Petrofac 2026 Senior Secured Notes Fall 10 Points to Low 20s After Missed Coupon Update; Company Works to Win Support of ‘Key’ Guarantee Lines Providers

Relevant Documents:
Press Release
Offering Memorandum

Quotes on Petrofac’s $600 million 9.75% 2026 senior secured notes, or SSNs, fell to the low 20s from around 30 this morning, sources told Reorg, after the company said Monday, April 29, it would not pay the coupon due May 15 and outlined details of a restructuring plan.

The company’s ad hoc noteholder group, which holds 41% of the SSNs, is proposing to extend $300 million of further credit, comprising $200 million of new funds and $100 million of credit support to help secure performance guarantees for certain of Petrofac’s existing contracts, as reported. The proposal is contingent on the company securing performance guarantees, and would also require the conversion of a significant proportion of the group’s existing debt to equity, it added.

Winning back the support of performance guarantee providers is a vital next step for the company, sources who spoke to Reorg said. Petrofac’s liquidity squeeze has been exacerbated by its inability to obtain the guarantees that it needs to move forward with potentially lucrative new contracts in its $8 billion backlog, as reported.

Performance guarantees are extended on a project-by-project basis, usually by bank lenders who are based in the same jurisdiction as the project they are guaranteeing, according to sources. Unlike in the case of McDermott International, where guarantee lines were syndicated, Petrofac usually secures its guarantees from a group of providers which are, in some cases, the same lenders who hold bilateral facilities with Petrofac, adding complexity to the negotiations, sources added.

Part of the rationale for releasing the statement on April 29 was to convince various parties to come together to the table to hammer out a solution, sources noted.

Petrofac did not disclose the amount of guarantee lines it needs to be able to tap into its existing backlog. Several sources told Reorg that the industry standard for performance guarantees is pegged at 10% of contract revenue.

According to sources, the company may need to significantly reduce its debt to convince guarantee providers to extend these lines, sources said.

Debt Trading

There has been little trading on Petrofac’s bond since Monday’s announcement. The ad hoc bondholder group is restricted from trading and comprises, among others, Fortress Investment Group, sources said.

A piece of the company’s $162 million RCF went up for sale recently at the same time the SSNs were trading at around 30, one source said.

Petrofac’s London-listed shares fell more than 50% after the announcement to trade at around 11.20 pence as of 4 p.m. BST. Its market capitalization stood at $58.5 million. Trading in the company's shares will be temporarily suspended from May 1 until the publication of its results, which is now scheduled for May 31.

Six hedge funds held short positions on Petrofac’s stock as of April 29, according to the Financial Conduct Authority’s short positions register.

Equity holders are likely to see their positions heavily diluted in a debt-for-equity swap scenario, as reported.

The company has also secured rolling short-term deferrals of amortization payments from its bank lenders as it progresses with the restructuring plans. As part of a loan rescheduling in 2023, Petrofac extended $252 million in bank debt to October 2024 and committed to amortizing half of that amount in the 12 months leading up to the maturity date.

Bondholders are working with Houlihan Lokey and Weil Gotshal, the company is working with Moelis & Co. and Teneo with Linklaters providing legal advice. Bank lenders have hired FTI Consulting and Latham & Watkins.

Potential Restructuring Scenarios

The group will need the support of more than just the ad hoc group of noteholders, who hold 41% of the SSNs, to move forward with a restructuring proposal. Petrofac Monday said it will seek to engage with other noteholders in the coming weeks.

Noteholders who choose not to join the group and put new money into the company could see the value of their holdings squeezed, assuming the new credit comes in super senior to the existing notes, sources said.

The bilateral bank debt ranks pari passu to the SSNs, according to the notes OM. In any restructuring scenario, pari passu bank lenders are therefore unlikely to emerge unscathed unless they are able to offer the company support equivalent to that being offered by the ad hoc group. That support could potentially come in the form of offering guarantee lines, some sources suggested.

At this stage it is unclear how the company purports to implement its proposals. Sources said that given the high threshold of consent needed to amend the terms of the SSNs, the situation is likely to end in a formal process of some kind.

The terms of the SSNs as described in the prospectus, prescribe that amendments to the money terms of the SSNs require the consent of 90% of noteholders.

The prospectus sets out that 25% of noteholders can accelerate the notes following a nonpayment of interest (which has a 30 day grace period). Following a payment default and acceleration, noteholders could enforce on the security held by the security agent (including pledges over the issued shares of Petrofac International Ltd, Petrofac (Malaysia - PM 304) Ltd. and Petrofac Facilities Management Ltd.), subject to the terms of the group’s intercreditor agreement.

A copy of the issuer’s corporate structure, from the prospectus can be found below.

The group could use an English law scheme of arrangement, or a Part 26A restructuring plan, or RP, as an implementation tool if it cannot reach the required 90% threshold required to consensually amend the terms of the notes. Both the scheme and RP require just 75% consent from each voting class, with the RP featuring an additional cross-class cramdown power. Reorg’s schemes and RP database can be found here.

The group has a Jersey incorporated borrower, English law incorporated guarantors and also an intercreditor agreement governed by English law. There are numerous steps that Petrofac could take to allow for the English courts to take jurisdiction, including a governing law amendment from New York law to English law (50% consent of SSNs required).

Petrofac’s capital structure as of June 30, 2023, is shown below: