Nostrum Oil & Gas – sanctions won't stop sanction
Nostrum Oil & Gas plc (the "Company") is an English-incorporated company and is the ultimate parent of a corporate group operating in the oil & gas business in Kazakhstan (the "Group"). The Group had been suffering financially due to declining production levels at its oil & gas field in Kazakhstan since 2017. The Chinarevskoye Field is the Group's sole source of revenue and its declining production had led to several write-downs of the Group's reserves causing it to become overleveraged. As a result, in May 2020, the Group opened discussions with its creditors and its major shareholder, ICU Holdings Limited, about a possible restructuring.
The indebtedness subject to the Scheme relates to two series of unsecured notes (the "Existing Notes") with outstandings of approximately USD 1.125 billion. The Existing Notes comprised of (i) the 2022 notes issued in July 2017 which were to be fully repaid on 25 July 2022 and (ii) the 2025 notes which were due to be repaid in 2025. The Group began missing interest payments on the Existing Notes in July 2020.
There were two Russian Scheme creditors, representing 7.1% by value of the Existing Notes, that were subject to sanctions in the UK, EU or US (the “Sanctions Disqualified Persons”) and therefore prohibited from dealing with the Existing Notes.
The Existing Notes were originally issued by another group entity, Nostrum Oil & Gas Finance B.V., incorporated in the Netherlands, pursuant to New York law governed indentures. In order that the Group could restructure using a scheme of arrangement, it (i) amended the Existing Notes to make the Company a co-issuer: (ii) amended the governing law to English law; and (iii) provided that the English courts have jurisdiction with regards to proceedings brought by an obligor.
Key commercial terms of the scheme
The key commercial terms within the Scheme were as follows:
- All Scheme Creditors to receive a pro rata allocation of two series of newly issued notes comprising:
- USD 250m of senior secured notes bearing 5% interest and maturing on 30 June 2026. These notes will have the benefit of first-ranking security over all the Group’s assets and will have the benefit of guarantees from group companies.
- USD 300m of senior unsecured notes bearing 1% interest (paid in cash) and 13% (paid in kind) and maturing on 30 June 2026. These notes will have second-ranking security over some of the Group’s bank accounts but will otherwise be unsecured. They will have also had the benefit of guarantees and will be capable of being repaid through the issuance of new shares in the Company.
- Each scheme creditor is entitled to receive a pro rata allocation of new shares in the Company which represent 88.89% of the equity on a fully-diluted basis.
- The holders of the new senior unsecured notes were also entitled to a pro rate allocation of additional share warrants which would increase their holding of the share capital to 90%.
- The Existing Notes were fully discharged.
Impact of sanctions on the scheme
With regards to the class composition under the scheme, the convening Judge considered the fact that the Sanctions Disqualified Persons would not be able to receive any consideration under the scheme until the sanctions were lifted. It was proposed that any consideration was to be held in a bare trust for them until they were legally able to access it. The Company had submitted that all scheme creditors should vote in a single class. It was held at the sanction hearing that the holding trust structure did not affect the fairness of the scheme and did not place the Sanctions Disqualified Persons at any greater disadvantage than they were already facing as a result of the restrictions under the sanctions legislation.
The Sanctions Disqualified Persons were also unable to vote on the scheme. However it was noted by the convening Judge that they had signed up to the Lock-Up Agreement prior to their being sanctioned which strongly indicated they did not object to the scheme and therefore were unlikely to object to the scheme at the time of the hearing. It was noted in the sanction hearing judgment that even if the Sanctions Disqualified Persons had all voted against the scheme the requisite majorities would still have been reached.
The Company had to acquire a regulatory licence from the US sanction authority, the Office for Foreign Assets Control (“OFAC”), before the scheme meeting was held. The Company also requires regulatory licences from the UK, the Netherlands and Guernsey, however these were not necessary to obtain prior to the scheme meeting but would be needed before the restructuring can be implemented. As the OFAC licence had been granted, the Company was hopeful that the other regulatory licences would be granted.
This is a helpful judgment particularly in confirming that sanctions will not necessarily be a bar to the sanctioning of a scheme of arrangement should the relevant regulatory licences be obtained. However, in this case the Sanctions Disqualified Persons had given an indication that they were in favour of the scheme by signing up to the Lock-Up Agreement prior to being sanctioned. It remains to be seen how a sanctioned scheme creditor would be dealt with where no such indication had been given.