Distressed debt funds will become big shareholders in troubled oil firm Gulf Keystone after bondholders agreed to swap $500 million of debt for equity, wiping out some of the world's top funds as shareholders.
Gulf Keystone operates the giant Shaikan oil field in Iraqi Kurdistan and produces about 40,000 barrels per day (bpd).
The firm has been fighting to avoid insolvency after low oil prices and overdue oil export payments from the Kurdistan regional government crippled its balance sheet.
But the deal will also set the stage for a battle for control if its new shareholders decide to offload their stakes to a new strategic investor, which Gulf Keystone has been seeking.
Shares in London-listed Gulf Keystone plunged more than 30 percent on the news.
The company said current shareholders, which include Capital Group, Prudential, Barclays and BlackRock would see their ownership diluted to 5 percent.
Sothic Capital, a London-based fund led by former distressed specialists from JP Morgan, is among the bondholders that will end up with a significant stake, according to sources close to the company and bondholders.
Other such bondholders are GLG Partners, part of hedge fund Man Group, and investment fund Taconic Capital.
Sothic did not respond to telephone calls. GLG and Taconic were not available for immediate comment.
"This is obviously negative in share price terms given the significant dilution, although it's an expected and necessary step to allow the company to continue trading on a far steadier footing," said analysts at Cenkos Natural Resources.
LARGE RESERVES
Gulf Keystone said it had received as many as 18 M&A deal proposals, ranging from farm-ins to full sales, but that political problems in Iraq and uncertainty about oil prices had blocked progress.
U.S. oil major Exxon Mobil several years ago showed interest in making an offer, Gulf Keystone's former chairman told Reuters last year.
After the bond swap is completed, Gulf Keystone's debt will fall to $100 million from the current $600 million of guaranteed and convertible bonds maturing in 2017, making it a much more attractive acquisition target.
The company will use some of the extra cash it hopes to raise via a $20-$25 million new equity issue to increase production to 55,000 bpd from around 40,000 currently.
The Shaikan oil field has proven and probable reserves of 639 million barrels.
'MIXED BAG'
For some of the new shareholders, the debt swap could be a real coup.
Gulf Keystone's $250 million guaranteed notes XS1056559088 traded below 50 cents to the dollar between January and April, Thomson Reuters data showed.
This means investors could have bought the debt for less than $125 million. The holders of the $250 million guaranteed bond will retain $100 million of reinstated notes and receive 65.5 percent of Gulf Keystone's equity.
Sources close to the company said, however, they had not registered a major change in bondholders over the past year.
"The new owners are really a mixed bag of investors. They are distressed specialists but also long-only funds," said one source, who asked not to be identified.
As a result of the proposed restructuring, the owners of $325 million in convertible bonds will receive 20 percent ownership of Gulf Keystone.
Gulf Keystone said Capital Group, one of the world's biggest funds, was supporting the restructuring. It could end up with 10-15 percent of the firm by retaining its shares and subscribing to the new issue.
With a market value of $3 billion in its heyday four years ago, Gulf Keystone is currently worth around $60 million. If the debt swap deal breaks down, the company would likely become insolvent, the firm said in a statement.
(Editing by Jason Neely)
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