Finance

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Founder John Fredriksen has had to watch the value of Seadrill Ltd fall from more than $20 billion to barely $100 million in the last four years. Now he has clinched a deal to save the oil services group from failure. He has had to lead it -- and call on some expensive help.

Seadrill owns and operates offshore oil rigs used by the likes of BP Plc and Exxon Mobil Corp. The persistence of the industry slump has crippled its finances. The company expects Ebitda to be just $552 million in 2018, against $2.7 billion in 2013. Debts of about $9 billion need restructuring.

After more than a year of wrangling, Seadrill has struck a deal with most of its creditors. Banks and bondholders take the pain. Equity holders escape total wipe-out. Providers of new capital have extracted incredible terms.

First look at the banks. They needed Seadrill to stay afloat to avoid massive writedowns. So they have eased the terms on their $6 billion of loans: Extending maturities and switching to interest-only mode. That's usually a no-no in this industry given the assets on which borrowings are secured depreciate in value every year. No way could Seadrill find such loans in the market. The banks have taken a haircut without it looking that way.

Getting Worse Before It Gets Better
Seadrill anticipates a recovery in its Ebitda in around 2020
Source: Company presentation

Rapprochement with lenders has paved the way for raising fresh cash from investors, with Fredriksen stepping up. This will keep the group functioning over the next few years. The first part comprises $860 million of secured loan notes paying 4 percent in cash interest and an 8 percent payment-in-kind coupon. As if that wasn’t eye-watering enough, the noteholders get given a 55 percent stake in the company. Fredriksen receives a further 5 percent.

A separate $200 million equity injection hints at what the new investors think this equity might be worth. This is for 24 percent of Seadrill. Suppose this cash call was priced at a 60 percent discount -- consistent with the distressed state of affairs -- then 100 percent of the equity would be worth $2.1 billion.

Now consider the sorry holders of $2.3 billion of bonds. The restructuring plan torches their securities and gives them a 14 percent equity stake, worth about $300 million on the above valuation. There's a painful gulf there. Less than half of bondholders have agreed to the deal. It's not clear what the rest think at this stage.

The remaining equity holders keep the last 2 percent of the company. Bondholders will be livid shareholders get anything at all.

From Hero To Not-Quite Zero
Shareholders in Seadrill get just 2 percent of the company in a proposed debt-for-equity swap
Source: Bloomberg

If the terms look generous to ordinary shareholders, they are munificent to the providers of new money. That reflects the difficulty of attracting investors to the oil services sector at this time. Fredriksen will end up owning a lot more than his current 23 percent stake, small consolation for the billions of value destroyed in recent years.

This may not be the final deal. The shares and bonds are trading above their value as implied by the restructuring. Maybe the market is seeing a recovery story taking shape. Maybe the stock is overreacting to the news that shareholders avoided total wipe-out. Maybe bondholders are hoping to get better terms as the deal is subject to court approval now the company has filed for bankruptcy protection. Something is going to have to give.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net