Hartshorne Holdings LLC

February 20, 2020

You have to hand it to creative name conventions. Especially when viewed from the lens of restructuring where all we see are BlackRock, StonePoint, Stone Hill, Owl Creek, Owl Rock, Oak Hill, etc. etc. For some reason trees, owls and rock formations are the only things that convey “steward of capital,” it seems. If we were starting a fund we’d go with something far more interesting. Giantsbane Capital, for instance. Or Hartshorne Capital. Sadly, Hartshorne is already taken. It’s the name of the latest coal company to file for bankruptcy (#MAGA!).

Kentucky-based Hartshorne Holdings LLC and three affiliates (the “debtors”) mine thermal coal — the kind used for power production — in the Illinois Coal Basin Western Kentucky. Per the debtors:

The Western Kentucky area is among the best mining jurisdictions in the United States due to its proximity to utility companies and access to low cost power, transportation and a non-union labor pool. Mining conditions at the Poplar Grove Mine are generally similar to those encountered in neighboring mines, which rank as some of the most productive room-and-pillar thermal coal operations in the United States.

In this first instance, this sounds highly positive. As does the fact that the debtors are party to (a) two fixed-priced coal sales contracts and a (b) fuel purchase order — all on terms that are “economically advantageous” for the debtors. So, what gives?

Well, for starters, we all know the macro issues. The coal industry is in secular decline, capitulating under the weight of declining commodity prices (induced in part by fracking and a US-based natural gas boom), reduced coal-based power capacity, and regulatory compliance constraints. Sh*t, are there any coal companies that haven’t gone bankrupt yet (yeah, yeah, Foresight Energy, but that’s coming and y’all know it).*

As if the macro conditions aren’t bad enough, this company ran into every operational issue under the sun. You name it, these guys experienced it:

• Unexpected geological soil issues. ✅

• Water issues. ✅

• Delays caused by encountering a geological fault. ✅

• Poor conditions for mine car movement. ✅

• Increased mine car battery changes (due to the poor conditions). ✅

• Less-than-expected processing yields. ✅

So while the debtors had economically advantageous contracts, they nevertheless couldn’t operate in such a way that was sustainable. Liquidity became extremely tight and, due to that, the debtors’ lenders refused to continue to finance the business. Any out-of-court resolution, therefore, became unrealistic and here we are. The debtors will now seek a sale of their assets in bankruptcy.

__________

*The debtors note:

Thermal coal demand in the domestic electric power sector has declined from 935 million tons in 2011 to 636 million tons in 2018 and coal has seen its share of the domestic electricity generation market reduce from 43% in 2011 to 31% in 2017.

• Jurisdiction: W.D. of Kentucky (Judge Fulton)

• Capital Structure: $42.6mm Term Loan, $9mm Royalty Interest (SP2 Royalty Co. LLC)

• Professionals:

  • Legal: Squire Patton Boggs US LLP (Stephen Lerner, Norman Kinel, Nava Hazan, Travis McRoberts, Kyle Arendsen, Maura McIntyre) & Frost Brown Todd LLC (Edward King, Bryan Sisto)

  • Financial Advisor/CRO: FTI Consulting Inc. (Bertrand Troiano)

  • Investment Banker: Perella Weinberg Partners LP

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

• Other Parties in Interest:

  • Pre-Petition Senior Secured & DIP Agent ($7.5mm): Tribeca Global Resources Credit Pty Ltd

    • Legal: Wyatt Tarrant & Combs LLP (John Brice)