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Summary

  • Seadrill announced 84.1% of 2017 bondholders accepted July 18 offer.
  • Sweetener a slightly sweeter $12,103 per $100,000 in bonds.
  • Non-converting (e.g. those who didn't get the memo) may be forced to convert with no sweetener.
  • Reinforces my optimism about SDRL and the sector; however the way this offering has played out has negatively impacted my opinion of the Board of Directors and executive management.

Yesterday afternoon, July 23, Seadrill (NYSE:SDRL) announced 84.1% of its $650 million 2017 bondholders had accepted its July 18 offer to convert their bonds into 3,612 shares of SDRL plus receive $12,103 in cash. The cash sweetener is actually $263 higher than the $11,840 originally projected due to an arcane calculation referred to as the volume weighed average price (e.g. SDRL shares average $37.61, a little higher than was used in the Company's original calculation). In an action slightly more sinister but perfectly legal, SDRL also referred to a clause in the original bond agreement, the "90% the clean-up call", which allows the Company to force bondholders who do not voluntary convert their bonds to convert, but without the cash incentive. To be triggered, this provision would require, as the name suggests, at least 90% of the bond holders to convert; conversion under clause 10.2.2 would save the company money (on the cash sweetener).

Given than over 60% of the bondholders had pre-agreed to convert prior to the July 18 press release, it was a foregone conclusion that this conversion (unlike the botched July 8 conversion) would occur. One item of note is that SDRL took pains in its July 18 press release to describe its actions as being partially driven by a desire to shield its stakeholders from financial pain ("The Board bears significant responsibility to all stakeholders and never intends to harm any of the Company's loyal supporters"), obliquely referring to losses certain bondholders took after shorting SDRL stock following the July 8 conversion announcement. The "90% clean-up call" would have the opposite effect on bondholders who, given the short (less than one week) time period between announcement and acceptance date (July 24), did not have either pre-notice, receive actual notification or have adequate time to consider and respond- in short, "insiders" and large holders are being treated differently than small funds and "mom and pop" investors.

I repeat my previous opinion (and here) that given macro, geo-political factors, I am optimistic about SDRL and the sector. However, the way this offering has played out has negatively impacted my opinion of the Board of Directors and executive management. Many on this board, and elsewhere, have discussed the "sharp" and potentially self-serving dealings of SDRL senior management; the events since July 8 (especially since July 18) seem to reinforce the old adage of "caveat emptor".

The opinions expressed in this article are not intended to influence any investors to buy or sell securities. Investors should also conduct their own due diligence before making any investment decisions.

Disclosure: The author is long SDRL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Update: Seadrill Bond Conversion A Done Deal; Little Guys Might Not Benefit