Hercules Prepares for Chapter 11; Another E&P Begins Restructuring

Houston-based jack-up contractor Hercules Offshore Inc., whose fleet is concentrated in the shallow waters of the Gulf of Mexico (GOM), is handing over ownership to creditors through a financial restructuring that would lead to a Chapter 11 filing in early July.

Two-thirds of Hercules debt holders agreed to a plan to convert $1.2 billion in senior debt into new equity, giving them almost 97% of the companys shares. Existing shareholders would receive about 3%. A bankruptcy court has to okay the plan once Hercules files for voluntary protection, which is expected in July.

Under the agreement, creditors would backstop $450 million in capital to pay for Hercules Highlander, a new drilling rig, among other things. No contracts would be broken, and operations would continue as usual.

Once our financial restructuring is completed, the new capital structure will provide a better foundation for Hercules to meet the challenges in the global offshore drilling market due to the downcycle in crude oil prices and expected influx of newbuild jackup rigs over the coming years, Hercules CEO John Rynd said.

Hercules is the second US oilfield services operator that would file for protection since the start of the year after Houstons Cal Dive International Inc. (see Daily GPI,March 4). Hercules already has reduced its workforce of 1,800 by 40% since the start of the year and has cold stacked 11 of 20 GOM rigs.

Tudor, Pickering, Holt amp; Co. said the Hercules deal with creditors reflects the depressing state of the jackup markets coupled with a highly levered…balance sheet. Moodys Investors Service in March had lowered the Hercules liquidity rating to SGL-4, its lowest rating on a scale of 1-4, from SGL-2. The SGL is a short-term rating system for speculative grade issuers that are by definition not prime.

Analysts with Raymond James amp; Associates Inc. said the Hercules news does not come as a surprise, because the high amount of leverage and weaker macro conditions have weighed on the companys financial health…

Evercore analysts noted that Hercules was able to avoid restructuring after the 2010 Macondo well blowout in the GOM shut down offshore operations for about half a year. This downturn, however, is proving to be too severe to escape and Hercules rigs are at a serious disadvantage in the current very oversupplied offshore market, analysts said.

Meanwhile, junior independent Saratoga Resources Inc., also based in Houston, filed for Chapter 11 on Thursday in US Bankruptcy Court for the Western District of Louisiana in Lafayette. Saratogas principal holdings cover around 52,000 net acres, mostly held by production, in the transitional coastline and protected in-bay environment on parish and state leases of South Louisiana and in the shallow GOM shelf.

The company joins a list of exploration and production operators based in North America that have fallen into bankruptcy since the start of the year as a result of the commodity price crunch.

Saratoga intends to continue to operate as debtors in possession (DIP), management said. The company should have sufficient cash to operate its businesses in the immediate term without need for DIP financing.

The bankruptcy filing follows earlier challenges relating to the companys field operations coupled with the precipitous decline in oil and gas prices, which resulted in lower than projected revenues and profitability and an unexpected arbitration award against the company by privately held Harvest Operating LLC, management said. Exhaustive initiatives were undertaken in field operations also, but its not been enough.

As a result of the steep decline in commodity prices during the second half of 2014 and continuing into 2015, compounded by production declines associated with run time issues in early 2014, which have subsequently been addressed, we have been operating in a cash-constrained environment, CEO Thomas F. Cook said.

We have been working closely with our secured lenders to try to address liquidity issues with a view to either restructure or repay existing debt and preserve collateral from hostile action arising from the outstanding arbitration award and have retained advisers to assist in the evaluation of potential alternatives to either restructure or repay the existing secured debt, Cook said.

Saratoga is pursuing legal claims against Harvest, which won an arbitration award of $3.7 million, but without an acceptable resolution of the arbitration award, our management and our principal lenders determined that a court administered reorganization would offer the best means of addressing the arbitration claim and the companys existing debt structure and realizing the anticipated benefits of our drilling, workover and recompletion program.

The Chapter 11 process is being used to avert adverse action by Harvest and to restructure.

Saratoga management intends to continue doing business while we complete the processes before us and expect that a vast majority of our suppliers, vendors and business associates will see no disruption in our business. We believe that our long-term prospects remain solid, that we continue to have substantial untapped reserves and that our development program will continue to increase daily production.

Cupric Canyon Capital buys Botswana’s copper firm out of liquidation

GABORONE (Reuters) – Cupric Canyon Capital, a private equity firm backed by a unit of Barclays Plc, has bought Discovery Copper Botswana (DCB) for 343 million pula ($35 million), the appointed liquidators said on Friday.

DCB, a unit of Australias Discovery Metal Limited, was placed under provisional liquidation earlier this year after failing to pay more than 1.3 billion pula to creditors. Cuprics takeover paves way for its Boseto Mine to resume operations.

Terry Brick, a director at Deloitte, the provisional liquidators of the mine, said his firm would seek the courts approval of the deal to enable DCB to come out of liquidation.

Out of DCBs $137 million in total liabilities, $103 million is owed to secured lenders, $4 million to government and $30 million to unsecured creditors.

Cupric Canyon was also one of the mining firms creditors, Brick said.

Cupric Canyon, through a local subsidiary Khoemacau, plans to open another copper mine near Boseto next year.

($1 = 9.9010 pulas)

Financial Briefs

Morgan Stanley Fined Over Supervision

The Financial Industry Regulatory Authority said it fined Morgan Stanley Smith Barney LLC and Scottrade Inc. a combined $950,000 for insufficient supervisory systems to monitor the transmittal of customer funds to third-party accounts.

“Firms must have robust supervisory systems to monitor and protect the movement of customer funds,” Finra enforcement official Brad Bennett said. “Morgan…

Nirvana Files for Bankruptcy Due to Cash Shortage and Loan Defaults

NEW YORK ( TheDeal) — Nirvana, with profits under water thanks to loan defaults and a cash shortage, hopes to find peace in bankruptcy court.

The Forestport, NY, water bottling company and affiliates Millers Wood Development, Nirvana Transport and Nirvana Warehousing, on June 3 filed Chapter 11 petitions in the US Bankruptcy Court for the Northern District of New York in Utica.

Judge Diane Davis on June 4 granted joint administration of the cases as well as interim use of cash collateral. A final hearing is set for June 15.

According to a first-day affidavit from president and co-founder Mozafar Rafizadeh, the company hopes to sell its assets through a competitive bidding process, but it has yet to file a bidding procedures motion.

Mozafar and brother Mansur Rafizadeh founded the closely held company in 1992. The siblings converted a 1,679-acre dairy farm Mozafar bought in the 70s into a bottling facility, and the 55-employee company now bottles water there from four springs that produce 605,000 gallons of water each day.

The company, which used the Millers Wood arm to purchase the real estate, created Nirvana Transport, which employs three people, to take care of deliveries in 2004, and Nirvana Warehousing, with 14 employees, to ready the bottles for delivery.

From 2003-2010, Nirvana was a leading co-packer for several major national brands, including Wal-Mart (WMT – Get Report), Wegmans, 7-11, Wawa and others, Mozafar said.

As the company grew, it sought to manage a capacity problem through a $12 million expansion. The bank that was supposed to finance the project, Tennessee Commerce Bank, failed, however, and was taken over by the Federal Deposit Insurance soon after the financing arrangements were made.

Nirvana had been transitioning from bottling water for others to bottling under its own label, and following the financing delay, it had to shift to its own brand more rapidly than expected, which caused the company to miss out on key sales opportunities in 2012 and 2013.

Mozafar said the plant expansion was complete by August 2013, but the company lost cash flow on the advertising, fees and other costs needed to establish Nirvanas brand in the Northeast.

Nirvanas sales have declined from a high of $28.57 million in 2012 to projected sales of less than $20 million in 2015 as a result of the companys cash shortage. Operating losses totaled $1.47 million in 2012, $3.7 million in 2013 and $3.97 million in 2014.

By late 2013, Nirvana had defaulted on secured loans from NBT Bank, the US Small Business Administration, the New York Business Development, Statewide Zone Capital, Northeast Bank/the US Department of Agriculture and Comsource.

Since then, the company has been exploring ways to refinance or to sell, retaining Next Point in December 2013 to market its business. After the process failed to produce a binding offer, Nirvana terminated Next Point in September.

An unnamed investor subsequently submitted a letter of intent for an out-of-court restructuring on Oct. 3, but the potential deal collapsed on Dec. 15 when one of the secured lenders refused to negotiate or consider a compromise on its claim. A second bidder on Feb. 26 signed a letter of intent that called for a Section 363 sale of Nirvanas assets, but the party terminated the deal on March 20 after due diligence.

Nirvana then determined Chapter 11 was unavoidable, as Northeast Bank also has been seeking to foreclose on its third mortgage lien. The lender on May 16, 2014, sued Nirvana in the New York State Supreme Court in Oneida County, and Carl S. Dziekan was appointed receiver for the debtors real estate on March 5.

The ‘Invention’ Of Bank Loan Ratings: How Jimmy Lee’s Offhand Comment …

Today it is hard to imagine a robust syndicated loan market without widespread distribution of major loans to an extensive investor base of banks, endowments, pensions, mutual funds, hedge funds and, especially, securitized vehicles like CLOs. It is equally difficult to imagine a healthy loan market without a system for rating loans and classifying them in terms of their default and recovery expectations, with links to the historical data that underpins those ratings and maps to the capital and reserve requirements of the banks and their regulators.

So it may seem like the dark ages of credit and lending to think back 20 years and reflect on a loan market without credit ratings, where the link between pricing and risk was tenuous. Many old-time commercial bankers (like the author) recall when banks used to hold their loans to maturity on their own books, and how credit analysis focused on a simple yes/no decision. Should we make the loan? Did the deal meet the banks credit standards? There was little portfolio management in the decision. And pricing, especially, was an afterthought. Credit was all: is this deal a good one or a bad one?

In joining Standard amp; Poors in 1992, I certainly had no notion of being a missionary to bring ratings to the commercial banking heathen. In fact, at that time the market considered ripe for picking by the rating agencies was the private placement market. The insurance regulator, the National Association of Insurance Commissioners, had just adopted a new credit scale that featured a huge reserve cliff between investment grade and non-investment grade borrowers, thus providing a potential inroad for ratings to help define which deals made the cut and which didnt.

So it was, that in pursuit of the goal of penetrating that market, I found myself in 1993 at an institutional private placement conference in New York. Loans had not yet generated enough interest among non-bank investors to support entire conferences devoted to them. But awareness had grown to the point where panel discussions on loans began to appear on the agenda of private placement conferences, usually sandwiched into the last half of the second day, where they competed for the audiences attention with the hotel bar and the early train home to Greenwich. As a result, there was not much of an audience left to witness the incident I will now relate, which figured so mightily in the development of loan ratings.

Loans at a Private Placement Conference

This particular panel on loans featured James B. (Jimmy) Lee, Jr. At the time Lee was running Chemical Banks powerhouse syndicated lending group, from which he went on to head the banks investment banking group, and ultimately rise to vice-chairman of JP Morgan Chase. While the panels overall membership and presentation were pretty forgettable, Lees answer to one of the questions from the audience was memorable, and catalytic in its impact on me, on Samp;P and on the loan rating business. Asked by a spectator, How do you price your loans? Jimmy didnt hesitate a nanosecond before answering, We price em all the same – 400 basis points over LIBOR. The audience chuckled and that was it, on to the next panel.

But Lees comment, partly in jest, but with a big grain of truth in it, gnawed at me for days afterwards. I knew syndicated loans were essentially a non-investment grade market that included double-Bs, single-Bs and even triple-Cs. At Samp;P we knew from decades of default statistics that single-B companies defaulted two to three times as often as double-B firms, and that default rates really jumped in triple-C territory. I also knew that in the bond and private placement worlds, the pricing cliffs between triple-B, double-B, single-B and triple-C were huge. So if Jimmy Lees remark were even remotely true, then corporate treasurers and institutional investors were continually leaving money on the table or getting a windfall from one deal to another, depending on where each issuer fell on the credit spectrum.

Now you would think, armed with authoritative, actionable market intelligence like this, straight from the horses mouth, that we at Samp;P would have jumped all over it. Unfortunately, Samp;P didnt have a rating that would work too well in evaluating secured loans to non-investment grade borrowers. Our traditional business had been rating corporate bonds, which were unsecured and issued mostly by investment grade companies. The whole analytical focus was on the risk of default. In other words, what is the risk of the issuer failing to pay interest or principal on time? Period. Since the likelihood of that occurring with investment grade issuers was minimal, there was almost never any collateral security to evaluate or much reason to analyze what would happen in a post-default environment. (The advent of high yield bonds changed that, but only a little. They were unsecured or even subordinated, so when defaults came, as they often did, there was little to recover.)

No Rating Is Better Than a Bad Rating

As long as a rating only addressed default risk, a rating on a bank loan was no help at all. It only emphasized the negative (that high yield companies were prone to default) but not the positive (when they did default, secured lenders got most of their money back.) But commercial bankers have always known how to make a risky credit bankable by tying the borrower up with protective covenants and collateral security. Although it represented a major change from past practice, Samp;Ps criteria and methodology gurus eventually agreed with us that a dual risk approach – default risk and expected recovery – was necessary if we wanted to serve the bank loan market. It also helped that the bankers Samp;P went out and talked to re-affirmed to us over and over again that such a two-dimensional approach was absolutely necessary.

The rest is history. Rating syndicated loans became an integral part of Samp;Ps corporate rating business, with volume some years even exceeding traditional corporate bond ratings. Now, twenty years later, we might well ask: How could anyone NOT analyze the structure, security and loss/recovery prospects of a companys various debt issues as separate elements of rating the total company? The answer may seem obvious today, but it certainly was not twenty years ago when Jimmy Lee took that question from the audience and helped spark a mini-revolution in the corporate rating business. I, for one, am very grateful that he did.

PG Industries Seeks ZSE Readmission

Of the US$5,3 million owed to secured lenders, US$4,33 million has been paid off through property sales or debt swap while the remaining balance of US$965 082 was restructured to a three year loan facility which would attract 12 percent interest per annum.

Company secretary, Kudakwashe Wanika, said it was now appropriate for PG Industries to resume trading its shares on the stock exchange after implementing the scheme of arrangement.

The secured lenders scheme has been implemented in full, said Waniwa.

The conversion process for the debentures and accrued interest has commenced. It is envisaged that shares will be distributed to debenture holders by June 30, 2015.The company will shortly be re-engaging the ZSE with a view to lifting the suspension.

Apart from PG Industries, three other companies — Celsys, Cottco and Phoenix — are also suspended from trading on the ZSE.

Next Week in Bankruptcy

A week into its bankruptcy case, gun manufacturer Colt Defense LLC will begin its faceoff Monday with bondholders averse to the company’s plan to retain private-equity firm Sciens Capital Management as its owner.

Judge Laurie Selber Silverstein of the US Bankruptcy Court in Wilmington, Del., will on Monday consider Colt’s motion to have Sciens cover the cost of its bankruptcy case with $20 million in bankruptcy financing, according to court documents. That loan is linked to a bid that would pay off $108 million of Colt’s top-tier debt and keep the Sciens ownership in place.

However, bondholders have offered $55 million in bankruptcy financing on what they say are better terms. The bondholders said their loan would allow the company to avoid a quick sale to current owner Sciens Capital Management, which has offered to serve as the lead bidder at an Aug. 3 bankruptcy auction.

The rival proposal was spelled out in court papers filed by bondholders that included Phoenix Investment Adviser LLC, New Generation Advisors LLC and Bowery Investment Management LLC.

On Tuesday, the US Bankruptcy Court in Richmond, Va., will consider Patriot Coal Corp.’s plan to sell its assets, with an offer from Blackhawk Mining LLC leading an auction.

The deal from Blackhawk would acquire Patriot Coal out of bankruptcy by issuing $643 million in new debt to Patriot’s secured lenders. The lenders would also receive an equity stake in the restructured company.

Under the proposed rules, Patriot is seeking rival bids by Aug. 7, an auction on Aug. 13 and a court hearing to approve the winning bid or bids on Aug. 18.

However, the United Mine Workers of America union, which says it represents more than 2,500 active and former Patriot employees, urged the judge not to authorize the sale process without significant changes. The union has argued that the deal is a windfall for lenders and could shut out rival bids.

In the filing, the union called the bankruptcy casePatriot’s second in less than three yearsdÃjà vu all over again. The union pointed to the painful and significant sacrifices it says its members made during the first go-round, including about $130 million in cuts to retiree health care and other benefits. The Blackhawk bid wouldn’t cover Patriot’s employee obligations or UMWA contracts, the company’s bankruptcy lawyer told the court earlier this month.

Defunct ship dismantler ESCO Marine Inc. will on Thursday ask a bankruptcy judge to consider allowing the company to sell its assets to a buyer that could restart operations.

In court papers, ESCO Marine officials asked a judge to set a July 17 bid deadline and a July 23 auction for buyers that are interested in the Brownsville, Texas, company, which they said is the world’s largest ship dismantling and recycling company with the power to break down seven ships at once.

Officials put the company into bankruptcy protection on March 7 following an abrupt shutdown that sent 200 workers home without their last paycheck.

-Peg Brickley, Jacqueline Palank and Katy Stech contributed to this article.

Write to Stephanie Gleason at stephanie.gleason@wsj.com. Follow her on Twitter at @stephgleason

Colt: Open For Business After Bankruptcy Filing

Colt remains open for business and anticipates no impact on customers as it enters voluntary Chapter 11 bankruptcy, which will allow for quicker sale of operations in the US and Canada. The filing ends long-time speculation about whether the iconic firearm manufacturer would be able to successfully emerge from its financial woes.

It has been reported that in its filing, the company estimated it owes up to $500 million to up to 50 creditors, with assets listed up to $500 million. “The plan we are announcing and have filed today will allow Colt to restructure its balance sheet while meeting all of its obligations to customers, vendors, suppliers and employees and providing for maximum continuity in the company’s current and future business operations,” said Keith Maib, Chief Restructuring Officer of Colt Defense LLC, in a statement posted on the Colt website.

Maib said that entering Chapter 11 protection, while not their preference, is the best path going forward as the company focuses on improving its business performance and competitive market positioning. He said the team “will continue to be sharply focused on delivering for our customers and being a good commercial partner to our vendors and suppliers.”

Colt’s private-equity backer, Sciens Capital Management, will act as a “stalking horse bidder” and acquire Colt’s assets. Colt’s existing secured lenders have also agreed to provide $20 million in incremental financing to fund operations.

I Clean Financial Messes

They divorced after years of conflict and misunderstanding.
Might objective financial planning have saved their marriage? I
remember my parents seeking advice from a retired accountant and an
insurance agent – decent people but untrained to sort through
finances.

My parents divorce got me thinking about the role money plays
in peoples lives – both good and bad. The minute you say
dentist, people get an image of a four-car garage and nice big
house. I grew up poor, with a lasting effect that made me insecure
about financial matters.

Dad finally did retire. Mom never went back to nursing. My
sisters and I kept her afloat financially. My parents were the
children of immigrants, the first generation that was going to make
it. It didnt work out that way.

True, you dont make the same mistakes your parents made: You
make others. I went out of my way not to make their mistakes.

I studied history in graduate school and I anticipated
completing my PhD and settling down to teaching and tenure. One
small problem: too many other people with the same idea and
virtually no teaching positions. So I used my study of Japanese to
shift to the business world.

Fifteen years later, Id built a career as an investment
professional with jobs in Tokyo, New York, the Netherlands and
Singapore. These were exciting years, including a few market
meltdowns.

The only thing missing from my career was working one-on-one as
a planner, so I provided financial advice pro bono to American
citizens. In Singapore, for instance, I helped a woman who wanted
to leave her husband except he had all their financial records. I
combed through what she had so she knew where she stood.

My pro bono work continued as I became a certified financial
planner in 2003 and a year later opened my firm. I talked to one
couple that just piled the bills up on a shelf unopened. Another
couple insisted on sending the kids to private religious schools
they couldnt afford, living hand-to-mouth, a fragile financial
arrangement that they cobbled together until it fell apart.

Just the other day I got a call from someone asking, How do I
establish a credit rating when I have card debt? I meet a lot of
people who are up to the gills in debt. I counsel cutting up the
cards, pulling back on the discretionary spending.

Im the bully, taking away the ice cream, the someone
else

whos telling them to stop. There are plenty of intelligent and
capable people in the world, and ending up in a bad money situation
is not intellectual incompetence. Some people with spending issues
just dont know how to dig themselves out of a money hole theyve
created.

Ive learned from clients, too. We all live complex financial
lives; its virtually impossible to make sound financial decisions
if you dont delegate to professionals. I pull together the
accountant, estate attorney and insurance agent so were all
together on behalf of a client.

Ive learned to be a better listener and to understand whats
important. Money is highly emotional and private. I love providing
clarity in peoples financial lives. I actually like to clean up
financial messes.

I love helping people in a ways I couldnt help my parents when
I was growing up.

Follow AdviceIQ on Twitter at

@adviceiq

.

Eve Kaplan

, CFP, is a fee-only advisor in Berkeley Heights, NJ

Kaplan Financial Advisors

is a Registered Investment Advisor in New Jersey and
New York.

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Colt Bites the Bullet, Files for Chapter 11 Protection

NEW YORK (The Deal) — Privately held firearms makerColt Defense has filed for bankruptcy after failing to reachan out-of-court restructuring deal with its senior noteholders.

The West Hartford, Conn., company and nine affiliates on Sunday submitted Chapter 11 petitions in the US Bankruptcy Court for the District of Delaware in Wilmington. The companies have requested joint administration of the cases, with Colt Holding Co. to serve as lead debtor.

Colt, which is majority-owned by New York private equity firmSciens Capital Management Group, looks to support a sale process through $20 million in new-money debtor-in-possession financing from its existing secured lenders.