|Delayed - 01/20 11:35:10 am|
Petra Diamonds : Petra issues Practice Statement Letter
|11/17/2020 | 01:47pm|
FOR IMMEDIATE RELEASE
|17 November 2020||LSE: PDL|
Petra Diamonds Limited
("Petra", "PDL" or the "Company" or, in conjunction with its subsidiaries, the "Group")
Petra issues Practice Statement Letter
Following announcements made on 20 October 2020 and also earlier today, Petra is pleased to announce that Petra Diamonds US$ Treasury plc (the “Scheme Company”) has today launched a scheme of arrangement (the “Scheme”) via the issuance of a practice statement letter (the “PSL”) addressed to, among others, the Scheme Creditors (as defined in the PSL).
The Scheme Company is proposing the Scheme in order to implement the proposed restructuring (the “Restructuring”) of the Petra group in the manner described and contemplated in the Lock-Up Agreement dated today's date, as further discussed and described in Petra's earlier announcement today.
Further details regarding the Scheme and the Restructuring are contained in the PSL and in the Lock-Up Agreement.
The Lock-Up Agreement is available to Scheme Creditors only and can be accessed via the Scheme Website www.lucid-is.com/petradiamonds.
Scheme Creditors that have questions in relation to the PSL or the Scheme may contact Lucid Issuer Services Limited as Information Agent appointed by the Scheme Company, using the contact details below.
~ Ends ~
For further information, please contact:
Petra Diamonds, London Telephone: +44 20 7494 8203
Cathy Malins email@example.com
Rothschild & Co
Giles Douglas firstname.lastname@example.org
Glen Cronin email@example.com
Mahir Quraishi firstname.lastname@example.org
Lucid Issuer Services Limited Telephone: +44 20 7704 0880
Sunjeeve Patel email@example.com
About Petra Diamonds Limited
Petra Diamonds is a leading independent diamond mining group and a consistent supplier of gem quality rough diamonds to the international market. The Company has a diversified portfolio incorporating interests in three underground producing mines in South Africa (Finsch, Cullinan and Koffiefontein) and one open pit mine in Tanzania (Williamson).
Petra's strategy is to focus on value rather than volume production by optimising recoveries from its high-quality asset base in order to maximise their efficiency and profitability. The Group has a significant resource base of ca. 243 million carats, which supports the potential for long-life operations.
Petra conducts all operations according to the highest ethical standards and will only operate in countries which are members of the Kimberley Process. The Company aims to generate tangible value for each of its stakeholders, thereby contributing to the socio-economic development of its host countries and supporting long-term sustainable operations to the benefit of its employees, partners and communities.
Petra is quoted with a premium listing on the Main Market of the London Stock Exchange under the ticker 'PDL' and is a constituent of the FTSE4Good Index. The Company’s US$650 million loan notes due in 2022, currently subject to restructuring, are listed on the Global Exchange market of the Irish Stock Exchange. For more information, visit www.petradiamonds.com.
This announcement contains statements about Petra that are or may be forward looking statements. All statements other than statements of historical facts included in this announcement may be forward looking statements. Without limitation, any statements preceded or followed by or that include the words "targets", "goals", "should", "would", "could", "continue", "plans", "believes", "expects", "aims", "intends", "will", "may", "anticipates", "estimates", "hopes", "projects" or words or terms of similar substance or the negative thereof, are forward looking statements.
Such forward looking statements involve risks and uncertainties that could significantly affect expected results and are based on certain key assumptions. Many factors could cause actual results to differ materially from those projected or implied in any forward looking statements. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward looking statements, which speak only as of the date hereof. Petra disclaims any obligation to update any forward looking or other statements contained herein, except as required by applicable law or regulation.
N.M. Rothschild & Sons Limited ("Rothschild & Co"), which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting exclusively for Petra and no one else in connection with the contents of this announcement and will not be responsible to anyone other than Petra for providing the protections offered to clients of Rothschild & Co nor for providing advice in relation to the subject matter of this announcement or any other matters referred to in this announcement.
THIS LETTER REQUIRES YOUR IMMEDIATE AND URGENT ATTENTION AS IT RELATES TO A SCHEME OF ARRANGEMENT PROPOSED BY PETRA DIAMONDS US$ TREASURY PLC WHICH WILL BE CONSIDERED BY THE COURT AT THE SCHEME CONVENING HEARING WHICH THE COMPANY ANTICIPATES WILL TAKE PLACE ON 9 DECEMBER 2020.
THIS LETTER DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION. NONE OF THE SECURITIES REFERRED TO IN THIS PRACTICE STATEMENT LETTER MAY BE SOLD, ISSUED OR TRANSFERRED IN ANY JURISDICTION IN CONTRAVENTION OF APPLICABLE LAW.
THE SECURITIES MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES UNLESS THEY ARE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT) OR ARE EXEMPT FROM SUCH REGISTRATION. THE SECURITIES PROPOSED TO BE ISSUED PURSUANT TO THE SCHEME WILL NOT BE, AND ARE NOT REQUIRED TO BE, REGISTERED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION (THE SEC) UNDER THE SECURITIES ACT OR THE SECURITIES LAW OF ANY OTHER JURISDICTION AND MAY NOT BE OFFERED OR SOLD IN THE U.S. OR, FOR CERTAIN OF THE SECURITIES TO BE ISSUED, TO U.S. PERSONS (AS DEFINED IN THE SECURITIES ACT) UNLESS THE SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT, OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENT OF THE SECURITIES ACT IS AVAILABLE.
THE SCHEME CREDITORS MUST RELY ON THEIR OWN EXAMINATION OF THE TERMS OF THE SCHEME, INCLUDING THE MERITS AND RISKS INVOLVED. THIS LETTER WILL NOT BE FILED WITH THE SEC AND THE SCHEME DOCUMENTS WILL NOT BE REVIEWED BY THE SEC OR ANY STATE SECURITIES AUTHORITY AND NONE OF THEM HAS OR WILL APPROVE, DISAPPROVE, PASS UPON OR ENDORSE THE MERITS OF THE SCHEME OR THE ACCURACY, ADEQUACY OR COMPLETENESS OF THIS LETTER OR THE SCHEME DOCUMENTS. IT IS UNLAWFUL TO MAKE ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
Petra Diamonds Us$ Treasury plc
Suite 31 Second Floor, 107 Cheapside
London, EC2V 6DN
(Registered under the laws of England and Wales with Company Number 09518557)
PRACTICE STATEMENT LETTER
17 November 2020 To: Deutsche Bank Trust Company Americas as trustee for the holders of the Notes (as defined
below) (the "Trustee")
To: The Noteholders (as defined below)
To: The Depositary Trust Company ("DTC") as the depositary under the Notes Indenture (as defined below) in respect of the Notes (the "Depositary")
To: Cede & Co. as nominee for DTC and as registered holder of the Notes (the "Registered Holder")
Cc: Lucid Issuer Services Limited as information agent of the Company (as defined below) (the "Information Agent")
THIS LETTER CONCERNS MATTERS WHICH MAY
AFFECT YOUR LEGAL RIGHTS AND ENTITLEMENTS
AND YOU MAY THEREFORE WISH TO TAKE
APPROPRIATE LEGAL ADVICE ON ITS CONTENTS
Proposed scheme of arrangement in relation to Petra Diamonds US$ Treasury plc (the "Company") under Part 26 of the Companies Act 2006 (as amended) (the "Scheme")
1. PURPOSE OF THIS LETTER
1.1 On 12 April 2017, the Company issued US$650 million 7.25 per cent. senior secured second lien notes due 1 May 2022 (ISINs: USG7028AAB91 and US71642QAB32; CUSIPs: G7028AAB9 and 71642QAB3) which constitute senior, secured obligations of the Company (the "Notes"). The Notes are fully and unconditionally guaranteed by certain of the Company's affiliates (including Petra Diamonds Limited ("Petra"), which directly holds 100% of the issued share capital in the Company, as well as certain of Petra's direct and indirect subsidiaries).
1.2 The Company is proposing a scheme of arrangement under Part 26 of the UK Companies Act 2006.
1.3 In accordance with the procedure and guidance laid down by the High Court of Justice of England and Wales (the "Court") in its Practice Statement issued on 26 June 2020 (the "Practice Statement") the purpose of this Practice Statement Letter is to inform you of:
(a) the objective which the Scheme is designed to achieve;
(b) the Company's intention formally to propose the Scheme to the Scheme Creditors (as defined below);
(c) the Company's intention to apply to the Court to seek an order convening a meeting of the Scheme Creditors for the purpose of considering and, if thought fit, approving the Scheme (the "Scheme Meeting");
(d) the intended composition of the class of Scheme Creditors for the purpose of voting on the Scheme at the Scheme Meeting; and
(e) the reasons why the Company considers the Court has jurisdiction in relation to the Scheme.
1.4 The Company is writing to each addressee in your respective capacity as:
(a) the Trustee appointed under the indenture dated 12 April 2017 relating to the Notes (as amended or supplemented from time to time) (the "Notes Indenture");
(b) a person who is the ultimate beneficial owner of any of the Notes (a "Noteholder");
(c) the Registered Holder, being the registered holder of the global certificates representing the Notes;
(d) the Depositary, being the depositary under the Notes Indenture in respect of the Notes,
(each a "Scheme Creditor" and together the "Scheme Creditors").
1.5 If you have been sent this as a Noteholder and you have assigned, sold or otherwise transferred all or part of your interests in the Notes, or you intend to do so, you are requested to forward a copy of this Practice Statement Letter to the person or persons to whom you intend to or have assigned, sold or otherwise transferred such interests.
1.6 Capitalised terms used but not defined in this Practice Statement Letter shall have the meaning given to them in the Notes Indenture as the context requires.
2. SCHEME CONVENING HEARING
2.1 The Company intends to apply to the Court for permission to convene the Scheme Meeting at a hearing (the "Scheme Convening Hearing") which is expected to take place on 9 December 2020 at a virtual hearing held using Skype for Business.
2.2 The date and time of the Scheme Convening Hearing will be confirmed by announcement on the London Stock Exchange and GEM, Dublin, through the "Clearing Systems" (DTC, Euroclear and Clearstream, Luxembourg) and publication by the Information Agent on its website www.lucid-is.com/petradiamonds (the "Scheme Website"), (which can be accessed by Scheme Creditors) as soon as it has been finally fixed by the Court.
3. OTHER KEY DATES
3.1 The deadline for the Scheme Creditors to accede to the Lock-Up Agreement (as defined below) and, subject to complying with the terms thereof, be entitled to a Lock-Up Fee (also defined below), will be 1 December 2020.
3.2 The deadline for Scheme Creditors to submit a proxy form or Account Holder Letter (defined below) will be 5:00 p.m. (London Time) on 5 January 2020 in order to:
(a) vote in the Scheme Meeting;
(b) give the necessary confirmations, including as to eligibility, in order to directly receive the Scheme Consideration (as defined below) on the date on which the Restructuring (as defined below) is implemented (the "Restructuring Effective Date");
(c) appoint a designated recipient to receive the Scheme Consideration on the Restructuring Effective Date if required; and/or
(d) elect to participate in the New Money (defined below).
3.3 The Scheme Meeting is anticipated to take place on 8 January 2021. The entitlement of each Scheme Creditor to their Scheme Consideration will be calculated at 5:00 p.m. (New York time on 6 January 2021 (the "Record Time"). If the date of the Scheme Meeting changes, the Record Time shall occur at 5:00 p.m. (New York time) on the date that is two business days before the Scheme Meeting.
4. BACKGROUND TO THE SCHEME
4.1 The Company is a wholly-owned subsidiary of Petra. Petra is the ultimate parent company of the Group (as defined below) and is a limited liability company incorporated in Bermuda, whose shares are listed on the London Stock Exchange. Petra and its direct and indirect subsidiaries are referred to in this Practice Statement Letter as the "Group".
4.2 The Group is an independent diamond mining business and a supplier of gem quality rough diamonds to the international market. It has a diversified asset portfolio incorporating assets in four producing mining operations, specifically three underground mines in South Africa (Cullinan, Finsch and Koffiefontein), and one open pit mine in Tanzania (Williamson) (together, the "Mines"). The Mines are held by four separate corporate entities, as follows:
(a) Cullinan, by Cullinan Diamond Mine (Pty) Limited (a limited liability company incorporated in South Africa);
(b) Finsch, by Finsch Diamond Mine (Pty) Limited (a limited liability company incorporated in South Africa);
(c) Koffiefontein, by Blue Diamond Mine (Pty) Limited (a limited liability company incorporated in South Africa); and
(d) Williamson, by Williamson Diamonds Limited (a limited liability company incorporated in Tanzania),
which are collectively referred to in this Practice Statement Letter as the "Mine-Owning Entities". The South African Mine-Owning Entities are held by a single South African- incorporated holding company, Petra Diamonds Holdings SA (Pty) Limited, and the Tanzanian Mine-Owning Entity is held by Willcroft Company Limited, which is incorporated in Bermuda.
4.3 The Company is the issuer of the Notes, which are guaranteed by Petra and certain of Petra's subsidiaries (those entities being, the "Guarantors"). The Guarantors include the Mine-Owning Entities, save for Williamson. Williamson is not a Guarantor and is part owned by Petra (with 25% of its ordinary shares held by the Government of Tanzania).
4.4 The Notes are secured on a second-priority basis to the Group's first lien debt liabilities, which are:
(a) the Group's existing ZAR400 million senior secured revolving credit facility (the "Existing RCF");
(b) the Group's existing ZAR500 million (in aggregate) working capital facilities (the "Existing WCFs") and other general banking facilities made available by the lenders under the Existing WCFs;
(c) the term loan facilities made available by ABSA Bank Limited, Firstrand Bank Limited and Ninety One SA Proprietary Limited to Itumeleng Petra Diamonds Employee Trust and Kago Diamonds (Pty) Limited to facilitate the Group's Black Economic Empowerment arrangements, amounting to ZAR717.2 million as at the time of this letter (the "Existing BEE Facilities"); and
(d) the liabilities owed by the Guarantors to ABSA Bank Limited, Firstrand Bank Limited and Nedbank Limited in connection with the Group's hedging agreements (the "Hedging Facilities"),
(referred to as the "First Lien Facilities", the lenders under each of which being the "First Lien Lenders"). The First Lien Facilities are made available under individual agreements, each of which are subject to a common terms schedule originally dated 11 April 2017 (the "Common Terms Schedule").
Group's Financial Position
4.5 Petra acquired the mining rights in respect of each of the Mines from De Beers between 2007 and 2011. Prior to Petra's ownership, there had been a prolonged period of under- investment in the Mines, with insufficient capital and other resources committed to their long-term continuity. In order to remedy the effects of this under-investment and to extend the lives of the Mines for the benefit of all stakeholders, Petra invested approximately US$1.6 billion between financial years 2006 and 2020. This investment resulted in the Group's annual production growing from approximately 170,000 carats in financial year 2006 to around 3.9 Mcts in financial year 2019, and its annual revenue growing from US$20.9 million in financial year 2006 to US$463.6 million in financial year 2019. However, Petra incurred considerable debt financing to fund this investment during this period. In 2017 the Notes were issued by the Company in order to bolster the Group's balance sheet and to provide the Group with additional financial flexibility.
4.6 In April 2019, Petra commenced "Project 2022" with the aim of driving efficiencies and improvements across all aspects of the business and delivering an initial target of US$150 million to US$200 million free cashflow over a three year period, with delivery weighted towards financial years 2021 and 2022 and a reduction in the net debt position of the Group. The impact of Project 2022 on productivity was positive, with the Group delivering the highest level of run-of-mine production for the first nine months of financial year 2020 prior to the impact of Mine closures and reduced production capability as a result of COVID-19 response measures (further detail on these measures is included at paragraph 4.8 below).
4.7 However, diamond prices have decreased globally over the last few years. The Bloomberg rough diamond price index, which has suspended publication of figures since March 2020 due to the COVID-19 pandemic, has rough diamond prices declining 19 per cent. in the year to 31 March 2020. Diamond prices realised by the Group decreased 18 per cent. in financial year 2020. This has had a significant impact on the Group's revenue and has largely offset the immediate benefits achieved through Project 2022. In light of the low rough diamond prices, coupled with the Group's operating results and cashflow position, Petra sought and obtained waivers from the First Lien Lenders in respect of the Group's EBITDA-related financial covenants under the Common Terms Schedule in respect of the half year ended December 2019 (as measured in March 2019).
4.8 The effects of the COVID-19 pandemic and the global government measures implemented in response to COVID-19 (which have seen restrictions placed on the movement of people and goods) have further impacted the Group's revenue, including as a result of price differentials and lost and deferred sales. The total revenue impact is estimated to be US$97.11 million for the financial year 2020.
4.9 The cumulative effect of these circumstances and events was a material deterioration in the Group's liquidity position, partly as a result of the Group becoming unable to satisfy the conditions to drawing the Existing RCF. In the context of this, on 29 May 2020 Petra and other members of the Group, including the Company, entered into:
(a) an amendment agreement with the First Lien Lenders in respect of the First Lien Facilities (the "First Lien Amendment Agreement"); and
(b) a forbearance agreement with an informal ad hoc committee of Noteholders (which is from time to time comprised of certain of the largest holders of the Notes) (the "Ad Hoc Committee") in respect of the Company's obligations under the Notes Indenture (the "Forbearance Agreement"),
to provide the Group with a short-term solution to its liquidity issues and the ability to engage in discussions with the First Lien Lenders and the Noteholders with respect to solutions which could stabilise the business on a long-term basis, which are described in more detail in the following paragraphs.
First Lien Amendment Agreement
4.10 The First Lien Amendment Agreement facilitated the drawdowns of ZAR400 million and ZAR500 million from the Existing RCF and Existing WCFs respectively (as referred to above in paragraph 4.4) and met the short-term liquidity requirements of the Group. The ZAR400 million drawdown was received by the Group on 23 June 2020, following which the net debt position of the Group was US$658 million. Each of the maturity dates under the First Lien Facilities was also aligned to 31 July 2021.
4.11 It was intended that entry into the First Lien Amendment Agreement and the drawdown of the Existing RCF and the Existing WCFs would be interim measures to provide Petra with a short-term solution to its immediate liquidity constraints. The First Lien Amendment Agreement was entered into on the understanding that it would be followed by a broader financial restructuring of the Group. As such, the First Lien Amendment Agreement requires the Group to progress a long term solution to the Group's financial difficulties through a restructuring of the Group's capital structure, and failure by the Group to achieve certain milestones ("Milestones") in this regard would constitute an event of default under the First Lien Facilities.
4.12 The First Lien Amendment Agreement also provides that neither the Company nor any other member of the Group shall make a payment in respect of the Notes (including the interest payments falling due on 1 May 2020 and 1 November 2020), other than as part of a broader restructuring solution approved by the First Lien Lenders (such as the Restructuring, as defined below). If the Company or another member of the Group were to make a payment under the Notes other than in connection with the Restructuring, or an alternative restructuring arrangement without the prior consent of the First Lien Lenders, this would constitute an event of default under the First Lien Amendment Agreement.
4.13 The Company's failure to pay the interest payment due under the Notes Indenture on 1 May 2020 (the May Interest Payment") triggered a default under the Notes Indenture. Accordingly, Petra sought a forbearance commitment from a majority of the Noteholders in respect of the rights arising under the Notes Indenture as a result of the event of default. On 29 May 2020 the Forbearance Agreement was entered into by the members of the Ad Hoc Committee (as it was then constituted, representing 50.7 per cent. of the outstanding principal amount of the Notes). As at the date of this letter, the forbearing Noteholders bound by the Forbearance Agreement represent, in aggregate, 76.3 per cent. of the outstanding principal amount of the Notes (the "Total Forbearance Amount"). Pursuant to the Forbearance Agreement, the relevant Noteholder parties agreed to forbear from the exercise of certain rights and remedies such parties have under the Notes Indenture in respect of the missed May Interest Payment, including agreeing not to accelerate all present and future monies, debts and liabilities owed or incurred under the Notes (the "Notes Debt").
4.14 As with the First Lien Amendment Agreement, the Forbearance Agreement was agreed with the counterparties on the understanding that a broader financial restructuring of the Group would occur. The initial forbearance period ceased on 31 August 2020. At each month end thereafter, any Noteholder counterparty has the ability to terminate the forbearance obligations (with respect to themselves only) by giving notice to Petra. One Noteholder (whose holdings do not form part of the Total Forbearance Amount) exercised that right to unilaterally terminate the Forbearance Agreement, effective on 31 August 2020. None of the remaining forbearing Noteholders have otherwise notified Petra of their intention to so terminate (on either 31 August 2020, 30 September 2020 or 31 October 2020) and, in accordance with the terms of the Forbearance Agreement, the forbearance obligations presently continue to be in force with respect to all counterparties. The Forbearance Agreement also provides that the forbearance obligations of the Noteholder counterparties shall fall away upon any termination of the First Lien Amendment Agreement. If an event of default were to occur under the First Lien Amendment Agreement, such that the First Lien Lenders would have the right to terminate that agreement, the Forbearance Agreement would similarly and automatically terminate with respect to the Noteholder counterparties.
4.15 Petra has obtained equivalent forbearance undertakings in respect of the further November interest payment due 1 November 2020 from the Noteholder parties which were the initial signatories to the Lock-Up Agreement (defined below), holding together approximately 61.2 per cent. in value of the Notes Debt.
The Proposal of the Restructuring
4.16 The directors of Petra (the "Directors") believe that the Group's current level of debt is unsustainable and that a longer term solution is required to (i) reduce the financial burden on the business (particularly in the current market conditions) and (ii) put the Group in a stronger position to continue operations, to realise and optimise the value of its mining assets and deliver growth for stakeholders. As such, since June 2020 and following entry into the First Lien Amendment Agreement and the Forbearance Agreement, Petra has engaged in confidential discussions with each of the First Lien Lenders and the members of the Ad Hoc Committee with respect to various proposals for the financial restructuring of the Group.
4.17 As a result, the Directors are now proposing a restructuring of certain of the Group's financial indebtedness and a recapitalisation of the Group (the "Restructuring"). The Scheme forms an integral part of the Restructuring, as it will facilitate the compromise of the Notes Debt and the related guarantee obligations of the Guarantors. The Directors recommend that the Scheme Creditors approve the Scheme. If implemented, the Restructuring will result in a material reduction of the aggregate principal amount of indebtedness of the Group, provide additional liquidity and reduce the cash-pay interest obligations of the Group. The Directors believe that it will put in place a stable and sustainable capital structure for the Group and significantly reduce the financial burden on the business, putting the Group in a stronger position to optimise the value of its mining assets, particularly in the current market conditions, and deliver growth for stakeholders.
5. OVERVIEW OF THE RESTRUCTURING
Objectives of the Restructuring and the Scheme
5.1 The primary objectives of the Restructuring, and therefore the Scheme, are to:
(a) achieve extensive deleveraging of the Group to ensure a stable and sustainable Group capital structure, which will result in:
(i) a stronger balance sheet position;
(ii) an appropriate level of annual debt service obligations;
(iii) extended debt maturity date(s); and
(iv) a covenant package consistent with the Group's financial forecasts;
(b) improve the ongoing liquidity position of the Group;
(c) enable the Group to direct its cash resources towards servicing the Group's general corporate and working capital requirements and necessary capital expenditures;
(d) obtain new capital in order to enable the Group to finance its debt capital and ongoing expenses and to help facilitate operational performance at the Mines;
(e) allow the Group to continue to service the market, pay its suppliers and support its employees;
(f) mitigate the risk and avoid the adverse consequences of any form of insolvency filing by any Group entity. Any such insolvency filing would prove value-destructive to the operating businesses within the Group; and
(g) provide the Scheme Creditors that are Noteholders with the opportunity to benefit from any future potential upside for the operating companies.
5.2 In addition to the wider advantages of the Restructuring:
(a) the Scheme will confer on the Company and the Guarantors, among others, the benefit of a release of their liabilities in connection with the Notes Debt, other than to the extent such liabilities are exchanged for liabilities in respect of a new series of notes (as described in paragraph 5.4 below); and
(b) the Scheme will confer certain releases for the benefit of the Company and certain other persons in connection with the Restructuring as agreed and contemplated in the Lock-Up Agreement (as defined below).
Key Features of the Restructuring
5.3 As announced on 20 October 2020, following the completion of an extensive period of engagement and negotiation with stakeholders, Petra agreed in principle the terms of the proposed Restructuring with all of the First Lien Lenders and the members of the Ad Hoc Committee, the latter representing approximately 61.2 per cent. of the Notes Debt as at the date of this letter.
5.4 The key features of the proposed Restructuring with respect to the Scheme Creditors are:
(a) US$30 million in "New Money" will be provided by the New Money Noteholders (as defined below) in cash in exchange for an allocation of additional New Notes (as defined below), with each Noteholder to have a right to subscribe for a portion of the New Money pro rata to their existing holdings of the Notes Debt at the Record Time;
(b) those Noteholders that elect to fund the New Money ("New Money Noteholders") will receive a proportion of US$150 million New Notes (pro rata to the amount of New Money provided) in consideration for the provision of the New Money;
(c) all Noteholders will receive a proportion of US$145 million New Notes (pro rata to their existing holding of Notes Debt) as a partial reinstatement of their holding of existing Notes at the Record Time;
(d) a debt-for-equity swap of the remainder of the Noteholders' Notes Debt that is not reinstated, such equity being new ordinary shares in Petra (the "New Shares"),
(the New Notes received pursuant to the debt reinstatement together with the equity received pursuant to the debt-for-equity swap forming the "Scheme Consideration");
(e) the sanctioning of a Scheme to effect points (a) through (d);
(f) the amendment and reinstatement of the First Lien Facilities (which shall be conditional upon the implementation of the other elements of the Restructuring, insofar as it relates to the Notes, occurring as described in this letter); and
(g) recognition of the Scheme as a foreign main proceeding pursuant to Chapter 15 of Title 11 of the United States Code.
5.5 As the debt-for-equity swap requires the issuance of shares in Petra, the approval, by ordinary resolution, of the holders of shares in Petra (the "Shareholders") (the "Resolution") is required at a special general meeting convened in connection with the Restructuring (the "Special General Meeting"). If the requisite number of Shareholders vote in favour of the Restructuring at the Special General Meeting, the Restructuring will be implemented, which effects the debt-for-equity swap through the assignment of relevant portions of each Noteholder's Notes Debt in exchange for the issuance to that Noteholder of shares in Petra.
5.6 All of the elements of the Restructuring are inter-conditional. The Scheme is conditional on the Scheme Conditions (as defined below) being satisfied or waived (in accordance with the Scheme).
5.7 None of the components of the Restructuring will be completed if the Scheme is not approved by the Scheme Creditors and sanctioned by the Court at the sanction hearing (the "Scheme Sanction Hearing"). Equally, even if the Scheme is approved by the Scheme Creditors and sanctioned by the Court at the Scheme Sanction Hearing, if any of the Scheme Conditions are not approved and/or implemented or waived (in accordance with the Scheme), the Scheme will not be implemented.
5.8 In connection with, and conditional on, the Restructuring, Petra has agreed with the First Lien Lenders to further amend the First Lien Facilities as follows:
(a) The Existing RCF will be increased to ZAR 560 million (the "New RCF") and the Existing WCFs and the Existing BEE Facilities will be combined into a single term loan of ZAR 1,200 million (the "Term Loan").
(b) Each of the New RCF and the Term Loan will mature three years from the Restructuring Effective Date. The Term Loan will amortise in quarterly instalments, the first of which will fall due and payable in June 2021, and the commitments under the New RCF will reduce on a quarterly basis for the term of the facilities.
(c) The other general banking facilities provided by the lenders under the Existing WCFs will be rolled over, each consistent with pre-May 2020 amendment levels and the operational requirements of the Group going forward and on terms customary for these types of facilities.
(d) The Hedging Facilities will continue to be made available on terms customary for these types of facilities in order to provide hedging lines of up to ZAR 300.0 million (in aggregate). The terms of the Group's existing hedging arrangements will be amended to have maturities staggered over the year following the Restructuring Effective Date.
(e) The above described arrangements with the First Lien Lenders (the "New Bank Facilities") will include a new debt service cover ratio covenant (being the ratio of cashflow to the debt service on the New Bank Facilities); the debt service cover ratio must be above 1.3x on each test date until the maturity of the New Bank Facilities (the "Senior DSCR"). A breach of the Senior DSCR will result in an event of default under the New Bank Facilities.
(f) The security arrangements will remain substantially the same, subject to amendments to reflect revised pre-enforcement cashflow and account waterfall and security enhancements (each as described in paragraph 9.2), provided that the First Lien Lenders' guarantees will become senior in right of payment to the Noteholders' guarantee claims (as will be set out in an amended intercreditor agreement).
6. 1.5 LIEN FUNDING
6.1 As mentioned above, the debt-for-equity swap (and therefore the implementation of the Restructuring) is conditional on the Shareholders voting in favour of the Resolution. In the event that the Shareholders vote against the Resolution, the Scheme will provide for the relevant provisions of the Notes Indenture to be amended to permit the Group to raise additional secured debt funding, in the form of bank debt or a new notes issuance, up to an aggregate principal amount of US$45 million, which will rank junior in priority to the First Lien Facilities but senior to the Notes (the "1.5 Lien Funding"). In furtherance of this, the Scheme would also reduce the relevant consent threshold under the Notes Indenture from 90.0% of Noteholders to Noteholders representing a majority in aggregate principal amount of Notes Debt, to allow Noteholders to instruct the Notes Trustee to consent to any changes to the existing Intercreditor Agreement necessary to introduce the 1.5 Lien Funding, on the 1.5 lien basis described above (and subject to a maximum amount of US$45 million).
6.2 The purposes of the 1.5 Lien Funding would be to assist the Group with its liquidity constraints at the time with the intention of increasing the Group's options in a scenario where the Restructuring, as outlined herein, cannot succeed and the Group is required to explore alternative options to deleverage its capital structure and improve its ongoing liquidity position.
6.3 The 1.5 Lien Funding would benefit from the same guarantees and security package as the First Lien Facilities and the Notes. It is anticipated that the 1.5 Lien Funding could be provided by the Noteholders and/or third party lenders.
6.4 Any 1.5 Lien Funding would be on terms determinable by the Group and would be subject to consent from the First Lien Lenders and Noteholders representing a majority in aggregate principal amount of Notes Debt as at the relevant time of raise.
6.5 For clarity, the 1.5 Lien Funding and the Restructuring as otherwise described in section 5, including the financial restructuring of the Notes and the First Lien Facilities, are mutually exclusive; in the event the Shareholders vote in favour of the Resolution, it is not expected that any such interim funding would be required and the amendments required to create the 1.5 Lien Funding will not be made.
7. CONSEQUENCES OF A FAILURE OF THE RESTRUCTURING
7.1 If the Scheme is not approved by the requisite majorities of Scheme Creditors or any of the other inter-conditional requirements or conditions to the Restructuring are not satisfied (or, where possible, waived) to enable the Restructuring to be implemented in accordance with the Implementation Deed (as defined below) and the presently proposed timetable, the Restructuring is not likely to be consummated.
7.2 The Directors believe that, given the considerable effort, time and cost that it has taken for Petra and the Company to agree to the terms of the Restructuring with its key stakeholders, the prospect of such parties agreeing to an alternative transaction which would leave the Group with a viable capital structure before enforcement proceedings were commenced or it became necessary to place Petra and/or one or more of the Group members, including the Company, into an insolvency procedure, is unlikely.
7.3 In particular, the Directors have given consideration to the existing defaults and potential defaults under the Notes Indenture, the prospect of failing to meet the Milestones under the First Lien Amendment Agreement and the consequences for the Group of insolvency proceedings under the Group's material trading arrangements. The Directors believe that, if it becomes apparent that the Restructuring is not capable of being implemented because, for example, the requisite majorities of Scheme Creditors do not vote in favour of the Scheme or the Court determines not to exercise its discretion to approve the Scheme at the Scheme Sanction Hearing, it is likely that shortly thereafter the First Lien Lenders and/or the Noteholders would terminate the present forbearance arrangements. In those circumstances, the Directors consider it is likely that one or more of the First Lien Lenders, the Noteholders or other creditors of the Group would take Enforcement Action against the Group or cause such action to be taken.
7.4 In these circumstances, the Directors would likely conclude that the best course of action for the Group and its stakeholders would be for the Guarantors that hold the Group's significant assets to petition the courts (in the relevant jurisdictions) to commence insolvency procedures to obtain, where possible, the benefit of statutory moratoriums and preserve the Group's going concern position.
7.5 As to this, assuming the necessary funding was available, the South African Mine-Owning Entities (either through Petra Diamonds Holdings SA (Pty) Ltd or directly) would most likely file for "Business Rescue" under Chapter 6 of the South African Companies Act, Act 71 of 2008, to provide for a temporary moratorium on the rights of the First Lien Lenders and the Noteholders against those members of the Group.
7.6 It is the Directors' view that, if the Group continued to trade, it is likely the Business Rescue practitioner then appointed would commence an accelerated marketing and sales process of the business of the Group with a view to effecting a going concern sale (or sales) of its key and operating assets within a short period. Any outcome achieved in a Business Rescue (for example, a sale the result of an accelerated sales process) is required to form the subject of a "Business Rescue Plan" for the purposes of pre-approval by the relevant entity's creditors and eventual approval by the courts in the relevant jurisdictions. With regard to any of the South African Mine-Owning Entities and Petra Diamonds Holdings SA (Pty) Ltd, this would include each of the First Lien Lenders and the Noteholders by virtue of the fact that each of the South African Mine-Owning Entities and Petra Diamonds Holdings SA (Pty) Ltd are Guarantors of the First Lien Facilities and the Notes, who will be required to submit proof of their claims to the satisfaction of the Business Rescue practitioner. A Business Rescue Plan requires the approval of 75% of the creditors of the relevant entity/ies creditors who actually voted (50% of which must be sufficiently independent of the entity/ies (unrelated to the company, a director or the Business Rescue practitioner)). In
the case of the Group, a Business Rescue Plan would also require the successful identification of a willing buyer (or buyers).
7.7 With respect to the South African Mine-Owning Entities, successful completion of any such sale would be subject to the relevant regulatory approvals being sought and obtained. The Directors expect such regulatory approval processes would be likely to take up to nine months to resolve from such date as the officeholders are able to reach binding terms with a prospective buyer. The relevant entity/ies (such as the South-African Mine Owning Entities) would remain under Business Rescue, and the Business Rescue practitioner(s) appointed would remain in control of those entity/ies (with the associated costs continuing to accrue), for the entirety of this period.
7.8 It is important to note that the Group would likely need additional funding in order to be able to conduct the Business Rescue as well as to continue trading during the period of Business Rescue. If funding for a Business Rescue were not to be available, either from the First Lien Lenders, a prospective buyer or otherwise, a Business Rescue would not be possible for the Group.
7.9 In these circumstances, the Group's creditors would likely bring Enforcement Action(s) against the Group members that are obligors and/or Guarantors (being the key asset owning entities in the Group). Liquidation or similar proceedings for Petra, the Mine-Owning Entities, the Company and/or potentially other Group members would commence as a result of applicable filings under the relevant local laws. Fragmented proceedings in various jurisdictions may be required, for example, as a result of the Group's creditors enforcing their security in multiple jurisdictions; and such proceedings would make it very challenging to sell the Group as a going concern. Furthermore, in South Africa, the South African Mine- Owning Entities would lose their mining licences as a result of commencing liquidation proceedings. A liquidation scenario is likely to be highly value-destructive for the Group and result in significant job losses for the Group's employees and contractors.
7.10 The Directors have sought professional advice to assist them in estimating what the likely outcomes would be for the Scheme Creditors in a Business Rescue and/or liquidation scenario in order to provide a comparative counterfactual to the Scheme. With regard to the Business Rescue scenario, the Directors have sought advice covering both a scenario in which the creditors of the South African Mine-Owning Entities vote in favour of a Business Rescue Plan and the Group's business is sold as a going concern, and the scenarios in which:
(i) they vote in favour of a Business Rescue Plan but a sale cannot be implemented; or (ii) they vote against a Business Rescue Plan, and, in each case, the Directors must therefore proceed to a winding up within Business Rescue ("Business Rescue Winding-Up"). A Business Rescue Winding-Up is by its nature more value-destructive than a sale with the approval of creditors, because it would require the South African Mine-Owning Entities to wind down each of their respective mines to be placed into a state of care and maintenance for eventual sale, leaving them unable to generate revenue until a sale is effected. Any potential purchaser will likely need to assist the Group in funding ongoing care and maintenance until that time and in any event, will need to expend additional costs to recommence operations at the mines. However, importantly, the South African Mine- Owning Entities would retain their mining licences (to be contrasted with a liquidation scenario). In a liquidation scenario, all mining rights and licences (which underpin current and future mine values) would likely be lost and Group assets would likely be realised on a broken-up basis.
7.11 The professional advice sought also includes the enterprise value attributable to the Group's interest in Williamson (the Tanzanian Mine-Owning Entity) because, in the scenario in which the Restructuring is not possible, it is likely that the Group would also seek to realise the value of its holding in Williamson through an accelerated sales process.
7.12 With the assistance of such advice, the Directors estimate that the returns to Scheme Creditors as a whole would be less under any of the counterfactual scenarios when
compared to successful implementation of the Scheme and the Restructuring; with Business Rescue Winding-Up likely to result in a nominal return only and a liquidation scenario likely not to return any value to Scheme Creditors at all. It is important to note that, even in a Business Rescue Plan scenario, the Directors expect (on the basis of professional advice) any Group valuation to be significantly discounted when compared to a going concern assessment; especially as the sale will be subject to diamond and wider financial market fluctuations whilst terms are agreed and additionally, will necessarily be accelerated and is therefore likely to be seen as a distressed exit process by third party purchasers.
8. LOCK-UP ARRANGEMENTS
8.1 As noted above, in light of the current market environment, the Group has been closely monitoring and managing its funding position and liquidity risk and has been engaged in discussions with the members of the Ad Hoc Committee and the First Lien Lenders, acknowledging that the Group would need to address its ongoing debt service obligations in respect of the Notes in order to achieve a stable and sustainable Group debt structure, particularly in light of market disruption described more fully in paragraphs 4.7 and 4.8.
8.2 On 17 November 2020, certain members of the Group (including Petra, the Company and the Guarantors) entered into a lock-up agreement with the First Lien Lenders and Noteholders holding approximately 61.2 per cent. in value of the Notes Debt (the "Lock- Up Agreement"), pursuant to which they agreed, among other things and subject to certain conditions:
(a) to take all steps reasonably necessary to support, facilitate, implement, consummate or otherwise give effect to the Restructuring; and
(b) in the case of the participating Scheme Creditors:
(i) to attend the Scheme Meeting in person or by proxy and vote in favour of the Scheme;
(ii) not to terminate or withdraw from the Forbearance Agreement in relation to the May Interest Payment (which is intended to remain in effect); and
(iii) not to take any enforcement action available under the Notes Indenture or in connection with the Notes (including in respect of or arising from any failure by the Company to pay the interest payment due under the Notes Indenture on 1 November 2020), subject to customary limited carve-outs ("Enforcement Action").
8.3 The purpose of the Lock-Up Agreement is to enable the Group to launch the Restructuring (and importantly, the Scheme) with a greater degree of certainty as to its support, particularly in light of the considerable publicity, cost and potential impact on the Group's business operations which is dependent upon the success of the Restructuring. Petra intends to invite all other Noteholders to accede to, or procure the accession to, the same lock-up arrangement with the Group in advance of the Scheme Meeting.
8.4 Noteholders who wish to support the Scheme and who have not entered into the Lock-Up Agreement may instruct their account holders in the Clearing Systems (each an "Account Holder") to provide a voting undertaking which will be set out in the Account Holder Letter (as defined below), pursuant to which they will also agree to, among other things and subject to certain conditions, attend the Scheme Meeting in person or by proxy and cast all of the votes in respect of their Notes in favour of the Scheme.
8.5 Noteholders who enter into the Lock-Up Agreement by the date falling 14 days after the Signing Date (as defined therein), being 1 December 2020 (the "Early Bird Deadline"), and who comply with the terms of the Lock-Up Agreement, will be entitled to receive a "Lock-Up Fee" in accordance with the terms of the Lock-Up Agreement. The Lock-Up Fee will be an amount equal to 1% of the Noteholder's aggregate principal outstanding Notes as at the Early Bird Deadline, and will be settled by allocation of additional New Notes on the date on which the Restructuring becomes effective. The opportunity to obtain a lock- up fee is offered by the Company in order to encourage timely entry into the Lock-Up Agreement and participation in the Restructuring process generally and provide certainty to the Group in relation to its ability to complete the Restructuring. Lock-up fees will be settled on the Restructuring Effective Date to qualifying, participating Noteholders in accordance with the Implementation Deed and the Allocations Spreadsheet and Funds Flow (as defined below).
8.6 For further information on the Lock-Up Agreement, Scheme Creditors can review the Lock- Up Agreement, a copy of which is available on the Scheme Website and through the Information Agent.
9. PROPOSED SCHEME New Notes
9.1 The Scheme will effect the cancellation of the Notes Debt of each Scheme Creditor in exchange for the debt for equity conversion (as per the mechanics described below) and the partial reinstatement of the Notes Debt by virtue of the issue to each Noteholder of New Notes in such proportions as determined in accordance with the following passages. The Scheme will give the Company and the relevant parties the authority to execute the Implementation Deed and other documents required to effect the foregoing, including an amendment and/or restatement of the Notes Indenture (the "Amended Indenture"), under which the New Notes will be issued.
9.2 The key features of the "New Notes", as they differ from the Notes (and as will be documented in the Amended Indenture), are as follows:
(a) Maturity date: Five years from the Restructuring Effective Date, which reflects an extension from the existing maturity date (May 2022);
(b) Interest: Interest will be payable semi-annually in arrear during the term of the New Notes. The New Notes will accrue PIK interest at 10.50% (per annum) for the first 24 months of the term of the New Notes. Thereafter, interest will be cash-pay at 9.75% (per annum), subject to the limitations described in paragraph (g) below;
(c) Non-call protection: The Amended Indenture will contain two-year non-call protection (with a customary make-whole obligation) and a coupon step-down profile thereafter at 104.88%, 102.44%, then par (but excluding any prepayments or redemptions);
(d) Restrictive covenants: The Amended Indenture will contain further restrictive covenants and a tightening of existing covenants relative to the Notes Indenture, including capped baskets of first lien debt and prohibitions on other pari passu or junior unsecured debt being incurred (the latter subject to ordinary course exceptions);
(e) Security: The New Notes will retain substantially the same second ranking security package, including guarantees from the majority of the Group members (being all of the Mine-Owning Entities). The security package will be enhanced to include (without limitation) security in favour of the Noteholders over intra-Group offtake receivables and inventory at all relevant points in the Group's supply chain (unless and until such inventory is sold to a third party). Williamson Diamonds Limited ("WDL") will remain a ring-fenced asset outside of the security package for the New Notes and the First Lien Facilities on principles which are to be agreed between the Company, the First Lien Lenders and the Noteholders in due course;
(f) Pre-enforcement cashflow waterfall: A pre-enforcement cashflow and account waterfall will bind the Group, which covers all cashflows in, out and within the Group (excluding WDL), in order to: (i) achieve transparent and orderly cashflow management in the ordinary course; (ii) ensure that all receipts of the Group are paid into secured accounts and applied in accordance with the agreed waterfall; (iii) record and implement the agreed priority of ordinary course payments as between the Group and its stakeholders; and (iv) minimise leakage outside of the Noteholder security package;
(g) Intercreditor arrangements: The intercreditor arrangements (to be set out in the "Amended Intercreditor Agreement") between, among others, the Trustee and the First Lien Lenders will reflect the second-ranking guarantees and security of the New Notes. The intercreditor arrangements will include a requirement that payment of the cash-pay coupon on the New Notes (applicable after the first 24 months) is subject to the following "Coupon Payment Conditions" being met by the Group:
(i) a debt service cover ratio equal to at least 1.3x;
(ii) the amount outstanding under the new revolving credit facility for the Group must not be more than ZAR400 million (as reduced over time through amortisation) immediately prior to the interest payment and for a period of two (2) weeks thereafter; and
(iii) Petra must be able to evidence that its unrestricted cash balance post payment of the interest payment would be in excess of US$20 million.
If the Coupon Payment Conditions are not met and the Company cannot pay the cash-pay interest payment, it will be in default under the Amended Indenture.
9.3 The Amended Indenture will continue to be governed by New York law and the New Notes will be listed on the same stock exchange as that of the Notes, being the Official List of the Irish Stock Exchange. Final drafts of the Amended Indenture, along with the Amended Intercreditor Agreement and the material security documents will be available for review by Scheme Creditors through the Scheme Website.
9.4 Each Noteholder's proportion of its Notes Debt that will be 'reinstated' as New Notes will be determined by the following factors:
(a) New Money pro rata entitlement: whether, and to the extent to which, the Noteholder has elected to exercise its entitlement to contribute to the New Money;
(b) New Money oversubscription: whether, and to the extent to which, the Noteholder has oversubscribed to the New Money and therefore has elected to provide (on a pro rata basis) any portion of the New Money not otherwise contributed by the initial pro rata entitlement contributions of electing Noteholders under paragraph (a) above;
(c) New Money backstop: whether the Noteholder has been required to subscribe for a further portion of New Notes in respect of the New Money, which shall be in addition to their pro rata entitlement and any oversubscription, by virtue of a commitment to the Company that it will backstop any portion of the New Money not otherwise contributed by electing Noteholders under paragraphs (a) and (b) above (the "New Money Shortfall") (such commitment being documented in a "Backstop Agreement" between the Company and the Ad Hoc Committee);
(d) New Money Noteholder entitlement: whether the Noteholder is entitled to a New Money Noteholder portion of the US$150 million of the New Notes, such portion to be pro rata to the New Money Noteholder's aggregate contribution to the New Money (including its own pro rata entitlement, any oversubscription and any amount of the New Money Shortfall that the New Money Noteholder is required to provide) as a proportion of the total New Money;
(e) Noteholder entitlement: each Noteholder's (including the New Money Noteholders') entitlement to the U$145 million allocation of the New Notes, such allocation to be pro rata to the proportion of the aggregate principal of all Notes that each Noteholder holds at the Record Time; and
(f) Fees: whether the Noteholder is entitled to any fees in connection with the Restructuring, which will be paid by issuing such amount of New Notes as is equal to the fees owed.
9.5 Each Noteholder will be able to indicate its willingness to contribute its pro rata portion of the New Money in its Account Holder Letter.
9.6 The agreed amounts of the New Notes, and the formulae underlying such amounts, are set out in the allocations spreadsheet and funds flow documenting the distribution of the total restructuring consideration to the Scheme Creditors (the "Allocations Spreadsheet and Funds Flow").
9.7 Scheme Creditors should note that the New Notes will be issued in accordance with the terms of the Implementation Deed and subject to applicable securities laws. The New Notes will be held in Euroclear and Clearstream only. The Company encourages Noteholders holding Notes through DTC to transfer their holdings to an account held with Euroclear or Clearstream prior to the Record Time in order to be in a position to receive the New Notes on the Restructuring Effective Date. For the avoidance of doubt, and irrespective of the Clearing System in which the Notes are held, the consideration due to Scheme Creditors in connection with the Scheme will be allocated to or on behalf of all Scheme Creditors rateably in accordance with the terms of the Implementation Deed.
Debt for equity
9.8 For the Scheme Creditors that are Noteholders, the Restructuring will involve the assignment of the portion of each Noteholder's Notes Debt that is not to be reinstated as New Notes to Petra in exchange for the issue of shares in Petra to the Noteholders.
9.9 Shares will be issued to each Noteholder as follows (in aggregate, being 91% of the enlarged share capital of Petra after the Restructuring):
(a) a total of 56% to be issued to Noteholders (including the New Money Noteholders) to be allocated pro rata to the proportion of the aggregate principal of all Notes that the Noteholder holds; and
(b) a total of 35% to be issued to each New Money Noteholder pro rata to the New Money Noteholder's aggregate contribution to the New Money (including its own entitlement, any oversubscription, and any amount of the New Money Shortfall that the New Money Noteholder was required to provide in accordance with its backstop obligation) as a proportion of the total New Money.
9.10 In the case of the 56%, any entitlements which any relevant Noteholder opts out of taking up (directly or indirectly) will be allocated to those Noteholders that do not opt-out of their equity entitlement only and otherwise on the same pro rata basis as described above.
9.11 In the case of the 35%, any entitlements not directly or indirectly taken up will be allocated to those New Money Noteholders that do not opt-out of their equity entitlement only and otherwise on the same pro rata basis as described above.
9.12 Petra's listing on the London Stock Exchange will be retained.
9.13 The debt-for-equity swap requires the Shareholders to vote in favour of the Restructuring at the Special General Meeting, in order for Petra to have the requisite corporate authorities, in accordance with Bermudian corporate law and the Petra Bye-Laws, to carry out the share issuance.
Chapter 15 Recognition
9.14 The Company intends to seek recognition of the Scheme as a foreign main proceeding under Chapter 15 of Title 11 of the United States Code and permanent relief in the United States Bankruptcy Court for the Southern District of New York (or other appropriate forum) enjoining Scheme Creditors from commencing or continuing any action or proceeding against any member of the Group or their successors in interest that are inconsistent with the Scheme in the United States ("Chapter 15 Recognition").
9.15 Chapter 15 Recognition will, among other things, ensure that the effect of the Scheme in relation to the Notes is effective as a matter of New York law and that all of the Scheme Creditors affected by the Scheme are treated consistently (regardless of whether they are located in the United Kingdom or the United States).
9.16 Chapter 15 Recognition is a condition to the implementation of the Restructuring and the Scheme. Based on precedents, the Company believes that Chapter 15 Recognition is likely to be granted by the United States Bankruptcy Court.
10. SCHEME JURISDICTION
10.1 The Directors consider that the Court has jurisdiction to sanction the Scheme on the basis that the Company is a public company limited by shares incorporated under the laws of England and Wales. The Company also has its centre of main interests in England.
10.2 Furthermore, no rule of transnational law, including Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 (the "Judgments Regulation") excludes the Court's jurisdiction. Part II of the Judgments Regulation requires that a person domiciled in a member state of the European Union be "sued" in the courts of that member state, but that general rule is subject to certain exceptions including Article 8 (which, broadly, allows persons to be sued in the courts of a member state in which a number of defendants are domiciled, if it is expedient to do so) and Article 25 (which, broadly, states that where the parties to an agreement have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction). The Company considers that, insofar as the Judgments Regulation applies in relation to the Scheme, the Court would have jurisdiction under:
(a) Article 8, to the extent that one or more Scheme Creditors have their registered office, central administration or principal place of business in England and Wales; and
(b) Article 25, on the basis that Scheme Creditors representing over 61.2 per cent. of the Noteholders in value have already submitted (in respect of disputes related to the Restructuring) to the jurisdiction of the courts of England and Wales by signing the Lock-Up Agreement, which is governed by English law.
10.3 The Notes are governed by New York law. However, the Scheme will be effective as a matter of New York law to vary the obligations represented by the Notes by means of the Chapter 15 Recognition described above. The Company expects to obtain an opinion from an independent expert that Chapter 15 Recognition of the Scheme is likely to be granted.
10.4 The Company also expects to obtain opinions from independent experts that the Scheme is likely to be given effect as a matter of each of Bermuda and South Africa law (being relevant jurisdictions as a result of the location of incorporation of Petra and the South African Mine- Owning Entities, respectively).
11. SCHEME MEETING AND PROPOSED VOTING CLASS Who is a Scheme Creditor
11.1 Under the provisions of Part 26 of the Companies Act 2006, a scheme of arrangement may be made between a Company and its creditors (or any class of creditors). In the present case, the Scheme is proposed between the Company and the Scheme Creditors, principally the Noteholders.
11.2 The Company considers that the Noteholders, being the ultimate beneficial owners of the Notes and persons with a right (in certain circumstances) to request that the Company issue a definitive note in respect of their interests in the Notes, are contingent creditors of the Company and therefore constitute creditors of the Company for the purposes of Part 26 of the Companies Act 2006. Votes cast by the Noteholders will be accounted for both for value and numerosity requirements in relation to the Scheme.
11.3 The Noteholders, as the beneficial owners of the Notes, will be entitled to vote in respect of the Scheme. Pursuant to section 6.9 of the Notes Indenture, the Trustee is not authorized to vote in respect of the claim of any Noteholder in any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Noteholder thereof. The Trustee has confirmed to the Company that it does not intend to exercise any voting rights to which it may be entitled as a Scheme Creditor at the Scheme Meeting. It is also not expected that the Registered Holder or the Depositary will exercise any voting rights to which it may be entitled as a Scheme Creditor at the Scheme Meeting. Accordingly, the Noteholders will be the only Scheme Creditors that will vote at the Scheme Meeting.
Proposed Voting Class
11.4 Under the provisions of Part 26 of the Companies Act 2006, a scheme of arrangement must be agreed by a majority in number (the "numerosity" majority), representing at least 75 per cent. in value (the "value" majority), of each class of scheme creditors present and voting either in person or by proxy, together as a class at the relevant class meeting ordered to be summoned by the Court for the purposes of considering the Scheme. A scheme of arrangement must then be sanctioned by the Court at a subsequent court hearing and a copy of the order delivered to the Registrar of Companies before it can become effective in accordance with its terms.
11.5 For the purposes of voting on the Scheme, if the rights of creditors are so different or would be affected so differently by the Scheme as to make it impossible for them to consult together with a view to their common interest, they must be divided into separate classes and a separate meeting must be held for each class of creditor.
11.6 Under the terms of the Practice Statement, it is the responsibility of the Company to formulate the class or classes of creditors for the purpose of convening properly constituted meetings to consider and, if thought fit, to approve the Scheme.
11.7 The Company has considered the present rights of the Noteholders against the Company and the rights which the Noteholders would have against the Company following implementation of the Scheme.
11.8 The existing rights of the Noteholders against the Company are the same since they are all holders of the same debt instrument issued by the Company and therefore each benefit from exactly the same rights against the Company.
11.9 In relation to the rights conferred by the Scheme, the Noteholders are treated in the same way under the Scheme and the wider Restructuring, as described above. There are no
differences in rights or, alternatively, any difference in rights is not material so as to require the relevant Noteholders to be placed into a separate class. The Company has made particular reference to the following factors and features of the Scheme and the Restructuring in conducting this analysis:
(a) the differing entitlements to the Scheme Consideration depending on whether a Noteholder elects to participate in the New Money or not;
(b) the Lock-Up Agreement and Lock-Up Fee;
(c) certain other fees; and
(d) "Nomination Rights" with respect to the board of directors of Petra.
Impact of the New Money
11.10 As explained above, each Noteholder will have the right to elect whether it wants to participate in the issuance of the New Money on a pro rata basis. Such elections will be made by Noteholders in the Account Holder Letters in respect of their Notes. If one or more Noteholders decides not to participate in the New Money, this will mean that the New Money Noteholders are entitled to a greater portion of the reinstated debt (being the New Notes) and of the equity, than those Noteholders who do not participate in the New Money. In particular, as described in paragraph 5.4, the portion of reinstated New Notes to be allocated to Noteholders electing to provide the New Money is significantly greater than the portion to be allocated to those Noteholders who do not. The Company considers that the allocation differential is an appropriate and proportionate incentive for the provision of the New Money which is commensurate with the additional commercial risk borne by the Noteholders who provide it.
11.11 The Company does not however consider that these features cause the class to be fractured. In particular, the Scheme gives each Noteholder the same rights (pro rata to their existing holdings of the Notes Debt) to elect to participate in the New Money. The Scheme has been structured to ensure as many Noteholders as possible are able to participate in the New Money in practice, by including as features:
(a) a nominated recipient mechanism, which ensures that any Noteholder who cannot itself participate in the New Money directly (for example, due to regulatory or compliance reasons) is still able to realise the benefit of its rights as a Scheme Creditor by allowing any such Noteholder to:
(i) appoint an affiliate to participate on behalf of that Noteholder; or
(ii) sell its participation rights to another institution which is able to participate in the New Money; and
(b) a minimum denomination of the New Notes of $1,000 (compared to the minimum denomination of the existing Notes of $200,000), which reduces the obstacles to participation for Noteholders with smaller holdings of the Notes.
It is then up to each Noteholder to decide whether or not it wishes to exercise that right.
11.12 The Company considers this means that, while it is possible that different Noteholders may eventually have different interests in the Scheme Consideration, each Noteholder has the same rights with respect to the Scheme Consideration. Accordingly, the Company considers, a single class to be appropriate. The Company further considers that this approach is consistent with, and supported by, the approach taken in other cases where schemes have provided for the issue of new money to scheme creditors.
Lock-Up Agreement and Lock-Up Fee
11.13 While the Company has considered the fact that certain Noteholders have entered or may enter into the Lock-Up Agreement while others will not, the Company does not consider that this means all Noteholders cannot consult together with a view to their common interests. The Company notes the following:
(a) on the case law, entry by creditors into a lock-up or voting agreement under which those creditors agree to vote in favour of a proposed scheme will not in and of itself fracture the class for voting purposes;
(b) the Lock-up Agreement also confers a pecuniary benefit on those Noteholders that execute the Lock-Up Agreement by the Early Bird Deadline, being the additional right to receive the Lock-Up Fee on the Restructuring Effective Date (by way of additional entitlement to New Notes as opposed to cash payment);
(c) however, the right to obtain the Lock-Up Fee is equally open to all Noteholders and thus all Noteholders have the same right in connection with the Restructuring, namely, to elect to receive the Lock-Up Fee;
(d) further, and in any event, the Lock-Up Fee is not so material as to fracture the class in light of the amount of the Lock-Up Fee (1% of the relevant principal of outstanding Notes Debt), the fact that the Lock-Up Fee is payable in New Notes not cash, the nature of the Restructuring comprising a comprehensive balance sheet restructuring including a debt-for-equity swap and substantial new money, and the likely alternatives to the Scheme and Restructuring.
11.14 The Scheme Creditors should note that certain Noteholders are each eligible for certain other fees as follows:
(a) "Restricted Period Fee": The Company has agreed to pay each Noteholder that is a member of the Ad Hoc Committee a "Restricted Period Fee" in remuneration for the commercial losses, disadvantages and risks borne by each Noteholder (including the loss of the opportunity to trade in its Notes) while it was restricted for the purposes of the negotiations with the Company and its stakeholders, which the Directors acknowledge was an unusually long time with respect to the Restructuring relative to comparable restructuring processes. During this time, each member of the Ad Hoc Committee effectively provided a commercial service to the Group by devoting substantial time, energy and resources to the review of documents, engagement in numerous discussions with advisers and principals, and negotiation of Noteholders' commercial requirements, in order to agree a Restructuring which could be supported by the Group's stakeholders (beyond the Ad Hoc Committee). For each applicable Noteholder, the Restricted Period Fee will be such amount as is equal to 1% of that Noteholder's Notes Debt (principal only) as at the date of the Lock-Up Agreement and shall be payable by way of additional entitlement to New Notes.
(b) "Backstop Fee": Certain of the Ad Hoc Committee members have entered into the Backstop Agreement with the Company and Petra under which those Noteholders have committed to backstop 100% of the New Money in the event that there is a New Money Shortfall. The Directors have agreed to pay each counterparty to the Backstop Agreement a "Backstop Fee" in remuneration for the benefit to the Group of it having certainty from the outset that 100% of the New Money will be raised in connection with the Restructuring, on terms set out therein. The Directors consider the Backstop Fee to be commensurate with a commercial underwriting fee paid to underwriters in connection with a capital raise. The Backstop Fee for each relevant
New Money Noteholder will be the New Money Noteholder's pro rata proportion of US$1.5 million of New Notes (being 5% of the total New Money) on the basis of the New Money Noteholder's contribution to the New Money Shortfall as a percentage of the total New Money Shortfall. For each applicable Noteholder, the Backstop Fee shall be payable by way of additional entitlement to New Notes and settled on the Restructuring Effective Date.
11.15 The Company does not consider that the Restricted Period Fee is relevant to the class analysis and, in any event, considers that it does not fracture the class because:
(a) the obligation to pay the Restricted Period Fee arises separately from the Scheme and the Lock-Up Agreement, pursuant to separate agreements entered into by the Company (and is not a condition to the Scheme or the Lock-Up Agreement);
(b) the Restricted Period Fee is payable to the relevant Noteholders as remuneration for services and/or benefits provided or to be provided by those Noteholders to the Group;
(c) the Restricted Period Fee is commensurate with work fees which have been paid to creditors in the restructuring market in consideration for taking actions, and providing services, which are similar to those described in paragraph 11.14 above and more specifically, which include agreeing to be restricted from trading for a significant period of time; and
(d) in any event, the Restricted Period Fee is not material in the context of the Scheme and the Restructuring (which involves a comprehensive balance sheet restructuring including the debt-for-equity swap described herein and the provision of the New Money) or the likely alternatives to the Scheme and the Restructuring.
11.16 Further, the Company does not consider that the Backstop Fee is relevant to the class analysis and, in any event, considers that it does not fracture the class because:
(a) the obligation to pay the Backstop Fee arises separately from the Scheme and the Lock-Up Agreement, pursuant to separate agreements entered into by the Company;
(b) the Backstop Fee is payable to the relevant Noteholders as remuneration for the services and/or benefits provided or to be provided by those Noteholders to the Group;
(c) the Backstop Fee for providing the backstop services is commensurate with those charged in the market by persons in the business of providing underwriting services and specifically, with those charged in the context of underwriting new money for businesses undergoing financial restructurings; and
(d) in any event, the Backstop Fee is not material in the context of the Scheme and the Restructuring (which involves a comprehensive balance sheet restructuring including the debt-for-equity swap described herein and the provision of the New Money) or the likely alternatives to the Scheme and the Restructuring.
11.17 The Group (specifically Petra) has also agreed to pay the legal and financial adviser fees of the Ad Hoc Committee. The Group's obligation to pay these fees was agreed and arises separately from, and is not contingent upon the sanction of the Scheme by the Court at the Scheme Sanction Hearing (albeit that certain compensation will be due to the Ad Hoc Committee's financial advisers upon a successful implementation of a comprehensive restructuring of the Group meeting certain criteria). However, the Company has considered this and does not view this arrangement as cause to fracture the class, because:
(a) Petra's obligations to pay such fees are set out in separate agreements entered into several months prior to the date of this letter, arising separately from the Scheme and covering broader attendances than the Scheme and Restructuring, as constituted; and
(b) the fees to be paid by Petra reflect the remuneration for services (legal and financial advisory) that have been provided.
11.18 The Directors have agreed to the following terms with the Ad Hoc Committee in connection with the Governance arrangements of the Group in the event of a successful Restructuring.
11.19 Individual Noteholder(s) projected, as at the Early Bird Deadline, to hold at least 5% of the enlarged share capital of Petra at the Restructuring Effective Date ("Qualifying Noteholders") will be entitled to nominate an individual to be appointed as a non- independent, non-executive director of Petra and to nominate one observer to be appointed to the Petra board (collectively, a "Nomination Right"), it being acknowledged that Petra shall comply with the UK Listing Rules and the UK Corporate Governance Code on the appointment of additional independent non-executive directors as applicable.
11.20 Nomination Rights will be allocated to the four largest Qualifying Noteholders, provided that:
(a) if any such Qualifying Noteholder elects not to exercise its Nomination Right, such Nomination Right may be exercised by the fifth largest Qualifying Noteholder, failing which by the next largest Qualifying Noteholder, and so on until each Qualifying Noteholder has had the opportunity to exercise such Nomination Right, and failing which each Qualifying Noteholder (in descending order from largest to smallest) shall be entitled to exercise the relevant Nomination Right following the same sequence as set out in this paragraph (save only that no one Qualifying Noteholder shall be entitled to more than two Nomination Rights); and
(b) a Nomination Right will be forfeited if any such Qualifying Noteholder does not hold 5% of the enlarged share capital of Petra at or following the Restructuring Effective Date.
11.21 For the avoidance of doubt, where a Qualifying Noteholder forfeits a Nomination Right on the basis that they do not hold 5% of the enlarged share capital of Petra at or following the Restructuring Effective Date, this shall not result in any other Noteholder who was not allocated a Nomination Right becoming entitled to one.
11.22 The Company has considered whether the Nomination Rights ought to have an impact on the class composition of the Scheme Creditors for voting at the Scheme Meeting. However, the Company does not consider the Nomination Rights to give rise to any difference in rights given that the rights apply to any Noteholders who hold the relevant amount of Notes and/or who elect to participate in the New Money (and for these purposes any Noteholder could choose to acquire additional Notes in the market, provided that such acquisitions are made in accordance with the terms of the Lock-Up Agreement). In any event the Nomination Rights are not material so as to fracture the class in light of, inter alia, the limited governance rights conferred by such rights, and also by reason of the fact that any directors appointed to the board would have a fiduciary duty to act in the best interests of the Company's stakeholders as a whole (and not merely to further the interests of the person(s) by whom they were appointed).
12. CONDITIONS TO THE IMPLEMENTATION OF THE SCHEME
12.1 As noted above, all of the elements of the Restructuring are inter-conditional. Therefore, even if Scheme Creditors approve the Scheme and the Scheme is sanctioned by the Court,
the terms of the Scheme will only be implemented if and when each of the other elements of the Restructuring are satisfied, specifically the following (the "Scheme Conditions"):
(a) the order of the Court sanctioning the Scheme is made and filed with the Registrar of Companies at Companies House;
(b) the resolution of Petra's shareholders required to be passed in relation to the issuance to each Noteholder of its equity entitlements (as described herein) under the Bermudian Companies Act, applicable Bermuda law and/or the Listing Rules of the UK Financial Conduct Authority being passed by the majority of Petra's shareholders;
(c) all relevant regulatory approvals required for the Restructuring being obtained (or otherwise waived);
(d) all shares in Petra to be issued to Noteholders as part of the debt-for-equity transaction being allotted, conditional only on admission of such shares to the premium listing segment of the Official List and to trading on the London Stock Exchange's main market for listed securities ("Admission") and all necessary filings and ancillary steps being taken in relation thereto;
(e) the occurrence of Admission;
(f) the United States Bankruptcy Court granting the U.S. Chapter 15 Order, or, if an appeal has been filed, such order not being stayed;
(g) confirmation being received from HM Revenue & Customs that the order of the Court sanctioning the Scheme will not be subject to a stamp duty charge; and
(h) all outstanding fees and expenses of the advisers to the Ad Hoc Committee being paid to them by Petra,
noting that conditions (b) to (g) above may be waived in accordance with the Scheme.
13. SCHEME CREDITOR ISSUES
13.1 As noted above, the Scheme Convening Hearing is expected to take place on or after 9 December 2020, at which the Company will draw any issue raised by Scheme Creditors to the Court's attention. Scheme Creditors have the right to attend the Scheme Convening Hearing in person or through counsel and make representations at the Scheme Convening Hearing, the date of which, as stated above, will be notified to the Scheme Creditors by the Information Agent once it has been finally fixed by the Court.
13.2 This Practice Statement Letter is intended to provide Scheme Creditors with sufficient notice of, and information regarding the Scheme and the Restructuring insofar as it relates to the Notes, so that, should they wish to raise any issues that relate to the jurisdiction of the Court to sanction the Scheme, or argue that the proposals outlined above for convening the Scheme Meeting are inappropriate, or to raise any other issue in relation to the constitution of the Scheme Meeting or which might otherwise affect the conduct of such Scheme Meetings, they may attend and be represented before the Court at the Scheme Convening Hearing. If any Scheme Creditors wish to raise any such issues, they should do so prior to or at the Scheme Convening Hearing.
13.3 The Scheme Creditors should be aware that the English courts have indicated that issues which may arise as to the constitution of meetings of creditors or which otherwise affect the conduct of those meetings or which affect the jurisdiction of the Court to sanction a scheme of arrangement (the "Scheme Issues") should be raised at the Scheme Convening Hearing, as the first court hearing seeking leave to convene the Scheme Meeting. By virtue of this Practice Statement Letter, Scheme Creditors are afforded an opportunity to raise any such issues. If they do not do so, while they will still be able to appear and raise objections at the Scheme Sanction Hearing, the Court may expect any Scheme Creditor doing so at the Scheme Sanction Hearing to show good reason why any Scheme Issues (or jurisdictional matters in respect of the proposals for convening of the Scheme Meeting) were not raised at an earlier stage of the Court process.
13.4 If the Court orders the Scheme Meeting to be convened at the Scheme Convening Hearing, the Scheme Creditors will have the opportunity to raise objections at the Scheme Sanction Hearing, at which the Court will decide whether to exercise its discretion to sanction the Scheme (assuming that the Scheme is approved at the Scheme Meetings by the requisite majorities). In this case, the Scheme Sanction Hearing is anticipated to be held on 12 January 2021.
14. CONTACT DETAILS AND FURTHER INFORMATION
14.1 Following the Scheme Convening Hearing, provided the Court gives permission to convene the Scheme Meeting of Scheme Creditors to vote on the Scheme, the Company will notify you in accordance with the direction of the Court, of the time, date and venue of the Scheme Meeting, set out how you may vote at that meeting and provide further detail of the terms of the proposed Scheme.
14.2 In particular, you should expect to receive the following documents:
(a) a notice convening the Scheme Meeting;
(b) an explanatory statement relating to the Scheme;
(c) the Scheme, which will be included in the explanatory statement; and
(d) an account holder letter (an "Account Holder Letter") containing, among other things, the forms and documents that you need to complete in order to vote at or to appoint a proxy to attend the Scheme Meeting and in order to receive the various components of the Scheme Consideration; and
(e) any documentation which may accompany the foregoing. (together, the "Scheme Documents").
14.3 The Information Agent has set up the Scheme Website at www.lucid-is.com/petradiamonds to disseminate information about the Scheme and to facilitate the implementation of the Scheme. Noteholders will be able to view and download Scheme Documents and other information and documents (including this Practice Statement Letter) relating to the Scheme from the website.
14.4 As explained above, the Scheme is an integral part of the Restructuring, which the Directors believe is fundamental for the continued operation of the Group's business and the avoidance of the need to place some or all of the Group's companies into some form of insolvency proceedings in the near future. For this reason, all Noteholders are encouraged to support the Scheme.
14.5 If you have any questions in relation to this letter or the Scheme, please contact the Information Agent:
Lucid Issuer Services Limited
12 Argyle Walk
London WC1H 8HA
Telephone: +44 20 7704 0880
Facsimile: +44 20 3004 2590
Attention: David Shilson
Scheme Website: www.lucid-is.com/petradiamonds
PETRA DIAMONDS US$ TREASURY PLC