Paragon Offshore Files Bankruptcy After Announcing Debt Plan

  • Proposal would release Noble from spinoff-related lawsuits
  • Paragon proposes swapping debt for equity in rig company

Paragon Offshore Plc, the oil services company spun off just as crude began its plunge, filed for bankruptcy protection after announcing deals to reorganize its debt and avoid protracted legal battles involving its former parent, Noble Corp.

Houston-based Paragon is the latest casualty of an oil market that has fallen more than 70 percent since June 2014, just weeks before the company was split off from Noble. Paragon has said it will use the Chapter 11 process to execute a restructuring agreement it announced on Feb. 12.

With oil trading at about $30 a barrel, offshore rig owners like Paragon have faced a glut of new drilling vessels entering the market just as customers slash spending. The company has a fleet of 40 rigs mostly in shallow waters from Mexico to the North Sea. The restructuring will position it “for long-term growth,” Chief Executive Officer Randall Stilley said in a statement Friday.

Along with the decline in oil and gas prices, the company cited the amount of debt it incurred in its spinoff, and the termination of long-term contracts with customers Pemex and Petrobras, as reasons for its bankruptcy. Paragon said in court papers that it’s disputing some contract terminations with Petrobras.

Litigation Release

Noble and Paragon executives had both fielded questions about whether a bankruptcy could be disrupted by lawsuits claiming the spinoff left Paragon without enough capital to survive. The agreement announced Feb. 12 includes a settlement releasing Noble from all claims relating to the spinoff. The deal requires court approval.

Paragon is the least successful spinoff of the past three years, according to data compiled by Bloomberg. As oil cratered, its shares plunged and the bonds were among the worst performers in the offshore drilling industry.

The age of some of its rigs and the timing of the spinoff could have become the basis for claims that Paragon was set up to fail, a common argument raised by creditors seeking to increase their recoveries. According to court papers filed Monday, the average age of the rigs Paragon got in the spinoff was 35 years.

Balance Sheet

In a petition filed Sunday in Delaware bankruptcy court, Paragon listed assets totaling $2.47 billion and liabilities of $2.96 billion. Its debt includes $708 million due under a revolving credit agreement and $642 million due under a secured term loan, both organized by JPMorgan Chase Bank NA, and more than $1 billion in bonds, according to court papers.

The so-called plan support agreement announced Feb. 12 calls for Paragon to shave $1.1 billion of its debt. The revolving-credit agreement will be reduced with a cash payment of $165 million, and lenders will be given new terms including mandatory prepayments, according to the agreement, which also requires court approval.

The deal should allow Paragon to exit Chapter 11 with about $300 million in cash, “which we believe will steadily shrink through the depths of the offshore driller downturn but should allow the company to survive for the foreseeable future,” Evercore ISI analyst James West said in a research note after the restructuring was announced.

Plan Support

Holders of 96 percent of the revolving debt and 77 percent of the company’s bondholders -- who own both 6.75 percent notes due 2022 and 7.25 percent notes due 2024 -- have signed on to the agreement, the company said in a statement Monday.

Bondholders will get 35 percent of the equity in the new company, while equity holders stand to receive the rest -- which looks to be “significantly greater than market expectations as recent offshore driller restructurings have left equity holders to retain” less than about 4 percent of equity, according to West.

As part of its settlement with Paragon, Noble will take on certain of its Mexican tax obligations, totaling $8 million to $12 million over several years. Noble CEO David Williams said in a statement that the accord “avoids the distraction and expense of the litigation,” which he said would have been inevitable following a bankruptcy filing, regardless of merit.

More Debt

As part of the spinoff, Paragon gave Noble $1.7 billion in promissory notes, and then borrowed $650 million and issued $1.03 billion of its own debt to satisfy the notes, according to court papers.

Paragon joins several other energy companies that have sought creditor protection amid the oil rout. Hercules Offshore Inc., owner of the largest fleet of shallow-water drilling rigs in the Gulf of Mexico, said Feb. 11 that it’s exploring strategic alternatives -- just three months after emerging from bankruptcy.

The case is Paragon Offshore Plc, 16-10386, U.S. Bankruptcy Court, District of Delaware.

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