Thu 08/26/2021 15:05 PM
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Relevant Items:
Ion Geophysical’s Debt Documents
Ion Geophysical’s Covenants Tear Sheet, Debt Document Summaries

To view the relevant documents above as well as our Americas Covenants team's coverage of thousands of other stressed and distressed debt situations including the Ion Geophysical exchange offer, request a trial here: https://reorg.com/trial

As previously reported by Reorg, in April, Ion Geophysical completed an exchange offer and rights offering pursuant to which it exchanged an aggregate principal amount of $113.5 million, or approximately 94.1%, of its then-outstanding 9.125% secured priority notes due 2021 (the “Old 2L Notes”) for a combination of cash, stock and new 8.000% second lien convertible notes due 2025 (the “New 2L Notes”). On April 19, the company amended its revolving credit agreement to permit the New 2L Notes issued in connection with the exchange, among other changes.

In the rights offering, an aggregate amount of $41.8 million of rights (including over-subscriptions) was exercised by the holders of the company’s common stock, of which $30.1 million was allocated in new 2025 second lien convertible notes and $11.8 million was allocated in 4.6 million shares of Ion common stock. Certain parties that backstopped the rights offering were paid 5% backstop fees in kind, resulting in the issuance of an additional $1.5 million aggregate principal amount of new secured priority notes and 215,241 shares of common stock.

In connection with the April 2021 notes exchange, the company and the Old 2L Notes indenture trustee entered into a supplemental indenture to the indenture governing the Old 2L Notes, which released the second priority security interest in the collateral securing the Old 2L Notes and deleted substantially all of the restrictive covenants in the Old 2L Notes Indenture. The first supplemental indenture also deleted the future guarantors requirement under the Old 2L Notes Indenture, though the guarantees supporting the Old 2L Notes were not released in connection with the amendment.

Despite the April 2021 exchange, approximately $7 million of Old 2L Notes remained outstanding as of June 30. The Old 2L Notes, though now unsecured and stripped of their negative covenant protection, were trading above par as of Wednesday, Aug. 25, compared with the New 2L Notes, which were trading at approximately 86 as of that time, according to Solve Advisors. The Old 2L Notes are callable at 103.5% up to but not including their Dec. 15 maturity date, which may partially explain why they are trading at a relative premium to the New 2L Notes.

The company’s capital structure and leverage metrics as of June 30 are shown below:

 
Notable Features of the New 2L Convertible Notes

Conversion mechanics - The New 2L Notes are convertible by holders at any time before close of business on the business day immediately preceding their maturity date (Dec. 15, 2025), at a conversion rate of 333 shares of common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of about $3 per share), plus approximately 56 common shares per $1,000 principal amount of notes issuable upon a Make Whole Fundamental Change.

The circumstances giving rise to a Make Whole Fundamental Change under the New 2L Notes Indenture are summarized in the below table.

On or after the 18-month anniversary of the issue date (Oct. 20, 2022), the Issuer may require the conversion of all or part of the New 2L Notes at the applicable conversion rate if its common stock has a 20-day volume-weighted average price of at least 175% of the conversion price then in effect.

The conversion obligation may, at the company’s option, be settled in cash, common stock or both.

Make whole mechanics - The New 2L Notes indenture provides for a cash make whole that is payable if the notes are redeemed before Dec. 15, 2023, or converted at the company’s option before April 20, 2024.

Upon the occurrence of a Make Whole Fundamental Change, an increased conversion rate (reflecting an additional 6.5 million shares of common stock) will apply to any conversion of the notes, which additional conversion obligation may, at the issuer’s option, be settled in cash, common stock or both.

Golden share (Series A Preferred Stock) exercisable upon default or event of default - As additional protection for holders of the New 2L Notes, the company issued one share of Series A Preferred Stock to the New 2L Notes trustee to be held for the benefit of the New 2L Noteholders. Upon the occurrence of a default or event of default under the indenture, the New 2L Noteholders may vote the Series A Preferred Stock with the company’s common stock as a single class having voting power equal to the shares of common stock that would be issuable upon a hypothetical conversion of the New 2L Notes (approximately 38.7 million shares, plus an additional 6.5 million shares issuable in connection with a Make Whole Fundamental Change).

As of Aug. 9, 2021, approximately 29.6 million shares of common stock were outstanding. Therefore, upon exercise, the Series A Preferred Stock would have majority voting power equal to at least 56.6% (not including shares issuable upon a Make Whole Fundamental Change) of the company’s outstanding common stock.

Notably, the New 2L Notes indenture clarifies that the voting power of the Series A Preferred Stock applies with respect to “any transaction (a) modifying, amending, supplementing, or waiving any provision of ION’s organizational documents or (b) entering into any merger, consolidation, sale of all or substantially all of ION’s assets, or other business combination transactions.” In other words, following a default or event of default under the New 2L Notes Indenture, the New 2L Noteholders may have sufficient voting power to veto a merger or sale of the company and/or any changes to the company’s charter, bylaws and other organizational documents.

In addition, the holder of the Series A Preferred Stock also has the right to appoint two independent directors to Ion’s board, which right was exercised in June 2021 with the appointment of Mark Doran and Gary Pittman.

Affiliated noteholders may not be restricted from voting on amendments - The New 2L Notes indenture contains separate and conflicting provisions that address the voting power of affiliated noteholders.

Section 2.09 of the New 2L Notes indenture, which governs the treatment of notes held by the issuer and certain of its affiliates, provides that for purposes of “determining whether holders of the required principal amount of notes have concurred in any direction waiver or consent,” notes held by the issuer, its subsidiaries or controlling affiliates are considered to be “not outstanding.”

Section 9.02 of the New 2L Notes indenture, which governs the circumstances in which noteholder consent is required to amend the indenture, contains similar language to that in Section 2.09, except that the language in Section 9.02 does not treat notes held by affiliated noteholders as not outstanding for voting purposes.

Therefore, Section 9.02 may be read as creating an exception to Section 2.09 that permits affiliated noteholders to vote their holdings with respect to amendments to the indenture but not with respect to other matters requiring noteholder consent.

--Julian Bulaon
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