Hurricane Energy Plc (the Company) recently completed a tender offer to buy back a portion of its US$230 million convertible unsecured bonds (the Bonds) as “a proactive liability management exercise”. A buy-back programme was suggested by the shareholders of the Company as one of the possible alternatives to the restructuring plan attempted by the Company in June 2021.
The Company’s prior attempt to restructure its indebtedness via a UK restructuring plan had failed as the plan was held not to satisfy the threshold conditions for cross-class cram downs. The completion of the tender offer affirms the decision by Justice Zacaroli and demonstrates the High Court’s willingness to critically assess a plan company’s evidence regarding the “relevant alternative”.
The decision by Justice Zacaroli builds on the judgment of Justice Snowden in the recent Virgin Active restructuring plan, which we commented on in May 2021. Justice Zacaroli’s judgment is an important reminder for companies seeking to use the restructuring plan procedure to restructure their liabilities, that the court will clearly undertake a robust analysis of whether the conditions to exercise the cram-down mechanism have been met. The decision demonstrates the importance for plan companies to consider fully which relevant alternative is most likely to occur, particularly where the company is not facing imminent insolvency.
The Company is an oil exploration and production company. Following the discovery of oil at its Lancaster site, to the west of the Shetlands, the Company raised US$300 million via an equity placing and the Bonds to fund the exploitation of the site. The holders of the Bonds (the Bondholders) are the Company’s main creditors, with the Bonds maturing on 24 July 2022. Following a period of financial underperformance, the Company predicted that it would be unable to repay the Bonds in full on maturity based on forecast revenue projections for the Lancaster site, its only current source of revenue. After entering into a lock-up agreement with a majority of its Bondholders, the Company proposed a restructuring plan that broadly sought to:
(i) extend the maturity date, increase the cash coupon and provide security for the Bonds; and
(ii) release US$50 million of the principal amount of the Bonds in exchange for 95 per cent of the equity of the Company, leaving the existing shareholders with only 5 per cent of the diluted equity.
In launching the restructuring plan, the Company projected that if the restructuring plan was sanctioned, there would at least be a possibility that sufficient cash would be generated to enable the restructured Bonds to be paid in full with a small surplus to generate at least some value in the equity, although this was described by the Company as less than a “meaningful return”.
Two classes of meetings were formed for voting purposes under the plan: one for the Bondholders and one for the shareholders. The Bondholders approved the plan, but 92.34 per cent of shareholders attending voted against the plan.