Servicos de Petroleo Constellation S.A. – Brazilian Drilling Company Seeks US Recognition of Brazilian Bankruptcy Proceedings, Announces Creditor Agreements

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December 6, 2018 – Servicos de Petroleo Constellation S.A. (“Constellation” or the “Company”) filed for Chapter 15 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 18-13952. [Docket No. 1] Andrew Childe, the Company’s foreign representative, is represented by Thomas MacWright of White & Case. In its Chapter 15 Petition, Constellation, a leading Brazilian oil and gas drilling company which operates rigs and drillships primarily in Brazilian waters, notes that on December 6, 2018 each of the Constellation Debtors (and certain affiliates that are not Debtors in the Chapter 15 Cases) had filed a joint voluntary recuperacao judicia or “RJ” proceeding  with the Brazilian RJ Court under the Brazilian Bankruptcy Law.
 
Plan Support Agreement and Agreement in Principle with a Majority of the 2024 Bondholders
 
On November 29, 2018, (i) the Company, (ii) holders of 97.5% of the combined aggregate outstanding principal amount under financings related to three of the Company’s drillships (the “Drillship Lenders”), (ii) Banco Bradesco S.A., to whom $152.6mn is owed under a pair of unsecured working capital facilities and (iv) the Company’s shareholders announced that they had agreed a plan support agreement (the “PSA”). Pursuant to terms of the PSA, the Drillship Lenders have agreed to re-lend approximately $39 million in funds that were escrowed in August and September of 2018, Bradesco has agreed to provide a $15 million letter of credit, and the shareholders have agreed to invest $27 million of new money at closing, “all to ensure the Company has ample liquidity to survive a prolonged downturn in the market post-restructuring.”
 
On December 7, 2018, the Company issued a press release announcing that it had reached an agreement in principle with a majority of the holders of its 9.00% Cash/0.50% PIK Senior Secured Notes due 2024 (the “2024 Notes”) subject to definitive documentation and approval of the PSA.
 
Events Leading up to the Brazilian Bankruptcy Proceedings and the Filing of the Chapter 15 Petition
 
In a Declaration and Verified Petition for Recognition of the Brazilian “Recuperacao Judicia, or “RJ,” proceeding (the “Childe Declaration”) [Docket No. 7], Andrew Childe, the authorized representative of the RJ proceeding, detailed the events leading up to the Company’s bankruptcy filings. The Child Declaration states, “The Company’s current financial distress arises from the well-publicized global decline in the international oil and gas sector, as well as the financial crisis that continues to grip Brazil. Its financial woes have recently become unsustainable as long-term charter and service contracts for seven of its eight Offshore Drilling Rigs…either have recently expired or are scheduled to expire in the near future….The offshore drilling market continues to suffer from an oversupply of rigs, and, as a result, short-term day-rates and utilization rates remain depressed. In light of these market conditions, the Company’s debts must now be adjusted to allow the Company the time and liquidity needed to weather the current offshore drilling environment, obtain new contracts, and generate the revenue necessary to service its debt.
 
As described further below, notwithstanding such broad creditor support [ie the PSA], the Company remains vulnerable to creditor actions outside of Brazil, including in the United States. Given these risks, the PSA requires, as one of the conditions precedent to the implementation of the restructuring transactions, an order from this Court granting recognition of the Brazilian RJ Proceeding with respect to each of the Debtors.”

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