Today, April 21, 2016, Hercules Offshore filed a disturbing 8K SEC filing (excerpt only):
... On April 18, 2016, the Company and certain of its subsidiaries (the "Loan Parties") entered into a Forbearance Agreement and First Amendment to the Credit Agreement (the "Amendment"), with the Agent for itself and certain Lenders designated therein. Pursuant to the Amendment, the Required Lenders have agreed, during the Forbearance Period (as hereinafter defined), to forbear from exercising their rights and remedies (if any) under the Credit Agreement with respect to the alleged failure by the Borrowers to comply with certain specified affirmative covenants under the Credit Agreement.
During the Forbearance Period, as provided in the Amendment, the Company will not be able to receive any of the Escrowed Amount, and accordingly will not be able to accept delivery of the Hercules Highlander. During the Forbearance Period, the Loan Parties and the Lenders who are parties to the Amendment agree to negotiate in good faith an agreement with respect to a potential recapitalization, business combination or other alternative strategic transaction with respect to the Borrower, including a potential restructuring of the Loans.
Item 8.01 Other Events.
During the Forbearance Period, as provided in the Amendment, the Company will not be able to receive funds held in escrow under the Credit Agreement. Accordingly, the Company will not be able to fund or accept delivery of the Hercules Highlander during this time. The Company is in communication with the shipyard and its customer regarding these matters.
During the Forbearance Period, the Company has agreed with the Lenders who are parties to the Amendment to negotiate in good faith an agreement with respect to a potential recapitalization, business combination or other alternative strategic transaction with respect to the Company, including a potential restructuring of the Loans under the Credit Agreement.
It always comes to the Hercules Highlander when we are talking about Hercules offshore. Why? Because It is the only exciting valuable asset left, period.
In short, the lenders believe that HERO will not be able to pay back the $200 million loan in escrow, thereby, they used a "failure by the Borrowers to comply with certain specified affirmative covenants under the Credit Agreement." to "renegotiate" with Hercules Offshore. This renegotiation will probably force Hercules offshore to sell the Hercules Highlander and its juicy contract to the highest bidder.
When we look at the balance sheet, and even assuming revenue from the Hercules Highlander, it is clear that the company will never be able to repay its debt and make a profit. HERO will have to restructure down the road again, unfortunately.
My opinion is that HERO has no visible leverage, in this "negotiation".
Accordingly, the Company will not be able to fund or accept delivery of the Hercules Highlander during this time. The Company is in communication with the shipyard and its customer regarding these matters.
Thus, the lenders may force a sale, at a discount, of the only valuable asset left, which is the Hercules Highlander, to the only potential buyer around: Maersk (in my opinion again).
Maersk will be able to buy back the contract and the rig as well, at a steep discount -- probably well below costs. Leaving the company with not much left. Basically, a number of old and obsolete rigs. Most of the backlog indicated above comes from the Hercules Highlander.
I have commented in a preceding article, on February 11, 2016, about the potentiality of Hercules offshore accepting a takeover offer from Maersk, and I was really surprised that nothing happened until now.
I said at the time:
The reason is that Maersk is squeezed between a rock and a hard place with the Hercules Highlander. The company has signed a contract at a day rate which is about double what it can get at the moment.
If the company terminates the firm contract, it will be forced to pay a huge termination fee, approximately between $350 million and $400 million. Furthermore, the Hercules Highlander is being built to Maersk's own specifications for an important natural gas project in the North Sea.
I do not see any positive ending for the actual shareholders, but I may be too negative. The street is sharing my opinion and is selling off. The stock lost nearly 40% today.
The lenders hold HERO hostage, totally cornered, and will use this situation to recoup as much as they can. The question is who drove the price so high in the first place, and why? This sounds like a manipulation in my opinion and the ones who are paying the price is the shareholders, as always.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I trade the stock