DBRS Comments on Savanna Energy Services Corp. Announcement of Debt Financing, Private Placement and Bought Deal Financing, and Intention of Unsolicited Takeover Offer from Total Energy Services Inc.

DBRS Limited (DBRS) today notes that on November 22, 2016, Savanna Energy Services Corp. (Savanna or the Company; rated B with Negative trends) announced that it has entered into agreements with Alberta Investment Management Corporation (AIMCo) for (1) a $200 million second lien senior secured term loan facility (the Term Loan) and (2) a private placement of 13 million common shares at a price of $1.45 per common share, for gross proceeds of $18.9 million. Concurrently, Savanna has also entered into an agreement with a syndicate of underwriters to sell, on a bought deal basis, 13 million common shares at a price of $1.45 per common share for gross proceeds of $18.9 million. Savanna has granted the underwriters an option to purchase an additional 1.95 million common shares to cover over-allotments, if any, at the same terms as the bought deal. Combined, the equity financings could raise up to $40.5 million in gross proceeds for Savanna. The above transactions are subject to certain conditions and are expected to close concurrently on or about December 15, 2016. Savanna intends to use the proceeds from the above transactions to reduce indebtedness and for general corporate purposes. The Company has also announced that it has negotiated the repurchase of approximately $62.5 million of its Senior Notes.

The Term Loan matures on December 31, 2021, and is available in two draws. It bears an interest rate of 7.15% per annum with amortization payments equal to 1% of the original principal amount payable annually, in equal quarterly installments, with the balance due on maturity. Savanna has also agreed to issue to AIMCo, on first draw under the Term Loan, seven million warrants to purchase common shares, entitling AIMCo to acquire up to seven million common shares. The exercise price will be equal to a 45% premium to the volume weighted-average price of the common shares for the five trading days ended prior to the date of issue of the warrants, at any time prior to two years following the date of issue of the warrants. Savanna retains the option to require AIMCo to exercise all or any portion of the warrants if the volume weighted-average price of the common shares is greater than the exercise price of the warrants for 60 consecutive calendar days. At close, AIMCo will own approximately 11% of the outstanding common shares (16% if the warrants are exercised in full).

In a October 26, 2016, press release (“DBRS Takes Rating Actions on High-Yield Oil & Gas Portfolio”), DBRS confirmed the ratings of Savanna and maintained the trends at Negative due to the refinancing risk associated with the Senior Notes. Subject to successful completion, the above transactions are expected to address the refinancing risk associated with Senior Notes, provide the Company with additional liquidity to cover future capital expenditure and improve the repayment profile of the Company. In particular, the Company’s secured revolving credit facility, which, in the absence of refinancing of the Senior Notes would have been due on January 25, 2018, can now (subject to lender approval) be expected to mature on May 25, 2019. Savanna expects to use the proceeds of the transactions to reduce indebtedness. On a pro forma basis the Company’s lease-adjusted debt-to-cash flow and lease-adjusted debt-to-capital ratios for the last twelve months (LTM) ended September 30, 2016, improve to 4.88 times (LTM Sep. 2016 actual: 5.71 times) and 31.6% (LTM Sep. 2016 actual: 37%), respectively. The transactions also provide Savanna with a strong strategic investor in AIMCo with a possibility of additional equity injections in the medium term. The transactions are subject to certain conditions and are expected to close on or about December 15, 2016.

DBRS also notes that on November 23, 2016, Total Energy Services Inc. (Total) has announced its intention, subject to various considerations, to make an unsolicited takeover offer for the outstanding shares of Savanna in an all share deal. If successful, shareholders of Savanna Shares are expected to receive, in exchange for each Savanna share, 0.1132 of a common share of Total. The offer follows unsuccessful attempts by Total to pursue a business combination transaction with Savanna in September 2016. Total has announced that it has support agreements in place with shareholders controlling 43% of Savanna’s shares, and tends to mail a take-over bid circular to the registered holders of Savanna shares on or about December 14, 2016.

Overall, DBRS views the AIMCo transactions as credit positive and on successful completion as outlined, DBRS may consider changing the trend to Stable. On the other hand, the announcement from Total is in its early stages, with uncertainty regarding (1) whether the takeover bid will actually materialize, (2) whether the takeover bid will be accepted and (3) if and how Total plans to restructure Savanna’s debt. DBRS will review the offer when it materializes along with Total’s financing plan, and take an appropriate rating action if needed.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Companies in the Oilfield Services Industry (September 2016) and DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers (March 2016), which can be found on our website under Methodologies.

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