Seadrill Chapter 11 details

Seadrill, a publicly traded company that does offshore oil drilling, filed a Chapter 11 arrangement. The salient terms of the pre-packaged deal are:

The chapter 11 plan of reorganization contemplated by the RSA provides the following distributions, assuming general unsecured creditors accept the plan:

• purchasers of the new secured notes will receive 57.5% of the new Seadrill equity, subject to dilution by the primary structuring fee and an employee incentive plan;
• purchasers of the new Seadrill equity will receive 25% of the new Seadrill equity, subject to dilution by the primary structuring fee and an employee incentive plan;
• general unsecured creditors of Seadrill, NADL, and Sevan, which includes Seadrill and NADL bondholders, will receive their pro rata share of 15% of the new Seadrill common stock, subject to dilution by the primary structuring fee and an employee incentive plan, plus certain eligible unsecured creditors will receive the right to participate pro rata in $85 million of the new secured notes and $25 million of the new equity, provided that general unsecured creditors vote to accept the plan; and
• holders of Seadrill common stock will receive 2% of the new Seadrill equity, subject to dilution by the primary structuring fee and an employee incentive plan, provided that general unsecured creditors vote to accept the plan.

This is one of those strange instances where the common stock was trading like something terrible was going to happen, but in relation to its closing price Monday, they received a relatively good “reward” out of this process, 2% of the company (compared to zero if creditors take this to court).

The question is whether the unsecured debtholders will agree to this arrangement – my paper napkin calculation suggests that bondholders will get about 10 cents on the dollar (probably less after the “subject to dilution” is factored in) compared to the trading around the 25 cent level before this announcement.

Their alternative is that if they vote against the deal, the secured creditors will receive everything.

Please read the Pirate Game for how this will turn out and also a lesson on why being an mid-tier creditor in a Chapter 11 arrangement that requires all capital structures to vote in favour of the agreement can be hazardous to your financial health.

I will also note that Teekay Offshore effectively went through a recapitalization, and this leaves Transocean and Diamond Offshore that both in relatively good standing financially.