Transocean Plan to Avoid Bankruptcy May Cause One Just the Same

(Bloomberg) -- Measures taken by Transocean Ltd. to stave off a bankruptcy filing could be exactly what ends up sending the offshore drilling company into Chapter 11 alongside some of its biggest peers.

The world's largest owner of deep-water oil rigs recently engineered a bond swap to trim some of its $9 billion debt load and ease the crunch caused by slumping energy prices. But other creditors, led by Whitebox Advisors LLC and Pacific Investment Management Co., say the transaction amounts to a default because it pledges assets that Transocean already promised to them.

They've given the company until Dec. 1 to cure the default, according to a court filing. The creditors are seeking a settlement, but would be prepared to demand immediate repayment of their debt if a deal cannot be reached, which could lead to Transocean filing for bankruptcy, according to people with knowledge of the matter. They asked not to be identified discussing confidential matters.

A spokeswoman for Transocean declined to comment beyond the company's public court filings. Representatives for Pimco and Whitebox declined to comment.

Transocean has said in court papers that the default claim is baseless and should be dismissed. It called Whitebox “a dissident minority noteholder seeking to force the company into bankruptcy,” and said the default notice threatens “access to liquidity that is essential to the company's continued successful operations.”

On paper, Transocean is in better shape than some of its rivals. Led by Chief Executive Officer Jeremy Thigpen and headquartered in Steinhausen, Switzerland, the company has enough liquidity and contracts to keep operating until 2023, according to industry watchers.

That stands in contrast to peers Diamond Offshore Drilling Inc., Valaris Plc and Noble Corp., all of which went bankrupt earlier this year. They're in trouble in part because oil prices have slumped below $40 a barrel, where it's hard to make a profit, and because offshore oil is among the most expensive to produce.

The Transocean dispute revolves around its August offer to swap various bonds for as much as $750 million in new notes maturing in 2027. The group of creditors, who own at least 50% of Transocean's priority guaranteed notes maturing in 2025 and 2027, say the exchange is forbidden because the company issued new senior debt guaranteed by assets that were already to pledged to their existing notes.

They initially claimed the “fraudulent and coercive” exchange offer contained misleading statements, and sought to have the exchange halted entirely, according to a complaint filed in federal court. Judge George B. Daniels denied the request, and Transocean went ahead with the deal, extending the deadline. The company also filed a counter-claim against the creditor group, asking Judge Daniels to dismiss the default notice.

Interest Savings

Transocean ultimately collected $1.5 billion in tendered notes for $750 million of new 11.5% senior guaranteed bonds maturing in 2027, according to a statement. This allowed Transocean to cut about $826 million of debt and save about $32 million on interest, according to Fredrik Stene, an analyst at Clarksons Platou Securities AS. It issued $687 million of new 2027 notes, which traded Sept. 18 at 48.5 cents on the dollar, according to Trace data compiled by Bloomberg.

“If you were holding an existing priority guaranteed note, you are now in a position where you could see senior unsecured debt jump in front of you because they are guaranteed by a subsidiary that is closer to the assets,” Stene said in an interview. “You could argue that the current priority guaranteed notes have the most to lose.”

The dissenting noteholders, represented by the Milbank law firm and advisers from Evercore Inc., would like to see a restructuring of Transocean's balance sheet -- in or out of bankruptcy -- that engages with all stakeholders, the people said. Representatives for Milbank and Evercore didn't respond to requests for comment.

Bankruptcy Advantage

If Judge Daniels were to rule against the creditors, and the company manages to stay out of bankruptcy, it could still face a different kind of pressure, according to analysts.

Competitors like Valaris and Noble will have lower operational and debt costs as a result of going through Chapter 11, and thus be more able to compete on price. That's significant in an industry that remains chronically oversupplied with too many rigs and not enough offshore drilling work generated by producers.

“This could create a scenario in which companies with more leverage coming out of the downturn may be at a disadvantage versus better-capitalized peers,” Scott Levine, a Bloomberg Intelligence analyst, said in a Sept. 21 note.

Investors have taken note, with Transocean's common shares at penny-stock levels for most of the year; the stock rose 4% to 83 cents at 9:54 a.m. in New York. Some of its first-lien notes are setting new lows almost daily, and some of the junior debt is quoted at less than 20 cents on the dollar.

Transocean has been able to rely on its backlog of contracts and ample liquidity, but it will ultimately need the offshore market to recovery meaningfully in the next two to three years, Stene said. The backlog is already shrinking and leverage could climb toward 10 times debt to earnings by the end of the year, according to Bloomberg Intelligence.

“They're pulling the levers that they can now, but they're still going to be at the mercy of the market somewhere down the line,” Stene said.

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