When Transocean (RIG) announced that it had retained Lazard as financial adviser for liability management transactions, many market observers thought that it was a first step towards restructuring. However, recent actions from Transocean have indicated that the company is trying to buy time and avoid restructuring. Here’s what Transocean has announced in recent days:
- Private exchange agreement of $356 million of 0.50% exchangeable bonds due January 2023 for $213 million of new 2.5% senior guaranteed exchangeable bonds due 2027.
- Private exchange agreement of $40.9 million 0.50% exchangeable bonds due January 2023 for $24.6 million of new 2.5% senior guaranteed exchangeable bonds due 2027.
- Exchange offer for up to $750 million of new notes. Holders of $184 million of 6.375% senior notes due 2021 and 3.800% $182 million notes due 2022 will be able to exchange them for 10.00% senior guaranteed notes due 2025, while the remaining bonds that are subject to exchange will be traded for 11.50% senior guaranteed notes due 2027 (please follow the link above for more details since the table of the offer is too long for the article).
So, what happened? Transocean has managed to push $396.9 million of 2023 maturities into 2027. After this exercise, Transocean will have to deal with $969.1 million of maturities in 2023. That’s still a lot of debt but the situation has improved for the company.
Meanwhile, Transocean tries to get rid of the nearest maturities in 2021 and 2022 while also dealing with longer-dated debt. The debt tender offer has been announced on August 10 so there are no results yet. While Transocean listed 11 notes that were eligible for the exchange offer, it has also set its acceptance priority levels (obviously, near-term maturities come first).
It is important to note that the debt tender offer does not deal with the debt due in 2023, which remains the main problem for the company. Also, the exchange offer skips 2024 bonds with a total of $1.42 billion of maturities.
I’d expect that most action will be concentrated in the biggest-priority notes although holders of 2021 notes might want to hold them to maturity in order to get out of their relationship with the company before the real challenges for Transocean begin. As a reminder, Transocean has previously indicated that it will run out of money by the end of 2021 and will have to rely on the $1.3 billion credit facility.
In short, Transocean’s debt exchange offer will be a very important indicator that will show what the debt market thinks about the company’s longer-term ability to survive with the current capital structure.
I maintain my view that Transocean is in a very challenging position with high restructuring risks. The floater segment is in deep distress, and it will likely need significant time to recover. Here’s what Bassoe Offshore wrote in its latest floater report: “Competitive utilization continued its downward spiral over the last month and combined drillship and semi-sub utilization has now fallen to 47%, compared with 61% during January 2020. Dayrates on the few deal that were awarded this month have been uninspiring, and this is likely to be the case for the foreseeable future until there is a substantial cut in supply and increase in demand.”
The company’s position has clearly improved since it managed to push almost $400 million of 2023 maturities into the future, but its long-term ability to support the current capital structure is still under question.
Given the fact that Transocean’s management decided to fight for the company’s survival and the liquidity of its stock, Transocean’s shares will remain highly sensitive to changes in offshore drilling market outlook and daily oil price fluctuations. Debt liability management is very important in the current situation, but no financial magic can substitute a true recovery.
For now, the offshore drilling market is still on its way down since rigs continue to roll off contracts while new contracts are scarce and carry poor dayrates. The history of the previous downturn indicates that the process of bottoming out and the subsequent rebound could take years.
A bet on Transocean is a bet that this time would be different. At this point, the company’s best chance is that competitors head into dissolution instead of restructuring. However, at least one of them, Noble Corp. (NYSE:NE), has presented a Chapter 11 plan which will allow it to fully continue its operations.
To sum it up, Transocean’s future is highly uncertain despite the recent progress on the debt management front, and the stock will remain a playground for traders for the foreseeable future.
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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 may trade any of the above-mentioned stocks.