ARCM, run by former Perry Capital manager Alp Ercil, specializes in credit and energy. Indeed, it is Premier’s biggest creditor. The chunky short position is ostensibly a hedge against potential losses on about $400 million of the driller’s debt.
The relationship turned hostile in January after Premier agreed to buy a collection of mature North Sea assets, including a $625 million deal with oil major BP Plc. The agreement would have seen Premier take on substantial decommissioning obligations when the fields became uneconomic — liabilities that would take precedence over repaying debts if the company got into financial difficulty. Premier was also asking bondholders such as ARCM to agree to their debt being repaid later than the existing maturity date.
Most of Premier’s lenders were supportive. But Ercil threatened court action to prevent the deal and have his fund’s debts settled on time. And ARCM’s opposition contained an awkward twist: its jumbo short position, which had been built up between 2017 and July 2019 and which was erroneously kept undisclosed until December. The bet against Premier’s equity may have been a hedge, but it started to look like an incentive to kill the BP transaction after Premier’s share price rallied on news of the deal.
Friday brought a resolution. The impact of the pandemic on the oil industry has clearly focused minds. BP will now retain much of the decommissioning costs; the deal proceeds will partly depend on a recovery in the oil price. ARCM will subscribe for 22 million pounds ($28 million) of new shares, 10% of the current share count, to help fund the asset purchases. In reality, that does more to help ARCM close its short than pay for the deal. This concession must feel extremely galling for Premier’s boss, Tony Durrant.
The company’s share price averaged about 80 pence over the 28 months ARCM was borrowing the stock and selling it. It is now offering ARCM the chance to return that borrowed stock by buying it at 27 pence, a 16% discount to Thursday’s closing price. The shares have reached 50 pence, jumping on relief at the end of hostilities and the expectation that ARCM may close the rest of its short position.
The denouement can be seen as a triumph of pragmatism, but neither ARCM nor Premier come out of this brilliantly. ARCM’s counterbalancing debt and equity positions didn’t help its case campaigning against a transaction that shareholders had cheered. Premier clearly miscalculated how its lead creditor would react to the deal. While it has ended up with a better transaction, it has suffered a bloody nose in the process.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.