Thu 09/03/2020 22:30 PM
Relevant Documents:
Whitebox Complaint
Whitebox Injunctive Relief Memorandum of Law
Transocean Injunctive Relief Response

This afternoon, District Judge George Daniels of the Southern District of New York denied Whitebox’s motion for a temporary restraining order pending a hearing on a preliminary injunction in Whitebox’s Sept. 2 suit to halt the Transocean exchange offer currently set to expire tomorrow, Sept. 4. Charging that Transocean has “deliberately misstated and withheld materials facts” concerning the proposed exchange offer in its offering memorandum in violation of securities laws, Whitebox sought to enjoin the exchange offer for an additional two weeks or 10 business days until Transocean “correct[ed]” its disclosures and to permit previously tendering noteholders to withdraw their tenders and receive their old notes.

In denying the TRO request, Judge Daniels viewed the availability of money damages for potentially aggrieved bondholders as undercutting claims of irreparable harm, and an articulation of the balance of the equities as not interfering with the proposed exchange offer given the impending closing date. “You’re just bondholders, you’re not entitled to anything other than cash,” Judge Daniels said, immediately thereafter appearing to conflate the principle of the time value of money with contractual interest payments in further colloquy with counsel to Whitebox. “I’m trying to figure out why two days before [the exchange offer] closes you’re asking me to change the status quo,” Judge Daniels told plaintiff’s counsel. The court observed that many parties have already tendered into the exchange and the instant dispute “is fairly public.”

Counsel for Transocean said the company may leave the exchange offer open for “another day or two” beyond the current Sept. 4 expiration “to make sure that the smoke that has been generated by [the litigation]” has cleared in light of the possibility that “the market may be spooked” by Whitebox’s allegations.

TRO Hearing

Judge Daniels questioned counsel for Whitebox, Antonia Apps of Milbank, at length today about the nature of the harm being alleged and whether it was sufficient to justify injunctive relief. Apps posited that “a pause” is “a routine matter in these types of deals” and repeatedly noted the practical difficulties of “unscrambl[ing]” completed exchange offers. However, the court held to the notion that bondholders are “not entitled to anything other than cash” and focused on the idea that regardless of whether the exchange offer went forward, Transocean would still be obligated to existing bondholders in the same amounts as were previously owed. “I don’t know what you’re asking me to protect,” Judge Daniels said, observing that existing noteholders with guarantees would retain the same guarantees regardless of whether the exchange offer occurred. Apps pushed back on this point, arguing that the value of the existing priority guarantee notes’ guarantee would be diluted if the company does not grant - as the complaint alleges is due - a $1.5 billion guarantee to the existing notes from the newly created entities guaranteeing the new exchange notes.

Apps argued that Transocean is in a “sufficiently precarious financial condition” for a reliance on monetary remedies to be insufficient relief and that the alleged misstatements in the offering memorandum distorted the economics by which other noteholders determined whether to exchange their notes. The court questioned whether the harm being articulated was truly to the plaintiff or to others not party to the litigation. Judge Daniels disagreed that the alleged ongoing securities law violations would constitute irreparable harm to the plaintiffs, as opposed to other non-parties to the suit.

Apps also told the court that a notice of default has been sent by holders of the requisite 25%-plus of the impacted bonds, an update from a footnote in the injunctive relief motion that stated “[t]he holders of 25% of the notes are in the process of obtaining the relevant documentation and hope to be able to serve the appropriate notices of default on TINC in the next few days.”

Appearing for Transocean, Glenn Kurtz of White & Case told the court that given the company’s current level of liquidity and recent operating results, it is unfounded to claim that the company is approaching bankruptcy. The exchange offer will only serve to strengthen the company’s balance sheet, he submitted. Kurtz added that the offering memorandum did not contain any misinformation, and argued that including the language sought by Whitebox would itself be a violation of the securities laws’ prohibition on false and misleading information. Kurtz said that the plaintiff had access to the alleged false information since August 10, but calculatedly filed for injunctive relief only days before the exchange offer was set to expire in an attempt to “hijack the process.” The court was receptive to the company’s position on this timing argument. Judge Daniels asked Kurtz if the new notes interfered with the existing guarantee on the plaintiff’s priority guarantee notes, and Kurtz replied they “absolutely [do] not.”

Judge Daniels denied the motion for a TRO on the grounds that Whitebox had not demonstrated a likelihood of success on the merits or irreparable injury. From a temporal perspective, the court found that Whitebox’s allegations that Transocean may not have sufficient cash to satisfy a monetary judgment in whole in the future was insufficient to grant a TRO now.

Lawsuit and Request for Injunctive Relief

Whitebox filed a complaint and motion for temporary restraining order and preliminary injunction yesterday, Sept. 2, alleging that Transocean has “deliberately misstated and withheld material facts” in the offering memorandum for its proposed exchange offer concerning Transocean’s “legal ability to execute the series of transactions culminating in the Exchange Offer without violating its existing indentures, the disclosure of which would materially alter the economics of the offer for all noteholders,” which violates sections 14(e) and 20(a) of the Securities Exchange Act. As a result, Whitebox sought injunctive relief to enjoin the exchange offer from closing for “an additional two weeks or 10 business days” until Transocean “correct[ed]” the alleged “misstatements and omissions” in the offering memorandum and to permit previously tendering noteholders to withdraw their tenders and receive their old notes.

At the heart of the dispute is what the complaint refers to as “a multi-step scheme intended to improperly remove the structural seniority” of the priority guarantee notes, “starting with a private exchange transaction involving an interested director and culminating in the fraudulent Exchange Offer.” Whitebox says that when Transocean created the new structurally senior “lower tier notes guarantors” and transferred the upper tier notes guarantors’ assets to the new entities, the company was required pursuant the 2025 and 2027 priority guarantee notes indentures to cause the lower tier notes guarantors to issue guarantees to the notes, but did not.

The complaint charges that the offering memorandum contains material misstatements and omissions regarding:

  • Transocean’s alleged breach of the indentures for the 7.25% priority guarantee notes due 2025 and 8.0% priority guarantee notes due 2027;

  • Transocean’s ability to structurally subordinate the 2025 and 2027 priority guarantee notes; and

  • The “purported” structural seniority of the new senior guaranteed notes upon completion of the exchange offer.

Whitebox says the offering memorandum’s statements that “‘the Existing Notes, including the Existing Guaranteed Notes, will be structurally subordinated to the New Senior Guaranteed Notes and the guarantees thereof to the extent of the value of the assets of the Lower Tier Notes Guarantors due to the fact that the Existing Notes do not, and will not, benefit from guarantees from the Lower Tier Notes Guarantors’” are materially false and misleading “in that they fail to state that the Lower Tier Notes Guarantors are required to provide a guarantee of the Senior Existing Guaranteed Notes, and thus the New Senior Guaranteed Notes will not be structurally senior to the Senior Existing Guaranteed Notes.” Whitebox also faults Transocean for failing to “mention the fact that as a result of its failure to cause the Lower Tier Guarantors to issue this guarantee, TINC is in default under the indentures governing the Senior Existing Guaranteed Notes.”

The motion for a TRO and preliminary injunction argues that the request for injunctive relief “is extremely limited,” positing the requested “corrective disclosure,” ability for noteholders to withdraw previously tendered notes and “additional two weeks, or 10 business days,” extension of the exchange offer would “allow noteholders to make a fully informed decision based on a full and accurate disclosure by TINC.” Such relief “cannot possibly harm the Defendants given that they have already once extended internal deadlines in the Exchange Offer for noteholders to tender their notes,” the motion continues, concluding that the balance of hardships tips in favor of granting the requested relief, as does the public interest in “ensuring compliance with the securities laws and full and fair disclosure by public companies for investors.”

In support of the injunctive relief motion, Whitebox filed supporting declarations from Marius Dahl, Head of Ocean Energy at DNB Bank, Antonia Apps of Milbank and Nickolas Stukas, Head of Credit Relative Value at Whitebox. The Apps declaration attaches, among other items, various correspondence between an ad hoc group of bondholders represented by Milbank and Transocean, and the Stukas declaration sets forth Whitebox’s holdings of Transocean securities.

The Dahl declaration surveys the current state of the offshore oil and gas market and concludes that if Transocean was required to immediately pay down $1.5 billion in accelerated debt on account of the alleged breaches of contract and/or lose access to its $1.3 billion revolving credit facility (because drawing down on such facility would violate debt capacity restrictions in their other debt issuances), “a liquidity shortfall would ensue that would undermine their ability to maintain operations in the ordinary course.” “While the Defendants would likely violate minimum liquidity covenants in the second quarter of 2021, the distressed nature of the offshore drilling market, as described above, would likely expedite the Defendants’ liquidity and operational constraints,” Dahl continues, concluding that - in the absence of an intervening material change in the market - this shortened liquidity runway “would likely force the Defendants to pursue a restructuring or bankruptcy in the near term that would, in all likelihood, impair their unsecured creditors (including with respect to damage claims resulting from the Exchange Offer and this litigation).”

Shortly before today’s TRO hearing, Transocean filed a response to the injunctive relief motion saying it “is too late and lacks merit.” The response argues that Whitebox “unreasonably delayed” seeking the requested injunctive relief, cannot prove a likelihood of success on the merits of securities law or breach of contract claims and has not demonstrated the irreparable harm necessary for injunctive relief, which could be measured in money damages, according to the company. Transocean also asserts that the balance of the equities supports allowing it to continue with its in-process deleveraging transactions and frames the public interest at stake as protecting “open markets where sophisticated investors can determine whether to participate in an exchange offer,” which would be harmed “if a very small noteholder can usurp investors that have already committed more than $1 billion in support of the transactions.”

Transocean suggests that the requested relief, which the response says “bears no relation to the alleged claims and is not designed to remedy the supposed [asset] transfers which have already occurred,” “reveals [Whitebox’s] true motive.” “In seeking to delay the exchange transactions and obtain a mechanism for holders to withdraw their tenders, Plaintiffs seek more time to attempt to dissuade other holders from participating in the exchange,” the response continues.

Elsewhere, the response critiques the plaintiffs as “distressed debt investors” that are “engaged in a campaign to impede the Company’s liability management efforts” and “pushing for a ‘comprehensive restructuring’ to obtain an oversized recovery for themselves at the expense of the Company and other stakeholders.” The response contrasts this with the idea that Transocean “is well positioned to weather the storm” of “current market volatility” because of its ongoing liability management transactions.

The docket for the lawsuit is available on Reorg here.
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