English High Court Reserves Judgment on Petrofac P26A Sanction Hearing

Justice Marcus Smith today said he would reserve judgment on whether to sanction Petrofac’s two restructuring plans, at the close of a three day hearing on the plans in the English High Court.

Saipem and Samsung opposed the company’s plans, arguing that the plans would unfairly saddle them with Petrofac’s share of the liabilities related to a failed joint venture the three companies had entered into to build Thai Oil’s Clean Fuel Project. Saipem and Samsung also argued that the plans would simultaneously reinstate Petrofac as a competitor in the contractor market, leaving them worse off.

The two dissenting creditors put forward an alternative proposal that they said the Judge, Marcus Smith should consider as the “relevant alternative” to the company plans – which, while still not considered “fair” by Saipem and Samsung, is a deal they are willing to accept and which they argued would leave the restructuring plans unopposed.

Key Arguments

The arguments heard in court rested on three key issues. They were:

1. The relevant alternative, i.e., whether the relevant alternative to consider under the “no worse off” test is a group-wide insolvency, as the plan companies and ad-hoc group contended, or an alternative proposal put forward by Saipem and Samsung;

2. Assuming that the relevant alternative is a group-wide insolvency, whether Saipem, and Samsung would nevertheless be worse off under the plan than under an insolvency; and

3. If, as a matter of fairness, the court could not sanction the plan because it excessively and unfairly enriches other creditors over and above Saipem and Samsung.

Relevant Alternative

Samsung and Saipem contended that the relevant alternative to Petrofac’s restructuring plans is the “open offer” put forward by them to the Plan Companies on April 4. Under the open offer the two dissenting creditors would receive – in addition to the share of the $1 million claims fund already offered to them – a $25 million cash payment by the end of December 2027, additional Tranche 1 warrants worth between $36 million and $45 million, and a small number of additional Tranche 2 warrants of ‘negligible value’.

Representing Saipem and Samsung, Andrew Thornton KC said the alternative plan being proposed was not an entirely new plan, but simply an easy tweak to the existing plan. “We are proposing keyhole surgery,” he said.

He noted that the $25 million cash payment would be paid in the context of a projected operating profit for Petrofac of $300 million in 2027, assuming the restructuring is successful.

Petrofac argued that Saipem and Samsung’s alternative could not be reasonably implemented in the timeframe needed to rescue the company, which is on the brink of collapse. Representing the plan companies, David Allison KC said the plan as it stands was the result of complex negotiations, asserting that the new money investor, Nut Tree Capital Management, would walk away from their participation in the new money if the terms of the current deal were to change. He added that as a matter of principle, unsecured creditors should not be allowed to “squeeze” secured creditors to get more out of a plan.

Thornton KC said that during cross examination, Petrofac CFO Afonso Reis e Sousa said that given the choice between the alternative plan and an insolvency, the company would opt for the alternative plan. Thornton KC said there was no real possibility of the new money investor walking away from a deal given their $23 million holding of the super senior secured notes. He said senior secured creditors would be “irrational and stupid” to choose an insolvency over the alternative plan, arguing that the delta between what senior secured creditors would get in a winding-up versus the alternative plan was about $600 million.

Petrofac’s counsel asserted that the alternative plan put forward by Saipem and Samsung would give them a preferable deal to those secured creditors who are not participating in the new money, subverting a key principle of insolvency law: namely, the preferential treatment of secured creditors vis-a-vis unsecured creditors. Allison KC also said that the alternative plan would give preferential treatment to Saipem and Samsung over another unsecured group of creditors, the shareholder claimants. He argued that Samsung and Saipem’s calculations, by which they sought to argue there was little to no financial impact on other creditors of giving them the concessions in their alternative plan, were misleading.

Petrofac said that Saipem and Samsung discounted the point that Nut Tree had purchased their $23 million nominal holding at a steep discount, and would make a profit on that initial buy-in amount in an insolvency scenario without having to deploy the additional $75 million in new capital represented by the new money.

Allison KC noted that in order to agree to support the deal to provide shareholder claimants with warrants, Nut Tree had already had to be given an equity-like “contingent value” instrument as a sweetener.

“No Worse Off” Test

Thornton KC argued that because Petrofac is a key competitor to his clients, the restructuring plan would leave his clients “worse off” than in the insolvency scenario because they are key competitors to Petrofac. Therefore, under the restructuring plan, not only would Saipem and Samsung have to shoulder a roughly estimated $500 million of liabilities for which Petrofac would have been responsible under the Thai Oils contract, they would also face more competition in the market from the continued existence of Petrofac as a player.

Smith J said the competition point is novel, and goes to the heart of how the rescue culture encouraged by the introduction of Part 26A restructurings should function.

Arguing for Petrofac, Allison KC said that the “no worse off” test only applied to Petrofac in its role as a creditor and that this was the natural way to interpret the meaning of the words “worse off” and “creditor” in the law, i.e., that the no worse off test would not apply to whether Saipem and Samsung would be worse off in their roles as competitor businesses to Petrofac.

Thornton KC said that the no worse off test was not only related to the natural meaning of the words . He said there were three parts to the “no worse off” argument: showing a material harm from the plan to the dissenting creditor; showing that the harm is sufficiently tied to the effect of the plan; and showing the harm was within the knowledge of the proponent of the plan.

Allison KC raised the concern that allowing challenges to the no worse off test on the basis of competition could open the floodgates to challenges on this basis, and is antithetical to the nature of the rescue culture.

Thornton KC said the case is highly unusual, if not unique, adding that the effect of sanctioning the plans on Saipem and Samsung is obvious, known to everybody, and potentially enormous.

“Rescue culture wasn’t designed to rescue companies in a manner that harms creditors,” Thornton KC said. “These are a really narrow set of circumstances. It’s not opening the floodgates.”

Fairness

The third argument revolved around how to assess fairness in a restructuring plan as regard differential treatment afforded to different types of creditors, including new money providers versus other creditors, and creditors across different levels of security ranking.

The judge noted that it is a given that different classes of creditors would be offered different levels of returns in a plan, on the basis of their seniority. The question as he framed it is then, “How does one test whether that sort of differentiation which is justifiable is fair in terms of extent?”

Thornton KC argued that the Thames Water judgment had caused a resetting of the approach toward out-of-the-money creditors. He said it could no longer be taken as a given that out of the money creditors could be considered as having been treated fairly as long as they receive a nominal amount more in a restructuring plan that they would have done under an insolvency.

He contended that Petrofac and the AHG did not consider whether the plans were fair to Saipem and Samsung, but rather calibrated the plans specifically only to ensure that they satisfied the “no worse off” test when compared with insolvency.

He said the significant upside for those participating in the new money was coupled with no attempt to value Saipem and Samsung’s contribution to the plans.

“There’s too much jam for the participants,” he said. He added that while his clients also did not consider the alternative plan they have put forward to be fair, if their plan progressed, it would remove the question of fairness for the judge as there would no longer be any opposing creditors and therefore no need for a cramdown.

Allison KC contended that the Thames Water Court of Appeal judgment applied only because that case was a bridging plan involving an interim financing, and did not involve a distribution, rather than a comprehensive debt restructuring. Thornton KC disputed that, saying there was no basis to say the Thames Water judgment was limited to a bridging plan.

“We do say the ‘little or no weight’ [to the views of dissenting creditors] does apply to out of the money creditors where the relevant alternative is a liquidation,” Allison KC said. “That’s a practical consequence of being able to have an effective restructuring.”

In his reply, Allison KC also denied that the “jam” was wrongly distributed. He said Saipem and Samsung had wrongfully made equivalence between the potential post-restructuring returns available for new money providers, and everyone else. He asserted that the challengers had made no attempt to dispute whether the new money was appropriately priced. He added that the warrants on offer to unsecured creditors were in fact already unusually generous given their place in the security structure ranking.

“In working out what jam there is to go around, you start with the people who are putting the new money in… they get around about 70% of the equity,” Allison KC said. “Then you work out who should get the remainder…

That’s the jam we are talking about, because without new money there’s never any jam to go around,” he said.

Counsel

The plan company is represented by David Allison KC, Henry Phillips and Stefanie Wilkins instructed by Linklaters.

Saipem and Samsung are represented by Andrew Thornton KC and Jon Colclough, instructed by Mayer Brown and their financial advisor is Alvarez & Marsal. The bondholder ad hoc group is represented by Daniel Bayfield KC and Riz Mokal instructed by Weil Gotshal.