Harbour Energy Back In Pursuit Of Pacific Energy; Floats Tender Offer For Outstanding Debt At 17.5% Of Face Value

After being rebuffed last summer by a major Venezuela based shareholder when it attempted to acquire Pacific Exploration & Production (TSX:PRE) (BVC:PREC) , then known as Pacific Rubiales, in a joint offer along with ALFA S.A.B. of Mexico, Harbour Energy is attempting to take control of the faltering petroleum company via purchasing the company’s outstanding debt, which should the company fall into insolvency, put Harbour Energy in a dominant position to acquire or force a restructure of the company.

Harbour Energy’s Cayman Islands based subsidiary EIG Pacific Holdings Ltd. has already begun tender offers and proposed a restructuring for Pacific Exploration & Production. On January 13, 2016, EIG commenced tender offers to purchase the $4.10 billion USD aggregate principal amount of outstanding notes of Pacific in its entirety. EIG at that time said that it believed “Pacific Exploration & Production is on the verge of insolvency and out of other options.”

Harbour Energy is an energy investment vehicle formed by EIG Global Energy Partners and the Noble Group (SGX:N21) to pursue control and near-control investments in high-quality upstream and midstream energy assets globally. Harbour Energy is externally managed by EIG Global Energy Partners, not to be confused with its own subsidiary, EIG Pacific Holdings, Ltd. EIG Global Energy Partners specializes in private investments in energy and energy-related infrastructure on a global basis and had $14.3 billion under management as of September 30, 2015.

Credit Ratings downgraded to “debt” & “default

Less than a day later, Pacific Rubliales announced that it would not be making its scheduled interest payments and would be utilizing the 30 day interest payment grace period under the indentures governing its notes. Standard &Poor’s  announced that it is lowering the  Pacific’s corporate credit and issue-level rating to ‘D’ on Standard &Poor’s expectation that Pacific will “enter into a general default and that it will fail to pay all or substantially all of its obligations as they come due.”

Fitch Ratings on the same day downgraded Pacific Exploration & Production’s foreign and local long-term Issuer Default Ratings (IDRs) to ‘C’ from ‘CCC’. Fitch also downgraded to ‘C/RR4’ from ‘CCC/RR4’ its long-term rating on Pacific’s outstanding senior unsecured debt issuances totaling approximately $4 billion with final maturities in 2019 through and 2025.

“We correctly informed the market about the dire financial situation at Pacific Exploration & Production last week and we believe the situation will spiral downward now that the cloak of denial has been lifted and in the face of a rapidly deteriorating market environment,” said R. Blair Thomas, CEO of EIG and Co-Chairman of Harbour Energy’s Board of Directors.

“We believe Pacific Exploration & Production is on the verge of insolvency and out of other options. We have an appreciation for the company and its operations, partners and stakeholders and are committed to shepherding the company through an expeditious reorganization that will permit it to continue operating, remain intact and thrive once again. We are offering to inject substantial capital by acquiring the senior notes of the company and sponsoring an overall reorganization of Pacific Exploration & Production. We hope to work with the Board and management to ensure continuity, job preservation and an efficient restructuring process. EIG, through Harbour Energy, is uniquely positioned to support Pacific Exploration & Production in making the necessary financial and operational decisions to restore Pacific Exploration & Production’s credit quality and allow the company to get back to the business of growth,” said Thomas.

Meanwhile, an Ad Hoc committee representing bondholders has retained Canadian law firm Goodmans LLP to represent them in light of the missed bond payment, and consider EIG’s tender offer, says Goodman in a statement. The Ad Hoc Committee holds in the aggregate approximately 40% of the approximately US$4.1 billion principal outstanding amount of the notes, and is in regular contact with holders of a significant additional amount of the notes.

Goodman clarified in a written statement: “The Ad Hoc Committee is actively assessing the company’s announcement on January 14, 2016 regarding its election to utilize the 30 day grace period under the indentures governing the 5.625% Notes and the 5.375% notes rather than making the interest payments due on January 19, 2016 and January 26, 2016 in respect of those notes, and other matters, including the tender offer for the notes announced on January 13, 2015 by EIG Pacific Holdings Ltd.”

Says EIG’s Thomas: “With an average effective price of approximately 20.1%, our offer represents a 100% premium over the average 10% bid price where Pacific Exploration & Production’s bonds were trading immediately before our offer was launched and when the market expected the company to make its January interest payments. We believe the company’s cash position is dire and that the market has underestimated the severity of the situation. The only credible solution is one that combines a significant infusion of new capital with a balance sheet restructuring in order to avoid a long and value-destructive asset level reorganization or distressed sale. Our offer presents certainty of value to bondholders in light of a highly complex and uncertain outcome.”

“Further, Pacific Exploration & Production is a capital intensive business operating in multiple jurisdictions with potentially unpredictable legal outcomes, and we believe the company would have material trade and contractual claims, many of which may have structural seniority to the bondholders in a true liquidation of the company. There are few other potential sponsors with the capacity to fund the significant capital needs of the company, the technical and managerial capabilities to oversee an exploration & production company of this scale, the ability to navigate the numerous complex legal and regulatory issues that an in-court restructuring will involve, as well as the familiarity with Pacific Exploration & Production’s operations and management team to be relevant on the timescale necessitated by the company’s situation. We are committed to shepherding the company through an expeditious reorganization that will permit it to continue operating, remain intact and thrive once again. We hope to work with the board and management to ensure continuity, job preservation and an efficient restructuring process.”

EIG’s Tender Offer Terms & Conditions for Pacific Exploration Bondholders

The Tender Offers are scheduled to expire at 5:00 p.m., Eastern Standard Time, on February 10, 2016 (unless extended or earlier terminated with respect to a Tender Offer, the “Expiration Date”). The Tender Offers are being made pursuant to an Offer to Purchase dated January 13, 2016 (the “Offer to Purchase”), a related Letter of Transmittal dated January 13, 2016 and a related Power of Attorney dated January 13, 2016 (together, the “Tender Offer Materials”), which set forth a more detailed description of the Tender Offers. Holders of the Notes are urged to carefully read the Tender Offer Materials before making any decision with respect to the Tender Offers.

The following table sets forth certain terms of the tender offers (USD:

(1) From Pacific Exploration & Production’s publicly filed interim financial statements for the three months ended September 30, 2015, available on SEDAR.

(2) Per U.S. $1,000 principal amount of Notes.

(3) Includes the Early Tender Payment for Notes validly tendered and not validly withdrawn, prior to the Early Tender Date and accepted for purchase.

The applicable total consideration (the applicable “Total Consideration”) payable for each $1,000 principal amount of Notes validly tendered at or prior to 5:00 p.m., Eastern Standard Time, on January 27, 2016 (such date and time with respect to each Tender Offer, as it may be extended, the “Early Tender Date”) and accepted for purchase pursuant to the Tender Offers will be the applicable Total Consideration for such series of Notes set forth in the table above. The applicable Total Consideration includes the applicable early tender payment for such series of Notes also set forth in the table above (the applicable “Early Tender Payment”). Holders must validly tender and not subsequently validly withdraw their Notes at or prior to the Early Tender Date in order to be eligible to receive the applicable Total Consideration for such Notes purchased in the Tender Offers.

Subject to the terms and conditions of the Tender Offers, each Holder who validly tenders and does not subsequently validly withdraw their Notes at or prior to the Early Tender Date will be entitled to receive the applicable Total Consideration if and when such Notes are accepted for payment. Holders who validly tender their Notes after the Early Tender Date but at or prior to the Expiration Date will be entitled to receive only the applicable tender offer consideration equal to the applicable Total Consideration less the applicable Early Tender Payment (the applicable “Tender Offer Consideration”) if and when such Notes are accepted for payment.

Subject to all conditions to the Tender Offers having been satisfied or waived by the Offeror, the Offeror will purchase Notes that have been validly tendered by the Expiration Date on a date promptly following the Expiration Date (the “Settlement Date”).

To receive either the applicable Total Consideration or the applicable Tender Offer Consideration, holders of the Notes must validly tender and not validly withdraw their Notes prior to the applicable Early Tender Date or the Expiration Date, respectively. Notes tendered may be withdrawn from the applicable Tender Offer at or prior to, but not after, 5:00 p.m., Eastern Standard Time, on January 27, 2016, unless extended, by following the procedures described in the Tender Offer Materials.

In addition to the applicable Tender Offer Consideration or the applicable Total Consideration, as applicable, all holders of Notes accepted for purchase pursuant to the Tender Offers will also receive accrued and unpaid interest on those Notes from, and including, the last interest payment date with respect to those Notes to, but not including, the earliest of (i) the applicable Settlement Date, (ii) the date on which Issuer Reorganization Proceedings (as defined in the Offer to Purchase) are commenced or (iii) February 19, 2016, as applicable.

The obligation of the Offeror to accept for purchase and to pay either the applicable Total Consideration or applicable Tender Offer Consideration pursuant to the Tender Offers is conditioned upon, among other things, (i) the receipt by the Offeror of valid tenders (that are not withdrawn) of a minimum of (a) 80.0% aggregate outstanding principal amount of the Notes in the aggregate and (b) 66.67% aggregate outstanding principal amount of each series of the Notes; (ii) the Reorganization Condition (as defined in the Offer to Purchase); and (iii) the other conditions described under “Conditions to the Tender Offers” in the Offer to Purchase.

The Offeror has retained Citigroup Global Markets Inc. as an exclusive Financial Advisor in this transaction and to serve as sole Dealer Manager for the Tender Offers. MacKenzie Partners, Inc. has been retained to serve as the Information and Tender Agent for the Tender Offers. Questions regarding the Tender Offers may be directed to Citigroup Global Markets Inc. at 390 Greenwich Street, 1st Floor, New York, New York 10013, Attn: Liability Management Group, (800) 558-3745 (toll-free), (212) 723-6106 (collect). Requests for the Tender Offer Materials may be directed to MacKenzie Partners at (800) 322-2885 (toll-free), (212) 929-5500 (collect) or via email at [email protected].