Pacific E&P was, until recently, the archetypal company-in-distress. Once a major player in South America’s energy industry, it absorbed a direct hit in the 2011 oil price disruption and struggled to regain its footing. After accumulating more than $5.6 billion of debt to finance acquisitions and construct massive water and electricity transmission projects, the company faced a liquidity crisis, which culminated in an unsustainable net leverage position. In light of these operational and financial challenges, Pacific E&P sat down with its bank lenders and noteholders at the end of 2015 and developed a pre-packaged restructuring plan.
In the world of distressed investing, there are “chop shops” and “workshops.” The chop shops – which too often see bankrupt companies as vehicles to scrap and sell for parts – vastly outnumber those that see an opportunity for genuine restructuring. If so inclined, private equity firms can take over a distressed company, disassemble it piece by piece, turn a quick profit, and move on. Numerous firms are based on this model; many of them are quite lucrative.
Turning an oil company with a $5 billion debt into something profitable, however, takes a steady hand and an intimate knowledge of the schematics driving the industry. In the case of Pacific E&P, Toronto-based Catalyst Capital Group Inc. chose to bring the ailing company into its workshop, despite daunting risks.
Those risks included the judicial proceedings that accompany bankruptcy, the volatility of oil prices, and the possibility that Catalyst principals could not reach a satisfactory agreement with creditors or relist Pacific E&P on a leading stock exchange. Catalyst’s quixotic mission also had to factor in the political instability of the Latin American countries in which Pacific E&P operates: Mexico, Colombia, Guatemala, Brazil, Guyana, and Peru.
Catalyst was ultimately selected by Pacific E&P and the creditors’ committee to participate in the Creditor/Catalyst Plan and as the best financial partner for the reorganized business moving forward. By November 2016, Catalyst and Pacific E&P completed their restructuring transaction. With the blessing of Pacific E&P’s bondholders, the firm took the first steps towards rehabilitating the company by recapitalizing Pacific E&P with some $500 million in debtor-In-possession financing. The Creditor/Catalyst Plan represents the most significant CCAA restructuring plan to be recognized in Colombia to date.
Pacific E&P came out of its recapitalization with a renewed strategic focus, positive cash flow, a strong balance sheet, and significantly reduced payables. Its incumbent board was replaced by a new group of independent directors with a global vision, led by Catalyst Managing Director Gabriel de Alba. They salvaged the company rather than breaking it apart, taking the more arduous – but ultimately more rewarding – path.
The company relisted on the Toronto Stock Exchange, transforming itself as the Frontera Energy Corporation, a strong player in Latin America’s low-cost oil and gas market. In essence, Frontera went into the garage as a clunker and emerged a hot rod. Most importantly, Catalyst buoyed shareholders, debtholders, and employees by rebuilding the erstwhile Pacific E&P into a successful oil and gas producer, one that spurs local, regional, and hemispheric growth. When Frontera left Catalyst’s shop, heads turned and the world took notice. R. William Ide III, a partner and corporate governance specialist at Dentons, commended Catalyst for “taking the long view – not the short one. The easy path is to divide the company into small pieces. The harder path is to develop the vision to see the company’s potential despite its imperfections and recreate something enduring for its employees and stakeholders. That’s real enterprise management.” Catalyst earned the Turnaround Management Association’s International Turnaround of the Year Award last month for successful restructuring, its sixth industry award of 2017.
Pacific E&P’s case study proves that not only is it possible for a firm to bring a company back from the brink, but that it can be done without inflicting undue harm on the employees and communities that rely on it.
Over time, Catalyst’s handling of Pacific E&P could prove a template for private equity firms and hedge funds. When circumstances dictate, workshops are preferable to chop shops.
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Richard Levick, Esq., @richardlevick, is Chairman and CEO of LEVICK. He is a frequent television, radio, online, and print commentator.