When oil prices reached $100 a barrel in 2008, an escalating demand for energy pushed big oil companies to find promising new fields to increase supplies. Investment-grade offshore drilling companies borrowed under an auspicious market in hopes of using those funds to tap into new sources in the vast deep waters.
Turn the clock ahead 10 years. Today a number of the top participants in the offshore drilling space have experienced a credit downgrade, becoming sub-investment grade because of the precipitous drop of commodity prices in recent years. This has left some borrowers in a much different financial climate than when their original credit facilities were put in place. Many lenders are reluctant to extend maturities of their credit facility commitments to these drilling companies without guarantees, collateral, and/or other credit enhancements.
The ripple effect across the industry has touched nearly every major drillco. The top five revenue-generating offshore drilling companies within the global energy equipment and services sector have each recently executed extended credit facilities.
Bracewell has served as counsel to the agents in four of the five deals completed to date, while representing a participant bank within the syndicate in the fifth deal.
Creating Flexible Credit Support
The approach on these pioneering transactions is to provide guarantee and/or collateral support for the extended facility, while maintaining flexibility for the borrower, by using a floating guarantee concept. Instead of requiring every subsidiary to grant guarantees in favor of the lenders – or requiring them to grant security over their assets – the lenders negotiate guarantee coverage ratios that provide sufficient asset support value for their commitments. The ratios typically measure fixed assets directly owned by guarantor subsidiaries against pari passu and senior debt, including the credit facility commitments, held at those guarantor subsidiaries. In addition, the terms often require that a certain percentage of the corporate group’s overall fixed assets be held directly by guarantors. The goal is to give a company flexibility to decide which of its subsidiaries are best positioned to provide guarantees and/or collateral, taking into account tax considerations, jurisdiction of organization and assets held.
The flexible guarantee structure Bracewell and its clients have put in place on these deals balances the needs of both sides of the transaction. The borrower, previously accustomed to investment-grade terms, is now coming to grips with the fact that its credit profile no longer justifies such advantageous terms and needs to incentivize its lenders to extend their commitments. The lenders need protective credit enhancements to continue lending to the borrower post-downgrade.