Thu 09/24/2020 19:40 PM
Share this article:
Relevant Documents:
Answer and Counterclaims
Notice of Motion for Summary Judgment
Summary Judgment Memorandum of Law

Today, Transocean filed an answer and five counterclaims, with a motion for summary judgment on the counterclaims, in the Whitebox suit challenging the company’s ability under the indenture for the existing priority guarantee notes, or JPGNs, due 2027 to layer in a directly held structurally senior subsidiaries without those subsidiaries guaranteeing the JPGNs. Transocean provided structurally senior guarantees to the new senior priority guarantee notes, or SPGNs, created in its recently-closed exchange transactions without providing matching guarantees to the JPGNs.

Continue reading for the Americas Core Credit by Reorg team's update on the Transocean situation, and request a trial to access our coverage of thousands of other distressed and performing credits.

The counterclaims seek declaratory judgments that the exchange transactions do not violate the indenture as claimed and that a notice of default delivered on Sept. 2 by 2027 existing guarantee noteholders, including Whitebox and PIMCO, is invalid and must be withdrawn. Prior to the filing of the motion for summary judgment, a Sept. 22 Covenants by Reorg analysis concluded that, based on publicly available information about the transactions, a court may find that the company breached the successor guarantors covenant at issue.

In a letter to the court requesting an expedited hearing on its summary judgment motion, Transocean says it is “essential” for the motion to be heard and decided by Dec. 1. Maintaining its position that Whitebox’s claim of a default is baseless, Transocean acknowledges “it creates a series of significant problems for the company” if the alleged default turns into an event of default under the 2027 JPGN indenture after the expiration of a 90-day cure period on Dec. 1. The letter notes that the “purported” event of default could give rise to “an alleged” acceleration of $612.1 million of outstanding debt under the 2027 indenture and Transocean could lose access to approximately $1.3 billion of revolver availability - lenders could refuse to honor draw requests, issue new letters of credit or performance bonds or extend letters of credit that would otherwise automatically renew. Access to the RCF “is critical for … compliance with [] contractual obligations and ability to obtain future work,” the letter continues.

Whitebox / PIMCO Notice of Default

The Sept. 2 notice of default under the 2027 JPGN indenture, sent by funds affiliated with Whitebox and PIMCO as holders of 25.1% of the notes, is attached to a declaration in support of the motion for summary judgment from Joshua Weedman of White & Case, counsel to Transocean. The notice asserts that the upper tier notes guarantors, which guaranteed the 2027 JPGNs, have “transferred all or substantially all of their assets, consisting of the capital stock of such subsidiaries,” to the newly-created lower tier guarantors, triggering a requirement for the new lower tier guarantors to guarantee the 2027 JPGNs (Transocean refers to the newly-created entities as the “lower tier notes guarantors” whereas the notice of default calls the same entities the “Mid-Co Guarantors”). Transocean’s failure to provide such a guarantee constitutes a default under section 11.03, “successors and assigns,” of the 2027 JPGN indenture, according to the notice. The 2027 JPGN indenture is attached to the Weedman declaration.

The Sept. 2 notice also includes a “conditional declaration of acceleration,” stating that if the alleged default “is not remedied or otherwise cured within 90 days from the date hereof, and as a result an Event of Default occurs and is continuing in accordance with Section 6.01(4) of the 2027 Indenture, this letter shall automatically constitute a declaration of acceleration in accordance with 6.02 of the 2027 Indenture, rendering the principal amount of 2027 Guaranteed Notes then outstanding, and any accrued and unpaid interest thereon, immediately due and payable.” The notice says that notwithstanding the existence of the guarantee default, the requisite holders “are prepared to discuss the possibility of a forbearance of any such acceleration, and … are available … to begin those discussions.”

Transocean responded to the notice on Sept. 7, arguing that the exchange transactions were allowed and that the purported notice of acceleration is defective, as there is no default, “let alone a continuing” event of default as required under the 2027 JPGN indenture. Transocean’s response is attached to the Weedman declaration.

Transocean says the notice of default “has also artificially depressed the price of the New Senior Guaranteed Notes, which has impaired the Company’s ability to engage in any future exchange transactions with the Company’s existing bondholders or otherwise issue additional New Senior Guaranteed Notes in order to further reduce the Company’s near-term debt liabilities.”

Transocean Summary Judgment Motion

Transocean asserts that there has been no default under the 2027 indenture and seeks summary judgment on its 5 counterclaims:

  • Declaring plaintiffs’ notice of default “invalid and of no force or effect.”

  • Declaring that none of the “purported events of default” alleged by plaintiffs are defaults under the 2027 indenture.

  • Declaring that the exchange transactions do not violate section 11.03 of the 2027 indenture.

  • Declaring that plaintiffs “have no right to exercise any remedies under the 2027 indenture.”

  • Directing plaintiffs to withdraw the notice of default.

Transocean first focuses on permitted indebtedness, arguing that clause (a)(12) of the debt covenant of the 2027 JPGN indenture “explicitly permits the Company and its subsidiaries to incur up to $2.4 billion of [] structurally senior debt.” The exchange transactions “fit squarely within - and are expressly permitted by” the indenture, the motion continues. Transocean says the 2020 exchange transactions used the same structure that was previously used to provide structural seniority for the 2027 JPGNs and that therefore the latest transaction structure is simply the same as “the one [the 2027 JPGNs] are benefitting from for their own structural seniority.” The motion also says that while the new exchange notes are structurally senior, “they do not impact the bargained-for structural seniority of the 2027 Guaranteed Notes to the Legacy Unsecured Debt.”

Second, Transocean argues that the exchange transactions do not violate section 11.03 of the 2027 JPGN indenture. The motion frames section 11.03 as a “boilerplate” “permissive ‘successor liability’ provision” that - relying on the principle of interpretation that specific contract provisions govern over general ones - does not preclude or supersede the express contract rights to issue new senior debt in section 4.04.

The motion next pivots to the argument that section 11.03 is not violated because the exchange transactions do not involve a transfer of “all or substantially all” of the upper tier notes guarantors’ assets. Consistent with prior statements, Transocean describes the creation of the lower tier notes guarantors as an “internal reorganization.” “[T]here was no transfer or disposition of any of the Upper Tier Notes Guarantors’ assets, much less all or substantially all of them,” the motion says, distinguishing that “[t]he Company’s value is in its operating companies.” This argument relies on the framing that the upper tier notes guarantors are “merely holding companies” that “held indirect interests in the Company’s operating assets” before the “internal reorganization” and now “continue to be the same holding companies with indirect interests in the same operating assets.” “There was no change to the Upper Tier Notes Guarantors’ value or assets resulting from the Company’s internal reorganization,” Transocean asserts. The motion returns to the idea that the exchange transactions are “merely” the incurrence of structurally senior debt “as explicitly permitted by the 2027 Indenture.”

Transocean says that even if the internal reorganization involved a transfer, it still would not involve a transfer of “all or substantially all” of the upper tier notes guarantors’ assets. The structurally senior debt “would be less than 5% of the guarantors’ consolidated assets,” Transocean says, “nowhere close to all or substantially all of their assets.” The motion reaches that conclusion by positing that the entities that guarantee the 2027 JPGNs have consolidated assets of approximately $22 billion by virtue of their ownership of “all of the Company’s operating entities through their ownership of the equity interests of the Lower Tier Notes Guarantors and [structurally senior asset holding companies].”

The final argument in the motion for summary judgment is that the “purported notice of acceleration” “is also baseless.” Transocean reiterates its argument that there is no default, therefore there can be no “event of default” triggering acceleration. Further, the motion notes that any notice of acceleration is defective from a temporal perspective because “requisite holders” and any event of default must each be measured at the expiration of the 90 day cure period which has not yet occurred.

In support of the motion for summary judgment, Transocean also filed a declaration from Thaddeus Vayda, Transocean Ltd. Vice President, Corporate Finance and Treasurer, and a statement of facts.
Share this article:
This article is an example of the content you may receive if you subscribe to a product of Reorg Research, Inc. or one of its affiliates (collectively, “Reorg”). The information contained herein should not be construed as legal, investment, accounting or other professional services advice on any subject. Reorg, its affiliates, officers, directors, partners and employees expressly disclaim all liability in respect to actions taken or not taken based on any or all the contents of this publication. Copyright © 2020 Reorg Research, Inc. All rights reserved.
Thank you for signing up
for Reorg on the Record!