Earlier this week, Weatherford delayed filing its quarterly report and canceled its earnings call. We now know why. As part of its 10-Q filing, the company disclosed it intends to file for bankruptcy.
The company stated that it expects to reach an agreement in principle with holders of the majority of unsecured senior notes on the terms of a pre-packaged bankruptcy agreement.
Terms of the Proposed Restructuring
The company expects that
- $7.7 billion of existing unsecured notes will be exchanged for 99% of the common stock of the reorganized company and $1.25 billion of new unsecured tranche B notes. Holders of the unsecured notes will have the option to convert up to $500 million of the tranche B notes to equity.
- existing secured debt and unsecured credit facility ($1.1 billion) will be repaid in full
- all trade claims against the company will be paid in full
- existing equity will be cancelled and exchanged for 1% of the new common stock and three year warrants to purchase 10% of the new common stock.
- two debtor-in-possession (DIP) facilities will be entered into. One for a $750 million revolving credit facility, the other a term loan for $1 billion, backed by the noteholders.
- once the company exits bankruptcy, the DIP facilities will be replaced by a $1 billion revolving credit facility and $1.25 billion new tranche A senior unsecured notes.
Poor Q1 performance
The intended Chapter 11 filing was triggered by another poor quarterly performance. The company made an operating loss of $301 million in the quarter. The operating loss included a goodwill impairment charge of $229 million. The company had total assets of $6.5 billion and total liabilities of $10.6 billion.
More importantly, the company had a net cash outflow from operating activities of $249 million. As a result, the company’s availability under its $1.1 billion credit facility dropped from $325 million at December 2018 to $93 million at March 31.
McKinsey under delivers
In 2018 Weatherford hired McKinsey to help with its transformation. The company disclosed in its quarterly report that the targeted savings of $30 million in the first quarter were not achieved due to ‘higher than anticipated costs associated with rationalizing our manufacturing footprint and market headwinds that negatively impacted the progress of our sales and commercial initiatives during the first quarter of 2019. Additionally, diminished pricing leverage and lack of supply chain savings contributed to slower progress on our transformation targets.’ Sounds like McKinsey oversold on their promises.
I will be interested to see how smoothly the Chapter 11 proceedings go. I suspect some of the smaller loan note holders will balk at the conversion terms and hold out for better terms, causing delays to the process.
$18 billion market cap in 2014
After market, the shares were trading at 10 cents (market cap $100 million). In 2014, the market capitalization was $18 billion.