Petrofac Secures another Forbearance Extension over Non-Payment of Debt

Petrofac Ltd.’s creditors have again agreed not to pursue legal action over the company’s failure to pay $29 million in bond interest.

The Jersey-based energy engineering company is in default on the senior secured notes due last May. But an ad-hoc group representing about 47 percent of the outstanding notes and other noteholders representing a further 12 percent entered into a forbearance deal with Petrofac in April, agreeing to withhold their legal claims.

That agreement has now been extended for the sixth time to allow Petrofac to pursue financial restructuring. The latest extension is in effect until November 15.

“The Board and management continue to work constructively with the Company’s creditors, key clients and other stakeholders to conclude due diligence and agree and finalize terms and conditions of its proposed financial restructure”, Petrofac said in a statement Monday.

“The Company aims to announce a lock-up agreement with final terms in the coming weeks.

“As previously communicated, the Group continues to closely manage its financial and commercial payment obligations.  This includes the outstanding balances on its revolving credit facility and term loans which the Company does not expect to pay at their maturity on 25 October 2024”.

Petrofac, which trades on the London Stock Exchange, opened the week higher at 13.3 pence after closing at 12.9 last Friday.

Petrofac said late last month key stakeholders had agreed in principle to support the company’s proposed debt reorganization. The proposal includes new long-term funding underwritten by the ad hoc group of noteholders.

Additionally, Petrofac is proposing to convert most of its existing debt into equity, “resulting in the significant dilution of the existing shareholders, the extent of which is still to be agreed”, it said in a press release September 27.

The in-principle agreement also includes “alternative arrangements with certain key clients to meet the performance security requirements, in lieu of performance guarantees, to protect key contracts in the Group’s backlog, releasing a significant amount of retentions to Petrofac”.

Petrofac may also see a reduction of about $100 million in guarantee requirements for a contract awarded 2023, through either a new performance bank guarantee or other arrangements.

“The financial restructure would ensure performance security requirements are met for Petrofac’s existing backlog, strengthen its balance sheet and provide a capital structure and improvement in liquidity which will support the Group in executing its order book and capturing future growth opportunities”, it said. “It would also provide a runway for a subsequent gradual improvement in access to guarantees for new EPC contracts on normal commercial terms”.

For the first six months of 2024, Petrofac reported a year-on-year increase of $26 million to $162 million in net losses.

“Operational performance in the first half of the year reflected the continued impact of legacy contracts, the challenges in securing performance guarantees and adverse operating leverage”, Petrofac reported September 30.

Its engineering and construction (E$C) business logged  $103 million in EBIT loss, “reflecting the impact of onerous contracts with no margin recognition and adverse operating leverage due to low levels of activity”.

On the other hand, overall revenue rose 13 percent to $600 million thanks to the initial phases of contracts won last year.

In assurance, Petrofac said it had $8 billion in order backlog, mostly in the Middle East and North Africa (MENA), and that it expects to bag $53 billion worth of new contracts over the next 18 months. “E$C’s addressable pipeline is US$44 billion, of which 47 percent is in the Group’s core MENA markets and 23 percent in energy transition sectors”, it said. “Asset Solutions’ addressable pipeline is US$9 billion, of which 62 percent is in target expansion geographies outside the UK & Europe”.

However, while Petrofac expects E&C activity to be higher this year than last year, the segment still looks to be “sub-scale as the portfolio transitions from legacy to new contracts”, the company said.

“The first half of 2024 was another challenging period for Petrofac, set against the backdrop of a restructuring process which aims to put the business in a stronger financial position”, chief executive Tareq Kawash said. “While this has impacted the Group’s performance during the first half, our new projects are performing well, and we continue to make progress in closing our legacy contracts in E&C.

“The markets we operate in remain robust and we have secured a good level of new order intake in Asset Solutions”.

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