Pioneering a Solution for Debt Holders During a Pandemic

Material adverse event: Those three words can stop a deal dead in its tracks . . . and, indeed, that nearly happened when the devastating impact from two major events, the COVID-19 pandemic and a crash in oil prices, set in motion a number of steps that threatened to derail the heavily negotiated prepackaged Chapter 11 cases of Pioneer Energy Services Corp. agreed to at the end of February among the company, its bondholders, and an ad hoc group of its secured term lenders (V&E’s clients).

Fortunately, tireless work and innovative problem-solving by a team at V&E made a massive contribution to a process that ultimately resulted in a settlement, helping the company to emerge from bankruptcy on the terms of the original deal.

“The market downturn, combined with the COVID-19 pandemic, created an unprecedented confluence of crises,” said Steven Zundell, a senior associate in restructuring and reorganization. “But thought leadership and initiative from the company’s stakeholders and the team at V&E led to a deal structure that was ultimately successful.”

Zundell is part of a multidisciplinary team of V&E attorneys — which was led by V&E’s restructuring and reorganization group’s co-head, partner David Meyer — that represented an ad hoc group of secured term lenders to Pioneer Energy Services Corp., a San Antonio-based oil drilling and production company. Pioneer’s debt structure included $175 million in secured term debt owed to the term lenders, as well as some $300 million in unsecured bonds.

“In mid-2019, the view from the company and its advisers was that the level of debt in the business acted as a restriction on Pioneer pursuing potential business opportunities.” explained restructuring and reorganization counsel Kevin Heverin, who also worked on the deal. “The company’s original plan was therefore to engage in discussions with a view to exploring a restructuring well in advance of any significant debt maturities”.

In the middle of 2019, long before the pandemic and market crashes darkened the global economy’s door, Pioneer contacted both V&E’s clients (the secured term lenders) and the company’s bondholders to discuss a potential transaction. Pioneer initially engaged in detailed discussions with an ad hoc group of bondholders and its advisers, before bringing V&E and its clients into the fold. A long negotiation culminated in a restructuring support agreement executed at the end of February 2020. Under the original deal, the lenders, the bondholders and the company supported a restructuring in which the bondholders would invest additional money as part of the restructuring and see their debt claims converted into equity. The term lenders, meanwhile, would be paid out in full in cash. The parties agreed that the transaction would be implemented via pre-packaged chapter 11 filings by the relevant debtor entities.

When oil prices plummeted and COVID-19 shuttered businesses worldwide, everything changed. Suddenly, some of the bondholders involved in the deal threatened to pull out; they claimed that deteriorating economic conditions constituted a material adverse event.

“Basically, certain members of the ad hoc bondholder group showed up and said, ‘We don’t believe we have to do the deal, because we believe there are provisions in the documentation that would allow us to walk away,’“ Heverin recalled. With a critical contingent of bondholders on the cusp of abandoning their obligations, the entire deal — including the payout to V&E’s clients — was in jeopardy.

“It turned what was supposed to be a creative but simple in-court process — by which our clients were going to be paid the full amount of their secured claim in cash — into a chaotic situation,” added Zundell.

What followed was a protracted period of litigation and, eventually, a complex mediation presided over by U.S. bankruptcy Judge Marvin Isgur. Attorneys from V&E’s litigation, M&A and Capital Markets practice groups worked seamlessly with V&E restructuring and reorganization attorneys to devise and implement a solution that avoided further litigation and allowed Pioneer to move to confirmation of its plan of reorganization. The solution was the result of weeks of negotiation with several other counterparties and their respective advisers.

The V&E team always made sure to streamline communications with clients, helping to get feedback on key issues as quickly as possible. “We kept interactions with our clients on a wide range of issues as efficient as possible. We know from feedback that that was very much appreciated,” Heverin said.

Due to the impact of country-wide lock-down measures, the negotiations with opposing counsel from March to May took place through phone calls and teleconference calls. The circumstances were less than ideal for attorneys accustomed to sitting down in conference rooms until an agreement was reached.

“When you’re locked in a conference room for a day, people come to a resolution more quickly,” Zundell said.

Still, the V&E team persevered, crafting a resolution that was ultimately agreed to by the bondholders who had indicated a desire to walk away. The original deal would go through, but immediately afterwards, certain bondholders would sell some of their convertible notes, newly acquired equity, and new secured debt holdings to the term lenders and also pay the term lenders a fee.

“In part due to V&E’s creativity and big-picture, solution-oriented thinking, our clients received a substantial recovery with some component of cash, some component of secured debt, and some component of equity,” Zundell said. Thanks in part to the back-to-back deals, the company successfully emerged from bankruptcy in early June.

“The choice here was ultimately find a way to get a deal done or the company was likely going to have to liquidate,” Heverin said. “It was extremely satisfying to see such a large team of V&E lawyers, across a number of practice areas, come together to help our clients navigate through the complexity and find a solution.”