Pacific Drilling S.A. – Drillship Operator Files “Prearranged” Chapter 11 as COVID-19 and Saudi/Russian Price War Leaves Ships Idle; RSA with Noteholders to See $1.1bn of Debt Exchanged for Equity in Second Chapter 11 in Three Years

October 30, 2020 – Pacific Drilling S.A. and 18* affiliated Debtors (NYSE: PACD; “Pacific” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Texas, lead case number 20-35212. The Debtors, an operator of seven drillships (with the lead Debtor organized under the laws of the Grand Duchy of Luxembourg), are represented by Joseph E. Bain of Jones Walker LLP. Further board-authorized engagements include (i) Latham & Watkins LLP as general bankruptcy counsel, (ii)  AlixPartners, LLP as financial advisors, (iii) Greenhill & Co. as investment banker and (iv) Prime Clerk as claims agent. 

Additional engagements include Akin Gump Strauss Hauer & Feld LLP and Houlihan Lokey as as legal advisors and financial advisors, respectively, to the noteholders.

* This excludes certain Debtors (the "Zonda Debtors") who remain active debtors in the Debtors' earlier bankrupty in United States Bankruptcy Court for the Southern District of New York. Any claims asserted against the Zonda Debtors that make it into these cases will be classified as general unsecured claims which are slated to receive no recovery (see further below).

The Debtors’ lead petition notes between 1,000 and 5,000 creditors, estimated assets of $2,166,943,000 and estimated liabilities of $1,142,431,000. Documents filed with the Court indicate that the Debtors do not have any unsecured creditors with a claim in excess of $73k.

Highlights

• Drillship contracts delayed or cancelled as COVID-19 and Saudi/Russian price war impacts clients
• Second Chapter 11 in under three years
• "Prearranged" Plan has 73% (plus) support of First Lien Noteholders and Second Lien Noteholders; First Lien Noteholders to name 4 of 5-member Board
• RSA signatories agree $1.1bn debt-for-equity swap: 91.5% of emerged equity to holders of First Lien Notes claims and 8.5% to Second Lien Notes claims
• RSA contemplates $80.0mn exit facility
• RSA requires Plan effectiveness by year end
• General Unsecured Creditors (including any holders of "Zonda" claims) to get no recovery
• London Court recently rejected Debtors' efforts to challenge $320.0mn arbitration award in respect of drillship Zonda contract

In a press release announcing the filing, the Debtors advised that they: “have entered into a restructuring support agreement with an ad hoc group of the largest holders of its outstanding bond debt. This consensual financial restructuring transaction will eliminate the Company’s approximately $1.1 billion in principal amount of outstanding bond debt through the cancellation and exchange of debt for new equity in the reorganized Company.

The Company also announced today that it has repaid its $50 million first lien superpriority revolving credit agreement with Angelo, Gordon Energy Servicer, LLC, as administrative agent and the lenders party thereto.

The Company expects to emerge by year-end with access to new capital in the form of an $80 million exit facility and with approximately $100 million of cash and cash equivalents on the balance sheet.

Since the beginning of 2020, the global health crisis caused by COVID-19 and the resulting oil supply and demand imbalance have caused significant disruption in world economies and markets, including a substantial decline in the price of oil. The impact of these market conditions on Pacific Drilling’s business has been direct and significantly negative, rendering our current capital structure unsustainable over the long-term."

Goals of the Chapter 11 Filings

The Harris Declaration (defined below) provides: "The Debtors commenced these ‘prenegotiated’ Chapter 11 Cases for the purpose of implementing an agreed restructuring of the Debtors’ 8.375% First Lien Notes due 2023 (the ‘Prepetition First Lien Notes’) and 11.0%/12.0% Second Lien PIK Notes due 2024 (the ‘Prepetition Second Lien PIK Notes’)."

Overview of the Plan

The Disclosure Statement provides: "The Plan provides for a comprehensive restructuring of the Debtors’ prepetition obligations, preserves the going-concern value of the Debtors’ businesses, maximizes all stakeholder recoveries, and protects the jobs of the Company’s most critical employees. 

The anticipated benefits of the Plan include, without limitation,the following:

(a) consensual use of Cash Collateral to enable the Debtors to continue to operate in the ordinarycourse of business during the Chapter 11 Cases (as defined below) and avoid value-destructive litigation;

(b) conversion of approximately $750 million of First Lien  Notes Claims (exclusive of accrued  and unpaid interest) to 91.5% of the New PDC Equity, subject to dilution; 

(c) conversion of approximately $326 million of Second Lien Notes Claims (exclusive of accrued and unpaid  interest) in exchange for (i) 8.5% of the New PDC Equity, subject to dilution, and (ii) issuance of New 2L Warrants to the Holders of Second Lien Notes Claims;

(d) prompt emergence from Chapter11;(e)access to new capital in the form of the Exit Facility in the aggregate principal amount of up to $80 million, and backstopped by the Backstop Parties, which will enable the Debtors to continue their business after emerging from Chapter 11; 

(f) elimination of the Debtors’ entire prepetition cash interest burden to enable the Debtors to obtain positive free cash flow as drillships return to operation; and

(g) positioning the Debtors to participate in industry consolidation with a substantially improved balance sheet."

Restructuring Support Agreement

On the Petition date (immediately prior to the filing of the their Petitions), the Debtors entered into a restructuring support agreement (the "RSA" attached to the Disclosure Statement, with RSA Term Sheet, at Exhibit B) with "Consenting First Lien Creditors" holding more than 72% in principal amount of the First Lien Notes claims and "Consenting Second Lien Creditors" holding more than 73% in principal amount of the Second Lien Notes claims. The RSA Term Sheet attaches (i) the Exit Facility Tem Sheet (Exhibit B), (ii) a Governance Term Sheet (Exhibit C) and (iii) an Employee Matters Term Sheet (Exhibit D). The brief Governance Term Sheet notes that "Required Consenting First Lien Creditors shall select 4 out of 5 members of the Board." 

The following is a summary of classes, claims, voting rights and projected recoveries (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. Each Holder will receive, at the election of the applicable Debtor(s) (a) payment in full in Cash; (b) the collateral securing its Allowed Other Secured Claim; (c) Reinstatement of its Allowed Other Secured Claim; or (d) such other treatment rendering its Allowed Other Secured Claim Unimpaired in accordance with Section 1124 of the Bankruptcy Code.  “Other Secured Claims” consist of all Secured Claims against any of the Debtors, including Secured Tax Claims, the First Lien Notes Claims, or the Second Lien Notes Claims.
• Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Each Holder thereof will receive, at the election of the applicable Debtor(s) or Reorganized Debtor(s), as applicable, payment in full in Cash or otherwise receive treatment consistent with the provisions of Section 1129(a)(9) of the Bankruptcy Code. “Other Priority Claims” consist of all Claims other than Administrative Claims or Priority Tax Claims entitled to priority in right of payment under Section 507(a) of the Bankruptcy Code.
• Class 3 (“First Lien Notes Claims”) is impaired and entitled to vote on the Plan. The projected amount of claims is $786.5mn and estimated recovery is 82%. Each Holder of an Allowed First Lien Notes Claim will receive (a) its pro rata share of 91.5% of the New PDC Equity,  subject  to  dilution on  account  of  the equity issued, if any, pursuant to the Management Incentive Plan cash sufficient to satisfy any accrued and unpaid Indenture Trustee fees and expenses pursuant to the First Lien Notes Indenture.and the New 2L Warrants and (b) cash sufficient to satisfy any accrued and unpaid Indenture Trustee fees and expenses pursuant to the First Lien Notes Indenture. “First Lien Notes Claims” consist of all Claims arising under or on account of those certain First Lien Notes issued pursuant to that certain Indenture, dated as of September 26, 2018, by and among PDSA, as successor in interest to Pacific Drilling First Lien Escrow Issuer Limited (the “First Lien Escrow Issuer”), Wilmington Trust, National Association, as trustee and as collateral agent (the “Trustee”), and the guarantors named therein, of the 8.375% First Lien Notes due 2023.
• Class 4 (“Second Lien Notes Claims”) is impaired and entitled to vote on the Plan. The projected amount of claims is $349.1mn and estimated recovery is 32%. Each Holder of an Allowed Second Lien Notes Claim will receive the following: (a) its pro rata share of (i) 8.5% of the New PDC Equity, subject to dilution on account of the equity issued, pursuant to the Management Incentive Plan, if any, and the New 2L Warrants; and (ii) the New 2L Warrants and (b) cash sufficient to satisfy any accrued and unpaid Indenture Trustee fees and expenses pursuant to the Second Lien Notes Indenture. “Second Lien Notes Claims” consist of all Claims arising under or on account of those certain Second Lien PIK Notes issued pursuant to that certain Indenture, dated as of September 26, 2018, by and among PDSA, as successor in interest to Pacific Drilling Second Lien Escrow Issuer Limited (the “Second Lien Escrow Issuer”), Wilmington Trust, National Association, as trustee and as Junior Lien Collateral Agent, and the guarantors named therein, of the 11.000% / 12.000% Second Lien PIK Notes due 2024.
• Class 5 (“General Unsecured Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. Holders of Claims in Class 5 will receive no recovery on account of such Claims. On the Effective Date, all such Claims will be cancelled, released, extinguished, and discharged. “General Unsecured Claims” consist of all Claims (other than Administrative Claims, Professional Fee Claims, Secured Tax Claims, Other Secured Claims, Priority Tax Claims, Other Priority Claims, First Lien Notes Claims, Second Lien Notes Claims, Intercompany Claims, or Section 510(b) Claims) against one or more of the Debtors. For the avoidance of doubt, General Unsecured Claims will include any direct or derivative Claims held by or asserted through the Zonda Debtors.
• Class 6 (“Section 510(b) Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. Holders of Claims in Class 6 will receive no recovery on account of their Class 6 Claims.
• Class 7 (“Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. 
• Class 8 (“Intercompany Interests”)is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. 
• Class 9 (“Existing Lux Beneficial Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. Holders of Allowed Existing Lux Beneficial Interests will receive no distribution on account of such Allowed Existing Lux Beneficial Interests, and all rights of Holders of such Beneficial Interests will be cancelled, released, extinguished, and discharged. “Existing Lux Beneficial Interests” consist of all Interests in PDSA.

2017 Bankruptcy

On November 17, 2017, Pacific Drilling and 21 affiliated Debtors filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 17-13193, with approximately $3.0 billion in funded debt.

In a November 19, 2018 press release announcing their (excluding the Zonda Debtors) emergence from Chapter 11, the then debtors noted that, “In connection with emergence from bankruptcy, the Company raised $1.5 billion in gross proceeds in new capital, consisting of $1.0 billion of new secured notes and $500 million of equity….Pursuant to the Plan, the Company equitized approximately $1.85 billion in pre-petition debt associated with the Company’s Term Loan B, 2017 Notes and 2020 Notes, and paid in full approximately $1.2 billion of debt related to its pre-petition senior secured credit facility, revolving credit facility and the post-petition debtor-in-possession financing.”

Zonda Debtors

Two of the entities that were Debtors in the 2017 bankruptcy proceedings remain active as debtors and debtors-in-possession in those ongoing proceedings—Pacific Drilling VIII Limited and Pacific Drilling Services, Inc. (together, the “Zonda Debtors”). The Zonda Debtors are not debtor entities in the current chapter 11 cases of the Debtors. 

In an October 20, 2020 press release, the Debtors announced that a London court had denied their application to appeal a $320.0mn (excluding an estimated $100.0mn of interest) arbitration award announced in January 2020. That award was granted to Samsung Heavy Industries Co. Ltd. (“SHI”) in relation to a contract for the construction and sale of the "Pacific Zonda." The Debtors' Disclosure notes: "For the avoidance of doubt, General Unsecured Claims will include any direct or derivative Claims held by or asserted through the Zonda Debtors." That class is slated to receive no recovery.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Harris Declaration”), James Harris the Debtors’ Chief Financial Officer, detailed the events leading to Pacific’s Chapter 11 filing. The Harris Declaration provides: “Since January 2020, international economies and financial markets—particularly, the oil and gas markets and, consequently, the offshore drilling industry—have been disrupted by (a) the global health crisis caused by the COVID-19 pandemic and (b) the impact from the failure of OPEC and a group of oil producing nations led by Russia to reach an agreement as to oil production cuts.

Oil producers have responded to the lower demand for oil and lower oil prices by cutting their 2020 capital budgets, with Pacific Drilling’s clients generally cutting their budgets and cancelling or delaying until 2022 work that had been scheduled or awarded to Pacific Drilling for 2020.

The impact of these market conditions on Pacific Drilling’s business has been direct and significantly negative. Prior to the COVID-19 pandemic and oil market share war, Pacific Drilling had four of its seven drillships operating for customers during the first quarter of 2020, and was mobilizing a fifth rig, the Pacific Meltem, for an anticipated Gulf of Mexico contract.

The Pacific Bora and the Pacific Sharav completed their projects in early April 2020, and contract opportunities that Pacific Drilling had expected to materialize in the form of follow-on work for the Pacific Sharav and the Pacific Bora, and the anticipated project for the Pacific Meltem, were all delayed until at least 2021. The Pacific Santa Ana was operating through the first quarter of 2020 on a project for Petronas that was suspended due to the COVID-19 pandemic on March 29, 2020, and is now on stand-by until January 1, 2021 at 35% of its contractual dayrate. In addition, certain contracts for the Pacific Khamsin and Pacific Sharav have been cancelled in exchange for the payment of termination fees.”

Prepetition Indebtedness

As of the Petition date, the Debtors had funded indebtedness totaling approximately $1.076bn

Significant Shareholders

• FMR LLC: 6.4302%
• TOR Asia Credit Master Fund LP: 6.0025%
• Quantum Pacific (Gibraltar) Ltd. : 5.1101%

The following documents were attached to the Disclosure Statement

• Exhibit A: Joint Plan of Reorganization
• Exhibit B: Restructuring Support Agreement (and exhibits thereto)
• Exhibit C: Liquidation Analysis
• Exhibit D: Valuation Analysis
• Exhibit E: Financial Projections
• Exhibit F: Corporate Organizational Chart

Key Dates

• Voting deadline: December 14, 2020
• Deadline for Plan confirmation order: December 24, 2020 (55 calendar days from Petition date)
• Deadline for Plan effectiveness date: December 30, 2020 (61 calendar days from Petition date)

Liquidation Analysis (see Exhibit C to Disclosure Statement [Docket No. 14] for notes)

About the Debtors

According to the Debtors: “With our best-in-class drillships and highly experienced team, Pacific Drilling is committed to exceeding our customers’ expectations by delivering the safest, most efficient and reliable deepwater drilling services in the industry. Pacific Drilling’s fleet of seven drillships represents one of the youngest and most technologically advanced fleets in the world."

The Disclosure Statement adds: "Pacific Drilling is an international offshore drilling contractor whose primary business is to contract its fleet of seven high-specification drillships to drill wells for clients in the global offshore oil exploration and production industry. Pacific Drilling’s industry-leading operational performance is grounded in its core values, emphasis on client relationships, and entrepreneurial culture. Pacific Drilling is committed to exceeding its clients’ expectations by delivering the safest, most efficient and reliable deepwater drilling services in the industry.

Corporate Structure Chart

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