What does it take to represent a private equity client entangled in a complex restructuring involving an important investment in a portfolio company?
Ask David Meyer, the Vinson & Elkins New York-based restructuring partner who led the V&E team representing Riverstone Holdings in the restructuring of Gulf of Mexico oil producer Fieldwood Energy.
In many ways, the case serves as a template for navigating amid a set of highly challenging circumstances.
Not only did Fieldwood successfully restructure its balance sheet with a $1.6 billion debt-to-equity swap, but Riverstone remains Fieldwood’s largest equity holder. In addition, the New York-based private equity firm managed to avoid protracted litigation from an aggressive group of hedge fund creditors, and mitigate potential tax consequences.
“Given the hand Riverstone was dealt, this is a significant win,” Meyer said.
Sizing Up the Challenges
Things could have turned out much differently for Fieldwood — and for Riverstone. Like many of its peers in the offshore exploration and production sector, Fieldwood has been hammered by the precipitous decline and prolonged slump in crude oil prices in recent years.
In spite of efforts to cut expenses and myriad initiatives aimed at boosting its balance sheet, last fall the Houston-based energy company found it couldn’t generate sufficient cash flow to meet its debt obligations, and risked rapidly diminished liquidity. Riverstone’s large equity investment in Fieldwood, as well as approximately $780 million in principal amount of second lien loans, could have easily been wiped out.
By the time Riverstone engaged V&E’s restructuring team in September of last year, Fieldwood was rapidly running out of money — and that was just one of multiple obstacles facing the firm.
In particular, Riverstone’s debt claims were potentially vulnerable because the private equity firm purchased second lien debt issued by Fieldwood at a discount to its face value. A group of hedge fund creditors threatened to bring various litigation claims, alleging Riverstone acted improperly when purchasing Fieldwood’s debt in the open market. If they prevailed, Riverstone’s second lien claims could have ended up at the bottom of the pile.
“You had distressed debt players looking to advance their own economic interests in a very aggressive and litigious fashion, and seeking to apply pressure on Riverstone in connection with important economic negotiations,” Meyer said.
Pulling Together a Cross-Departmental Team and Playing Offense
The complexity of both Fieldwood’s capital structure and its legal issues required a cross-departmental effort at V&E involving a sizable team of restructuring, litigation, M&A, capital markets, employee benefits, and tax lawyers, in New York, Houston, Dallas, and Washington D.C.
The key to their strategy: always staying several steps ahead in evaluating the strengths and weaknesses of legal arguments various parties could raise, and developing strategies and tactics that further their client’s goals.
“We did immense amounts of work to be prepared for each thing we saw coming,” Meyer explained. “There was no issue that caught us by surprise.”
For instance, the V&E team spent extensive time evaluating Riverstone’s potential exposure occasioned by its debt purchases. As a result, V&E was able to stand firm at each juncture in which the hedge fund creditors made a proposal that V&E deemed unfavorable to Riverstone. Ultimately, the private equity firm received the same treatment as all of the other second lien lenders on account of its claims and new money investment rights, as well as a full release from potential litigation claims.
Negotiating a Novel Restructuring
In the end, V&E helped engineer a unique restructuring for Fieldwood. The energy company is converting $1.6 billion of its approximately $3.2 billion debt into equity. Fieldwood is raising a total of about $525 million in a rights offering, with Riverstone contributing more than $250 million. The kicker: Fieldwood will use a significant portion of the money raised to acquire all of the Gulf of Mexico-based deepwater oil and gas assets of Noble Energy, assets Fieldwood and Riverstone believe complement and enhance its own operations.
“The piece that makes this truly transformational — and the judge commented on this at our first day hearing and at confirmation — is we’re looking to deleverage and grow at the same time,” Meyer said.
Guiding a Client Facing Financial Stress on a Critical Investment
The overall outcome for Riverstone is all the more noteworthy because of the importance of its investment in Fieldwood and the unique facts and circumstances Fieldwood's restructuring present.
“It’s always the goal to do the best thing for your client,” Meyer said. “But the goal is heightened when it’s an important investment facing financial distress. We wanted to be sure we were there to help them to the maximum extent possible and get the best result. I think we did.”