Shipping billionaire John Fredriksen struck a deal to save his Seadrill oil services company from collapse in 2017. This year, he faces a fight to keep the plan together.
When oil majors cut drilling as crude prices collapsed in 2014, rig-supplier Seadrill was hit hard. Cash flows fell too low to support a US$9 billion (S$12 billion) debt pile; the company's market value dived from a peak of US$22 billion the previous year to settle at about US$120 million.
Founder Fredriksen saw his US$5 billion stake almost wiped out.
In September, he led a US$1.1 billion cash injection with new and existing investors that was designed to hand Seadrill enough funds to keep going until drilling activity recovers.
Rather than being the end of the sorry saga, the deal has triggered a row with a group of bond holders excluded from the rescue who reckon Mr Fredriksen and his pals could make excess returns if Seadrill bounces back.
To recap, the restructuring sees Mr Fredriksen and private equity firm Centerbridge Partners stump up US$610 million, with a minority of existing Seadrill bond holders providing a further US$450 million. In return, the group gets an 84 per cent equity stake, US$860 million of very high-yielding bonds and lucrative fees.
Valuing the equity is tough, but based on a Gadfly analysis, it could be worth about US$2.3 billion. On that basis, the rescue group's equity stake alone could be worth roughly US$2 billion.
By contrast, holders of the unsecured bonds get forced into a tiny equity stake that would represent an 85 per cent haircut on the above valuation.
The deal is subject to ratification by a bankruptcy court and the angry bond holders have already started petitioning for a better outcome.
This won't be easy. They can't dislodge Mr Fredriksen as the banks want him centre stage and committed to the recovery. In turn, Mr Fredriksen wanted an outside partner that could validate the deal objectively - hence roping in Centerbridge.
So the bond holders have to come up with an alternative plan which Mr Fredriksen and the banks support. It must be both cheaper for the company and offer the same certainty as the deal on the table.
Two separate groups, one including Barclays, have submitted proposals that Seadrill says it's evaluating.
Something will need to give this year. Mr Frederiksen and his buddies have already agreed to pass on about 10 per cent of their fundraising plan to bond holders who want to subscribe for the new shares and debt. One option would be to raise that percentage.
The bond holders could argue too that they have more claim on the 1.9 per cent of Seadrill stock reserved currently for existing shareholders.
That the shares carry any value at all remains an oddity: The company would have to emerge from restructuring with an equity value of more than US$6 billion to justify the present share price.
The fight will be a litmus test of the appetite to invest in oil services as the industry starts to look past its slump.
Mr Fredriksen is clearly eyeing a recovery, having raised money in a private placement through another vehicle, Oslo-listed Northern Drilling.
The S&P Oil & Gas Equipment and Services Select Industry Index is up one-third from its August low as investors start to look ahead. Brent crude is up 50 per cent since June.
The macro backdrop suggests a less stormy future for Seadrill.
The brighter things look, the more intense will be the fight over who benefits.
•This column does not necessarily reflect the opinion of Bloomberg and its owners.
A version of this article appeared in the print edition of The Straits Times on January 02, 2018, with the headline 'Shipping tycoon's rescue plan runs into stormy bond holder reception'. Print Edition | Subscribe
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