Thu 08/27/2020 13:30 PM
Relevant Items:
Covenant Tear Sheet, Debt Document Summaries
Weatherford’s Debt Documents

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Weatherford International, a multinational oilfield servicing company, filed for bankruptcy in the Southern District of Texas on July 1, 2019, and emerged on Dec. 13, 2019. The company emerged with three pieces of debt: a $450 million ABL facility, a $195 million letter of credit facility, and $2.1 billion in 11% senior notes due 2024 (the “Exit Notes”). The company is currently working toward issuing $500 million of new 8.75% senior secured first lien notes due 2024, but has not yet completed the transaction. The proceeds from the new first lien secured notes, if issued, would be used to repay and terminate the ABL (as well as providing general liquidity).

If Weatherford’s ABL does remain outstanding, the company may be heading toward a breach. In its most recent 10-Q, it disclosed that the Covid-19 pandemic and the “precipitous decline in oil prices” have “result[ed] in a significant reduction in our accounts receivable, inventory and rental tools, particularly in North America, which comprise the most significant components of the borrowing base of our credit facility.” Weatherford disclosed that “we expect that a breach of our covenants under our ABL Credit Agreement could occur in the first half of 2021,” and that such a default could “raise[] substantial doubt on our ability to continue as a going concern within the next 12 months.”

The company’s capital structure as of June 30, 2020, the end of its second quarter, is shown below for reference.

Note that while outstanding borrowings and letters of credit under the ABL facility suggest availability should be $307 million, the company disclosed that its availability is only $91 million, likely due to a reduced borrowing base.
Issues in the ABL

The ABL contains a springing financial covenant that requires a fixed charge coverage ratio of 1x if excess availability is less than the greater of 15% of the Line Cap and $50.625 million. A reduced borrowing base would reduce the excess availability threshold which could trigger the financial maintenance covenant.

The debt covenant under the ABL permits the Exit Notes, but does not explicitly permit any refinancing thereof. That means that, to the extent the company wanted to refinance the Exit Notes, it would need to be permitted to incur $2 billion of new-money debt. Nevertheless, refinancing the Exit Notes is mentioned in the ABL’s restricted payments covenant and in another negative covenant, suggesting that this may be an unintentional oversight. The debt covenant in the LC Facility does explicitly permit refinancing of the Exit Notes, which supports this theory.
Current Negative Covenant Capacities

Given the company’s financials as of June 30, we estimate that it could incur $10 million of additional debt that can be secured by a first lien basis on either the ABL priority collateral or the LC facility priority collateral, $500 million of debt secured by junior liens on the collateral (incurred by a loan party), and at least $718 million of unsecured debt (potentially more depending on the ratio basket in the notes, but any amount over $1.146 billion must be subordinated and incurred by a loan party).

We also estimate that the company could make $200 million of restricted payments and at least another $100 million of investments (up to $225 million, with $25 million of that amount limited to investments in unrestricted subsidiaries).

Note that, because the Exit Notes and the LC Facility are more restrictive debt documents, the termination of the ABL will not alter these capacities (though, of course, the new indenture could).
New Secured Notes

The $500 million of secured notes will need to be permitted under the LC facility and Exit Notes. The Exit Notes contain a $1 billion credit facilities basket, which can include bond debt. The LC facility has a basket specifically permitting the ABL and any Permitted Refinancing Indebtedness related thereto, up to $495 million. The remaining $5 million of first lien secured debt would likely need to come from the LC facility’s general debt and general lien baskets, which would leave the company with only $5 million of additional first lien secured debt capacity.

--Alisha Turak
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