Some important updates to the previous VAL restructuring post:
1. Different tranches of Senior Notes have different weightings
This impacts the value (and underwriting obligations) of the Senior Note e.g. Pride notes are ~1.7x the value of VAL notes (closer to 1.65x after subscription rights are taken into account)
2. They removed the 23% additional note holder requirement
This means anyone who joins the Backstop Party (and any rational investor will always want to take up max subscription rights because this is where most of the equity value accrues) will have pro-rata underwriting obligations to ANY unsubscribed portion of the new note which excluding the 50.9% controlled by the Ad Hoc group could be as high as 49.1% (though not really possible since >2/3 of debt holders must approve of the restructuring scheme for it to pass).
This is my calculation of the additional investment required (full uptake of original subscription rights + underwriting obligations). Scenario 3 is not possible (above reason). However additional funding could as high as low teens % of the adjusted Principal (Adj Principal = Original Principal x Claims Multiplier). For example a Pride Note holder who purchased a $100 par value senior note would have additional funding needs of up to $20 (assume a midway scenario between 2 and 3: $100 x 1.7 x 12% = ~$20).
On the negative side, dropping the requirement could signal lower confidence in external support for the scheme. There is also no estimate on the timing on when the scheme will be voted on
3. The Revolving Credit Facility (RCF) providers are against this deal
This was news to me but it seems that the banks are against taking equity. They want a scheme where the senior notes equitise but the banks maintain their debt position in the new VAL (newCo) and the new secured note raising is increased by an additional $300m. However as I understand it, bankruptcy judge will NOT put weight to any concerns of parties which he/she thinks are being made whole in the scheme. Since the RCF are getting 32.5% of the new equity (worth ~$3.9bn of newCo assuming no adjustments to the Asset Values) for their $551m of lending to VAL, I think there is sufficient 'fat' for a judge to consider them adequately compensated for.
However this does mean a new revolving credit facility is unlikely to materialise
4. Restructuring advisor assumptions
The projected financials I've seen by the restructuring advisors estimate: a) negative unlevered cashflows until 2024, b) cumulative cash burn (assuming removal of newbuild rig obligations) from today onwards maxing out at -$88m by 2023 which is well below their cash position post restructuring.
The assumptions on utilisation and dayrate used in their model seem okay: ~40% utilisation and $1xx dayrates with only gradual improvements. The bigger influence on cashburn will be whether the newbuild contracts for DS-13, DS-14 rigs being built in South Korea (total $390m cumulative by 2022) are wiped out by the Chapter 11. As per my original understanding, a bankruptcy judge is very likely to render these contracts void.
Secondly a study done by bondholders using new estimates for VAL's asset values and with two scenarios: 50% and 100% of their assumed asset value ($3.1bn and $5.2bn respectively). In the study, the revolving credit facility is paid back their full lending amount and the senior notes are adjusted according to their Claim Multiplier. The estimated recovery rate of bonds' par value are:
VAL/Legacy Rowan: 23%-54%
Ensco International: 19%-55%
Pride: 28-60%
Ensco Jersey: 44-103%
Summary
In light of the new information I adjust downwards the % chance of the restructuring scheme passing whilst slightly adjusting upwards the upside estimate (higher chance of additional equity participation) and the survival probability (post restructuring). The investment timescale is still 3-5yrs.
The new return table based on VAL's current book value and for VAL bonds is shown above. To adjust for other tranches the rough estimate is the Return x Claim Multiplier. An alternative is to use the bondholder study conclusions: e.g. VAL bond trading at 5% of par has return profile of 4.6-10.8x.
I think the VAL restructuring deal is still worth investing if one pays <10% of par value for the bonds (based on the VAL bond tranches) and a 2-4% portfolio position (including all the funding obligations) is roughly right given the risk/reward profile.
The deadline for joining the Backstop Parties is September 10th (NY time). Interested parties should contact ValarisInquiries@stretto.com and they will be put in touch with someone at Lazard who are co-ordinating the process. Non-US persons will need to sign joinder contracts and possibly put underwriting commitment monies into escrow.
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