Offshore drilling rig operator Paragon Offshore PLC will file for bankruptcy this weekend under the terms of a prearranged deal cutting about $1.1 billion in debt from its balance sheet.

The company said Friday that it has reached an agreement with 77% of two groups of its unsecured bondholders and 89% of senior lenders, under which each of these groups will receive cash payments in return for agreeing to reduce the principal balance of their debt or modify the terms of their loan.

The bondholders have agreed to accept $345 million in cash and 35% equity in the restructured company in exchange for forgiving $984 million in debt. The group could receive another $50 million in payments based on Paragon's future earnings.

Additionally, in exchange for a $165 million cash payment, the balance on Paragon's revolving loan will be reduced to $631 million and the maturity of that loan will be extended to 2021. As of Sept. 30, Paragon owed $697 million under that credit agreement, which matures in 2019.

Current equity holders are slated to retain a 65% stake in the company and its current term loan, $640.8 million as of Sept. 30, will carry through the bankruptcy. Paragon had $2.6 billion in debt overall as of Sept. 30.

Noble Corp., which spun off Paragon in 2014, also has agreed to help Paragon challenge certain Mexican tax liabilities stemming from the years 2005 to 2010 as part of the restructuring, and Noble would eventually assume some of the tax liabilities.

Under the agreement, Paragon will file for bankruptcy by Sunday with the U.S. Bankruptcy Court in Wilmington, Del. In bankruptcy, Paragon will poll creditors on the deal and must receive a majority of support from the groups. The plan will then be presented to a bankruptcy judge for approval.

The company, which has offices in Houston and is incorporated in the U.K., didn't provide a time frame for how quickly it hopes to execute this process but said it plans to move "as quickly and efficiently as possible."

Paragon and its peers have been hurt by the tumble in oil prices during 2015, a situation that has worsened during the first two months of this year. Low prices have forced energy producers that contract drilling equipment to cut spending. Rig operators Hercules Offshore Inc. and Vantage Drilling Co. each filed for bankruptcy last year.

So-called day rates for shallow-water drilling rigs have fallen along with oil prices last 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 2015, Mexico's Petró leos Mexicanos and Brazilian state oil company Petró leo Brasileiro SA, or Petrobras, both have sought to terminate such agreements with the company and other service providers.

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.

Paragon Chief Executive Randall D. Stilley said in a prepared statement Friday that this restructuring will "allow Paragon to significantly reduce its debt while preserving majority ownership for existing equity holders…We believe that successful completion of our financial restructuring will lead to an improved competitive stance."

Matt Jarzemsky contributed to this article.

Write to Stephanie Gleason at stephanie.gleason@wsj.com

(END) Dow Jones Newswires

February 12, 2016 13:05 ET (18:05 GMT)

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