Weatherford International plc – Court Confirms Prepackaged Plan after Last Minute Modifications to Post-Exit Capital Structure; Debtors Look to Cut Funded Debt by $6.25bn as Shareholders Fume

September 11, 2019 – The Court hearing the Weatherford International cases confirmed the Debtors’ Second Amended Joint Prepackaged Plan and approved the related Disclosure Statement [Docket No. 343]. The Court also approved the Debtors' last minute modifications to the Plan [Docket No. 342] (see below).

On July 1, 2019, Weatherford International Plc (NYSE: WFT) and two affiliated debtors (together, “Weatherford” or the “Debtors”) filed for Chapter 11 protection with the US Bankruptcy Court in the Southern District of Texas, lead case number 19-33676. In their lead Petition, the Debtors, one of the largest multinational oilfield service companies, noted between 200 and 1,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn. 

The Debtors' memorandum in support of Plan confirmation sums up the Plan as follows: "The overwhelming support for the Plan among the Debtors’ stakeholders is unsurprising: the Plan preserves the Debtors’ business and operations, enhances their value by substantially deleveraging the Debtors’ balance sheet, and provides for the unimpairment of all trade and general unsecured claims. Among other things, the Plan reduces the Company’s funded debt from approximately $8.35 billion to $2.10 billion, which will allow the Debtors to focus on long-term growth prospects and their competitive position in the market, and emerge from the Chapter 11 Cases as a stronger company, less burdened by debt service obligations."

It might be fair to add here that the $6.25bn comes at the expense of the Debtor's pre-petition noteholders who will see their debt extinguished in echange for 99% of the emerged Debtors' new common stock and at the expense of shareholders who will settle for the remaining 1% of common stock. An ad hoc committee of shareholders (including Silver Point Capital, L.P., Paloma Partners Management Company, Latigo Partners, Diameter Master Fund LP, funds, accounts, and other clients managed by affiliates of Apollo Global Management) put up an aggressive resistance throughout these cases and have argued that the noteholders are set to get a windfall at their expense [see our story on Docket No. 193]. That view will not have been anything but hardened by the Plan modifications. 

Final Summary of Classes, Claims, Voting Rights and Projected Recoveries (defined terms as defined in the Plan and/or Disclosure Statement)

• Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 3 (“Secured Tax Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 4 (“Prepetition Revolving Credit Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate principal amount of allowed claims is $316.7mn, plus accrued and unpaid interest thereon. Recovery is 100% in cash.
• Class 5 (“Prepetition Term Loan Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate principal amount of allowed claims is $297.5mn, plus accrued and unpaid interest thereon. Recovery is 100% in cash.
• Class 6 (“Prepetition A&R Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate principal amount of allowed claims is $305.0mn, plus accrued and unpaid interest thereon, plus outstanding letters of credit in an amount of $166.0mn. Recovery is 100% in cash.
• Class 7 (“Prepetition Notes Claims”) is impaired and entitled to vote on the Plan. The aggregate principal amount of allowed claims is $7.4bn, plus accrued and unpaid interest thereon. Expected recovery is 63%.This class is comprised of the following series of notes:
  • $365,107,000 in aggregate principal amount, plus accrued and unpaid interest on account of the 5.125% Notes;
  • $750,000,000 in aggregate principal amount, plus accrued and unpaid interest on account of the 7.750% Notes;
  • $1,265,000,000 in aggregate principal amount, plus accrued and unpaid interest on account of the 5.875% Notes;
  • $646,286,000 in aggregate principal amount, plus accrued and unpaid interest on account of the 4.500% Notes;
  • $750,000,000 in aggregate principal amount, plus accrued and unpaid interest on account of the 8.250% Notes; 
  • $790,000,000 in aggregate principal amount, plus accrued and unpaid interest on account of the 9.875% 2024 Notes;
  • $453,045,000 in aggregate principal amount, plus accrued and unpaid interest on account of the 6.500% Notes;
  • $461,300,000 in aggregate principal amount, plus accrued and unpaid interest on account of the 7.000% Notes;
  • $250,000,000 in aggregate principal amount, plus accrued and unpaid interest on account of the 9.875% 2039 Notes;
  • $462,601,000 in aggregate principal amount, plus accrued and unpaid interest on account of the 6.750% Notes;
  • $374,961,000 in aggregate principal amount, plus accrued and unpaid interest on account of the 5.950% Notes;
  • $600,000,000 in aggregate principal amount, plus accrued and unpaid interest on account of the 9.875% 2025 Notes; and
  • $258,767,000 in aggregate principal amount, plus accrued and unpaid interest on account of the 6.8000% Notes.

Each Holder of an Allowed Prepetition Notes Claim will receive its pro rata share of (i) 99% of the emerged Debtors’ new equity (the “New Common Stock”), subject to dilution on account of equity issued pursuant to the New Management Incentive Plan (the “MIP”), the Tranche B Equity Conversion (see above), and the New Common Stock issuable pursuant to the New Warrants and (ii) the Takeback Notes. In addition, each holders will receive Subscription Rights to purchase its Pro Rata share of the Rights Offering Notes pursuant to the Rights Offering and in accordance with the applicable Rights Offerings Procedures.

• Class 8 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. 
• Class 9 (“Intercompany Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 10 (“Existing Common Stock”) is impaired and entitled to vote on the Plan. Each Holder of Existing Common Stock will receive its pro rata share of (i) 1.0% of the New Common Stock, subject to dilution on account of the equity issued pursuant to the MIP and the New Common Stock issuable pursuant to the New Warrants; and (ii) the New Warrants.
• Class 11 (“Intercompany Equity Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 12 (“Unexercised Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.

The Plan voting results were as follows:

• Class 7 (“Prepetition Notes Claims”) – 1,780 claims holders, representing $6,419,301,330 (or 99.79%) in amount and 97.53% in number, accepted the Plan. 45 claims holders, representing $13,642,000 (or 0.21%) in amount and 2.47% in number, rejected the Plan.
• Class 10 (“Existing Common Stock”) – accepted by holders representing 387,344,353 shares (or 79.38%) in amount and rejected by holders representing 100,622,047 (or 20.62%) in amount.

Plan Modifications

On September 9, 2019, the Debtors filed major modifications to their already creditor-approved Plan and argued, successfully, that the changes did not negatively impact voting creditor classes and that the Debtors should not have to resolicit creditors fro Plan approval. As to the modifications, which primarily related to the Debtors' post-exit capital structure, the Court commented [Docket No. 342]: "The Modified Plan is deemed accepted by all creditors and equity holders who havepreviously accepted the Original Plan and such acceptances cannot be withdrawn, and the Debtors are not required to prepare or distribute a new disclosure statement with respect to the Modified Plan." The short Court order seems rather anti-climactic, given the Debtors' scramble to assure creditors and the Court that the modifications were at worst creditor neutral, including the filing of a press release assuring all that "the Company believes that there will be a dollar-for-dollar increase in the imputed range of potential equity value for the reorganized Company." As detailed below, the Debtors argued that the modified Plan, with its $400.0mn reduction in post-exit funded debt, effectively increased "the imputed range of potential equity value for Reorganized Parent proportionately from between $2.62 and $4.62 billion to $3.02 and $5.02 billion."

In their motion requesting Court approval of the Plan modifications [Docket No. 328], the Debtors detailed the amended Plan as follows: "As previously announced in open court on August 1, 2019, the Debtors, the Consenting Noteholders, and an ad hoc group of equity holders reached a global resolution regarding modified terms to the Original Plan.

The terms of such global settlement were memorialized in the First Amended Joint Prepackaged Plan of Reorganization for Weatherford International plc and its Affiliate Debtors Under Chapter 11 of the Bankruptcy Code, dated September 4, 2019 [Docket No. 315, Exhibit A] (the ‘First Amended Plan’). 

As announced in open court on September 9, 2019, the Debtors and the Consenting Noteholders have agreed to certain additional modified terms with respect to the Original Plan…which modifications primarily involve the amount and structure of the new unsecured notes upon the Debtors’ emergence from these Chapter 11 Cases. 

The Debtors seek to modify the First Amended Plan as set forth in the Second Amended Joint Prepackaged Plan of Reorganization for Weatherford International plc and its Affiliate Debtors Under Chapter 11 of the Bankruptcy Code, dated September 9, 2019, attached hereto as Exhibit B (the “Second Amended Plan”). 

…under the Original Plan, the Reorganized Debtors’ exit capital structure was contemplated to include up to a new $1.0 billion secured revolving credit facility (with a sub-limit for letters of credit), plus two tranches of unsecured debt totaling $2.5 billion in the aggregate. The New Tranche A Senior Unsecured Notes were to be new money debt in the amount of $1.25 billion raised pursuant to a rights offering and backstopped by certain members of the Ad Hoc Noteholder Committee. The New Tranche B Unsecured Notes were to be takeback debt in the aggregate amount of $1.25 billion, with an option to convert up to $500 million of the New Tranche B Unsecured Notes to New Common Stock at a set conversion price. 

Pursuant to the Second Amended Plan Modifications, the $2.5 billion of new unsecured notes (issued in two tranches) will be reduced by $400 million in the aggregate and replaced with a single tranche of new unsecured notes in the aggregate amount of $2.1 billion (consisting of $1.6 billion in new money Rights Offering Notes and $500 million of Takeback Notes). 

The Second Amended Plan Modifications do not affect the Reorganized Debtors’ enterprise value in the aggregate amount of between $4.80 and $6.80 billion as set forth in the Disclosure Statement. Instead, as a result of the $400 million reduction in unsecured notes, the Debtors believe it would increase the imputed range of potential equity value for Reorganized Parent proportionately from between $2.62 and $4.62 billion to $3.02 and $5.02 billion.

The Second Amended Plan Modifications are positive for all key constituencies in these Chapter 11 Cases because the Reorganized Debtors will emerge from Chapter 11 with lower funded debt. From the perspective of the Prepetition Noteholders, they experience minimal (if any) change to their overall recoveries (and certainly not ‘material and adverse’ changes as described more fully below) since the $400 million in reduced unsecured notes results in a dollar-for-dollar increase in the potential equity value for Reorganized Parent, of which they own 99.0% upon emergence. The reduction in unsecured notes increases the implied equity value of the Debtors’ go-forward business and allows the Reorganized Debtors to better compete with a right-sized capital structure as compared to their peers upon emergence.

Finally, since the Rights Offering is increasing by $350 million (from $1.25 billion under the Original Plan to $1.60 billion under the Modified Plan), a large subset of the Prepetition Noteholders (members of the Ad Hoc Noteholder Committee holding approximately 80% of the Prepetition Notes) will receive an additional 5.0% fee for backstopping this $350 million in new money as well as the commitments of certain holders no longer wishing to participate in the backstop ($18.7 million underwriting fee), which fee would be approved pursuant to the Confirmation Order and paid on the Effective Date. The Debtors believe, in the exercise of their business judgment and consistent with their fiduciary duties, that the Modified Plan reflects an enhancement to the Debtors and does not change the treatment of either Voting Class in a materially adverse manner. In accordance with section 1127(a) of the Bankruptcy Code and Bankruptcy Rule 3019, the Debtors believe that no additional solicitation is required with respect to either of the two Voting Classes under the Original Plan as the Plan Modifications are not materially adverse to either class."

Summary of Changed Terms

Events Leading to the Chapter 11 Filings

The Debtors' Disclosure Statement for the most part provides what is a now familiar and unremarkable tale of woe for those service businesses whose health is dependent on that of the oil and gas sector generally; and the Debtors spend some time looking for cover in a crowded field of failure: "Oil and natural gas prices are dependent on factors beyond the Company’s control…dozens of oilfield services companies, whose business is dependent on spending by oil and gas companies, have filed for bankruptcy in the last several years…,"etc, etc. If the causes may be unremarkable at this point, the end result is most certainly not; with the scale of the Debtors' shortcomings really insisting upon being noticed: $5.85bn in debt to be extinguished by a company that had more than $900.0mn in negative cash flow over the last three fiscal years. 

The Disclosure Statement provides provides the following summary: "The sustained drop in oil and gas prices has impacted companies throughout the oil and gas industry including Weatherford and the majority of its customers.  As spending on exploration, development, and production of oil and natural gas has decreased so has demand for Weatherford’s services and products. The decline in spending by oil and gas companies has had a significant effect on the Debtors’ financial health. To illustrate, on a consolidated basis, the Company’s cash flows from operating activities have been negative $304 million, negative $388 million, and negative $242 million in fiscal years 2016, 2017, and 2018, respectively.

In addition to the issues facing the oil and gas industry generally, Weatherford operates in a highly competitive market. The oilfield services and equipment industry is saturated with competition from various companies that operate in the same sector and the same regions of the world as Weatherford.  The primary competitive factors include safety, performance, price, quality, and breadth of products and services.  Weatherford also faces competition from regional suppliers in some of the sectors in which it operates as these suppliers offer limited equipment and services that are specifically tailored to the relevant local market.  Some of the Company’s competitors have better financial and technical resources, which allows them to pursue more vigorous marketing and expansion activities.  This heavily competitive market has impacted the Company’s ability to maintain its market share and defend or maintain the pricing for its products and services.  Heavy competition has also impacted the Company’s ability to negotiate contract terms with its customers and suppliers, which has resulted in the Company accepting suboptimal terms.

The Company’s operations are also subject to extensive federal, international, state and local laws and regulations relating to environmental production, waste management and cleanup of hazardous materials, and other matters.  Compliance with the various requirements imposed by these laws and regulations has also resulted in increased capital expenditures as companies in these sectors have had to make significant investments to ensure compliance.

The decline in the price of oil and gas and the resulting adverse market conditions have severely impacted Weatherford affecting, among other things, the Company’s cash flow, borrowing capacity, and ability to service its outstanding indebtedness.  As with many of their peers, this drastic and prolonged drop in oil and gas prices has strained the Company’s liquidity for an extended period of time."

The June 28, 2019 8-K provides the following detail as to the impending default that triggered the immediate need to file for bankruptcy protection: "The Company’s 7.75% Senior Notes due 2021, 8.25% Senior Notes due 2023 and 6.80% Senior Notes due 2037 (together, the 'Defaulting Notes') provide for an aggregate $68.8 million interest payment that became due on June 15, 2019. The applicable indenture governing the Defaulting Notes provides a 30-day grace period that extends the latest date for making this interest payment to July 16, 2019, before an event of default will occur under the applicable indenture….If the Company does not make its interest payment by July 16, 2019 or has not filed the Cases, an event of default would occur under the applicable indenture governing the Defaulting Notes…An event of default under the Defaulting Notes may result in defaults and acceleration of maturities under the Company’s other debt instruments."

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