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.

A chasm has opened between Seadrill Ltd.'s bondholders. A minority has teamed up with billionaire founder John Fredriksen to bail out the bankrupt oil rig firm in a deal that could pay off handsomely. The rest are stranded with big losses. They're learning the hard way that just because you suffer with a company as it falls from grace, that doesn't guarantee a stake in any recovery.

Seadrill clinched a deal last month to raise $1.1 billion from Fredriksen and friends and cut back its $9 billion of borrowings. This should keep it functioning until the oil industry bounces back.

It's a cracking deal for the investors, who between them own 40 percent of Seadrill's bonds. The rescue package comprises $860 million of new debt paying 12 percent interest. Stapled to the loan is a 55 percent equity stake. In addition, the group is paying $200 million for another 24 percent of the equity. It also gets $62 million in cash and an equity kicker in fees.

Sunk Cost
Seadrill's equity story has not been a happy one
Source: Bloomberg

Sure, it's risky investing in oil right now. But the downside on the loan is mitigated by security over Seadrill assets and the whopping interest.

The equity upside depends on how you value Seadrill when it emerges from bankruptcy next year. Suppose it commands an enterprise value of about 8 times its conservative $1 billion Ebitda forecast for 2019, in line with rig giant Transocean Ltd. Deduct $5.7 billion of estimated net debt and the equity would be worth about $2.3 billion. On that basis, the total equity component of the cash fundraising package -- 84 percent of the company -- would be worth $1.9 billion.

Life After Bankruptcy
Seadrill's anticipating a comeback in the next few years
Company presentation

Holders of the remaining 60 percent of bonds can but look on in chagrin. The face value of their debt is $1.4 billion. The restructuring deal envisages giving all bondholders an 14 percent stake. This group's share would be about 8 percent, worth less than $200 million on the same valuation. True, the investors do get some minor rights to participate in the fundraising to a small degree, but these would only give them another 8 percent of the company.

What's even more galling for these bondholders is that one investor in the cash call, private equity firm Centerbridge Partners, is new to Seadrill. Centerbridge didn't suffer in the rig group's demise, yet it's primed to profit from a recovery.

Companies in trouble will pay over the odds for rescue capital. The painful truth is that this opportunity often goes to outsiders. It doesn't automatically go to existing investors and creditors.

That's what happened here. Seadrill's banks said they would cut it some slack if it raised $1 billion with Fredriksen as an anchor. Fredriksen wanted the support from an external partner. Centerbridge stepped up. The bondholders who got in on the fundraising -- including GLG Partners -- were sufficiently smart, tough and organized to muscle in early on.

The left-behind bondholders are a fragmented bunch of institutions and retail investors. While bigger by weight, they couldn't mobilize to the same effect.

The bankruptcy court can impose this plan on bondholders even if they vote it down. To be sure of a better deal, they need an alternative plan for injecting $1.1 billion in partnership with Fredriksen. But it's hard to see them dislodging Centerbridge.

Their most realistic bet may be to gum up the process in litigation. Seadrill would doubtless prefer their support and so may tweak the terms. A sweetener could come from giving the disgruntled bondholders more than just a nibble at the fundraising. The 2 percent of equity being kept for the existing shareholders is another source of top-up. Despite this possibility, the shares are currently worth $188 million, implying a ridiculous $10 billion valuation for the equity post restructuring, and demonstrating how unreliable the stock market can be in a bankruptcy.

The losing bondholders may as well fight. But they need to remember that the spoils of restructurings tend to go to those who start punching at the beginning, not the end.

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