par Petrofac Limited (isin : GB00B0H2K534)
Petrofac Limited: Petrofac enters Lock-Up Agreement and announces comprehensive financial restructuring
Petrofac Limited ( PFC) NOT FOR PUBLICATION, RELEASE OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART IN, OR INTO ANY JURISDICTION IN WHICH SUCH PUBLICATION, RELEASE OR DISTRIBUTION WOULD BE UNLAWFUL. THIS ANNOUNCEMENT IS FOR INFORMATION PURPOSES ONLY AND DOES NOT CONSTITUTE OR CONTAIN ANY INVITATION, SOLICITATION, RECOMMENDATION, OFFER OR ADVICE TO ANY PERSON TO SUBSCRIBE FOR, OTHERWISE ACQUIRE OR DISPOSE OF ANY SECURITIES IN PETROFAC LIMITED OR ANY OTHER ENTITY IN ANY JURISDICTION. THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF THE UK VERSION OF REGULATION (EU) NO. 596/2014 ON MARKET ABUSE, AS IT FORMS PART OF UK DOMESTIC LAW BY VIRTUE OF THE EUROPEAN UNION (WITHDRAWAL) ACT 2018.
Petrofac enters Lock-Up Agreement and announces comprehensive financial restructuring Petrofac Limited (“Petrofac” or the “Company” and together with its subsidiaries, the “Group”) today announces that it has entered into a binding agreement (the “Lock-Up Agreement”) with key financial creditors on the terms of a comprehensive restructuring (the “Restructuring”) to significantly strengthen the financial position of the Group and enable Petrofac to deliver its strategy. The Lock-Up Agreement formalises the in-principle agreement announced by the Company on 27 September 2024 with certain key stakeholders including an ad hoc group of holders of senior secured notes (the “Ad Hoc Group”) and certain other senior secured noteholders, which together comprise approximately 57% of the senior secured notes. It is part of a comprehensive restructuring that also involves a new equity raise and certain agreements with core clients and other counterparties. In aggregate, the Restructuring will deliver at least US$325m of new funding to the Group. After repayment of certain obligations, including payments required to extinguish certain historical claims and contingent liabilities, and payment of transaction costs, this will result in an immediate increase in Group liquidity of at least US$195m. Since announcing a review of the Company’s strategic and financial options in December 2023, the Directors have considered and evaluated several alternative options to improve the position of the Group’s balance sheet. The Directors are of the view that the Restructuring provides the best available outcome for the Group, its 8,000 strong workforce and its external stakeholders. The components of the Restructuring are inter-conditional and certain elements will be implemented by way of restructuring plans launched by the Company and Petrofac International (UAE) LLC (“PIUL”) pursuant to Part 26A of the Companies Act 2006 which will require sanction by the English court (the “Restructuring Plans”). Shareholders will be asked to approve certain components of the Restructuring at a General Meeting of the Company, which is expected to take place in February 2025. The proposed Restructuring includes the following:
It is expected that, subject to receipt of all requisite approvals and satisfaction of conditions, the Restructuring will be completed during Q1 of 2025 (the “Restructuring Effective Date”).
René Médori, Chairman, said:
“We are pleased to have announced today a deal with creditors and other stakeholders which will materially strengthen Petrofac’s financial position. We recognise the demands that this process has placed on the Group’s stakeholders, each of whom is playing a vital role in delivering this critical step for the business. I would once again like to thank our shareholders, clients, creditors and employees – we will continue to depend on your support over the coming weeks as we implement the agreement and deliver Petrofac’s future growth potential. “The financial restructuring will mark a new beginning for Petrofac. I look forward to overseeing the conclusion of this process with a view to transitioning my Board duties to a new Chairperson in 2025.”
Tareq Kawash, Group Chief Executive, said:
“The agreement announced today will provide a sustainable financial structure that will support our business plan and allow the Group to move forward with confidence. Bolstered by our current backlog and pipeline of opportunities, the business is well positioned as a leading provider of critical energy infrastructure. We have made good progress in closing out our legacy portfolio of contracts, our new projects are progressing well, we have a refreshed strategy focused on our strengths, with enhanced bidding discipline and project governance. “I am grateful to our stakeholders for coming together as part of the Lock-Up Agreement to deliver these stronger foundations for the future and look forward to leading our exceptional team in pursuit of future successes.”
Remaining Steps to the Restructuring The entry into the Lock-Up Agreement and associated agreements represents the culmination of many months of work. A number of steps are now required to complete the Restructuring, which is critical for the Company to continue as a going concern. Each of these steps is inter-conditional, and so all need to be completed in order for the Restructuring (including the new funding set out above) to proceed. The equity raise is being conducted by way of a non-pre-emptive placing, which in the view of the Directors was critical for the purposes of announcing a fully committed transaction. The Company values its retail investor base and is keen to ensure that a broader range of investors have an opportunity to participate in the Group’s future growth. The Company therefore intends to announce an offer of ordinary shares to retail investors to raise approximately US$8m, at the same issue price as the new equity raise announced today, following the publication of the Company’s audited financial statements for the year ended 31 December 2024. The Company also intends to give preferential allocation to those retail investors who are shareholders on the date of this announcement to the extent reasonably practicable. Implementation of the Restructuring requires (among other things) (i) shareholder approval for components of the Restructuring at a General Meeting of the Company, which is expected to take place in February 2025; (ii) the requisite creditor support (in particular from the Group’s senior secured funded creditors), and sanctioning by the Court of the Group’s proposed restructuring plans under Part 26A of the Companies Act 2006; (iii) agreement to secure performance guarantees for certain key EPC contracts or agreeing to alternative solutions with the clients; (iv) full and final settlement with HMRC in relation to certain historical claims against the Group on terms acceptable to creditors who have entered the Lock-Up Agreement; (v) obtaining non-compromised Thai Oil guarantor support for the Restructuring; (vi) consent from the Jersey Financial Services Commission for certain issuances in connection with the Restructuring; (vii) agreement with guarantee providers to waive defaults resulting from the Restructuring; and (viii) receipt of proceeds from the issuance of new ordinary shares and new notes. Further detail on the conditions to the Restructuring is set out in Section 5(a) below. Certain shareholders, including each of the Directors, who together hold in aggregate approximately 37% of the Company’s outstanding share capital have undertaken to vote their shareholdings in favour of the resolutions proposed at the General Meeting. The Directors are confident in the Group’s prospects and, in connection with the New Equity, René Médori (Chairman), Tareq Kawash (Chief Executive Officer), Afonso Reis e Sousa (Chief Financial Officer) and David Davies (Non-Executive Director) have agreed to subscribe for new ordinary shares at the same price as other New Equity investors for aggregate consideration of US$1.08m. The lenders under the Group’s existing revolving credit facility and term loans (together, the “Bank Lenders”) have not yet signed the Lock-Up Agreement. The Group is progressing discussions with the Bank Lenders to seek their support for the final terms of the Restructuring. The Group is aiming to conclude the discussions in the coming weeks. The support of certain of the Bank Lenders will be necessary in order for the Restructuring to take place. All lenders (that is, all holders of the Group’s outstanding senior secured notes and Bank Lenders (together the “Funded Creditors”)) are encouraged to accede to the Lock-Up Agreement and participate in the Restructuring. Section 5 “Participation by Funded Creditors in the Lock-Up Agreement and the New Money” sets out next steps on how to do this.
Reasons for the Restructuring Under the current management team, Petrofac has made significant progress having refreshed its strategy to focus on its strengths and enhance bidding discipline and project governance. Despite significant progress in rebuilding the backlog in 2023, challenges with the Group’s legacy portfolio impacted Petrofac’s financial performance. In particular, the Group’s activities were exposed to adverse and significantly delayed contractual outcomes and settlements and were negatively affected by the impacts of the COVID-19 pandemic, leading to losses on a number of contracts. This included significant cost overruns on the Thai Oil Clean Fuels joint venture contract, which have been driving losses at the Engineering & Construction division (“E&C”) and Group level in recent years. Here, the impact of the pandemic, together with the scale and unique complexity of the project and its location, meant that significant additional work and costs were necessary to recover lost time and complete the project. In this context, the Group, alongside its joint venture partners, has been in protracted discussions since 2022 to recover costs incurred. As part of the Restructuring, the Group continues to seek agreed terms to continue its participation on the project on a defined and limited basis. Absent this, the Group will exit the Thai Oil Clean Fuels contract with associated potential claims and contingent liabilities expected to be compromised as part of the Restructuring Plans. In this regard, Petrofac is aware of the announcement made on 20 December 2024 by Thai Oil that its board of directors has convened an extraordinary general meeting of its shareholders to consider and approve an increase of the investment cost in the Thai Oil Clean Fuels Project. Due to the timing of this announcement, its impact (if any) on the Restructuring remains subject to ongoing review by the Company In conjunction with the challenges noted above, a reduced appetite for the provision of performance bonds and/or advance payment guarantees (“guarantees”) across the sector, impaired the Company’s ability to secure guarantees for its engineering, procurement, and construction (“EPC”) contracts — a standard industry requirement — without the posting of cash collateral. These restrictions strained the liquidity of the Group, preventing it from being able to execute its contract backlog without support from its stakeholders to resolve both the guarantee requirements and liquidity needs. Purpose of the Restructuring The Directors believe that the Restructuring is critical to deleverage and strengthen the Group’s balance sheet and liquidity position, as well as to deliver a sustainable capital structure that will allow the Group to meet future guarantee requirements and deliver its strategy. The Restructuring provides a comprehensive solution that involves support from the Group’s various stakeholders and aims to: (i) protect existing backlog contracts; (ii) protect the Group from future exposure on the Thai Oil Clean Fuels contract and certain other historical claims and contingent liabilities; (iii) support access to future guarantees; (iv) reduce the Group’s gross indebtedness; (v) restore the Group to a positive net equity position; (vi) allow for the normalisation of the Group’s working capital; (vii) improve the Group’s liquidity; (viii) reduce the Group’s interest costs and (ix) rationalise the Group along operational lines. The Group expects the Restructuring to provide a foundation for significant growth in the coming years, as summarised in Section 3 “Financial Outlook”. The Directors believe that the Group’s ability to continue as a going concern is contingent on the implementation of the Restructuring. If the Restructuring is not implemented, the Company would likely enter into liquidation proceedings. The Board has carefully considered the terms of the Restructuring (including the resulting equity dilution of existing shareholders) and believes that the Restructuring is in the best interests of stakeholders as a whole. See Section 4 “Other considerations” for an overview of key outstanding steps to implementation.
The equity allocation following implementation of the Restructuring is summarised in the table below.[1]
The key terms of the Restructuring steps are summarised below. Each component of the Restructuring is inter-conditional with the other components.
The Group has secured new equity and debt commitments as set out below (the “New Money”). New Equity US$194m of commitments to subscribe for ordinary shares in the Company (the “new ordinary shares”):
In aggregate, taken together with the new ordinary shares to be issued (i) in connection with the debt-for-equity swap (see Section 2(b) below), (ii) to Funded Creditors that subscribe for the New Money Notes (see “New Money Notes” in this Section 2(a)) and (iii) in respect of the backstop fees (see Section 2(i) below), 20,550m new ordinary shares are expected to be issued on completion of the Restructuring representing 97.5% of the Company’s share capital. This will result in a significant increase in the issued ordinary share capital of the Company and consequently existing holders of the ordinary shares will experience material dilution. As consideration for backstopping their portion of the New Equity, the Ad Hoc Group and the Additional Noteholders will receive a backstop fee, paid in part by the issuance of new ordinary shares, as described further below in section 2(i). All Funded Creditors will be entitled to participate in the backstopped New Equity, provided they also participate in the New Money Notes on a fixed ratio of 50/50 (the “Funding Ratio”) between New Money Notes and New Equity (see “New Money Notes” in this Section 2(a), Section 2(i) and Section 5 below). In addition, the Company has agreed to issue two classes of warrants over ordinary shares to existing shareholders who have committed to subscribe for ordinary shares as part of the New Equity, but excluding Directors, (the “Existing Shareholder Investors”) for nil consideration. The key terms of the warrants are summarised below.
New Money Notes US$131m (before original issue discount (“OID”) and backstop fees) (the “New Money Notes”) of debt funding in the form of new super senior secured notes, with US$94m backstopped by the Ad Hoc Group and the Additional Noteholders and US$38m committed by the New Investor. As consideration for backstopping their portion of the New Money Notes, the Ad Hoc Group and the Additional Noteholders will receive a backstop fee, paid in part by the issuance of additional New Money Notes, as described further below in section 2(i). As noted above, all Funded Creditors (and certain other existing secured guarantee providers) will be entitled to participate in the backstopped New Money Notes (see Section 2(i) and Section 5 below). The New Notes (being the New Money Notes together with the Reinstated Notes (as defined in Section 2(b) below) will be issued by a newly incorporated subsidiary that will become the holding company of the Group’s Asset Solutions division and have the following key terms:
Funded Creditors that subscribe for the New Money Notes will also receive new ordinary shares constituting 17.9% of the post-Restructuring share capital of the Company as additional consideration for their New Money investment.
Debt-for-equity swap Approximately US$772m of outstanding debt under the Company’s revolving credit and term loan facilities and its senior secured notes (the “Funded Debt”) will be converted into new ordinary shares constituting 17.3% of the post-Restructuring share capital of the Company. Reinstated Notes Funded Creditors who participate in the New Money Notes will receive, for every US$1 of participation, reinstatement of US$0.81 of their Funded Debt as super senior secured notes (the “Reinstated Notes” and, together with the New Money Notes, the “New Notes”), subject to any adjustment to the reinstatement ratio in connection with the provision of New Guarantee Facilities, the Thai Oil non-compromised guarantor claims and the Thai Oil Guarantee Claims. Reinstated Notes will also be issued to Funded Creditors (and certain other existing creditors) that participate in New Guarantee Facilities (see Section 2(c) below).
As of the date of this announcement, the Company is in advanced discussions with an existing Funded Creditor to provide US$72m of New Guarantee Facilities for a major E&C project. In consideration, the Funded Creditor will receive, in respect of their Funded Debt, a partial cash repayment (c.US$19.6m) and partial reinstatement as Reinstated Notes (c.US$19.6m). Funded Creditors and certain other creditors of the Group will also be invited to participate in providing New Guarantee Facilities for a second EPC contract in amount of €50m. For every US$1 of such New Guarantee Facilities commitments, participants will receive:
The New Guarantee Facilities will be issued on terms customary for facilities of this nature, and will be subordinated to the New Money Notes, but rank pari passu with all other senior secured debt over the common guarantee and security package. The New Guarantee Facilities in respect of the first major E&C project will benefit from the ring-fencing arrangements noted below (see Section 2(d) below).
As part of the Restructuring, the Group has revised the terms of the US$14bn multi-year framework agreement with TenneT in relation to the Group’s work alongside Hitachi Energy on a series of offshore wind projects (the “TenneT Framework Agreement”). The revised arrangements include a more gradual build-up of the performance security requirement over the life of the TenneT Framework Agreement and the ability to meet at least part of that security through retentions rather than performance guarantees. These arrangements will apply until 31 December 2026, following which performance security will be required in the form of guarantees. In exchange, future payments made by TenneT will be ring-fenced and used exclusively for costs associated with the TenneT contracts (including services provided by other Group entities), and transfers outside of the ring-fence will only be permitted for transfers of certain profits and overhead to the Group, alongside limited additional amounts of excess liquidity. In addition, the Group has agreed revisions to its agreements with ADNOC in relation to the provision of guarantees. The revised arrangements include an extension, for 18 months from the date that the Restructuring becomes effective, of the period to provide guarantees for one contract. In exchange, future payments made by ADNOC to the Group on the two contracts awarded in 2023 will be paid into ring-fenced bank accounts and used exclusively for costs associated with those contracts, including services provided by other Group entities, and for transfers of overhead to the Group.
As part of the Restructuring, the Group has agreed settlements and/or will seek to settle and/or compromise certain historical claims and contingent liabilities required under the terms of the Lock-Up Agreement and as summarised below: Consensual settlements
Compromise of certain historical claims and contingent liabilities Certain historical liabilities of the Company and PIUL will be compromised, subject to implementation of the Restructuring Plans (see Section 4(a) below) (unless settlements are subsequently agreed). These include:
The Company expects that the aggregate initial outflows required to settle and/or compromise these historical claims and contingent liabilities will not exceed US$25m from the proceeds of the Restructuring, with certain other payments to be made in the future. Further details on the terms of these compromises will be provided as part of the Restructuring Plans process.
Current Shareholders As a result of the Restructuring, including the conversion of the Group’s debt to equity, current Shareholders will be diluted through the resultant issuance of new equity in the Company, such that existing Company Shareholders will hold approximately 2.5% of the post-Restructuring share capital of the Company. Other Guarantee Facilities / Sureties Other guarantee facilities, surety facilities or similar instruments that are not currently subject to the intercreditor agreement (but which may have their own security / guarantees) will not be amended or compromised by the Restructuring, but may become Elevated Existing Unsecured Guarantees if the relevant creditors agree to provide New Guarantee Facilities (see Section 2(c) above). In addition, the Group will be required to procure waivers from guarantee providers for defaults arising as a result of the Restructuring.
Prior to the Restructuring Effective Date, the Company will finalise its plan to formalise the legal and operational separation of its delivery units (E&C, Energy Transition Projects (̶ | |||||||||||||||||||||||||||||||||