Vantage Drilling CO

As of September 30, 2015, we have approximately $2.7 billion of debt outstanding, including approximately $77.8 million of current maturities and cash on hand of approximately $224.0 million.  The debt outstanding and cash on hand include $150.0 million of borrowings on our revolving Credit Agreement which we received from our lenders in September 2015. In 2016, we have scheduled debt maturities aggregating approximately $78.47 million, consisting of (i) $50.0 million on our 2017 Term Loan (the “2017 Term Loan”), (ii) $3.5 million on our 2019 Term Loan (the “2019 Term Loan,” and collectively with the 2017 Term Loan, the “Term Loans”), (iii) $24.97 million on our 5.50% Convertible Senior Notes (the “5.50% Convertible Notes”) and (iv) $19,000 on the 7.875% Senior Convertible Notes (the “7.875% Convertible Notes”). We intend to fund our operations and debt service, including interest payments, through a combination of cash on hand and cash flow from operations. While these funds will be sufficient to fund our operations and debt service through December 31, 2015, there are several factors that could adversely impact our liquidity in 2016 and beyond including, but not limited to, the following factors described in greater detail below: (i) a material fine, penalty or disgorgement of earnings resulting from an adverse determination by the SEC or the Department of Justice (the “DOJ”) regarding our investigation of corruption by our former agent in Brazil, (ii) a ruling in the Cobalt Explorer arbitration seeking to recover construction payments from us or preventing us from recovering on the refund guarantee, (iii) any restriction placed on our ability to borrow or utilize funds under the Credit Agreement, or (iv) if we are unable to contract our drilling rigs for an extended period of time or at sufficient dayrates. Furthermore, if we prevail in the arbitration we instituted to challenge our client’s wrongful termination of the Titanium Explorer contract, any judgment in our favor may not fully compensate us for our lost cash flows and liquidity and may not be timely.

Because some or all of these factors will have a significant impact on our ability to service our debt as scheduled, we have entered into discussions with certain Term Loan holders and holders of our secured senior notes (“Senior Notes”) regarding a possible deleveraging transaction to substantially reduce our overall debt levels and near-term debt service.  The deleveraging transaction may require a substantial restructuring of the Company’s capital structure including a conversion of a substantial amount of the Term Loans and Senior Notes to equity.  In order to execute such a restructuring, it may be necessary to seek court protection for the transaction in the United States or the Cayman Islands. There can be no assurances that we will reach an agreement with the Term Loan holders and Senior Note holders that will be adequate to provide sufficient liquidity to meet our scheduled debt service requirements.  Any such deleveraging transaction could have a material and adverse impact on our existing shareholders and creditors. If we are unable to complete such a deleveraging transaction, we anticipate taking further actions that may include preserving cash flow by cold stacking drilling equipment, additional workforce reductions, raising additional equity on a preferential basis to our existing equity, pursuing single or multiple asset sales or potentially selling or merging the Company, although there can be no assurance that we will be successful in any of these actions.  

On or about September 2, 2015, we requested and received an advance of $150 million from the lenders under the Credit Agreement.  At the time of such advance, we made certain representations to the lenders as required under the Credit Agreement.  Although we believe that our $150 million drawing satisfied the terms and conditions of the Credit Agreement, on October 14, 2015, we received a letter from the administrative agent for the lenders in which they “request” return of such $150 million advance. The letter stated that if we refused to return the advance, “at minimum” we must segregate such funds from other company funds and maintain them in the account in which such funds were initially deposited, and provide the lenders with information regarding certain representations in the loan documents at the time the advance was made.  One of the issues the lenders are evaluating is whether the termination of the Titanium Explorer contract, if proper, prohibited the Company from borrowing under the Credit Agreement.  We believe that the termination of the contract was wrongful and we commenced arbitration proceedings on August 31, 2015 to recover damages including loss of future revenues and expenses in connection with the wrongful termination of the contract.  It is unclear whether we may be required to repay the borrowings we have made or any additional borrowings under our Credit Agreement will be available to us, given the foregoing.

Market conditions for offshore drilling services is driven by the exploration and production spending of our customers.  Due to the significant decline in oil and natural gas prices over the last year, our customers have been dramatically reducing their capital spending levels. This has resulted in a significant decline in the current market rates for drilling services and a decline in the utilization of offshore drilling rigs. The Aquamarine Driller has been idle since completing its contract in March 2015, and the Emerald Driller, Sapphire Driller, and Topaz Driller have each either extended existing contracts or contracted with new customers at progressively lower rates. We have recently received a letter of award for an 18 month contract (with 9 months of options) for the Aquamarine Driller and are preparing for the re-commencement of operations later this year. Additionally, the Platinum Explorer will complete its current contract prior to year end and is anticipated to re-contract at a lower dayrate or become idle. These lower rates, combined with the cancellation of the Titanium Explorer contract, will result in the Company achieving significantly lower income and cash flow from operations for the remainder of 2015 and 2016. In response to current market conditions, we reduced operating costs and capital expenditures for our fleet.  During the quarter ended September 30, 2015, we recognized a restructuring charge of approximately $2.5 million consisting primarily of severance costs associated with our reduction in personnel.

On August 31, 2015, we received notice from Petrobras America, Inc. (“PAI”) and Petrobras Venezuela Investments & Services B.V. (“PVIS”) stating that PAI and PVIS were terminating the Agreement for the Provision of Services Contract for the Titanium Explorer dated February 4, 2009 (the “Drilling Contract”), between PVIS and Vantage Deepwater Company, a wholly-owned indirect subsidiary of Vantage, and which had been novated to PAI and to Vantage Deepwater Drilling, Inc., a wholly-owned indirect subsidiary of Vantage, respectively. The notice alleges that Vantage had breached its obligations under the Drilling Contract, but the notice does not provide any explanation as to the facts and conduct that constitute a breach by Vantage of its obligations under the Drilling Contract. Under the terms of the Drilling Contract, Vantage filed for arbitration on August 31, 2015 with the American Arbitration Association to challenge the assertions made in the Notice and to assert that the Notice is a wrongful attempt to terminate the Drilling Contract. Vantage believes that it is in compliance with all of its obligations under the Drilling Contract and strongly disagrees with the allegations of contractual breaches set forth in the notice. We intend to vigorously defend our position.