By Patrick Fitzgerald 

Offshore drilling contractor Ocean Rig UDW Inc. filed for bankruptcy protection in the U.S. to block distressed debt investors from interfering with a debt restructuring that will slash $3.7 billion in debt from its books.

The Cayman Islands holding company filed Monday night for protection under chapter 15, the section of the U.S. code dealing with cross-border insolvencies. Ocean Rig is one of a number of offshore rig owners and operators brought down by the prolonged slump oil and gas prices.

In a filing Monday filing with the U.S. Bankruptcy Court in New York, Antonios Kandylidis, Ocean Rig UDW's president, said the U.S. filing was necessary to protect the company from "vulture investors" who bought up the company's debt last year on the cheap, hoping to take advantage of the steep decline in oil prices.

"These were bad bets," said Mr. Kandylidis, alluding to the traders' wager that Ocean Rig would pay off its bonds at maturity. Instead, facing an April 3 interest payment of $14.9 million, Ocean Rig filed for bankruptcy to pursue its debt-for-equity swap with lenders.

Judge Martin Glenn of the U.S. Bankruptcy Court in New York Monday granted Ocean Rig a temporary restraining order to block creditors from interfering with its debt restructuring.

Under the company's proposed restructuring plan, Ocean Rig lenders and investors will swap $3.7 billion in debt for the new equity in the reorganized company plus $288 million in cash and new secured debt of $450 million. Lenders, owed $3.1 billion, would divvy up 76.2% of the equity in the new company.

Funds owed $131 million in senior unsecured bonds would get 20.9% of the equity in the new company, and the senior secured bondholders -- those distressed debt funds referred to by Mr. Kandylidis as "vulture investors" -- would get 2.9%.

Senior secured bonds issued by Ocean Rig subsidiary Drill Rig Holding are due to mature in October. The bonds have recently traded at 34 cents on the dollar, according to FactSet. The outstanding senior unsecured debt matures in 2019. Those notes recently traded at 32 cents on the dollar, according to FactSet.

Ocean Rig Chairman George Economou, the Greek shipping magnate who also heads dry-bulk carrier DryShips Inc., said the company "faces a deep and prolonged industry downturn."

With crude prices hovering around $50 a barrel, oil companies have cut expenditures on drilling and this, coupled with a glut of rigs, has put rig owners under severe pressure.

Of the company's 11 ultra-deepwater drilling rigs, six have been decommissioned and are in storage. Of the five in operation, only one is under contract past next year, Mr. Kandylidis said.

Ocean Rig's largest individual shareholder is James Dondero, co-founder of the $15 billion hedge fund Highland Capital Management. Highland is also Ocean Rig's largest senior unsecured bondholder and one of the company's lenders.

The distressed debt funds and Highland "are positioning themselves to stymie [Ocean Rig's] reorganization efforts in order to extract value to which they are not entitled to under any reasonable restructuring scenario," Mr. Kandylidis.

Highland, earlier this month, revealed it had discussions with Messrs. Economou and Kandylidis about an Ocean Rig debt restructuring but talks were called off before any deal could be reached.

A Highland spokeswoman declined to comment on the Ocean Rig bankruptcy.

AlixPartners' Eleanor Fisher and Simon Appell have been appointed Ocean Rig UDW's Cayman liquidators. Evan Hollander of Orrick, Herrington & Sutcliffe is handling the U.S. bankruptcy case. The case number is 17-10736.

Ocean Rig is scheduled to make its debut in New York bankruptcy court on Monday.

Write to Patrick Fitzgerald at patrick.fitzgerald@wsj.com

 

(END) Dow Jones Newswires

March 28, 2017 13:50 ET (17:50 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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