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December 15, 2020 – The Debtors’ filed their second amended Chapter 11 Plan of Reorganization and a related Disclosure Statement, showing changes to the versions filed on December 11, 2020 [Docket Nos. 815 and 816, respectively].
Substantially all of the amendments in the revised Plan documents relate to ongoing disputes between the Debtors (advocating positions the Debtors share with the "Ad Hoc Group," defined below) and the Debtors' prepetition senior lenders fronted by Citibank N.A. (the "RCF Agent") in what is shaping up as an epic battle between lender groups pitting seniority against size.
The RCF Agent represents holders of senior bank debt issued under the Debtors' prepetition revolving credit facility (the “Revolving Credit Facility” and the "RCF Lenders," respectively). That is $581.0mn of top-of-the-waterfall senior debt (which the revised Disclosure Statement now concedes is more properly $623.2mn, with the inclusion of $41.2mn of letters of credit issued under that facility). That heft, however, pales in comparison to the Debtors' $6.5bn of bond debt, the majority of which lines up behind the Ad Hoc Group (72% in amount signing up to the RSA).
From the outset, the RCF Agent (and holders of "Credit Facility Claims" stemming from RCF debt) has objected to the fundamental structure of the Debtors' Plan which equitizes ALL of the Debtors' prepetition funded debt; that of senior lenders and noteholders alike. Senior lenders have howled foul at being equitized and for the failure of the Plan to respect their structural seniority; insisting that at least some of their recovery be in the form of takeback debt. That approach was not, however, adopted by the Debtors or by the ad hoc group of holders of the Debtors' Senior Notes (the “Ad Hoc Group”) with whom the Debtors ultimately executed a restructuring support agreement (the "RSA").
Even worse for the RCF Lenders than being treated as a common bondholder, however, is (i) being excluded from the handsome fees that the Ad Hoc Group Group has awarded itself for its roles in providing DIP financing, exit financing and backstopping a rights offering (notwithtstanding, the RCF Agent argues, superior alternatives available from the RCF Lenders as to each) and (ii) having to accept a Plan which over-values the Debtors and leaves RCF Lender with an equity holding (32.5%) that based on a more rationale valuation (and reality) will not make it whole [as discussed further below, the RCF Agent believes that current trading prices for bond and bank debt imply a valuation of approximately $1.0bn, which would require that the RCF lenders be left with 54.7% of the emerged Debtors' equity].
The Debtors' "unwavering pursuit of their fatally flawed prepetition deal with the ad hoc group behalf of the Ad Hoc Group," the RCF Agent sums up, "is untethered to the constraints of the Bankruptcy Code."
"Such a step-down of the priority of the Credit Facility Claims into Post-Emergence Parent Equity, which is a security that would be shared with structurally junior holders of Senior Notes (the 'Noteholders')," the RCF Agent argues "directly contravenes long-standing Supreme Court precedent."
In reflecting on why the Debtors and the Debtors' management have pursued the Plan "in a continued abdication of their fiduciary duties to all creditors," the RCF Agent muses that "it is difficult to discern with precision the Debtors’ motivation…", before surmising that the Plan's management incentive plan (the "MIP," which is set to to leave up to 10% of the Debtors' emerged equity on the table for management) might have something to do with it, the proposed MIP adding insult to injury by further diluting the RCF Lenders' already speculative equity recovery and (as discussed below) contravening terms in the RSA.
The presentation of the now heavily amended Disclosure Statement, page after page of objecting language which the Debtors have inserted "verbatim at the request of the RCF Agent," is nothing short of extraordinary. The Debtors' non-engaging response at each turn ("the Debtors disagree with the RCF Agent’s position and reserve all rights and counterarguments with respect thereto….see Debtors’ Reply [Docket No. 814]") is equally so.
It is difficult not to see the inclusion of the language, and the Debtors' failure to aggressively counter the RCF Agent's withering attacks on the Debtors' DIP facility, exit facility, rights offering, settlement negotiations, valuation efforts, etc (ie the fundamental pillars of the Debtors' Plan which the RCF Agent refers to as "another step in the Debtors’ unwavering pursuit of their fatally flawed prepetition deal with the ad hoc group") as indicative of anything less than a complete breakdown of negotiations (if they ever existed) and the Debtors' now focus on both (a) convincing Judge Marvin that theirs is the only viable Plan and (b) preparing to deter and defend the litigation that the RCF Agent promises is coming.
Get the necessary support of multiple classes (the bondholders occupy five and general unsecureds are set for a 100% recovery in a sixth); ignore the apoplectic anger of the dissenting Class 3 (where the RCF Lenders hold "Credit Facility Claims"); leverage the now largely embedded Plan pillars relating to financing; push standard Chapter 11 arguments relating to the need for speed and resolution; and have a watertight presentation of solicitation material…seems to be the current approach of the Debtors and the size-emboldened Ad Hoc Group. Whatever happens (and it is not impossible, or even unlikely, that the RCF Lenders will end up with a larger equity slice and/or allowed participation (and fees) in the proposed exit financing and rights issue), it is hard to not see the Ad Hoc Group emerging as a winner for its efforts to lock in fees at each stage and push valuations (including by it now admits completely ignoring the relevance of debt trading prices) that would leave the RCF lenders with a smaller equity recovery (and noteholders with a correspondingly larger one) in respect Debtors unencumbered by the takeback debt that the RCF Lenders had insisted on. Judge Isgur may trim the winnings, but one way or another they will be considerable; and a validation of hardball tactics employed by noteholders who had the size to allow that approach.
At the request of the RCF Agent, the Debtors now include in the Disclosure Statement the RCF Agents' "verbatim" perspective on the Plan as follows:
- On the DIP facility: "Although the DIP facility offered by the RCF Lenders (the 'Proposed RCF DIP Facility') was less expensive and offered a letter of credit subfacility, the Debtors ultimately selected the DIP Facility because it was being provided by the Ad Hoc Group, the Debtors’ preferred partner for an exit facility and all-equity capital structure."
- On the exit facility: "On December 10, 2020, the RCF Agent delivered a second exit financing proposal….Like the Exit Facility, the Alternate RCF Exit Proposal would raise $500 million of cash for the Debtors in return for first lien securednotes, with a seven-year maturity, bearing interest at 8.25% in cash, 10.25% (with 5.125% in cash and 5.125% PIK), or 12% PIK, at the Debtors’ election. As a backstop fee, backstop parties to the Alternate RCF Exit Proposal would receive a 6.0% fee payable in kind (i.e., $20 million less than the $50 million premium contemplated by the Exit Facility) after they re-advance $20 million in a cash commitment fee that would bepaid into escrow (similar to the fee payment structure in the RSA), in addition to the same 2.7% of the reorganized equity. The “stapled equity” consideration in the Alternate RCF Exit Proposal, however, is 25%, or 500 basis points less [or $125.0mn] than the 30% contemplated by the Exit Facility….Prior to the Petition Date, the Debtors did not engage in discussions with the RCF Agent or the RCF Lenders on a proposal for an exit facility. After delivery of the First RCF Exit Proposal, the Debtors still did not approach the RCF Agent to discuss alternatives to the Exit Facility, despite the RCF Agent having indicated in it its objection to the DIP Motion that parties to the Credit Facility would be willing to provide exit financing on the same terms as the exit financing under the Rights Offering, except with less 'stapled equity'."
- On the prospect of litigation: "Indeed, as of the date hereof, the Debtors expect there to be significant objections to confirmation of the Plan, which will result in litigation related to the Plan. Among the confirmation issues raised in the RCF Agent Disclosure Statement Objection (which the RCF Agent made clear were not all of its potential objections to confirmation), are that the Plan’s treatment of claims in Class 3 (Credit Facility Claims) is not fair and equitable as required by section 1129(b) of the Bankruptcy Code, that the Plan impermissibly disregards the separateness of the Debtors to effectuate an impermissible de facto substantive consolidation, and that the Plan improperly disregards the structural seniority of the Credit Facility Claims."
- On the Rights Offering and value transfer to Backstop Parties: "Backstop Parties and other Holders of Senior Notes that participate in the Rights Offering will receive, in consideration for their participation in the Rights Offering, 30.0 percent of New Valaris Equity (as defined below), which, under the current midpoint enterprise value of the Valuation Analysis of $2.475 billion, would be worth $761.4 million, plus the $50 million Backstop Premium (as defined below). Backstop Parties will receive an additional 2.7 percent of the total issued and outstanding New Valaris Equity in exchange for the Backstop Commitment, which, under the current midpoint enterprise value of the Valuation Analysis would be worth $68.5 million. In total, therefore, Backstop Parties and other Holders of Senior Notes will receive $1.38 billion worth of value in the form of New Secured Notes (including the Backstop Premium), Participation Equity (as defined below), and Additional Backstop Equity (as defined below) for the $500 million in new money that is to be raised in the Rights Offering.
- On valuation and relevance of bond trading values: "The Debtors, under their own misplaced legal theory that they could law fully satisfy the structurally senior Credit Facility Claims with Post-Emergence Parent Equity absent the consent of the RCF Parties, cannot do so with equity worth less than 100% of the amount of such claims. Here, because under the Proposed Plans Credit Facility Claims would receive a fixed percentage of Post-Emergence Parent Equity, if the actual valuation is any number less than $2.1 billion (after giving effect to the dilution from the Management Incentive Plan, as discussed below), the Credit Facility Claims would receive value under the Proposed Plans of less than 100%. Although the Valuation Analysis indicates a midpoint Asserted Enterprise Value of approximately $2.475 billion, the Disclosure Statement fails to disclose that Asserted Enterprise Value is not supported by current trading prices of the Credit Facility Claims or Senior Notes Claims, which indicate an aggregate enterprise value for the Debtors of at most $1 billion. At the enterprise value reflected by current trading prices (and assuming Credit Facility Claims are only $581 million), the RCF Parties would have to receive 54.7% of the Post-Emergence Parent Equity in order to receive a full recovery on their Credit Facility Claims. The implications of a valuation in that range are manifest: A fixed recovery of 32.5% of the Post-Emergence Parent Equity would be worth significantly less than the full value of the Credit Facility Claims."
The Debtors (on their own volition) have now added the following Disclosure and table: "As described in Exhibit F [the Valuation Analysis], the Debtors did not rely upon debt trading prices of the Debtors’ prepetition indebtedness in preparing their valuation. To the extent such information is helpful to Holders of Claims and Interests, below is a table including the trading prices of the Debtors’ debt as of December 9, 2020:
- On Management Incentive Plan ("MIP") and Dilution: "The Debtors will reserve between 5% to 10% of New Valaris Equity, determined on a fully diluted and fully distributed basis, for participants under the Management Incentive Plan. Under the current midpoint enterprise value of the Valuation Analysis of $2.475 billion, the value of that equity is between $123.8 and $247.5 million.
Although the RSA only identified that New Valaris Equity would dilute the recovery of the Senior Notes, the Debtors have elected to have the New Valaris Equity dilute the recoveries of the Senior Notes and the Credit Facility Claims.
Under the RSA only the Senior Notes Distributable Pool was subject to dilution on account of the Management Incentive Plan while the recovery afforded on account of Credit Facility Claims was not. However, under the Plan, the Credit Facility Distributable Pool is subject to dilution on account of the Management Incentive Plan."
The Second Amended Disclosure Statement [Docket No. 816] provides, “Since the Petition Date, in addition to obtaining approval of the DIP Facility, the Debtors have continued to build consensus with the Holders of the Senior Notes for the deal reflected in the RSA. Following the Petition Date, additional holders of senior notes signed joinders to the RSA, resulting in holders of approximately $1.5 billion of additional bond debt signing the RSA. In total, 72 percent in aggregate principal amount of Senior Notes signed the RSA.
The Debtors also developed the RSA into the Plan, which provides as follows:
- all priority and administrative Claims will be rendered Unimpaired;
- Holders of Credit Facility Claims will share in a recovery of 32.5 percent of (1) the Common New Valaris Equity and, depending upon the Implementation Mechanisms utilized in England and Wales, (2) a $125,000 Cash pool to be split among all Holders of Claims and Interests receiving Common New Valaris Equity (the ‘Stapled Cash Consideration’);
- Holders of Senior Notes Claims will receive Subscription Rights and share in an equity pool comprised of 34.8 percent of the Common New Valaris Equity and, depending on the Implementation Mechanisms utilized in England and Wales, the Stapled Cash Consideration;
- in addition to the treatment provided to the Senior Notes, Holders of Pride Notes and Legacy Rowan Notes will receive an aggregate $1.25 million and $23.75 million payment in Cash, respectively;
- the subscribers of the New Secured Notes pursuant to the Rights Offering will receive 30 percent of the Common New Valaris Equity, with additional backstop fees discussed further below;
- Holders of General Unsecured Claims will either have their Claims Reinstated or receive payment in full in Cash within a specified period post-emergence;
- the Newbuild Contracts will be rejected and Holders of Newbuild Claims will receive their liquidation recovery, unless otherwise agreed between such Holders and the Debtors and with the consent of the Required Consenting Noteholders; and
- depending on the Implementation Mechanism and level of shareholder support for the Restructuring Transactions, shareholders may receive (a) the New Warrants; (b) the New Warrants and Common New Valaris Equity; or (c) no distribution.
The formulation of the RSA and Plan is a significant achievement for the Debtors in the face of historic commodity price declines and a depressed operating environment. The Debtors strongly believe that the Plan is in the best interests of the Debtors’ estates and represents the best available alternative at this time. Given the Debtors’ core strengths, including their modern fleet, highly skilled workforce, global reach, and successful operating and safety track record, the Debtors are confident they can efficiently implement the restructuring set forth in the RSA and Plan to ensure their long-term viability and success. For these reasons, the Debtors strongly recommend that Holders of Claims and Interests entitled to vote to accept or reject the Plan vote to accept the Plan.”
The following is an amended summary of classes, claims, voting rights and expected recoveries showing highlighted changes (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. The aggregate amount of claim is N/A and expected recovery is N/A.
- Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claim is N/A and expected recovery is N/A.
- Class 3 (“Credit Facility Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claim is $582.1mn to $623.3mnFN and expected recovery is at least 100%. Holder shall receive its Pro Rata share (as determined as a percentage of all Allowed Credit Facility Claims) of the Credit Facility Distributable Pool. This amount includes principal and prepetition accrued interest. FNThis amount also includes $41.2 million in outstanding, undrawn letters of credit that represent contingent claims against the Debtors.
- Class 4 (“Pride Bond Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claim is $439.2mn and expected recovery is 25.7%. Holder shall receive its Pro Rata share of (i) 8.807 percent of (x) the Senior Notes Distributable Pool and (y) the Subscription Rights, and (ii) an aggregate $1.25 million payment in Cash.
- Class 5 (“Ensco International Bond Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claim is $114.2mn and expected recovery is 17.2%. Holder shall receive its Pro Rata share of 1.549 percent of (x) the Senior Notes Distributable Pool and (y) the Subscription Rights.
- Class 6 (“Jersey Bond Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claim is $863.5mn and expected recovery is 29.6%. Holder shall receive its Pro Rata share of 20.209 percent of (x) the Senior Notes Distributable Pool and (y) the Subscription Rights.
- Class 7 (“Valaris Bond Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claim is $3.1bn and expected recovery is 14.9%. Holder shall receive its Pro Rata share of 36.835 percent of (x) the Senior Notes Distributable Pool and (y) the Subscription Rights.
- Class 8 (“Legacy Rowan Bond Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claim is $2.2bn and expected recovery is 20.0%. Holder shall receive its Pro Rata share of (i) 32.600 percent of (x) the Senior Notes Distributable Pool and (y) the Subscription Rights, and (ii) an aggregate $23.75 million payment in Cash.
- Class 9 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claim is $255.5mn and expected recovery is 100%. Holder shall receive payment in full in cash within ninety days after the later of (i) the Effective Date and (ii) the date such Allowed General Unsecured Claim comes due under applicable law or in the ordinary course of business in accordance with the terms and conditions of the particular transaction or agreement giving rise to such Allowed General Unsecured Claim.
- Class 10 (“Newbuild Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claim is $358.8mn and expected recovery is 0.2%. Holder shall receive its Liquidation Recovery promptly after the date such Newbuild Claim is Allowed, but in any event no later than ten days after such date.
- Class 11 (“Intercompany Claims”) is impaired/unimpaired, deemed to accept/reject and not entitled to vote on the Plan. The aggregate amount of claim is N/A and expected recovery is N/A.
- Class 12 (“Intercompany Interests”) is impaired/unimpaired, deemed to accept/reject and not entitled to vote on the Plan. The aggregate amount of claim is N/A and expected recovery is N/A.
- Class 13 (“Existing Interests in Valaris”) is impaired and entitled to vote on the Plan. The aggregate amount of claim is N/A and expected recovery is $11.0mn. Treatment: (i) If Holders as a class vote in favor of the Plan each Holder of an Allowed Existing Interest in Valaris shall receive its Pro Rata share of the New Warrants; or (ii) If Holders as a class do not vote in favor of the Plan, no New Warrants shall be issued to any Holder of Allowed Existing Interests in Valaris.
- Class 14 (“Section 510(b) Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claim is $0 and expected recovery is 0%.
The Disclosure Statement [Docket No. 816] attached the following exhibits:
- Exhibit A: Plan of Reorganization
- Exhibit B: RSA
- Exhibit C: Corporate Organization Chart
- Exhibit D: Liquidation Analysis
- Exhibit E: Financial Projections
- Exhibit F: Valuation Analysis
Proposed Key Dates:
- Voting Deadline: February 3, 2021
- Plan Objection Deadline: February 3, 2021
- Confirmation Hearing: Date February 11, 2021
As of the Petition Date, the Debtors had approximately $7.1bn in aggregate funded debt obligations. These obligations arise under the Revolving Credit Facility and the Senior Notes. The chart below summarizes the Debtors’ prepetition capital structure. as to the RCF, the Disclosure Statement now adds (without amending the table below): "As of the Petition date, approximately $623.3 million, consisting of approximately $582.1 million in outstanding advances and approximately $41.2 million in outstanding letters of credit, was outstanding under the Revolving Credit Facility."
- Luminus Management LLC: 17.96% (Class A Shares)
- The Vanguard Group Inc.: 10.09% (Class A Shares)
- BlackRock Inc.: 10.04% (Class A Shares)
- Contrarius Investment Management Ltd.: 9.36% (Class A Shares)
- Odey Asset Management Group Ltd.: 5.00% (Class A Shares)
- Ensco International Incorporated: 100% (Class B Shares)
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Baksht Declaration”), Jonathan Baksht [Docket No. 23] the Debtors’ Executive Vice President and Chief Financial Officer, detailed the events leading to Valaris’s Chapter 11 filing. The Baksht Declaration provides: “Last spring, global events forced the Debtors to quickly reevaluate their financial position and immediate next steps. The economic impact of the COVID-19 pandemic took its toll with daily demand for global oil dropping approximately 18 million barrels a day or 18% per the International Energy Agency, while supply continued to increase as a result of a dispute between the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia. As a result, the Company’s customers have significantly reduced their planned capital expenditures, with many seeking to cancel or defer projects, which has led to terminations or renegotiations of several existing contracts.
Since the beginning of March 2020, approximately ten existing contracts have been canceled, and the Debtors have agreed to modify several others. At the beginning of this year, the Debtors did not expect to be filing for chapter 11. The Debtors began 2020 with approximately $1.6 billion of undrawn capacity under their revolving credit facility, which was anticipated to provide sufficient liquidity to fund the Debtors’ operations for the foreseeable future. Moreover, the Debtors had financial flexibility to address their capital structure pursuant to the terms of their debt documents. In late 2019 and early 2020, the Debtors engaged advisors — including Kirkland & Ellis LLP and Slaughter and May as US and UK counsel and Lazard Frères & Co. LLC (‘Lazard’) as investment banker — to consider out-of-court liability management transactions to reduce leverage and capture discount. COVID-19, however, shifted the economic landscape for the Debtors. Ultimately, it became clear that the Debtors’ leverage was unsustainable in this new environment.”
Liquidation Analysis (see Exhibit D of Disclosure Statement [Docket No. 816] for notes)
About the Debtors
According to the Debtors: “Valaris plc (NYSE: VAL) is the industry leader in offshore drilling services across all water depths and geographies. Operating a high-quality rig fleet of ultra-deepwater drillships, versatile semisubmersibles and modern shallow-water jackups, Valaris has experience operating in nearly every major offshore basin. With an unwavering commitment to safety and operational excellence, and a focus on technology and innovation, Valaris was rated first in total customer satisfaction in the latest independent survey by EnergyPoint Research – the ninth consecutive year that the Company has earned this distinction. Valaris plc is an English limited company (England No. 7023598) with its corporate headquarters located at 110 Cannon Street, London EC4N 6EU.”
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