured Notes Indenture
- Exhibit D-1: Redline to Version Posted December 23, 2021
- Exhibit E: Description of Transaction Steps
- Exhibit E-1: Redline to Version Posted December 23, 2021
- Exhibit F: New SeaMex MSA
- Exhibit F-1: Redline to Version Posted December 23, 2021
- Exhibit G: Services Agreement
- Exhibit G-1: Redline to Version Posted December 23, 2021
- Exhibit H: Schedule of Assumed Executory Contracts and Unexpired Leases
- Exhibit I: Schedule of Rejected Executory Contracts and Unexpired Leases
- Exhibit J: Shareholder Agreement
- Exhibit J-1: Redline to Version Posted December 23, 2021
On January 11th, the Debtors’ claims agent notified the Court of Plan voting results [Docket No. 7], which were as follows:
- Class 3 (“Secured Notes Claims”): 56 claim holders, representing $425,488,176.00 (or 99.995%) in amount and 98.25% in number, accepted the Plan. 1 claim holder, representing $22,372 (or 0.005%) in amount and 1.75% in number, rejected the Plan.
- Class 7 (“Interests in NSNCo”): [Sealed] claim holders, representing 100% in amount, accepted the Plan.
Events Leading to the Chapter 11 Filing
The Disclosure Statement provides: “The markets for oil and natural gas liquid have historically been volatile. In 2014, the oil and gas industry entered what has become a sustained down cycle that was brought on by multiple factors, including declining commodities prices. As previously noted, oil prices peaked in June 2014 with the Brent price of crude oil at $115/barrel before declining to $28/barrel by January 2016. Although prices partially recovered over the years that followed, a measure of volatility continued even through the partial recovery and the industry did not recover as strong in 2018 and 2019 as predicted and forecasted at the time of the Prior Chapter 11 Cases. Seadrill has not been immune to the effects of the market decline.
Following the decline in oil prices from 2014, the Debtors’ customers have significantly reduced their capital spending budgets, including the cancellation or deferral of existing programs. Declines in capital spending levels, together with the oversupply of rigs from newbuild deliveries, resulted in significantly reduced day rates and utilization that led to one of the most severe downturns in the industry’s history.
The first quarter of 2020 brought two unprecedented challenges for the oil industry generally. First, the COVID-19 outbreak, which began in China in late 2019, continued to spread. This spread culminated in the World Health Organization declaring COVID-19 a global pandemic on March 11, 2020. From that time, the COVID-19 crisis put substantial downward pressure on the price of oil as demand for energy decreased due to a reduction in energy usage resulting from factories shuttering and travel largely ceasing worldwide. As a result of the COVID-19 pandemic, global oil demand in the second quarter of 2020 was reduced by 16.4 million barrels per day.
Combined with the pandemic, the oil market also faced a price war between the Organization of the Petroleum Exporting Countries ('OPEC') and Russia. The OPEC-Russia oil price war which began in March 2020 and lasted approximately one month led to over-supply at the exact same time that demand was severely retracting as a result of COVID-19. A deal was eventually brokered, and with 2021 Brent crude prices remaining above $50 per barrel, crude markets are returning to pre-COVID-19 prices.
As a result of the global market and low oil prices, many of the oil majors have significantly cut their 2020 capital expenditures. Such cutbacks have resulted in reductions in exploration programs and delays in the sanctioning of development programs, which has led to cancelled or deferred tenders, contract terminations and renegotiations of existing contracts. In turn, this has caused an oversupply of rigs and, consequently, reduced day-rates and rig utilization rates and lowered revenues for offshore drilling contractors….
Accordingly, Seadrill determined that it would not be competitive in today’s challenging offshore drilling environment without a deleveraged balance sheet to match that of its competitors. An out-of-court transaction never materialized into a restructuring plan suitable to Seadrill’s business enterprise and key stakeholders.
Negotiations with Key Stakeholders.
While Seadrill implemented various initiatives to reduce costs and increase efficiency in response to the sustained downward market conditions, Seadrill recognized the need early on to examine comprehensive restructuring solutions and sought outside strategic advice beginning in early 2020. Seadrill determined that in the context of market conditions applicable from March 2020 onwards, it could require a more comprehensive restructuring solution to best position Seadrill and NSNCo for the future and that this would be in the best interests of Seadrill, NSNCo, and its stakeholders as a whole. Accordingly, Seadrill began to focus on exploring a potential restructuring transaction that would provide increased liquidity runway and deleveraging, consistent with its business plan.
Seadrill thereafter commenced discussions with its own creditor constituencies regarding a broader and consensual restructuring. At the same time, NSNCo commenced initial discussions with creditor constituencies to explore potential out-of-court transactions. Although these efforts were constructive, an out-of-court transaction presented certain challenges, including the ability to obtain the requisite level of support needed to effectuate any such transaction and the ongoing risks associated with the deteriorating commodity price market.
These transactions continued to be kept under close review through the second quarter of 2020 and NSNCo remained open to implementing an out-of-court transaction if feedback from its key stakeholders, including the Ad Hoc Group, indicated that this might represent a feasible option in the best interests of NSNCo and its stakeholders. To that end, NSNCo negotiated with the Ad Hoc Group and its advisors regarding a standalone restructuring strategy for the proposed treatment of the Secured Notes….
To preserve liquidity as discussions with the Ad Hoc Group continued, on January 15, 2021 NSNCo elected not to pay approximately $11.2 million in coupon payments related to the Secured Notes. The NSNCo board of directors voted and approved such actions after discussing the interest payments with NSNCo’s advisors. Before the expiration of the applicable grace periods, NSNCo entered into forbearance agreements pursuant to which certain members of the Ad Hoc Group and other stakeholders agreed to waive any default or event of default and to forbear from the exercise of certain rights and remedies, as applicable, with respect to the missed interest payment and certain other missed interest and charter payments by the Seadrill Group.
Such forbearances allowed NSNCo and the Ad Hoc Group to continue to negotiate the terms of a comprehensive restructuring throughout the first half of 2021. Continued negotiations bore fruit and on July 2, 2021, NSNCo and the Ad Hoc Group, among others, signed the RSA."
Seadrill New Finance
12.0% Senior Secured Notes due 2025. As of the date hereof, the Debtors are liable for approximately $557.0mn aggregate principal amount of aggregate funded debt obligations arising under the Secured Notes (without giving effect to any premium that may have become due and payable prior to the Petition Date). The Secured Notes were issued on July 2, 2018 (ie on the effective date of the first restructuring in 2018) in an aggregate amount of $880.0mn.
At filing in February 2021, the Seadrill Limited debtors had the following indebtedness:
About the Debtors
Seadrill New Finance Ltd engages in the new secured notes business. The company was founded in 2018 and is based in Hamilton, Bermuda. Seadrill New Finance Ltd operates as a subsidiary of Seadrill Limited who filed bankruptcy 2/20/21. Seadrill Limited, an offshore drilling contractor, provides offshore drilling services to the oil and gas industry worldwide. It operates in three segments: Floaters, Jack-up Rigs, and Other. The Floaters segment offers drilling, completion, and maintenance services for offshore exploration and production wells. Its drilling contracts relates to semi-submersible rigs and drill ships for harsh and benign environments in mid, deep, and ultra-deep waters. The Jack-up Rigs segment provides drilling, completion, and maintenance services for offshore exploration and production wells. Its drilling contracts relate to jack-up rigs for operations in harsh and benign environment in shallow waters. The Other segment offers management services to third parties and related parties. The company operates a fleet of 35 drilling units, including 7 drill ships, 12 semi-submersible rigs, and 16 jack-up rigs. It serves oil super-majors, state-owned national oil companies, and independent oil and gas companies. Seadrill Limited was founded in 2005 and is based in Hamilton, Bermuda."
Simplified Corporate Structure Chart (see Exhibit C of Disclosure Statement for Full Chart)
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