Hercules Offshore Files For Chapter 11 Bankruptcy Protection | June 6, 2016

Hercules Offshore and certain of its affiliates filed for protection under Chapter11 of the United States Bankruptcy Code on June 6, 2016 in the United States Bankruptcy Court for the District of Delaware under Case No. 16-11385.

The Debtors in these chapter 11 cases, along with the last four digits of each Debtor’s federal tax identification number, are: Cliffs Drilling Company (8934); Cliffs Drilling Trinidad L.L.C. (5205); FDT LLC (7581); FDT Holdings LLC (4277); Hercules Drilling Company, LLC (2771); Hercules Offshore, Inc. (2838); Hercules Offshore Services LLC (1670); Hercules Offshore Liftboat Company LLC (5303); HERO Holdings, Inc. (5475); SD Drilling LLC (8190); THE Offshore Drilling Company (4465); THE Onshore Drilling Company (1072); TODCO Americas Inc. (0289); and TODCO International Inc. (0326). The Debtors’ corporate headquarters are located at, and the mailing address for each Debtor is, 9 Greenway Plaza, Suite 2200, Houston, TX 77046.

Troy L. Carson is the Senior Vice President and Chief Financial Officer of Hercules Offshore, Inc. (“HERO”) since 2007 and discusses the filing:

INTRODUCTION

“The Debtors and their Non-Debtor Subsidiaries (collectively, “Hercules”) are providers of shallow-water drilling and marine services to the oil and natural gas exploration and production industry globally. Hercules operates a fleet of twenty-five self-elevating, mobile offshore drilling units, or “jackup rigs” (seventeen marketed, eight cold stacked), and nineteen self-elevating, self-propelled “liftboat” vessels (eighteen marketed, one cold stacked). This diverse fleet is capable of providing services such as oil and gas exploration and development drilling, well service, platform inspection, maintenance and decommissioning operations. HERO was formed in 2004 and has evolved from a small U.S. Gulf of Mexico offshore drilling operator to an expansive, worldwide enterprise operating through its direct and indirect subsidiaries in several key shallow-water provinces around the world.”

“On August 13, 2015, certain of the Debtors commenced voluntary prepackaged chapter 11 cases in order to address their overleveraged capital structure (consisting of more than $1.2 billion of debt) and other challenges largely caused by the then ongoing decline in the price of crude oil that was affecting many companies in the offshore drilling market. The Debtors emerged from that chapter 11 process on November 6, 2015. While the Debtors were successful through their prior restructuring in chapter 11 in addressing their capital structure issues, the challenges facing the Debtors’ business and the offshore drilling market have continued as demand for jackup rigs remains weak, while, at the same time, the market remains scheduled to deliver a significant number of new build rigs in the next several years, which (with the exception of the Hercules Triumph and the Hercules Resilience) are expected to be better suited to meet industry needs than Hercules’ fleet. As the offshore drilling market continued to face substantial challenges, in early 2016, the Debtors determined to form a special committee (the “Special Committee”) consisting of the independent members of their board of directors (the “Board”) to investigate strategic alternatives to maximize the value of the Debtors and their assets. To that end, the Special Committee initiated a Marketing Process (as defined below) pursuant to which Hercules sought bids for the acquisition of Hercules as an enterprise, including the Hercules Highlander and a related drilling contract, or of Hercules’ individual assets. After the Special Committee determined that (a) the bids received in connection with the Marketing Process would not result in a transaction that could be consummated or would provide an acceptable recovery to junior creditors and holders of HERO Common Stock and (b) continuing Hercules business operations status quo would be both challenging and detrimental to stakeholders, the Debtors and an ad hoc group (the “Ad Hoc Group”) of certain First Lien Lenders (as defined below) entered into negotiations regarding a potential transaction that would allow the Debtors to monetize their assets in a controlled manner through an orderly disposition of the Debtors’ remaining assets in an effort to maximize the value of the Debtors’ assets and provide an opportunity for a recovery to as many of the Debtors’ stakeholders as possible, including holders of HERO Common Stock.”

“On May 26, 2016, after many weeks of intensive negotiations, the Debtors and First Lien Lenders holding more than 99.75% of the First Lien Claims (collectively, the “Consenting First lien Lenders” is attached hereto as Exhibit A) entered into a restructuring support agreement (as may be amended from time to time, the “Restructuring Support Agreement”). The Restructuring Support Agreement sets forth, subject to certain conditions, the commitment to and obligations of, on the one hand, the Debtors, and on the other hand, the Consenting First Lien Lenders in connection with a wind down of the Debtors business and operations, which is to be implemented through the Plan. The Plan contemplates that, upon consummation, all of the Debtors’ assets (including their equity interests in the Non-Debtor Subsidiaries) will be transferred to the Wind Down Entity, which will be responsible for, among other things, the monetization of the Debtors’ assets and winding down the Debtors’ and the Non-Debtor Subsidiaries’ businesses and operations in a controlled, efficient and value-maximizing manner.”

“The Plan has very strong support from the Debtors’ First Lien Lenders, as nearly all of the holders of First Lien Claims, representing more than 99.75% of the amount outstanding on the First Lien Claims, voted to accept the Plan.5 Upon information and belief, the Consenting First Lien Lenders also own more than 27% of the HERO Common Stock. The solicitation of votes to accept or reject the Plan from holders of Class 7 HERO Common Stock is continuing after the Petition Date and will conclude on June 28, 2016. The Debtors believe that the Plan and the transactions contemplated there under will enable the Debtors to monetize their assets in a manner that will result in maximum recoveries for all of the Debtors’ stakeholders and wind down their operations in an orderly fashion.”

CORPORATE HISTORY AND STRUCTURE

“HERO was formed in 2004. HERO is the ultimate parent of forty-one direct and indirect subsidiaries, of which fourteen domestic entities are Debtors in the chapter 11 cases. The remaining twenty-seven direct and indirect subsidiaries are Non-Debtor Subsidiaries and are foreign entities, with the exception of HLC and HOIL, each of which are incorporated in Delaware. Pursuant to the Amended and Restated Forbearance Agreement (as defined below), certain of the First Lien Lenders and, at the direction thereof, the First Lien Agent, have agreed to forbear from exercising certain of their respective default-related rights and remedies against HLC and HOIL, as well as the other Non-Debtor Subsidiaries during the pendency of the chapter 11 cases (subject to certain terms and conditions).”

“The chart attached hereto as Exhibit B illustrates Hercules’ corporate structure as of the Petition Date.”

Corporate Structure Chart

Hercules Offshore, Inc. – Subsidiaries as of 20 April 2016

OVERVIEW OF THE BUSINESS OPERATIONS

“Hercules is a provider of shallow-water drilling and marine services to the oil and natural gas exploration and production industry globally. Hercules provides such services to national oil and gas companies, major integrated energy companies and independent oil and natural gas operators. Through its diverse fleet of jackup rigs and liftboats, its services range from oil and gas exploration, well service, platform inspection, maintenance and decommissioning operations.”

Jackup Rig and Liftboat Fleet and Other Assets

“Hercules’ property consists primarily of jackup rigs, liftboats and ancillary equipment, substantially all of which it owns through various subsidiaries domestically and internationally. Hercules’ owns twenty-five self-elevating mobile drilling units, or “jackup rigs.” The jackup rigs are used primarily for exploration and development drilling in shallow waters, including (a) seventeen rigs in the Gulf of Mexico (nine contracted, eight cold stacked), (b) three rigs contracted offshore in Saudi Arabia, (c) one rig contracted offshore in Congo, (d) two rigs in Gabon (one ready stacked and one warm stacked), (e) one rig ready stacked in the Netherlands and (f) one rig warm stacked in Malaysia.”

“In addition, Hercules owns and operates nineteen liftboat vessels. Liftboats have large open deck space, which provides a versatile, mobile and stable platform to support a broad range of offshore maintenance and construction services throughout the life of an oil or natural gas well. Hercules’ liftboats include (a) fifteen liftboats operating or available for contracts in West Africa, (b) one liftboat cold stacked in West Africa and (c) three liftboats operating or available for contracts in the Middle East region.”

“Hercules maintains offices, maintenance facilities, yard facilities, warehouses and waterfront docks as well as residential premises in various countries, including the United States, United Kingdom, Nigeria, Singapore, Saudi Arabia, United Arab Emirates, Malaysia, Congo, and Bahrain. All of these properties are leased except for an office and a warehouse in the United Kingdom. Hercules’ leased principal executive offices are located in Houston, Texas.”

Industry Operating Environment and Competition

“The shallow-water offshore markets in which Hercules operates are highly competitive. Contracts are typically awarded on a competitive bid basis. Pricing is often the primary factor in determining which qualified contractor is awarded a job, although technical capability of service and equipment, unit availability, unit location, safety record and crew quality may also be considered. Certain competitors in the shallow-water business may have greater financial and other resources than Hercules presently has. As a result, these competitors may have a better ability to withstand periods of low utilization, compete more effectively on the basis of price, build new rigs, acquire existing rigs, and make technological improvements to existing equipment or replace equipment that becomes obsolete.”

“Competition for offshore rigs is usually on a global basis, as drilling rigs are mobile and may be moved, at a cost that is sometimes substantial, from one region to another in response to demand. A number of Hercules’ jackup rigs, however, are mat-supported, which render them less capable than independent leg jackup rigs of managing variable sea floor conditions found in many areas outside of the Gulf of Mexico. As a result, Hercules’ ability to move their mat-supported jackup rigs to certain regions in response to changes in market conditions is limited. Additionally, a number of competitors have independent leg jackup rigs with generally higher specifications and capabilities than most of the independent leg rigs that Hercules currently operates. Particularly during market downturns when there is decreased rig demand, higher specification rigs may be more likely to obtain contracts than lower specification rigs.”

“In the face of these market conditions, Hercules as a whole has continually sought out opportunities to improve its operations and financial performance. In this regard, it has looked to sell or scrap underperforming or unutilized assets to convert them to cash or just to reduce the substantial expense associated with owning these assets. In 2015, Hercules sold six unutilized rigs for aggregate proceeds of $4.5 million.”

Customers and Existing Contractual Arrangements

“Hercules individually negotiates its contracts to provide services, and the contracts vary in their terms and provisions. Currently, all of Hercules’ drilling contracts are on a dayrate basis. Dayrate drilling contracts typically provide for higher rates while the unit is operating and lower rates or a lump sum payment for periods of mobilization or when operations are interrupted or restricted by equipment breakdowns, adverse weather conditions or other factors. A dayrate drilling contract generally extends over a period of time covering the drilling of a single well or group of wells or covering a stated term. Traditionally, most contracts in the U.S. Gulf of Mexico have been on a short-term basis of less than six months. Contracts in international locations have historically been longer-term, with contract terms of up to five years. Customers may have the right to terminate, or may seek to renegotiate, existing contracts if Hercules experiences downtime or operational problems above a contractual limit, if the rig is a total loss, or in other specified circumstances, which could result in penalties to Hercules. A customer is more likely to seek to cancel or renegotiate its contract during periods of depressed market conditions.”

“A liftboat contract generally is based on a flat dayrate for the vessel and crew. Liftboat dayrates are determined by prevailing market rates, vessel availability and historical rates paid by the specific customer. Under most of its liftboat contracts, Hercules receives a variable rate for reimbursement of costs such as catering, fuel, rental equipment and other items. Liftboat contracts generally are for shorter terms than are drilling contracts.”

“Hercules calculates its contract revenue backlog, or future contracted revenue, as the contract dayrate multiplied by the number of days remaining on the contract assuming full utilization, less any penalties or reductions in dayrate for late delivery or non-compliance with contractual obligations. Backlog excludes revenue for management agreements, mobilization, demobilization, contract preparation and customer reimbursables. The amount of actual revenue earned and the actual periods during which revenue is earned will be different than the expected backlog due to various factors. Downtime due to various operational factors, including unscheduled repairs, maintenance, operational delays, health, safety and environmental incidents, weather events and other factors (some of which are beyond Hercules’ control), may result in lower dayrates than the full contractual rate. In some of the contracts, the customer has the right to terminate the contract without penalty and, in certain instances, with little or no notice.”

“Hercules’ backlog at April 28, 2016, totaled approximately $824.2 million for its executed contracts. This amount included approximately $410.9 million related to the Maersk contract for the Hercules Highlander, which was transferred to Maersk UK prior to the Petition Date (as discussed below), and assumes that the dayrates for two of the Non-Debtor Subsidiaries’ Saudi rigs revert back to their originally contracted rates effective January 1, 2017.”

“The following are some of the Hercules’ larger customer contracts:

• Saudi Aramco: Hercules has three rigs, Hercules 261, Hercules 262 and Hercules 266, under contract with Saudi Aramco. Hercules 261 and Hercules 262 are operating under five-year contracts, each of which is scheduled to terminate in the Fall of 2019. The contract term for the Hercules 266 was originally scheduled to expire between September 30, 2015 and April 8, 2016, at the discretion of Saudi Aramco. The originally contracted dayrate for the Hercules 261, Hercules 262 and Hercules 266 was approximately $136,000, $118,000 and $125,000, respectively. As discussed in further detail below, the dayrates under the contracts for the Hercules 261 and Hercules 262 have been reduced to $63,650 per day until December 31, The dayrate for the Hercules 266 was also reduced to $63,650 per day effective January 1, 2016. On April 6, 2016, Hercules received a notice from Saudi Aramco extending the contract for the Hercules 266 to June 30, 2016. The dayrate for the Hercules 266 will remain at $63,650 per day through the term of the contract extension. If the Hercules 261 and the Hercules 262 rigs remain at their currently reduced dayrates beyond December 31, 2016 and through the duration of their contract period, Hercules’ backlog revenue at April 28, 2016 would be reduced by approximately $129.8 million. The Saudi Aramco agreements can be terminated by Saudi Aramco upon 30-days’ notice with no penalty or early termination payment.
• Eni Agreement: In March 2015, Hercules signed a five-year contract with a subsidiary of Eni S.p.A. for use of the Hercules 260 in West Africa. The dayrate under the contract will range from a minimum of $75,000 per day when the price of Brent crude oil is $86 or less per barrel, to a maximum of $125,000 per day when the price of Brent crude oil is $125 or more per barrel. This contract commenced in early April 2015. The price of Brent crude oil is currently $49.10 per barrel.
• Perisai Agreement: In November 2013, Hercules entered into an agreement with Perisai Drilling Sdn Bhd (“Perisai”), whereby Hercules agreed to market, manage and operate two Pacific Class 400 design new-build jackup drilling rigs, Perisai Pacific 101 and Perisai Pacific 102 (“Perisai Agreement”). Pursuant to the terms of the Perisai Agreement, Hercules is reimbursed for all operating expenses and Perisai pays for all capital expenditures. Hercules receives a daily management fee for each rig and a daily operational fee equal to 12% of the rig based EBITDA, as defined in the Perisai Agreement. In August 2014, Perisai Pacific 101 commenced work on a three-year drilling contract in Malaysia. Perisai Pacific 102 was scheduled to be delivered by the shipyard by mid-2015, but delivery has not yet occurred. It is Hercules’ understanding that Perisai is in discussions with the shipyard to further delay delivery of the rig. Specific to the Perisai Agreement, Hercules recognized revenue and operating expenses of $2.4 million and $1.6 million, respectively, for the three months ended March 31, 2016, and $4.2 million and $2.6 million, respectively, for the three months ended March 31, 2015. These results are included in Hercules’ International Offshore segment.”

Employees

“As of the Petition Date, Hercules had in the aggregate approximately 890 employees. The Debtors employ approximately 459 employees, and Non-Debtor Subsidiaries employ approximately 431 employees. Hercules requires skilled personnel to operate and provide technical services and support for its rigs and liftboats. As a result, Hercules conducts extensive personnel training and safety programs. In the course of the last year, Hercules reduced its total number of employees as a result of prevailing economic conditions.”

“As of the Petition Date, none of the Debtors are parties to any collective bargaining agreements. Efforts have been made from time to time to unionize portions of the Company’s offshore workforce in the U.S. Gulf of Mexico. Employees of certain Non-Debtor Subsidiaries in West Africa are working under collective bargaining agreements.”

PREPETITION CAPITAL STRUCTURE

The First Lien Credit Agreement

“HERO is the borrower under that certain Credit Agreement (the “First Lien Credit Agreement”), dated as of November 6, 2015, among HERO, as borrower, the subsidiaries of HERO party thereto, as guarantors (the “First Lien Guarantors” and collectively with HERO, the “First Lien Obligors”), Jefferies Finance LLC, as administrative agent and collateral agent (the “First Lien Agent”), and the lenders from time to time party thereto (the “First Lien Lenders”). The First Lien Credit Agreement provides for a $450 million senior secured credit facility consisting entirely of term loans (the “First Lien Facility”). The First Lien Facility was issued with 3.0% original issue discount, and $200 million of the proceeds of the First Lien Facility (the “Escrowed Amount”) were placed into an escrow account (the “Escrow Account”). At the time the Escrowed Amount was placed into the Escrow Account, the Escrowed Amount was intended to be used to pay the remaining installment payment on the Hercules Highlander and the expenses, costs and charges related to the construction and purchase of the Hercules Highlander and, in the absence thereof, to repay the term loans under the First Lien Facility. The remaining proceeds of the First Lien Facility were used to consummate the 2015 Plan (as defined below) and were available to the Debtors for working capital and general corporate purposes. The First Lien Facility has a scheduled maturity date of May 6, 2020.”

“The First Lien Facility bears interest, at Hercules’ option, at either (i) the alternate base rate (the highest of the prime rate, the federal funds rate plus 0.5%, the one-month LIBOR rate plus 1.0%, and 2.0%), plus an applicable margin of 8.50%, or (ii) the LIBOR rate plus an applicable margin of 9.50% per annum. The LIBOR rate includes a floor of 1.0%. In connection with entering into the First Lien Credit Agreement, the Debtors paid to the original commitment parties a put option premium in the total aggregate amount of $9.0 million. This amount represented 2.0% of each such commitment party’s commitment (one half of such fee was paid upon execution of the commitment letter, and the remaining half of such fee was paid on the closing date under the First Lien Credit Agreement). In addition, the Debtors paid certain administrative and other fees to the First Lien Agent of $1.2 million.”

“HERO’s obligations under the First Lien Credit Agreement (the “First Lien Obligations”) are guaranteed by the First Lien Guarantors, which include all of the other Debtors and certain of the Non-Debtor Subsidiaries. The First Lien Obligations are secured on a first priority basis by liens on substantially all of the First Lien Obligors’ respective assets, including their current and future vessels (including, in the event it would have been delivered to Hercules North Sea, the Hercules Highlander), bank accounts, accounts receivable, and equity interests in subsidiaries.”

“Under the terms of the First Lien Credit Agreement, HERO is required to pay an additional premium in the event that the First Lien Facility is prepaid pursuant to section 2.10(a)(i) of the First Lien Credit Agreement or the First Lien Obligations are accelerated, which premium is comprised of all interest that would accrue until November 6, 2018, plus a 3% premium, discounted to present value (“Applicable Premium”). As of May 26, 2016, HERO estimated that the Applicable Premium to be approximately $129 million.”

“As discussed in further detail below, as a result of an alleged Event of Default and an alleged Default (each as defined in the First Lien Credit Agreement), on April 18, 2016, HERO and the First Lien Guarantors entered into the Original Forbearance Agreement (as defined below) with respect to the First Lien Credit Agreement, and on April 28, 2016, HERO and the First Lien Guarantors entered into the Amendment (as defined below) to the Original Forbearance Agreement. On May 26, 2016, HERO and the First Lien Guarantors entered into the Amended and Restated Forbearance Agreement in connection with the transfer of the Hercules Highlander to Maersk Highlander UK Limited (“Maersk UK”) and the Events of Default resulting therefrom. Pursuant to the terms of the Amended and Restated Forbearance Agreement, as a result of those Events of Default, the First Lien Obligations were accelerated and, thereafter, the Escrowed Amount was released from the Escrow Account to the First Lien Agent in partial satisfaction of the First Lien Obligations.”

HERO Common Stock

“As of the Petition Date, 19,988,898 shares of HERO Common Stock were issued and outstanding.”

EVENTS LEADING TO THE CHAPTER 11 CASES

Mobile Drilling Rig and Liftboat Market

“Demand for the Debtors’ oilfield services is driven by its exploration and production customers’ capital spending, which can experience significant fluctuation depending on current commodity prices and expectations of future price levels, among other factors. The decline in the price of crude oil that began in mid-2014 and has extended into 2016 has severely impacted dayrates and demand for the Debtors’ services. Additionally, the consolidation and financial distress of the domestic customer base has negatively impacted demand for jackup rigs in the U.S. Gulf of Mexico. The Debtors understand that, notwithstanding the decline in demand, more than 115 number of new jackup rigs are currently under construction around the world and will become available for service in the next three years in addition to the more than 460 rigs currently marketed. This anticipated growth in capacity could put additional pressure on the operating environment for the Debtors’ and the Non-Debtor Subsidiaries’ existing jackup rig fleet. Although activity levels for liftboats are not as closely correlated to commodity prices as the Hercules’ drilling segments, commodity prices are still a key driver of liftboat demand. Demand for liftboat services in West Africa has been weak, which the Debtors believe has been driven by budgetary constraints with major customers primarily in Nigeria.”

“On February 25, 2015, Hercules received a notice from Saudi Aramco terminating for convenience its drilling contract for the Hercules 261, effective on or about March 27, 2015. The Company received subsequent notices from Saudi Aramco extending the effective date of termination to May 31, 2015. On June 1, 2015, Hercules received a notice from Saudi Aramco reinstating the drilling contract on the Hercules 261, in exchange for dayrate concessions on the Hercules 261, Hercules 262 and Hercules 266 from their existing contracted rates to $67,000 per day. These reduced dayrates were effective retroactively from January 1, 2015 through December 31, 2016 for the Hercules 261 and Hercules 262, and through the remaining contract term for the Hercules 266. On March 9, 2016, the Company received a new notice from Saudi Aramco further reducing the dayrates under the contracts for the Hercules 261 and Hercules 262 from $67,000 per day to $63,650 per day. The reduced dayrates apply for the period from January 1, 2016, through December 31, 2016. The dayrate for the Hercules 266 was also reduced from $67,000 per day to $63,650 per day effective January 1, 2016, through the remaining term of its contract, or April 7, 2016. On April 6, 2016, the Company received notice from Saudi Aramco extending the contract for the Hercules 266 to June 30, 2016. The dayrate for the Hercules 266 will remain at $63,650 through the term of the contract extension.”

“Hercules has taken numerous actions to mitigate the effects of the decline in activity levels, including but not limited to: (i) cold stacking nine rigs and warm stacking seven rigs since the fourth quarter of 2014 to significantly reduce operating expenses; (ii) significantly reducing their capital expenditures in 2015 and the amount planned for 2016; and (iii) significantly reducing their workforce, both onshore and offshore, domestically and internationally.”

The 2015 Restructuring

“Faced with this challenging market environment, on August 13, 2015, HERO and certain of its domestic direct and indirect subsidiaries (together with HERO, the “2015 Debtors”) commenced voluntary pre-packaged chapter 11 cases (the “2015 Chapter 11 Cases”) in the Bankruptcy Court. HERO’s foreign subsidiaries and one U.S. domestic subsidiary (“Non-Filing Entities”) were not debtors in the 2015 Chapter 11 Cases.”

“Through the 2015 Chapter 11 Cases, the Debtors implemented a prepackaged plan of reorganization (the “2015 Plan”) in accordance with the terms of a restructuring support agreement that the Debtors entered into with certain holders of the Debtors’ then outstanding senior unsecured notes (the “Senior Notes”). The 2015 Plan provided for a substantial reduction of the Debtors’ funded debt obligations by, among other things, exchanging $1.2 billion in face amount of the Senior Notes for 96.9% of the HERO Common Stock. In addition, notwithstanding the fact that the 2015 Debtors’ equity holders were substantially out of the money, the 2015 Plan provided such equity holders with the opportunity to receive their pro rata share of 3.1% of the HERO Common Stock and warrants to purchase up to another 20% HERO Common Stock on a Pro Rata basis at a per share price based on a total enterprise value of $1.55 billion. Finally, the Plan provided the Debtors with access to new liquidity in the form of the First Lien Facility. The Bankruptcy Court entered an order confirming the 2015 Plan on September 24, 2015, and the Plan became effective in accordance with its terms on November 6, 2015.”

Declining Earnings and Utilization Rates

“Largely driven by the continuing depression in commodity prices, Hercules, like other companies in the offshore drilling market, has faced greater challenges as demand for jackup rigs remains weak, while the market is still scheduled to deliver a significant number of newbuild rigs in the next several years, which (with the exception of the Hercules Triumph and the Hercules Resilience) are expected to be better suited to meet industry needs than Hercules’ fleet. These challenges, including day rate reductions implemented by Saudi Aramco, are born out in Hercules’ recent earnings and utilization statistics for its three business segments, Domestic Offshore, International Offshore, and International Liftboats.”

“Specifically, revenue generated from Domestic Offshore for the first quarter of 2016 decreased 76.6% to $12.4 million from $52.9 million for the first quarter of 2015, driven by a decline in operating days and lower average dayrates. Operating days in the first quarter of 2016 declined to 210 days with utilization of 25.6% on a marketed fleet of 9 rigs, compared to 533 days on 18 marketed rigs at 60.1% utilization in the first quarter of 2015. Average revenue per rig per day decreased by 40.6% to $58,948 in the first quarter of 2016 from $99,203 in the first quarter of 2015. Operating expense decreased to $11.7 million in the first quarter of 2016, from $35.9 million in the first quarter of 2015. The significant reduction in operating expense in 2016 was largely attributable to lower activity levels. Domestic Offshore reported an operating loss of $1.9 million in the first quarter of 2016, compared to operating income of $3.8 million in the first quarter of 2016.”

“International Offshore reported revenue of $27.5 million in the first quarter of 2016, compared to revenue of $51.6 million in the first quarter of 2015. Utilization increased slightly to 49.9% in the first quarter of 2016 from 47.9% in the first quarter of 2015. Average revenue per rig per day decreased by 49.4% to $75,680 in the first quarter of 2016 from $149,700 in the first quarter of 2015, driven largely by warm stacking certain rigs and lower dayrates. Operating expense decreased to $23.4 million in the first quarter of 2016, from $50.2 million in the first quarter of 2015. This reduction in operating expense was due to certain rigs being warm stacked, and other rigs being prepared in the shipyard for new operations. International Offshore recorded an operating loss of $151,000 in the first quarter of 2016 compared to an operating loss of $20.9 million in the first quarter of 2015.”

“International Liftboats revenue declined by 39.2% to $11 million in the first quarter of 2016 from $18.1 million in the first quarter of 2015, due to a decline in operating days and lower average revenue per vessel per day. Utilization in the first quarter of 2016 increased slightly to 39.7% from 38.1% in the first quarter of 2015. Average revenue per liftboat per day decreased by 26.2% to $16,945 in the first quarter of 2016 from $22,964 in the first quarter of 2015, primarily due to market pressure on dayrates. Operating expense in the first quarter of 2016 declined by 15.6% to $11.4 million, compared to $13.5 million in the first quarter of 2015, reflecting lower activity levels. International Liftboats recorded an operating loss of $3.9 million in the first quarter of 2016 compared to an operating loss of $351,000 in the first quarter of 2015.”

“As a result of its declining earnings and utilization rates, Hercules has experienced significant negative operating cash flow over the last several months. Only seven of Hercules’ 25 rigs are operating and four of those seven are rolling off contracts within the next 60 days. Unfortunately, no improvement is expected in the economic performance of the Domestic Offshore, International Offshore, and International Liftboats operations over the course of the next year. In fact, if it maintains the status quo, Hercules anticipates that it will continue to experience negative operating cash flow of approximately $450,000 per day. As a result, on May 5, 2016 and as discussed in further detail below, Hercules projected that it would violate the Maximum Senior Secured First Lien Leverage Ratio (as defined in the First Lien Credit Agreement) under the First Lien Credit Agreement on March 31, 2017, which was premised on, among other things, Hercules having made the final installment payment on, and taken delivery of, the Hercules Highlander. For that reason, the Debtors believe that obtaining confirmation of the Plan and exiting chapter 11 as expeditiously and efficiently as possible is critical to maximizing value for the benefit of all stakeholders.”

Formation of the Special Committee

“While the 2015 Plan significantly improved Hercules’ balance sheet, the challenges facing the offshore drilling industry continued to adversely impact Hercules’ business. As a result, in early 2016, HERO formed the Special Committee comprised of all of the independent members of the Board to consider and explore various strategic alternatives potentially available to Hercules in order to maximize the value of Hercules’s assets. Hercules announced the formation of the Special Committee on February 11, 2016, and, at the same time, disclosed that Hercules had $514 million in cash on hand.”

“The Special Committee was authorized to explore, review, and evaluate any potential strategic transaction involving Hercules and any alternatives thereto, including, but not limited to, the sale of Hercules, a merger or share exchange involving Hercules, the sale of some or all of Hercules’ assets, and a recapitalization of Hercules (whether by issuance of equity or debt securities, incurrence of additional indebtedness, or issuance of derivatives of securities thereof).”

“Akin Gump Strauss Hauer & Feld LLP (“Akin Gump”), as legal counsel, and PJT Partners Inc. (“PJT”), as financial advisor, were retained to assist the Special Committee and Hercules in connection with considering and exploring strategic alternatives and additional matters.”

The Marketing Process

“As Hercules’ earnings and utilization rates continued to decline and Hercules faced increased challenges in successfully operating its business (including significant negative operating cash flow), the Special Committee determined that pursuing a potential sale of Hercules and/or its assets was an appropriate path to consider. To that end, the Special Committee authorized PJT to initiate a marketing process (the “Marketing Process”) pursuant to which Hercules would seek bids for the acquisition of Hercules. Throughout the Marketing Process, the Special Committee was prepared to consider bids for some or all of Hercules’ assets.”

“In late February 2016, PJT launched the Marketing Process. In connection therewith, PJT contacted approximately fifty-one potentially interested parties, including a number of large drilling companies and other strategic buyers with the financial ability to pursue a transaction. Of those fifty-one potentially interested parties, fifteen parties signed nondisclosure agreements with Hercules and gained access to diligence materials contained in a virtual dataroom that was prepared for the Marketing Process (the “Dataroom”). Thereafter, approximately eight of these parties conducted significant diligence and actively communicated with PJT and members of Hercules’ management team, including myself.”

“As part of the Marketing Process, first round bids were due the week of March 21, 2016 (the “First Round Bid Deadline”). Seven parties (the “First Round Bidders”) submitted non-binding bids (the “First Round Bids”) by the First Round Bid Deadline. Despite Hercules’ significant cash position of $514 million on February 11, the indicative purchase price of the First Round Bids ranged from $110 million on the low end to $455 million on the high end. Three of the First Round Bidders, one of which bids was only for Hercules’ Middle Eastern assets, expressed interest in a potential transaction without specifying a purchase price. The First Round Bids that contained a purchase price contemplated that the purchase price would be paid (i) entirely in the form of stock, (ii) entirely in the form of cash or (iii) in a combination of stock and cash.”

“On or about March 25, 2016, following a review of the First Round Bids, the Special Committee, with the assistance of PJT, determined that three of the First Round Bids warranted further consideration. Accordingly, the Special Committee directed PJT to invite the First Round Bidders who submitted such bids to submit second round bids (the “Second Round Bids”) on or before April 14, 2016 (the “Second Round Bid Deadline”). After being invited to submit Second Round Bids, all three of the bidders were provided with the opportunity to conduct further diligence with respect to Hercules, including by meeting with Hercules’ management team, including myself, to discuss Hercules’ business and operations and a potential sale transaction. As part of that process, Hercules’ management team participated in multiple in person meetings and/or teleconferences with each of the respective bidders to respond to inquiries regarding Hercules’ business and operations. At this stage of the Marketing Process, the goal of PJT and the Special Committee was to obtain Second Round Bids with as few contingencies as possible.”

“On or about the Second Bid Round Bid Deadline, Hercules received two nonbinding Second Round Bids from bidders (the “Second Round Bidders”). The Second Round Bids contemplated enterprise level purchase prices from $423 million to $470 million for Hercules, payable in the form of a combination of cash and stock or cash and take-back debt. Following the Second Round Bid Deadline, Hercules received an additional non-binding bid from a third bidder that was invited to submit a Second Round Bid, as well as two non-binding bids from parties that had not submitted First Round Bids (collectively, the “Additional Bids”), including one bid for the Hercules Highlander. The Additional Bids contemplated purchase prices ranging from $326 million to $515 – 520 million, with the latter bid comprised of $65-70 million of stock and $450 million of rollover debt. Except for the bids submitted by the First Lien Lenders (as discussed below), none of the bids received provided sufficient value to pay the  First Lien Claims in full or provide any recovery to the holders of HERO Common Stock. Meanwhile, Hercules continued to maintain significant cash on its balance sheet.”

“During the Marketing Process, the Special Committee was also contacted by certain First Lien Lenders who are Ad Hoc Group Members regarding the Marketing Process. Such First Lien Lenders advised the Special Committee that the First Lien Lenders were unlikely to consent to a sale transaction unless such transaction generated sufficient cash proceeds to pay the obligations owing under the First Lien Credit Agreement. In response, the Special Committee encouraged the First Lien Lenders to participate in the Marketing Process by submitting a bid. Thereafter, the First Lien Lenders submitted proposals to Hercules that were premised on an orderly wind-down of Hercules’ operations and a sale of its assets on an asset by-asset basis. In addition, notwithstanding the fact that the wind-down process would require the First Lien Claims to be paid over time with no guaranty that the First Lien Claims would be paid in full, the bids submitted by the First Lenders contemplated, subject to diligence, payment in full of all General Unsecured Claims and significant recoveries to holders of HERO Common Stock, which, the Special Committee advised the First Lien Lenders should be included in any bid submitted by the First Lien Lenders. The Debtors have been advised that certain of the First Lien Lenders contacted certain holders of HERO Common Stock that were not also First Lien Lenders regarding the Marketing Process, and those discussions resulted in limited dialogue.”

“Following review of the Second Round Bids and the rights of the First Lien Lenders with respect to the transactions contemplated by such bids, the Special Committee directed PJT to engage in further discussions with the two Second Round Bidders in an effort to obtain a higher purchase price. However, the Second Round Bidders were unwilling to increase the amount of their bids by sufficient amounts to satisfy the obligations under the First Lien Credit Agreement. Thereafter, the Special Committee determined that the Second Round Bids would not result in a transaction that could be consummated or that would, in any event, yield a greater recovery to junior creditors and holders of HERO Common Stock than the transaction proposed by the First Lien Lenders.”

“In addition to the foregoing, Hercules has engaged Simmons & Co. (“Simmons”) to separately market for sale its fleet of liftboat vessels (the “Liftboat Fleet”) and Clarksons Platou Shipping Services USA LLC to market the Hercules Resilience and the Hercules Triumph. Hercules has retained Mitchen Anderson Group LLC to market its domestic rigs and the Hercules 208 and the Hercules 267. Hercules has received letters of intent and/or expressions of interests for the sale of the Liftboat Fleet, the Hercules Resilience, the Hercules Triumph and other assets. The sale processes for these assets as well as Hercules’ other assets are on-going.”

The 2015 10-K Disclosures

“On March 30, 2016, shortly after the first round bid deadline, HERO filed a Form 10-K for 2015. Therein, HERO disclosed that Hercules projected that it would violate the Maximum Senior Secured First Lien Leverage Ratio (as defined in the First Lien Credit Agreement) under the First Lien Credit Agreement on March 31, 2017. If this occurred and Hercules were not able to obtain a waiver from the First Lien Lenders, the First Lien Lenders could accelerate the First Lien Facility at that time, which would require Hercules to repay immediately the First Lien Claims, including the Applicable Premium.”

The Alleged Defaults and Events of Default and the Forbearance Agreement

“On April 18, 2016, shortly after the Second Round Bid Deadline, HERO and the First Lien Guarantors entered into a Forbearance Agreement and First Amendment to the Credit Agreement (the “Original Forbearance Agreement”), with the First Lien Agent for itself and  certain First Lien Lenders comprised of the members of the Ad Hoc Group. Pursuant to the Original Forbearance Agreement, at Hercules’ request, the Required Lenders (as defined in the First Lien Credit Agreement) agreed, during the Forbearance Period (as defined below), to forbear from exercising their rights and remedies (if any) under the First Lien Credit Agreement with respect to the alleged failure by HERO to comply with certain specified affirmative covenants relating to post-closing matters in foreign jurisdictions. In particular, certain First Lien Lenders asserted (but did not give notice under the First Lien Credit Agreement) that (i) an Event of Default (as defined in the First Lien Credit Agreement) occurred based on Hercules’ alleged failure to be in compliance with an affirmative covenant with respect to causing Hercules

Offshore Nigeria Limited, a Non-Debtor Subsidiary, to deliver a certificate of registration of a vessel mortgage for collateral purposes by April 15, 2016 (the “Nigeria Registration Covenant”), and (ii) a Default (as defined in the First Lien Credit Agreement) occurred based on Hercules’ alleged failure to be in compliance with an affirmative covenant with respect to using best efforts to cause Discovery Offshore (Gibraltar) Limited, a Non-Debtor Subsidiary, to dissolve, merge or consolidate with or into another Loan Party within the required time period (the “Gibraltar Covenant”). While there is no express cure period in the First Lien Credit Agreement with respect to the Nigeria Registration Covenant, HERO delivered the required certificate of registration on April 21, 2016. HERO notified the First Lien Agent that it (i) disagreed with the First Lien Lenders’ interpretation of the alleged Default and Event of Default with respect to these covenants and (ii) believed that defenses may exist with respect to the alleged Default and Event of Default and has reserved all rights with respect thereto.”

“Under the Original Forbearance Agreement, the First Lien Lenders’ forbearance commenced on the date that certain conditions in the Original Forbearance Agreement were metand continued until the earlier to occur of: (i) the termination of the Forbearance Period as a result of any default under the Original Forbearance Agreement; and (ii) April 28, 2016, unless otherwise mutually agreed in writing by HERO and the Required Lenders (with written notice to the First Lien Agent) (the “Forbearance Period”).”

“On April 28, 2016, HERO and the First Lien Guarantors entered into that certain Amendment No. 1 to Forbearance Agreement and First Amendment to Credit Agreement (the “Forbearance Amendment”) with the First Lien Agent and certain First Lien Lenders, which amended the Original Forbearance Agreement to extend the Forbearance Period. Pursuant to the Forbearance Amendment, the Required Lenders agreed to extend the Forbearance Period until the earliest to occur of: (i) the termination of the Forbearance Period as a result of any default under the Forbearance Agreement; (ii) 11:59 p.m. (New York City time) on May 31, 2016; and (iii) 11:59 p.m. (New York City time) on the second business day following the First Lien Lenders’ delivery of written notice (which notice would have been effective only if delivered after 11:59 p.m. (New York City time) on May 4, 2016) to HERO terminating the Forbearance Period, subject to the right of the First Lien Lenders to revoke such written notice. The First Lien Lenders never exercised their rights to accelerate the termination of the Forbearance Period. As a result, during the Forbearance Period, the Special Committee, through PJT, continued discussions with third parties in an effort to obtain greater value for stakeholders than contemplated by the bids submitted by the First Lien Lenders and the transactions contemplated by the Plan, but such efforts were not successful as no party was willing to provide greater value or certainty of closing a transaction than the First Lien Lenders.”

“Under the Forbearance Amendment, the First Lien Lenders’ forbearance was subject to certain conditions as described therein and in the First Lien Credit Agreement as amended thereby. The Forbearance Amendment further served to amend the First Lien Credit Agreement to, among other matters, clarify the process to be followed for delivery of an officers’ certificate and release of the Escrowed Amount under the escrow agreement governing the Escrow Account (the “Escrow Agreement”).”

“Specifically, by entering into the Forbearance Amendment, Hercules agreed that it would not be permitted to draw the Escrowed Amount during the Forbearance Period, and accordingly, would not be able to accept delivery of the Hercules Highlander during that time. As noted above and discussed below, Hercules did not take delivery of the Hercules Highlander, but instead, in the exercise of its business judgment, determined to transfer its rights to the Hercules Highlander to Maersk UK (as defined below). Following the transfer of the Hercules Highlander, the Escrowed Amount was distributed to the First Lien Agent for the benefit of the First Lien Lenders in accordance with the terms of the Escrow Agreement (the “Escrow Repayment”).”

The 1Q 2016 10-Q and Related Disclosures

“On May 5, 2016, HERO filed a Form 10-Q for the first quarter of 2016 (the “1Q 2016 10-Q”) and reiterated that Hercules projected that it would violate the Maximum Senior Secured First Lien Leverage Ratio (as defined in the First Lien Credit Agreement) under the First Lien Credit Agreement on March 31, 2017. If this occurred and Hercules were not able to obtain a waiver from the First Lien Lenders, the First Lien Lenders could accelerate the First Lien Facility at that time, which would require Hercules to repay immediately the First Lien Claims, including the Applicable Premium. HERO stated that it likely would be difficult to obtain a waiver from the First Lien Lenders at that time given, among other things, the state of the drilling market and that a refinancing likely would not be a viable option.”

“In addition, HERO disclosed that, in the event the First Lien Facility were called and accelerated as a result of the alleged Event of Default and Default relating to the Nigeria Registration Covenant and the Gibraltar Covenant, the outstanding principal amount of the First Lien Facility and the Applicable Premium would have become due immediately. HERO further disclosed that, if the outstanding principal amount of the First Lien Facility and Applicable Premium became due immediately, it could raise substantial doubt about Hercules’ ability to continue as a going concern.”

The Hercules Highlander Transaction

“In May 2014, non-Debtor Hercules British Offshore Limited (“Hercules British Offshore”) signed a five-year drilling contract (the “Maersk Agreement”) with Maersk Oil North Sea UK Limited (“Maersk”) for the Hercules Highlander. In support of the Maersk Agreement, in May 2014, Hercules North Sea Ltd. (“Hercules North Sea”) signed a rig construction contract (the “Rig Construction Contract”) with Jurong Shipyard Pte Ltd. (“Jurong”) in Singapore with respect to the Hercules Highlander. In April 2016, Jurong requested that Hercules North Sea accept delivery of the Hercules Highlander and pay the final installment payment in accordance with terms of the rig construction contract. As discussed in further detail below, on May 26, 2016, Hercules transferred the right to acquire the Hercules Highlander to Maersk Highlander UK Limited (“Maersk UK”), and Hercules British Offshore novated its rights under the Maersk Agreement to Maersk UK.”

“As discussed above, the Marketing Process did not result in bids that were sufficient to satisfy the obligations under the First Lien Credit Agreement in full or anywhere near an amount that would be satisfactory to the First Lien Lenders. Accordingly, the Special Committee determined that pursuing a sale or alternative transaction in respect of the HerculesHighlander, coupled with a transaction with the First Lien Lenders that provided for holders of Allowed General Unsecured Claims to be paid in full and the opportunity for material recoveries to the holders of HERO Common Stock, provided the best means of maximizing value for the benefit of all stakeholders.”

“Following extensive negotiations, on May 26, 2016, Hercules North Sea, HERO and Hercules British Offshore (together with Hercules North Sea and HERO, the “Hercules Parties”) entered into a series of agreements related to the Hercules Highlander, including (i) a tripartite agreement (the “Tripartite Agreement”) with Jurong and Maersk Highlander UK Limited (the “Maersk UK”) pursuant to which Hercules North Sea assigned its rights to purchase the Hercules Highlander to Maersk UK and Maersk UK assumed the obligation to pay USD $195,988,025 to Jurong as the final installment to acquire the Hercules Highlander (the “Final Installment”), (ii) Hercules British Offshore and HERO assigned to Jurong all of their rights, title and interest in and to certain equipment, consumables and spares acquired in anticipation of operating the Hercules Highlander, including Jurong’s assumption of USD $5,098,042 in outstanding accounts payable for such equipment (the “Bill of Sale”), (iii) Hercules British Offshore novated the Maersk Agreement to Maersk UK (the “Novation”) as well as a transportation contract with Dockwise Shipping B.V. to mobilize the Hercules Highlander to the UK North Sea from Singapore (the “Heavy Lift Novation”).”

“As a result of the completion of the transactions contemplated in the suite of agreements constituted by the Tripartite Agreement, the Bill of Sale, the Novation and the Heavy Lift Novation (the “Transaction Documents”), the Hercules Parties no longer have any interest in the Hercules Highlander or its related equipment, nor do they have any obligation to pay the Final Installment or the outstanding balance on the equipment included with the Bill of Sale Further, the Hercules Parties have no obligations to provide any drilling services to Maersk. In connection with the execution of the Transaction Documents, several other agreements related to the Hercules Highlander previously entered into by certain of the Hercules Parties were terminated or assigned to Maersk UK. The Transaction Documents also provide each of the Hercules Parties with a full release of their respective obligations, duties or other rights arising out of or related to the Maersk Agreement or the Hercules Highlander. With respect to the equipment transferred under the Bill of Sale, Maersk UK also agreed to indemnify the Hercules Parties against third party payment demands if the actual acquisition costs exceed USD $5,098,042.”

The Amended and Restated Forbearance Agreement

“On May 26, 2016, in connection with the Hercules Highlander transaction and the execution of the Restructuring Support Agreement, HERO and the First Lien Guarantors also entered into an Amended and Restated Forbearance Agreement (the “Amended and Restated Forbearance Agreement”) with the First Lien Agent and First Lien Lenders holding in the aggregate in excess of 99% of the First Lien Claims. The Amended and Restated Forbearance Agreements amends and restates the Original Forbearance Agreement, as amended. Entry into the Amended and Restated Forbearance Agreement was a necessary component for the Hercules Highlander transaction because, under the terms of the First Lien Credit Agreement, the Hercules Highlander transactions would cause certain Events of Default to occur under the First Lien Credit Agreement and Maersk UK would not complete its acquisition of the Hercules Highlander absent the releases from the First Lien Lenders.”

“Pursuant to the Amended and Restated Forbearance Agreement, each First Lien Lender signatory thereto (severally and not jointly), and, at the direction thereof, the First Lien Agent, agreed, among other things, to (x) forbear from exercising certain of their respective default-related rights and remedies against HERO and the First Lien Guarantors with respect to certain defaults under the First Lien Credit Agreement specified in the Amended and Restated Forbearance Agreement (other than, among other things, the acceleration of the loans under the First Lien Credit Agreement and the delivery of a written direction instructing the First Lien Agent to deliver a written instruction to the Escrow Agent to distribute all funds in the Escrow Account to the First Lien Agent to prepay the claims under the First Lien Credit Agreement), (y) consent to the release of all liens and security interests in any assets or property subject to the transactions contemplated in the Tripartite Agreement, the Novation, the Heavy Lift Novation and the Bill of Sale and grant related releases and (z) upon the request of HERO, consent to the release of the First Lien Obligors who are not Debtors from their guarantees under the First Lien Credit Agreement and the release of all liens and security interests in any assets or property of the First Lien Obligors who are not Debtors upon the Effective Date of the Plan.”

“In addition, pursuant to the Amended and Restated Forbearance Agreement, HERO received written notice from the First Lien Agent that the commitments under the First Lien Credit Agreement were terminated and the outstanding loans under the First Lien Credit Agreement were declared due and payable, in whole, including, without limitation the principal of the loans under the First Lien Credit Agreement, together with accrued interest thereon, unpaid accrued fees, the Applicable Premium and all other obligations of HERO accrued under the First Lien Credit Agreement and any other Loan Document (as defined under the First Lien Credit Agreement).”

“Further, pursuant to the Amended and Restated Forbearance Agreement, the First Lien Lenders party to the Amended and Restated Forbearance Agreement directed the First Lien Agent to deliver a written instruction to the Escrow Agent to distribute all the funds in the Escrow Account in the amount of $200 million to the First Lien Agent to prepay the First Lien Facility pursuant to section III (d) of the Escrow Agreement and section 2.10(a)(i) of the First Lien Credit Agreement. I understand that the Applicable Premium became due and owing in connection with the Hercules Highlander transaction, the Events of Default resulting therefrom, the acceleration of the First Lien Obligations pursuant to the Amended and Restated Forbearance Agreement and the prepayment of the First Lien Facility.”

The Restructuring Support Agreement and the Plan

“Also on May 26, 2016, after many weeks of intensive negotiations, the Debtors and the Consenting First Lien Lenders, which hold in excess of 99% of the principal amount outstanding under the First Lien Credit Agreement and approximately 27% of the HERO Common Stock, entered into the Restructuring Support Agreement. The Restructuring Support Agreement sets forth, subject to certain conditions, the commitment to and obligations of, on the one hand, the Debtors, and on the other hand, the Consenting First Lien Lenders to effectuate the Plan.”

“Contemporaneously with the commencement of these cases, the Debtors filed the Plan. The Plan provides for all claims against the Debtors’ estates (other than the First Lien Claims) to be paid in full in cash prior to repayment in full of the First Lien Obligations. The Plan also provides that, if Class 7 HERO Common Stock votes to accept the Plan, the holders of HERO Common Stock will receive a meaningful recovery before the First Lien Obligations are paid in full, with such distributions to holders of HERO Common Stock subject to reduction to the extent that the Confirmation Order does not become a Final Order within 72 days of the Petition Date as the result of actions taken directly or indirectly by holders of HERO Equity Interests, their representatives, and/or any other persons (including any HERO Entity) acting in concert with the holders of HERO Equity Interests.”

“The Restructuring Support Agreement and the Plan contemplate a value-maximizing transaction for the Debtors and their stakeholders through the orderly monetization of the Debtors’ and Non-Debtor Subsidiaries’ assets and the winding down of the Hercules’ entities. Specifically, the Plan provides that holders of Claims and Equity Interests will receive the following treatment:

• each holder of an Allowed First Lien Claim shall receive its Pro Rata share of: (i) if Class 7 votes to accept the Plan, (a) the Acceptance Lender Wind Down Claim; and (b) 100% of the Class A Wind Down Entity Interests; or (ii) if Class 7 votes to reject the Plan, the Rejection Lender Wind Down Claim;
• holders of Administrative Claims, Priority Tax Claims, Priority Non-Tax Claims, Other Secured Claims and General Unsecured Claims will be paid in full in cash; and
• each holder of HERO Common Stock shall receive its Pro Rata share of: (i) if Class 7 votes to accept the Plan, (a) the Shareholder Effective Date Cash Distribution; and (b) 100% of the Class B Wind Down Entity Interests; or (ii) if Class 7 votes to reject the Plan, 100% of the Rejection Wind Down Entity Interests.”

“The waterfall of distributions generally provides that, if Class 7 HERO Common Stock votes in favor of the Plan, each holder of HERO Common Stock will receive its Pro Rata Share of the following:

• $12.5 million in cash on the Effective Date of the Plan;
• An additional $15 million in cash after $420 million, in the aggregate, has been received by the First Lien Lenders through a combination of (i) the Escrow Repayment, (ii) principal payments under the Cash Collateral Order, (iii) any pre- Effective Date principal payments from asset sale proceeds and (iv) post-Effective Date payments on the Lender Wind Down Claim;
• 15% of the net proceeds from the monetization of Hercules’ assets through the Class B Wind Down Entity Interests after $510 million and until $530 million, in the aggregate, has been received by the First Lien Lenders through a combination of (i) the Escrow Repayment, (ii) principal payments under the Cash Collateral Order, (iii) any pre-Effective Date principal repayments from asset sale proceeds; (iv) any Effective Date payments; (v) post-Effective Date payments on the Lender Wind Down Claim; and (vi) distributions on the Class A Wind Down Entity Interests;
• An additional $3 million in cash after $530 million, in the aggregate, has been received by the First Lien Lenders through a combination of (i) the Escrow Repayment, (ii) principal payments under the Cash Collateral Order, (iii) any pre- Effective Date principal repayments from asset sale proceeds; (iv) any Effective Date payments; (v) post-Effective Date payments on the Lender Wind Down Claim; and (vi) distributions on the Class A Wind Down Entity Interests; and
• 15% of the net proceeds from the monetization of Hercules’ assets through the Class B Wind Down Entity Interests after $533 million, in the aggregate, has been received by the First Lien Lenders through a combination of (i) the Escrow Repayment, (ii) principal payments under the Cash Collateral Order, (iii) any pre- Effective Date principal repayments from asset sale proceeds; (iv) post-Effective Date payments on the Lender Wind Down Claim; and (v) distributions on the Class A Wind Down Entity Interests.”

“Based on the recovery analyses attached as Exhibit E to the Disclosure Statement (the “Recovery Analyses”) , if Class 7 HERO Common Stock votes to accept the Plan, holders of HERO Common Stock are projected to receive recoveries between the $12.5 million Effective Date payment (rounded to $13 million in the Disclosure Statement) and $41 million. The Plan provides that if Class 7 HERO Common Stock votes to reject the Plan, holders of HERO Common Stock will only receive recoveries after the holders of First Lien Claims have been paid in full on account of such First Lien Claim totaling $579 million (plus accrued and unpaid interest, if any, as of the Effective Date of the Plan) in the aggregate. Based on the Recovery Analyses, if Class 7 HERO Common Stock votes to reject the Plan, holders of HERO Common Stock are projected to receive recoveries between $0 and $27 million in the aggregate”

“Upon consummation of the Plan, all of the Debtors’ assets will be transferred to the Wind Down Entity. The Wind Down Entity will be responsible for, among other things, monetizing the Debtors’ assets and winding down the Debtors’ and the Non-Debtor Subsidiaries’ business and operations in a controlled manner. The Wind Down Entity will be funded with the Initial Wind Down Funding Amount (which will not exceed $85 million) and will be governed by the Wind Down Trust Board.”

“In addition, pursuant to the terms of the Restructuring Support Agreement, the Consenting First Lien Lenders agreed, among other things, and subject to certain conditions: (a) not to support any plan or sale process that is inconsistent with the Restructuring Support Agreement, the Term Sheet or the Plan; (b) not to instruct the Agent under the First Lien Credit Agreement to take any action inconsistent with the terms and conditions of the Restructuring Support Agreement; (c) to vote to accept the Plan; and (d) contemporaneously with the execution of the Restructuring Support Agreement, enter into (and direct the Agent to enter into) the Amended and Restated Forbearance Agreement.”

“Finally, the Restructuring Support Agreement also provides for a settlement, pursuant to Bankruptcy Rule 9019 and Bankruptcy Code section 1123, among the Debtors and the holders of First Lien Claims of any and all disputes among the parties, including any disputes in respect of (i) the asserted Defaults and Events of Default relating to the Nigeria Registration Covenant and the Gibraltar Covenant, (ii) whether the Escrow Release Payment constitutes an avoidable preference, and (iii) any potential defenses to the amount of the Applicable Premium. The consideration for such settlement consists of the receipt by the holders of First Lien Claims of the releases contemplated by Article V of the Plan in exchange for their agreement to compromise their First Lien Claims in order to enable holders of Allowed General Unsecured Claims to be paid in full under the Plan and the holders of HERO Common Stock to receive a meaningful recovery under the Plan before holders of First Lien Claims are paid in full.”

“The Restructuring Support Agreement may be terminated upon the occurrence of certain events, including the failure to meet specified milestones related to filing, confirmation and consummation of the Plan, among other requirements, and in the event of certain breaches by the parties under the Restructuring Support Agreement.”

“Based on the strong support for the Plan among holders of First Lien Claims, the Debtors believe that the Chapter 11 Cases will proceed expeditiously, and the Debtors will be able to move forward with the monetization of the Debtors’ and the Non-Debtor Subsidiaries’ assets and a controlled wind-down of their operations to maximize recoveries for all of the Debtors’ stakeholders in an efficient manner. The Debtors believe that this outcome is in the best interests of the Debtors, their Estates and all stakeholders, and that the Plan and the transactions contemplated thereby will maximize the value of the Debtors’ and the Non-Debtor Subsidiaries’ assets and enable them to make distributions to greatest number of stakeholders.”