Relevant Document:Cash Management Order
At an uncontested first day hearing today, Judge David Jones granted all of the Diamond Offshore Drilling debtors’
first day relief, including the approval of the debtors’ cash management motion on an interim basis. Paul Basta of Paul Weiss, counsel for the debtors, in addressing why the debtors filed chapter 11 despite their over $435 million of liquidity, stressed that the debtors are seeking to protect the company, particularly its $1.4 billion contract backlog, in light of the current market environment.
Reorg’s live blog coverage of today’s first day hearing can be found
HERE.
The hearing saw remarks from Dennis Dunne of Milbank, counsel for the ad hoc committee of unsecured bondholders holding about 50% of the company’s unsecured bonds, indicating that the ad hoc committee is ready to “substantially equitize its debt” and “move forward quickly towards a plan.”
He disclosed that the ad hoc committee has put together a term sheet that it will send to the debtors this week. Dunne stated that the parties will also be discussing the appropriate amount of capital the company will need going forward to “not only survive post-chapter 11” but also to “take advantage of opportunities in the industry” that may come about in both the near- and medium-term. Dunne indicated that the ad hoc committee would be willing to provide such capital, if necessary.
Basta said during his opening remarks that in the wake of the collapse in oil prices, the debtors have faced considerable requests for contract concessions. Basta also noted that the debtors have
filed an adversary proceeding against Beach Energy, a customer in Australia, that is seeking to terminate a rig contract after the debtors had spent months preparing the rig. Beach, according to Basta, waited for the rig to be on location in Australia so that when it terminated the contract, Beach could be at a point of “maximum leverage” in renegotiating the terms. Basta said that the debtors are hopeful that Beach withdraws its termination, and emphasized that the debtors are seeking to avoid similar situations with other customers. As part of the first day relief, the debtors were seeking, and obtained, an order confirming the application of the automatic stay, intended to, among other things, prevent customers from taking action similar to Beach.
Daniel Shamah of O'Melveny, counsel for Beach Energy, noted that Beach does not object to the debtors’ motion for an order confirming the application of the automatic stay, commenting that Beach disagrees with the debtors on the issue of whether the termination was valid. Judge Jones stressed that the court will be “as flexible as [the parties] can possibly imagine” in terms of trying to craft a mechanism to get a resolution, and acknowledged that the parties will need some time to digest the chapter 11 filings and the adversary complaint, Judge Jones stresses that the court will be “all ears” when the parties are ready to pursue a particular path.
Bob Britton of Paul Weiss then addressed the court, reviewing the company’s history, global operations, capital structure and events leading to the chapter 11 filing. Britton cited, as did the first day pleadings, a prolonged period of overcapacity, underutilization and suppressed day rates in the offshore rig contractor market as well as market conditions such as the oil price war between OPEC and Russia and the Covid-19 pandemic.
The first day pleadings were then presented by Christopher Hopkins and Shamara James of Paul Weiss. As noted above, Judge Jones approved the debtors’ cash management motion on an interim basis. During his presentation on the motion, Hopkins explained that the debtors are not seeking approval of cash collateral or DIP financing at this time, meaning that the cash management order includes provisions that are not typically found in cash management orders, including a 13-week budget.
Judge Jones scheduled a second day hearing for May 27 at 9 a.m. ET.
Remarks from Counsel for Ad Hoc Committee
Dunne, speaking on behalf of the ad hoc committee of unsecured bondholders noted that his committee holds approximately 50% of the $2 billion of outstanding principal amount of the unsecured bonds. Dunne indicated that the ad hoc committee would be filing a Rule 2019 statement shortly. Dunne noted that following the debtors’ missed coupon payment on April 15, the ad hoc committee reached out to the company to “start a dialogue.” He noted that the debtors, “to their credit,” were open to the signing of NDAs and allowing the ad hoc committee to gather information. Dunne stressed that the debtors were “quite forthcoming” about their plan to file in the near time and their related objectives.
Dunne said the case is predominantly a balance sheet restructuring. According to Dunne, the ad hoc committee was willing to negotiate the terms of a potential deal and RSA prior to the filing, but, as the debtors explained, the company “needed to file quickly” and needed “to get the automatic stay in place” to protect the company’s cash and assets. The ad hoc committee agrees with the debtors that the company is overlevered and needs to restructure its debt stack, he added.
Dunne said the company and its stakeholders should work together to try to best position the company for future success, adding that there may be an advantage being “the first to file and first to exit” in the debtors’ industry when other peers may need to file as well. “It is in that spirit” that the ad hoc committee will send over its term sheet (as discussed above), said Dunne, who expressed hopes that it would galvanize a discussion.
In closing, Dunne stated that the ad hoc committee was “generally supportive” of the first day motions, subject to certain ongoing diligence and a few clarifications.
Comments By RCF Agent
In connection with the debtors’ cash management motion, which was unopposed, the court heard comments from Trey Wood of Bracewell, counsel for Wells Fargo as RCF agent, who acknowledged that the RCF agent was amenable to the proposed revisions to the interim
cash management order. Although there were still some “open issues” in connection with the debtors’ budget from Wells Fargo’s perspective, Wood outlined the notice provisions regarding payments contained in the revised proposed order as well as other notice provisions, and with that, the parties “resolved the issue” Wells Fargo that gets the parties “past today.”
Wood explained that Wells Fargo believes it is “uniquely situated” in the chapter 11 cases, noting the recent draws on the RCF totalling more than $430 million, explaining that it is the proceeds of the draws that the debtors seek to use to fund their chapter 11 cases. Wood also reviewed the modifications to the cash management system leading up to the petition date to “move the cash out of the RCF lenders account” to avoid any kind of “offset or cash collateral issues.” He pointed out that there was some cash left at two institutions that are RCF Lenders - JPMorgan and HSBC. As a result, the RCF agent is reserving its applicable setoff rights and requiring the maintenance of certain minimum balances because the debtors have not sought the use of cash collateral.
In addition, Wood also reviewed the assets of the various guarantors, explaining that the RCF lenders may be “the only creditor” at certain levels, which raises concern that it is the cash of those guarantors that is being used to fund the obligations of the other debtors and to pay creditors that are “structurally junior” to the RCF lenders’ position, including “a lot of the prepetition claims” that are being paid through relief being sought at the first day hearing. Wood stressed that the RCF lenders are reserving their rights for the final hearing and may seek “additional protection of our interests for continued use of the cash and assets” at the RCF lenders’ guarantors and our borrowers.
Although the court suggested the possibility of approving the debtors’ critical vendor motion on a final basis at today’s hearing, providing that the parties could return to the court in the event a dispute arises, the court ultimately approved the motion on an interim basis at the request of the RCF agent, who cited the abbreviated timeline under which the RCF agent and its advisors received the cash collateral budget in asking the court to set a final hearing to consider the “larger number” set forth in the motion.