Key Energy Services, creditors trade financial restructuring proposals

By Caroline Salls

Pittsburgh, June 15 – Key Energy Services, Inc. has exchanged restructuring proposals with some unaffiliated holders of its 6¾% senior notes due 2021 and some of its term loan lenders, according to an 8-K filed Wednesday with the Securities and Exchange Commission.

Key aid it has been in negotiations with the noteholders and lenders since February.

On May 20, the noteholders’ advisers sent a letter to the company’s board of directors outlining the non-binding terms and conditions and proposed timeline of a potential restructuring supported by the creditors.

That proposal called for an exchange of all outstanding notes for 100% of the equity in reorganized Key, subject to dilution as a result of a $75 million rights offering.

The proceeds of the rights offering would be used together with other available funds to repay $63 million in principal and interest of the term loans at par, with the remaining $250 million principal balance of term loans to remain in place, subject to modifications agreed among the creditors.

The terms of the remaining $250 million term loan balance would include an interest rate of Libor plus 1,025 basis points with a 1% Libor floor and a maturity date of June 1, 20121.

Also under the proposal, vendors and other general unsecured creditors would be paid in full.

Eligible shareholders would receive the right to acquire up to 8% of the equity of reorganized Key under the rights offering, and ineligible shareholders would be entitled to a share of a $100,000 payment.

The company said the creditors’ proposal was based on the satisfaction of a number of conditions, including execution of a plan support agreement, completion of the proposed restructuring through a pre-packaged Chapter 11 plan, full resolution of the company’s FCPA investigation on terms satisfactory to the creditors, and due diligence.

Under the proposal, reorganized Key would not be an SEC reporting company.

Following receipt of the creditors’ proposal, Key continued to negotiate with the noteholders regarding the treatment of the noteholders and shareholders, while assuming the treatment of the term loans for negotiation purposes.

To that end, Key and the noteholders exchanged documents outlining their respective proposals regarding the amount and terms of common equity and warrants to be received by existing Key shareholders.

Counterproposals

The noteholders delivered their latest proposal on these points on June 2, and Key responded with a counterproposal on Tuesday.

In their June 2 proposal, the noteholders said qualified shareholders would have a 5% allocation in the rights offer, and backstop parties would receive a share of common equity issued as a put premium.

Qualifying shareholder common equity would represent 1% of the reorganized company’s common equity.

Meanwhile, the shareholder warrants would be equal to 15% of common equity exercisable in cash at any time or on a cashless basis under specified circumstances. The warrants would be based on a schedule under which 10% of the common equity would be tied to three-year warrants at a strike price equal to an equity value of par plus accrued interest of the senior unsecured notes as of the restructuring date and 5% would be tied to five-year warrants exercisable at a strike price equal to an equity value of $997 million.

The noteholders most recent proposal also includes an up to $9.5 million convenience class cash-out.

Under Key’s counterproposal, qualifying shareholders would receive 5% of the common equity post-dilution from the rights offering but subject to dilution from the warrants.

The shareholders would be entitled to an up to 5% participation in the rights offering, invested at a 25% discount to plan equity value and including a share of a 6% backstop fee.

Qualifying shareholders would also receive warrants for 5% of the reorganized common equity with a strike price for A warrants equal to the equity value of par plus interest on the notes as of the restructuring date. The A warrants would carry a five-year term and assume a strike price of $697.8 million of equity value.

Also under the company’s counterproposal, qualifying shareholders would receive seven-year B warrants for 6.25% of the reorganized common equity with a strike price of $997 million.

Key included an up to $12 million convenience class cash-out option for non-qualifying shareholders.

Discussions between Key and the creditors are ongoing, according to the 8-K.

Key Energy is Houston-based onshore, rig-based well servicing contractor.

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