Weekly Workout - Bleak Oil, Adios Amigo, Wonder Woman to the rescue

9fin analysis on European stressed, distressed and restructuring activity

In previous iterations of the Workout we opined on industries affected by Covid-19 such as Airlines and Hospitality and whether it will accelerate structural changes. We argued that Covid-induced reductions in activity are not purely cyclical - some habits may change forever.

This week, we turn our focus to the Oil and Gas sector. 

Several Oil & Gas companies had only recently emerged from restructurings driven by the last Oil Price slump in 2015/16. But while that crisis was seen as cyclical in nature, this time they may face a much longer and deeper crisis, as the appetite for funding and M&A has diminished markedly. Exit wells of capital are being spudded and the reservoir of buyers is drying up.

Second round restructurings are happening with signs of stress emerging in some service companies reliant on E&P sector capex spend. KCA Deutag and Premier Oil have agreed restructuring plans with Tullow and Enquest trying hard to avoid full-blown workouts. 

Service providers such as PGS and CGG are building up cash buffers and reducing costs, seeking to prove to investors they are more resilient this time. 

Into Reverse

Premier Oil creditors early this week approved a reverse takeover with Chrysaor. Earlier this year management had hoped that an amend-and-extension coupled with an equity injection would suffice, but the downturn and lack of appetite from equity investors prompted an M&A alternative in conjunction with a debt restructuring. 

As our piece details lenders preferred a cash out exit with some equity upside. Around $2.7bn of gross debt will be repaid with creditors to receive $1.23bn in cash and other liabilities. Assuming cash take-up in full, existing premier shareholders will get 5.5% of MergedCo, with Premier’s creditors receiving 10.6%. Focus shifts to shareholders approval. 

Backed by EIG Global Partners, Chrysaor is an interesting vehicle, acting as a consolidator of North Sea assets. It gains the benefit of a listed vehicle and around £4bn of tax losses.  

RBL refinancing window

Premier is moving its funding model away from bond and bank debt to a $4.5bn borrowing base facility, mostly via a reserve-based lending (RBL) facility. Many of the RBL lenders to MergedCo are common to Chrysaor and Premier, according to sources close to the situation. 

Under an RBL the borrower can borrow the lower of the ‘borrowing base amount’ and the amortising facility amount. It is redetermined twice a year using an agreed projection or banking case, applying the lower of a Loan Life Cover Ratio and Project Life Cover ratio to the DCF of development and producing assets. The facility is repaid from oil and gas revenues. 

The borrowing base varies to reflect changes in a number of assumptions – production forecasts, oil and gas prices, reserves assessments, tax changes, amongst others. 

Oil price forecasts are fed into the model – the ‘price deck’ – typically International deals will use conservative assumptions, rather than forward price curves seen in the US. The banking case is more of a business plan and requires agreement from over two-thirds of lenders. Banks will typically seek at least 70% of the next 12-months production to be hedged, and lower hedges for future years. This provides protection but can limit the upside for producers.

Falling oil prices earlier this year led to a number of producers slashing capex and investment to become cash flow breakeven at around $30 per barrel. RBL lenders were supportive, but with oil prices remaining depressed and range bound, many are taking a closer look at business forecasts and overall lending exposure, according to industry bankers and lawyers. 

In addition, many RBLs are entering their refinancing window, of around 18-months to two years to maturity. A good test of lender appetite may be the unfolding events at Tullow Oil.

Tullow Oil 2025 bonds traded down into teens earlier this year, before rebounding into low 50s after it sold its Ugandan Assets for $575m under a $1bn non-core disposal programme. 

Tullow has $300m of 6.625% July 2021 convertible bonds to refinance and $1.4bn of further bond maturities in 2022 and 2025. But while it may have enough cash or liquidity headroom under the RBL to take out the converts, there is a 18-month liquidity look forward test on the RBL, which suggests that Tullow may need to come up with something more substantive. 

Some brokers are pushing the ‘double-dip’ nature of the converts. Issued out of a separate Jersey vehicle with proceeds on-lent to Tullow Oil Plc. In theory they benefit from the inter-co and a guarantee. But in practice both are unlikely to be triggered, suggested one analyst. 

Notwithstanding, the converts are trading in the 80s, on hopes that they will be taken out, rather than being extended as part of an amend and extend or subject to another debt restructuring. 

Tullow Oil African operations

Tullow’s capital markets day on 25 November could be a must attend. 

Ithaca Energy announced earlier this week that it had completed its RBL redetermination with $1.1bn of availability, allowing sponsor Delek to take a $250m dividend. Further dividends are restricted until oil prices exceed $50 per barrel. 

Fellow North-Sea operator Enquest also faces near term maturities with a $425m senior credit facility due in October and $742m and £155m of senior notes in April 2022. Some analysts suggest it could go the same route as Premier and tap the RBL market. As at the end of the first half Net debt was a manageable $1.31bn giving leverage of 1.8x. 

Oil Service

Companies servicing the Oil & Gas Exploration and Production companies are likely to find the environment tough for at least a couple of years and exploration spending is reined in. 

KCA Deutag neared completion of a second restructuring this week reducing $1.9bn of debt by $1.4bn. Justice Snowden sanctioned the UK Scheme on 4 November. Existing shareholders, including Pamplona, Goldentree, EIG, Blackrock and various Middle Eastern accounts  mostly lenders from the last restructuring will be totally wiped out save for “anti-embarrassment” warrants which kick-in when creditors get 100% recoveries on old debt. 

PGS has seen a dramatic drop in contract revenues in the past two quarters, but has already secured consents from lenders to an amend and extend transaction whereby its $350m RCF ($135m due Sept 20, $215m Sept 23) will be converted into a new TLB carrying the same terms as the existing TLB. In addition, the company will issue a NOK 116.2m three-year convertible bond – mostly backstopped by certain TLB lenders. 

Its peer CGG on Thursday (4 October) is more ambitious with management stating on a conference call their ambitions to refinance its first and second lien bonds in March next year. The 12.5% call premium on the second lien bonds issued out of a 2018 restructuring expires in Q1 2021 reducing refinancing costs by $66-67m. The first lien trades slightly above par, there is an opportunity to take these out alongside the expensive second lien they added.

With activity significantly lower in Q2 and Q3, and sharp drops in revenues and EBITDA it could be a stretch of Aston Martin proportions. We think a PGS-style stressed A&E is more likely.

WonderWoman to the Rescue

In its earnings call this week troubled cinema chain AMC said it was in talks with around a dozen strategic investors as it seeks to lengthen its liquidity runway until next summer from early 2021. In addition, AMC is in talks with lenders to bolster liquidity and renewed talks with landlords seeking further rental concessions. 

But with cash burning at over $100m per month and just 10-20% attendance compared to reduced self-imposed 40% capacity, the US-headquartered Cinema operator hopes the release of Wonderwoman for Xmas season will “meaningfully extend this [liquidity runway]”

Adios Amigo

Already hit with an Asset VReq by the FCA, there was more bad news for Amigo lenders this week as the uk-based guarantor loan provider disclosed that the number of complaints received was higher than expected and for longer. With a notable number coming from claims management companies Amigo said it was difficult to quantify, but added that provisions would increase from £116.4m to over £150m, leading to a P&L charge in excess of £85m. 

Amigo said it is still in discussions with the FCA and FOS “to agree a way forward.” With an imminent second lockdown, the resumption in lending had been delayed until next year.  

WHOA, time to go Dutch

Earlier this week, we published the latest in our series of primers on new restructuring processes, looking at the Dutch Super Scheme which comes into force on 1 January 2021

WHOA (or the Dutch Scheme) has a number of advantages over its English counterparts, borrowing from Chapter 11 and building on elements of the English scheme. 

Flexibility, speed, cheaper costs and lower voting thresholds are often cited. 

But take a closer look and talk to the locals, and you will find that there are tactical advantages (especially for junior creditors) and the process introduces some game theory on where and when to file, and if it could be used in combination with other processes. 

Navirea Armas to float cap structure options

Spanish Ferry operator Naviera Armas has started restructuring negotiations with its bondholders, according to a notice on 4 November. It said it would not make its 30 October interest payment on its €232m 2023 FRNs. The notes have a 30-day grace period.

Naviera Armas stated that it had started “discussions with the advisors to a group of institutions holding a majority of the notes in relation to potential options available to the group to enhance its capital structure and next steps.”

Bloomberg in April disclosed Houlihan Lokey was hired to advise on restructuring options.

The group secured €52m of Spanish Government funding in May. HPS and Apollo agreed to provide EUR 75m of new liquidity secured on certain vessels and cargo receivables.. 

The group reported half-year results at the end of September. Passenger volumes fell 54.6% due to Covid-19, with cargo less affected down 20%. Revenues fell 27.5% to €202.8m, posting negative €13.4m of EBITDA, compared to positive €26.5m the prior year. The group burned through €36.3m during H1 leaving just €11.7m in cash plus €4.6m of undrawn RCF.  

Net debt including €181.6m of capitalised obligations was €892m as 1H20. In addition to the 2023 senior-secured FRNs there are €300m of 2024 senior-secured FRNs, €31m of RCF and €31.2m of short-term loans, according to its 1H20 presentation. 

The FRNs have dropped sharply into the mid-40s since the announcement. 

In brief

In a busy earnings and news week, there isn’t time to cover everything in depth. Below are a few links to other announcements/events, some we will aim to follow-up on next week.

PAX Midco Spain (Areas) Downgraded To 'CCC+' On Slower Recovery Prospects by S&P

The agency said “Based on our revised industry forecast, we expect Areas' earnings to be largely reduced, increasing the chances its capital structure becomes unsustainable.”

Steinhoff creditors have approved a $1bn settlement agreement to settle litigation claims

Debt collector International Personal Finance secured overwhelming consents to its amend- and-extend transaction into new five-year notes.

NewDay released its Q3 earnings, slightly increasing impairment charges in the quarter after a sharp rise in Q2. In October, the credit card company issued £350m of publicly listed Asset-backed securities to refinance £244.3m of debt due in April 2021

Despite announcing an A&E and sale of Santillana Spain to deleverage, Prisa was downgraded this week to triple-hook by Moody’s.

Moody's downgrades Pronovias' CFR to Caa2; “The recent resumption of government restrictions as well as social distancing measures will likely curb demand for weddings and hence the company's products in the next 18 months.” Moody’s believes that the company “applies numerous EBITDA add-backs and as such the headline EBITDA reported by the company is significantly higher than the cash actually generated by its operating activities.”

The FT reported that HMRCs move up the capital structure will affect recoveries for companies forced into insolvency. This was already the case for Football clubs.