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In March 2017, four companies – Ocean Rig UDW Inc (parent), Drillships Financial Holdings Inc (DFH), Drillships Ocean Ventures Inc (DOV) and Drill Rigs Holdings Inc (DRH), (DFH, DOV and DRH together, the subsidiaries) (the parent and the subsidiaries together, each a scheme company) – in the NASDAQ-listed, offshore ultra-deepwater and harsh-environment drilling contractor, the Ocean Rig Group, filed papers in the Cayman Islands Grand Court for approval of a compromise between each of the companies and their respective creditors. At that time, over 90 per cent of the Group’s creditors had pledged support for the largely pre-agreed arrangement, pursuant to which it was proposed that creditors would compromise US$3.7 billion of debt in exchange for a new US $450 million facility, shares in the restructured companies and cash.
Despite the clarity over the terms of the deal and the overwhelming creditor support for it at the time of the court filing, there were many unique hurdles that had to be cleared for the restructuring to be brought into effect. The triumph of the Ocean Rig story is that all of these obstacles were overcome, notwithstanding that the restructuring was complex, it was of unprecedented high value for the Cayman Islands, it involved several legal firsts, and was opposed at every stage and on virtually every conceivable basis by the majority unsecured creditor in the parent company of the group (the opposing creditor). This outcome was achieved, in large part, due to the intense engagement and alignment of the scheme companies and the ad hoc committee (and their respective attorneys and advisers) in evaluating and answering every challenge that was raised against the schemes. The Cayman and US courts were ultimately persuaded that the restructuring was fair and in the best interests of the companies’ creditors, but not before the innovative arrangement was heavily stress-tested by the opposing creditor.
This review outlines the challenges that the scheme companies and ad hoc committee faced in navigating the azure, but turbulent, waters of this prototype Cayman Islands restructuring. It also posits views on the circumstances in which a similar process will and will not be viable in future cases.
Overview of challenges
To be carried into effect, the Ocean Rig restructuring had to overcome numerous challenges. These challenges included the need for:
- the Cayman Islands Grand Court (the Cayman Court) to accept jurisdiction notwithstanding that there was no precedent for the Cayman Court sanctioning a scheme proposed by companies incorporated outside of the Cayman Islands; the ‘wrapping’ of light-touch provisional liquidation had not been previously applied to foreign companies; and the nexus with the Cayman Islands arose from a deliberative, pre-filing shift of the centre of main interests (COMI) for the purposes of forum shopping;
- the four interconnected schemes to be treated as standalone when assessing creditor rights even though some creditors had claims against one scheme company only, whereas others had claims against more than one;
- creditors to vote in one class in all of the schemes, even where scheme creditors included secured and unsecured creditors;
- rebuttal of allegations that the restructuring extinguished creditor claims against management;
- acceptance of use of an innovative Cayman trust for the first time in a Cayman Islands restructuring to preserve and fund future litigation claims;
- rebuttal of allegations that the creditor support for the restructuring had been bought by impermissibly high inducement payments and that the opposing creditor had been wrongfully excluded from the negotiation of the terms of the restructuring;
- rebuttal of allegations that management were lining their own pockets through excessive management incentivisation payment arrangements;
- acceptance that creditors’ votes at the extraordinary general meetings were sufficiently representative;
- the alternative scheme proposals by the opposing creditor not to upset the parent scheme;
- three of the four schemes to be approved and sanctioned, or the restructuring would fail: and
- the restructuring to be blessed by both the Cayman Court and the US Bankruptcy Court.
Before addressing the key challenges in more detail, the circumstances that precipitated the Ocean Rig Group’s parlous financial state and the weight of debt that threatened to sink the enterprise, entirely, are outlined below.
In the two years prior to the Ocean Rig restructuring, the price of oil suffered a spectacular collapse (falling by over two-thirds of its value). This free-fall in the price of oil placed the highly levered Ocean Rig Group (and many others within the oil and gas service provider sector) under acute financial strain and risk of collapse. Such was the breadth of pain in the sector that secured creditors were not inclined to enforce their security as drill rigs were unable to be deployed or sold for significant value but represented significant liabilities due to the high cost of hot or cold-stacking and, if cold-stacked, the significant costs before the drill rig could be returned to operations. Conditions were ripe, therefore, for restructurings, which saw the best possible returns to creditors, secured and unsecured, and that could restructure the balance sheet to right-size debt loads (or maturity profiles) and allow the enterprise to continue as a going concern.
Prior to the restructuring, the scheme companies were each Greek-headquartered, Marshall Islands-incorporated, companies. Shipping and drilling rig businesses were often operated through companies incorporated in the Marshall Islands because that jurisdiction had successfully attracted domestication of corporate structures by adopting the Delaware commercial code and then offering shipping and rigs tax tonnage breaks compared with other offshore jurisdictions. This worked to the benefit of companies and their shareholders when oil markets were buoyant, but when the market turned and restructuring was needed, the Marshall Islands had no restructuring apparatus available to those companies, which accordingly had to look to established restructuring jurisdictions.
Of these restructuring jurisdictions, one prominent and commonly selected option was to make Chapter 11 filings and advance a plan of reorganization in the US Bankruptcy Court. While effective, such workouts had become notoriously expensive and were not suitable for companies that were mired in controversy as the scheme companies were, because the restructuring risked collapsing under weight of stakeholder litigation. A UK scheme of arrangement with Chapter 15 recognition was a more cost-effective alternative, but an offshore enterprise conducting its restructuring onshore was not ideal, due to taxation considerations. The Cayman Islands had essentially the same scheme of arrangement statutory provisions and common law as the UK, but came with the significant additional benefit of tax neutrality. For this reason, the scheme companies and the ad hoc committee agreed that the situs of the restructuring would be the Cayman Islands.
The Cayman Islands
The front-loaded preparation of the Ocean Rig restructuring approached threshold jurisdictional issues in both the Cayman Islands and the US with an abundance of caution.
For the Cayman Court to exercise its winding up and restructuring jurisdiction over non-Cayman companies, it was (at a minimum) necessary for the companies concerned to be foreign companies that had property or carried on business in the Cayman Islands and were registered as a foreign company. The steps taken in preparation for the Ocean Rig restructuring went considerably further. The parent re-domesticated to the Cayman Islands and each of the subsidiaries not only created a substantial nexus with the Cayman Islands (an establishment) but went further and shifted their COMI to the Cayman Islands– this involved head office and administrative operations being moved to and demonstrably conducted from the Cayman Islands, board meetings were held in the Cayman Islands, a service provider Cayman subsidiary was incorporated, and directors relocated and purchased real estate in the Cayman Islands. While a nexus with the Cayman Islands was required to ground the Cayman Court’s and US Bankruptcy Court’s respective jurisdictions, the shift of COMI was essential for the endgame of obtaining Chapter 15 recognition of the schemes of arrangement (if approved by the Cayman Court) on a ‘foreign main proceedings’ basis, so as to qualify for the automatic ancillary protections of Chapter 15 recognition.
The shifting of COMI (of the subsidiaries) prior to the restructuring filings was a jurisdictional first for the Cayman Islands. Before Ocean Rig, COMI shifts in restructuring cases occurred by reason of the control exerted over the company by the Cayman Islands-based provisional liquidators (JPLs). JPLs were subsequently appointed to each of the scheme companies to invoke the statutory moratorium and ring fence the companies’ assets against creditor action. Although this was routine for the parent (which had become a Cayman company) the appointment of JPLs to the subsidiaries was a Cayman first, as light-touch JPLs had not previously been appointed to registered foreign companies.
The Cayman Court had no difficulty with the forum shopping, the pre-filing COMI shifting or the novel issues referenced above as it was satisfied that it had jurisdiction to be seized of the restructuring and the rationale for the movement of COMI was clear – the restructuring could not occur in the Marshall Islands, the driver for the move to the Cayman Islands was that of facilitating the best possible outcome for each scheme company’s creditors and it was necessary for COMI to be established in the Cayman Islands to ground the Chapter 15 application that was necessary to bind US creditors to the arrangements.
Debt structure and the clash over creditor classes
The scheme companies’ debt structure was as follows:
- the parent owed US$131 million to senior unsecured noteholders and US$3.56 billion pursuant to guarantees provided in respect of the debt of the subsidiaries. The parent’s guarantee was secured against its shares in the subsidiaries;
- DFH owed US$1.83 billion pursuant to secured term loans;
- DOV owed US$1.27 billion pursuant to secured loans; and
- DRH owed US$459.7 million pursuant to secured notes.
Although there was no cross-collateralisation as between the subsidiaries, one of the central sticking points and battlegrounds of the case arose from the two categories of the parent’s creditors, namely noteholders with claims against the parent alone, and creditors pursuant to guarantees given by the parent in respect of the debts of the subsidiaries (who were therefore creditors of both the parent and the subsidiaries); also, the former were unsecured, the latter, secured.
The opposing creditor seized on these points of difference and complained the parent scheme was forcing creditors with different rights to vote together. If the opposing creditor had succeeded in persuading the Cayman Court that it (and the other unsecured noteholders of the parent) had to be placed in their own class, the opposing creditor would have had sufficient power to veto the parent’s scheme, thereby causing the subsidiary schemes to fail.
The opposing creditor argued that it should be in a class of its own, rather than vote with creditors of the parent who held security and would be influenced in their vote on the parent scheme by their interest in the subsidiary schemes. The opposing creditor sought to further build out its case for it (and the other unsecured noteholders) being in a separate class of the parent’s creditors by asserting that in addition to the unsecured noteholders’ creditor rights being different, the treatment of the opposing creditor pursuant to the proposed scheme was also different. It was alleged that the parent’s guarantee creditors were given unfair advantages and inducements that the opposing creditor did not enjoy. Those uneven entitlements were said to include consent fees, director appointment rights and the payment of professional fees of the creditors who comprised the ad hoc committee. The opposing creditor also put considerable store in an argument that by having its creditor status removed through the parent scheme, it would be deprived of the opportunity of issuing proceedings pursuant to the New York Debtor and Creditor Law seeking orders to set aside alleged fraudulent conveyances of property to related third parties, which it wished to pursue in preference to accepting the parent scheme, notwithstanding that the arrangements between the scheme companies and their creditors had built into them a mechanism that was directed to the purpose of investigating and pursuing similar claims.
The opposing creditor’s efforts to bifurcate the parent’s creditor classes failed. The Cayman Court accepted the key arguments of the scheme companies and the ad hoc committee’s counsel, and found that:
- the security held by the guarantee creditors of the parent, being the shares in the subsidiaries, was valueless because the subsidiaries were hopelessly insolvent. This meant that the class of creditors was not fractured and secured creditors and unsecured creditors could vote together;
- the fact that certain creditors of the parent also had creditor claims against the subsidiaries had no bearing on class composition because the applicable test for class composition is as to rights against the scheme company concerned, not rights against third parties and not as to interests;
- each of the subsidiaries was effectively a debt silo, there being no cross-collateralisation of debt, and the proposed subsidiaries’ schemes were therefore appropriately treated as a standalone arrangement between the respective subsidiary and its creditors. There was no reason to treat the parent scheme any differently;
- the consent fees that were paid were made in the interests of securing agreement to the lock-up agreement. They were not sufficiently material to require that creditors who were not offered and did not receive the fee (such as the opposing creditor) vote in a different class. Similar findings were made in respect of the professional fees that were paid and the director appointment rights – they were proportionate and not causative of uneven treatment that would mandate a split in class composition; and
- the wish of the opposing Cceditor to pursue US litigation rather than participate in the parent’s scheme did not justify division of the class of the parent’s creditors for the vote. There was a sufficient mechanism in the scheme (a preservation of claims trust (PCT)) so that potentially valuable rights of action would be available for the benefit of all creditors ratably (rather than the opposing creditor alone), post-restructuring.
The extraordinary general meetings of each of the scheme companies were subsequently held and, in each case, the creditors present and entitled to vote returned an overwhelming level of support of each of the four schemes of arrangement. This did not mandate the Cayman Court to sanction the schemes but the Court would only have been justified in departing from the creditors’ vote if it was satisfied that an honest, intelligent and reasonable member of the class would not have voted for the scheme and, in that regard, the Court’s own view as to whether the scheme is reasonable or even the best scheme that might have been proposed, is irrelevant.
Despite the outcome of the scheme vote, the opposing creditor maintained its opposition to the parent scheme, advancing its case on the basis of alleged unrepresentative voting at the scheme meeting; an unjustified rejection of a proposed amendment to the scheme that would see the opposing creditor ‘opt out’ of the scheme and that, it was argued, would address the opposing creditor’s concerns and be in the interests of the parent’s wider body of creditors; the unfair and excessive lock-up benefits argued at the first hearing; and that the opposing creditor was being prevented from pursuing litigation instead of accepting the mechanics of the scheme for such potential claims.
The Cayman Court rejected every argument advanced by the opposing creditor. It found that:
- the existence of a lock-up agreement and the consent fees paid did not undermine the integrity of the vote on the scheme;
- the meeting was conducted with procedural fairness and the vote was representative of the class;
- the fact that a majority of the parent’s creditors had additional interests that motivated them to vote in the scheme did not make the vote unfair, provided that (as was the case) the majority was voting in favour of the scheme on its merits, and not against the class. There was no evidence that an intelligent and honest member of the class without those additional interests could not have voted in favour of the scheme;
- the parent scheme was not unlawful or discriminatory against the opposing creditor. Other unsecured noteholders (in the same position as the opposing creditor) voted in favour of parent’s scheme;
- the Cayman restructuring first using a Cayman STAR trust to create a litigation trust (the PCT) was permissible and fair to all creditors. This was a key finding, because had the Cayman Court not accepted this innovative use of Cayman statutory trust as the repository for the PCT, the ‘appropriate comparator’ test (the outcome under the scheme as compared with liquidation) may have favoured liquidation over the schemes if liquidation allowed the claims to be pursued and the schemes did not;
- the parent scheme (as was the case in relation to the subsidiaries’ schemes) was clearly preferable to liquidation and was overwhelmingly supported by creditors; and
- the fact that an alternative formulation for the parent scheme had been advanced by the opposing creditor and rejected by the parent, or that better scheme terms might have been formulated than those approved by creditors, was of no concern to the Cayman Court.
As a result of the arguments of the opposing creditor being overcome and the formalities of the scheme law and procedure having been complied with, the Cayman Court approved the schemes of arrangement of each of the scheme companies.
Judge Glenn of the US Bankruptcy Court subsequently approved the scheme companies’ application for Chapter 15 recognition, notwithstanding that last resort opposition was also put forward in that forum, and the largest-ever Cayman Islands restructuring, and the first of foreign companies came into effect.
When will an Ocean Rig style restructuring be viable, and when not?
Given the rigour with which the Ocean Rig schemes were tested, it is clear that, in suitable cases, a Cayman Islands restructuring of foreign companies without native restructuring regimes is entirely open. This begs the question, however, of in what circumstances an Ocean Rig-style restructuring could be deployed and in what circumstances it would be more problematic to do so.
The key considerations here, in practical terms, are likely to be whether the entity involved has US creditors; the character and function of the company concerned within the group; whether the company is incorporated in a jurisdiction with or without restructuring apparatus, and whether the tax rate of the jurisdiction is lower than the prevailing rate in the UK (if not, a UK scheme might be seen as preferable); and whether an ad hoc committee can be formed that can guide the process in conjunction with the company or whether the creditors are so disparate that reaching a deal that would garner sufficient support to approve a scheme would be impossible. Related to this, if multiple classes of creditors are likely to be unavoidable (due to significant differences in rights being present), a Chapter 11, despite its greater cost, could be of greater utility, given the ability of cramdown of classes being available in Chapter 11 and unavailable in either UK or Cayman schemes.
To be assured of the US Bankruptcy Court extending the ancillary orders consequent upon recognition of the Cayman schemes, the Chapter 15 application must be brought in respect of a foreign main proceeding; namely, a proceeding where the scheme process is in a jurisdiction in which the scheme company has its COMI. As we saw in Ocean Rig, shifting COMI of a foreign company is an intensive but manageable undertaking where the company or companies concerned are a financing company or holding company entities. It would be markedly more difficult to shift COMI where the company concerned was a trading or operating company with all core assets in the jurisdiction in which it carries on business. A COMI shift is not required for the Cayman Court to take jurisdiction over the restructuring (a foreign company need only register as such to enliven the Cayman Court’s jurisdiction); however, the endgame of Chapter 15 recognition requires this issue to be a central consideration before stepping off into such a restructuring. A foreign non-main Chapter 15 proceeding can also suffice to bind in US creditors; however, there is not the same level of assurance that the Bankruptcy Court will apply the stay on creditor action (if an establishment in the Cayman Islands is proved instead of COMI) as it is not mandatory for the US Court to do so, absent COMI in the restructuring jurisdiction. US law advice will be required on the prospects for obtaining an order for a stay, on the facts of the particular case.
In cases where the Ocean Rig-style of restructuring is needed and can be deployed, it represents a powerful and extraordinarily versatile addition to the cross-border restructuring toolkit.
 Tony Heaver-Wren is a senior partner and David Bulley is a partner at Appleby. The authors led the Appleby team, the Cayman Island attorneys, for the ad hoc committee of creditors.
 In the Matter of Ocean Rig UDW Incorporated, Drill Rigs Holdings Incorporated, Drillships Financing Holdings Incorporated and Drillships Ocean Ventures Incorporated (each in provisional liquidation) 2017 (2) CILR 495.
 The opposing creditor, Highland Capital Management LP, held 56.5 per cent of the senior unsecured notes issued by the parent, but that debt was only 2 per cent of the parent’s creditors.
 That alignment being the common ground of belief in the scheme as the best outcome for creditors, and agreement that the restructuring was without prejudice to creditors’ continuing adversity to management in potential future litigation claims.
 In the initial draft scheme documents, all four scheme companies had to return an affirmative vote or the restructuring would be ineffective. It was subsequently agreed that it would not be a condition of the other scheme companies’ arrangements that DFH’s scheme be approved.
 In a first for the Cayman Islands, a direct judicial dialogue was established between Justice Parker of the Cayman Court and Judge Glenn of the US Bankruptcy Court with a view to facilitating clear communications and a forum for discussion of any issues of concern to either judge in relation to the cross-border restructuring.
 Other examples being CHC Group (Cayman), Pacific Drilling (BVI) and Seadrill (Bermuda) all of which entered restructuring; Appleby acted for the company in the CHC and Pacific Drilling restructurings, and for the creditors in Seadrill.
 The cost of Chapter 11 restructurings have run to several hundred million dollars in some cases, and are commonly multiples of the cost of restructuring through schemes of arrangement.
 The Ocean Rig ad hoc committee of creditors comprised Elliott Management, Blue Mountain, Lionpoint Capital and Avenue Capital who collectively held around US$3 billion of the group’s debt.
 Pursuant to Part IX of the Companies Law.
 Contemporaneously with the appointment of JPLs, a temporary restraining order was obtained in the US, to provide protection from US creditors, pending the filing of an application of Chapter 15 recognition.
 ‘Light-touch’ provisional liquidation refers to JPLs appointed pursuant to Section 104(3) of the Companies Law to facilitate an arrangement between the company and its creditors, with the directors of the company remaining in control of the company and the advancement of the restructuring, with the oversight of the JPLs.
 The aggregate consent fees were less than 1 per cent of the principal amount of the debt.
 Pursuant to Part VIII of the Cayman Islands Trust Law.