Texaco Discloses Its Reorganization Plans : Firm Will Borrow $3.4 Billion to Pay Off Pennzoil, Other Creditors

Texaco disclosed Thursday that it will borrow about $3.4 billion to pay off Pennzoil and its other creditors and emerge from bankruptcy proceedings, slightly more than the oil giant’s creditors and shareholders had predicted.

In a disclosure statement filed with the U.S. Bankruptcy Court in White Plains, N.Y., Texaco also said the bankruptcy court will formally consider the proposed settlement and reorganization plan that is detailed in the disclosure statement at a hearing set for Jan. 27.

If the court approves, the plan then will be sent to Texaco creditors and shareholders for their confirmation. At least two-thirds of Texaco’s shareholders must approve the plan before the historic takeover battle and ensuing Chapter 11 bankruptcy can officially end.

In addition to the $3 billion in cash that Texaco has agreed to pay Pennzoil to settle their dispute over Getty Oil, Texaco requires cash of $2.6 billion to pay off its other creditors, according to the filing.

Texaco said it will use $2.2 billion of its cash reserves toward paying off the $5.6-billion debt and will incur new debt of $3.4 billion to pay off the balance. The company said it plans to obtain the money from bank loans, revolving credit accounts and other unspecified sources.

Analysts and representatives of Texaco’s shareholders were somewhat surprised that Texaco plans to borrow such a large portion of the money.

Bridge Financing

Dennis O’Dea, a Chicago attorney who represents the court-appointed Texaco shareholders committee, said he had expected Texaco to borrow no more than $3 billion. And Frederick P. Leuffer, an analyst with the Cyrus J. Lawrence investment firm, had predicted that the company would borrow only $2.6 billion and use $3 billion of its cash reserves.

As of Sept. 30, Texaco reported having $4.3 billion in cash and marketable securities on hand.

But while Texaco’s new debt level will be higher than many predicted, Leuffer said the increase “will not make any substantial difference” in the company’s financial position and shouldn’t adversely affect its credit ratings.

Texaco said that, after it incurs the additional $3.4 billion in debt and retires $1.8 billion of matured debt, its total debt will approximate $7.9 billion. That is about $340 million more than its $7.56-billion debt level at the end of 1986.

The money Texaco plans to borrow to pay off its creditors will be in the form of short-term, or “bridge,” financing. In the marathon settlement and reorganization talks that preceded the Dec. 19 settlement pact between Texaco and Pennzoil, Texaco agreed not to incur long-term debt that would reduce the company’s value to shareholders and creditors.

Texaco’s chief executive, James W. Kinnear, has said the company will pay off the short-term loans by selling various Texaco assets, and analysts widely predict that the bulk of those assets will be oil- and gas-producing properties rather than Texaco subsidiaries.

It is the details of how the $3.4 billion in short-term debt will ultimately be refinanced that “are the real issues,” said Joseph Zweibel, the attorney representing the Texaco creditors’ committee.

Such details are part of a major restructuring that will dovetail with Texaco’s emergence from bankruptcy proceedings and that weren’t in Texaco’s 119-page filing Thursday. Kinnear said he expects to submit “major elements” of the planned restructuring program to Texaco’s board in early January.