(Reuters) – KCA Deutag, the drilling contractor owned by British-based oil industry services company Abbot Group [TRBTAG.UL], will meet lenders on Friday to discuss a revised business plan, senior investors said on Thursday.
KCA Deutag was expected to reach agreement with lenders on its $2.16 billion debt as it seeks to avoid an anticipated covenant breach on a mezzanine loan on Nov. 15 after breaching covenants on senior loans on Aug. 15.
A spokesman for KCA Deutag, which is the biggest platform drilling contractor in the North Sea and Caspian region and has operations worldwide, declined to comment.
Abbot Group was downgraded to CCC by Standard & Poor’s on Aug. 10 after pulling a $500 million high-yield bond it planned to issue via subsidiary KCA Deutag on Aug. 9 to repay a $554.6 million mezzanine loan. [ID:nSPW9BsN1m]
KCA Deutag’s senior lenders waived the August covenant breach and called for a new business plan by Sept. 15 and an independent business review and proposal by Oct. 15, a senior fund manager said.
The waiver gave the company breathing space to reach agreement with junior lenders and deal with two rig contracts due to expire on Sept. 30, he said.
Lenders will meet at Morgan Stanley’s offices in London on Friday to discuss the new business plan which is expected to give a guideline to the scope of the financial solution required and possible equity injection.
Another senior investor said he was expecting a reduction of around 10 percent on the business plan, which could require a higher equity injection than the $303 million originally proposed by sponsor First Reserve.
First Reserve bought Abbot Group in December 2007 in a deal valuing the company at 906 million pounds ($1.4 billion). Pamplona Capital also has a minority stake in the company.
Senior lenders agreed a $200 million equity injection from sponsor First Reserve earlier this year in return for a covenant reset, both of which did not take place after the high-yield bond issue failed.
First Reserve also pledged an additional $103 million of equity by agreeing to equitise its own mezzanine position in the $2.16 billion buyout financing, sources said, which brought the size of the proposed equity injection to $303 million.
Mezzanine lenders are calling for an additional $50 million equity to reset mezzanine covenants and deleverage the heavily indebted company. Senior lenders may also seek fresh funds if the new business plan is significantly lower, investors said.
First Reserve is likely to have to supply additional equity or risk being diluted on its $1.4 billion equity investment, as several third parties including bond investors are willing to supply the funds, the two fund managers said.
“The company is overleveraged. If it wants covenant headroom, it will have to delever,” the first fund manager said.
Deutag is being advised by Morgan Stanley and Clifford Chance. The steering committee of senior lenders consists of Lloyds TSB, Royal Bank of Scotland, HSBC, Bank of Ireland and Harbourmaster.
Mezzanine investors including Blackrock, GoldenTree and Wamco are talking to a number of advisers, including Blackstone (BX.N: Quote, Profile, Research, Stock Buzz), Houlihan Lokey, and Rothschild [ROT.UL]. [ID:nLDE68815T]
First Reserve bought Abbot Group in December 2007 through a Turbo Alpha vehicle via a combination of committed debt facilities underwritten by Goldman Sachs and indirect equity from FR XI-D offshort AIV LP and Turbo Cayman.
The $2.16 billion loan backing the buyout consisted of $1.625 billion of senior drawn and undrawn facilities and a $540 million senior secured bridge to a high-yield bond and was arranged jointly by Goldman Sachs, Bank of Scotland, Lloyds TSB and Royal Bank of Scotland, according to Thomson Reuters LPC data.
(Reporting by Tessa Walsh; Editing by Dan Lalor)
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