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JEFF McINTOSH/The Globe and Mail

Stornoway Portfolio Management Inc. is backing a restructuring of struggling Arcan Resources Ltd. that includes swapping more than half its sizable debt for equity, four months after the fund manager blocked a takeover of most of the junior oil company.

Arcan has announced an exchange of debentures that will result in its debt being reduced to $150.6-million from $324.6-million. The company's capital spending has been limited by its heavy debt burden and it said last week that the sharp drop in oil prices limited its options.

Stornoway, which holds Arcan debt in its Ravensource Fund and Stornoway Recovery Fund, said it worked with the oil company and other stakeholders to arrive at the recapitalization plan. Debenture-holders are slated to vote on the restructuring before the end of the first quarter.

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The holders rejected a contentious rescue plan for Arcan in August. Arcan had urged its investors to support privately held Aspenleaf Energy Ltd. taking over 87.5 per cent of Arcan's light oil assets in the Swan Hills area of north-central Alberta. Arcan was to form a new junior oil company with the remaining Swan Hills interests, with Aspenleaf owning 6.7 per cent of it.

Stornoway complained about a 17.5 per cent haircut on its securities under that proposal.

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