IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
In re:
PACIFIC DRILLING S.A., et al.,1
Debtors. x : : : : : : x Chapter 11 Case No. 20-35212 (DRJ) (Jointly Administered)
DECLARATION OF JAMES HARRIS IN
SUPPORT OF CONFIRMATION OF THE FIRST AMENDED
JOINT PLAN OF REORGANIZATION OF PACIFIC DRILLING S.A. AND ITS DEBTOR AFFILIATES PURSUANT TO CHAPTER 11 OF THE BANKRUPTCY CODE
I, James Harris, pursuant to 28 U.S.C. § 1746, hereby declare under penalty of perjury that the following is true and correct to the best of my knowledge and belief:
1. I am the Chief Financial Officer and Senior Vice President of Pacific Drilling S.A., a public limited liability company (société anonyme) organized under the laws of the Grand Duchy of Luxembourg (“PDSA”) and one of the debtors and debtors in possession (collectively, the “Debtors”) in the above-captioned Chapter 11 cases (the “Chapter 11 Cases”). I submit this declaration (the “Declaration”) in support of confirmation of the First Amended Joint Plan of
Reorganization of Pacific Drilling S.A. and its Debtor Affiliates Pursuant to Chapter 11 of the Bankruptcy Code, filed on November 5, 2020 [Docket No. 110-1, Ex. A] (as may be amended,
supplemented, or otherwise modified from time to time, the “Plan”) and the Debtors’
1 The Debtors in the Chapter 11 Cases, along with the last four digits of each Debtor’s U.S. federal tax
(A) Memorandum of Law in Support of (I) Final Approval of the Disclosure Statement and (II) Confirmation of the First Amended Joint Plan of Reorganization of Pacific Drilling S.A. and its Debtor Affiliates Pursuant to Chapter 11 of the Bankruptcy Code and (B) Reply to Objection to Confirmation and Joinder Thereto (the “Confirmation Memorandum”), filed concurrently
herewith.2
2. By serving as Chief Financial Officer and Senior Vice President of PDSA since July 2019, I am familiar with the Debtors’ financial affairs, current and anticipated post-emergence capital structure, creditors, and related matters. I am also familiar with the terms of the Plan and the Disclosure Statement for the First Amended Joint Plan of Reorganization of Pacific Drilling
S.A. and its Debtor Affiliates Pursuant to Chapter 11 of the Bankruptcy Code, filed on November
5, 2020 [Docket No. 110-1] (the “Disclosure Statement”). Unless otherwise indicated, the statements set forth in this Declaration are based on (a) my personal knowledge or opinion; (b) my knowledge of the Debtors’ operations, financial condition, and liquidity; (c) information that I have received from the Debtors or their advisors; or (d) my review of relevant documents, including the Plan and the Disclosure Statement.
3. I am authorized to submit this Declaration in support of the Plan. If called upon to testify, I could and would testify to the facts set forth herein.
Professional Background and Qualifications
4. In my capacity as Chief Financial Officer of PDSA, I oversee and manage the finances of the Debtors and their non-Debtor affiliates (collectively, “Pacific Drilling” or the
2 Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to them in
“Company”), and I am responsible for the Debtors’ accounting, reporting, budgeting, taxes, treasury, and corporate planning.
Development and Negotiation of the Plan
5. As set forth in the First Day Declaration, since January 2020, international economies and financial markets—particularly, the oil and gas markets and, consequently, the offshore drilling industry—have been disrupted by (a) the global health crisis caused by the COVID-19 pandemic and (b) the impact from the failure of OPEC and a group of oil producing nations led by Russia to reach a timely agreement as to oil production cuts. Indeed, the scope of the negative impact that the COVID-19 pandemic has had on the offshore drilling industry cannot be overstated and is evidenced by, among other things, the fact that numerous oil and gas companies, many of which are the Company’s competitors or peers in the offshore drilling industry, have availed themselves of the protections afforded by Chapter 11 since the start of 2020. As of November 30, 2020, at least 45 oil and gas companies have filed Chapter 11 in 2020.3 Such companies include, without limitation, (a) some of the larger companies in the market, such as BJ Services, LLC, Chesapeake Energy, Hi-Crush Inc., FTS International, Inc., McDermott International, Inc., Pioneer Energy Services Corp., Target Drilling, Inc., UTEX Industries, Inc., and (b) many companies involved in the offshore drilling industry, such as Diamond Offshore Drilling, Inc., Hermitage Offshore Services Ltd., Hornbeck Offshore Services, Inc., Valaris plc, and Noble Corporation plc.
6. In response to deteriorating market conditions, the Company implemented various initiatives—including reducing salaries and retainer fees across the Company, reducing its
3 See Haynes and Boone, LLP, Oil Patch Bankruptcy Monitor, Nov. 30, 2020,
workforce, closing offices, and cutting rig and other costs—to slow its rate of cash use and increase efficiency. Despite having implemented these initiatives and the reduction in operating expenses that stemmed therefrom, the decline in the offshore drilling industry caused by the onset of the COVID-19 pandemic was unrelenting over the course of the year.
7. As publicly disclosed in its Form 10-Q for the quarterly period ended March 31, 2020 (which was filed on May 8, 2020), the Company has expected since the end of the first quarter of 2020 that the COVID-19 pandemic coupled with the severe oversupply of oil would significantly impact its business and future liquidity position. This expectation of deteriorating market demand for its services was the direct result of the Company’s customers—which include the largest oil and gas exploration and production companies in the world—having announced that they were substantially curtailing their exploration and development drilling programs. The Company provides drilling services on a “dayrate” contract basis, pursuant to which it provides drillships and rig crews to customers in exchange for a fixed amount per day regardless of the number of days required to drill a given well. Thus, each day the Company maintains an idle drillship, it expends cash without seeing any revenue. Although the Debtors had four of their seven drillships operating for customers and were mobilizing a fifth rig for an anticipated contract during the first quarter of 2020, the Debtors currently have no drillships in operation as all of the contracts have either been cancelled or are on stand-by as a direct result of these macroeconomic factors.
operate in the third quarter of 2021 and, accordingly, it no longer had a viable path to meet the financial obligations imposed by its capital structure and (b) concluded that its excessive debt levels would prevent it from being able to participate in substantial market consolidation expected as soon as mid-2021.
9. As a result, in March 2020, the Debtors began exploring various restructuring alternatives with their lenders and other stakeholders. In the first half of 2020, the Company engaged Latham & Watkins, LLP, as its legal advisor, Greenhill & Co. (“Greenhill”), as its investment banker, and AlixPartners, LLP, as its restructuring advisor, to assist the Company in evaluating various alternatives to address its longer-term liquidity outlook and capital structure. After engaging in extensive discussions with its advisors, the Company determined that filing for Chapter 11 protection prior to depleting all of its cash would yield significant benefits including, without limitation, (a) being able to restructure quickly and on a consensual basis rather than through a much lengthier “free fall” Chapter 11 several months later, which would occur if the Company delayed filing, (b) realizing the monetary benefits that stem from a quicker restructuring process, such as professional fee savings and the acceleration of cost synergies from post-emergence merger and acquisition opportunities, (c) maximizing value for the Company’s secured creditors and providing junior secured creditors with a substantial recovery, and (d) allowing the Company to credibly compete for future work with current clients and potential clients.
non-disclosure agreements to allow such parties to conduct due diligence and, as part of that process, the parties began exchanging initial term sheets setting forth the proposed terms of a potential transaction.
11. In order to avoid paying the $31.4 million interest installment due on October 1, 2020 with respect to the prepetition First Lien Notes and the $19.6 million PIK interest due October 1, 2020 with respect to the prepetition Second Lien Notes, the Company originally planned to implement the restructuring by filing for Chapter 11 protection on or before September 30, 2020. However, because the Company did not reach an agreement in principle with the Ad Hoc Crossover Group in time, the Company instead elected to use the 30-day grace period provided under the indentures and to commence the Chapter 11 Cases on October 30, 2020.
12. After engaging in extensive good-faith and arm’s-length negotiations with representatives of the Ad Hoc Crossover Group and certain other Holders of the Second Lien Notes, shortly prior to commencing the Chapter 11 Cases, the Debtors, certain Holders of the First Lien Notes—which hold more than 72% of outstanding First Lien Notes—and certain Holders of the Second Lien Notes—which hold more than 73% of outstanding Second Lien Notes—agreed on the terms of the Restructuring as set forth in the Restructuring Support Agreement. Thus, despite being caught in the maelstrom of the COVID-19 pandemic and the oil market share war, Pacific Drilling charted a path forward that was designed to maximize the value of the enterprise for its stakeholders.
Overview of the Plan
Statement as Exhibit D, the implied value of the Reorganized Debtors is $752 million and thus insufficient to pay in full the claims of the First Lien Noteholders, which total approximately $786.5 million. Notwithstanding this fact, the First Lien Noteholders agreed to provide some value in the Reorganized Debtors to the Second Lien Noteholders as part of the terms of the Restructuring. In agreeing to the terms of the Restructuring and the concession to the Second Lien Noteholders, it was essential to the First Lien Noteholders that the Debtors emerge from Chapter 11 by December 31, 2020, so as to maximize the value of the Reorganized Debtors and increase the likelihood that the Company is not foreclosed from being able to participate in expected market consolidation.
14. Pursuant to the Plan, each Holder of an Allowed First Lien Notes Claim will receive (a) its pro rata share of 91.5% of the New PDC Equity, subject to dilution (the “Permitted Dilution”) on account of any equity issued, if any, pursuant to a management incentive plan and the New 2L Warrants (as defined below) and (b) cash sufficient to satisfy any accrued and unpaid Indenture Trustee fees and expenses pursuant to the First Lien Notes Indenture. Each Holder of an Allowed Second Lien Notes Claim will receive (a) its pro rata share of (i) 8.5% of the New PDC Equity, subject to the Permitted Dilution and (ii) 7-year warrants to purchase its pro rata share of 15% of the New PDC Equity (the “New 2L Warrants”) and (b) cash sufficient to satisfy any accrued and unpaid Indenture Trustee fees and expenses pursuant to the Second Lien Notes Indenture.
the Plan. Because such creditors and Interest Holders are not receiving any recovery on account of their Claims and Interests, they are deemed to reject the Plan and, therefore, are not entitled to vote on the Plan.
16. The Plan provides for, among other things, the following treatment of other Claims and Interests that are not entitled to vote on the Plan:
Administrative Claims and Priority Tax Claims will be paid in full in Cash, or otherwise receive treatment consistent with the provisions of Section 1129(a)(9) of the Bankruptcy Code;
other Secured Claims will, at the election of the applicable Debtor(s) (with the consent of the Required Consenting First Lien Creditors) or Reorganized Debtor(s), receive (a) payment in full in Cash, (b) the collateral securing their claims, (c) reinstatement of their claims, or (d) such other treatment rendering their claims unimpaired in accordance with Section 1124 of the Bankruptcy Code;
remaining Intercompany Interests will be, at the option of the Debtors (with the consent of the Consenting Creditors) or the Reorganized Debtors, either reinstated or cancelled and released without any distribution; and
Claims legally subordinated to General Unsecured Claims or Section 510(b) Claims will receive no recovery and all such claims will be cancelled, released, extinguished, and discharged.
17. Pursuant to the terms of the Plan and the Proposed Confirmation Order, on the Effective Date, the Restructuring Transaction Steps, as set forth in Exhibit 2 of the Proposed Confirmation Order, will occur. As contemplated in the Restructuring Transaction Steps:
(a) prior to the effectiveness of any releases or discharges under the Plan, (i) Pacific Drilling Holding (Gibraltar) Limited (“PDHGL”) will contribute the Intercompany Receivables to Pacific Sharav S.À R.L. (“PSS”), (ii) the PSS Payable to PDHGL will be extinguished, (iii) PSS will contribute one of the Intercompany Receivables, the PDOI Intercompany Receivable, to Pacific Drilling Operations Inc., and (iv) the PDOI Payable to PDHGL and PSS will be extinguished;
(c) (i) PDSA will transfer the Interests in PDCL to the First Lien Noteholders and Second Lien Noteholders in exchange for approximately $752 million of First Lien Notes Claims and Second Lien Notes Claims against PDSA, and (ii) the LLC Agreement of Reorganized PDC will become effective to provide for the issuance of the New PDC Equity and the New 2L Warrants;
(d) Reorganized PDC will issue the New PDC Equity and the New 2L Warrants to the applicable Holders of Allowed First Lien Notes Claims and Holders of Allowed Second Lien Notes Claims; and
(e) (i) the Intercompany Interests will be reinstated, (ii) PDSA will be discharged of outstanding First Lien Notes Claims, Second Lien Notes Claims, Existing Lux Beneficial Interests, and all other Claims (including General Unsecured Claims and Intercompany Claims against PDSA), and (iii) legal title to all Existing Lux Interests will be deemed transferred to the Estate Representative or a Reorganized Debtor or another direct or indirect subsidiary of Reorganized PDC (including a newly formed subsidiary).
18. In addition, upon the Effective Date of the Plan, the Reorganized Debtors will enter into an $80,000,000 senior secured delayed draw term loan exit facility (the “Exit Facility”) that is backstopped by the Backstop Parties pursuant to the terms of the Backstop Commitment Agreement.
19. Confirmation and implementation of the Plan, in conjunction with entry into the Exit Facility, will enable the Debtors to de-lever their balance sheet by over $1 billion in funded debt obligations and ultimately position the Reorganized Debtors to obtain financial stability following emergence from bankruptcy. This is demonstrated by the set of financial projections (the “Financial Projections”) prepared, with the assistance of the Debtors’ management team, for fiscal years 2021 through 2025 (the “Projection Period”). The Financial Projections, which were attached as Exhibit E to the Disclosure Statement, provided that, after payment of their obligations as required under the Plan, the Debtors expect to have approximately $187 million of liquidity4 as of an assumed Effective Date occurring on December 31, 2020. Under the Financial Projections,
4 Per the Debtors’ most-recent 13-week forecast, however, the Debtors expect to have slightly reduced liquidity
the Debtors forecast that, during the Projection Period, the Reorganized Debtors’ adjusted EBITDA will grow from approximately negative $32 million in 2021 to approximately $225 million in 2025 and total levered free cash flow will grow from negative $80 million in 2021 to approximately $185 million in 2025. Assuming that no additional or contingent liabilities arise, the Debtors project that they will be able to meet their obligations under the Plan and will have sufficient remaining liquidity during the Projection Period (after honoring their obligations under the Plan) to conduct their business operations in their normal course.
20. Thus, I believe the terms of the Plan and the Restructuring Transaction Steps provide a reasonable compromise and the best available alternative for the Debtors given the challenging environment in which the Debtors operate.
The Plan Satisfies the Requirements for Confirmation
21. The Debtors’ advisors have advised me of the applicable standards under which a plan of reorganization may be confirmed. I believe the Plan satisfies the applicable Bankruptcy Code requirements for confirmation of a plan of reorganization. I have set forth the reasons for such belief below, except where such compliance is apparent on the face of the Plan, the Plan Supplement, and the related documents or where it will be the subject of other testimony or evidence introduced at the Confirmation Hearing.
I. The Plan Complies with the Applicable Provisions of the Bankruptcy Code A. Section 1122: Proper Classification of Claims and Interests
factual reasons justify the separate classification of the particular Claims or Interests into the Classes created under the Plan.
23. I believe that each of the Claims and Interests in each particular Class is substantially similar to the other Claims and Interests in such Class. In general, the Plan’s classification scheme follows the Debtors’ capital structure. Debt and equity are classified separately. Likewise, other aspects of the classification scheme are related to the different legal, business, or factual nature of each Class. Accordingly, I believe that the Plan fully complies with and satisfies Section 1122 of the Bankruptcy Code.
B. Section 1123(a)(1-3): Specification of Classes, Impairment, and Treatment 24. I believe that Article III of the Plan specifies in detail the classification of Claims and Interests, whether such Claims and Interests are Impaired or Unimpaired, and the treatment that each Class of Claims and Interests will receive under the Plan.
C. Section 1123(a)(4): Equal Treatment Within Each Class
25. It is my understanding that the Plan provides the same treatment for each Claim or Interest of a particular Class. I believe the Plan meets this requirement because Holders of Allowed Claims or Interests in each Class will receive the same rights and treatment as other Holders of Allowed Claims or Interests within such Holders’ respective Class. Therefore, I believe that no unfair discrimination exists between or among Holders of Claims and Interests.
D. Section 1123(a)(5): Adequate Means for Implementation
issuance of New PDC Equity and New 2L Warrants, the execution of the Exit Facility Documents, and the filing of the New Organizational Documents for the Reorganized Debtors. As a result, it is my belief that the Plan satisfies Section 1123(a)(5) of the Bankruptcy Code.
E. Section 1123(a)(6): Amendment of the Reorganized Debtors’ Charters
27. I am advised that Section 1123(a)(6) of the Bankruptcy Code (a) prohibits the issuance of non-voting equity securities, and requires amendment of a debtor’s charter to so provide, and (b) also requires that a corporate charter provide an appropriate distribution of voting power among the classes of securities possessing voting power. The Plan does not provide for the issuance of non-voting equity Securities, and the form of Amended and Restated Limited Liability Company Agreement of Reorganized PDC, which was filed with the Plan Supplement, prohibits the issuance of non-voting equity Securities. Accordingly, I believe that the Plan satisfies the requirements of Section 1123(a)(6) of the Bankruptcy Code.
F. Section 1123(a)(7): Provisions Regarding Directors and Officers
G. Section 1129(a)(3): The Plan Has Been Proposed in Good Faith and Not by Any Means Forbidden by Law
29. I believe that the Debtors have proposed the Plan in good faith, with honesty and good intentions, and the Plan has a reasonable likelihood of success. Contrary to the assertions in
Patrick F. Lennon’s, as Liquidation Trustee for the Liquidation Trust, Objection to the Debtors’ First Amended Joint Plan of Reorganization [Docket No. 215] (the “Liquidation Trust
Objection”), the Debtors proposed the Plan in good faith after extensively consulting with the Debtors’ management and their legal and financial advisors to determine the best way for the Debtors to withstand the decline in the oil drilling industry caused by the onset of the COVID-19 pandemic and the oil market share war. The Plan is the culmination and the direct result of the Debtors’ extensive negotiations with their key creditor constituencies and estate fiduciaries regarding a plan structure and confirmation timeline that would minimize the Debtors’ time in Chapter 11 and correspondingly maximize value and increase their likelihood of emerging with their operations fully intact.
York Bankruptcy Court”), and that the then-uncertain outcome of the Zonda Arbitration caused the 2017 Debtors to adopt a bifurcated plan structure, pursuant to which certain of the 2017 Debtors (the “2017 Reorganized Debtors”) would emerge from Chapter 11 before the Zonda Entities and the Zonda Entities would be parties to a separate plan of reorganization/liquidation (the “Zonda Plan”).5 Moreover, the Debtors’ management team was aware that the Zonda Plan was constructed such that (i) if the Zonda Entities prevailed in the Zonda Arbitration, the funds from any arbitration award would flow to the Zonda Entities and the reorganized Zonda Entities would return to the Pacific Drilling enterprise and would become guarantors on the first and second lien notes, but (ii) if the Zonda Entities did not prevail in the Zonda Arbitration (and SHI prevailed), the Zonda Entities would be liquidated by a liquidation trust, which was effectively in the control of SHI.
31. I know that, from July 2019 (when I began my employment at Pacific Drilling) until January 15, 2020, the Debtors’ management team believed that the Zonda Arbitration was an asset rather than a liability. In fact, prior to January 15, 2020, Pacific Drilling (with the support of its lawyers, auditors, and other advisors) had recorded the expected outcome of the Zonda Arbitration in its books and records as a partial receivable rather than a contingent liability. It thus was a great surprise to the Debtors’ management team when the Tribunal, on January 15, 2020, issued a decision against the Zonda Entities and awarded SHI $320 million with respect to the Zonda Arbitration. Despite this decision, the Debtors’ management team remained optimistic that the Zonda Entities would prevail in the dispute on appeal.
32. Moreover, the Debtors’ management team was confident that the Debtors could not be exposed to liability for the Zonda Arbitration even if the Zonda Entities lost on appeal, because the claims in the Zonda Arbitration were only brought against the Zonda Entities and, thus, the Zonda Arbitration was confined to the Zonda Entities. The Debtors’ management team only became more confident in this belief when the New York Bankruptcy Court published on April 2, 2020 an opinion, attached as Exhibit B to the Confirmation Memorandum, holding that SHI’s failure to file a proof of claim against the 2017 Reorganized Debtors prior to the bar date established in the 2017 Cases barred SHI from bringing such claims against PDSA and the other 2017 Reorganized Debtors. Significantly, the New York Bankruptcy Court observed that “[i]t was entirely clear to [the Court], and [the Court] believe[s] to all of the parties involved (including [SHI]), that the whole premise of the separate plan confirmation for the Non-[Liquidated] Debtors in October 2018 was that the [SHI] claims would be isolated to the [Liquidated] Debtors.”6
33. As the Debtors began negotiating the terms of the Restructuring Support Agreement with the Ad Hoc Crossover Group, however, the Ad Hoc Crossover Group advised the Debtors that their willingness to support a restructuring that completely equitized their secured claims and provided some equity recovery to the holders of the prepetition Second Lien Notes was predicated upon several conditions including that (a) such restructuring could be consummated on an expedited time frame that would allow emergence by year end, and (b) following the Debtors’ emergence from Chapter 11, the new owners of the Reorganized Debtors (i.e., the prepetition First Lien Noteholders and the prepetition Second Lien Noteholders) would not be exposed to any risk of liability from (i) potential prepetition litigation claimants and (ii) other unsecured non-trade creditors who were unnecessary to the ongoing operation of the Debtors’ business.
34. Thus, while the Zonda Arbitration and the attendant possibility that the Zonda Entities would be liquidated were among the myriad of factors that went into the styling of the restructuring that the Debtors negotiated with the Ad Hoc Crossover Group so as to maximize value for the Debtors and their stakeholders, the Debtors’ decision to commence the Chapter 11 Cases and the timeline for the Chapter 11 Cases were not based on those factors. Rather, they were based purely on the Debtors’ financial situation, the macroeconomic variables involved— particularly, the decline in the oil drilling industry caused by the onset of the COVID-19 pandemic and the oil market share war—and the ability of the Debtors to satisfy the applicable creditor constituencies so as to reach a consensual reorganization, which (a) is embodied by the terms of the Restructuring Support Agreement and the Plan and (b) enables the Debtors to eliminate over $1 billion of funded debt obligations, maintain relationships with key vendors, and secure an appropriate level of operational capital post-emergence.
not yet been able to provide the Debtors with a formal invoice for such goods and services. These trade vendor payments totaled less than $10 million, almost all of which went to vendors who could assert liens if not paid in full.
36. In addition, the Debtors’ management team is aware that, because PDSI had historically performed many of the administrative and corporate services functions for Pacific Drilling, PDSI assumed and assigned several executory contracts and unexpired leases (collectively, the “Zonda Agreements”) in the 2017 Cases to a non-Liquidated Debtor, Pacific Drilling LLC, after obtaining approval to do so from the New York Bankruptcy Court. Significantly, none of the Zonda Agreements were customer contracts and, thus, none were sources of revenue for the Zonda Entities. Rather, the Zonda Agreements were comprised exclusively of vendor agreements (including some under which the Zonda Entities owed cure amounts to the vendors) that were obligations or liabilities of the Zonda Entities, such that assumption of the Zonda Agreements by Pacific Drilling LLC reduced the liabilities of the Zonda Entities. Thus, it is my belief that the transfer of the Zonda Agreements from the Debtors to the Reorganized Debtors under the terms of the Plan are fair and do not undermine the good-faith intentions underlying the Plan.
37. For the foregoing reasons, among others, I believe that the Plan has been proposed by the Debtors in good faith and solely for the legitimate and honest purposes of reorganizing the Debtors’ ongoing businesses and enhancing their long-term financial viability. I believe the Plan maximizes the value of the Estates.
H. Section 1129(a)(4): The Payment for Certain Services or for Certain Costs and Expenses is Subject to Court Approval
distributions of property under the plan, be approved by the Court as reasonable or remain subject to approval by the Court as reasonable. I can confirm that the Plan provides that Professional Fee Claims and corresponding payments are subject to prior Court approval and the reasonableness requirements under Sections 328 or 330 of the Bankruptcy Code. The Plan, moreover, provides that professionals shall file all final requests for payment of Professional Fee Claims no later than 30 days after the Effective Date, thereby providing an adequate period of time for interested parties to review such Professional Fee Claims.
I. Section 1129(a)(5): Necessary Information Regarding Directors and Officers of the Debtors Under the Plan has Been Disclosed
39. The members of the New Board shall be comprised of the chief executive officer of Reorganized PDC and the other directors that have been identified in paragraph 28 above. In addition, I understand that, to the extent applicable, the Debtors will disclose the identity and affiliations of any Person proposed to serve as an officer of Reorganized PDC, and—to the extent such Person is an insider other than by virtue of being a director, managing member or an officer— will disclose the nature of any compensation for such Person. Additionally, it is my understanding that each such director, manager, managing member and/or officer shall serve from and after the Effective Date pursuant to applicable law and the terms of the New Organizational Documents. Accordingly, I believe that the Plan satisfies the requirements of Section 1129(a)(5) of the Bankruptcy Code.
J. Section 1129(a)(6) of the Bankruptcy Code Is Not Applicable
jurisdiction, after Confirmation of the Plan, over the rates of the Debtors. Thus, I believe that Section 1129(a)(6) of the Bankruptcy Code is inapplicable to the Chapter 11 Cases.
K. The Plan is Confirmable Notwithstanding the Requirements of Section 1129(a)(8) of the Bankruptcy Code
41. It is my understanding that, subject to the exceptions identified in Section 1129(b) of the Bankruptcy Code, Section 1129(a)(8) of the Bankruptcy Code requires that each class of claims or interests either accept the plan or be unimpaired by a plan. Class 1 (Other Secured Claims) and Class 2 (Other Priority Claims) are Unimpaired and are conclusively presumed to have accepted the Plan pursuant to Section 1126(f) of the Bankruptcy Code. Both of the Impaired Classes of Claims that were entitled to vote on the Plan—Class 3 (First Lien Notes Claims) and Class 4 (Second Lien Notes Claims)—voted to accept the Plan.
42. Of the Classes that were not entitled to vote, (a) Class 5 (General Unsecured Claims), Class 6 (Section 510(b) Claims), Class 7 (Intercompany Claims), and Class 9 (Existing Lux Beneficial Interests) are Impaired and are deemed to have rejected the Plan and (b) Class 8 (Intercompany Interests) may be deemed to have rejected the Plan. Although the Plan does not satisfy Section 1129(a)(8) of the Bankruptcy Code on account of such Classes, it is my understanding that the Plan is confirmable because it satisfies Sections 1129(a)(10) and 1129(b) of the Bankruptcy (as discussed below).
L. Section 1129(a)(9): The Plan Provides for Payment in Full of Allowed Administrative and Priority Claims
M. Section 1129(a)(10): The Plan Has Been Accepted by at Least One Impaired Class That is Entitled to Vote
44. It is my understanding that the Bankruptcy Code provides that, to the extent there is an impaired class of claims, at least one impaired class of claims must accept the plan “without including any acceptance of the plan by any insider,” as an alternative to the requirement under Section 1129(a)(8) of the Bankruptcy Code that each class of claims or interests must either accept the plan or be unimpaired under the plan. It is my understanding that each of the voting Classes has voted to accept the Plan, exclusive of any acceptances by insiders, which includes an accepting Voting Class at each Debtor. Accordingly, I believe the Plan satisfies the requirements of Section 1129(a)(10) of the Bankruptcy Code.
N. Section 1129(a)(12): The Plan Provides for Full Payment of Statutory Fees 45. Article 2.3 of the Plan provides that all fees payable pursuant to Section 1930 of Title 28 of the United States Code shall be paid when due and payable. Similarly, all such fees payable after the Effective Date shall be paid when due and payable. Based upon the foregoing, I believe the Plan satisfies the requirements of Section 1129(a)(12) of the Bankruptcy Code. II. The Principal Purpose of the Plan is not the Avoidance of Taxes under Bankruptcy
Code Section 1129(d)
business, and maximizing recoveries to their stakeholders. Accordingly, I believe that the Debtors have satisfied what I understand to be the requirements of Section 1129(d) of the Bankruptcy Code. III. The Release, Exculpation, and Injunction Provisions in the Plan Are Appropriate
47. I understand that Article VIII of the Plan sets forth certain release, exculpation, and injunction provisions, as permitted by Section 1129(b) of the Bankruptcy Code, including a “debtor release” pursuant to Article 8.2 of the Plan (the “Debtor Release”) and a “third party release” pursuant to Article 8.3 of the Plan (the “Third-Party Release”). Based on my knowledge of the Debtors’ restructuring efforts and information provided by the Debtors and their counsel, I believe that the release, exculpation, and injunction provisions in the Plan are appropriate because, among other reasons, I understand that they are the product of good-faith, arm’s-length negotiations, were a material inducement for parties to support the comprehensive restructuring embodied in the Plan, are supported by the Debtors and their key constituents, are integral to the Debtors’ reorganization, and are consistent with the scope of releases, exculpations, and injunctions approved by this Court in other complex Chapter 11 cases.
A. The Debtor Release Should Be Approved
Designated Representative, and with respect to the foregoing, each such entity’s current and former Affiliates, and such entities’ and their current and former Affiliates’ current and former directors, managers, officers, control persons, equity holders (regardless of whether such interests are held directly or indirectly), affiliated investment funds or investment vehicles, participants, managed accounts or funds, fund advisors, predecessors, successors, assigns, subsidiaries, principals, members, employees, agents, advisory board members, financial advisors, partners, attorneys, accountants, investment bankers, consultants, representatives, investment managers, and other professionals, each in their capacity as such (collectively, the “Related Persons”); provided that any Holder of a Claim that is not a party to the Restructuring Support Agreement and that opts out of the releases contained in the Plan shall not be a “Released Party,” in each case from any Claims and Causes of Action related to or in connection with the Debtors, their business or capital structure, the Restructuring Transactions, the Chapter 11 Cases or any matters or agreements related thereto, in each case arising on or prior to the Effective Date.
49. I believe those of the Released Parties who are not affiliated with the Debtors have contributed to and facilitated the Debtors’ restructuring in the Chapter 11 Cases including by, among other things, agreeing to support the Plan, consenting to the use of cash collateral, committing to provide the Exit Facility, entering into the Backstop Commitment Agreement, and converting certain of the prepetition Claims into equity in the Reorganized Debtors.
that were represented by able professionals and who conditioned their support for the Plan on, among other things, the grant of the Debtor Release. Further, I am not aware of, and understand that the Debtors are not aware of, any valid Claims or Causes of Action. Accordingly, I believe the Debtor Release is fair, equitable, justified, and in the best interests of the Debtors’ Estates.
B. The Third-Party Release Should Be Approved
51. I understand the Third-Party Release provides for the release of the Released Parties from any Claims or Causes of Action held by any Releasing Party, subject to the exceptions set forth in the Third-Party Release. Notably, the Third-Party Release expressly excludes any Causes of Action arising from actual fraud, willful misconduct, or gross negligence.
52. It is my understanding that the Third-Party Release satisfies the Fifth Circuit’s standard and the Procedures for Complex Cases adopted in the Southern District of Texas. First, the Third-Party Release is fully consensual, as it (a) does not in any way release Claims (including General Unsecured Claims) held by Holders of Claims or Interests who are deemed to have rejected the Plan and, thus, whose votes were not solicited on the Plan, and (b) provides Holders of Claims who were eligible to vote on the Plan with the opportunity to affirmatively opt out of the Third-Party Release. Parties in interest were provided extensive notice of the Chapter 11 Cases, the Plan, the deadline to object to Confirmation of the Plan, the Voting Deadline, and the deadline for opting out of the Third-Party Release. As evidenced by the Affidavit of Service of
Solicitation Materials, dated November 23, 2020 [Docket No. 157], the Ballots were sent to
Holders of all Claims in Voting Classes 3 and 4, and the Notice of Non-Voting Status,7 which
provided an opportunity for each Non-Voting Holder to opt out of the Plan’s Third-Party Release, was sent to all Holders of Claims and Equity Interests in Non-Voting Classes 1, 2, 5, 6, 7, 8, and 9. Each of the Ballots and the Notice of Non-Voting Status informed Holders of Claims and Equity Interests of the Third-Party Release by providing the exact language of the Third-Party Release in its entirety in bold font. In addition, the Ballots advised careful review and consideration of the terms of the Third-Party Release and the repercussions of electing not to check the opt-out box. Specifically, each of the Ballots advises Holders of Claims, in bold type, that “IF YOU VOTED TO REJECT THE PLAN OR ABSTAINED FROM VOTING AND YOU DO NOT OPT OUT OF THE THIRD-PARTY RELEASES BY CHECKING THE [OPT-OUT] BOX BELOW, YOU WILL BE DEEMED TO HAVE CONCLUSIVELY, ABSOLUTELY, UNCONDITIONALLY, IRREVOCABLY AND FOREVER GRANTED THE THIRD-PARTY RELEASES CONTAINED IN THE PLAN.” The language of the Third-Party Release was also emphasized using bold font in the Plan and Disclosure Statement. Thus, all Holders of Claims were clearly advised of the opportunity to opt out of the Third-Party Release and provided with the opportunity to act accordingly.
53. Second, the Third-Party Release is sufficiently specific to put the Releasing Parties on notice of the types of Claims being released by the Third-Party Release in that the Third-Party Release describes in detail the nature and types of Claims being released.
obligations, the extension of new financing under the Exit Facility upon emergence, and entry into the Backstop Commitment Agreement. The Third-Party Release provides assurances that the collateral securing the Exit Facility will not be subject to post-emergence litigation or disputes related to the restructuring, thereby maximizing enterprise value post-emergence and benefiting all of the Reorganized Debtors’ stakeholders.
55. Fourth, and lastly, the Party Release is given for consideration. The Third-Party Release has been tailored appropriately to offer protections to parties that participated constructively in the Debtors’ restructuring process.
56. As described above, the Released Parties have played an integral role in the Debtors’ restructuring and, in some cases, made material contributions and concessions in order to obtain consensus and further the global settlement embodied in the Plan, including the Consenting Creditors that agreed to provide the Exit Facility. The consideration, concessions and support by the Released Parties will greatly improve the Debtors’ liquidity profile and potential for future success. All parties in interest benefit from the transactions contemplated by the Plan and the contributions of the Released Parties in furtherance thereof.
57. In light of the foregoing, I believe that the Third-Party Release reflects a consensual settlement of Claims and Causes of Action by the Releasing Parties in exchange for consideration provided by the Released Parties and, accordingly, is appropriate, fair, and reasonable under the circumstances of the Chapter 11 Cases.
C. The Exculpation Provision Should Be Approved
Indenture Trustee, the Second Lien Notes Agent, the Estate Representative, the Designated Representative and, in each case, their Related Persons—for any Claims or Causes of Action arising from any actions taken or failed to be taken prior to or on the Effective Date in connection with the Debtors’ restructuring. Importantly, I understand the Exculpation Provision excludes from its scope any Causes of Action arising from actual fraud, willful misconduct, or gross negligence of an Exculpated Party. To the best of my knowledge, the Exculpated Parties have participated in good faith with respect to the Chapter 11 Cases and the formulation, negotiation, implementation, confirmation, consummation, and administration of the Plan. I understand that the Exculpation Provision is the product of good-faith, arm’s-length negotiations and is an integral component of the Plan, and, therefore, I believe it should be approved.
D. The Injunction Provision Should Be Approved
otherwise; or (e) commencing or continuing in any manner any action or other proceeding of any kind on account of or in connection with or with respect to any such Claims or Interests discharged, released, exculpated, or settled pursuant to the Plan. All injunctions or stays provided for in the Chapter 11 Cases under Section 105 or Section 362 of the Bankruptcy Code, or otherwise, and in existence on the Confirmation Date, shall remain in full force and effect until the Effective Date. I understand that the Injunction Provision is necessary to preserve and enforce the release, discharge, and exculpation provisions in the Plan, all of which are integral components of the Plan. I, therefore, believe that the Injunction Provision should be approved.
Conclusion
60. In light of the foregoing, I believe that: (a) the Plan and the transactions embodied therein have been structured to accomplish the Debtors’ goal of maximizing returns to stakeholders and effectively reorganizing the Debtors, (b) the Plan has been proposed by the Debtors in good faith, and (c) the Debtor Release, the Third-Party Release, the Exculpation Provision, and the Injunction Provision are appropriate, fair, and reasonable.
61. Accordingly, I believe that the Plan satisfies the requirements of the Bankruptcy Code, the Bankruptcy Rules and other applicable non-bankruptcy laws, as they have been explained to me, and should be confirmed.
Pursuant to 28 U.S.C. § 1746, I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge, information, and belief.
Dated: December 18, 2020 Pacific Drilling S.A.
on behalf of itself and each of its Debtor Affiliates
/s/ James W. Harris
