Paragon Offshore plc (fka PGNPQ)

[SPARK]

Paragon Offshore - Judge Christopher Sontchi Was Not So Blind After All
Oct. 31, 2016 10:09 AM ET|30 comments | About: Paragon Offshore

Judge Christopher Sontchi issued on Friday his oral ruling and denied the revised plan submitted by Paragon offshore.

Paragon Offshore is now facing a difficult task to re-negotiate a deal again with the bondholders, and re-submit a plan to the judge Sontchi.

I recommend to stay away from the stock, especially, if you do not have a trading experience.

This article is an update to my preceding article about Paragon Offshore (OTCPK:PGNPQ), published on October 18, 2016.

Bildresultat för MSS1

On Friday, October 28, 2016, Paragon Offshore announced the following:

the United States Bankruptcy Court (the "Bankruptcy Court") for the District of Delaware has given an oral ruling denying confirmation of the company's previously filed Modified Second Amended Joint Chapter 11 Plan of Reorganization (the "Plan"). A written ruling is expected to follow shortly. Paragon filed for protection under chapter 11 of the United States Bankruptcy Code on February 14, 2016.



Image: Judge Christopher Sontchi. Courtesy Harvard Law School.

In issuing his oral ruling, Judge Christopher Sontchi commented that the Plan is not feasible as it removes too much cash from the company during the current downturn. However, he noted that his ruling did not preclude the company from a restructuring, only that the company could not do so under the current Plan.

Paragon is evaluating its course of action but cannot comment on details of the next steps the company will take. The company continues to believe, but cannot provide any assurances, that a positive resolution of the company's restructuring process can be achieved.

A little history of the "case".

On March 25, 2016, the company filed an 8-K SEC filing to announce the following:

As previously reported, on February 14, 2016, Paragon Offshore plc (the "Company") and certain of its subsidiaries (collectively, the "Debtors") filed voluntary petitions for relief (the "Bankruptcy Cases") under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").

In connection with the Bankruptcy Cases, on March 24, 2016, the Debtors filed an amended plan of reorganization (the "Amended Plan") and disclosure statement (the "Amended Disclosure Statement") with the Bankruptcy Court.

On August 8, 2016, Paragon offshore announced that it had filed a "downside sensitivity" to its base business case in a supplement to the company's Disclosure Statement. Paragon also announced it had reached an agreement in principle on a revised restructuring plan (the "Revised Plan") with the company's Bondholders and Revolver Lenders.

In short,

Common equity to be retained by existing shareholders went down from 65% to now 53%.
With approximate shares outstanding of 165.7 million shares from an initial of 135.1 million.
Cash paid to bondholders goes from $345 million to $285 million.
Bondholders $60 million note payable due 2021.
The agreement with Noble Corp. (NYSE:NE) remained the same.
Where are we now?

The new "deal" was discussed by Judge Christopher Sontchi, on Friday. The judge issued an oral ruling, indicating that the "new revised plan" will be denied, because it removes too much cash from the company to be able to survive the downturn -- $285 million paid to bondholders -- and sent the company back to the drawing board.

What we know is that the bondholders were trading $984 million in debt for $285 million in cash and 47% of the company, pushing the new potential outstanding to 165.7 million.

This is not going to happen! and Paragon Offshore will have to reduce the $285 million significantly to be able to get a plan approved by Judge Sontchi.

I am sure this oral ruling chocked a lot of shareholders who expected a positive ruling. I was surprised as well, and I wrote in my preceding article:

I am expecting a confirmation -- despite my firm belief that the company will be back in bankruptcy no later than H2 2017 -- unless the Judge Sontchi is well aware of the business situation, that will probably get much worse for Paragon Offshore, at least until H2 2018, which is evidently too late.

What next?

The first mistake is to quickly calculate a "liquidation value" for the stock based on the different components of the company, and come up with an overblown valuation. The company is basically worthless or a few pennies for a dollar in this market conditions, period. No other offshore companies will be interested to take over Paragon Offshore and only a few rigs can be sold right now.

The company will not be liquidated immediately, and bondholders will get less cash, whereas, they will negotiate a much bigger stake of the company shares outstanding. It is very simple to understand and Paragon offshore cannot do anything about it.

This is what happened already with the "revised plan", and will happen again. The question is whether or not the shareholders will get a "good deal" if the bondholders get much less than the $285 million they received in the revised plan denied? A quick answer is that it is very unlikely.

Paragon Offshore is now facing a difficult task to re-negotiate a deal again with the bondholders, and re-submit a plan to the judge Sontchi, there are no alternatives left.

The rumor is that the Judge Sontchi suggested $150 million to $200 million added to the cash position to eventually approve the revised "revised plan". Let's assume $175 million... And see what will happen to the revised plan above in this case, using a simple calculation.

Common equity to be retained by existing shareholders went down from 53% to now 18%.
With approximate shares outstanding of 488 million shares from an initial of 165.7 million.
Cash paid to bondholders goes from $285 million to $115 million.
Bondholders $175 million note payable due 2021.
The agreement with Noble Corp. (NE) remained the same.
I see three important negative issues with this new eventual deal.

First, Bondholders will certainly ask for a bigger stake, due to the increasing risk of getting less cash. It is possible that the shareholders will get less than 10% instead, and the shares outstanding will increase to 600 million shares or more.

Second, Paragon offshore will probably try to negotiate a deal with the term lenders -- some sort of pre-approval -- which means that the cash paid to bondholders will be even lower.

Remember, time is of the essence. Which means that the new plan will be delayed and the whole process will take another three to six months, making things much harder financially for Paragon Offshore.

Conclusion:



I believe the stock price may eventually trade between 0.05-0.10 or lower. Many shareholders have not sold a share yet, because they hold on to the idea that somehow everything will be solved by magic. With this new oral ruling, the window of opportunity for a positive outlook is rapidly closing, unfortunately.

Basically, I recommend to stay away from the stock, especially, if you do not have trading experience. Based on my calculation above, you can see that the stock will be severely diluted. The only opportunity safe enough, should be to day trade the stock on any news, but it requires control and knowledge that many shareholders are not familiar with.

Important note: Do not forget to follow me on PGNPQ or other offshore drillers. Thank you.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Just day trade PGNPQ on special occasion.

http://seekingalpha.com/article/4017130-paragon-offshore-judge-christopher-sontchi-blind?auth_param=1d7ijq:1c1ek4v:39d97c542afa1f7b52756e98c70c43e9&dr=1