KCA Deutag announces scheme of arrangement to implement restructuring

By Sarah Lizee

Olympia, Wash., Sept. 11 – KCA Deutag UK Finance plc announced via practice statement letter a scheme of arrangement in order to implement a proposed financial restructuring of the KCA Deutag group.

The scheme relates to $375 million 7¼% senior secured notes due 2021 (Cusips: 48244LAA6, G5222MAA3), $535 million 9 7/8% senior secured notes due 2022 (Cusips: 48244LAC2, G5222MAB1), $400 million 9 5/8% senior secured notes due 2023 (Cusips: 48244LAE8, G5222MAC9), a $407,314,617 term loan borrowed by KCA Deutag GmbH, $95 million of drawn revolving loans originally borrowed by Abbot Group Ltd., and the liabilities under a $115 million net overdraft facility made available by HSBC UK Bank plc.

The company said that as a result of concern over the group’s financial leverage and some debt maturities in early 2021, it engaged Houlihan Lokey EMEA, LLP as financial adviser in August 2019 to assist with conducting a strategic review of its balance sheet and finding a solution to the group’s capital structure. However, the range of options available to the group was “severely limited” by the outbreak of Covid-19.

In light of this, on March 26 the group announced that it was planning to use the applicable grace periods in relation to interest payments due on April 1 for the 2022 and 2023 notes, and would be formally engaging with its creditors, including an ad-hoc committee of term loan lenders and existing noteholders and the lenders under the revolving credit facility.

Standstill agreements

Having used the applicable grace periods, the group announced on May 2 that it had entered into a standstill agreement with the ad-hoc committee and each of the revolving facility lenders.

Under the terms of the standstill agreement, the members of the ad-hoc committee, the revolving facility lenders and the other creditors party to it agreed to standstill arrangements relating to the existing notes and credit agreement for a period running from May 2 until July 31.

The group gave various undertakings under the standstill agreement and accepted some restrictions on the conduct of its business. It was also agreed that the group would not make the April interest payments or any other interest or amortization payments during the standstill period.

As a condition of the standstill agreement, KCA Deutag Alpha Ltd. and other members of the group entered into a work fee letter with some members of the ad-hoc committee on May 2 and a work fee letter with some revolving facility lenders on May 4.

Under the work fee letters, Alpha procured the payment to the members of the ad-hoc committee of $18,608,038, and to the revolving facility lenders of $4,766,250.

Lock-up agreements

On July 31, the group announced that it entered into a lock-up agreement with each member of the ad-hoc committee and some revolving facility lenders setting out the agreed commercial terms of the proposed restructuring.

As the ultimate shareholders of the group had agreed to support the proposed restructuring, KCAD Holdings I Ltd., the ultimate shareholding entity of the group, and other holding companies in the group structure entered into the lock-up agreement as original parties.

Since the date of the lock-up agreement, additional creditors and some of the ultimate shareholders of the group have acceded to the lock-up agreement.

As of Sept. 11, existing noteholders of 92.76% of the outstanding principal amount of the 2021 notes, existing noteholders of 99.08% of the outstanding principal amount of the 2022 notes, existing noteholders of 99.01% of the outstanding principal amount of the 2023 notes, lenders of 92.81% of the outstanding principal amount of the term loan, lenders of 89.47% of the outstanding principal amount of the revolving loans and the existing overdraft provider, the existing LC lender and the existing undertaking lender have executed or acceded to the lock-up agreement, meaning that scheme creditors representing 96.09% of the aggregate amount of debt have entered into the lock-up agreement.

In line with the lock-up agreement and in order to help facilitate the scheme, on or prior to Sept. 11, the company entered into supplemental indentures dated Aug. 17 to amend terms of the existing indentures to ensure that any step taken or to be taken in connection with the scheme or the proposed restructuring did not and will not trigger a default or event of default.

On Aug. 21, Abbot procured payment to each participating creditor who had entered into or acceded to the lock-up agreement by Aug. 14 of a 15 bps lock-up fee.

New secured notes

As a result of the proposed restructuring, it is anticipated that in return for the issuance to the scheme creditors of $500 million of new 9 7/8% senior secured notes and ordinary shares by a newly incorporated Jersey company, the restructured group will have a strengthened and delevered balance sheet, with its total debt being reduced by about $1.4 billion, meaning it will have a pro forma net leverage of 1.4x, down from its current net leverage of 6.3x.

The restructured group’s annual debt servicing costs will be reduced to $49 million from $155 million, it will benefit from a five-year runway to maturity of the new notes, and it will have access to overdraft, cash pooling and bank account facilities.

Scheme meeting set

The company intends to apply to the court for permission to convene a virtual scheme meeting currently scheduled for Oct. 15.

In order to become effective, the scheme has to be approved by a majority in number of over 50%, representing at least 75% in value of each class of creditors present and voting at each relevant scheme meeting.

Scheme creditors that have questions in relation to the practice statement letter or the scheme may contact Lucid Issuer Services Ltd. (kcadeutag@lucid-is.com) as information agent. Lucid and Allen & Overy LLP are the solicitors.

Houlihan Lokey is acting as financial adviser to the company, Moelis & Co. is acting as financial adviser to the ad hoc committee.

Any party who would like to accede to the lock-up agreement should contact Lucid via e-mail and arrange the signing of an accession agreement.

KCA Deutag is an Aberdeen, U.K.-based drilling and engineering contractor for onshore and offshore oil, gas and geothermal markets.

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