The Ocean Rig Group, a NASDAQ listed offshore ultra-deep water drilling operation suffering from the depression in the world’s oil and gas market, has effected a remarkable restructure of some US$3.7 billion of New York law governed debt using the Cayman Islands provisional liquidation and schemes of arrangement regimes.
The basic design of the restructure was that:
- Four of the Ocean Rig Group companies, comprising a Cayman Islands incorporated company and its three wholly and directly owned Marshall Islands incorporated subsidiaries (together, the scheme companies), successfully applied to appoint Cayman Islands provisional liquidators to themselves so that they would benefit from the Cayman Islands statutory moratorium on adverse creditor action while the restructure was effected;
- The debts would be compromised in exchange for a mixture of (mostly) equity, debt and cash;
- Each of the scheme companies convened a single class of creditors (this was contentious: an overwhelming majority of creditors supported the restructure, while the minority did not and sought to be placed in their own class – this would have granted them an effective power of veto of the entire restructure);
- The schemes were promoted by the scheme companies themselves, rather than the provisional liquidators (who oversaw and supported the schemes in any event);
- The recovery to creditors by way of the restructure was appreciably higher than the only alternative – a fire sale of assets on liquidation of the scheme companies; and
- Potential claims against third parties in respect of alleged fraudulent transfers were to be preserved by way of Cayman Islands purpose trust.
The schemes were approved by the vast majority of creditors at the scheme meetings, and sanctioned by the Cayman Islands court despite the arguments made by the minority creditors as to class composition at both the convening and sanction hearings.
What’s the significance?
The Ocean Rig restructure is novel both for its complexity and the size of the restructured debt. It is also of broader significance for the Cayman Islands as a leading restructuring jurisdiction:
- Cayman Islands provisional liquidation in aid of restructure: The Cayman Islands statutory provisional liquidation regime aided a complex, high value and multi-jurisdictional debt restructure. How? The scheme companies obtained the benefit of a statutory moratorium on adverse creditor action and the appointment allowed the companies to seek a temporary restraining order in the U.S. pending Chapter 15 U.S. Bankruptcy Code recognition. While the schemes were promoted by the scheme companies themselves, the provisional liquidators provided independent oversight and scrutiny, a creditor advocate and liaison, and boosted creditor (and no doubt the court’s) confidence in the restructure.
- Foreign companies can restructure under Cayman Islands law: The Cayman Islands court appointed provisional liquidators to the Ocean Rig Group’s Marshall Islands subsidiaries and sanctioned the relevant compromises of their debts. This is a very welcome confirmation of the breadth of the Cayman Island’s restructuring jurisdiction, particularly given the increasing competition among jurisdictions to attract cross border restructurings (see, for example, Singapore’s recent Companies (Amendment) Act 2017 which came into force on 23 May 2017), facilitating a one stop shop for restructure rather than adding cost and complexity in going before the Marshall Islands court.
- Class composition: A small group of creditors argued that they belonged in a separate class from the majority. The Court, in applying the test of (dis)similarity of legal rights against the scheme companies, balanced the competing concerns of ensuring that the majority of creditors did not oppress the minority against the minority being able to veto an otherwise desirable restructure supported by the majority, and ultimately sanctioned the creditor classes proposed by the scheme companies. The Court’s restructure-friendly analysis further boosts the Cayman Islands credentials in circumstances where other common law jurisdictions are also prepared to be flexible in the interests of facilitating restructure (see, for example, the Australian decision First Pacific Advisors LLC v Boart Longyear Ltd  NSWCA 116 which has been widely acknowledged to have created new boundaries in terms of conferring differing rights to creditors without causing class fractions).