Pacific Exploration -- summary under Recapitalizations or note exchanges

Overview

The debt of the Corporation, which filed for protection under the CCAA, consists of U.S.$4.1B of notes (the “Notes”), U.S.$1.3B of loans (the “Credit Facilities,” and with the Notes, the “Affected Claims”) and U.S.$0.50B of DIP financing, of which U.S.$0.24B was advanced by Catalyst (the “Plan Sponsor”). Under the proposed CCAA Plan, the notes and loans will be exchanged for approximately 58.2% of the Corporation’s fully diluted shares, the Catalyst DIP financing will be exchanged for 29.3% of the fully diluted shares – and the DIP providers will hold warrants (with a nominal exercise price) to acquire 12.5% of the fully diluted shares. In addition, those who acted to support the recapitalization before a specified time will receive, in aggregate, an extra 2.5% of the fully diluted common shares (the “Early Consent” shares - which effectively come out of the shares otherwise receivable by those slower to act). The holders of the Notes and Loans also will have the option to cash in some of their common shares, to be funded out of additional cash subscriptions by the Plan Sponsor and some others. Existing common shareholders will hold 0.006% of the post-Plan shares. The U.S. tax disclosure indicates a risk of the Early Consent shares being treated as a taxable consent fee, whereas the Canadian disclosure indicates that they are part of the exchange consideration. The U.S. tax disclosure discusses the risk that U.S. holders would receive rollover treatment – on the basis that their debt holdings are “securities,” or that the Plan would be considered to be a recapitalization. There are no Canadian risk disclosures.

The Corporation

Pacific Exploration & Production Corporation (formerly Pacific Rubiales Energy Corp.) is a B.C. public company. On April 27, 2016, it applied for creditor protection under the CCAA and an initial order was granted by the Ontario Superior Court of Justice (Commercial List). On May 25, 2016, its Common Shares were delisted from the TSX.

The Notes held by the Noteholders

(i) 5.375% senior unsecured notes due January 26, 2019; (ii) 7.25% senior unsecured notes due December 12, 2021; (iii) 5.125% senior unsecured notes due March 28, 2023; and (iv) 5.625% senior unsecured notes due January 19, 2025.

Credit Facilities owed to the Bank Lenders

(i) the U.S.$109,000,000 Credit and Guaranty Agreement dated as of May 2, 2013 with Bank of America, N.A. as lender; (ii) the U.S.$250,000,000 Credit and Guaranty Agreement dated as of April 8, 2014 with HSBC Bank USA, N.A., as administrative agent, and the lenders party thereto; and (iii) the U.S.$1,000,000,000 Revolving Credit and Guaranty Agreement dated April 30, 2014 with Bank of America, N.A., as administrative agent, and the lenders party thereto.

Plan Sponsor

The Catalyst Capital Group Inc.

DIP Offering

U.S.$500 million of debtor-in-possession financing (the "DIP Offering"), less an original issue discount, has been provided jointly by certain of the Noteholders (the "Funding Creditors") and the Plan Sponsor. The Plan Sponsor has provided U.S.$240 million for the purchase of notes (after taking into account the original issue discount) pursuant to the DIP Offering (the "Plan Sponsor DIP Financing") and the Funding Creditors have provided U.S.$240 million for the purchase of notes and warrants (after taking into account the original issue discount) pursuant to the DIP Offering (the "Creditor DIP Financing").

Warrants

Funding Creditors have purchased warrants with a nominal exercise price that will allow them to acquire their pro rata share of approximately 12.5% of the fully diluted common shares of the reorganized Corporation upon implementation of the Plan.

DIP L/C Facility

Certain of the Bank Lenders have provided a letter of credit facility to the reorganized Corporation in the amount of U.S.$115,532,794 (the "DIP L/C Facility").

The Plan

• The Plan Sponsor DIP Financing will be exchanged for approximately 29.3% of the fully diluted common shares of the reorganized Corporation.
• The claims of Affected Creditors in respect of approximately U.S.$4.1 billion under the Notes, approximately U.S.$1.2 billion under the Credit Facilities, as well as the Affected Claims of other Affected Creditors, will be settled in exchange for approximately 58.2% of the fully diluted common shares of the reorganized Corporation (the "Claim Settlement Shares"), which shall be allocated pro rata to the Affected Creditors. However, persons holding an Affected Claim in respect of the Notes who signed and returned a Support Agreement or joinder thereto by May 6, 2016, who vote in favour of the Plan and who hold Notes in an aggregate principal amount equal to, or in excess of, the fair market value of the "Early Consent Shares," will receive, as additional consideration in exchange for their Affected Claims, their pro rata share of approximately 2.2% of the fully diluted common shares of the reorganized Corporation which shall be allocated from the Claim Settlement Shares otherwise payable to the Noteholders.
• Under the Cash Election, certain Affected Creditors will have the opportunity to receive cash in lieu of the Claim Settlement Shares that they would otherwise be entitled to receive. The Plan Sponsor and certain other Noteholders have agreed to subscribe for up to U.S.$250 million of common shares of the reorganized Corporation on the effective date of the Plan to enable Affected Creditors to participate in the Cash Election. Each Affected Creditor will have the option of electing to make a Cash Election to receive cash in lieu of the New Common Shares it would otherwise be entitled to receive under the Plan. Such Cash Election may be made at the Designated Rate (U.S.$16.00 per share, on a post-Common Share Consolidation basis), an Offer Rate (being a single rate to be designated by the Cash Election Creditor on a post-Common Share Consolidation basis, provided that such rate must be U.S.$16.10 or such higher rate in increments of U.S.$0.10 above U.S.$16.10), or a combination thereof. Cash Elections made (i) at the Designated Rate where such elections are in aggregate in excess of U.S.$250,000,000 or (ii) at the Offer Rates, will only be honoured if, and only to the extent that, the Plan Sponsor agrees to subscribe for New Common Shares based on such increased prices or at such amounts, as the case may be, in which case elections made by Cash Election Creditors will be accepted starting with the lowest price until the subscriptions are satisfied.
• The common shares of the Corporation will be consolidated (into "new Common Shares") on the basis of one post-consolidated share for each 100,000 common shares outstanding immediately prior to the consolidation.
• The Creditor DIP Financing will not be repaid upon the Corporation's exit under the Plan but instead will be amended and restated as five-year secured notes (the "Exit Notes"). The Exit Notes will accrue interest at a rate equal to 10% per annum and may be redeemable by the Corporation subject to certain terms, including the payment of a prepayment premium. For a period of two years following the date the Plan is implemented, the Corporation will have the option, if the Corporation's unrestricted cash in operating accounts falls below U.S.$150 million, to make "payments-in-kind" with respect to any interest payment owed on the Exit Notes at a rate of 14% per annum.
• The DIP L/C Facility will be amended and restated as an exit letter of credit facility expiring in June 2018.

Effect of Plan

• The Corporation's indebtedness will be reduced by approximately U.S.$5.1 billion.
• Annual interest expense will be reduced by approximately U.S.$258 million.
• The U.S.$250 million of Exit Notes will be the only long-term debt in the Corporation's capital structure outside of facilities to support letters of credit or hedging activities.
• Existing Shareholders will hold, in the aggregate, approximately 3,000 Common Shares, which will constitute no more than 0.006% (rounded to the nearest thousandth of a percent) of the Common Shares outstanding following the issuance of the New Common Shares.

The Corporation has agreed with the DIP Note Purchasers that it shall cause the consolidated Shares to be publicly listed and available for trading on the TSX or, if such listing is not available, on the TSX-V.

Canadian tax consequences

Interest entitlements and settlements

Under the initial CCAA order, interest on Affected Claims ceased to accrue as of the filing date. Under the Plan, no amount will be paid in satisfaction of accrued and unpaid interest on the Notes and Bank Lender's Allowed Claims. Any accrued and unpaid interest on the Notes and Bank Lender's Allowed Claims up to the Filing Date will be forgiven by Noteholders and Bank Lenders, respectively. The principal amount of a Noteholder's Notes or Bank Lender's Allowed Claim, as applicable, will be forgiven by the applicable Noteholder or Bank Lender to the extent such principal amount exceeds the aggregate of (i) the fair market value on the Implementation Date of New Common Shares to be issued to such Noteholder or Bank Lender and (ii) the Cash Amount payable to such Noteholder or Bank Lender in satisfaction of the principal amount of its Notes or Bank Lender's Allowed Claims, as applicable….

Reversal of accrued interest

Where a Canadian Holder is required to include an amount in income on account of interest on Notes that accrues in respect of the period prior to the date of acquisition of such Notes or Bank Lender's Allowed Claims, as the case may be, by such Canadian Holder, the Canadian Holder should be entitled to a deduction of an equivalent amount in computing income….

Taxable exchange

In general, a Canadian Holder will realize a capital gain (or capital loss) on the exchange of Notes or Bank Lender's Allowed Claims, as the case may be, for New Common Shares and/or cash equal to the amount by which the proceeds of disposition, net of any reasonable costs of disposition, exceed (or are exceeded by) the adjusted cost base to the Canadian Holder of such Notes or Bank Lender's Allowed Claims, as the case may be. A Canadian Holder's proceeds of disposition of Notes or Bank Lender's Allowed Claims, as the case may be, upon their exchange for New Common Shares will be an amount equal to the aggregate of the fair market value (at the time of the exchange) of the New Common Shares received on the exchange plus the amount of any cash received.

Consolidation

A Canadian Holder will not realize a capital gain or a capital loss as a result of the Common Share consolidation.

U.S. tax consequences

Test of "security"

A debt instrument with a term to maturity of less than five years generally does not qualify as a security while a debt instrument with a term to maturity of ten years or more generally does qualify as a security. The treatment as a security of a debt instrument with a term to maturity between five and ten years is unclear.

Securities exchange or recapitalization

If the Notes or Bank Lender's Allowed Claims are properly treated as securities for purposes of the corporate reorganization provisions of the Code, then, except as otherwise described herein, U.S. Holders will not recognize any gain or loss with respect to the exchange of Notes or Bank Lender's Allowed Claims for New Common Shares or cash in lieu of common shares in the Plan except that U.S. Holders will recognize taxable income to the extent that any such Common Shares are deemed to have been received in respect of accrued and unpaid interest on the Notes or Bank Lender's Allowed Claims, as applicable. Notwithstanding the foregoing, if the Notes or Bank Lender's Allowed Claims are exchanged for New Common Shares plus cash in an exchange treated as a "recapitalization" under the Code, a U.S. Holder that realizes gain on the exchange generally would recognize gain, for U.S. federal income tax purposes, equal to the lesser of: (i) the amount of gain realized, which would be the excess of fair market value of New Common Shares and cash received pursuant to the Plan, over the U.S. Holder's adjusted tax basis in the Notes and Bank Lender's Allowed Claims exchanged pursuant to the Plan; and (ii) the amount of the cash received pursuant to the Plan.

Non-securities exchange

If any of the Notes or Bank Lender's Allowed Claims are not properly treated as securities for U.S. federal income tax purposes, or if the Notes or Bank Lender's Allowed Claims are exchanged solely for cash pursuant to the Cash Election, then the exchange of those Notes or Bank Lender's Allowed Claims by a U.S. Holder in the Plan would be fully taxable, and such U.S. Holder would recognize gain or loss, for U.S. federal income tax purposes.

Early Consent Shares

A U.S. Holder's receipt of Early Consent Shares could be treated as separate consideration received for consenting to the exchange prior to the Consent Deadline, which would generally be taxable as ordinary income or as additional consideration received by the U.S. Holder as part of the exchange. The Corporation expects to treat the Early Consent Shares as additional consideration that will be treated for Code purposes as the New Common Shares received in exchange for the Notes or Bank Lender's Allowed Claims.