On October 28, 2016, the United States Bankruptcy Court, District of Delaware ruled that the Modified Second Amended Joint Plan of Paragon Offshore plc and Affiliated Debtors (the “Bankruptcy Plan”) was likely to be followed by further reorganization and was therefore not feasible.
On February 14, 2016, Paragon, a provider of offshore oil rigs, commenced with the Bankruptcy court a voluntary case under Chapter 11 of the Bankruptcy Code. Paragon attributed the Bankruptcy filing to, among other reasons, a reduction in oil exploration activity due to collapsing oil prices, an oversupply of rigs competing for limited business, and contract terminations and renegotiations. The Bankruptcy Plan included projections for Paragon’s post-bankruptcy performance, which relied on improved estimates for Paragon’s rig utilization, rig rental rates (called “dayrates”), revenue, and profitability, among other things.
All classes of claims against Paragon supported the Bankruptcy Plan with the exception of Compass Lexecon’s clients, the holders of Paragon’s Secured Term Loans. The holders of the Secured Term Loans claimed that Paragon’s business plan did not include a sufficient cushion to account for a prolonged downturn in the commodities markets, and that Paragon would be unable to achieve their projected utilization and dayrate projections and also would be unable to meet its obligations as they came due.
In support of the feasibility of the Bankruptcy Plan, Paragon submitted expert reports containing Discounted Cash Flows and Comparable Company analyses purporting to show that Paragon would be solvent upon emergence under the Bankruptcy Plan, would have sufficient cash to pay its debts as they came due, and would be able to refinance their debt upon maturity.
In response, Compass Lexecon President Professor Daniel R. Fischel opined that Defendants’ valuation analyses were fundamentally flawed and that the projections contained in the Bankruptcy Plan overstated Paragon’s value at emergence. Professor Fischel also opined that under more reasonable, alternative projections, Paragon would be insolvent upon emergence from Bankruptcy and therefore would be unable to refinance its debt upon maturity.
In his November 15, 2016 ruling, Judge Christopher S. Sontchi agreed with Professor Fischel that Paragon’s Bankruptcy Plan was not feasible, stating that Paragon would be unable to achieve its projected utilization and dayrates, would likely run out of cash, and would be unable to refinance its debt at or prior to maturity.
Professor Fischel was supported by a team at Compass Lexecon led by Rajiv Gokhale that included Clifford Ang in our Oakland office, and Jonathan Polonsky and Cheryl Leong in our Chicago office. We worked with Madlyn Gleich Primoff, Jeffrey A. Fuisz, Steven Fruchter and Benjamin Mintz of Kaye Scholer LLP who successfully represented the holders of the Secured Term Lenders in the case.