Offshore drilling rig operator Paragon Offshore PLC is in talks with its bondholders aimed at reaching a deal to reduce its $2.6 billion debt load, according to people familiar with the matter.

The Houston company recently started confidential discussions with bondholders including AllianceBernstein Holding LP and Loomis Sayles & Co., the people said. The debt restructuring could involve a swap of bonds for new debt, an ownership stake in the company or a cash payment, some of the people said.

The bondholders are working with advisory firm Ducera Partners LLC while a separate group of Paragon's senior lenders has tapped PJT Partners Inc., the people added. Paragon earlier this year said it tapped investment bank Lazard Ltd. and law firm Weil, Gotshal & Manges LLP for advice on fixing its capital structure.

Paragon and its peers have been hurt by the past year's tumble in oil prices, which has forced energy producers that contract drilling equipment to cut spending. Rig operators Hercules Offshore Inc. and Vantage Drilling Co. filed for bankruptcy protection earlier this year.

So-called day rates for shallow-water drilling rigs have tumbled along with oil prices over the past year. Energy producers, meanwhile, have moved to cancel long-term contracts for equipment used in deep-water drilling.

Paragon's two largest customers at the start of the year, Mexico's Petró leos Mexicanos and Brazilian state oil company Petró leo Brasileiro SA—or Petrobras—have both sought to terminate such agreements with the company and other service providers.

Paragon had $733 million in cash at the end of September but carries an unwieldy debt burden. The company's 6.75% bonds due in 2022 have fallen about 70% this year to 18 cents on the dollar, according to MarketAxess. Its stock has fallen 93% this year, closing at 19 cents on Friday.

Paragon Chief Executive Randall Stilley told analysts on a November conference call the company's cash pile puts it "in a unique position relative to other companies" regarding its efforts to stay afloat. He said the company was focused on a "comprehensive capital structure solution" rather than "piecemeal" efforts like buying back debt at a discount.

In a regulatory filing last month, Paragon has said a decline in its business could force it to breach a limit on debt relative to earnings allowed under its credit line within the next 12 months. The company warned there is "substantial doubt" about its ability to continue operating as a going concern.

In September, Paragon reported a $1.1 billion loss for the third quarter, mostly due to write-downs related to the value of its fleet. Its sales declined from a year earlier for the third consecutive period.

Write to Matt Jarzemsky at matthew.jarzemsky@wsj.com

 

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(END) Dow Jones Newswires

December 04, 2015 17:45 ET (22:45 GMT)

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