Paragon Offshore (OTCQX:PGNPQ)
Image: Paragon Offshore SemiSubmersible MSS1
This article is an update to my preceding article about Paragon on July 19, 2016.
On March 25, 2016, the company filed an 8-K SEC filing to announce the following:
As previously reported, on February 14, 2016, Paragon Offshore plc (the "Company") and certain of its subsidiaries (collectively, the "Debtors") filed voluntary petitions for relief (the "Bankruptcy Cases") under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
In connection with the Bankruptcy Cases, on March 24, 2016, the Debtors filed an amended plan of reorganization (the "Amended Plan") and disclosure statement (the "Amended Disclosure Statement") with the Bankruptcy Court.
On August 2, 2016, The company updated its FAQs and it is the subject of my article today.
What do we know?
The FAQs have been very helpful for shareholders and were basically the main source of information. Good work of the Paragon team, here.
Since Paragon offshore filed voluntary petitions for relief under chapter 11 on February 14, 2016 and presented and "Amended Plan" in March 24, 2016, we learned from the FAQs that the initial testimony were concluded on June 30, 2016.
As we all know probably here, the "Term lenders" are fighting against (objection) Paragon Offshore since the beginning. They are the lenders who are not part of the bankruptcy process, but are directly affected by the plan.
It is important to know that the "legal bill" is paid by Paragon Offshore in its entirety, which doesn't motivate the term lenders to accept any early settlement.
What happened at the hearing?
Issues were rising and forced upon Paragon offshore to change the "Amended Plan" again. First, the deal with Noble (NYSE:NE) has been questioned and second, Paragon Offshore will need to keep more cash.
This decision has been forced upon Paragon Offshore in order to get the "Amended amended plan" finally accepted and I expect that this new version will be the
The new plan should be filed today, August 5, 2016, most likely after the market close.
What can we expect?
In the FAQs we learned that:
On July 27, 2016, a hearing was held before Judge Sontchi. At the hearing, Paragon announced that the company would be filing an amended Disclosure Statement, which will include a downside sensitivity to the business plan provided to the court in our Disclosure Statement approved April 19, 2016.
Additionally, the judge sets date to hear the planned additional testimony on the Noble settlement as well as testimony regarding the downside sensitivity
Basically, Paragon Offshore has been "forced" by the Court to re-negotiate an additional liquidity and covenant relief with the Bondholders and Revolving Credit Facility Banks. This new negotiation will be the subject of the next 8-K filing that we are awaiting now.
Obviously, the Court is not buying the "rosy outlook" presented by Paragon Offshore and the company is now changing again the "plan" with a "downside sensitivity" plan based on:
1 - That the recovery does not occur until late in 2018, well beyond anyone's expectations;
2 - That certain of the company's rigs do not go back to work as quickly as in the business plan; and
3 - That the day rates associated with a new work increase at a slower rate versus the business plan.
4 - Additionally, it includes our actual year-to-date results, which have been better than originally anticipated.
What does it mean?
First, Unless a settlement is reached with the term lenders, which is very unlikely, the judge Sontchi will render his ruling in mid October, which is later than expected.
Second, in order to renegotiate the "amended plan", Paragon Offshore will have to change the deal, and put the changes to a shareholder approval again.
The deal has been negotiated with the Bondholders and Revolving Credit Facility Banks, which means we can forget about the 65%/35% that was indicated before.
However, to allow the company to maintain more cash on its balance sheet versus the original plan, we are negotiating with the two lender groups who supported the original plan, the Bondholders and the Revolving Credit Facility Banks. These negotiations will focus on adjusting the treatment of the Bondholders and Revolving Credit Facility Banks to take into account the downside sensitivity giving the Company significantly more liquidity and covenant relief through the forecast period.
Depending on the extra-cash needed, and what sort of covenant relief we are talking about here, the "banks" will want a more significant chunk of the new shares outstanding, and probably around 65% and 35% remaining for the shareholders, which is still an extremely good deal, all considered. The cost of less equity and other potential changes cannot be avoided.
Of course, the new "amended plan" will leave Paragon Offshore in slightly better terms as cash and lessened covenants are concerned, thereby, increasing ability to survive the downturn and avoid another bankruptcy by 2017-2018, which was my main concern with the "plan" initially.
I think this move is a positive step in the right direction for Paragon shareholders. The new improved plan will probably change drastically the equity ratio between the bondholders/banks and the shareholders, whereas, the new plan will be more realistic for a potential survival assuming a slow recovery by 2018.
The question is what can be considered a realistic value for the stock after the company will emerge from Bankruptcy in October, which is the most likely outcome?
I cannot really answer this question and I have read many preposterous estimates. But, based on the last uptick it is potential that the stock may re-test $1.25, and I believe trading PGNPQ, using the 200MA as a support, could provide some good profit for the ones who are not greedy.
Yet, I still recommend to stay away from the stock, if you do not intend to trade it. PGNPQ is too speculative...
I bought a small amount below 0.40 recently, and I intend to add on any weakness, depending on the new deal announced, of course. Trading PGNPQ is extremely difficult and demands patience, due to a poor market which is not liquid.
Important note: Do not forget to become one of my followers on PGNPQ and other offshore drillers. Thank you.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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 from time to time and own a small amount below 0.40 now. I may buy more at 0.35 or lower. Disregard the disclosure above.
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