Offshore Drilling Giant Seadrill Files For Bankruptcy

Seadrill Ltd., the London-based offshore driller controlled by billionaire Norwegian shipping magnate John Fredriksen, filed bankruptcy protection in the Southern District of Texas after working out a deal with most of its senior lenders to inject $1 billion of new money into the company pursuant to a pre-arranged plan of reorganization.  The filing was largely expected and came just a couple of days before the company"s $843 million 5.625% Notes of 2017 came due. 

According to Bloomberg, Fredriksen spent more than 18 months trying to strike an agreement with creditors to restructure the industry’s biggest debt-load after crude’s collapse curbed demand for Seadrill’s services.  Daily leases for the company’s rigs, which once commanded up to $800,000, have dropped to around $200,000 as cheap oil from U.S. shale drilling continues to flood the market.

“The deal gives us a great liquidity cushion,” allowing Seadrill to survive the “mother of all downturns,” Chief Executive Officer Anton Dibowitz said by phone. The new capital is “underpinned” by top shareholder Hemen Holding Ltd. and more than 40 percent of bondholders support the plan along with 97 percent of Seadrill’s secured bank lenders, he said. Dibowitz expects more bondholders to sign up to the deal.

Bondholders are currently predicting their ultimate recovery is worth about 25 cents on the dollar as of today.

Of course, Seadrill is just the latest bankruptcy filing in an industry that has been devastated by persistently weak commodity prices.

In late July, Ocean Rig UDW Inc. filed for bankruptcy protection in the U.S. Hercules Offshore Inc., GulfMark Offshore Inc., Toisa Ltd. and Vantage Drilling Co. have also spent time in bankruptcy court since oil and gas prices cratered.

Paragon Offshore PLC emerged from Chapter 11 in August but was forced back into bankruptcy after it was unable to transfer two rigs to its reorganized entity. Its successor, Paragon Offshore Ltd., isn’t under bankruptcy protection and was unaffected by Paragon Offshore PLC’s new filing.

Under the proposal, lenders will extend the maturity on $5.7 billion in debt, with no amortization payments due until 2020.  Meanwhile, the company will get a new $1 billion capital injection which will come in the form of $860 million in secured notes and $200 million in equity.  If bondholders ultimately sign on to the current deal, they would be converted into a 15% pro forma ownership stake in the restructured company.  Here is a brief recap of the reorg plan from Seadrill"s presentation:

After the restructuring is complete, Seadrill"s capital structure should look something like this:

Meanwhile, some very expensive lawyers at Kirkland and Ellis are predicting that the whole process should be complete by next summer.

And, here are the obligatory "hockey-stick" financials that accompany most bankruptcy disclosure statements..."everything should be awesome" again in just a couple of years.

Finally, here is a list of the advisors who will be leeching millions in fees from the bankruptcy estate throughout the process.

The Company has engaged Kirkland & Ellis LLP as legal counsel, Houlihan Lokey, Inc. as financial advisor, and Alvarez & Marsal as restructuring advisor. Slaughter and May has been engaged as corporate counsel, and Morgan Stanley served as co-financial advisor during the negotiation of the restructuring agreement. Advokatfirmaet Thommessen AS is serving as Norwegian counsel. Conyers Dill & Pearman is serving as Bermuda counsel.

As always, we very much look forward to reviewing future expense reports from these folks throughout the bankruptcy process.

Shocking Admission From NY Bankruptcy Judge: "Chapter 11, 15 Filings Have Exploded"

A stunning soundbite was captured by a Bloomberg reporter during last week"s event at the American Bankruptcy Institute. According to judges speaking at an ABI conference Thursday in Manhattan, the U.S. Bankruptcy Court for the Southern District of New York is seeing a sharp rise in cases this year, with Chapter 11 and Chapter 15 filings outpacing national averages.

"Chapter 11s and Chapter 15s have exploded" said U.S. Bankruptcy Judge Shelley Chapman, speaking at American Bankruptcy Institute event, cited by Bloomberg reporter Tiffany Kary.

The numbers for the bankruptcy court which serves Manhattan are, frankly, horrifying: Chapter 11s have tripled in the first quarter of the year, while Chapter 15s for companies seeking U.S. aid for a reorganization in a foreign court have increased sevenfold, Chapman added.

What makes New York data so dramatic is that the region"s bankruptcy filings contrast with national data, that show Chapter 11 filings are down slightly, Judge Carla Craig from Eastern District of New York said.

New York is not alone it seems: As Bloomberg adds, Judge Brendan Shannon from Delaware said he has also seen an uptick in Chapter 11s and Chapter 15s, though not as marked as in New York. Shannon also sees trend in retail and energy sector bankruptcies continuing, based on current cases .

The culprit? Take one guess:

“The report is that for at least a lot of retailers, it is certainly a difficult, if not flat out impossible environment to operate in,” Shannon said. “We do see more of those cases likely on the horizon.”

And while we appreciate the transfer of business from bricks and mortar retail to online, it is simply impossible that the millions of soon to be laid off legacy retail, minimum-wage workers will find suitable employment in the coming retail bankruptcy tsunami (which will claim the following 11 names next according to Fitch), and which will unleash a tidal wave of bankruptcies first across New York, and soon after, across the entire US. How far this particular destructive tsunami of default will reach, and how fast, will determine just how acute the next recession will be.

Clothing Retailer Rue21 Files For Bankruptcy, Many More On Deck

This time Fitch was right. One month ago the rating agency listed 8 retail names that were most likely to file for bankruptcy next, just over a month later 1 out of the 8 was down, when teen clothing retailer Rue21 filed a prepackaged bankruptcy on Monday night in Pennsylvania bankruptcy court.

In its bankruptcy petition, the company which retained Kirkland & Ellis as legal advisor, Rothschild as financial advisor, and Berkeley Research as its restructuring advisor, listed both assets and liabilities in the range of $1 to $10 billion.

The restructuring process, during which the company will operate as normal, will lead to company"s "transformation into a more focused and highly performing retailer" the company announced in a press release, and added that as part of its restructuring process, it had "entered into a Restructuring Support Agreement (RSA) with certain of its stakeholders that confirms the support of the Debtors" key constituents for the Debtors" restructuring process and contemplates, among other things, an emergence from chapter 11 proceedings in the fall of 2017 with a significantly deleveraged balance sheet.  In particular, lenders holding 96.8% of the Company"s secured term loan, bondholders representing 60.2% of the Company"s issued and outstanding unsecured notes, and the Company"s majority shareholder each executed the Restructuring Support Agreement."

The Company has also reached agreements, subject to the approval of the Court, to obtain up to $125 million in ABL debtor-in-possession financing from its existing ABL lenders and up to $50 million in new money term loan debtor-in-possession financing from a subset of its existing term loan lenders.  This financing is intended to provide the Company with the liquidity necessary to support its ongoing business operations during the financial restructuring process

Melanie Cox, Chief Executive Officer of rue21, said "These actions are being undertaken with the goal of strengthening the Company"s balance sheet, achieving a more efficient cost structure, and concentrating resources on a tighter retail footprint in order to pave the best path forward for rue21. Even in a challenging environment, we are fortunate that rue21 has highly relevant brands, an enthusiastic and loyal customer base, and hundreds of highly performing stores. The agreement with our lenders represents their confidence in rue21"s future success even at a time of significant retail industry change. Looking ahead, I am confident that the outcome of this process will be a stronger and more sustainable rue21 for our customers, vendors and business partners."

The company also noted that last month it began the process of closing approximately 400 underperforming stores in its 1,179 store fleet in order to streamline operations, however it warned that it "may evaluate additional store closings as it continues to manage its real estate lease portfolio."

Rue21’s bankruptcy filing lifts Fitch’s U.S. retail trailing 12-month institutional leveraged loan default rate to 1.7% from 0.9%. An impending bankruptcy from Gymboree would further lift the retail TTM to 2.7%, Fitch said. The rating agency expects a flood of future defaults, and forecasts the retail loan default rate at 9% on roughly $6 billion of defaults, though it concedes that "the fate of Sears Holdings and the resolution of J. Crew Group’s bond exchange could materially alter the projection."

It also noted that the high yield retail default rate is also expected to finish 2017 at 9%, with more than $4 billion of likely defaults

Additional Fitch revised its retail concern list, which now lists eleven retailers on Fitch’s loans and/or bonds of concern lists, which compile issuers with a significant risk of default within the next 12 months, including:

• Sears Holdings


• Gymboree


• Nine West Holdings


• 99 Cents Only Stores


• True Religion Apparel


• Charlotte Russe


• Charming Charlie


• NYDJ Apparel


• Vince.A


• Claire’s Stores


• Chinos Intermediate Holdings (J Crew Group)

Finally putting the 2017 announced store closings in context, here is a chart we showed one month ago. We expect many more names will soon be added to this running total.