Seventy Seven Energy Agrees to File Prepack by May 26; RSA Gives Opco Senior Notes Up to 98.67% of Reorg Equity

Relevant Document:
8-K

Seventy Seven Energy, the oilfield services company spun off of Chesapeake in 2014, announced this morning that it would commence a prepackaged chapter 11 proceeding based on a restructuring support agreement entered into with the debtors’ term loan lenders representing 92% of term loan and incremental term loan claims and 58% of the opco 2019 senior note claims. The RSA contemplates a filing in Delaware on or before May 26, with the solicitation process commencing on April 22. As further detailed below, SSE’s restructuring contemplates repayment of ABL claims including through a $100 million DIP, reinstatement of the $393 million term loan, partial reinstatement of the $99 million incremental term loan - with the non-reinstated incremental getting a 2% consent fee and $15 million - and $650 million in opco senior notes and $450 million in holdco senior notes getting 96.75% to 98.67% and 1.33% to 3.25%, respectively, of reorg equity, subject to dilution.

The consenting term loan lenders are being advised by Latham & Watkins, while consenting opco noteholders are being advised by Weil, Gotshal & Manges and Moelis. The company - who is being advised by Baker Botts and Lazard - will pay advisor fees for the consenting term lenders and noteholders. Signatories of the RSA include Bluemountain, Mudrick and Axar. Seventy Seven Energy's 6.5% notes due 2022 were working with Houlihan Lokey and Schulte Roth.

The term sheet contemplates the following claims to be restructured pursuant to the RSA:
 

• ABL claims consisting of undrawn letters of credit in the face amount of $14.7 million and “all other amounts outstanding,” with Nomac, PTL and Great Plains as borrowers and holdco, opco, landco, SSE Leasing and PTL Prop as guarantors. The deal provides for repayment with cash collateral (including through a $100 million DIP, which will also be used to finance the chapter 11.)
   
• Term loan claims of $393 million, with opco as borrower and holdco, Great Plains, Nomac, PTL, PTL Prop, SSE Leasing and LandCo as guarantors. Term loan claims are unimpaired and deemed to accept, with the plan providing for reinstatement pursuant to section 1124 of the Bankruptcy Code.
   
• Incremental term loan claims of $99 million, with opco as borrower and holdco, Great Plains, Nomac, PTL, PTL Prop, SSE Leasing and LandCo as guarantors. Incremental term loan claims are impaired and entitled to vote, with the plan providing: a 2% consent fee, $15 million and the remaining $84 million to remain outstanding under the facility’s existing terms, except that the incremental term loan will be amended to remove any future prepayment premium for 18 months after the effective date.
   
• Opco 6.625% senior note claims of $650 million, with opco as issuer, SSF as co-issuer and Nomac, PTL, Great Plains, PTL Prop, LandCo, HoldCo and SSE Leasing as guarantors. Opco note claims are impaired and entitled to vote, receiving 96.75% of new holdco equity, subject to dilution from a management incentive plan and new warrants. On account of guarantee claims, the opco notes receive the holdco litigation proceeds and, if the holdco notes do not vote in favor of the plan, their pro-rata share of 3.25% of new equity, as further described below.
   
• Holdco 6.5% senior notes claims of $450 million, with holdco as issuer. The holdcos are impaired and entitled to vote. If the class votes in favor of the plan, noteholders receive 3.25% of new holdco equity, subject to dilution from the MIP and new warrants, new A warrants and holdco litigation proceeds. If the holdcos do not vote in favor of the plan, creditors will share the 3.25% equity distribution with the incremental term loan - though lenders have agreed to waive their guarantee claim - and opco notes guarantee claims. According to the term sheet, the equity distributions if the holdco notes do not vote in favor of the plan include 1.33% of new holdco equity to the holdco notes and 1.92% of new holdco equity to the opco notes guarantee claims, in each case subject to dilution from the MIP and warrants.
   
• General unsecured claims will be paid in full in cash in the ordinary course. 
   
• Opco equity interests are impaired and deemed to reject. However, if each of the incremental term loan, opco and holdco claims vote in favor of the plan, opco equity gets new B warrants and new C warrants.

The management incentive plan is to provide for up to 10% of reorg equity, subject to dilution only from the warrants. As noted above, the plan contemplates three types of warrants to be distributed to creditors:
 

• New A warrants: five-year warrants to purchase up to 15% of new holdco common shares at a strike price at a total equity value of $524 million.
   
• New B warrants: five-year warrants to purchase up to 10% of new holdco common shares at a strike price at a total equity value of $1.788 billion.
   
• New C warrants: seven-year warrants to purchase up to 10% of new holdco common shares at a strike price at a total equity of $2.5 billion.  

Referenced above, the plan contemplates establishing a litigation trust, though the term sheet states only that the trust will be established “to pursue certain claims and causes of action to be assigned and transferred to the Litigation Trust by the Debtors on the Effective Date for the benefit of the Litigation Trust Beneficiaries.”

The RSA term sheet contemplates that the debtors will obtain commitments for a $100 million new DIP ABL, on terms reasonably acceptable to requisite supermajority consenting noteholders. The debtors would seek authority to use cash collateral to repay outstanding borrowings under the prepetition ABL. Further, the term sheet includes that the DIP may be converted to a $100 million exit facility or else the debtors will obtain an alternate $100 million revolving exit facility.

As for releases, the term sheet states: “The Plan shall include standard and customary mutual releases and third party releases, including without limitation, releases of current officers and directors, from holders of claims or interests to the extent permitted by law.”

The RSA sets out the following deadlines for the bankruptcy process:
 

• April 22: commencement of plan solicitation;
• May 26: file for chapter 11 proceedings;
• Petition Date: filing of plan, disclosure statement and RSA motions;
• June 9: order authorizing RSA;
• June 29: confirmation hearing;
• July 6: confirmation order entered approving the DS;
• July 22: completion of RSA transactions, effective date.

The filing also includes the following financial projections, which according to a footnote reflect management’s estimates: