Smith International's dissident creditor groups, which had been threatening to block approval of the oil service company's bankruptcy reorganization plan, agreed Wednesday to withdraw their objections after Smith said it would increase the interest payments on part of its debt.
Had the two creditor groups persisted, their opposition could have cost Smith a considerable amount in legal fees, at best. At worst, they could have destroyed a deal in which Smith can settle a $205-million legal judgment for just $95 million.
The agreement with the creditors, announced late Wednesday, calls for Newport Beach-based Smith to pay 13% annual interest on the $90 million in Series A notes it plans to issue to creditors as part of its debt repayment program. The plan that the two creditor groups opposed called for Smith to pay 12.5% annual interest on the notes.
The difference in payments is $450,000 a year. Under the new plan, Smith would pay $11.7 million in annual interest on the notes rather than $11.25 million.
Additionally, Smith agreed to delete a section of its reorganization plan that would have allowed it to pay part of the interest on the notes by issuing additional notes if it lacked the necessary cash.
Loren Carroll, Smith's chief financial officer, said Wednesday that the two concessions to the dissident creditors were minor. He said the additional $450,000 in annual interest would not be a significant expense for Smith, which has more than $400 million in annual revenue.
And the company "never intended" to make interest payments by issuing new notes, he said, but had inserted the provision in the original plan as insurance.
Thomas Walper, a lawyer with the Los Angeles firm of Stroock & Stroock & Lavan, which represents a group of six investment companies that had objected to Smith's reorganization plan, said he believes that "everybody is pleased" with Wednesday's agreement.
He said a formal written agreement is still being drafted and will include a provision that Smith pay "reasonable" fees to the objecting creditors' attorneys.
Carroll said the compromise means that Smith should receive near-unanimous approval from its creditors of its reorganization plan, which is scheduled to be certified by the bankruptcy court in Los Angeles on Nov. 12.
Smith filed for protection from creditors under Chapter 11 of the federal bankruptcy code in March, 1986, shortly after a federal judge in Los Angeles ruled that the company had to pay $205-million to Hughes Tool Co. to settle a 15-year-old patent infringement case.
In June, Hughes, which merged with Baker International earlier this year and became Baker Hughes, agreed to accept $95 million to satisfy the judgment, provided that it receive the money by Dec. 31.
While Smith officials have maintained confidence that the bankruptcy court would approve their reorganization regardless of the creditor objections, the threat of a prolonged legal battle that would delay payment to Baker Hughes and thus reinstate the full $205-million judgment provided considerable incentive to reach an agreement with the dissidents.