Western Energy forges restructuring plan, pays late interest in kind

By Rebecca Melvin

Concord, N.H., March 22 – Western Energy Services Corp. has entered into restructuring agreements for a portion of its outstanding debt, including its second-lien term loan facility for about C$218.5 million and the C$7.8 million interest payment originally due on Jan. 4 that was paid in kind, according to a company news release Tuesday.

Under the plan, the company also raised new capital, reduced the amount of its senior secured credit facilities, extended debt maturities and raised the interest rate of the second-lien facility.

The company entered into an agreement of debt restructuring with Alberta Investment Management Corp., the lender of the second-lien facility under which the company will convert C$100 million of the principal amount outstanding into common shares at a conversion price of C$0.05 per share.

On completion of the debt exchange, the second-lien facility will be amended to extend the maturity four years from Jan. 31, 2023.

The payment in kind was made by adding the overdue amount to the outstanding principal amount, and the interest rate was raised to 8.5% from 7.25%.

The company also entered into a commitment letter with some lenders of its senior secured credit facilities, under which the lenders have consented to the debt exchange. The facility is also being reduced to C$45 million from C$60 million, and the maturity is being extended from July 1, 2022 to the third anniversary of the exchange.

A condition of the debt exchange is that the company conducts a rights offering of common shares to eligible shareholders to raise proceeds of C$31.5 million. The subscription price for each right will be determined based on the market price of the shares when the offering begins.

G2S2 Capital Inc., G2S2’s subsidiary Armco Alberta Inc., Ronald P. Mathison and Matco Investments Ltd., currently the company's largest shareholders, have entered into a standby purchase agreement to exercise in full their basic subscription privilege and, in the case of Armco and Matco, subscribe for any shares not subscribed for by other eligible shareholders. Proceeds will be applied to reduce the principal amount outstanding under the second-lien facility by C$10 million, with the remaining C$21.5 million to be applied to fund maintenance and growth capital and for general corporate purposes.

In addition, reducing the second lien facility to about C$108.5 million will reduce interest to about C$15.0 million to C$9.0 million a year.

Given the large number of common shares to be issued under the debt exchange and rights offering, the company expects to seek approval for a consolidation of shares at its next annual general meeting to be held in June.

The restructuring transaction followed a detailed review process under which management and board of directors considered options to address the pending maturities of the senior facilities and second-lien facility, as well as the potential for events of default under such facilities prior to their maturities, all with a view to providing for a viable capital structure to allow Western to continue its business and to preserve value for its shareholders, the release stated.

The board formed a special committee of directors who are fully independent of any relationship with Alberta Investment, Matco, G2S2 or Armco of the special committee to assist the review process. The special committee took an active role in reviewing and overseeing the negotiation of the terms of the debt exchange and rights offering, as well as other aspects of the restructuring transaction. It engaged Osler, Hoskin & Harcourt LLP as independent counsel and ATB Capital Markets Inc. as financial advisor.

The board and special committee examined other financing alternatives and are of the view that, given the company’s debt position and the continued challenging environment in the energy services industry, the restructuring transaction is the best option available to the company which preserves value for shareholders.

Debt exchange details

Immediately following the completion of the rights offering and standby commitment, Western and Alberta Investment will complete the debt exchange involving the conversion of C$100 million principal amount of the loan under the second-lien facility into common shares.

Alberta Investment currently holds about 19.18% of the common shares and will not be participating in the rights offering.

In addition, C$10 million of the proceeds from the rights offering will be paid to Alberta Investment to further reduce the principal amount outstanding under the second-lien facility.

The conversion price will be reduced below C$0.05 if the rights offering subscription price is less than C$0.016. Assuming that the conversion price is C$0.05 per share and the rights offering subscription price is C$0.016 per share, about 2 billion common shares will be issuable to Alberta Investment, and it will hold about 49.69% of the outstanding common shares.

Alberta Investment and the company have agreed that, upon completion of the debt exchange and the repayment of C$10 million of the principal amount of the second-lien facility, the facility will be amended to provide for an extension of the maturity of the remaining principal amount from Jan. 31, 2023 to a date that is four years from the closing date of the debt exchange and an increase in the interest rate from 7.25% to 8.5%.

Completion of the debt exchange is subject to regulatory approval, among other things.

Amendment to senior facilities

The company has also entered into a commitment letter with HSBC Bank Canada and ATB Financial, two of the lenders under the senior facilities, to provide for amendments to take effect upon completion of the debt exchange.

At the time the amendments become effective, the third lender in the syndicate will cease to be a member of the company’s bank lending syndicate.

The amendments include an extension of the maturity from July 1, 2022 to a date that is three years following the closing date of the debt exchange; a reduction in the amount available under the syndicated revolving facility from C$50 million to C$35 million, with no change to the amount of the C$10 million operating facility; and revisions to some financial covenants.

The covenant revisions include a reduction of the debt-to-capitalization ratio from 0.6 to 1 or less to 0.5 to 1 or less, a new requirement for trailing 12 months EBITDA of $19.3 million in the first quarter of 2022 and $16.4 million in each of the second and third quarters of 2022, in each case, if the senior facilities are drawn above C$25 million during such fiscal quarter or the net book value of property, plant and equipment is less than C$250 million for the prior fiscal quarter.

Rights offering details

The company plans to file a preliminary short form prospectus for the rights offering in all of the provinces of Canada. The rights are expected to be listed for trading on the Toronto Stock Exchange and will be exercisable for not less than 21 days following the date of mailing to shareholders of the final prospectus.

Western, the standby purchasers, G2S2 and Ronald Mathison have entered into a standby purchase agreement. G2S2 currently holds roughly 25% of the outstanding common shares, and Matco, together with its controlling shareholder Ronald Mathison, holds about 19.93%.

Armco and Matco have committed to subscribe, directly or through an affiliate, for 55.6% and 44.4%, respectively, of any unsubscribed common shares under the rights offering. Alberta Investment has agreed not to participate in the rights offering.

A condition of the debt exchange is that the board will appoint two persons designated by AIberta Investment Management to be directors and that the company and Alberta Investment will enter into an investor rights agreement.

Under the rules of the Toronto Stock Exchange, the issuance of the common shares requires the approval of a majority of shareholders of the corporation, excluding shares held by Alberta Investment.

Western Energy is a Calgary, Alta.-based oilfield drilling company.

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