⛽️New Chapter 11 Filing - Arsenal Resources Development LLC⛽️

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An “array of resources available for a certain purpose” connotes something positive — an advantage to the party in possession of the resources. Of the arsenal. Bankruptcy sure loves to flip things on their head. We’re looking at you Arsenal Resources Development LLC.

Arsenal Resources Development LLC and 16 affiliated companies filed for bankruptcy in the District of Delaware on Friday. This marked the second prepackaged chapter 11 filing for entities affiliated with the Arsenal enterprise in less than 12 months. In February, Arsenal Energy Holdings LLC, a holding company, filed a 9-day prepackaged bankruptcy to effectuate a debt-for-equity swap of $861mm of subordinated notes. We wrote at the time:

Pursuant to its prepackaged plan of reorganization, the company will convert its subordinated notes to Class A equity. Holders of 95.93% of the notes approved of the plan. The one holdout — the other 4+% — precipitated the need for a chapter 11 filing. Restructuring democracy is a beautiful (and sometimes wasteful) thing.

And:

The company, itself, is about as boring a bankruptcy filer as they come: it is just a holding company with no ops, no employees and, other than a single bank account and its direct and indirect equity interests in certain non-debtor subs, no assets. The equity is privately-held.

More of the action occurred out-of-court upon the recapitalization of the non-debtor operating company. Because of the holdout(s), the company, its noteholders, the opco lenders (Mercuria) and the consenting equityholders agreed to consummate a global transaction in steps: first, the out-of-court recap of the non-debtor opco and then the in-court restructuring of the holdco to squeeze the holdouts. For the uninitiated, a lower voting threshold passes muster in-court than it does out-of-court. Out-of-court, the debtor needed 100% consent. Not so much in BK. (emphasis added).

Critically, the February restructuring did not successfully amend any of the company’s gathering agreements. Trade creditors were unimpaired and unaffected (economically).

With this bankruptcy filing, the operating companies are now in chapter 11. Which makes statements like these…

…technically incorrect. This isn’t a Chapter 22 per se. This isn’t even what we’d dub going forward, a Crapter 22-12 (two bankruptcy filings in 12 months a la Hercules Offshore Inc., another misleadingly-strong-named-failure-of-an-enterprise) or the “Two-Year Rule” violating Crapter 22-24 (two bankruptcy filings in 24 months a la Gymboree).* This is actually David’s Bridal in reverse: an out-of-court restructuring quickly followed in short order by an in-court restructuring. This is, technically, a “reverse Chapter 11.5.” We know…this is getting to be a bit much, but work with us here, folks: when the restructuring process becomes this much of a joke, jokester labels apply.

Founded in 2011, Arsenal is an independent exploration and production company that acquires and develops “unconventional” nat gas resources in the Appalachian Basin; it has 177k acres in the Marcellus Shale. The company is headquartered in Pennsylvania but its primary acreage and horizontal wells exist in West Virginia. The company had $120.1mm of revenue in ‘18 and appears on track to more or less match that in ‘19 ($59.3mm through June’s end, so, okay, maybe “less”).

In its latest Disclosure Statement, the company has the cajones to spitball the following:

“The Company creates value by leveraging its technical expertise and local knowledge to assemble a portfolio of concentrated, high-quality drilling locations, develop its acreage position safely and efficiently and install midstream infrastructure to support its upstream activities.”

Except, all we see here — across two recapitalization transactions in less than 12 months — is value destruction across the enterprise.** To be fair, the natural gas price environment has been far from accommodating over the last year. It is primarily for that reason — and a still too-levered balance sheet — that the company is in bankruptcy. This is telling:

…following the Prior Plan Effective Date, the E&P industry’s declining trend continued through fiscal year 2019, as exhibited by the following chart, depicting a natural gas futures-strip priced on the Prior Plan Effective Date compared against the same strip priced on October 22, 2019. As shown in the chart, since the Prior Plan Effective Date, realized gas prices have been on average 8.1% below futures strip (and the forward looking October 22, 2019 strip is on average 8.6% lower today than February 14, 2019 strip). Indeed, since the Prior Plan Effective Date, through September 30, 2019, 31 E&P companies have filed for chapter 11 protection. This represents a significant increase compared to the 22 E&P companies that filed for chapter 11 during the first 9 months of 2018.

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Compounding matters is the balance sheet:

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The new plan, which has been agreed upon by all three of the major constituencies party to the capital structure, will:

  • provide the Debtors with access to $90mm in DIP credit from Citibank NA, the debtors’ prepetition RBL Lenders and, upon confirmation and emergence from bankruptcy, a $130mm exit facility;

  • convert the term loan and seller notes into 100% of the equity in the reorganized debtors (subject to dilution) from a $100mm equity infusion from lenders Chambers and Mercuria.

This filing also requires — as a condition to the equity infusion — the implementation of amendments to two of five of the debtors’ gathering agreements and the rejection, assumption or consensual amendment of the remaining three agreements. Why? The debtors note:

“…certain of the Gathering Agreements impose significant minimum volume commitments (“MVCs”) at uneconomic fixed prices, thereby requiring ARE, the debtor party to the agreements, to pay for pipeline access, whether or not it is fully utilizing that capacity.”

Significantly, the debtors have reached agreement with the two gathering agreement counterparties on more realistic obligations in the current nat gas environment. Accordingly, the debtors hope to have this case completed by the end of February.


*Credit for “Crapter 11” belongs to loyal reader, David Guess, a Partner, who, congratulations are in order, recently moved over to Greenberg Traurig in Irvine CA. Cheers David!

**That is, unless we factor in the professionals. Simpson Thacher & Bartlett LLP, Alvarez & Marsal LLC, PJT Partners Inc., and Prime Clerk LLC all get a second bite at the apple. Who says that debtor-work doesn’t have recurring revenue??

  • Jurisdiction: D. of Delaware (Judge Shannon)

  • Capital Structure: See Above.

  • Professionals:

    • Legal: Simpson Thacher & Bartlett LLP (Michael Torkin, Kathrine McLendon, Nicholas Baker, William Russell Jr., Edward Linden, Jamie Fell) & Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Kara Coyle, Ashley Jacobs)

    • Financial Advisor: Alvarez & Marsal LLC

    • Investment Banker: PJT Partners Inc. (Avi Robbins)

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Prepetition RBL Agent and DIP Agent: Citibank NA

      • Legal: Paul Hastings LLP (Andrew Tenzer) & Richards Layton & Finger PA (Mark Collins, David Queroli)

      • Financial Advisor: RPA Advisors

    • Gathering Agreement Counterparty: Equitrans Midstream Corporation ($ETRN)

      • Legal: Buchanan Ingersoll & Rooney PC (Mary Caloway, Mark Pfeiffer, TImothy Palmer)

🌑New Chapter 11 Bankruptcy Filing - Murray Energy Holdings Co.🌑

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Ohio-based Murray Energy Holdings Co. and its 90+ affiliated debtors are now part of a not-so-exclusive club: the Bankrupted Coal Company Club (the “BCCC”)! Unlike some more recent small(er) coal bankruptcy filings, this one is a behemoth: the debtors own and operate 13 active mines in Ohio, West Virginia, eastern and western Kentucky, Alabama, Illinois, and Utah*; their primary product is thermal coal used for electricity (though, with recent acquisitions, the debtors are also now in the steel-making business). To give you a sense of the magnitude of this company, here are some key figures:

  • Produced 53mm tons of bituminous coal in 2018;

  • Employs 5,500 people, including 2,400 active union members EXCLUSIVE of folks employed through the debtors’ partnership with soon-to-be-BCCC-member Foresight Energy LP ($FELP);

  • Generated $2.5b in coal sales and $542.3mm of EBITDA in 2018; and

  • Carries $2.7b of funded debt on balance sheet, $298mm of annual interest and amort expenses, AND $8b+ in actual or potential liability obligations under various pension and benefit plans. In 2018, the debtors’ statutory or CBA-related employee and retiree obligations totaled approximately $160mm. These are key factors that explain why, ultimately, despite every effort to hold out, this company capitulated into bankruptcy.

This is a story of unfettered expansion and spending, hubris, misplaced trust in new Washington on the part of Robert Murray, and utterly savage disruption.

The disruption side of the equation is compelling. Per the company:

“The thermal coal markets that Murray traditionally serves have been meaningfully challenged over the past three to four years, and deteriorated significantly in the last several months. This sector-wide decline has been driven largely by (a) the closure of approximately 93,000 megawatts of coal-fired electric generating capacity in the United States, (b) a record production of inexpensive natural gas, and (c) the growth of wind and solar energy, with gas and renewables, displacing coal used by U.S. power plants.”

Interestingly, this one statement ties together so much of what we’ve all been seeing in the restructuring space. Over the last several years, there have been a number of power company bankruptcies and through bankruptcy or otherwise, capacity has been cut considerably (indeed, FirstEnergy is a recipient of Murray Energy coal and undoubtedly took measures to cut back on coal supply). Fracking across the US has led to a deluge of natural gas — so much so that producers are flaring excess natural gas due to a lack of pipe infrastructure with which to transport it. Despite structural challenges, natural gas exports are on the rise. From the U.S. Energy Information Administration just yesterday:

“From January through June of 2019, U.S. net natural gas exports averaged 4.1 billion cubic feet per day (Bcf/d), more than double the average net exports in 2018 (2.0 Bcf/d), according to data in the U.S. Energy Information Administration’s (EIA) Natural Gas Monthly. The United States became a net natural gas exporter (exported more than it imported) on an annual basis in 2017 for the first time in almost 60 years.”

And as this odd illustration shows, the US is becoming increasingly dependent — in large part due to federal and state emissions standards — upon solar and wind for its electricity needs. The debtors highlight:

“…coal-fired installed capacity as a percentage of total installed capacity has fallen from 26 percent in 2013 to 20 percent in 2019, with coal-fired generation as a percentage of total generation falling from 35 percent in 2013 to 27 percent in early 2019. Natural gas and renewables installed electricity generation capacity in the United States as a percentage of total installed capacity has increased from 59 percent in 2013 to 67 percent in 2019, and natural gas and renewables generation as a percentage of total generation increased from 42 percent in 2013 to 48 percent in early 2019.”

YIKES. That is a DRAMATIC change. They continue:

“During its peak in 2007, coal was the power source for half of electricity generation in the United States and by early 2019, coal-fired electricity generation fell to approximately 27 percent. These challenges have intensified recently as (i) certain electric utility companies have filed for bankruptcy protection and others have sought, and received, subsidies for their nuclear generation capacity to avoid bankruptcy, at the expense of coal-fired facilities, (ii) domestic natural gas prices hit 20-year lows this past summer, and (iii) overall demand for electricity in the United States has declined two percent in 2019, further depleting demand for coal at domestic utilities.”

MAGA!!

The international story, though, ain’t much better, with the company noting a “perfect storm of negative forces” that includes:

“…low liquefied natural gas prices; a recent trade war driving Russia to increase exports; mild weather across the Northern Hemisphere led to a reduction in demand for heating in both Europe and Asia; higher freight costs; and a prolonged monsoon season in India which kept demand depressed while conditions cleared for a record eight months.”

As if all of that isn’t bad enough, the competitive landscape has been horrific and while we suppose its admirable to try and holdout to avoid the embarrassment and stigma of bankruptcy, that strategy clearly becomes untenable when literally every other competitor in the US has already joined the BCCC and stripped themselves of burdensome debt and pension obligations. The company acknowledges as much:

“…while Murray has historically been able to navigate the challenges of the coal marketplace, these rapidly deteriorating industry conditions have caused more than 40 coal companies to file for bankruptcy since 2008, with more than half a dozen major operators filing in the last year alone. These bankruptcies have affected thousands of workers across the United States, and they have left their mark on Murray. Competitors have used bankruptcy to reduce debt and lower their cost structures by eliminating cash interest obligations and pension and benefit obligations, leaving them better positioned to compete for volume and pricing in the current market, while Murray continued to satisfy its significant financial obligations required by the weight of its own capital structure and legacy liability expenses. As a result, Murray generated little cash after satisfying debt service obligations, paying employee health and pension benefits, and maintaining operations.”

That’s a quaint narrative but it’s also a bit misleading.

While every other company was falling apart, Mr. Murray went on a shopping spree, snapping up Consolidation Coal CompanyForesight Energy LP (coming soon to a bankruptcy court near you), Mission Coal Company LLCArmstrong Energy Inc., and certain Colombian assets. This undoubtedly led to increased integration costs and debt. During that time, the debtors deployed every capital structure trick in the book to extend maturities and kick the can down the road. That road has come to an end at the bankruptcy court doors.

Here is that sweet clean capital structure:

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Man, that’s a beaut.

Rounding out the company’s extensive liabilities are the obligations to employees under CBAs and pension and benefit plans.

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Pursuant to these CBAs, Murray contributes to three multi-employer retirement plans. If you want a sense of how employer-employee relations have changed since the 1970s, look no farther than the debtors’ obligations under what they’ve dubbed the “1974 Pension Plan.” Per the debtors:

“Following the large wave of chapter 11 filings in 2015 and 2016, more than half a dozen large U.S. coal companies collapsed into bankruptcy over the last several years and withdrew from the 1974 Pension Plan. When an employer withdraws, its vested beneficiaries remain in the 1974 Pension Plan and are referred to as “orphan” beneficiaries. The remaining contributing employers become responsible for the benefits of these orphaned participants who were never their employees. As a result, approximately 95 percent of beneficiaries who currently receive benefits from the 1974 Pension Plan last worked for employers that no longer contribute to the Plan. As of January 2019, 11 employers contribute to the 1974 Pension Plan, compared to over 2,800 in 1984. This has placed significant stress on the 1974 Pension Plan and the small number of contributing employers—Murray most of all. If Murray withdraws from the 1974 Pension Plan, the withdrawal liability could be $6.4 billion or more, with annual estimated payments of approximately $32 to $35 million in perpetuity.”

Whoa. And that’s just one plan: the company is also on the hook for others, not to mention $1.9b in other federally-mandated post-employment benefits, asset retirement obligations and environmental obligations.

“Likely”?!?

The company has a restructuring support agreement with 60% of its “consenting superpriority lenders” and “consenting equityholders” (read: Robert Murray) that outlines the general terms of a path forward: a sale with the superpriority lenders as stalking horse bidder, DIP lender, and funder of administrative expenses. Those lenders committed to provide a $350mm DIP commitment. From here, the clock is ticking.

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The debtors hope to have an auction within 135 days and plan confirmation within 195 days. And within 106 days the debtors want to have a solution their CBA/retiree problem or file a motion seeking to reject those agreements and modify those benefits.

There is, as with most cases, a “cooler talk” aspect to this filing: there’s the Kirkland-is-dominating-with-yet-another-coal-bankruptcy-representation-post-westmoreland-and-mission-coal-and-armstrong-energy-which-means-that-A&M-is-dominating-which-means-that-Prime-Clerk-is-dominating-and-what-the-f*ck-happened-to-Jones-Day-which-used-to-crush-coal-filings-with-Peabody-and-Alpha-Natural-but-now-seems-to-be-unraveling-narrative, but putting aside that inside baseball crap and how much frikken cash this case is going to print for all of the above, it’s the miners themselves — those guys who were in the depths of the earth (as distinct from the white-collar professionals who always talk about “the trenches” and “hard fought” negotiations) — who are very likely to get completely and utterly shafted here. As if getting misled or lied to by Mr. Murray — however good his intentions may have been — and Mr. Trump wasn’t enough, they’re now facing the very real possibility of losing the benefits that they worked especially hard to get. All while the professionals are billing $1650/hour. Bankruptcy is vicious.

To point here is the UMWA’s statement about the bankruptcy:

“Today’s filing by Murray Energy for Chapter 11 bankruptcy reorganization comes as no surprise. This day has been coming for some time.

Coal production in this country continues to decline, due to the glut of natural gas on the market and continued government preference for gas and renewable energy to replace coal-fired power generation. Combined with a recent severe reduction in coal exports, these factors delivered a one-two punch that an over-extended Murray Energy could not withstand.

Now comes the part where workers and their families pay the price for corporate decision-making and governmental actions. Murray will file a motion in bankruptcy court to throw out its collective bargaining agreement with the union. It will seek to be relieved of its obligations to retirees, their dependents and widows. We have seen this sad act too many times before.”

Let’s pour one out for the little guys.

*This number is contradicted in the bankruptcy papers. In one instance, the company’s new CEO indicates that there are 13 owned and operated mines; in another he says 18. Whatevs. What are 5 mines in the scheme of things (we’re kidding…WTF, y’all?). The company also owns and operates a mine in Colombia, South America.

  • Jurisdiction: S.D. of Ohio (Judge Hoffman Jr.)

  • Capital Structure: See Above

  • Professionals:

    • Legal: Kirkland & Ellis LLP (James Sprayragen, Nicole Greenblatt, Ross Kwasteniet, Joseph Graham, Alexander Nicas, Mark McKane, Tricia Schwallier) & Dinsmore & Shohl LLP (Kim Martin Lewis, Alexandra Horwitz)

    • Financial Advisor: Alvarez & Marsal LLC (Robert Campagna)

    • Investment Banker: Evercore Group LLC

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Prepetition ABL Agent: Goldman Sachs Bank USA

    • Prepetition FILO and DIP FILO Lender: GACP Finance Co. LLC

      • Legal: Sidley Austin LLP (Jennifer Hagle, Leslie Plaskon, Anna Gumport) & Frost Brown Todd LLC (Ronald Gold, Erin Severini

    • Prepetition Superpriority Agent: GLAS Trust Company LLC; DIP Administrative Agent: GLAS USA LLC; DIP Collateral Agent: GLAS Americas LLC

      • Legal: Wilmer Cutler Pickering Hale and Dorr LLP (Andrew Goldman, Benjamin Loveland) & Frost Brown Todd LLC (Douglas Lutz, A.J. Webb, Bryan Sisto)

    • Term Loan Agent: Black Diamond Commercial Finance LLC

      • Legal: Ropes & Gray LLP (Gregg Galardi) & Keating Muething & Klekamp PLLC (Robert Sanker)

    • 1.5L Notes Indenture Trustee: U.S. Bank N.A.

    • 2L Notes Indenture Trustee (‘20 and ‘21): The Bank of New York Mellon Trust Company N.A.

    • Ad Hoc Group of Superpriority Lenders

      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Adam Shpeen, James McClammy) & Frost Brown Todd LLC (Douglas Lutz, A.J. Webb, Bryan Sisto)

      • Financial Advisor: Houlihan Lokey Capital Inc.

    • Equityholders (Robert Murray)

      • Legal: Willkie Farr & Gallagher (Brian Lennon, Matthew Feldman)

    • Official Committee of Unsecured Creditors (Bank of NY Mellon Trust Company NA, CB Mining Inc., Joy Global, RM Wilson Co., UMWA 1974 Pension Trust, United Mine Workers of America International Union, Wheeler Machinery Co.)

🎦New Chapter 11 Bankruptcy Filing - Deluxe Entertainment Services Group Inc.🎦

Deluxe Entertainment Services Group Inc.

October 3, 2019

Summary to come.

  • Jurisdiction: (Judge Drain)

  • Capital Structure: ⬇️

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  • Professionals:

    • Legal: Kirkland & Ellis LLP (Jonathan Henes, Jonathan Altman)

    • Board of Directors: Ronald Perelman, Matthew Cantor, Paul Savas

    • Financial Advisor: AlixPartners LLP

    • Investment Banker: PJT Partners Inc. (James Baird)

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Existing ABL Agent, Senior Priming Term Loan Agent, Priming Term Loan Agent, and Existing Term Loan Agent: Credit Suisse AG

      • Legal: Cravath Swaine & Moore LLP (Paul Zumbro, George Zobitz, Sarah Rosen) & Norton Rose Fulbright

    • Ad Hoc Committee of the Senior Priming Term Loan,2 the Priming Term Loan, the Existing Term Loan and the DIP Term Facility (see below, as of 10/7/19)

      • Legal: Stroock & Stroock & Lavan LLP (Kristopher Hansen, Jonathan Canfield, Gabriel Sasson)

      • Financial Advisor: FTI Consulting Inc.

    • MAFCO

      • Legal: Skadden Arps Slate Meagher & Flom LLP (Shana Elberg, Mark McDermott)

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⛽️New Chapter 11 Bankruptcy Filing - Sheridan Holding Company II, LLC⛽️

Sheridan Holding Company II, LLC

September 15, 2019

Houston-based Sheridan Holding Company II LLC and 8 affiliated debtors filed a chapter 11 bankruptcy case in the Southern District of Texas with a nearly-fully-consensual prepackaged plan of reorganization. The plan, once effective, would eliminate approximately $900mm(!) of pre-petition debt. The case is supported by a $100mm DIP credit facility (50% new money).

Why so much debt? While this is an oil and gas story much like scores of other companies we’ve seen march through the bankruptcy court doors, the business model, here, is a bit different than usual. Sheridan II is a “fund”; it invests in a portfolio of working interests in mature onshore producing properties in Texas, New Mexico and Wyoming. Like Matt Damon in “Promised Land,” the debtors scour God’s country in search of properties, acquires working interests in those properties, and then seeks to deploy their special sauce (“application of cost-effective reinvestments, operational improvements, and enhanced recovery programs to the acquired assets”) to eke out product and, ultimately, sell that sh*t at a profit. This, as you might suspect, requires a bunch of capital (and equity from LPs like Warburg Pincus).* Hence the $1.1b of debt on balance sheet. All of this is well (pun intended) and good, provided the commodity environment cooperates. Which, we all know all too well, has not been the case in recent years. Peace out equity. Peace out sub debt.

Interestingly, some of that debt was placed not too long ago. Confronted with the oil and gas downturn, the debtors took the initiative to avoid bankruptcy; they cut off distributions to LPs, took measures to decrease debt, cut opex, capex and SG&A, and engaged in a hedging program. In 2017, the debtors raised $455mm of the subordinated term loan (with PIK interest galore), while also clawing back 50% of distributions previously made to LPs to the tune of $64mm. Everyone needed to have skin in the game. Alas, these measures were insufficient.

Per this plan, that skin is seared. The revolving lenders and term lenders will receive 95% of the common stock in the reorganized entity with the subordinated term lenders getting the remaining 5%. YIKES. The debtors estimate that the subordinated term lenders will recover 2.6% of the amount of their claims under the proposed plan. 2.6% of $514mm = EPIC VALUE DESTRUCTION. Sweeeeeeeeet. Of course, the limited partners are wistfully looking at that 2.6%. Everything is relative.

*****

Some additional notes about this case:

  • The hope to have confirmation in 30 days.

  • The plan includes the ability to “toggle” to a sale pursuant to a plan if a buyer for the assets emerges. These “toggle” plans continue to be all of the rage these days.

  • The debtors note that this was a “hard fought” negotiation. We’ve lost count of how many times professionals pat themselves on the backs by noting that they arrived at a deal, resolving the issues of various constituencies with conflicting interests and positions. First, enough already: this isn’t exactly Fallujah. You’re a bunch of mostly white males (the CEO of the company notwithstanding), sitting around a luxury conference table in a high rise in Manhattan or Houston. Let’s keep some perspective here, people. Second, THIS IS WHAT YOU GET PAID $1000+/hour to do. If you CAN’T get to a deal, then that really says something, particularly in a situation like this where the capital structure isn’t all-too-complex.

  • The bulk of the debtors’ assets were purchased from SandRidge Energy in 2013. This is like bankruptcy hot potato.

  • Independent directors are really becoming a cottage industry. We have to say, if you’re an independent director across dozens of companies, it probably makes sense to keep Quinn Emanuel on retainer. That way, you’re less likely to see them on the opposite side of the table (and when you do, you may at least temper certain bulldog tendencies). Just saying.

Finally, the debtors’ bankruptcy papers provide real insights into what’s happening in the oil and gas industry today — particularly in the Permian Basin. The debtors’ assets mostly rest in the Permian, the purported crown jewel of oil and gas exploration and production. Except, as previously discussed in PETITION, production of oil out of the Permian ain’t worth as much if, say, you can’t move it anywhere. Transportation constraints, while relaxing somewhat, continue to persist. Per the company:

“Prices realized by the Debtors for crude oil produced and sold in the Permian Basin have been further depressed since 2018 due to “price differentials”—the difference in price received for sales of oil in the Permian Basin as compared to sales at the Cushing, Oklahoma sales hub or sales of sour crude oil. The differentials are largely attributable to take-away capacity constraints caused by increases in supply exceeding available transportation infrastructure. During 2018, Permian Basin crude oil at times sold at discounts relative to sales at the Cushing, Oklahoma hub of $16 per barrel or more. Price differentials have narrowed as additional take-away capacity has come online, but crude oil still sells in the Permian Basin at a discount relative to Cushing prices.”

So, there’s that teeny weeny problemo.

If you think that’s bad, bear in mind what’s happening with natural gas:

“Similarly, the Henry Hub natural gas spot market price fell from a peak of $5.39 per million British thermal units (“MMBtu”) in January 2014 to $1.73 per MMBtu by March 2016, and remains at approximately $2.62 per MMBtu as of the Petition Date. In 2019, natural gas prices at the Waha hub in West Texas have at times been negative, meaning that the Debtors have at times either had to shut in production or pay purchasers to take the Debtors’ natural gas.”

It’s the natural gas equivalent of negative interest rates. 😜🙈

*All in, this fund raised $1.8b of equity. The Sheridan Group, the manager of the debtors, has raised $4.6b across three funds, completing nine major acquisitions for an aggregate purchase price of $5.7b. Only Sheridan II, however, is a debtor (as of now?).

  • Jurisdiction: S.D. of Texas (Judge Isgur)

  • Capital Structure: $66 RCF (Bank of America NA), $543.1mm Term Loan (Bank of America NA), $514mm ‘22 13.5%/17% PIK Subordinated Term Loans (Wilmington Trust NA) — see below.

  • Professionals:

    • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Steven Serajeddini, Spencer Winters, Stephen Hackney, Rachael Marie Bazinski, Jaimie Fedell, Casey James McGushin) & Jackson Walker LLP (Elizabeth Freeman, Matthew Cavenaugh)

    • Board of Directors: Alan Carr, Jonathan Foster

      • Legal: Quinn Emanuel Urquhart & Sullivan LLP

    • Financial Advisor: AlixPartners LLP

    • Investment Banker: Evercore Group LLC

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Administrative agent and collateral agent under the Sheridan II Term Loan Credit Agreements: Bank of America NA

      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Stephen Piraino, Nathaniel Sokol)

      • Financial Advisor: Houlihan Lokey Capital Inc.

    • Administrative Agent under the Sheridan II RBL: Bank of America NA

      • Legal: Vinson & Elkins LLP (William Wallander, Bradley Foxman, Andrew Geppert)

      • Financial Advisor: Houlihan Lokey Capital Inc.

    • Ad Hoc Group of Subordinated Term Loans (Pantheon Ventures US LP, HarbourVest Partners LP)

      • Legal: Weil Gotshal & Manges LLP (Matthew Barr, Gabriel Morgan, Clifford Carlson)

      • Financial Advisor: PJT Partners LP

    • Limited Partner: Wilberg Pincus LLC

      • Legal: Willkie Farr & Gallagher LLP (Brian Lennon)

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Source: First Day Declaration

Source: First Day Declaration

New Chapter 11 Filing - GCX Limited

GCX Limited

September 15, 2019

GCX Limited and 15 affiliated debtors filed a prepackaged bankruptcy this week in pursuit of a dual-track restructuring that will, either through a debt-for-equity swap or a sale, extinguish over $150mm of debt. In the swap scenario, the company will hand the keys over to senior secured noteholders; in the sale scenario, the noteholders will gladly take their cash payout and get the f*ck out of dodge. Either way, the company will be under new ownership with a significantly deleveraged capital structure. Certain consenting senior secured noteholders will provide $54.5mm in DIP financing.

The debtors are a global data communications provider; they operate one of the world’s largest fiber networks (PETITION Note: we’re old enough to remember when fiber was the future!). They provide undersea and terrestrial cables and landing stations and provide managed network services all across the globe. In English, this means they help power, among other things, major telecomms companies and streaming media.

Unfortunately, the debtors have declining revenues. Among other reasons for that sad state of affairs, the debtors cite (i) newly developed and planned cable systems along the debtors’ existing and planned network routes, (ii) financial distress at the parent level, (iii) ongoing disputes with banks that have applied setoff rights against the debtors’ cash, and (iv) high fixed costs and less certain recurring revenue due to clients newfound refusal to enter into long-term arrangements. For all of these reasons, the debtors have been unable to refinance their senior secured notes and the notes matured on July 31. Obviously — considering this thing is now in bankruptcy court — the debtors’ issues prevented them from paying off the debt as it became due. Instead, the debtors have operated under a forbearance agreement since July, during which time it formulated its go-forward plan and solicited the support, via a restructuring support agreement, of a meaningful amount of senior unsecured noteholders. The forbearance expired on the filing date.

Now the bankers, Lazard & Co., will have their work cut out for them. The debtors hope to run an expedited sales process (though, in the bankers’ favor is the fact that the pool of interested parties for assets like these is likely limited) and conduct an auction within 42 days of the filing. Absent that, the debtors will proceed with the debt-for-equity swap with an eye towards confirmation within 75 days and going effective before the end of the year (subject to requisite regulatory approvals, i.e., FCC and CFIUS).

  • Jurisdiction: D. of Delaware (Judge Sontchi)

  • Capital Structure: $365.8mm 7% ‘19 senior secured notes (The Bank of New York Mellon)

  • Professionals:

    • Legal: Paul Hastings LLP (Chris Dickerson, Brendan Gage, Robert Dixon Jr., Todd Schwartz) & Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Jaime Luton Chapman)

    • Board of Directors: Rodney Riley, Donald Mallon, Alan Carr

    • Financial Advisor/CRO: FTI Consulting Inc. (Michael Katzenstein, Don Harer)

    • Investment Banker: Lazard & Co. (Ken Ziman)

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Wilmington Trust NA

      • Legal: Duane Morris LLP (Christopher Winter, Jarret Hitchings)

    • Ad Hoc Group of Senior Secured Noteholders

      • Legal: White & Case LLP (Brian Pfeiffer, William Guerrieri, Varoon Sachdev) & Farnan LLP (Brian Farnan, Michael Farnan)

💊New Chapter 11 Bankruptcy Filing - Purdue Pharma LP 💊

Purdue Pharma LP

September 15, 2019

See here for our writeup.

  • Jurisdiction: S.D. of New York (Judge Drain)

  • Professionals:

    • Legal: Davis Polk & Wardwell (Marshall S. Huebner, Benjamin S. Kaminetzky,, Timothy Graulich, Eli J. Vonnegut)

    • Board of Directors: Robert Miller, Kenneth Buckfire, John Dubel, Michael Cola, Anthony Roncalli, Cecil Pickett, F. Peter Boer

    • Financial Advisor: AlixPartners LLP

    • Investment Banker: PJT Partners Inc.

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Ad Hoc Committee of AGs in Support of Settlement

      • Legal: Kramer Levin Naftalis & Frankel LLP (Kenneth Eckstein, Rachael Ringer), Brown Rudnick LLP (David Molton, Steven Pohl), Gilbert LLP (Scott Gilbert, Craig Litherland, Kami Quinn), Otterbourg PC (Melanie Cyganowski, Jennifer Feeney)

    • AG of New York

      • Legal: Pillsbury Winthrop LLP (Andrew Troop)

    • Official Committee of Unsecured Creditors: West Boca Medical Center, CVS Caremark D Services LLC, LTS Lohmann Therapy Systems Corporation, Blue Cross and Blue Shield Association, Pension Benefit Guaranty Corporation and 4 individuals

      • Legal: Akin Gump Strauss Hauer & Feld LLP

9/28/19 #135

⛽️New Chapter 11 Filing - Alta Mesa Resources Inc. ($AMR)⛽️

Alta Mesa Resources Inc.

September 11, 2019

Man. We nailed this one. Once Alta Mesa Holdings LP’s borrowing base got redetermined down, it was f*cked.*

As we’ve previously covered, Alta Mesa Resources Inc. is an independent oil and nat gas exploration and production company focused on the Sooner Trend Anadarko Basin Canadian and Kingfisher County (otherwise known as the “STACK”) in Oklahoma. It has an upstream business and, through a non-debtor entity it is now suing in an adversary proceeding (Kingfisher Midstream LLC), a midstream business.

The fact that another oil and gas company is now in bankruptcy** is, frankly, fairly uninteresting: the debtors blame the usual factors for their demise. Depressed oil prices ✅. Over-leverage (here, a $368mm RBL and $509mm in unsecured notes)✅. Liquidity constraints✅. We’ve now seen these story — and those factors — several dozen times this year alone. Like many of its oil and gas predecessors, these debtors, too, will explore a “value-maximizing sale of all or substantially all of the [d]ebtors’ assets” while also looking at a restructuring along with non-debtor affiliates. Par for the course.

What’s most interesting to us on this one — and relatively rare in bankruptcy — is the fact that the company emanated out of a “special purpose acquisition company or “SPAC” for short (these are also known as “blank check” companies). For the uninitiated, SPACs are generally shady-as-sh*t investment vehicles with pseudo-private-equity-like characteristics (including the enrichment of the sponsors) that are offered via IPO to idiot public equity investors who are enamored with putting money behind allegedly successful founders/investors. They have a long and sordid history but, as you might imagine in frothy AF markets like the one we’re currently experiencing, they tend to rise in popularity when people have lots of money to put to work and limited avenues for yield baby yield. According to this “SPAC 101” presentation by the law firm Winston & Strawn LLP, “[i]n 2017, there were 32 SPAC IPOs raising a total of $8.7 billion, the highest total since 2007.” That number rose above $10b in 2018. Some recent prominent examples of SPACs include: (a) the proposed-but-called-off combination of SPAC Leo Holdings Corp. ($LHC) with Chuck E. Cheese, (b) Chamath Palihapitiya’s investment in Richard Branson’s Virgin Galacticspace initiative via his $600mm spac, Social Capital Hedosophia Holdings Corp ($IPOA), and (c) something closer to home for distressed players, Mudrick Capital Acquisition Corporation ($MUDS.U), founded by Jason Mudrick. The latter, despite being 18 month post-close, has yet to deploy its capital (which is notable because, typically, SPACs have a two-year life span before capital must be returned to investors).

In late 2016, Riverstone Investment Group LLC formed its SPAC and commenced an IPO in Q1 ‘17. The IPO generated proceeds of over $1b. These proceeds were placed in a trust account — standard for SPACs — and ultimately used to partially fund the “business combination” that started the sh*tshow that we all now know as Alta Mesa. That transaction closed in February 2018. Public shareholders were now in the mix.

So, how did that work out for them? Well, here we are:

So, yeah. Add this one to the list of failed SPACs. The lawyers sure have: AMR, certain of its current and former directors, Riverstone Investment Group LLC and Riverstone Holdings LLC were named defendants in securities class action lawsuits in both United States District Courts for the Southern District of New York and the Southern District of Texas that allege that the defendants “disseminated proxy materials containing materially false or misleading statements in connection with the Business Combination….” The debtors are obviously calling these claims “meritless.”

So, there you have it folks. An inauspicious start has brought us to a suspect penultimate chapter. There is no purchaser in tow, no clear direction for the bankruptcy proceeding, and an adversary proceeding that faces some recent unfavorable precedent (albeit in a different, less favorable, jurisdiction).

We can’t wait to see where this flaming hot mess goes from here.


*We wrote:

PETITION Note: Ruh roh. Just like that, the lenders have put the squeeze on AMH. AMH meet world of hurt. World of hurt, meet AMH.

“As provided under the Alta Mesa RBL, AMH will elect to repay the excess utilization in 5 equal monthly installments of $32.5 million, the first of which will be due in September 2019. As of July 31, 2019, AMH had cash on hand of approximately $79.7 million.”

PETITION Note: HAHAHAHAHA, yeah, sure it will. And we have a bridge to sell you.

Re-engage the bankruptcy countdown. Maybe…MAYBE…some crazy macroeconomic shock will occur and oil prices will shoot up to $1900/barrel. Like, maybe a meteor strikes Earth and annihilates Saudi Arabia, completely wiping it off the map. In that scenario, yeah, sure, AMH is copacetic. 

Interestingly, as we write this, Yemeni Houthi rebels are taking credit for a drone attack that has shut down half of Saudi Arabia’s oil output. Per the WSJ:

The production shutdown amounts to a loss of about five million barrels a day, the people said, roughly 5% of the world’s daily production of crude oil. The kingdom produces 9.8 million barrels a day.

Meteors. Drones. Let’s not split hairs.

**10% of the top 30 creditors features energy companies with prior BK experience including greatest hits like Chaparral Energy LLC, Weatherford US LP (another recent Latham client), and Basic Energy Services LP.


  • Jurisdiction: S.D. of Texas (Judge Isgur)

  • Capital Structure: $368mm RBL (Wells Fargo Bank NA), $509mm 7.785% unsecured notes (US Bank NA)

  • Professionals:

    • Legal: Latham & Watkins LLP (George Davis, Caroline Reckler, Annemarie Reilly, Brett Neve, Andrew Sorkin) & Porter Hedges LLP (John F. Higgins IV, Eric English, Aaron Power, M. Shane Johnson)

    • Board of Directors: James Hackett (Riverstone), Pierre Lapeyre Jr. (Riverstone), David Leuschen (Riverstone), Donald Dimitrievich (HPS), William McCullen, Sylvia Kerrigan, Donald Sinclair, Jeffrey Tepper, Diana Walters, Patrick Bartels, Marc Beilinson)

    • Financial Advisor/CRO: AlixPartners LLP (Robert Albergotti)

    • Investment Banker: Perella Weinberg Partners (Kevin Cofsky)

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Ad Hoc Noteholder Group (Bain Capital Credit LP, Firefly Value Partners LP, Leroy DH LP, PGIM Inc., PPM America Inc.)

      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Angela Libby, Stephanie Massman & (local) Rapp & Krock PC (Henry Flores, Kenneth Krock)

    • Issuing Lender: Wells Fargo Bank NA

      • Legal: Bracewell LLP (William A. Wood III, Jason G. Cohen)

    • Unsecured Note Indenture Trustee: US Bank NA

      • Legal: Blank Rome LLP (Ira Herman, James Grogan)

    • Creditor: Kingfisher Midstream LLC

      • Legal: Quinn Emanuel Urquhart & Sullivan LLP (Susheel Kirpalani, Patrica Tomasco, Devin va der Hahn)

    • Equity Sponsors: Riverstone Investment Group LLC/HPS Investment Partners LLC

      • Legal: Vinson & Elkins LLP (David Meyer, Michael Garza, Harry Perrin)

    • Equity Sponsor: Bayou City Energy Management LLC

      • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Gregory Pesce, Anna Rotman)

    • Equity Sponsors: Orbis Investment Management Limited, High Mesa Holdings LP,

New Chapter 11 Filing - Hollister Construction Services LLC

Hollister Construction Services LLC

September 11, 2019

Sometimes it really pays to be a middleman. If you’re a middleman that can razzle dazzle potential claimants by saying you leverage a lot of cloud-based software, data integration apps and drones, you may even plow your way to $292mm in gross revenue. It’s all about tech these days.

NJ-based Hollister Construction Services LLC is a general construction firm that, in the course of providing construction management services, leverages the aforementioned tech. It doesn’t construct projects itself; rather, it engages in (i) design development, (ii) pre-development services, (iii) assisting with municipal approvals (iv) pre-construction services (including the subcontractor bidding process), and (iv) construction administration. Its projects are located across NJ and NY.

Here’s the thing: lots of tech and expertise are great but you still have to have a functional operating business. The economy has been charging and cranes are everywhere. The building business is booming. This is great if you’re ready to scale with the opportunity. Hollister apparently wasn’t up to the challenge. Per the company:

…recent and rapid expansion of the Debtor’s client base, combined with the Company’s underestimation of the costs of certain projects, resulted in the Company not being able to fully service all of its Project Owners’ projects. Likewise, Hollister was not able to ensure that Subcontractors were paid on the agreed-upon schedule. Certain Subcontractors subsequently stopped performing on their contracts with Hollister.

Accordingly, certain Project Owners ceased making remittance or progress payments to the Debtor on Projects that were pending or completed, but not yet paid in full. As Project Owner payments are the Debtor’s sole source of operating revenue, non-payment led to the Company experiencing significant operational cash flow and liquidity issues.

That’s brutal to read. This is what they call, “over your skis.” 45 projects are in various stages of completion.

The bankruptcy filing is predicated upon triggering the automatic stay, initiating a “breathing spell,” and giving the company an opportunity to negotiate with the Project Owners, the subcontractors, property owners and insurers on how to proceed.

  • Jurisdiction: D. of New Jersey (Judge Kaplan)

  • Capital Structure: $14mm line of credit (funded, PNC Bank NA), $1.3mm Term Loan (funded, PNC Bank NA)

  • Professionals:

    • Legal: Lowenstein Sandler LLP (Brian Buechler, Kenneth Rosen, Joseph DiPasquale, Jennifer Kimble, Arielle Adler)

    • Financial Advisor/CRO: 10X CEO Coaching LLC (Paul Belair)

    • Business Consultant: The Parkland Group Inc. (Larry Goddard)

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • PNC Bank NA

      • Legal: Duane Morris LLP (James Holman, Sommer Ross)

9/13/19 #55

🇲🇽New Chapter 22 Bankruptcy Filing - Maxcom USA Telecom Inc.🇲🇽

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We’re all for a reprieve from retail and energy distress but, sheesh, couldn’t have been more interesting than this?

Maxcom USA Telecom Inc. is a telecommunications provider deploying “smart-build” approaches to “last mile” connectivity (read: modems, handsets and set-up boxes) for enterprises, residential customers and governmental entities in Mexico — which is really just a fancy way of saying that it provides local and long-distance voice, data, high speed, dedicated internet access and VoIP tech, among other things, to customers.* It purports to be cutting edge and entrepreneurial, claiming “a history of being the first providers in Mexico to introduce new services,” including (a) the first broadband in 2005, (b) the first “triple-play” (cable, voice and broadband) in 2005, and (c) the first paid tv services over copper network using IP…in 2007. That’s where the “history” stops, however, which likely goes a long way — reminder, it’s currently the year 2019 — towards explaining why this f*cker couldn’t generate enough revenue to service its ~$103.4mm in debt.** Innovators!!

And speaking of that debt, it’s primarily the $103.4mm in “Old Notes” due in 2020 that precipitated this prepackaged bankruptcy filing (in the Southern District of New York).***

The Old Notes derive from a prior prepackaged bankruptcy — in 2013 (PETITION Note: not a “Two-Year Rule” violation) — and were exchanged for what were then outstanding 11% senior notes due in 2014. These Old Notes have a “step-up interest rate,” which means that, over time, the interest rate…uh…steps up…as in, increases upward/up-like. The rate currently stands at 8%. Unfortunately, the company doesn’t have revenue step-ups/upwardness/upseedayzee to offset the interest expense increase; rather, the company “…incurred losses of $4.9 million for the three months ended June 30, 2019, as compared to losses of $2.9 million for the three months ended June 30, 2018, and losses of $16 million for the year ended December 31, 2018, compared to losses of $.8 million for the year ended December 31, 2017….” Compounding matters are, among other things, the negative effects of decreased interest income and foreign currency exchange rates (the dollar is too damn strong!).**** The closure of the residential segment also, naturally, affected net revenue.

To make matters worse, the company’s debt actually has limitations (remember those?). Per the company:

In order to expand its network and strengthen its market share, the Debtors require additional capital. But, the Old Notes Indenture prohibits Maxcom Parent from incurring additional indebtedness (other than permitted indebtedness) unless certain leverage coverage ratios are satisfied, and the increased interest burden under the Old Notes seriously constrains the Debtors’ ability to take the actions required under its business plan to strengthen and expand their operations.

The purpose of this bankruptcy filing, therefore, is to effectuate a consent solicitation and exchange offer whereby the Old Notes will be swapped (and extinguished) for new “Senior Notes,” new “Junior PIK Notes” and cash consideration. The cash consideration will be covered by a new equity injection of $15mm. This transaction will bolster the company’s liquidity and shed approximately $36mm of debt from the balance sheet (PETITION Note: carry the one, add the two, that’s roughly $2.88mm in annual interest savings before taking into account the PIK notes, which won’t be cash-pay, obviously).

Prior to the bankruptcy filing, the company obtained the requisite amount of support to jam non-consenting creditors (PETITION Note: in bankruptcy, a debtor needs 2/3 in amount and half in number of a particular class of debt to bind a class. Here, the company nailed down acceptances of the plan from 84.75% of the holders of Old Notes holding 66.73% of principal amount in Old Notes). And there is one large group of non-consenting holders, apparently. Cicerone Advisors LLC, a financial advisor to three holders of the Old Notes, Moneda Asset ManagementMegeve Investments and UBS Financial Services, Inc., attempted to engage the company on better terms than that offered under the plan. It did not, however, ultimately provide a proposal; instead, it demanded terms, including confidentiality and an agreement to pay fees and expenses of financial and legal advisors. Here’s the thing, though: they miscalculated their leverage: with only 30% of Old Notes represented, they don’t have a “blocking position” that could thwart the company’s proposal. Absent an additional 4%, these guys are dead in the water.

This should be…should be…a very quick trip through bankruptcy.*****


*The company is shutting down its residential segment, which “involves the gradual closure of residential clusters and mass disconnection of residential customers.” Apparently, people don’t need the company’s services anymore. At least not when they’re carrying $1,000 telecommunications systems in their pants pockets? 🤔

The disruption is real. Indeed, the company’s residential segment operates through an outdated copper network that doesn’t comport with the latest in fiber network technology.

**U.S. Bank NA is the indenture trustee under the Old Notes.

***Oh man, the venue on this one is just quaint. There are two debtors, Maxcom Telecomunicaciones, S.A.B. DE C.V., a Mexican entity and Maxcom USA Telecom Inc., which is 100% owned by the former. What does the latter do? According to Exhibit A of the First Day Declaration it does “[Assorted services in the USA].” Hahaha. This sh*t is so suspect that nobody even bothered to remove the brackets. It might as well say, “[Kinda sorta maybe some random sh*t within US borders and down the street from the SDNY for purposes of ginning up venue”]. Is it a guarantor on the notes? “[Yes].” HAHAHA. Like, is it, or not?? The listed highlight? “Recently created.” Damn straight it was. This year. The service address? “c/o United Corporate Services, Inc., Ten Bank Street, Suite 560, White Plains, NY 10606.” Conveniently happens to fall right in Judge Drain’s lap.

We mean, seriously, folks? People AREN’T EVEN TRYING to be slick about manufacturing venue anymore.

Apropos to the point, Duane Morris LLP’s Frederick Hyman highlights the trend of foreign borrowers with little to no assets in the U.S. filing for chapter 11 to take advantage of the automatic stay here, describing the slippery-slope-creating case of TMT Shipping (which established venue by funding professional retainers in the US).

****Interestingly, people have been voicing concerns about the foreign exchange rates and US-dominated debt in emerging markets. It seems those concerns may be warranted:

…from 2013 to date, the value of the Mexican Peso, as compared to the U.S., has decreased by 53%. Because of such devaluation, Maxcom Parent’s repurchase of the $74.3 million in principal amount of the Old Notes did not decrease the amount that Maxcom Parent’s books and records reflect is owed to the holders of the Old Notes given that Maxcom Enterprise’s revenues are mostly in Mexican Pesos. In other words, while the amount that Maxcom Parent owes on account of the Old Notes has decreased in U.S. Dollars, because the majority of Maxcom Enterprise’s revenues are in Mexican Pesos and the Old Notes are denominated in U.S. Dollars, Maxcom Parent’s liability on account of the Old Notes remains roughly the same on its books and records.

Ruh roh. 🙈 We expect to see many more mentions of exchange-related issues going forward. Mark our words.💥

*****Small victories. The dissenting bondholders were able to successfully push the debtors’ timeline by a week or so at the first day hearing.

  • Jurisdiction: S.D. of New York (Judge Drain)

  • Capital Structure: $103.4mm old notes

  • Professionals:

    • Legal: Paul Hastings LLP (Pedro Jimenez, Irena Goldstein)

    • Financial Advisor: Alvarez & Marsal Mexico

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Indenture Trustee: US Bank NA

      • Legal: Thompson Hine LLP (Jonathan Hawkins, Curtis Tuggle)

🙈New Chapter 11 Bankruptcy Filing - Avenue Stores LLC🙈

Avenue Stores LLC

August 16, 2019

Retail, retail, retail.

Brutal. Absolutely B.R.U.T.A.L.

Avenue Stores LLC, a speciality women’s plus-size retailer with approximately 2,000 employees across its NJ-based HQ* and 255 leased stores,** is the latest retailer to find its way into bankruptcy court. On Friday, August 16, Avenue Stores LLC filed for chapter 11 bankruptcy in the District of Delaware. Like Dressbarn, another plus-size apparel retailer that’s in the midst of going the way of the dodo, any future iteration of the Avenue “brand” will likely exist only on the interwebs: the company intends to shutter its brick-and-mortar footprint.

What is Avenue? In addition to a select assortment of national brands, Avenue is a seller of (i) mostly “Avenue” private label apparel, (ii) intimates/swimwear and other wares under the “Loralette” brand and (iii) wide-width shoes under the “Cloudwalkers” brand. The company conducts e-commerce via “Avenue.com” and “Loralette.com.” All of this “IP” is the crux of the bankruptcy. More on this below. 

But, first, a digression: when we featured Versa Capital Management LP’s Gregory Segall in a Notice of Appearance segment back in April, we paid short shrift to the challenges of retail. We hadn’t had an investor make an NOA before and so we focused more broadly on the middle market and investing rather than Versa’s foray into retail and its ownership of Avenue Stores LLC. Nevertheless, with the benefit of 20/20 hindsight, we can now see some foreshadowing baked into Mr. Siegel’s answers — in particular, his focus on Avenue’s e-commerce business and the strategic downsizing of the brick-and-mortar footprint. Like many failed retail enterprises before it, the future — both near and long-term — of Avenue Stores is marked by these categorical distinctions. Store sales are approximately 64% of sales with e-commerce at approximately 36% (notably, he cited 33% at the time of the NOA). 

A brand founded in 1987, Avenue has had an up-and-down history. It was spun off out of Limited Brands Inc. and renamed in 1989; it IPO’d in 1992; it was then taken private in 2007. Shortly thereafter, it struggled and filed for bankruptcy in early 2012 and sold as a going-concern to an acquisition entity, Avenue Stores LLC (under a prior name), for “about $32 million.” The sale closed after all of two months in bankruptcy. The holding company that owns 100% of the membership interests in Avenue Stores LLC, the operating company, is 99%-owned by Versa Capital Management. 

Performance for the business has been bad, though the net loss isn’t off the charts like we’ve seen with other recent debtors in chapter 11 cases (or IPO candidates filing S-1s, for that matter). Indeed, the company had negative EBITDA of $886k for the first five months of 2019 on $75.3mm in sales. Nevertheless, the loss was enough for purposes of the debtors’ capital structure. The debtors are party to an asset-backed loan (“ABL”) memorialized by a credit agreement with PNC Bank NA, a lender that, lately, hasn’t been known for suffering fools. The loan is for $45mm with a $6mm first-in-last-out tranche and has a first lien on most of the debtors’ collateral. 

The thing about ABLs is that availability thereunder is subject to what’s called a “borrowing base.” A borrowing base determines how much availability there is out of the overall credit facility. Said another way, the debtors may not always have access to the full facility and therefore can’t just borrow $45mm willy-nilly; they have to comply with certain periodic tests. For instance, the value of the debtors’ inventory and receivables, among other things, must be at a certain level for availability to remain. If the value doesn’t hold up, the banks can close the spigot. If you’re a business with poor sales, slim margins, diminishing asset quality (i.e., apparel inventory), and high cash burn, you’re generally not in very good shape when it comes to these tests. With specs like those, your liquidity is probably already tight. A tightened borrowing base will merely exacerbate the problem.

Lo and behold, PNC declared the debtors in default on July 22; in turn, they imposed default interest on the debtors and initiated daily cash sweeps of the debtors’ bank accounts. Like we said. Suffer. No. Fools.*** The debtors owe $15.2mm on the facility. 

The debtors also have outstanding a subordinated secured note to the tune of $37.8mm. The note pays interest at 15% but is paid in kind.**** The lender on the note is an affiliate of Versa, and per the terms of the note, Versa had continued, at least through April 2019, to fund the business (and letters of credit for the debtors’ benefit) with millions of dollars of capital. 

If this sounds like a hot mess, well, yeah, sure, kudos. You’re clearly paying attention. It’s a dog eat dog world out there. Per the company:

The Debtors operate in an extremely competitive retail environment, facing competition from other specialty-retail stores, including Lane Bryant, Ashley Stewart, and Torrid, and mass-market retailers such as Walmart and Target, many of which are located in close proximity to Avenue stores. In addition to long-standing, traditional competitors within the plussize segment, there has been a recent influx of many other iconic fashion retail brands expanding their range of size offerings into the plus-size range, as well as a proliferation of new entrants targeting this same plus-size fashion market. Due to increased competition, the Debtors have faced significant pressure to maintain market share, which has directly and negatively affected their profitability.

Not that this is anything new. We all know this by now: competition is fierce (Stitch Fix Inc. ($SFIX)Neiman MarcusKohl’s Corporation ($KSS)Macy’s Inc. ($M) and others are now going after it hard), B&M sucks because leases carry higher expenses, store traffic is down, blah blah f*cking blah. The company continues:

…changes in consumer spending habits have necessitated many retailers to increase promotional activities and discounting, leading to thinner profit margins. Onerous brick-and-mortar lease terms and increased operating costs, during a period of downturn in the retail sector and deep discounting, have intensified retail losses.

Interestingly, in the face of surging U.S. retail sales in July,***** the company also notes that “a review of historic customer data indicates that Avenue customers are shopping less frequently than they once were….” They blame this on a “[s]hifts in consumer preferences” and the debtors’ emphasis on “fashion basics.” DING DING DING. No wonder customers are shopping there less frequently. “Basic” is the antithesis of Instagram-based retail these days. Basics can be purchased at any big box retailer; basics are now available via Amazon’s private label. Basics don’t create an influencer and, on the flip side, no influencer will market “basic.” Maybe Avenue could get away with “fashion basics” if it had brand-equity like SUPREME and was perceived as a luxury brand. But far from it. 

Speaking of basic, that pretty much describes the go-forward game plan. We’ll lay it out for you:

  • Engage an independent director to explore strategic alternatives;

  • Engage professionals (Young Conaway is legal and Berkeley Research Group as restructuring advisor and CRO)******;

  • Consider whether there’s going concern value, conclude, like, basically, “nope,” and then hire a consultant******* to solicit bids from liquidators for the B&M piece and an investment banker (Configure Partners) for the IP and e-commerce business; 

  • Issue WARN notices, RIF employees, and start shuttering stores (with intent to file a rejection motion on day 1 of the bankruptcy); 

  • Select a stalking horse bidder for the B&M assets from the pool of interested liquidators (in this case, Gordon Brothers and Hilco Merchant Resources LLC); 

  • Continue to search for a stalking horse bidder for the IP and e-commerce (at filing, there wasn’t one yet); and

  • Secure DIP financing (here, $12mm from PNC) to fund the cases while the B&M liquidation transpires and the banker searches under every rock under an extremely compressed timeframe (by 9/24/19) for that e-commerce/IP buyer.******** 

So we’ll know in the next 60 days what the future is for Avenue.

If there is one.


*Let’s pour one out for NJ. The state’s larger retailers are having a rough go of things lately, see, e.g., Toys R Us. The 2,000 figure is updated to reflect a recent round of layoffs. 

**The debtors are located primarily in shopping malls and shopping centers, doing business in 35 states. They have a distribution center for brick-and-mortar merchandise in Troy, Ohio, and a third-party warehousing facility located in Dallas, Texas, which handles logistics for e-commerce. The Troy center is the subject of a wholly unoriginal PE-backed sale/leaseback transaction. The debtors sold the center for $11.3mm and subsequently entered into a 15-year lease with the buyer, RD Dayton LLC. We mention this because sale/leaseback transactions have been getting hyper-focus these days as a tactic-of-choice by private equity overlords to extract returns out of portfolio companies’ assets with any actual value: real property. If you’re wondering why there is very little asset value left for unsecured creditors in retail cases, sale/leaseback transactions are often a culprit. Here, it’s especially egregious because Avenue doesn’t own ANY of its stores: the entire footprint is leased.

The debtors recently closed the Ohio center and transitioned its inventory to Texas and the company already filed a motion seeking to reject this lease (Docket 15).

***This is not extraordinary. Banks do this all of the time when debtors default. A liquidity starved company is almost always toast (read: bankrupt) once this happens. 

****PIK interest means that the interest accrues in the form of additional notes and is not subject to scheduled cash payments. 

*****Per Reuters:

Retail sales increased 0.7% last month after gaining 0.3% in June, the government said. Economists polled by Reuters had forecast retail sales would rise 0.3% in July. Compared to July last year, retail sales increased 3.4%.

******Something tells us that the likes of FTI, A&M and AlixPartners are happy to cede the liquidating retailer market to Berkeley Research Group. 

*******This is one of the more ingenious things to come out of the restructuring market in recent years. These liquidator agreements are so unintelligible that they might as well be written in Dothraki. Hence the need for an intermediary to break out the secret decoder ring and figure out what is actually being contracted for. We don’t know: if something is so woefully incoherent that it requires a separate consultant just to interpret it, something tells us that obfuscation is a feature not a bug.

********If none is found, the liquidator will also get these assets as part of the agency agreement. 

  • Jurisdiction: D. of Delaware (Judge Silverstein)

  • Capital Structure:

  • Professionals:

    • Legal: Young Conaway Stargatt & Taylor LLP (Robert Brady, Andrew Magaziner, Ashley Jacobs, Allison Mielke, Betsy Feldman)

    • Financial Advisor/CRO: Berkeley Research Group (Robert Duffy)

    • Investment Banker: Configure Partners

    • Liquidators: Gordon Brothers and Hilco Merchant Resources LLC

    • Liquidation Consultant: Malfitano Advisors LLC

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Pre-petition & DIP Agent: PNC Bank NA

      • Legal: Blank Rome LLP (Regina Stango Kelbon)

    • Subordinated Lender: Versa Capital Management LP

      • Legal: Landis Rath & Cobb LLP (Adam Landis, Matthew McGuire)

🌑New Chapter 11 Bankruptcy Filing - Blackhawk Mining LLC🌑

Blackhawk Mining LLC

July 19, 2019

What are we averaging? Like, one coal bankruptcy a month at this point? MAGA!!

This week Blackhawk Mining LLC filed prepackaged Chapter 11 cases in the District of Delaware, the effect of which will be the elimination of approximately $650mm of debt from the company’s balance sheet. Unlike other recent bankruptcies, i.e., the absolute and utter train wreck that is the Blackjewel LLC bankruptcy, this case actually has financing and employees aren’t getting left out in the lurch. So, coal country can at least take a deep breath. Small victories!

Before we get into the mechanics of how this deleveraging will work, it’s important to note some of the company’s history. Blackhawk represents opportunism at its best. Founded in 2010 as a strategic vehicle to acquire coal reserves, active mining operations and logistical infrastructure located primarily in the Appalachian Basin, the privately-owned coal producer hit the ground running. Initially the company started with Kentucky thermal coal assets (PETITION Note: thermal coal’s end use is the production of electricity; in contrast, metallurgical coal’s prime use is for the production of steel). It then quickly moved to diversify its product offering with a variety of acquisitions. In 2014, it acquired three mining complexes in the bankruptcy of James River Coal Company (which served as the company’s entry into the production of met coal). Thereafter, in 2015, the company purchased six mining complexes in the bankruptcy of Patriot Coal Company (which has since filed for bankruptcy a second time). This acquisition lofted the company into the highest echelon of US-based met coal production (PETITION Note: met coal drives 76% of the company’s $1.09b in revenue today). The company now operates 19 active underground and 6 active surface mines at 10 active mining complexes in West Virginia and Kentucky. The company has 2,800 employees. 

Naturally, this rapid growth begs some obvious questions: what was the thesis behind all of these acquisitions and how the hell were they financed? 

The investments were a play on an improved met coal market. And, to some degree, this play has proven to be right. Per the company: 

“The Company’s strategic growth proved to be a double-edged sword. On one hand, it significantly increased the Company’s position in the metallurgical coal market at a time when asset prices were depressed relative to today’s prices. The Company continues to benefit from this position in the current market. The price of high volatile A metallurgical coal has risen from $75 per ton to an average of $188 per ton over the last two years, providing a significant tailwind for the Company. On the other hand, the pricing environment for metallurgical coal did not improve until late 2016, and the debt attendant to the Company’s acquisition strategy in 2015 placed a strain on the Company’s ability to maintain its then-existing production profile while continuing to reinvest in the business. During this time, to defer expenses, the Company permanently closed over 10 coal mines (with over 5 million tons of productive capacity), idled the Triad complex, and depleted inventories of spare equipment, parts, and components. Furthermore, once the coal markets began to improve, the Company was forced to make elevated capital expenditures and bear unanticipated increases in costs—for example, employment costs rose approximately 25% between 2016 and 2018—to remain competitive. The confluence of these factors eventually made the Company’s financial position untenable.”

Longs and shorts require the same thing: good timing. 

Alas, the answer to the second question also leads us to the very predicament the company finds itself in today. The company has $1.09b in debt split across, among other things, an ABL facility (’22 $85mm, MidCap Financial LLC), a first lien term loan facility (’22 $639mm, Cantor Fitzgerald Securities), a second lien term loan facility (’21 $318mm, Cortland Capital Markets Services LLC), and $16mm legacy unsecured note issued to a “Patriot Trust” as part of the Patriot Coal asset acquisition. More on this Trust below.

But this is not the first time the company moved to address its capital structure. In a bankruptcy-avoiding move in 2017, the company — on the heals of looming amortization and interest payments on its first and second lien debt — negotiated an out-of-court consensual restructuring with its lenders pursuant to which it kicked the can down the road on the amortization payments to its first lien lenders and deferred cash interest payments to its second lien lenders. If you’re asking yourself, why would the lenders agree to these terms, the answer is, as always, driven by money (and some hopes and prayers). For their part, the first lien lenders obtained covenant amendments, juiced interest rates and an increased principal balance owed while the second lien lenders obtained an interest rate increase. Certain first and second lien lenders also got equity units, board seats and additional voting rights. These terms — onerous in their own way — were a roll of the dice that the environment for met coal would continue to improve and the company could grow into its capital structure. Clearly, that hope proved to be misplaced. 

Indeed, this is the quintessential kick-the-can-down-the-road situation. By spring 2019, Blackhawk again faced a $16mm mandatory amortization payment and $20mm in interest payments due under the first lien term loan. 

Now the first lien lenders will swap their debt for 71% of the reorganized equity and a $225mm new term loan and the second lien lenders will get 29% of the new equity. The “will-met-coal-recover-to-such-a-point-where-the-value-of-the-company-extends-beyond-the-debt?” option play for those second lien lenders has expired. The company seeks to have its plan confirmed by the end of August. The cases will be financed by a $235mm DIP of which $50mm is new money and the remainder will rollup $100mm in first lien term loan claims and $85mm in ABL claims (and ultimately convert to a $90mm exit facility). 

Some other quick notes:

  • Kirkland & Ellis LLP represents the company after pushing Latham & Watkins LLP out in a move that would make Littlefinger proud. This is becoming an ongoing trend: as previously reported, K&E also gave das boot to Latham in Forever21. A war is brewing folks. 

  • The Patriot Trust will get $500k per a settlement baked into the plan. On a $16mm claim. The “Patriot Trust” refers to the liquidating trust that was established in connection with the Patriot Coal Corporation chapter 11 cases, previously filed in the Eastern District of Virginia. Marinate on that for a second: the creditors in that case fought long and hard to have some sort of recovery, won a $16mm claim and now have to settle for $500k. There’s nothing like getting screwed over multiple times in bankruptcy. 

  • But then there’s management: the CEO gets a nice cushy settlement that includes a $500k payment, a seat on the reorganized board of managers (and, presumably, whatever fee comes with that), and a one-year consulting contract. He waives his right to severance. If we had to venture a guess, Mr. Potter will soon find his way onto K&E’s list of “independent” directors for service in other distressed situations too. That list seems to be growing like a weed. 

  • Knighthead Capital Management LLC and Solus Alternative Asset Management LP are the primary holders of first lien paper and now, therefore, own the company. Your country’s steel production, powered by hedge funds! They will each have representation on the board of managers and the ability to jointly appoint an “independent” director. 


  • Jurisdiction: D. of Delaware (Judge Silverstein)

  • Capital Structure: See above.

  • Professionals:

    • Legal: Kirkland & Ellis LLP (James Sprayragen, Ross Kwasteniet, Joseph Graham, Stephen Hessler, Christopher Hayes, Derek Hunter, Barack Echols) & (local) Potter Anderson Corroon LLP (Christopher Swamis, L. Katherine Good) 

    • Financial Advisor: AlixPartners LLP

    • Investment Banker: Centerview Partners (Marc Puntus)

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Prepetition ABL & DIP ABL Agent: Midcap Funding IV Trust

      • Legal: Hogan Lovells US LLP (Deborah Staudinger)

    • Prepetition & DIP Term Agent: Cantor Fitzgerald Securities

      • Legal: Herrick Feinstein LLP (Eric Stabler, Steven Smith)

    • Second Lien Term Loan Agent: Cortland Capital Market Services LLC

      • Legal: Stroock & Stroock & Lavan LLP (Alex Cota, Gabriel Sasson)

    • Consenting Term Lenders: Knighthead Capital Management LLC, Solus Alternative Asset Management LP, Redwood Capital Management LLC

      • Davis Polk & Wardwell LLP (Brian Resnick, Dylan Consla, Daniel Meyer)

    • Ad Hoc Group of First Lien Lenders

      • Legal: Shearman & Sterling LLP (Fredric Sosnick, Ned Schodek)

🏠New Chapter 11 Bankruptcy Filing - Stearns Holdings LLC🏠

Stearns Holdings LLC

July 9, 2019

Hallelujah! Something is going on out in the world aside from the #retailapocalypse and distressed oil and gas. Here, Blackstone Capital Partners-owned Stearns Holdings LLC and six affiliated debtors (the “debtors”) have filed for bankruptcy in the Southern District of New York because of…drumroll please…rising interest rates. That’s right: the FED has claimed a victim. Stephen Moore and Judy Shelton must be smirking their faces off.

The debtors are a private mortgage company in the business of originating residential mortgages; it is the 20th largest mortgage lender in the US, operating in 50 states. We’ll delve more deeply into the business model down below but, for now, suffice it to say that the debtors generate revenue by producing mortgages and then selling them to government-sponsored enterprises such as Ginnie Mae, Fannie Mae and Freddie Mac. There are a ton of steps that have to happen between origination and sale and, suffice it further to say, that requires a f*ck ton of debt to get done. That said, on a basic level, to originate loans, the debtors require favorable interest rates which, in turn, lower the cost of residential home purchases, and increases market demand and sales activity for homes.

Except, there’s been an itsy bitsy teeny weeny problem. Interest rates have been going up. Per the debtors:

The mortgage origination business is significantly impacted by interest rate trends. In mid-2016, the 10-year Treasury was 1.60%. Following the U.S. presidential election, it rose to a range of 2.30% to 2.45% and maintained that range throughout 2017. The 10-year Treasury rate increased to over 3.0% for most of 2018. The rise in rates during this time period reduced the overall size of the mortgage market, increasing competition and significantly reducing market revenues.

Said another way: mortgage rates are pegged off the 10-year treasury rate and rising rates chilled the housing market. With buyers running for the hills, originators can’t pump supply. Hence, diminished revenues. And diminished revenues are particularly problematic when you have high-interest debt with an impending maturity.

This is where the business model really comes into play. Here’s a diagram illustrating how this all works:

Source: First Day Declaration, PETITION

Source: First Day Declaration, PETITION

The warehouse lenders got nervous when, over the course of 2017/18, mortgage volumes declined while, at the same time, the debtors were obligated to pay down the senior secured notes; they, rightfully, grew concerned that the debtors wouldn’t have the liquidity available to repurchase the originated mortgages within the 30 day window. Consequently, the debtors engaged PIMCO in discussions about the pending maturity of the notes. Over a period of several months, however, those discussions proved unproductive.

The warehouse lenders grew skittish. Per the debtors:

Warehouse lenders began reducing advance rates, increasing required collateral accounts and increasing liquidity covenants, further contracting available working capital necessary to operate the business. Eventually, two of the warehouse lenders advised the Debtors that they were prepared to wind down their respective warehouse facilities unless the Debtors and PIMCO agreed in principle to a deleveraging transaction by June 7, 2019. That did not happen. As a result, one warehouse lender terminated its facility effective June 28, 2019 and a second advised that it will no longer allow new advances effective July 15, 2019. The Debtors feared that these actions would trigger other warehouse lenders to take similar actions, significantly impacting the Debtors’ ability to fund loans and restricting liquidity, thereby jeopardizing the Debtors’ ability to operate their franchise as a going concern.

On the precipice of disaster, the debtors offered the keys to PIMCO in exchange for forgiveness of the debt. PIMCO rebuffed them. Subsequently, Blackstone made PIMCO a cents-on-the-dollar cash-out offer on the basis that the offer would exceed liquidation value of the enterprise and PIMCO again declined. At this point there’s a lot of he said, she said about what was offered and reneged upon to the point that it ought to suffice merely to say that the debtors, Blackstone and PIMCO probably aren’t all sharing a Hamptons house together this summer.

So, where did they end up?

The debtors have filed a plan of reorganization with Blackstone as plan sponsor. Blackstone agreed to inject $60mm of new equity into the business — all of which, notably, is earmarked to cash out the notes in their entirety (clearly at at discount — read: below par — for PIMCO and the other noteholders). The debtors also propose to subject Blackstone’s offer to a 30-day competitive bidding process, provided that (a) bids are in cash (credit bids will not be allowed) and (b) all obligations to the GSEs and other investors are honored.

To fund the cases the debtors have obtained a commitment from Blackstone for $35mm in DIP financing. They also sourced proposals from warehouse lenders prepetition and have obtained commitments for $1.5b in warehouse financing from Barclays Bank PLC and Nomura Corporate Funding Americas LLC (guaranteed, on a limited basis, by Blackstone). In other words, Blackstone is ALL IN here: with the DIP financing, the limited guarantee and the equity check, they are placing a stake in the ground when it comes to mortgage origination.

  • Jurisdiction: S.D. of New York (Judge Chapman)

  • Capital Structure: $184mm 9.375% ‘20 senior secured notes (Wilmington Trust Association NA)

  • Professionals:

    • Legal: Skadden Arps Slate Meagher & Flom LLP (Jay Goffman, Mark McDermott, Shana Elberg, Evan Hill, Edward Mahaney-Walter)

    • Financial Advisor: Alvarez & Marsal LLC (Robert Campagna)

    • Investment Banker: PJT Partners LP (Jamie O’Connell)

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

    • Board of Directors: David Schneider, William Cary, Glenn Stearns, Nadim El Gabbani, Chinh Chu, Jason Roswig, Chris Mitchell

  • Other Parties in Interest:

    • Indenture Trustee: Wilmington Trust Association NA

      • Legal: Alston & Bird LLP (Jason Solomon)

    • Major Noteholder: Pacific Investment Management Company LLC

      • Legal: Hogan Lovells US LLP (Bennett Spiegel, Stacey Rosenberg)

    • Blackstone Capital Partners VI-NQ/NF LP

      • Legal: Simpson Thacher & Bartlett LLP (Elisha Graff, Jamie Fell)

    • Barclays Bank PC

      • Legal: Hunton Andrews Kurth LLP (Peter Partee Sr., Brian Clarke)

    • Nomura Corporate Funding Americas LLC

      • Legal: Milbank LLP (Mark Shinderman, Lauren Doyle) & Alston & Bird LLP (Karen Gelernt)

    • Fannie Mae

      • Legal: O’Melveny & Myers LLP (Stephen Warren)

    • Freddie Mac

      • Legal: McKool Smith PC (Paul Moak)

7/9/19 #30

⛽️New Chapter 11 Filing - Weatherford International Plc⛽️

Weatherford International Plc

July 1, 2019

There hasn’t been a MASSIVE bankruptcy filing in a while. Windstream Holdings Inc. filed back in late February and while there’s been plenty of chapter 11 activity since, there hasn’t been anything quite as large in the last several months. There is now. Enter Weatherford International Plc.

Late on Friday, Weatherford, an Irish public limited company, filed an 8-K with the SEC with a proposed plan of reorganization and disclosure statement; it and several affiliated debtors intend to file prepackaged chapter 11 cases in the Southern District of Texas on Monday, July 1.* The timing is appropriate: nothing screams “Independence!” like a massive chapter 11 bankruptcy filing that has the effect of eliminating six billion tyrannical dollars from the balance sheet. YEE HAW. G-D BLESS AMERICA.

Here is a snapshot of Weatherford’s pre and post-bankruptcy capital structure:**

Screen Shot 2019-06-29 at 5.15.48 AM.png

And all of the action is at the pre-petition notes level of the cap stack.*** The holders of the $7.4b of pre-petition notes**** will walk away with 99% of the equity in the reorganized company (subject to various means of dilution) — a 63% recovery based on the offered valuation of the company. They will also receive up to $1.25b of new tranche b senior unsecured convertible notes and the right to participate in new tranche a senior unsecured notes. Every other class — but for existing equity (which will get wiped out) — will ride through as if this shabang ain’t even happening.

You must be wondering: how in bloody hell does a company rack up over $8b of debt? $8 BILLION!! That’s just oil and gas, darling.

Weatherford is a provider of equipment and services used in the drilling, evaluation, completion, production, and intervention of oil and natural gas wells; it operates in over 80 countries worldwide and has service and sales locations in nearly all of the oil and natural gas producing regions in the world. It operates in a highly commoditized industry and so the company dedicates millions each year to research and development in an effort to separate itself from the pack and provide value to end users that is unmatched in the market.

Which, by its own admission, it fails to do. All of that R&D notwithstanding, Weatherford nevertheless provide a commoditized product in a tough macro environment. And while all of that debt should have helped position the company to crush less-capitalized competitors, it ultimately proved to be an albatross.

To service this debt, the debtors require stability in the oil and natural gas markets at prices that catalyze E&P companies to drill, baby, drill. An oil field services company like Weatherford can only make money if there are oil operations to service. With oil and natural gas trading at low levels for years…well, you see the issue. Per the company’s 8-K:

The sustained drop in oil and gas prices has impacted companies throughout the oil and gas industry including Weatherford and the majority of its customers. As spending on exploration, development, and production of oil and natural gas has decreased so has demand for Weatherford’s services and products. The decline in spending by oil and gas companies has had a significant effect on the Debtors’ financial health. To illustrate, on a consolidated basis, the Company’s cash flows from operating activities have been negative $304 million, negative $388 million, and negative $242 million in fiscal years 2016, 2017, and 2018, respectively.

While not quite at Uber Inc. ($UBER) levels, this company is practically lighting money on fire.

Relating to the competition:

The oilfield services and equipment industry is saturated with competition from various companies that operate in the same sector and the same regions of the world as Weatherford. The primary competitive factors include safety, performance, price, quality, and breadth of products and services. Weatherford also faces competition from regional suppliers in some of the sectors in which it operates as these suppliers offer limited equipment and services that are specifically tailored to the relevant local market. Some of the Company’s competitors have better financial and technical resources, which allows them to pursue more vigorous marketing and expansion activities. This heavily competitive market has impacted the Company’s ability to maintain its market share and defend or maintain the pricing for its products and services. Heavy competition has also impacted the Company’s ability to negotiate contract terms with its customers and suppliers, which has resulted in the Company accepting suboptimal terms.

The squeeze is on, ladies and gentlemen. As E&P companies look to cut costs in the face of increased pressure from investors to lean out, they are putting companies like Weatherford through the ringer. You bet your a$$ they’re getting “suboptimal terms.”

Compounding matters, of course, is the government:

…operations are also subject to extensive federal, international, state and local laws and regulations relating to environmental production, waste management and cleanup of hazardous materials, and other matters. Compliance with the various requirements imposed by these laws and regulations has also resulted in increased capital expenditures as companies in these sectors have had to make significant investments to ensure compliance.

Well GOSH DARN. If only Weatherford had unfettered ability to pollute the hell out of the countryside and our waters all of that debt could be paid off at par plus. Those gosh darn government hacks.

All of these factors combined to strain the debtors’ liquidity “for an extended period of time.” Accordingly, the company went into cost cutting mode.***** In Q4 ‘17, it eliminated 900 jobs to the tune of $114mm in annualized savings. In 2018, the company — with the assistance of McKinsey Restructuring & Transformation Services — continued with workforce reductions, facility consolidations, and other measures.

Yet, the squeeze continued. Per the company:

Despite implementing these efficient and strategic initiatives, the Company continued to face declining revenue and cash flow, as well as market challenges. Due to the Company’s increasingly tight liquidity, its key vendors began requiring shortened payment terms, including pay on delivery or prepayment for all supplies purchased by the Company. This contributed to additional pressure on liquidity that the Company could not sustain. Additionally, as discussed above, the highly competitive market that the Company operates in posed challenges for the Company in winning new bids, resulting in decreased revenue.

Weatherford was therefore forced to divest assets. YOU KNOW YOU’RE LEVERAGED TO THE HILT WHEN YOU SELL NEARLY $1B OF ASSETS AND IT BARELY MOVES THE NEEDLE. Sale proceeds were coming in just to go back out for debt service. The company had a leverage ratio of OVER 10X EBITDA. THIS IS AN UNMITIGATED F*CKING DISASTER. What’s actually astonishing is that the company notes that it retained Lazard Freres & Co LLC ($LZ) and Latham & Watkins LLP in December ‘18 and April ‘19, respectively. Taking them at their word (and we could have sworn Latham was in there much earlier than April), WHAT THE HELL WERE THEY WAITING FOR$600mm of annual interest payments, pending maturities, untenable leverage relative to competitors, AND squeezing vendors and the company only got its sh*t together in April? They couldn’t possibly have been THAT inept. Ah, who are we kidding? We’re talking about bankruptcy here.

Now, though, the company has a deal****** and so the upshot is that it is well-positioned for a quick trip into bankruptcy. Indeed, it seeks plan confirmation no later than September 15, 2019 — a nice not-as-speedy-as-other-recent-prepacks-but-speedy prepack. To finance the cases, the company will seek approval of up to $750mm DIP revolver and a $1b DIP term loan. And it is optimistic that it will be well-positioned for the future:

Screen Shot 2019-06-29 at 10.53.10 AM.png

We’ll see.

*The company will also push through Bermuda and Irish proceedings.

**JPMorgan Chase Bank NA ($JPM) is the agent on the prepetition term loan, the prepetition revolving credit agreement, and the A&R facility.

***Only three entities out of an organizational structure of 255 or so direct and indirect subsidiaries are on the hook for the prepetition notes, thereby limiting the number of actual debtor entities that will be subsumed by these cases.

****The pre-petition notes consist of 13 — yes, THIRTEEN — different issuances of notes with interest rates ranging from 4.5% to 9.875% and maturities ranging from 2020 through 2042.

*****Well, as it relates to certain peeps, of course. The debtors’ non-debtor affiliates still had money to make a May 2019 payout to participants in the Executive Bonus Plan.

******The ad hoc noteholder committee is represented by Akin Gump Strauss Hauer & Feld LLP and Evercore Group LLC ($EVR).

  • Jurisdiction: S.D. of Texas (Judge )

  • Capital Structure:

  • Professionals:

    • Legal: Latham & Watkins LLP (George Davis, Keith Simon, David Hammerman, Annemarie Reilly, Lisa Lansio) & (local) Hunton Andrews Kurth LLP (Timothy Davidson, Ashley Harper)

    • Financial Advisor: Alvarez & Marsal LLC

    • Investment Banker: Lazard Freres & Co LLC

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Ad Hoc Prepetition Noteholder Committee

      • Legal: Akin Gump Strauss Hauer & Feld LLP (Michael Stamer, Meredith Lahaie, Kate Doorley)

      • Financial Advisor: Evercore Group LLC

    • DIP Agent: Citibank NA

      • Legal: Shearman & Sterling LLP (Frederic Sosnick, Ned Schodek, Sara Coelho, Ian Roberts)

🏠New Chapter 11 Filing - Monitronics International Inc.🏠

Monitronics International inc.

June 30, 2019

We wrote about Monitronics International Inc. in July 2018 in "😬Home Security Company Looks Vulnerable 😬,” noting that “home security is a tough business (short Ascent Capital Group).” And, by “tough” we meant uber-competitive and saturated. It doesn’t help when you’re levered like a boss. We recommend you read the link above to understand the challenges these businesses faced in a better way than that described in the bankruptcy papers.

That said, the debtors’ capital structure is an important element of this story; they carry:

  • $181.4mm ‘21 Revolving Credit Facility

  • $1.072b ‘22 Term Loan

  • $585mm ‘20 9.125% Senior Notes

Leverage + disruption = a recipe for disaster. This prepackaged bankruptcy filing is meant to address the former. Management will be on the clock to figure out the latter. A significantly deleveraged capital structure and a cash infusion will certainly help.

The debtors’ proposed prepackaged plan of reorganization will eliminate approximately $885mm of funded debt by way of equitizing the entirety of the senior notes, and reducing the revolving credit facility (by $50mm) and the amount of term loans (by $250mm). The term lenders will receive $150mm in cash (financed by a rights offering totaling $177mm) and equitize $100mm worth of their loans. The remainder of the term loan amount will be exchanged for take back paper issued by the reorganized debtors.

Source: First Day Declaration ($ in millions)

Source: First Day Declaration ($ in millions)

This is what the capital structure will look like pre and post-transaction:

Source: First Day Declaration ($ in millions)

Source: First Day Declaration ($ in millions)

The senior unsecured notes are fully exchanged for 18% of pre-diluted equity in the reorganized debtors.

The overall structure of the transaction is complex and depends upon some contingencies. This is the summary the debtors provided:

It might as well be gibberish at this point. Once we know whether Ascent toggle occurs we’ll have a better sense of who is contributing what. Moreover, once we the rights offering is consummated, the debtors’ new ownership will be more obvious.

  • Jurisdiction: S.D. of Texas (Judge Jones)

  • Capital Structure: See above.

  • Professionals:

    • Legal: Latham & Watkins LLP (David Hammerman, Annemarie Reilly, Jeremy Mispagel, Liza Burton, Brian Rosen, Christopher Harris, Zachary Proulx) & King & Spalding LLP (Roger Schwartz, Sarah Primrose) & (local) Hunton Andrews Kurth LLP (Timothy Davidson, Ashley Harper)

    • Board of Directors: Jeffery Gardner, William Niles, Marc Beilinson, Sherman Edmiston III

    • Financial Advisor: FTI Consulting Inc.

    • Investment Banker: Moelis & Company LLC

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Ad Hoc Lender Group (Term B-2 Lenders)(Anchorage Capital Group LLC, Boston Management and Research, BlueMountain Capital Management LLC, Eaton Vance Management, FS Global Advisor LLC, Invesco Advisors Inc., KKR Credit Advisors US LLC, Monarch Alternative Capital LP)

      • Legal: Jones Day (Paul Green, Scott Greenberg, Michael Schneidereit, Peter Saba)

      • Financial Advisor: Evecore LLC

    • Ad Hoc Group of Noteholders

      • Legal: Stroock & Stroock & Lavan LLP (Kristohper Hansen, Sayan Bhattacharyya, Jason Pierce) & (local) Haynes and Boone LLP (Kelli Norfleet, Stephen Pezanosky)

      • Financial Advisor: Houlihan Lokey Capital Inc.

    • KKR Credit Advisors US LLC

      • Legal: Proskauer Rose LLP (Chris Theodoridis)

    • Administrative Agent under Pre-Petition Credit Agreement: Bank of America NA

      • Legal: Morgan Lewis & Bockius LLP (Amelia Joiner) & ( Local) Winstead PC (Sean Davis)

    • Pre-Petition Agent: Cortland Capital Markets Services LLC

      • Legal: Arnold & Porter Kaye Scholer LLP (Christopher Odell, Hannah Sibiski, D. Tyler Nurnberg, Sarah Gryll)

    • Ascent Capital Group

      • Legal: Baker Botts LLP

New Chapter 11 Bankruptcy Filing -- Fusion Connect Inc.

June 3, 2019

We previously wrote about Fusion Connect Inc. ($FSNN), providers of “Unified Communications-as-a-Service” and “Infrastructure-as-a-Service” in “⛈A Dark "Cloud" on the Horizon⛈.” Therein we marveled at how special Fusion must be…to fail SO SPECTACULARLY in today’s cloud here, cloud there, cloud everywhere, everyone’s gaga for cloud environment. Cloud is SO captivating that it wasn’t until the company filed a piss poor 8-K back in April that a B. Riley FBR ($RILY) analyst FINALLY had an epiphany and declared that the company’s stock ought to be downgraded from “buy” to “neutral” (huh?!?) with a price target of $0.75 — down from $9.75/share. This is despite the fact that the stock hadn’t traded anywhere in the vicinity of $9.75/share in ages — nowhere even close, actually — but whatevs. Clearly, his head was in the cloud(s). This, ladies and gentlemen, demonstrates, in a nutshell, the utter worthlessness of equity analyst reports.🖕

But this isn’t a story about shoddy analyst research. That would be wholly unoriginal. This is a story about synergies and burdensome debt. Because, like, that’s so super original that you won’t read of it again until…well…you scroll below to the next bit of content about FTD!! 🙄

Boiled down to its simplest form, this company is the product of an acquisition strategy (and reverse merger) gone wrong. Like, in a majormajor way. Per the company:

The Company pursued the Birch Merger with a vision of leveraging its existing processes and structures to create synergies between Fusion’s and Birch’s joined customer bases, combine network infrastructure assets to improve operational efficiencies, and ultimately drive material growth in Fusion’s and Birch’s combined annual revenue. In connection with the Birch Merger and MegaPath Merger, the Company incurred $680 million in secured debt(emphasis added)

That reverse merger closed at the end of Q2, 2018. Yet…

Unfortunately, due to underperformance compared to business projections, the Company found itself with limited liquidity and at risk of default under its debt documents by early 2019.

Wait, what? Limited liquidity and risk of default by “early 2019”?!? Who the f*ck diligenced and underwrote this transaction?!? This sitch is so bad, that the company literally didn’t have enough liquidity to make a recent $6.7mm amort payment under the first lien credit agreement and a $300k interest payment on its unsecured debt. This is the company’s pre-petition capital structure:

  • $20mm super senior L+10% June 2019 debt

  • $43.3mm Tranche A Term Loans L+6.0% May 2022 debt

  • $490.9mm Tranche B Term Loans L+8.5% May 2023 debt

  • $39mm Revolving Loans L+6.0% May 2022 debt

  • $85mm Second Lien L+10.5% November 2023 debt

  • $13.3mm Unsecured Debt

Back in April we summed up the situation as follows:

The company’s recent SEC reports constitute a perfect storm of bad news. On April 2, the company filed a Form 8-K indicating that (i) a recently-acquired company had material accounting deficiencies that will affect its financials and, therefore, certain of the company’s prior filings “can no longer be relied upon,” (ii) it won’t be able to file its 10-K, (iii) it failed to make a $7mm interest payment on its Tranche A and Tranche B term loan borrowings due on April 1, 2019, and (iv) due to the accounting errors, the company has tripped various covenants under the first lien credit agreement — including its fixed charge coverage ratio and its total net leverage ratio.

Again, who diligenced the reverse merger?!? 😡

So here we are. In bankruptcy. To what end?

The company is seeking a dual-path restructuring that is all the rage these days: everyone loves to promote optionality that will potentially result in greater value to the estate. In the first instance, the company proposes, as a form of “stalking horse,” a “reorganization transaction” backed by a restructuring support agreement with certain of its lenders. This transaction would slash $300mm of the company’s $665mm of debt and result in the company’s first lien lenders owning the company. That is, unless a buyer emerges out of the woodwork with a compelling purchase price. To promote this possibility, the company is filing a bid procedures motion with the bankruptcy court with the hope of an eventual auction taking place. If a buyer surfaces with mucho dinero, the company will toggle over to a sale pursuant to a plan of reorganization. This would obviously be the optimal scenario. Absent that (and maybe even with that), we’ve got a jaw-dropping example of value destruction. “Fail fast,” many in tech say. These cloud bros listened!! Nothing like deep-sixing yourself with a misguided poorly-diligenced acquisition. Bravo!!

The company has secured a commitment for a fully-backstopped $59.5mm DIP that subsumes the $20mm in super senior pre-petition bridge financing recently provided by the first lien lenders. Is this DIP commitment good for general unsecured creditors? Is any of this generally good for unsecured creditors? Probably not.

Major creditors include a who’s who of telecommunications companies, including AT&T Inc. ($T) (first Donald Trump and now THIS…rough week for AT&T), Verizon Communications Inc. ($VZ)XO Communications (owned by VZ), Frontier Communications Corp. ($FTR)(which has its own issues to contend with as it sells assets to sure up its own balance sheet), CenturyLink Inc. ($CTL)Level 3 Communications ($LVLT)Time Warner Inc. ($TWX), and….wait for it…bankrupt Windstream Communications ($WINMQ). Because the hits just keep on coming for Windstream….

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Jurisdiction: S.D. of New York (Judge Bernstein)

  • Capital Structure: see above.

  • Professionals:

    • Legal: Weil Gotshal & Manges LLP (Gary Holtzer, Sunny Singh, Natasha Hwangpo)

    • Board of Directors: Matthew Rosen, Holcombe Green Jr., Marvin Rosen, Holcombe Green III, Michael Del Guidice, Lewis Dickey Jr., Rafe de la Gueronniere, Neil Goldman)

    • Financial Advisor: FTI Consulting Inc. (Mark Katzenstein)

    • Investment Banker: PJT Partners (Brent Herlihy, John Singh)

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Ad Hoc First Lien Lender Group

      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Adam Shpeen)

      • Financial Advisor: Greenhill & Co. Inc.

    • DIP Lender: Credit Suisse Loan Funding LLC

    • DIP Agent, Prepetition Super Senior Agent & Prepetition First Lien Agent: Wilmington Trust NA

      • Legal: Arnold & Porter Kaye Scholer (Michael Messersmith, Sarah Grylll, Alan Glantz)

    • Prepetition Second Lien Successor Agent: GLAS America LLC & GLAS USA LLC

    • Ad Hoc Group of Tranche A Term Loan/Revolving Lenders

      • Legal: Simpson Thacher & Bartlett LLP (Sandeep Qusba, Soogy Lee, Edward Linden)

    • Second Lien Lenders

      • Legal: Proskauer Rose LLP (Charles Dale, Jon English)

    • Large Unsecured Creditor: AT&T

      • Legal: Norton Rose Fulbright US LLP (David Rosenzweig, Francisco Vazquez)

Updated 6/4/19 at 5:42am


😷New Chapter 11 Bankruptcy Filing - Aegerion Pharmaceuticals Inc.😷

Aegerion Pharmaceuticals Inc.

May 20, 2019

We were right and we were wrong. Back in November 2018, in “😬Biopharma is in Pain😬 ,” we snidely wrote, “Do Pills Count as ‘Healthcare’? Short Biopharma” riffing on the common trope that healthcare was a hot spot for restructuring activity.* No, we argued: the activity is really in publicly-traded biopharma companies with little to no sales, too much debt (and usually busted convertible notes) and attractive intellectual property. We went on to predict that Synergy Pharmaceuticals Inc. ($SGYP) and Aegerion Pharmaceuticals Inc. (a subsidiary of Novelion Therapeutics Inc. ($NVLN)) would both file for bankruptcy. Ding ding!!! We were right.** The former filed back in December and, now, the latter is also in bankruptcy court. Of course, with respect to the latter, we also wrote, “[c]ome February — if not sooner — it may be in bankruptcy court.” But let’s not split hairs.***

The company manufactures two approved therapies, JUXTAPID and MYALEPT, that treat rare diseases. On Sunday, we’ll discuss the future of these therapies and what the company seeks to achieve with this restructuring.

*To be fair, the healthcare space has, indeed, picked up in activity since then.

**For what it’s worth, we also predicted that Orchids Paper Products Company ($TIS) would be in bankruptcy soon, writing “This company doesn’t produce enough toilet paper to wipe away this sh*tfest. See you in bankruptcy court.” Three for three: this is precisely why — wait for the shameless plug — you should become a PETITION Member today.

***Maturity of the bridge loan was initially February 15, 2019 but the debtors had a right to extend, which they did.

  • Jurisdiction: Southern District of New York (Judge )

  • Capital Structure: $36.1mm 8% PIK ‘19 secured Novelion Intercompany Loan, $73.8mm Bridge Loan (Highbridge Capital Management LLC and Athyrium Capital Management LP), $304mm 2% unsecured convertible notes (The Bank of New York Mellon Trust Company NA)

  • Professionals:

    • Legal: Willkie Farr & Gallagher LLP (Paul Shalhoub, Andrew Mordkoff)

    • Financial Advisor/CRO: AlixPartners LLP (John Castellano)

    • Investment Banker: Moelis & Co. (Barak Klein)

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • DIP Agent: Cantor Fitzgerald Securities

    • Ad Hoc Group of Convertible Noteholders

      • Legal: Latham & Watkins LLP & King & Spalding LLP

      • Financial Advisor: Ducera Partners LLC

    • Novelion

      • Legal: Goodwin Proctor LLP & Norton Rose Fulbright Canada LLP

      • Financial Advisor: Evercore

⛽️New Chapter 11 Bankruptcy Filing - Edgemarc Energy Holdings LLC⛽️

Edgemarc Energy Holdings LLC

May 15, 2019

Pennsylvania-based Edgemarc Energy Holdings LLC and its eight affiliated debtor affiliates are the latest in a string of oil and gas related bankruptcy filings. Don’t let $73/barrel brent crude and $63/barrel West Texas Intermediate prices full you: this is one of many oil and gas filings on the near term horizon.

Edgemarc is a natural gas E&P company focused on the Appalachian Basin in Ohio and Pennsylvania; it and its affiliates control approximately 45k net acres and have drilled and developed 60 producing wells. Now, everyone knows that, right now, the Permian Basin in West Texas is the shizz and, therefore, hearing about the Appalachian Basin may put some of you on edge. But, here, there was an extraordinary externality that really helped push the company into bankruptcy, other more macro factors notwithstanding.

In September 2018, a pipeline and gathering system under construction by a third-party (ETC Northeast Pipeline LLC) exploded. This pipeline was meant to be the gathering and processing avenue for the debtors’ natural gas. Imagine spending a ton of time milking a farm full of cows only to have the production facility designed for processing and transporting the milk explode right as you were about to bring your product to market. Kinda hard to make money in that scenario, right? The same applies to drilling for natural gas: its hard to generate revenue when you can’t process, transport and sell it. And, unfortunately, repair hasn’t been easy: what was supposed to be a “within weeks” project now looks poised to push well into 2020.

According to the debtors, a subsequent dispute with ETC prevented the debtors from flowing their gas through alternative pipelines. Consequently, the debtors “had no other means of selling gas from the affected wells” and opted to “shut in” their Pennsylvania wells and pause all remaining Pennsylvania operations — a hit to 33% of the company’s production activity. Compounding matters, the debtors and ETC are now embroiled in litigation. 😬

Suffice it to say that any company that suddenly loses the ability to sell 33% of its product will struggle. Per the company:

The Debtors’ inability to sell gas from their Pennsylvania properties had a substantial negative impact on their liquidity and ability to satisfy their funded debt, contractual and other payment obligations.

Ya think?!?!? The debtors have approximately $77mm of funded debt; they also has fixed transportation services agreements pursuant to which they agreed to fixed amounts of transportation capacity with various counterparties that exposes the debtors to financial liability regardless of whether they actually transport nat gas. This is so critical, in fact, that the debtors have already filed motions seeking to reject transportation services agreements with Rover Pipeline LLC, Rockies Express Pipeline LLC, and Texas Gas Transmission LLC. Combined, those three entities constitute 3 of the top 4 creditors of the estate, to the tune of over $6mm. These obligations — along with a downward redetermination of the borrowing base under the debtors’ revolving credit facility — severely constrained the debtors’ ability to operate. The debtors have, therefore, filed for chapter 11 with the hope of finding a buyer; they do not have a stalking horse purchaser lined up (though they do have a commitment for a $107.79mm DIP from their prepetition lenders, of which $30mm is new money). The company generated consolidated net revenue of $116.9mm in fiscal 2018.

Significantly, the company is seeking to reject a “marketing service agreement” and “operational agency agreement” with BP Energy Company ($BP), pursuant to which BP agreed to purchase and receive 100% of the debtors’ nat gas capacity. We gather (see what we did there?) that it’s hard to perform under those agreements when you can’t transport your product: accordingly, BP is listed as the debtors’ largest unsecured creditor at ~$41mm. BP’s rights to setoff and/or recoupment (PETITION Note: Weil Gotshal & Manges LLP just happened to write about these two remedies this week here) will be a major facet of this case: if BP is able to exercise remedies, the debtors ability to operate post-restructuring will be threatened. Per the company:

Docket #17, Rejection Motion.

Docket #17, Rejection Motion.

The privately-held company is owned primarily by affiliates of Goldman Sachs and the Ontario Teachers’ Pension. Absent “holdup value,” we can’t imagine they’ll get any return on their investment given the circumstances.

  • Jurisdiction: D. of Delaware (Judge Shannon)

  • Capital Structure:

  • Professionals:

    • Legal: Davis Polk & Wardwell LLP (Darren Klein, Lara Samet Buchwald, Aryeh Falk, Jonah Peppiatt) & (local) Landis Rath & Cobb (Adam Landis, Kerri Mumford, Kimberly Brown, Holly Smith)

    • Directors: Patrick J. Bartels Jr., Scott Lebovitz, Sebastien Gagnon, Baird Whitehead, Zvi Orvitz, Romeo Leemrijse, Verlyn Holt, Jack Golden, George Dotson, Callum Streeter, Alan Shepard

    • Financial Advisor: Opportune LLC and Dacarba LLC

    • Investment Banker: Evercore Partners

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Prepetition & DIP Agent: Keybank NA

      • Legal: Hunton Andrews Kurth LLP (Timothy Davidson, Joseph Rovira) & (local) Connolly Gallagher LLP (Jeffrey Wisler)

    • Equityholders: Goldman Sachs & Ontario Teachers’ Pension Plan Board

      • Legal: Wachtell Lipton Rosen & Katz (Richard Mason, Emil Kleinhaus, Michael Cassel) & (local) Drinker Biddle & Reath LLP (Steven Kortanek, Patrick Jackson, Joseph Argentina Jr.)

    • ETC

      • Legal: Akerman LLP (John MItchell, David Parham, Yelena Archiyan) & (local) Pachulski Stang Ziehl & Jones LLP (Laura Davis Jones, TImothy Cairns)

🚁New Chapter 11 Bankruptcy Filing - Bristow Group Inc.🚁

Bristow Group Inc.

May 11, 2019

Nothing like being late to the party. Following in the footsteps of fellow helicopter transportation companies Erickson Inc., CHC Group, Waypoint Leasing* and PHI Inc., Bristow Group Inc. ($BRS) and its eight affiliated debtors are the latest in the space to find their way into bankruptcy court. The company enters bankruptcy with a restructuring support agreement and a $75mm DIP financing commitment with and from its senior secured noteholders.

While each of the aforementioned companies is in the helicopter transportation space, they don’t all do exactly the same business. PHI, for instance, has a fairly large — and some might say, attractive — medical services business. Bristow, on the other hand, provides industrial aviation and charter services primarily to offshore energy companies in Europe, Africa, the Americas and the Asian Pacific; it also provides search and rescue services for governmental agencies, in addition to the oil and gas industry. Like the other companies, though: it is not immune to (a) the oil and gas downturn and (b) an over-levered balance sheet.

At the time of this writing, the debtors’ chapter 11 filing wasn’t complete and so details are scant. What we do know, however, is that the company does have a restructuring support agreement executed with “the overwhelming majority” of senior secured noteholders and a $75mm DIP commitment.

*Waypoint Leasing is listed as the 14th largest creditor, owed nearly $104k. Sheesh. These businesses can’t catch a break.

  • Jurisdiction: S.D. of Texas (Judge Jones)

  • Capital Structure:

  • Professionals:

    • Legal: Baker Botts LLP (James Prince, Omar Alaniz, Ian Roberts, Kevin Chiu, Emanuel Grillo, Chris Newcomb)

    • Financial Advisor: Alvarez & Marsal LLC

    • Investment Banker: Houlihan Lokey Capital Inc.

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • ABL Facility Agent: Barclays Bank PLC

    • 2019 Term Loan Agent: Ankura Trust Company LLC

    • Indenture Trustee for the 8.75% ‘23 Senior Secured Notes: U.S. Bank NA

    • Indenture Trustee for the 6.25% ‘22 Senior Notes and 4.5% ‘23 Convertible Senior Notes: Wilmington Trust NA

    • Ad Hoc Group of Secured Notes and Term Lenders (Blackrock Financial Management Inc., DW Partners LP, Highbridge Capital Management LLC, Oak Hill Advisors LP, Whitebox Advisors LLC)

      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Natasha Tsiouris) & (local) Haynes and Boone LLP (Charles Beckham, Kelli Norfleet, Martha Wyrick)

    • Ad Hoc Group fo Unsecured Noteholders

      • Legal: Kramer Levin Naftalis & Frankel LLP

🌑New Chapter 11 Filing - Cloud Peak Energy Inc.🌑

In what ought to come as a surprise to absolutely no one, Cloud Peak Energy Inc. ($CLD) and a slate of affiliates FINALLY filed for bankruptcy.

Let’s take a moment of silence for coal country, shall we? If this is what MAGA looks like, we’d hate to see what happens when a global downturn eventually hits. There’s gonna be blood in the water.

Sounds like hyperbole? Note that since 2016, there have been a slate of coal-related bankruptcies, i.e., Westmoreland Coal CompanyMission Coal Company LLC, and now Cloud Peak Energy Inc. Blackhawk Mining LLC appears to be waiting in the wings. We suppose it could be worse: we could be talking about oil and gas country (and we will be, we certainly will be…and SOON.).

Cloud Peak is an impressive company. Since its formation in 2008, it has become one of the largest (subbituminous thermal coal) coal producers in the US — supplying enough coal to satisfy approximately 2% of the US’ electricity demand. Its three surface mines are located in the Powder River Basin in Wyoming and Montana; it sold approximately 50mm tons of coal in 2018 to 46 domestic and foreign end users.*

In the scheme of things, Cloud Peak’s balance sheet isn’t overly complicated. We’re not talking about billions of dollars of debt here like we saw with Walter EnergyPeabody Energy, Arch Coal, Patriot Coal or Alpha Natural Resources. So, not all coal companies and coal company bankruptcies are created equal. Nevertheless, the company does have $290.4mm of ‘21 12% secured notes (Wilmington Trust NA) and $56.4mm of ‘24 6.375% unsecured notes (Wilmington Trust NA as successor trustee to Wells Fargo Bank NA) to contend with for a total of $346.8mm in funded debt liability. The company is also party to a securitization facility. And, finally, the company also has reclamation obligations related to their mines and therefore has $395mm in third-party surety bonds outstanding with various insurance companies, backed by $25.7mm in letters of credit. Coal mining is a messy business, homies.

So why bankruptcy? Why now? Per the company:

The Company’s chapter 11 filing, however, was precipitated by (i) general distress affecting the domestic U.S. thermal coal industry that produced a sustained low price environment that could not support profit margins to allow the Company to satisfy its funded debt obligations; (ii) export market price volatility that caused decreased demand from the Company’s customers in Asia; (iii) particularly challenging weather conditions in the second quarter of 2018 that caused spoil failure and significant delays in coal production through the remainder of 2018 and into 2019, which reduced cash inflows from coal sales and limited credit availability; and (iv) recent flooding in the Midwestern United States that has significantly disrupted rail service, further reducing coal sales.

To summarize, price compression caused by natural gas. Too much regulation (which, in turn, favors natural gas over coal). Too much debt. And, dare we say, global warming?!? Challenging weather and flooding must be really perplexing in coal country where global warming isn’t exactly embraced with open arms.

Now, we may be hopping to conclusions here but, these bits are telling — and are we say, mildly ironic in a tragic sort of way:

In addition to headwinds facing thermal coal producers and export market volatility, the Company’s mines suffered from unusually heavy rains affecting Wyoming and Montana in the second quarter of 2018. For perspective, the 10-year average combined rainfall for May, June, and July at the Company’s Antelope Mine is 6.79 inches. In 2018, it rained 10.2 inches during that period. While certain operational procedures put in place following heavy flooding in 2014 functioned effectively to mitigate equipment damage, the 2018 rains interrupted the Company’s mining operations considerably.

It gets worse.

The problem with rain is that the moisture therefrom causes “spoil.” Per the company:

Spoil is the term used for overburden and other waste rock removed during coal mining. The instability in the dragline pits caused wet spoil to slide into the pits that had to be removed by dragline and/or truck-shovel methods before the coal could be mined. This caused significant delays and diverted truck-shovel capacity from preliminary stripping work, which caused additional production delays at the Antelope Mine. The delays resulting from the spoil failure at the Antelope Mine caused the Company to have reduced shipments, increased costs, and delayed truck-shovel stripping in 2018. Consequently, the reduced cash inflows from coal sales limited the Company’s credit availability under the financial covenants in the Amended Credit Agreement prior to its termination, and limited access to any new forms of capital.

But, wait. There’s more:

Additionally, the severe weather affecting the Midwest region of the United States in mid-March 2019 caused, among other things, extensive flooding that damaged rail lines. One of Cloud Peak’s primary suppliers of rail transportation services – BNSF – was negatively impacted by the flooding and has been unable to provide sufficient rail transportation services to satisfy the Company’s targeted coal shipments. As of the Petition Date, BNSF’s trains have resumed operations, but are operating on a less frequent schedule because of repairs being made to rail lines damaged by the extensive flooding. As a result, the Company’s coal shipments have been materially impacted, with cash flows significantly reduced through mid-June 2019.

Riiiiiiiight. But:

More about Moore here: the tweet, as you might expect, doesn’t tell the full story.

Anywho.

The company has been burning a bit over $7mm of liquidity a month since September 2018. Accordingly, it sought strategic alternatives but was unable to find anything viable that would clear its cap stack. We gather there isn’t a whole lot of bullishness around coal mines these days.

To buy itself some time, therefore, the company engaged in a series of exchange transactions dating back to 2016. This enabled it to extinguish certain debt maturing in 2019. And thank G-d for the public markets: were it not for a February 2017 equity offering where some idiot public investors hopped in to effectively transfer their money straight into noteholder pockets, this thing probably would have filed for bankruptcy sooner. That equity offering — coupled with a preceding exchange offer — bought the company some runway to continue to explore strategic alternatives. The company engaged J.P. Morgan Securities LLC to find a partner but nothing was actionable. Ah….coal.

Thereafter, the company hired a slate of restructuring professionals to help prepare it for the inevitable. Centerview Partners took over for J.P. Morgan Securities LLC but, to date, has had no additional luck. The company filed for bankruptcy without any prospective buyers lined up.

Alas, the company filed for bankruptcy with a “sale and plan support agreement” or “SAPSA.” While this may sound like a venereal disease, what it really means is that the company has an agreement with a significant percentage of both its secured and unsecured noteholders to dual track a sale and plan process. If they can sell the debtors’ assets via a string of 363 sales, great. If they have to do a more fulsome transaction by way of a plan, sure, that also works. These consenting noteholders also settled some other disputes and support the proposed $35mm DIP financing

*Foreign customers purchased approximately 9% of ‘18 coal production.

  • Jurisdiction: D. of Delaware (Judge Gross)

  • Capital Structure: $290mm 12% ‘21 secured debt (Wilmington Trust NA), $56.4mm unsecured debt (BOKF NA)

  • Professionals:

    • Legal: Vinson & Elkins LLP (Paul Heath, David Meyer, Jessica Peet, Lauren Kanzer, Matthew Moran, Steven Zundell, Andrew Geppert, Matthew Pyeatt, Matthew Struble, Jeremy Reichman) & (local) Richards Layton & Finger PA (Daniel DeFranceschi, John Knight)

    • Financial Advisor: FTI Consulting Inc. (Alan Boyko)

    • Investment Banker: Centerview Partners (Marc Puntus, Ryan Kielty, Johannes Preis)

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Major shareholders: Renaissance Technologies LLC, The Goldman Sachs Group Inc., Dimensional Fund Advisors LP, Kopernik Global Advisors, Blackrock Inc.

    • DIP Agent: Ankura Trust Company LLC

      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Aryeh Ethan Falk, Christopher Robertson) & (local) Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Curtis Miller, Paige Topper)

      • Financial Advisor: Houlihan Lokey

    • Prepetition Secured Noteholder Group (Allianz Global Investors US LLC, Arena Capital Advisors LLC, Grace Brothers LP, Nomura Corporate Research and Asset Management Inc. Nuveen Alternatives Advisors LLC, Wexford Capital LP, Wolverine Asset Management LLC)

      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Aryeh Ethan Falk, Christopher Robertson) & (local) Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Curtis Miller, Paige Topper)

    • Indenture Trustee: BOKF NA

      • Legal: Arent Fox LLP (Andrew Silfen, Jordana Renert) & (local) Womble Bond Dickinson US LLP (Matthew Ward)

    • Official Committee of Unsecured Creditors (BOKF NA, Nelson Brothers Mining Services LLC, Wyoming Machinery Company, Cummins Inc., ESCO Group LLC, Tractor & Equipment Co., Kennebec Global)

      • Legal: Morrison & Foerster LLP (Lorenzo Marinuzzi, Jennifer Marines, Todd Goren, Daniel Harris, Mark Lightner) & Morris James LLP (Carl Kunz III, Brya Keilson, Eric Monzo)

      • Investment Banker: Jefferies LLC (Leon Szlezinger)

Update: 7/7/19 #379

New Chapter 11 Bankruptcy Filing - Hospital Acquisition LLC

Hospital Acquisition LLC

May 6 & 7, 2019

Texas-based Hospital Acquisition LLC and dozens of other affiliated companies operating in the acute care hospital, behavioral health and out-patient would care space have filed for bankruptcy in the District of Delaware.* The debtors operate 17 facilities in 9 states for a total of 865 beds; their revenue “derives from the provision of patient services and is received through Medicare and Medicaid reimbursements and payments from private payors.

Technically, this is a chapter 22. In 2012, the debtors’ predecessor reeled from the effects of Hurricane Katrina and reduced reimbursement rates and filed for bankruptcy. The case ended in a sale of substantially all assets to the debtors.

So, why is the company in bankruptcy again? Well, to begin with, re-read the final sentence of the first paragraph. That’s why. Per the company:

…internal and external factors have lead the Debtors to an unmanageable level of debt service obligations and an untenable liquidity position. In 2015, Medicare’s establishment of patient criteria to qualify as an LTAC-compliant patient facility led to significant reimbursement rate declines over the course of 2015 and 2016 as changes were implemented. Average reimbursement rates for site neutral patients, representing approximately 57% of 2016 cases, is estimated to drop from $23,000 to $9,000 across the portfolio. When rates declined sharply, the Debtors were unable to adjust. Further, the number of patients that now qualify by Medicare to have services provided in an LTAC setting has declined substantially, resulting in a significant oversupply of LTAC beds in the market.

To offset these uncontrollable trends, the company undertook efforts to convert a new business plan focused around, among other things, closing marginally performing hospitals and diversifying the business into post-acute care “to compete in the evolving value-based health care environment.” To help effectuate this plan, the debtors re-financed its then-existing revolver, entered into its $15mm “priming” term loan, and amended and extended its then-existing term loan facility. After this transaction, the company had total consolidated long-term debt obligations totaling approximately $185mm.

So, more debt + revised business plan + evolving macro healthcare environment = ?? A revenue shortfall, it turns out. Which put the debtors in a precarious position vis-a-vis the covenants baked into the debtors’ debt docs. Whoops. Gotta hate when that happens.

The debtors then engaged Houlihan Lokey to explore strategic alternatives and engaged their lenders. At the time of filing, however, the debtors do not have a stalking horse agreement in place; they do hope, however, to have one in place by mid-July.

*There are also certain non-debtor home health owners and operators in the corporate family that are not, at this time, chapter 11 debtors.

  • Jurisdiction: D. of Delaware (Judge Shannon)

  • Capital Structure: $23.9mm RCF, $9.4mm LOCs, $15mm “Priming Term Loan” ($7.7mm funded), $136.8mm TL

  • Professionals:

    • Legal: Akin Gump Strauss Hauer & Feld LLP (Scott Alberino, Kevin Eide, Sarah Link Schultz) & (local) Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Jaime Luton Chapman, Joseph Mulvihill, Betsy Feldman)

    • Financial Advisor: Houlihan Lokey Inc. (Geoffrey Coutts)

    • Investment Banker: BRG Capital Advisors LLC

    • Claims Agent: Prime Clerk LLP (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Equityholders: Monarch Master Funding Ltd., Twin Haven Special Opportunities Fund IV LP, Blue Mountain Credit Alternatives Master Fund LP, Merrill Lynch Pierce Fenner & Smith Inc., Oakstone Ventures Inc.

    • White Oak Healthcare Finance LLC

      • Legal: King & Spalding LLP (Arthur Steinberg, Scott Davidson) & (local) The Rosner Law Group LLC (Frederick Rosner, Jason Gibson)

    • Marathon Asset Management

      • Legal: Ropes & Gray LLP (Matthew Roose)

    • Prepetition Term Loan Agents: Seaport Loan Products LLC & Wilmington Trust NA

      • Legal: Shearman & Sterling LLP (Ned Schodek, Jordan Wishnew) & (local) Potter Anderson & Corroon LLP (Jeremy Ryan, R. Stephen McNeill, D. Ryan Slaugh)

    • Official Committee of Unsecured Creditors

      • Legal: Greenberg Traurig LLP (David Cleary, Nancy Peterman, Dennis Meloro) & (local) Bayard PA (Justin Alberto, Erin Fay, Daniel Brogan)

Updated 5/18