Borr Drilling: Debt Rollover Issues May Lead to Dilution

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To note: I covered Borr Drilling (NYSE: BORR) previously, so investors should consider this as an update to my previous articles on the society.

Shares of young offshore driller Borr Drilling are down around 60% in the past six weeks as oil prices retreated below the $100 level amid heightened recession fears and weaker than expected demand.

Worse, the company’s debt refinancing efforts didn’t go as well as management suggested during the first quarter conference call in late May:

Our refinancing process is underway and we are in discussions with our lenders with a view to finalizing the refinancing before the end of the second quarter. Given the strong market fundamentals, several options are currently on the table to meet the maturity profile of our debt and provide a long-term financing solution.

Some of these options include direct debt solutions, while others involve certain asset sales, of which our fleet is attracting strong interest at attractive prices. We are currently working to improve all refinancing conditions as the market is moving rapidly and positively and believe a solution is achievable in the coming weeks.

It turned out that the lenders weren’t as accommodating as management expected and asked Borr Drilling to raise additional equity and repay some of its approximately $1.9 billion net debt. .

On Thursday, the company provided an update on ongoing negotiations:

The Company’s Board of Directors is pleased to report that agreements in principle have been reached with most secured creditors to extend the majority of secured debt through 2025. These agreements are subject to respective Board approvals and to binding documentation. The company is seeking the necessary consents and waiver extensions from the lenders to complete the transaction. Once these agreements are in place, the Company will have long-term financing of approximately $1.4 billion and has also maintained long-term financing on the 2 new constructions in the amount of $260 million. Refinancing is to be largely made possible by the sale of selected assets and additional equity.

The asset sale includes 3 rigs under construction/contract for which the company has received a binding letter of intent as previously announced, plus an additional rig which is expected to be sold in Q4 2022, after which the fleet of rigs would consist of 22 rigs delivered plus 2 rigs under construction.

The agreements provide in principle for a partial repayment of the senior secured facility secured by 8 platforms from $313 million to $250 million, of which $100 million is subject to successful syndication. If this facility is reduced to $150 million drawn, then 3 rigs will be unencumbered assets that could be sold to reduce capital requirements. Additionally, the tentative agreements contemplate a $30 million repayment of the Hayfin facility.

In a separate press release, Borr Drilling said it aims to raise up to $250 million in a stock offering following the company’s second quarter earnings release on August 11:

Proceeds from the potential capital increase are expected to be used to partially repay certain secured facilities. The company aims to raise up to $250 million under the offering, which could be reduced in the event of facility syndication, additional asset sales or attractively priced joint ventures.

With the proposed capital increase still nearly four weeks away, the news is effectively an invitation to short the shares.

After Thursday’s sale, raising $250 million in equity at an assumed price of $2.50 per share would increase shares outstanding by more than 65%, and with an estimated net asset value (“NAV”) per share of just $1.25, there’s not much that would stop the stock price from falling even further over the next two weeks.

Please note that restructured competitors like Noble Corporation (NE) or Valaris (VAL) are trading at substantial discounts to NAV despite much better liquidity and virtually zero net debt.

Additionally, the mandatory sale of four new-build rigs will prevent the company from having the earning power claimed in recent presentations:

gain power

Company presentation

Conclusion

Clearly, things did not go as planned by Borr Drilling management during the first quarter conference call at the end of May, as lenders are demanding, among other things, that the company raise a very large amount of new equity. .

The requirement to raise up to $250 million in new equity will likely result in very significant dilution for existing shareholders and, with enough time for short sellers to position themselves accordingly, stocks could come under additional pressure. over the next two weeks.

While lower oil prices and a looming recession could impact clients’ capital budgets in the future, I remain positive on the offshore drilling industry, primarily due to supply dynamics. and demand dramatically improved.

Once completed, the upcoming debt refinancing should put Borr Drilling in a position to fully exploit the favorable momentum in the jack-up rig market, fueled by strong demand from the Middle East.

But given the uncertainties surrounding the potential size and price of the proposed offering, I’m downgrading the company’s stock from “to buy” at “hold” and apologize to my readers for a really bad call six weeks ago.

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