KEY ENERGY SERVICES, INC. (OTCMKTS:KEGXQ) Files An 8-K Entry into a Material Definitive Agreement
Item 1.01 Entry into a Material Definitive Agreement.
As previously announced, on January 24, 2020, Key Energy Services, Inc. (the Company or Key) entered into a Restructuring Support Agreement (including the exhibit thereto, the RSA) with certain lender parties thereto collectively holding over 99.5% (the Supporting Term Lenders) of the principal amount of the Companys outstanding term loans (the Existing Term Loans) under the Companys existing term loan facility. The RSA contemplated a series of out-of-court transactions that would effectuate a financial restructuring (the Restructuring) of the Companys capital structure and indebtedness and related facilities, including the conversion of approximately $241.9 million aggregate outstanding principal of the Companys Existing Term Loans (together with accrued interest thereon) into (i) newly issued shares of the common stock of the Company and (ii) $20 million of term loans under a new approximately $51.2 million term loan facility (the New Term Loan Facility).
On March 6, 2020 (the Effective Date), the Company completed the Restructuring, including a 1-for-50 reverse stock split, as described in more detail below.
This Current Report on Form 8-K contains summary descriptions of certain agreements the Company and its subsidiaries entered into in connection with the Restructuring. The descriptions in this Current Report on Form 8-K are qualified in their entirety by reference to the full agreements, copies of which the Company intends to file as exhibits to its Annual Report on Form 10-K for the year ended December 31, 2019.
Exchange Agreement
On the Effective Date, the Company and the Supporting Term Lenders entered into an exchange agreement (the Exchange Agreement) wherein the Supporting Term Lenders exchanged the full principal amount outstanding and accrued and unpaid interest of the Existing Term Loans held by such Supporting Term Lenders for (i) $20 million of term loans under the New Term Loan Facility and (ii) 13,362,009 newly issued shares of the Companys common stock, par value $0.01 (the Common Stock), each on a pro rata basis based on their holdings of existing term loans. After giving effect to the transactions contemplated in the Exchange Agreement, the Supporting Term Lenders own 97% of the Common Stock and holders of Common Stock immediately prior to the Effective Date own 3% of the Common Stock, in each case subject to potential dilution as a result of the Warrants (as defined below) and the 2019 Equity and Cash Incentive Plan, as may be amended from time to time.
Warrants
to the RSA, on March 5, 2020, the Board declared a dividend of two series of warrants that will be distributed on March 13, 2020. Each stockholder as of February 18, 2020 will receive their pro rata share of the Warrants based on their ownership of Common Stock as of such date. The first series of warrants (the Series A Warrants) will entitle the holders to purchase in the aggregate 1,669,730 shares of the Companys Common Stock, at an exercise price of $19.23 (the Series A Exercise Price). The second series of warrants (the Series B Warrants and together with the Series A Warrants, the Warrants) will entitle the holders to purchase in the aggregate 1,252,297 shares of the Companys Common Stock, at an exercise price of $28.85 (the Series B Exercise Price). Each series of warrants will have a four-year exercise period.
All unexercised Warrants will expire, and the rights of the holders of such Warrants to purchase Common Stock will terminate, at the close of business on the first to occur of (i) March 13, 2024 or (ii) the date of completion of a certain reorganization transactions that results in the Common Stock being converted into, changed into or exchanged for consideration consisting solely of cash (Cash Exit Transaction). Upon the occurrence of a Cash Exit Transaction, each holder of the Warrants shall receive the positive difference between the cash consideration per Common Stock and the exercise price of each Warrant, if any; provided, that if no such payment results from a Cash Exit Transaction that occurs prior to the 18-month anniversary of the Effective Date, then each holder shall receive their pro rata share of the value of the Warrants, as determined by using the Black-Scholes valuation method, in cash as of the date of the Cash Exit Transaction subject to an aggregate cap of $10 million.
The exercise price per share of the Warrants and the number of Warrants are subject to adjustment from time to time upon the occurrence of certain events including: (i) the issuance of Common Stock as a dividend or distribution to all holders of shares of Common Stock, or a subdivision, combination, split, reverse split or reclassification of Common Stock into a greater or smaller number shares of Common Stock, (ii) the issuance as a dividend or distribution to all holders of Common Stock of cash, evidences of indebtedness, securities of the Company or any other person, or other property, (iii) the issuance to all holders of Common Stock of rights, options or warrants entitling them for a period expiring 60 days or less from the date of issuance of such rights, options or warrants to purchase Common Stock at less than the fair value of Common Stock as of the date of announcement of such issuance, and (iv) upon the occurrence of certain reorganization transactions (subject to similar Black-Scholes protection as described above in the first 18-months where cash comprises more than 10% of the consideration in the reorganization and the Warrants are out-of-the-money).
The Warrants permit a holder to exercise the Warrants by paying the applicable exercise price in cash or on a cashless basis. No Warrant holder will have, by virtue of holding or having a beneficial interest in the Warrants, the right to vote, to consent, to receive any cash dividends, stock dividends, allotments or rights or other distributions paid, allotted or distributed or distributable to the holders of Common Stock, or to exercise any rights whatsoever as a stockholder of the Company unless, until and only to the extent such Warrant holder becomes a holder of record of shares of Common Stock issued upon settlement of Warrants.
Stockholders Agreement
to the RSA, on the Effective Date, the Company and the Supporting Term Lenders executed the Stockholders Agreement. Among other things, the Stockholders Agreement provides:
CASA Letter Agreement
On the Effective Date, the Company and Platinum Equity Advisors, LLC (Platinum), entered into a letter agreement (the CASA Letter Agreement) regarding outstanding payments owed to Platinum by the Company under the Corporate Advisory Services Agreement, dated as of December 15, 2016 (the Advisory Agreement). to the CASA Letter Agreement and the Exchange Agreement, Platinum agreed to release the Company from its outstanding payment obligations under the Advisory Agreement in exchange for the right to a potential payment of $4.0 million upon the occurrence of certain reorganization events involving the Company.
New Term Loan Facility
Upon completion of the Restructuring, Key entered into the New Term Loan Facility with the Supporting Term Lenders. The New Term Loan Facility is comprised of (i) a $50 million senior secured term loan, of which $30 million will be funded with new cash proceeds provided by the Supporting Term Lenders and $20 million will be issued in exchange for the Existing Term Loans held by, and accrued interest owed to, the Supporting Term Lenders and (ii) an approximate $1.2 million senior secured term loan tranche in respect of Existing Term Loans held by lenders who are not Supporting Term Lenders. The New Term Loan Facility will mature 5.5 years after the Effective Date. Soter provided $7.5 million of the $30 million of new funding under the New Term Loan Facility and the Supporting Term Lenders provided the rest of such $30 million on a pro rata basis based on their holdings of Existing Term Loans. The net proceeds of the $30 million new money term loans will be used to finance capital expenditures and working capital and for other general corporate purposes. Contemporaneously with the closing of the Restructuring, the agent under the New Term Loan Facility entered into an amended and restated intercreditor agreement (the New Intecreditor Agreement) with the agent under the New ABL Facility (as defined below).
The annual interest rate under the New Term Loan Facility is equal to LIBOR plus 10.25% and is payable semi-annually. Notwithstanding the foregoing, Key has the option to pay interest in kind at an annual rate of LIBOR plus 12.25% on the outstanding principal amount of the New Term Loans for the first two years following the closing of the Restructuring.
The Companys obligations under the New Term Loan Facility are guaranteed by the same subsidiaries that guarantee the Existing Term Loans. The obligations under the New Term Loan Facility are secured by a perfected first priority lien on all assets of the Company and the subsidiary guarantors (except for such assets on which the liens securing the obligations under the New Term Loan Facility are junior in priority to liens securing the obligations under the New ABL Facility, as provided under the New Intercreditor Agreement).
The Company has the right to voluntarily prepay the New Term Loans under the New Term Loan Facility at any time, subject to a prepayment premium (which may be waived by lenders holding New Term Loans under the New Term Loan Facility representing at least two-thirds of the aggregate outstanding principal amount of the New Term Loans) expressed as a percentage of the principal amount of the New Term Loans prepaid equal to 3% from the closing of the Restructuring to the first anniversary of the Effective Date, 2% from the first anniversary to the second anniversary, 1% from the second anniversary to the third anniversary, and 0% thereafter. The prepayment premium is also payable upon certain debt incurrences and asset sales, generation of excess cash flow, receipt of extraordinary cash proceeds (e.g., tax and insurance), certain change of control transactions and acceleration of the loans under the New Term Loan Facility because of an event of default or otherwise, subject in each case to certain exceptions.
The New Term Loan Facility contains affirmative and negative covenants customary for facilities of this type.
New ABL Facility
In connection with the Restructuring, Key entered into a third amendment to its existing ABL facility (the New ABL Facility). The New ABL Facility (i) reduced the lenders aggregate commitments to make revolving loans to $70 million, (ii) increased the applicable interest rate margin by 75 basis points to 275375 basis points for LIBOR borrowing and 175225 basis points for base rate borrowing, in each case depending on the fixed charge coverage ratio at the time of determination, and (iii) lowered the availability thresholds for triggering certain covenants. The New ABL Facility contains affirmative and negative covenants that are substantially similar to those under the New Term Loan Facility.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
The information regarding the New Term Loan Facility and the New ABL Facility set forth in Item 1.01 of this Current Report on Form 8-K is incorporated herein by reference.
