⚡️New Chapter 11 Bankruptcy Filing - Griddy Energy LLC⚡️

Griddy Energy LLC

Sooooooo this one was predictable. The writing was on the wall a few weeks ago and we noted in “💥Is Texas F*cked?💥,” that Griddy Energy LLC was a likely bankruptcy candidate.* On Sunday, we noted how recent PUCT/ERCOT decisions to extend the deadline “…for electric retailers to dispute the ridonkulous liabilities imposed upon them after the now-infamous Texan storm” — liabilities that already claimed Just Energy Group Inc.($JE) and Brazos Electric Power Cooperative Inc. as victims — might buy time for certain other players in the stack to figure out their futures. By then, however, it was already too late for Griddy. On February 26, 2021, ERCOT forced the mass transition of Giddy’s customers to other electricity providers.

Griddy’s whole business model was passing through wholesale pricing sans mark-up to 29,000 retail end customers in exchange for a monthly fixed fee of $9.99. Through this model, Griddy claims to have saved its customers more than $17mm since 2017. Griddy argues that at no point since its inception was its model targeted as problematic by the PUCT. PUCT, after all, granted Griddy’s license.

That all obviously changed with February’s big storm. Per the debtor:

During the winter storm in Texas in February 2021, Griddy and its customers suffered as a result of (a) inaccurate information from ERCOT about the preparedness of the electricity grid for the 2020-2021 winter season, (b) the decision by the PUCT to order electricity prices be set to $9,000 per megawatt hour (“MWh”), and (c) ERCOT’s decision to hold electricity prices at $9,000 per MWh for 32 hours after firm load shed had stopped. Prior to the PUCT order, the real-time electricity price had reached $9,000 per MWh for a total of only 3 hours since 2015. In contrast, after the PUCT order, the electricity price was set to $9,000 per MWh for 87.5 hours between February 15, 2021 and February 19, 2021.

This obviously creates a whole host of issues when, in turn, you’re only getting $9.99 per customer per month (plus other passthrough expenses) for a total of $289.7k in revenue a month. Prior to the storm, Griddy was solvent. As of the petition date, it has only $1.448mm of pre-petition debt outstanding (due to Macquarie Investments US Inc.). Griddy obviously blames the reversal of that fortune on ERCOT’s missteps and poor planning. Per the debtor:

Prior to the mid-February winter storm event, Griddy was solvent. As discussed above, the failures of ERCOT and resulting actions taken by the PUCT during the winter storm event resulted in Griddy’s loss of all of its customers and forced Griddy to file this case. The winter storm event also left Griddy in an untenable position – engage in aggressive collection actions against customers for exceedingly high prices for wholesale electricity and ancillary services (which is not its preference) and fight baseless lawsuits – or file for bankruptcy and distribute its remaining cash in an orderly manner.

Be that as it may, Griddy now owes a contingent and disputed $29mm nut to ERCOT — its largest general unsecured creditor. Its customers — who generally tend to be on the lower end of the socioeconomic spectrum — have bills far in excess of historical norm and expectation. So now what?

Griddy is basically flicking the bird to ERCOT (🖕):

In the weeks since the winter storm event, Griddy has created a chapter 11 plan whereby (i) Macquarie would compromise a portion of the remaining amount of money owed to it by Griddy for the benefit of Griddy’s other creditors, (ii) Griddy would give former customers with unpaid bills releases in exchange for such customers’ releases of Griddy and certain other parties, (iii) other general unsecured creditors would share pro rata in remaining available cash, and (iv) upon emergence, a plan administrator would take over ownership of Griddy and, in his or her discretion, pursue causes of action, whether against ERCOT for potential preference claims, fraudulent transfers or other claims related to the winter storm event, or otherwise. Griddy has filed its proposed chapter 11 plan, disclosure statement and related motions concurrently herewith. Griddy intends to seek confirmation of its proposed chapter 11 plan on as expedited basis as possible.

“Certain other parties” no doubt includes Macquarie.

All of this seems so strangely … American. Thousands of innocent people sign up for a product that they don’t fully understand most likely thinking that there are systems in place to protect them. Turns out the systems are broken: thousands of innocent people lose electricity for days and ultimately get billed up the wazoo and, naturally, nobody wants to take any responsibility for that. Lawsuits commence. Bankruptcies ripple through the area.** Meanwhile, the lenders do everything in their power to shed any and all liability risk. God bless America.

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*We said we “smell a chapter 7 filing” which, it turns out, was perhaps a bit to flippant. While the spirit of the comment is correct in that there is no future for the company as a going concern, we neglected to consider some of the benefits of a chapter 11 filing including, among other things, the sought-after releases.

**One interesting side note — given that this is a uniquely Texan fact pattern — is that it took this catastrophe to finally hour-up some Texas-based lawyers rather than enrich some Chicago or New York attorneys. Putting aside Just Energy Group Inc. (represented by Kirkland & Ellis LLP), Brazos Electric Power Cooperative Inc. is represented by Norton Rose Fulbright and Griddy is represented by Baker Botts LLP. The lender, Macquarie, is counseled by Haynes and Boone LLP and ERCOT is represented by Munsch Hardt Kopf & Harr P.C. The local folks must seriously be thinking “it’s about time.”

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Date: March 15, 2021

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

Capital Structure: $15mm Borrowing Base Facility ($1.448m outstanding)

Company Professionals:

• Legal: Baker Botts LLP (Robin Spigel, David Eastlake, Chris Newcomb, Jacob Herz)

• Claims Agent: Stretto (Click here for free docket access)

Other Parties in Interest:

• Pre-petition Lender: Macquarie Investments US Inc.

  • Legal: Haynes and Boone LLP (Kelli Norfleet, Arsalan Muhammad)

• ERCOT

  • Legal: Munsch Hardt Kopf & Harr P.C. (Kevin Lippman)

⛽️New Chapter 11 Bankruptcy Filing - Rosehill Resources Inc. ($ROSE)⛽️

Rosehill Resources Inc. ($ROSE)

July 27, 2020

Stop us if you’ve heard this before: Rosehill Resources Inc. ($ROSE), a Texas-based independent E&P company focused, via a fellow-debtor operating company, Rosehill Operating Company LLC (“ROC”), on the Permian Basin (and, more specifically, the Delaware Basin), filed for bankruptcy because of the usual suspects that literally every oil and gas company blames. Seriously, it’s like everyone is just copying and pasting Arya Stark’s hitlist at this point: “Vladimir Putin, Mohammad Bin Salman Al Saud, COVID-19, the competition, too much debt, etc. etc.” Never mind: we’ll stop ourselves. We’ve all heard this before. Many. MANY. Times.

Speaking of the debt, here is what the capital structure looks like and this is what will happen to it pursuant to the prepackaged plan of reorganization that’s already on file:

©️PETITION LLC

That should be pretty self-explanatory but there are a few things to highlight:

• The $235mm exit RBL actually represents a decreased borrowing base. The original RCF had a maximum commitment of $500mm with a most recent borrowing base of $340mm. That borrowing base amount created a deficiency/liability the company struggled — when coupled with service obligations related to the RCF, secured notes and preferred stock — to make.

• The DIP will run at 8% PIK which is better than the 10% cash pay under the secured notes.

In terms of operations, Rosehill operates or owns working interests in 133 oil and gas wells of which 128 are producing or are capable of production. And here’s what that production looks like:

Is that interesting? Not particularly. We include only to demonstrate that we’re not the only ones who are capable of highly unfortunate and irritating typographical errors. More interesting is the fact that Rosehill earned $302.3mm in revenue in ‘19 against $239mm of operating expense. Revenue was basically flat from ‘18 whereas the company’s operating expense increased. On the plus side, the company had some favorable hedge agreements in place which, upon monetization, resulted in $87.6mm in proceeds that the company ultimately used to paydown its RCF immediately prior to the filing. Actually, who are we kidding? That’s not particularly interesting either.

Given how boring this bankruptcy is, the last thing we’ll mention — again because we and the entire world of finance seems to be obsessed with the topic — is that the company emanated out of … wait for it … wait for it … a SPAC!! While the company was originally incorporated in 2015 as a SPAC under the name KLR Energy Acquisition Corporation — sponsored by the KLR Group’s Edward Kovalik, Stephen Lee and Reid Rubinstein — the business corporation that ultimately became Rosehill Resources Inc. occurred in April 2017.

The rest, as they say, is now history. Perhaps we should start taking a running tally: new SPAC IPOs vs. old SPACs that have now filed for chapter 11 bankruptcy!

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

• Capital Structure: $226.5mm RCF, $106.1mm second lien secured notes,

• Professionals:

  • Legal: Gibson Dunn & Crutcher LLP (David Feldman, Matthew Kelsey, Dylan Cassidy, Hillary Holmes, Shalla Prichard, Michael Neumeister, Ashtyn Hemendinger) & Haynes and Boone LLP (Kelli Norfleet, Arsalan Muhammad)

  • Financial Advisor: Opportune LLP

  • Investment Banker: Jefferies Group LLC (Jeffrey Finger)

  • Claims Agent: Epiq Corporate Restructuring LLC (*click on the link above for free docket access)

• Other Parties in Interest:

  • Admin Agent: JPMorgan Chase Bank NA

    • Legal: White & Case LLP (Mark Holmes) & Bracewell LLP (Jason Cohen)

  • Admin Agent to the Secured Note Purchase Agreement: US Bank NA

    • Legal: Shipman & Goodwin LLP (Kimberly Cohen, Robert Borden)

  • Second Lien Noteholders & Series B Preferred Stockholderes & Majority DIP Lenders: EIG Management Company LLC

    • Legal: Kirkland & Ellis LLP (Chad Husnick, Christopher Koenig, Mary Kogut Brawley) & Zack A. Clement PLLC (Zach Clement)

  • Tax Receivable Claimant & Preferred and Common Stockholder: Tema Oil & Gas Company

    • Legal: McDermott Will & Emery LLP (James Kapp III, Brandon White, Nathan Coco, Fred Levenson, Michael Boykins)
      
      
      

⛽️New Chapter 11 Filing - Patriot Well Solutions LLC⛽️

Patriot Well Solutions LLC

July 20, 2020

And YET ANOTHER oilfield services company in bankruptcy. Colorado-based Patriot Well Solutions LLC provides coiled tubing, nitrogen & pumping services, wireline logging and perforating services and crane services to the oil and gas industry in North Dakota, Wyoming, Colorado and Texas; it filed its chapter 11 petition in the Southern District of Texas to pursue a sale of substantially all of its assets. Backed by White Deer Energy LP II and MBH Energy Resources LLC, the company was formed in early 2016. White Deer has committed to providing a $9.4mm DIP and will serve as the company’s stalking horse purchaser.

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

• Capital Structure:

• Professionals:

  • Legal: Squire Patton Boggs LLP (Christopher Giaimo, Travis McRoberts, Kelly Singer, Jeffrey Rothleder)

  • Managers: Ben Guill, James Meneely III, Eric White, Michael Tangedahl, Robert McNally

  • Financial Advisor/CRO: Sonoran Capital Advisors (Matt Foster, Dax Murray, Ry Neri)

  • Investment Banker: Piper Sandler & Co./Simmons Energy

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

• Other Parties in Interest:

  • Pre-petition Lender, DIP Secured Lender & Stalking Horse Purchaser: White Deer Energy LP II

7/21/20 Docket #2

🧀 New Chapter 11 Bankruptcy Filing - CEC Entertainment Inc. 🧀

CEC Entertainment Inc.

June 24, 2020

For our rundown, please go here.

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

• Capital Structure: $1.089b funded debt ($760mm TL, $108 RCF, $6mm LOC, $215.7mm notes)

• Professionals:

  • Legal: Weil Gotshal & Manges LLP (Matthew Barr, Alfredo Perez, Andrew Citron, Rachael Foust, Scott Bowling)

  • Board of Directors: David McKillips, Andrew Jhawar, Naveen Shahani, Allen Weiss, Peter Brown, Paul Aronzon

  • Financial Advisor: FTI Consulting Inc. (Chad Coben)

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

  • Real Estate Advisor: Hilco Real Estate LLC

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

• Other Parties in Interest:

  • PE Sponsor: Queso Holdings Inc./AP VIII CEC Holdings, L.P. (Apollo)

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP

  • First Lien Credit Agreement Agent: Credit Suisse AG, Cayman Islands Branch

    • Legal: Davis Polk & Wardwell LLP (Eli Vonnegut) & Rapp & Krock PC (Henry Flores, Kenneth Krock)

  • Ad Hoc Group of First Lien Lenders: American Money Management Corp, Arbour Lane Capital Management, Arena Capital Advisors LLC, Ares Management LLC, Bank of Montreal, BlueMountain Capital Management, Carlson Capital LP, Catalur Capital Management LP, Citibank NA, Credit Suisse AG, Deutsche Bank New York, Fidelity Management & Research Co., Fortress Investment Group LLC, GS Capital Partners LP, Hill Path Capital, Indaba Capital Fund LP, ICG Debt Advisors, Jefferies Financ LLC, J.H. Lane Partners Master Fund LP, Monarch Alternative Capital LP, MSD Capital LP, MSD Partners LP, Octagon Credit Investors LLC, Par Four Investment Management LLC, RFG-Clover LLC, Second Lien LLC, UBS AG, Wazee Street Capital Management, Western Asset Management Company LLC, WhiteStar Asset Management, ZAIS Group LLC

    • Legal: Akin Gump Strauss Hauer & Feld LLP (Ira Dizengoff, Philip Dublin, Jason Rubin, Marty Brimmage Jr., Lacy Lawrence)

  • Indenture Trustee: Wilmington Trust NA

    • Legal: Reed Smith LLP (Kurt Gwynne, Jason Angelo)

  • Ad Hoc Group of ‘22 8% Senior Noteholders (Longfellow Investment Management Co. LLC, Prudential Financial Inc., Resource Credit Income Fund, Westchester Capital Management)

    • Legal: King & Spalding LLP (Matthew Warren, Lindsey Henrikson, Michael Rupe)

    • Financial Advisor: Ducera Partners LLC

  • Official Committee of Unsecured Creditors: Wilmington Trust NA, The Coca-Cola Company, National Retail Properties, Performance Food Group, Washington Prime Group, NCR Corporation, Index Promotions

    • Legal: Kelley Drye & Warren LLP (Eric Wilson, Jason Adams, Lauren Schlussel & Womble Bond Dickinson LLP (Matthew Ward)

7/17/20 Dkt. 352.

⛽️New Chapter 11 Bankruptcy Filing - Unit Corporation ($UNT)⛽️

Unit Corporation

May 22, 2020

Oklahoma is where a lot of the action is at. Unit Corporation ($UNT) is a publicly-traded Tulsa-based holding company that, through three operating segments, offers (i) oil and gas exploration and production, (ii) contract drilling and (iii) midstream services. Like every other oil and gas company under the sun, this one has too much funded debt. $789mm to be exact, split between a $139mm RBL facility and $650mm in ‘21 subordinated unsecured notes. And like every other oil and gas company under the sun, it cannot sustain its capital structure. For months now, the debtors have been the bankruptcy equivalent of deadbeats — bouncing from one standstill agreement to the next so as not to get hit with a meaningful on-schedule redetermination liability that they wouldn’t be able to satisfy (PETITION Note: this is particularly relevant because they had already been hit by a “wildcard” or “off-schedule” redetermination in January, knocking their borrowing base down $75mm. Instant liability! Yay!!). On brand, the debtors likewise couldn’t afford their semi-annual May 15 interest payment.

Why the bankruptcy now? Well, you’ve seen this movie many times already in the last month or so. You’ve got a starring role for Vladimir Putin. And a starring role for MBS. And you’ve got a few plagues for added drama: first, plummeting commodity prices and then a global pandemic. These factors negatively impacted liquidity and sparked a number of strategic processes including (a) the sale of 50% ownership in Superior Pipeline Company to SP Investor Holdings LLC for $300mm in spring of 2018 and (b) an attempted up-tier exchange of the subordinated notes into newly issued 10% senior secured notes and 7% junior notes. The debtors, however, were unable to successfully obtain the requisite number of tenders. Not only would the exchange have extended the debtors’ maturity profile and eliminated short-and-medium term refi risk, it would have removed the danger that the debtors would trigger a springing maturity in their RBL. Oh well.

Luckily the debtors got themselves an agreement with 70% of the subordinated noteholders and the RBL lenders on the terms of a consensual financial restructuring transaction — like, as the shotclock was about to go off (read: when the standstill agreement expired on May 22, the filing date). The deal includes, among other things, (i) a $36mm new money DIP credit facility, (ii) a debt-for-equity swap by the noteholders for equity in each of reorganized Unit Corp and the upstream and contact drilling opcos, (iii) a new $180mm exit facility from the RBL lenders in exchange for a 5% exit fee paid in post-reorg equity in reorganized Unit Corp. (PETITION Note: apparently the RBL lenders have no interest in owning equity in contact drilling services), and (iv) payment in full in cash or reorganized equity to general unsecured claimants depending upon which entity they have a claim against. Notably, equityholders who do not opt out of releases will receive out-of-the-money warrants exercisable for an aggregate of 12.5% of the interests in the reorganized Unit Corp entity.

We’d be remiss if we didn’t highlight one other aspect of these cases. As is all the rage these days, management got away with an amended incentive structure on the eve of bankruptcy that enriched them all to the tune of $900k. Sweeeeeet. Meanwhile, they spent a good chunk of November ‘19 through April ‘20 sh*tcanning their employees and promising them 4 weeks of severance for every year of service up to 104 weeks. While this is admittedly a pretty rich severance plan, it appears that the restructuring support agreement memorializing the above-referenced transaction proposes to renege on this policy and instead provide merely four to 13 weeks severance to employees. You’ve gotta love these oil and gas execs: they’re wildly proficient at destroying value but still manage to always siphon some off for themselves. It’s awesome.

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

• Capital Structure: $139mm RBL facility (BOKF NA), $650mm in ‘21 subordinated unsecured notes (Wilmington Trust NA)

• Professionals:

  • Legal: Vinson & Elkins LLP (Harry Perrin, Paul Heath, Matthew Pyeatt, David Meyer, Lauren Kanzer, Zachary Paiva, Emily Tomlinson)

  • Financial Advisor: Opportune LLP (Gary Pittman)

  • Investment Banker: Evercore Group LLC (Bo Yi)

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

• Other Parties in Interest:

  • RBL Agent: BOKF NA

    • Legal: Frederic Dorwart Lawyers PLLC (Samuel Ory) & Bracewell LLP (William A. Trey Wood III)

    • Financial Advisor: Huron Consulting Group Inc.

  • Ad Hoc Group

    • Legal: Weil Gotshal & Manges LLP (Matthew Barr, Lauren Tauro)

    • Financial Advisor: Greenhill & Co. Inc.

⛽️New Chapter 11 Bankruptcy Filing - Hornbeck Offshore Services Inc. ($HOSS)⛽️

Hornbeck Offshore Services Inc.

May 19, 2020

Hornbeck Offshore Services Inc. and 13 affiliates (the “debtors”), providers of marine transportation services to petroleum exploration and production, oilfield service, offshore construction and US military customers, filed prepackaged chapter 11 bankruptcies in the Southern District of Texas. Judge Isgur and Judge Jones must be thinking “Thank G-d”: for the judges, “prepackaged” is the operative word here and a quickie case amidst some of these melting ice cubes (e.g., J.C. Penney) must be a welcome breath of fresh air.

Hornbeck is one of those companies that people have been watching ever since 2015 — mostly on account of (i) the idea that offshore drilling had become prohibitively expensive in a falling commodity price environment and (ii) thanks to years of capital-intensive vessel construction programs and vessel acquisitions, an over-levered balance sheet. The good news is that, because of those programs/acquisitions, the company is relatively well-positioned with a nimble and younger fleet (76 vessels in total) — a fact that’s surely recognized by the company’s future equity holders. The bad news is that, with this much debt, even Hornbeck couldn’t postpone the inevitable bankruptcy ad infinitum when oil is where it is. Per the company:

Despite the Company’s relative strengths in its core markets, recent industry trends have had a materially adverse impact on the offshore energy industry and on the Company in particular. While the Company is accustomed to, and built for, the cyclical nature of the oilfield services industry, the recent downturn in the industry has lasted nearly six years, much longer than any previous cycles in the deepwater era, and has put pressure on the Company’s ability to repay or refinance its significant debt obligations.

This is what the funded debt looks like:

Despite that ghastly capital structure and the unfriendly market, Hornbeck, unlike other players in the space like Tidewater Inc. and GulfMark Offshore Inc., managed to stay out of bankruptcy. To do so, it pulled every lever in the book:

• Stacking of vessels to right-size the size of the available fleet relative to demand? ✅

• Defer drydocking costs? ✅

• Onshore and offshore personnel pay cuts? ✅

• Selectively taking on assignments, avoiding long-term Ks and insurance risk? ✅

This is all great but of course there’s still that monstrosity of a balance sheet. In tandem with the operational restructuring, the company has been pursuing strategic balance sheet transactions since 2017 — some more successful than others. The most recent attempt of out-of-court exchange offers and consent solicitations was in early February and though it got a super-majority of support from holders of the ‘20 and ‘21 notes, it failed to meet the required 99% threshold to consummate the deal. On March 23, the date of the bottom of the stock market (irrelevant…just a fun fact), the company terminated the offers. After a long road over many years, bankruptcy became more of a reality.

And so here we are. With the amount of support indicated on the offers, this thing set up nicely for a prepackaged plan. Regarding the plan, there’s a whole lot going on there because of the way the exit facilities are contemplated and the fact that there are Jones Act compliance issues but suffice it to say that the plan treats the first lien lenders as the fulcrum security. The second lien lenders will get a tip and the unsecured noteholders essentially walk away with a small equity kiss and warrants. The company will require liquidity on the back end of the chapter 11 and so the plan also contemplates a $100mm rights offering in exchange for 70% of the reorganized equity.

The debtors will fund the cases via a $75mm DIP credit facility which includes $56.25 million funded by certain secured lenders and $18.75 million funded by certain unsecured noteholders.

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

• Capital Structure: $50mm ABL (Wilmington Trust NA), $350mm first lien facility (Wilmington Trust NA), $121.2mm second lien facility (Wilmington Trust NA), $224.3mm ‘20 unsecured notes, $450mm ‘21 unsecured notes

• Professionals:

  • Legal: Kirkland & Ellis LLP (Edward Sassower, Ryan Blaine Bennett, Ameneh Bordi, Debbie Farmer, Emily Flynn, Michael Lemm, Benjamin Rhode) & Jackson Walker LLP (Matthew Cavenaugh, Kristhy Peguero, Jennifer Wertz, Veronica Polnick)

  • Financial Advisor: Portage Point Partners LLC

  • Investment Banker: Guggenheim Securities LLC

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

• Other Parties in Interest:

  • DIP Agent ($75mm): Wilmington Trust NA

  • Counsel to the Consenting Secured Lenders

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Darren Klein, Stephanie Massman)

  • Counsel to Consenting Unsecured Notes

    • Legal: Milbank LLP (Gerard Uzzi, Brett Goldblatt, James Ball)

  • Large equityholders: Cyrus Capital Partners LP, Fine Capital Partners LP, William Hurt Hunt Trust Estate

New Chapter 11 Bankruptcy Filing - J.C. Penney Company Inc. ($JCP)

J.C. Penney Company Inc.

May 15, 2020

Let’s be clear about something right off the bat. Encino Man, Captain America and Austin Powers could all suddenly surface from being entombed in ice for decades and even THEY wouldn’t be surprised that Texas-based J.C. Penney Company Inc. (and 17 affiliates, the “debtors”) filed for chapter 11 bankruptcy.

There are a couple of ways to look at this one.

First, there’s the debtors’ way. Not one to squander a solid opportunity, the debtors dive under “COVID Cover”:

“Before the pandemic, the Company had a substantial liquidity cushion, was improving its operations, and was proactively engaging with creditors to deleverage its capital structure and extend its debt maturities to build a healthier balance sheet. Unfortunately, that progress was wiped out with the onset of COVID-19. And now, the Company is unable to maintain its upward trajectory through its “Plan for Renewal.” Moreover, following the temporary shutdown of its 846 brick-and-mortar stores, the Company is unable to responsibly pay the upcoming debt service on its over-burdened capital structure.”

The debtors note that since Jill Soltau became CEO on October 2, 2018, the debtors have been off to the races with their “Plan for Renewal” strategy. This strategy was focused on getting back to JCP’s fundamentals. It emphasized (a) offering compelling merchandise, (b) delivering an engaging experience, (c) driving traffic online and to stores (including providing buy online, pickup in store or curbside pickup — the latest in retail technology that literally everyone is doing), (d) fueling growth, and (e) developing a results-minded culture. The debtors are quick to point out that all of this smoky verbiage is leading to “meaningful progress” — something they define as “…having just achieved comparable store sales improvement in six of eight merchandise divisions in the second half of 2019 over the first half, and successfully meeting or exceeding guidance on all key financial objectives for the 2019 fiscal year.” The debtors further highlight:

The five financial objectives were: (a) Comparable stores sales were expected to be down between 7-8% (stores sales were down 7.7%); (b) adjusted comparable store sales, which excludes the impact of the Company’s exit from major appliances and in-store furniture categories were expected to be down in a range of 5-6% (adjusted comparable store sales down 5.6%); (c) cost of goods sold, as a rate of net sales was expected to decrease 150-200 basis points (decreased approximately 210 basis points over prior year, which resulted in improved gross margin); (d) adjusted EBITDA was $583 million (a 2.6% improvement over prior year); and (e) free cash flow for fiscal year 2019 was $145 million, beating the target of positive.

Not exactly the highest bar in certain respects but, sure, progress nonetheless we suppose. The debtors point out, on multiple occasions, that prior to COVID-19, its “…projections showed sufficient liquidity to maintain operations without any restructuring transaction.” Maintain being the operative word. Everyone knows the company is in the midst of a slow death.

To prolong life, the focus has been on and remains on high-margin goods (which explains the company getting out of low-margin furniture and appliances and a renewed focus on private label), reducing inventory, and developing a new look for JCP’s stores which, interestingly, appears to focus on the “experiential” element that everyone has ballyhooed over the last several years which is now, in a COVID world, somewhat tenuous.

Which gets us to the way the market has looked at this. The numbers paint an ugly picture. Total revenues went from $12.87b in fiscal year ‘18 to $12b in ‘19. Gross margin also declined from 36% to 34%. In the LTM as of 2/1/20 (pre-COVID), revenue was looking like $11.1b. Curious. But, yeah, sure COGs decreased as has SG&A. People still aren’t walking through the doors and buying sh*t though. A fact reflected by the stock price which has done nothing aside from slowly slide downward since new management onboarded:

All of this performance has also obviously called into question the debtors’ ability to grow into its capital structure:

Here’s a more detailed look at the breakdown of unsecured funded debt:

And yet, prior to COVID, the debt stack has more or less held up. Here is the chart for JCP’s ‘23 5.875% $500mm senior secured first lien notes from the date of new management’s start to today:

Here is the chart for JCP’s ‘25 8.624% $400mm second lien notes from the date of new management’s start to today:

And here is our absolute favorite: JCP’s ‘97 7.625% $500mm senior unsecured notes:

The fact that these notes were in the 20s mere months ago is mind-boggling.

We talk a lot about how bankruptcy filings are a way to tell a story. And, here, the debtors, while not trying to hide their stretched balance sheet nor the pains of brick-and-mortar department stores with a 846-store footprint, are certainly trying to spin a positive story about management and the new strategic direction — all while highlighting that there are pockets of value here. For instance, of those 846 stores, 387 of them are owned, including 110 operating on ground leases. The private brand portfolio — acquired over decades — represents 46% of total merchandise sales. The debtors also own six of their 11 distribution centers and warehouses.

With that in mind, prior to COVID, management and their advisors were trying to be proactive about the balance sheet — primarily the term loans and first lien secured notes maturing in 2023. In Q3 ‘19, the debtors engaged with their first lien noteholders, term lenders and second lien noteholders on proposals that would, among other things, address those maturities, promote liquidity, and reduce interest expense. According to the debtors, they came close. A distressed investor was poised to purchase more than $750mm of the term loans and, in connection with a new $360mm FILO facility, launch the first step of a broader process that would have kicked maturities out a few years. In exchange, the debtors would lien up unencumbered collateral (real estate). Enter COVID. The deal went up in smoke.

There’s a new “deal” in its stead. A restructuring support agreement filed along with the bankruptcy papers contemplates a new post-reorg operating company (“New JCP”) and a new REIT which will issue new common stock and new interests, respectively. Beyond that, not much is clear from the filing: the term sheet has a ton of blanks in it:

There’s clearly a lot of work to do here. There’s also the “Market Test” element which entails, among other things, running new financing processes, pursuing potential sale/leaseback transactions, and pursuing a sale of the all or part of the debtors’ assets. If the debtors don’t have a business plan by July 14 and binding commitments for third-party financing by August 15, the debtors are required to immediately cease pursuing a plan and must instead pursue a 363 of all of their assets. Said another way, if the economy continues to decline, consumer spending doesn’t recover, and credit markets tighten up, there’s a very good chance that JCP could liquidate. Remember: retail sales sunk to a record low in April. Is that peak pain? Or will things get worse as the unemployment rate takes root? Will people shop at JC Penney if they even shop at all? There are numerous challenges here.

The debtors will use cash collateral for now and later seek approval of a $900mm DIP credit facility of which $450mm will be new money (L+11.75% continues the trend of expensive retail DIPs). It matures in 180 days, giving the debtors 6 months to get this all done.

*****

A few more notes as there are definitely clear winners and losers here.

Let’s start with the losers:

1. The Malls. It’s one thing when one department store files for bankruptcy and sheds stores. It’s an entirely different story when several of them go bankrupt at the same time and shed stores. This is going to be a bloodbath. Already, the debtors have a motion on file seeking to reject 20 leases.

2. Nike Inc. ($NKE) & Adidas ($ADDYY). Perhaps they’re covered by 503(b)(9) status or maybe they can slickster their way into critical vendor status (all for which the debtors seek $15.1mm on an interim basis and $49.6mm on a final basis). Regardless, showing up among the top creditors in both the Stage Stores Inc. bankruptcy and now the J.C. Penney bankruptcy makes for a horrible week.

3. The Geniuses Who Invested in JCP Debt that Matures in 2097. As CNBC’s Michael Santoli noted, “This JC Penney issue fell only 77 years short of maturing money-good.”

4. Bill Ackman & Ron Johnson. This.

And here are the winners:

1. The New York Times. Imperfect as it may be, their digitalization efforts allow us all to read and marvel about the life of James Cash Penney, a name that so befitting of a Quentin Tarantino movie that you can easily imagine JC chillin with Jack Dalton on some crazy Hollywood adventure. We read it with sadness as he boasts of the Golden Rule and profit-sharing. Profits alone would be nice, let alone sharing.

2. Kirkland & Ellis LLP. Seriously. These guys are smoking it and have just OWNED retail. In the past eight days alone the firm has filed Stage Stores Inc., Neiman Marcus Group LTD LLC and now JCP. It’s a department store hat trick. Zoom out from retail and add in Ultra Petroleum Corp. and Intelsat SA and these folks are lucky they’re working from home. They can’t afford to waste any billable minutes on a commute at this point.

3. Management. They’re getting what they paid for AND, consequently, they’re getting paid. No doubt Kirkland marched in there months ago and pitched/promised management that they’d secure lucrative pay packages for them if hired and … BOOM! $7.5mm to four members of management!

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

• Capital Structure: See above.

• Professionals:

  • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Christopher Marcus, Aparna Yenamandra, Rebecca Blake Chaikin, Allyson Smith Weinhouse, Jake William Gordon) & Jackson Walker LLP (Matthew Cavenaugh, Jennifer Wertz, Kristhy Peguero, Veronica Polnick)

  • OpCo (JC Penney Corporation Inc.) Independent Directors: Alan Carr, Steven Panagos

    • Legal: Katten Muchin Rosenman LLP (Steven Reisman)

  • PropCo (JCP Real Estate Holdings LLC & JC Penney Properties LLC) Independent Directors: William Transier, Heather Summerfield

    • Legal: Quinn Emanuel Urquhart & Sullivan LLP

  • Financial Advisor: AlixPartners LLP (James Mesterharm, Deb Reiger-Paganis)

  • Investment Banker: Lazard Freres & Co. LLC (David Kurtz, Christian Tempke, Michael Weitz)

  • Store Closing Consultant: Gordon Brothers Retail Partners LLC

  • Real Estate Consultants: B. Riley Real Estate LLC & Cushman & Wakefield US Inc.

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

• Other Parties in Interest:

  • DIP Agent: GLAS USA LLC

    • Legal: Arnold & Porter Kaye Scholer

  • RCF Agent: Wells Fargo Bank NA

    • Legal: Otterbourg PC & Bracewell LLP (William Wood)

    • Financial Advisor: M-III Partners (Mo Meghli)

  • TL Agent: JPMorgan Chase Bank NA

  • Indenture Trustee: Wilmington Trust NA

  • Ad Hoc Group of Certain Term Loan Lenders & First Lien Noteholders & DIP Lenders (H/2 Capital Partners, Ares Capital Management, Silver Point Capital, KKR, Whitebox Advisors, Sculptor Capital Management, Brigade Capital Management, Apollo, Owl Creek Asset Management LP, Sixth Street Partners)

    • Legal: Milbank LLP (Dennis Dunne, Andrew Leblanc, Thomas Kreller, Brian Kinney) & Porter Hedges LLP

    • Financial Advisor: Houlihan Lokey (Saul Burian)

  • Second Lien Noteholders (GoldenTree Asset Management, Carlson, Contrarian Capital Management LLC, Littlejohn & Co.)

    • Legal: Stroock & Stroock & Lavan LLP (Kris Hansen) & Haynes and Boone LLP (Kelli Norfleet, Charles Beckham)

    • Financial Advisor: Evercore Group LLC (Roopesh Shah)

  • Large equityholder: BlackRock Inc. (13.85%)

🥾New Chapter 11 Bankruptcy Filing - Stage Stores Inc. ($SSI) 🥾

Stage Stores Inc.

April 10, 2020

Houston-based Stage Stores Inc. ($SSI) marks the second department store chain to file for chapter 11 bankruptcy in Texas this week, following on the heals of Neiman Marcus. With John Varvatos and J.Crew also filing this week, the retail sector is clearly starting to buckle. All of these names — with maybe the exception of Varvatos — were potentially headed towards chapter 11 pre-COVID. As were J.C. Penney Corp. ($JCP) and GNC Holdings Inc. ($GNC), both of which may be debtors by the end of this week. Sh*t is getting real for retail.

We first wrote about Stage Stores in November ‘18, highlighting dismal department store performance but a seemingly successful experiment converting 8 department stores to off-price. At the time, its off-price business had a 9.9% comp sales increase. Moreover, the company partnered with ThredUp, embracing the secondhand apparel trend. While we have no way of knowing whether this drove any revenue, it, in combination with the conversions, showed that management was thinking outside the box to reverse disturbing retail trends.

By March ‘19, the company was on record with plans to close between 40-60 department stores. In August ‘19, it became public knowledge that Berkeley Research Group was working with the company. The company reported Q2 ‘19 results that — the hiring of a restructuring advisor with a lot of experience with liquidating retailers, aside — actually showed some promise. We wrote:

Thursday was a big day for the company. One one hand, some big mouths leaked to The Wall Street Journal that the company retained Berkeley Research Group to advise on department store operations. That’s certainly not a great sign though it may be a positive that the company is seeking assistance sooner rather than later. On the other hand, the company reported Q2 ‘19 results that were, to some degree, somewhat surprising to the upside. Net sales declined merely $1mm YOY and comp sales were 1.8%, a rare increase that stems the barrage of consecutive quarters of negative turns. Off-price conversions powered 1.5% of the increase. The company reported positive trends in comps, transaction count, average transaction value, private label credit card growth, and SG&A. On the flip side, COGs increased meaningfully, adjusted EBITDA declined $2.1mm YOY and interest expense is on the rise. The company has $324mm of debt. Cash stands at $25mm with $66mm in ABL availability. The company’s net loss was $24mm compared to $17mm last year.

Some of the reported loss is attributable to offensive moves. The company’s inventory increased 5% as the company seeks to avoid peak shipping expense and get out ahead of tariff risk (PETITION Note: see a theme emerging here, folks?). There are also costs associated with location closures: the company will shed 46 more stores.

What’s next? Well, the company raised EBITDA guidance for fiscal ‘19: management is clearly confident that the off-price conversion will continue to drive improvements. No analysts were on the earnings call to challenge the company. Restructuring advisors will surely want to pay attention to see whether management’s optimism is well-placed.

As we wrote in February ‘20, subsequent results showed that “management’s optimism was, in fact, misplaced.” Now, three months later, the company is in court.

We should take a second to note that this is a potential sale case. The first day papers, therefore, are meant to paint a picture that will draw interest from potential buyers. And so it’s all about the successful conversion of stores. Indeed, the company asserts that its transformation WAS, in fact, taking hold as it moved beyond the initial small batch of store conversions to a more wholesale approach to off-price. By September 2019, 82 store transitions had been completed. And, to date, 233 department stores have been converted to the Gordmans off-price model (PETITION Note: the company acquired Gordmans out of bankruptcy. The company also deigns to suggest that the stock price increase from under a dollar in January ‘19 to $9.50 in early ‘20 is indicative of the market’s support of the off-price conversion and the potential for success post-conversion — as if stock prices mean sh*t in this interest rate environment.). The company now has 289 off-price stores in total (including the Gordmans acquisition) and 437 department stores.

Enter COVID-19 here. No operations = no liquidity. The company’s conversion plan stopped in its tracks. Like every other retailer in the US, the company stopped paying rent and furloughed thousands of employees. “Combined with zero revenue and uncertainty associated with consumer demand in the coming months, Stage Stores, like so many others, is in the middle of a perfect storm.”

The company’s plan in bankruptcy appears to be to leave open any and all optionality. One one hand, it will liquidate inventory, wind-down operations and close stores. On the other hand, it will pursue a sale process, managing inventory in such a way “…to increase the likelihood of a going-concern transaction and, to the extent one materializes … pivot to cease store closings at any stores needed to implement the going-concern transaction.” To aid this plan, the company will seek court latitude as it relates to post-petition rent. These savings, coupled with cash collateral, will avail the company of liquidity needed to finance this dual-path approach (PETITION Note: the company suggests that, if needed, the company will explore a DIP credit facility at a later time).

We should note that Wells Fargo Bank NA ($WFC) is the company’s lender and has permitted the use of over $10mm for cash collateral. We previously wrote:

Wells Fargo Bank NA ($WFC) is the company’s administrative agent and primary lender under the company’s asset-based credit facility. Prior to Destination Maternity’s ($DEST) chapter 11 filing, Wells Fargo tightened the screws, instituting reserves against credit availability to de-risk its position. It stands to reason that it is doing the same thing here given the company’s sub-optimal performance and failure to meet projections. Said another way, WFC has had it with retail. Unlike oil and gas lending, there are no pressures here to play ball in the name of “relationship banking” when, at the end of the day, so many of these “relationships” are getting wiped from the earth.

Looks like they’re at least providing a little bit of leash here to give the company at least some chance of locating a White Knight that will provide value above and beyond liquidation value (however you calculate that these days)* and keep this thing alive. Which is to say that none of this is likely to give much solace to the staggering $173mm worth of unsecured trade debt here. 😬

Not that the unsecureds should be the only concerned parties here. With first day relief totaling over $2mm, employee wage obligations running potentially as high as $8mm, and high-priced professionals, this thing could very well be administratively insolvent from the get-go.

*Perhaps news coming out of T.J. Maxx (TJX) will help spark interest from a buyer. There are also some potentially valuable NOLs here.

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

• Capital Structure: $178.6mm RCF (Wells Fargo Bank NA), $47.4mm Term Loan (Wells Fargo Bank, Pathlight Capital LLC)

• Professionals:

  • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Neil Herman, Joshua Altman, Kevin McClelland, Jeremy Fielding) & Jackson Walker LLP (Matthew Cavenaugh, Jennifer Wertz, Kristhy Peguero, Veronica Polnick)

  • CRO: Elaine Crowley

  • Financial Advisor: Berkeley Research Group LLC (Stephen Coulombe)

  • Investment Banker: PJ Solomon LP (Mark Hootnick)

  • Real Estate Advisor: A&G Realty Partners

  • Liquidation Consultant: Gordon Brothers Retail Partners LLC

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

• Other Parties in Interest:

  • RCF Agent: Wells Fargo Bank NA

    • Legal: Riemer & Braunstein LLP (Jaime Koff, Brendan Recupero, Paul Bekkar, Steven Fox) & Winstead PC (Sean Davis, Matthew Bourda)

  • Term Agent: Wells Fargo Bank NA

    • Legal: Choate Hall & Stewart LLP (Kevin Simard, Mark Silva) & Winstead PC (Sean Davis, Matthew Bourda)

  • Large equityholder: Axar Capital Management LP

New Chapter 11 Bankruptcy Filing - Neiman Marcus Group LTD LLC

Neiman Marcus Group LTD LLC

May 7, 2020

Dallas-based Neiman Marcus Group LTD LLC, Bergdorf Goodman Inc. and 22 other debtors filed for chapter 11 bankruptcy in the Southern District of Texas late this week. If anyone is seeking an explanation as to why that may be outside the obvious pandemic-related narrative, look no farther than this monstrosity:

A quick reality check: that $5b capital structure isn’t attached to an international enterprise with hundreds or thousands of stores. You know, like Forever21. Rather, that horror show backs a 68 store business (43 Neiman Marcus, 2 Bergdorf, 22 Last Call). Ah….gotta love the good ol’ $5b leveraged buyout.

This case is all about “BIG.”

Big capital structure stemming from a big LBO by two big PE funds, Ares Capital Management and CPP Investment Board USRE Inc.

Big brands with big price tags. PETITION Note: top unsecured creditors include Chanel Inc., Gucci America, Dolce and Gabbana USA Inc., Stuart Weitzman Inc., Theory LLC, Christian Louboutin, Yves Saint Laurent America Inc., Burberry USA, and more. There is also a big amount allocated towards critical vendors: $42.5mm. Nobody messes with Gucci, folks. Here’s a live shot of a representative walking out of court confident that they’ll get their money:

Big fees. More on this below.

Big, complicated — and controversial — multi-year re-designation and asset stripping transactions that were part of the debtors’ (and now non-debtors’) elaborate strategy to restructure out-of-court by kicking the can down the road. This is undoubtedly going to stir a big fight in the case. More on this below too.

Big value destruction.

Here is what will happen to the pre-petition capital structure under the proposed term sheet and restructuring support agreement filed along with the chapter 11 papers — a deal that has the support of 78% of the term lenders, 78% of the debentures, 99% of the second lien notes, 70% of the third lien notes, and 100% of the private equity sponsors:

The Asset-Based Revolving Credit Facility and FILO Facility will get out at par. There’ll be a $750mm exit facility. Beyond that? All that red constitutes heaps and heaps of value that’s now essentially an option. It’s a bet that there is a place in the future for brick-and-mortar luxury department stores. Pursuant to the deal, the “Extended Term Loans” will get the lion’s share of equity (87.5%, subject to dilution). The rest of the capital structure will get small slivers of reorganized equity. General unsecured creditors will get “their pro rata share of a cash pool.” The private equity sponsors will get wiped out but for their hoped-for liability releases.

Back to those big fees. The biggest issue for this week was the debtors’ proposed $675mm new money DIP credit facility (that comes in junior to the existing ABL in priority…in other words, no roll-up here). The DIP is essentially 13% paper chock full of fees (including a backstop fee payable in “NewCo equity” at 30% discount to plan value). One disgruntled party, Mudrick Capital Management, a holder of $144mm of the term loan, appears to have beef with Pimco and other DIP backstop parties — saying that the backstop agreement is inappropriate and the DIP fees are outrageous, likening the fee grab to a COVID hoarding mentality — and therefore felt compelled to cross-examine the debtors’ banker as to the reasonableness of it all. If you’ve ever imagined a kid suing other kids for not picking him for their dodgeball team, it would look something like this did.

And so Lazard’s testimony basically boiled down to this:

“Uh, yeah, dude, nobody knows when the economy will fully open up. The company only has $100mm of cash on the petition date. And IT’S NOT OPERATING. That money is enough for maybe 3 weeks of cash burn given that the debtors intend to continue paying rent (unlike most other retailers that have filed for bankruptcy lately). Damn pesky high-end landlords. Anyway, so we’ll burn approximately $300mm between now and when stores are projected to reopen in July/August. No operating cash flow + meaningful cash burn = risky AF lending environment. It’s unprecedented to lend into a situation with a cash burn that, while it pales in comparison to something like Uber, is pretty damn extreme. Look at the J.Crew DIP: it ain’t exactly cheap to lend in this market. There are no unencumbered assets; there certainly isn’t a way to get junior financing. And a priming fight makes no sense here given the impossibility of showing an equity cushion. So stop being an entitled little brat. There’s no obligation on anyone to cut you into the deal. And if you’re going to cry over spilled milk, take up your beef with Pimco and f*ck right off. Alternatively, you can subscribe to your pro rata portion of the DIP and enjoy all of the fees other than the backstop fee.”

The Judge was convinced that the above rationale constituted good business judgment and approved the DIP on an interim basis.

The hearing also foreshadowed another contentious issue in the case: the myTheresa situation. See, the Debtors’ position is the following: “The ‘17 MyTheresa designation as unrestricted subs + the ‘18 distribution of the myTheresa operating companies to non-debtor Neiman Marcus Group Inc. (a/k/a the “asset stripping” transaction) + a ‘19 wholesale amend-and-extend + cost-saving initiatives + comparable same store sales growth for 7 of 10 quarters + “significantly expanded margins” during the holiday period = rocket ship future growth but for the damn pandemic. On the flip side, Marble Ridge Capital LP takes the position that:

…the Debtors’ financial troubles were entirely foreseeable well before recent events. The Company has operated at leverage multiples more than twice its peers since at least 2018 (prior to the fraudulent transfers described herein). And last year’s debt restructuring increased the Company’s already unsustainable annual interest expense by more than $100 million while only reducing the Company’s debt load by $250 million leaving a fraction of adjusted EBITDA for any capital expenditures, principal repayment, taxes or one-time charges. Sadly, the Debtors’ financial distress will come as no surprise to anyone.

This ain’t gonna be pretty. Marble Ridge has already had one suit for fraudulent transfer dismissed with prejudice at the pleading stage. Now there are defamation and other claims AGAINST Marble Ridge outstanding. And subsequent suits in the NY Supreme Court. Have no fear, though, folks. There are independent managers in the mix now to perform an “independent” investigation into these transactions.

The debtors intend to have a plan on file by early June with confirmation in September. Until then, pop your popcorn folks. You can socially distance AND watch these fireworks.

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

• Capital Structure: See above.

• Professionals:

  • Legal: Kirkland & Ellis LLP (Anup Sathy, Chad Husnick, Matthew Fagen, Austin Klar, Gregory Hesse, Dan Latona, Gavin Campbell, Gary Kavarsky, Mark McKane, Jeffrey Goldfine, Josh Greenblatt, Maya Ben Meir) & Jackson Walker LLP (Matthew Cavenaugh, Jennifer Wertz, Kristhy Peguero, Veronica Polnick)

  • Independent Managers of NMG LTD LLC: Marc Beilinson, Scott Vogel

    • Legal: Willkie Farr & Gallagher LLP (Brian Lennon, Todd Cosenza, Jennifer Hardy, Joseph Davis, Alexander Cheney)

    • Financial Advisor: Alvarez & Marsal LLC (Dennis Stogsdill)

  • Independent Manager of Mariposa Intermediate Holdings LLC: Anthony Horton

    • Legal: Katten Muchin Rosenman LLP

  • Neiman Marcus Inc.

    • Legal: Latham & Watkins LLP (Jeffrey Bjork)

  • Financial Advisor/CRO: Berkeley Research Group LLC (Mark Weinstein, Kyle Richter, Marissa Light)

  • Investment Banker: Lazard Freres & Co. LLC (Tyler Cowan)

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

• Other Parties in Interest:

  • Pre-petition ABL Agent: Deutsche Bank AG New York Branch

    • Legal: White & Case LLP (Scott Greissman, Andrew Zatz, Rashida Adams) & Gray Reed & McGraw LLP (Jason Brookner, Paul Moak, Lydia Webb)

  • FILO Agent: TPG Specialty Lending Inc.

    • Schulte Roth & Zabel LLP (Adam Harris, Abbey Walsh, G. Scott Leonard) & Jones Walker LLP (Joseph Bain)

  • Pre-petition Term Loan Agent: Credit Suisse AG Cayman Islands Branch

    • Legal: Cravath Swaine & Moore LLP (Paul Zumbro, George Zobitz, Christopher Kelly) & Haynes and Boone LLP (Charles Beckham, Martha Wyrick)

  • Second Lien Note Agent: Ankura Trust Company LLC

  • Third Lien Note Agent: Wilmington Trust NA

  • Unsecured Notes Indenture Trustee: UMB Bank NA

    • Legal: Kramer Levin Naftalis & Frankel LLP (Douglas Mannal, Rachael Ringer)

  • 2028 Debentures Agent: Wilmington Savings Fund Society FSB

  • Ad Hoc Term Loan Lender Group (Davidson Kempner Capital Management LP, Pacific Investment Management Company LLC, Sixth Street Partners LLC)

    • Legal: Wachtell Lipton Rosen & Katz (Joshua Feltman, Emil Kleinhaus) & Vinson & Elkins LLP (Harry Perrin, Kiran Vakamudi, Paul Heath, Matthew Moran, Katherine Drell Grissel)

    • Financial Advisor: Ducera Partners LLC

  • Ad Hoc Secured Noteholder Committee

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Andrew Rosenberg, Alice Belisle Eaton, Claudia Tobler, Diane Meyers, Neal Donnelly, Patricia Walsh, Jeffrey Recher) & Porter Hedges LLP (John Higgins, Eric English, M. Shane Johnson)

    • Financial Advisor: Houlihan Lokey Capital Inc.

  • Large Creditor: Chanel Inc.

    • Legal: Sheppard Mullin Richter & Hampton LLP (Justin Bernbrock, Michael Driscoll)

  • Large Creditor: Louis Vuitton USA Inc.

    • Legal: Barack Ferrazzano Kirschbaum & Nagelberg LLP (Nathan Rugg)

  • Large Creditor: Moncler USA Inc.

    • Legal: Morrison Cohen LLP (Joseph Moldovan, David Kozlowski)

  • Marble Ridge Capital LP & Marble Ridge Master Fund LP

    • Legal: Brown Rudnick LLP (Edward Weisfelner, Sigmund Wissner-Gross, Jessica Meyers, Uchechi Egeonuigwe)

  • Mudrick Capital Management LP

    • Legal: Gibson Dunn & Crutcher LLP (Michael Rosenthal, Mitchell Karlan, David Feldman, Keith Martorana, Jonathan Fortney)

  • Sponsor: CPP Investment Board USRE Inc.

    • Legal: Debevoise & Plimpton LLP (Jasmine Ball, Erica Weisgerber) & Pillsbury Winthrop Shaw Pittman LLP (Hugh Ray, William Hotze, Jason Sharp)

  • Sponsor: Ares Capital Management

    • Legal: Milbank LLP (Dennis Dunne, Thomas Kreller)

  • Official Committee of Unsecured Creditors

    • Legal: Pachulski Stang Ziehl & Jones LLP (Richard Pachulski) & Cole Schotz PC (Daniel Rosenberg)

    • Financial Advisor: M-III Advisory Partners LP (Mohsin Meghji)

    • Valuation Expert: The Michel-Shaked Group (Israel Shaked)

⛽️New Chapter 11 Bankruptcy Filing - Diamond Offshore Drilling Inc. ($DO)⛽️

Diamond Offshore Drilling Inc.

April 26, 2020

Houston-based Diamond Offshore Drilling Inc. and 14 affiliates (the “debtors”), a contract drilling services provider to the oil and gas industry filed for bankruptcy in the Southern District of Texas. The company has 15 offshore drilling rigs: 11 semi-submersibles and four ultra-deepwater drillships deployed around the world (primarily in the Gulf of Mexico, Australia, Brazil and UK). Offshore drilling was already challenged due to excess supply of rigs — and has been since 2014. Recent events have made matters much much worse.

Thanks MBS. Thanks Putin. Thanks…uh…debilitating pandemic. The left-right combination of the Saudi/OPEC/Russia oil price war and COVID-19 has the entire oil and gas industry wobbling against the ropes. The pre-existing reality for offshore services companies “worsened precipitously” because of all of this. And so many companies will fall. The question is at what count and at what strength will they be able to get back on their feet. Given that this is a free-fall into bankruptcy with no pre-negotiated deal with lenders, it seems that nobody knows the answer. How could they? More on this below.

Unfortunately, the services segment the debtors play in is particularly at risk. “Almost all” of the debtors’ customers have requested some form of concessions on $1.4b of aggregate contract backlog. One customer, Beach Energy Ltd. ($BEPTF), “recently sought to formally terminate its agreement with the Company” (an action that is now the subject of an adversary proceeding filed in the bankruptcy cases). The debtors have been immersed in negotiations with their contract counter-parties to navigate these extraordinary times. It doesn’t help when business is so concentrated. Hess Corporation ($HES) is 30% of annual revenue; Occidental Petroleum Corporation ($OXY) is 21%; and Petrobras ($PBR) is 20%. BP PLC ($BP) and Royal Dutch Shell ($RDS.A) are other big customers.

With the writing on the wall, the debtors smartly drew down on their revolving credit facility — pulling $436mm out from under Wells Fargo Bank NA ($WFC). WFC must’ve loved that. Times like these really give phrases like “relationship banking” entirely new meaning. The debtors also elected to forgo a $14mm interest payment on its 2039 senior notes. Yep, you read that right: the company previously issued senior notes that weren’t set to mature until 2039. Not exactly Argentina but holy f*ck that expresses some real optimism (and froth) in the markets (and that issuance isn’t even the longest dated maturity but let’s not nitpick here)!

Yeah, so about that capital structure. In total, the debtors have $2.4b in funded debt. In addition to their $442mm of drawing under their revolving credit facility, the debtors have:

• $500mm of 5.7% ‘39 senior unsecured notes;

• $250mm of 3.45% ‘23 senior unsecured notes;

• $750mm of 4.875% ‘43 senior unsecured notes; and

• $500mm of 7.785% ‘25 senor unsecured notes.

As we’ve said time and time again: exploration and production is a wildly capital intensive business.

So now what? As we said above, there’s no deal here. The debtors note:

The Debtors determined to commence these Chapter 11 Cases to preserve their valuable contract backlog, and preserve their approximately $434.9 million in unrestricted cash on hand while avoiding annual interest expense of approximately $140.1 million under the Revolving Credit Facility and the Senior Notes, and to stabilize operations while proactively restructuring their balance sheet to successfully compete in the changing global energy markets. The Debtors and their Advisors believe cash on hand provides adequate funding at the outset of these cases. The Debtors are well-positioned to successfully emerge from bankruptcy with a highly marketable fleet, a solid backlog of activity, a strong balance sheet and liquidity position, and a differentiated approach and set of capabilities. Despite the volatile and current uncertain market conditions, the Debtors remain confident in the need for their industry, its importance around the world, and the critical services they provide.

We suspect the debtors will hang out in bankruptcy for a bit. After all, placing a value on how “critical” these services are in the current environment is going to be a challenge (though the relatively simple capital structure makes that calculation significantly easier…assuming the value extends beyond WFC). One thing seems certain: Loews Corporation ($L) is gonna have to write-down the entirety of its investment here.

*****

We’d be remiss if we didn’t highlight that, similar to Whiting Petroleum’s execs, the debtors’ executives here got paid nice bonuses just prior to the bankruptcy filing. PETITION Note: We don’t have data to back this up but there appeared to be a much bigger uproar in Whiting’s case about this than here. Which is not to say that people aren’t angry — totally factually incorrect — but angry:

Because equity-based comp doesn’t exactly serve as “incentive” when the equity is worth bupkis, the debtors paid $3.55mm to employees a week before the filing and intend to file a motion to seek bankruptcy court approval of their go-forward employee programs.

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

• Capital Structure: $442mm RCF (inclusive of LOC)(Wells Fargo Bank NA). See above.

• Professionals:

  • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Paul Basta, Robert Britton, Christopher Hopkins, Shamara James, Alice Nofzinger, Jacqueline Rubin, Andrew Gordon, Jorge Gonzalez-Corona) & Porter Hedges LLP (John Higgins, Eric English, M. Shane Johnson, Genevieve Graham)

  • Financial Advisor: Alvarez & Marsal LLC (Nicholas Grossi)

  • Investment Banker: Lazard Freres & Co. LLC

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

• Other Parties in Interest:

  • Prepetition RCF Agent: Wells Fargo Bank NA

    • Legal: Bracewell LLP

    • Financial Advisor: FTI Consulting

  • Indenture Trustee: The Bank of New York Mellon

  • Ad Hoc Group of Senior Noteholders

    • Legal: Milbank LLP

    • Financial Advisor: Evercore Group LLC

  • Major Equityholder: Loews Corporation

    • Legal: Sullivan & Cromwell LLP (James Bromley)

  • Official Committee of Unsecured Creditors: The Bank of New York Mellon Trust Company NA, National Oilwell Varco LP, Deep Sea Mooring, Crane Worldwide Logistics LLC, Kiswire Trading Inc., Parker Hannifin Corporation, SafeKick Americas LLC

    • Legal: Akin Gump Strauss Hauer & Feld LLP (Ira Dizengoff, Philip Dublin, Naomi Moss, Marty Brimmage, Kevin Eide, Patrick Chen, Matthew Breen)

    • Financial Advisor: Berkeley Research Group LLC (Christopher Kearns)

    • Investment Banker: Perella Weinberg Partners LP (Alexander Tracy)

🚢 New Chapter 11 Bankruptcy Filing - Speedcast International Limited 🚢

Speedcast International Limited

April 22, 2020

This is a fun one.

Speedcast International Limited, a publicly-traded Australian company headquartered in Houston and 32 affiliates (the “debtors”) filed rare freefall bankruptcy cases in the Southern District of Texas earlier this week. In a week where another 4.4mm people filed for unemployment, one thing seems abundantly clear: the Texas’ bankruptcy courts are going to need help. While Delaware has also been extremely busy, both the Northern District and Southern District of Texas are seeing rock solid bankruptcy flow these days. If the judges got volume bonuses, they’d be rolling in it.

Who’s the big loser? Well, with all of these bankruptcy hearings conducted telephonically, we reckon it’s the city of Houston. In normal times, there’d be a steady stream of suits flushing through the local economy there: staying at the hotels, eating at the restaurants, drinking at the bars. Brutal. But we digress. 🤔

One thing the restructuring industry gives us is an open window into how one domino can topple over others. For instance, the energy and cruise industries are clearly effed currently and so it stands to reason that service providers to those industries would also feel pain. This is where Speedcast comes in: it is a provider of information technology services and (largely satellite-dependent) communications solutions (i.e., cybersecurity, content solutions, data and voice apps, IoT, network systems) to customers in the cruise, energy, government and commercial maritime businesses. They plug a hole: they offer telecom services to users in remote parts around the world, “primarily where there is limited or no terrestrial network.” Picture some evildoer in some decked out yacht-lair somewhere plotting to take over the world Austin Powers-style. He is probably leveraging Speedcast for IT solutions (PETITION Note: we’re just painting a picture folks; we’re not suggesting that the company merely deals with shady-a$$ mofos. Don’t @ us.). The business is truly international in scope.

Putting aside yacht-loving villains, Speedcast has high profile clients. Carnival Corp. ($CCL), for instance, contracted with Speedcast in December 2018 — long before any of Carnival’s customers contracted with the coronavirus. Cruisers streaming reports about their horrific cruise-going experiences likely used Speedcast product to get the word out. 😬 This was a growing business segment. Revenue increased by $36.5mm from fiscal year 2018 to 2019.

Likewise, the debtors’ energy business had also been growing. The debtors provide “high-bandwidth remote communication services to all segments of the global energy industry, including companies involved in drilling and exploration, floating production storage, offloading, offshore service, general service, engineering, and construction.” Revenue there increased from $158.3mm in FY18 to $164.5mm. We’re pretty sure we know which direction that number is heading in FY20.

Similarly, the debtors’ other business segments — Enterprise & Emerging Markets and Government — demonstrated growth between ‘18 and ‘19. All in, this is a $722.3mm revenue business. Unfortunately, it also had net losses of $459.8mm in FY19. So, yeah. There’s that. The debtors’ rapid expansion over the years apparently didn’t lead to immediate synergistic realization and the debtors suffered from margin compression, revenue declines from specific business lines, and other ails that affected performance and liquidity.

While there have been operational issues for some time now, those were just jabs. COVID-19 and the attendant global shutdown body slammed the company. The debtors note:

Further, the lasting and distressed market conditions in the maritime and oil and gas industries, and the recent and dramatic impact of the COVID-19 pandemic, have impacted all players in the global marketplace. The Company has been particularly hard hit by these adverse market conditions. The outsized impact on the Company’s Maritime Business and Energy Business customers has manifested in a dramatic reduction in cash receipts. This macroeconomic downturn, along with the above-mentioned headwinds that contributed to the lower than expected FY19 financial results, made clear that the Company would not satisfy the Net Leverage Covenant under the Credit Agreement.

Right. The debt. $689.1mm of it, to be exact (exclusive of financing arrangements) — of which approximately $590mm is a term loan. With a capital structure this simple, one would think that this is a case that is ripe for a prearranged deal memorialized via a pre-petition restructuring support agreement. But no. There isn’t one here. Why not?

The term lenders argue that the debtors engaged them too late in the game. Therefore, there wasn’t enough time to conduct due diligence on the business, they say. Surely quarantine ain’t helping matters on that front. Nor is the fact that the company is international in nature.

And so this is a traditional freefall balance sheet and operational restructuring — something you don’t really see much of anymore. This case looks headed towards either a sale — which we’re guessing is the term lenders preferred outcome (par plus accrued baby!) — or a plan that would equitize the term lenders and put the go-forward financing needs of the debtors on the shoulders of the term lenders. A plan would preserve the debtors’ net operating losses which, as noted above, could be meaningful.

The debtors and the ad hoc lenders did nail down a commitment for a multiple-draw super-priority senior secured term loan DIP which includes a $90mm new money portion ($35mm on an interim basis) and a $90mm roll-up ($35mm on an interim basis). Judge Isgur took some exception to the interim roll-up portion of the proposed facility but the debtors and the lenders were hand-in-hand saying that — particularly under the circumstances today — the interim roll-up was necessary and appropriate because the lenders need a “big incentive” to lend and “the lenders’ capital providers are getting squeezed themselves.” 🤔 (PETITION Note: The DIP market sounds vicious — though some of that, here, is attributable to the nature of the assets. Delta Airlines can place senior secured notes right now at around 7% because, well … duh … planes!). Judge Isgur did caution however that he wants no part of professionals throwing this interim roll-up in his face as precedent in an upcoming case (Um, we’ll see how that plays out…this financing environment ain’t exactly reversing overnight). While the ad hoc lenders are clearly in pole position for the DIP commitment, they’re syndicating the loan now (which would obviously affect the roll-up too). The DIP will push the professionals towards a path forward over the next couple of weeks and the hope is for a result to be consummated within six months.

Interestingly, the largest single unsecured creditor is an entity that suffers from its own issues and has reportedly hired bankruptcy professionals for advice: Intelsat SA is owed $44mm. In late March, Intelsat terminated their contract with the debtors in a pretty savage leverage play. We talk about leverage a lot in PETITION. There’s balance sheet leverage and then there is situational leverage. Intelsat flexed its muscles and exercised the latter. In exchange it got critical vendor designation, acknowledgement of the full amount of their pre-petition claim and mutual releases. Significantly, the debtors stressed the importance of the relationship, noting that the IT services were needed more than ever as vessels sail adjusted routes due to COVID (read: boats are circling around because governments won’t let passengers disembark).

We should know within a few weeks what a deal may look like here.

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

• Capital Structure: $87.7mm RCF, $591.4mm Term Loan, $10.6mm LOC

• Professionals:

  • Legal: Weil Gotshal & Manges LLP (Gary Holtzer, Alfredo Perez, David Griffiths, Brenda Funk, Martha Martir, Kelly DiBlasi, Stephanie Morrison, Paul Genender, Amanda Pennington Prugh, Jake Rutherford) & Herbert Smith Freehills LLP

  • Independent Director: Stephe Wilks, Grant Scott Ferguson, Michael Martin Malone, Peter Jackson, Carol Flaton, David Mack)

  • Financial Advisor/CRO: FTI Consulting Inc. (Michael Healy)

  • Investment Banker: Moelis & Company Co. (Paul Rathborne, Adam Waldman)

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

• Other Parties in Interest:

  • Ad Hoc Group of Secured Lenders

    • Davis Polk & Wardwell LLP (Damian Schaible, David Schiff, Jonah Peppiatt, Jarret Erickson) & Rapp & Krock PC (Henry Flores, Kenneth Krock)

    • Financial Advisor: Greenhill & Co. Inc.

  • DIP Agent: Credit Suisse AG

    • Skadden Arps Slate Meagher & Flom LLP (Steven Messina, George Howard, Albert Hogan III, David Wagener)

  • Large Creditor: Intelsat SA

    • Legal: Kirkland & Ellis LLP (Edward Sassower, Steven Serajeddini, Anthony Grossi) & Jackson Walker LLP (Matthew Cavenaugh)

  • Large Creditor: Inmarsat Global Limited

    • Legal: Steptoe & Johnson LLP (Michael Dockterman) & Norton Rose Fulbright US LLP (Jason Boland, Bob Bruner)

  • Official Committee of Unsecured Creditors

    • Legal: Hogan Lovells US LLP (S. Lee Whitesell, John Beck, David Simonds, Ron Silverman, Michael Hefter) & Husch Blackwell LLP (Randall Rios, Timothy Million)

⛽️New Chapter 11 Bankruptcy Filing - Whiting Petroleum Corporation ($WLL)⛽️

Whiting Petroleum Corporation

April 1, 2020

Denver-based Whiting Petroleum Corporation ($WLL) and four affiliates (the “debtors”), independent oil-focused upstream exploration and production companies focused primarily on the North Dakota and Rocky Mountain regions, filed for bankruptcy in the Southern District of Texas. This is a story that requires an understanding of the debtors’ impressively-levered capital structure to understand what’s going on:

• $1.072b ‘23 RBL Facility (JPMorgan Chase Bank NA)(springing maturity to 12/20 if the ‘21 notes below are not paid in full by 12/20)

• $189.1mm ‘20 1.25% convertible senior unsecured notes due 2020 (Bank of New York Mellon Trust Company, N.A.)

• $773.6mm ‘21 5.75% senior unsecured notes

• $408.3mm ‘23 6.25% senior unsecured notes

• $1b ‘26 6.625% senior unsecured notes

You’ve heard us talk about the capital intensive nature of E&P companies so … yeah … the above $3.443b of debt shouldn’t come as much of a surprise to you. The company is also publicly-traded. The stock performance over the years has been far from stellar:

What’s interesting here is that EVERYONE knows that oil and gas has been a value-destructive sh*t show for years. There’s absolutely ZERO need to belabor the point. Yet. That doesn’t stop the debtors’ CRO from doing precisely that. Here, embedded in the First Day Declaration, is a chart juxtaposing a $100 investment in WLL versus a $100 investment in an S&P 500 index and a Dow Jones U.S. E&P Index:

We should also add that the spike reflected in the above chart in the 2017 timeframe isn’t on account of some stellar improvement of operating performance; rather, it reflects a November 2017 1-to-4 reverse stock split which inflated the reflected price of the shares. Just to be clear.

Notwithstanding the hellacious performance since 2014, the debtors take pains to paint a positive picture that was thrown into disarray by “drastic and unprecedented global events, including a ‘price war’ between OPEC and Russia and the macroeconomic effects of the COVID-19 pandemic….” In fact, the debtors come in HOT in the introduction to the First Day Declaration:

The Debtors ended 2019 standing on solid ground. While the Debtors had more than $1 billion in unsecured bond debt set to mature prior to December 2020, the Debtors had significant financial flexibility to restructure their capital structure. Most importantly, the Debtors began 2020 with a committed revolving credit facility that provided them with committed financing of up to $1.75 billion—more than enough liquidity to service the Debtors’ 2020 maturities and fund anticipated capital expenditure needs throughout the year. For these reasons, the Debtors secured a “clean” audit report as recently as February 27, 2020.

And to be fair, the debt was doing just fine until the middle of February. Indeed, the unsecured notes didn’t hit distressed levels until right after Valentine’s Day. Check out this freefall:

Who needs open amusement parks when you can just follow that price action?

Already focused on “liability management” (take a drink!) given the looming ‘21 notes maturity and the corresponding RBL springing maturity, the debtors’ retained professionals shifted over to restructuring talks with an ad hoc committee of noteholders. The debtors also drew down $650mm on their revolver to ensure adequate go-forward liquidity (and, cough, avoid the need for a relatively more expensive DIP credit facility). After what sounds like serious deliberation (and opposition from the ad hoc committee), the debtors also opted to forgo the $190mm maturity payment on the convertible notes due April 1.

The debtors filed the case with the framework of a restructuring support agreement (aka a term sheet). That framework would equitize the converts and the unsecured notes, giving them 97% of the equity (for now … debt is also still under consideration). Unsecured claims will be paid in full. Existing equity would receive 3% of post-reorg equity and warrants. Post-reorg management will get 8% of the post-reorg equity. In total, this would amount to the evisceration of over $2b worth of debt. 😬

Speaking of management, a lot of people were up in arms over this bit in the debtors’ Form 8-K filed to announce the bankruptcy filing and term sheet:

That’s right. A nice immediately-payable bonus to management.

Remember that story of Lehman Brothers CEO Dick Fuld getting punched the day after Lehman’s bankruptcy on a treadmill in the corporate gym?

Fees like something like that may be coming soon to $WLL headquarters... 👀

— EnergyCynic (@EnergyCynic) April 1, 2020

We’d love to hear how this ISN’T a subversion of code provisions regarding KEIPS/KERPS. Seriously, write us: petition@petition11.com. Ensure stability huh? Tell us: WHERE THE F*CK ARE THESE GUYS GOING TO GO IN THIS ENVIRONMENT? But at least they’re passing up their (WILDLY WORTHLESS) equity awards and bonus payments. FFS.

Ok, fine. Maybe there were contractual provisions that needed to be taken into account. And maybe the alternative — sh*tcanning management and rejecting the employment contracts — doesn’t fit the construct of leaving an umimpaired class of unsecured creditors. Equity is wildly out-of-the-money and getting a tip here anyway. This, therefore, is just a transfer of value from the noteholders to the management. We have to assume that the noteholders, then, were aware of this before it happened. If not, they should be pissed. And the Directors — who make between $180,000 and $305,000 a year — ought to be questioned by said noteholders about potential breaches of duties.

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

• Capital Structure:

• Professionals:

  • Legal: Kirkland & Ellis LLP (Stephen Hessler, Brian Schartz, Gregory Pesce, Anna Rotman) & Jackson Walker LLP (Matthew Cavenaugh, Jennifer Wertz, Veronica Polnick)

  • CRO: Stein Advisors LLC (Jeffrey Stein)

  • Financial Advisor: Alvarez & Marsal LLC (Julie Hertzberg)

  • Investment Banker: Moelis & Company

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

• Other Parties in Interest:

  • RBL Agent: JPMorgan Chase Bank NA

  • Ad Hoc Committee of Noteholders

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Andrew Rosenberg, Alice Beslisle Eaton, Michael Turkel, Omid Rahnama) & Porter Hedges LLP (John Higgins, Eric English, Genevieve Graham)

    • Financial Advisor: PJT Partners LP

  • Creditor: Caliber North Dakota LLC

    • Legal: Weil Gotshal & Manges LLP (Alfredo Perez, Brenda Funk)

⛽️New Chapter 11 Filing - CARBO Ceramics Inc. ($CRRT)⛽️

CARBO Ceramics Inc.

March 29, 2020

Houston-based CARBO Ceramics Inc. and two affiliates (the “debtors”) are the latest oil and gas servicers to file for chapter 11 bankruptcy; they are manufacturers and sellers of ceramic tech products and services and ceramic proppant for oilfield, industrial and environmental markets. Make no mistake, though: they are indexed heavily to the oil and gas market.

Here’s a paragraph that literally scores of companies ought to just copy and paste (with limited edits) over the next several months as a wave of oil and gas companies crash into the bankruptcy system:

Beginning in late 2014, a severe decline in oil prices and continued decline in natural gas prices led to a significant decline in oil and natural gas drilling activities and capital spending by E&P companies. While modest price recoveries have occurred intermittently since that time, prices have generally remained depressed and recently fell precipitously again to near record low levels. The Company’s financial performance is directly impacted by activity levels in the oil and natural gas industry. A downturn in oil and natural gas prices and sustained headwinds facing the E&P industry have resulted in both reduced demand for the Company’s products and services and reduced prices the Company is able to charge for those products and services. Because drilling activity has been reduced over a protracted period of time, demand for all of the Company’s products and services (proppant, in particular) has been significantly depressed.

They can then follow it up with some astounding business performance figures like:

From 2014 to 2019, the Company’s total revenue for base ceramic media fell from approximately $530 million to approximately $34 million.

BOOM!

Of course, this financial pain will trickle down to others. Like railcar and distribution center lessors, among others.

The debtors have a consensual deal with their pre-petition secured lenders, Wilks Brothers LLC and Equify Financial LLC, to equitize their debt — including maybe the DIP if its not rolled into an exit facility. The deal is interesting because it provides 100% recovery to unsecured creditors of two debtors and a cash payment option to unsecured debtors of the main debtor. The lenders will see a liquidating trust with a whopping $100k so that certain avoidance actions can be pursued. And, finally, there’s a “death trap.” If the unsecured creditors vote to accept the plan, the pre-petition secured creditors will waive their “very significant unsecured deficiency claim.” If not, they’ll flood them into oblivion. Of course, this statement implies that the value of the business is negligible at this point. Reminder: revenue dipped from $530mm to $34mm in 2019. Can’t imagine numbers for 2020 are looking particularly rosy either. Finally, all of the above is subject to a “fiduciary out” — you know, in case, by some miracle, someone else actually wants this business (spoiler alert: nobody will).

Also interesting is the value of the NOLs here which dwarf the funded debt. 🤔

Wilks will fund a $15mm DIP to finance the cases with $5mm needed within the first 14 days of the cases. This, however, is subject to what we’ll call “The COVID-caveat.” Per the company:

The DIP Budget is based on information known to date and is the best estimate of the Debtors’ current expectations. It should be noted that the global outbreak of the COVID-19 virus and the severe disruption and volatility in the market has caused and continues to cause major challenges across all industries and may ultimately result in the Debtors’ falling short of their forecasted receipts.

Interestingly, they note further:

The Company’s New Iberia facility is currently non-operational due to a state-wide shelter-in-place order, but the Company, pursuant to applicable state law, is continuing to pay its employees. While the shelter-in-place order could terminate by April 10, 2020, it is possible that the order will be extended.

While the Company’s other facilities in Alabama and Georgia are still operational, it is possible that these states will also enact shelter-in-place orders in the near term that will force these facilities to go non-operational.

The simultaneous supply and demand shock in the oil market is unprecedented and may cause a substantial strain on or reduction in collections from the Company’s primary customers, many of whom are dependent on oil prices.

None of this is surprising but it’s interesting to see the various x-factors that are now part of the DIP sizing process.

As you all very well know, these are extraordinary times.

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

• Capital Structure: $65mm RCF (Wilks Brothers LLC & Equify Financial LLC)

• Professionals:

  • Legal: Vinson & Elkins LLP (Matthew Moran, Matthew Struble, Garrick Smith, Paul Heath, David Meyer, Michael Garza) & Okin Adams LLP (Matthew Okin, Johnie Maraist)

  • Financial Advisor: FTI Consulting Inc.

  • Investment Banker: Perella Weinberg Partners LP (Jakub Mlecsko)

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

• Other Parties in Interest:

  • Prepetition Secured Lender & Major Equityholder: Wilks Brothers LLC & Equify Financial LLC

    • Legal: Norton Rose Fulbright LLP (Greg Wilkes, Francisco Vazquez)

    • Financial Advisor: Ankura Consulting Group LLC

⛽️New Chapter 11 Filing - Echo Energy Partners I LLC⛽️

Echo Energy Partners I LLC

March 24, 2020

Soooooo, this is an odd one. On March 24, 2020, Oklahoma City-based Echo Energy Partners I LLC, an independent oil and gas company — primarily natural gas from the Anadarko Basin — filed for bankruptcy in the Southern District of Texas. It was a bare bones filing. For well over a week, the docket sat empty with no real substantive pleadings filed or definitive information coming through about the case. Then, finally, over a week later, the company filed more actual first day motions and its First Day Declaration. Usually the automatic stay doesn’t apply to the debtors’ work but, yeah, sure, more power to them.

Anyway, now we know what’s up. And it’s not particularly original or interesting. The upshot? Apparently nobody wants to finance “gas-heavy, capital intensive, non-operated wells with longer production curves” in a $2.00 per million Btu environment let alone a now-sub-$2.00 per million Btu environment. The debtor, therefore, ran into severe liquidity constraints — a situation compounded by third-party operators like Continental Resources inc. ($CLR) initiating forced forfeitures of the debtor’s working interest in key wells.

What’s the plan now? Well, it ain’t looking good. The debtor has a $8.5mm DIP commitment from its pre-petition lender, Texas Capital Bank ($TCBI), and hopes to use the chapter 11 process to pursue a sale of its business.

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

• Capital Structure: $80mm RCF (Texas Capital Bank) & $165mm notes (HPS Investment Partners LLC)

• Professionals:

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

  • Manager: John T. Young Jr.

  • Financial Advisor: Opportune LLP (Gregg Laswell)

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

⛽️New Chapter 11 Filing - Pioneer Energy Services Corp. ($PESX)⛽️

Pioneer Energy Services Corp.

March 1, 2019

San Antonio-based oilfield services provider Pioneer Energy Services Corp. and several affiliates (the “debtors”) filed “straddle” prepackaged chapter 11 bankruptcy cases on Sunday in what amounts to a true balance sheet restructuring. Will this kickoff a new slate of oil and gas related bankruptcy filings? 🤔

The debtors provide well servicing, wireline and coiled tubing services to producers in Texas and the Mid-Continent and Rocky Mountain regions; they also provide contract land drilling services to operators in Texas, Appalachia, and the Rocky Mountain region. International operations in Colombia are not part of the bankruptcy cases. Due to the…shall we say…unpleasant…atmosphere for oil and gas these last few years — which, clearly undermined demand for their services and, obviously, revenue generation — the debtors determined that they couldn’t continue to service their existing capital structure. Alas, bankruptcy.

Hold on: not so fast. We previously wrote in “⛽️Storm Clouds Forming Over Oil & Gas⛽️,” the following:

And so it’s no wonder that, despite a relative dearth of oil and gas bankruptcy filings in 2020 thus far, most people think that (a) the E&P and OFS companies that avoided a bankruptcy in the 2015 downturn are unlikely to avoid it again and (b) many of the E&P and OFS companies that didn’t avoid a bankruptcy in the 2015 downturn are unlikely to avoid the dreaded Scarlet 22….

Sure, Pioneer hasn’t filed for bankruptcy before. But it has been in a constant state of restructuring ever since 2015. Per the debtors:

…in 2015 and 2016, Pioneer reduced its total headcount by over 50%, reduced wage rates for its operations personnel, reduced incentive compensation and eliminated certain employment benefits. In 2016, the Company closed ten field offices to reduce overhead and associated lease payments. At the same time, the Company lowered its capital expenditures by 77% to primarily routine expenditures that were necessary to maintain its equipment and deferred discretionary upgrades and additions (except those that it had previously committed to make during the 2014 market slowdown).

And:

Since the beginning of 2015 through the end of 2018, the Company has liquidated nonstrategic or non-core assets. Specifically, Pioneer has sold thirty-nine (39) non-AC domestic drill rigs, thirty-three (33) older wireline units, seven (7) smaller diameter coiled tubing units and various other drilling and coiled tubing equipment for aggregate net proceeds of over $75 million. As of September 30, 2019, the Company reported another $6.2 million in assets remaining held for sale, including the fair value of buildings and yards for one domestic drilling yard and two closed wireline locations, one domestic SCR drilling rig, two coiled tubing units and spare support equipment.

Annd:

In the first quarter of 2019, the Company continued its cost-reduction initiatives and operational adjustments by expanding the roles and related responsibilities of several of its executive leaders to further leverage their existing talents to the entire organization.

In other words, these guys have been gasping for air for five years.

Relatively speaking, the debtors capital structure isn’t even that intense:

1. $175mm Term Loan (Wilmington Trust NA)

2. $300mm 6.125% ‘22 senior unsecured notes (Wells Fargo Bank NA)

Yet with oil and gas getting smoked the way it has, it was still too much. So what now?

The prepackaged plan would give the term lenders cash (from a rights offering) and $78.125mm in new secured bonds (PETITION Note: we’re betting there are a bunch of CLOs here). The unsecured noteholders will get either all of the equity or 94.25% of the equity depending upon what the interest holders do; they’ll also get rights to participate in the rights offering. If the interest holders vote to accept the plan, they’ll get 5.75% of the equity and rights to participate in the rights offering; if they reject the plan, they’ll get bupkis and the noteholders will get 100% of the equity (subject to dilution). General unsecured claimants will get paid in full. Management will put in money as part of the rights offering and an ad hoc group of the unsecured noteholders (Ascribe Capital, DW Partners LP, Intermarket Corporation, New York Life Investments, Strategic Income Management LLC, and Whitebox Advisors LLC) agreed to backstop substantially all of the rights offering (and will receive an 8% premium for their commitment). The cases will be supported by a $75mm DIP. This thing is pretty buttoned up. Confirmation is expected within 45 days.

The end result? The debtors will emerge with $153mm of debt on balance sheet (the $78.125mm in new secured bonds and a $75mm exit ABL). Time will tell whether or not this remains too much.*

*The risk factors here are particularly interesting because all of them are very real. If the oil patch does suffer, as expected, the debtors’ concentration of business among their top three clients (66% of revenue) could be especially troubling — depending on who those clients are.

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

• Capital Structure: see above.

• Professionals:

  • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Brian Hermann, Elizabeth McColm, Brian Bolin, William Clareman, Eugene Park, Grace Hotz, Sarah Harnett) & Norton Rose Fulbrights US LLP (William Greendyke, Jason Boland, Robert Bruner, Julie Goodrich Harrison)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Lazard Freres & Co. LLC

  • Claims Agent: Epiq Bankruptcy Solutions LLC (*click on the link above for free docket access)

• Other Parties in Interest:

  • DIP Lender ($75mm): PNC Bank NA

    • Legal: Blank Rome LLP (James Grogan, Broocks Wilson)

  • Prepetition Term Loan Agent: Wilmington Trust NA

    • Legal: Covington & Burling LLP

  • Ad Hoc Group of Prepetition Term Loan Lenders

    • Legal: Vinson & Elkins LLP (David Meyer, Paul Heath, Harry Perrin, Steven Zundell, Zachary Paiva)

  • Ad Hoc Group of Unsecured Noteholders: Ascribe Capital, DW Partners LP, Intermarket Corporation, New York Life Investments, Strategic Income Management LLC, Whitebox Advisors LLC)

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Natasha Tsiouris, Erik Jerrard, Xu Pang) & Haynes and Boone LLP (Charles Beckham)

    • Financial Advisor: Houlihan Lokey

⚓️New Chapter 11 Bankruptcy Filing - American Commercial Lines Inc.⚓️

American Commercial Lines Inc.

February 7, 2020

Indiana-based American Commercials Lines Inc. and ten affiliates (the “debtors”), large liquid and dry cargo shippers with an active fleet of approximately 3,500 barges, filed a prepackaged bankruptcy case in the Southern District of Texas to (i) effectuate a comprehensive restructuring of $1.48b of debt ($536mm RCF and $949mm term loan) and (ii) inject the debtors with much-needed new capital via a rights offering. Now, we know what you’re thinking: the debtors are just the latest victims of the oil and gas crash. While oil and gas do make up some small portion of the debtors’ revenues (10%), this is incorrect. Other factors complicated the debtors’ efforts to service their bulk of debt (see what we did there?). Hold on to your butts, people.

The company notes:

Beginning in early 2016, the inland barge industry entered a period of challenging conditions that have resulted in reduced earnings. These challenges were brought on by a variety of international trade, macroeconomic, industry capacity, and environmental factors. The industry has experienced a prolonged period of declining freight rates, grain volume volatility related to international competition and tariffs on U.S.-grown soybeans, and excessive operating costs incurred as a result of extreme flooding conditions. Freight rates during 2016 and 2017 were under continued downward pressure from reduced shipping demand for metals, grain, refined products, petrochemicals, chemicals and crude oil. These declines resulted in part from pressure on the U.S. steel industry linked to dumping of foreign steel into U.S. markets, increased international competition in grain exports, and the decline in North American crude oil production in response to an oversupply of global crude oil.

Wow. So much to unpack there. It’s as if the debtors’ diversified revenue streams all fell smack dab in the middle of each and every declining sector of the US economy. Reduced steel shipments due to Chinese dumping ✅. Distress in agriculture leading to less volume ✅. Oil and gas carnage ✅.

Compounding matters was increased barge supply (read: competition) due to an increase in coal shipments. That’s right, folks. We’re back to coal. Less coal production = redeployed ships looking for replacement cargo = more competition in the liquid and dry cargo space = decreased freight rates.

The debtors got a temporary reprieve in late 2017 when the Trump administration imposed steel tariffs. A short-lived recovery in steel prices combined with a temporary recovery in oil prices and, due to the above issues, a slowdown in barge construction, helped rates recover a tad.

It didn’t last. In mid-2018, China imposed tariffs on US-grown soybeans. Agricultural products constitute 36% of the debtors’ revenues. Combined with flooding that disrupted farming and navigable waterways, the debtors experienced approximately $86mm in increased operating costs. So, yeah, no bueno. As the debtors note with no intended irony, all of these factors amount to a “perfect storm” heightened mostly by an unsustainable and unserviceable debt load.

A few things to highlight here in terms of the process and trajectory of the cases:

• This serves as yet another example where the pre-petition lenders used the debtors’ need for additional time to fund a short-term bridge and, in exchange, lock down a full rollup of the pre-petition debt into a $640mm DIP credit facility. The term lenders will also provide a $50mm DIP to fund the administration of the cases.

• The term lenders are equitizing their $949mm term loan, getting 100% 7.5% “take back preferred equity” and “new common equity” in return. Their estimated recovery is 38%. Post-reorg, the major owners of the debtors, therefore, will be Contrarian Capital Management LLC, Finepoint Capital LP, and Invesco Ltd.

• The company will get a $150mm of new money via a backstopped rights offering supported by certain holders of term loan claims. This new money infusion (in exchange for 10% junior preferred equity to that noted above and provided subject to a 7% backstop premium) will presumably give the debtors some additional runway should the market forces noted above persist.

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

• Capital Structure: $536mm RCF and $949mm term loan

• Professionals:

  • Legal: Milbank LLP (Dennis Dunne, Samuel Khalil, Parker Milender) & Porter Hedges LLP (John Higgins, Eric English) & Seward & Kissel LLP

  • Post-Reorg Independent Director: Scott Vogel

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Greenhill & Co. Inc.

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

• Other Parties in Interest:

  • Prepetition ABL & DIP ABL Agent: Wells Fargo Bank NA

    • Legal: K&L Gates LLP (David Weitman, Christopher Brown)

  • Preptition Term Loan Agent: Cortland Capital Market Services LLP

  • Ad Hoc Group of Term Lenders: Contrarian Capital Management LLC, Finepoint Capital LP, and Invesco Ltd.

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Darren Klein, Erik Jerrard) & Rapp & Krock PC (Henry Flores, Kenneth Krock)

    • Financial Advisor: Evercore Group LLC

  • Large Equityholder: Platinum Equity
    

😷New Chapter 11 Bankruptcy Filing - Walker County Hospital Corporation (d/b/a Huntsville Memorial Hospital)😷

Walker County Hospital Corporation (d/b/a Huntsville Memorial Hospital)

November 11, 2019

Walker County Hospital Corporation (“WCHC,” d/b/a Huntsville Memorial Hospital) is the latest in a recent string of healthcare bankruptcies. Why?

Per the debtor:

“While the Hospital has outpaced market trends in the region for admissions and revenue, and has little outstanding long-term debt, as a standalone hospital operator, the Debtor faces significant challenges in acquiring competitive pricing for necessary goods and services and favorable managed care contracts as compared to multi-hospital systems.”

If you’re wondering about why private equity firms are rolling-up hospital systems, this ⬆️ ought to give you some perspective.

“As a result, the Hospital has significantly above average operating costs that exceed its revenue generation.”

That, ladies and gentlemen, is what you call a lack of economies of scale.

“In addition, the Debtor’s over-extension into rural healthcare clinics and a failed lab venture and ambulatory surgery center, among other issues, have resulted in an unsustainable balance sheet and liquidity.”

So, uh, that all sucks.

Interestingly, the State of Texas helped bury the debtor:

In 2018, the State of Texas shifted its health insurance coverage for state employees from United Healthcare to Blue Cross Blue Shield. This shift materially impacted the Debtor’s revenue, as the Debtor’s contract with Blue Cross Blue Shield has less favorable reimbursement rates and a large portion of the Hospital’s patient population is employed by the State. The Debtor has been in negotiations with Blue Cross Blue Shield since 2016, in an attempt to obtain a managed care contract with the insurer at a fair market rate, but efforts thus far have remained unsuccessful.

Because of this and other issues, the debtor’s revenue dipped and it tripped covenants in its pre-petition credit facility AND defaulted under its operating agreements with the Walker County Hospital District. The debtor has been operating under forbearance agreements with both for some time now while it sought to find a buyer. It failed. This bankruptcy is intended to provide one chance for such a sale: the debtor already has a sale process motion on the docket. It does not have a stalking horse purchaser, it does have some hope that the District will be a participant in an auction. To allow that process to play out, the debtor obtained a $5mm DIP credit facility commitment from its pre-petition (direct) lender, MidCap Financial Trust.

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

• Capital Structure: $2mm RCF (MidCap Financial Trust)

• Professionals:

  • Legal: Waller Lansden Dortch & Davis, LLP (Ryan Cochran, Blake Roth, Tyler Layne, Andrea Cunha, Evan Atkinson)

  • Financial Advisor: Healthcare Management Partners LLC (Steven Smith)

  • Claims Agent: Epiq Corporate Restructuring LLC (*click on the link above for free docket access)

• Other Parties in Interest:

  • DIP Lender: MidCap Financial Trust

    • Legal: Vedder Price P.C. (Michael Eidelman, David Kane) & Porter Hodges LLP (John Higgins, Kiran Vakamudi)

🥛New Chapter 11 Filing - Southern Foods Group LLC (d/b/a Dean Foods Company)🥛

Southern Foods Group LLC (d/b/a Dean Foods Company)

November 12, 2019

In one corner: innovation. In the other corner: disruption. Dean Foods Co. $DF, the largest US supplier of milk, is struggling as a result. From back in March: https://t.co/Rk8xRVdW86 (paywall) https://t.co/TNpq1s4rzc

— 💥PETITION💥 (@petition) May 21, 2019

We’ve published these charts before here but they’re worth revisiting:

Since we’re all about the charts right now, here’s another one — perhaps the ugliest of them all:

Yup, Southern Foods Group LLC (d/b/a Dean Foods Company) has been a slow-moving train wreck for some time now. In fact, we wrote about the disruption it confronts back in March. It’s worth revisiting (we removed the paywall).

Alas, the company and a long list of subsidiaries finally filed for bankruptcy yesterday in the Texas (where things seem to be getting VERRRRRY VERRRRRY busy these days; see below ⬇️).

Once upon a time everyone had milk. Serena and Venus Williams. Dwight Howard. Mark McGuire. Tyra Banks. The Olsen twins. David Beckham. Giselle. The “Got Milk? campaign was pervasive, featuring A-listers encouraging folks to drink milk for strong bones. Things have certainly changed.

Dean Foods’ long history begins in 1925; it manufactures, markets and distributes branded and private label dairy products including milks, ice cream, creamers, etc. It distributes product to schools, QSRs like McDonald’s Inc. ($MCD), small format retailers (i.e., dollar stores and pharmacies), big box retailers like Walmart Inc. ($WMT)(which accounted for 15.3% of net sales in ‘18), and the government. Its products include, among many others, Friendly’s, Land O Lakes and Organic Valley. This company is a monster: it has 58 manufacturing facilities in 29 states, 5000 refrigerated trucks and 15,000 employees (40% of whom are covered by collective bargaining agreements). Milk, while on the decline, remains big business.

How big? Per the company:

In 2018, Dean Foods’ reported consolidated net sales of $7.755 billion, gross profit of $1.655 billion, and operating income of $(315.2) million. Through the first 6 months of 2019, Dean Foods’ reported consolidated net sales of $3.931 billion, gross profit of $753.2 million, and operating income of $(96.2) million.

Those are some serious sales. And losses. And the company also has a serious capital structure:

Milk production is a capital intensive business requiring a variety of inputs: raw milk, resin to make plastic bottles (which likely infuse all of us with dangerous chemicals, but whatevs), diesel fuel, and juice concentrates and sweeteners. Hence, high debt. So, to summarize: high costs, low(er) demand, lots of debt? No wonder this thing is in trouble.

What are the stated reasons for the company’s chapter 11 filing?

• Milk Consumption Declines. “For the past 10 years, demand has fallen approximately 2% year-over-year in North America.” This is consistent with the chart above.

• Loss of Pricing Power. Because volumes declined, economies of scale also decreased. “Delivered cost per gallon rose approximately 20.7% between 2018 and 2013 as a result of volume deleverage.” That’s vicious. Talk about a mean spiral: as volumes went down, the company couldn’t support the input volumes it had previously and therefore lost pricing power. “Dean Foods suffered a full year 2018 year-over-year decline in fluid milk volume of 5.8% following a 2017 year-over-year decline of 4.2%. Moreover, Dean Foods’ volume declines continue to outpace the overall category; while category volumes declined by approximately 4%8 year-over-year through the end of September, 2019, Dean Foods experience declines of over 11.4%.” Apparently, this impacted Dean Foods disproportionately. Any buyer looking at this has to wonder how these issues can be remedied.

• Market Share Disruption. New forms of “milk” have taken market share. “Sales of nut and plant beverages grew by 9% in 2018 and had sales of $1.6 billion, according to the Plant Based Foods Association.”

• Retail Consolidation. It doesn’t help when, say, Dollar General merges with Family Dollar. That gives the dollar stores increased leverage on price. And that’s just one example.

• “The BigBox Effect.” The biggest retailers have become increasingly private label focused and, in turn, vertically integrated. Take Walmart, for example. In 2018, the retailer opened its first U.S. food production facility in Indiana. Want to guess what kind of food? Why would we be mentioning it? This new facility amounted to a 100mm gallon loss of volume to Dean Foods.

• “The Loss Leader Effect.” We often talk about the venture-backed subsidization of commonplace lifestyle items, e.g., Uber Inc. ($UBER). Retailers have, in recent years, aggressively priced private label milk to drive foot traffic. “As retailers continue to invest in private-label milk to drive foot traffic, private label margin over milk contracted to a historic low of $1.26 in June, before falling even further to $1.24 in September.”

• Freight Costs. They’ve been up over the last few years. This is a different version of
  ”The Amazon Effect” ($AMZN).

All of these are secular issues that a balance sheet solution won’t remedy. Buyer beware. 😬🤔

So, what CAN the bankruptcy achieve? Yes, the obvious: the balance sheet. Also, there is a contingent liability of over $722.4mm that results from the company’s participation in an underfunded multi-employer pension plan. And liquidity: the bankruptcy will avail the company of a $850mm DIP credit facility. It may also allow the company to pursue a sale transaction to its long-time commercial partner and largest single raw milk vendor, Dairy Farmers of America (which is wed $172.9mm). Surely they must be aware of the secular trends and will price any offer accordingly, right? RIGHT? Either way, those ‘23 notes look like they might be about to take a bath.*

*Likewise certain trade creditors. The debtors state that that they have $555.7mm of total outstanding accounts payable and claim $257mm needs to go to critical vendors and another $189.2mm to 503(b)(9) admin claimants. That leaves a small subset of creditors due a bit more than $100mm holding the bag. This also explains the sizable DIP.

Meanwhile, one of the largest unsecured creditors is Acosta Inc., with a contingent, disputed and unliquidated claim arising out of litigation. Acosta is unlikely to recover much on this claim which is a bit ironic considering that an Acosta bankruptcy filing is imminent. Womp womp.

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

• Capital Structure: see above

• Professionals:

  • Legal: Davis Polk & Wardwell LLP (Brian Resnick, Steven Szanzer, Daniel Meyer, Nate Sokol, Alexander Bernstein, Charlotte Savino, Cameron Adamson) & Norton Rose Fulbright LLP (William Greendyke, Jason Boland, Bob Bruner, Julie Goodrich Harrison)

  • Financial Advisor: Alvarez & Marsal LLC (Jeffrey Stegenga, Brian Fox, Tom Behnke, Taylor Atwood)

  • Investment Banker: Evercore Group LLC (Bo Yi)

  • Claims Agent: Epiq Bankruptcy Solutions LLC (*click on the link above for free docket access)

• Other Parties in Interest:

  • Receivables Securitization Agent, RCF Agent & DIP Agent: Rabobank USA

    • Legal: White & Case LLP (Scott Greissman, Philip Abelson, Elizabeth Fuld, Rashida Adams, Andrew Zatz) & Gray Reed & McGraw LLP (Jason Brookner, Lydia Webb, Amber Carson)

  • Unsecured Bond Indenture Trustee: Bank of New York Mellon NA

    • Legal: Emmett Marvin & Martin LLP (Thomas Pitta, Edward Zujkowski, Elizabeth Taraila)

  • Ad Hoc Group of 6.5% ‘23 Unsecured Noteholders: Ascribe III Investments LLC, Broadbill Investment Partners LLC, Ensign Peak Advisors Inc., Kingsferry Capital LLC, Knighthead Capital Management LLC, MILFAM Investments LLC

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Andrew Rosenberg, Robert Britton, Douglas Keeton, Grace Hotz) & Pillsbury Winthrop LLP (Hugh Ray III, William Hotze, Jason Sharp)

  • Official Committee of Unsecured Creditors: Central States Southeast and Southwest Areas Pension Fund, The Bank of New York Mellon Trust Company NA, Pension Benefit Guaranty Corporation, Land O’ Lakes Inc., California Dairies Inc., Consolidated Container Company LP, Select Milk Producers Inc.

    • Legal: Akin Gump Strauss Hauer & Feld LLP (Ira Dizengoff, Philip Dublin, Meredith Lahaie, Martin Brimmage, Joanna Newdeck, Julie Thompson, Patrick Chen, Madison Gardiner)

    • Financial Advisor: Berkeley Research Group LLC (Christopher Kearns)

    • Investment Banker: Miller Buckfire & Co. LLC (Richard Klein)

Update 1/11/20

⛽️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)

Source: First Day Declaration

⛽️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:

$AMR is no more.

May be the embodiment of peak shale era with insane deal underwriting/valuation, misaligned incentives (SPAC) and a complete failure in execution.

Everything went wrong here, in quick fashion. https://t.co/uQCbtbkW4s

— EnergyCynic (@EnergyCynic) September 12, 2019

In 577 days, Silver Run II (SPAC) went from acquiring Alta Mesa Holdings to filing for Chapter 11. Roughly ~2B in cash was lit on fire ($3.5mm a day). Interestingly, Kingfisher Midstream was not part of the filing $AMR

— WastedEnergy (@energy_wasted) September 12, 2019

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,