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 - Cinemex Holdings USA Inc. 🍿

Cinemex Holdings USA Inc.

April 25, 2020

Mexican-owned and Florida-based Cinemex Holdings USA Inc., which owns 41 CMX cinema locations in 12 states filed for bankruptcy in the Southern District of Florida. The company is owned by German Larre, Mexico’s third-richest man. The company blames COVID-19 and the lack of clarity as to when things will return to normal for the need to file. The company previously walked from a planned merger with Star Cinema Grill over coronavirus concerns and is now embroiled in litigation initiated by Star Cinema Grill’s owner, Omar Kahn. It seems pretty apparent that the courts are going to be littered with litigation deriving from COVID-related deal blowups.

• Jurisdiction: S.D. of Florida (Judge Isicoff)

• Capital Structure: $9mm unsecured loan (BBVA, HSBC, Scotiabank, SAB Capital, Banco Santander)

• Professionals:

  • Legal: Quinn Emanuel Urquhart & Sullivan LLP & Bast Amron LLP (Jeffrey Bast)

📺 New Chapter 11 Bankruptcy Filing - Frontier Communications Inc. ($FTR) 📺

Frontier Communications Inc.

April 14, 2020

We often highlight how, particularly in the case of oil and gas companies, capital intensive companies end up with a lot of debt and a lot of debt often results in bankruptcy. In the upstream oil and gas space, exploration and production companies need a lot of upfront capital to, among other things, enter into royalty interest agreements with land owners, hire people to map wells, hire people to drill the earth, secure proper equipment, procure the relevant inputs and more. E&P companies literally have to shell out to pull out.

Similarly, telecommunications companies that want to cover a lot of ground require a lot of capital to do so. From 2010 through 2016, Connecticut-based Frontier Communications Inc. ($FTR) closed a series of transactions to expand from a provider of telephone and DSL internet services in mainly rural areas to a large telecommunications provider to both rural and urban markets across 29 states. It took billions of dollars in acquisitions to achieve this. Which, in turn, meant the company took on billions of dollars of debt to finance said acquisitions. $17.5b, to be exact. Due, in large part, to the weight of that heavy debt load, it, and its 28922932892 affiliates (collectively, the “debtors”), are now chapter 11 debtors in the Southern District of New York (White Plains).*

The debtors underwrote the transactions with the expectation that synergistic efficiencies would be borne out and flow to the bottom line. PETITION readers know how we feel about synergies: more often than not, they prove elusive. Well:

Serving the new territories proved more difficult and expensive than the Company anticipated, and integration issues made it more difficult to retain customers. Simultaneously, the Company faced industry headwinds stemming from fierce competition in the telecommunications sector, shifting consumer preferences, and accelerating bandwidth and performance demands, all redefining what infrastructure telecommunications companies need to compete in the industry. These conditions have contributed to the unsustainability of the Company’s outstanding funded debt obligations—which total approximately $17.5 billion as of the Petition Date.

Shocker. Transactions that were meant to be accretive to the overall enterprise ended up — in conjunction with disruptive trends and intense competition — resulting in an astronomical amount of value destruction.

As a result of these macro challenges and integration issues, Frontier has not been able to fully realize the economies of scale expected from the Growth Transactions, as evidenced by a loss of approximately 1.3 million customers, from a high of 5.4 million after the CTF Transaction closed in 2016 to approximately 4.1 million as of January 2020. Frontier’s share price has dropped … reflecting a $8.4 billion decrease in market capitalization.

😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬

Consequently, the debtors have been in a state of liability management ever since the end of 2018. Subsequently, they (i) issued new secured notes to refinance a near(er)-term term loan maturity, (ii) amended and extended their revolving credit facility, and (iii) agreed to sell their northwest operations and related assets for $1.352b (the “Pacific Northwest Transaction”). The Pacific Northwest Transaction has since been hurdling through the regulatory approval process and seems poised to close on April 30, 2020.**

While all of these machinations were positive steps, there were still major issues to deal with. The capital structure remained robust. And “up-tier” exchanges of junior debt into more senior debt to push out near-term maturities were, post-Windstream***, deemed too complex, too short-term, and too likely to end up the subject of fierce (and costly) litigation**** As the debtors’ issued third quarter financials that were … well … not good, they announced a full drawn down of their revolver, instantly arming them with hundreds of millions of dollars of liquidity.

$FTR with the clean sweep - Revs, margins, ebitda, FCF, churn, subs, ARPC all worse sequentially. https://t.co/vn49m5PDPP

— JV (@AyyouEm) November 5, 2019

The company needed reconstructive surgery. Band-aids alone wouldn’t be enough to dam the tide. In many respects, the company ought to be commended for opting to address the problem in a wholesale way rather than piecemeal kick, kick, and kick the can down the road — achieving nothing but short-term fixes to the enrichment of really nobody other than its bankers (and Aurelius).

And so now the company is at the restructuring support agreement stage. Seventy-five percent of the holders of unsecured notes have agreed to an equitization transaction — constituting an impaired consenting class for a plan of reorganization to be put on file within 30 days. Said another way, the debtors are taking the position that the value breaks within the unsecured debt. That is, that the value is at least $6.6b making the $10.949b of senior unsecured notes the “fulcrum security.” Unsecured noteholders reportedly include Elliott Management Corp., Apollo Global Management LLC, Franklin Resources Inc., and Capital Group Cos. They would end up the owners of the reorganized company.

What else is the RSA about?

• Secured debt will be repaid in full on the effective date;

• A proposed DIP (more on this below) would roll into an exit facility;

• The unsecured noteholders would, in addition to receiving equity, get $750mm of seniority-TBD take-back paper and $150mm of cash (and board seats);

• General unsecured creditors would ride through and be paid in full; and

• Holders of secured and unsecured subsidiary debt will be reinstated or paid in full.

The debtors also obtained a fully-committed new money DIP of $460mm from Goldman Sachs Bank USA. This has proven controversial. Though the DIP motion was not up for hearing along with other first day relief late last week, the subject proved contentious. The Ad Hoc First Lien Committee objected to the DIP. Coming in hot, they wrote:

Beneath the thin veneer in which these so-called “pre-arranged” cases are packaged, lies multiple infirmities that, if not properly addressed by the Debtors, will ultimately result in the unraveling of these cases. While the Debtors seek to shroud themselves in a restructuring support agreement (the “RSA”) that enjoys broad unsecured creditor support, the truth is that underlying that support is a fragile house of cards that will not withstand scrutiny as these cases unfold. Turning the bankruptcy code on its head, the Debtors attempt through their RSA to pay unsecured bondholders cash as a proxy for their missed prepetition interest payment, postpetition interest to yet other unsecured creditors of various subsidiaries, and complete repayment to prepetition revolver lenders that are attempting, through the proposed debtor-inpossession financing (the “DIP Loan”), to effectively “roll-up” their prepetition exposure through the DIP Loan, all while the Debtors attempt to deprive their first lien secured creditors of contractual entitlements to default interest and pro rata payments they will otherwise be entitled to if their debt is to be unimpaired, as the RSA purports to require. While those are fights for another day, their significance in these cases must not be overlooked.

Whoa. That’s a lot. What does it boil down to? “F*ck you, pay me.” The first lien lenders are pissed that everyone under the sun is getting taken care of in the RSA except them.

• You want to deny us our default interest. F+ck you, pay me.

• You want a DIP despite having hundreds of millions of cash on hand and $1.3b of sale proceeds coming in? F+ck you, pay me.

• You want a 2-for-1 roll-up where, “as a condition to raising $460 million in debtor-in-possession financing, the Debtors must turn around and repay $850 million to their prepetition revolving lenders, thus decreasing the Debtors’ overall liquidity on a net basis”? F+ck you, pay me.

• You shirking our pro rata payments we’d otherwise be entitled to if our debt is to be unimpaired? F+ck you, pay me.

• You want to pay unsecured senior noteholders “incremental payments” of excess cash to compensate them for skipped interest payments without paying us default interest and pro rata payments? F+ck you, pay me.

• You want to use sale proceeds to pay down unsecureds when that’s ours under the first lien docs? F+ck you, pay me.

• You want to pay interest on the sub debt without giving us default interest? F+ck you, pay me.

• You want to do all of this without a proper adequate protection package for us? F+ck you, pay me.

The second lien debtholders chimed in, voicing similar concerns about the propriety of the adequate protection package. For the uninitiated, adequate protection often includes replacement liens on existing collateral, super-priority claims emanating out of those liens, payment of professional fees, and interest. In this case, both the first and second liens assert that default interest — typically several bps higher — ought to be included as adequate protection. The issue, however, was not up for hearing on the first day so all of this is a preview of potential fireworks to come if an agreement isn’t hashed out in coming weeks.

The debtors hope to have a confirmation order within four months with the effective date within twelve months (the delay attributable to certain regulatory approvals). We wish them luck.

______

*Commercial real estate is getting battered all over the place but not 50 Main Street, Suite 1000 in White Plains New York. Apparently Frontier Communications has an office there too. Who knew there was a speciality business in co-working for bankrupt companies? In one place, you’ve got FULLBEAUTY Brands Inc. and Internap Inc. AND Frontier Communications. We previously wrote about this convenient phenomenon here.

**The company seeks an expedited hearing in bankruptcy court seeking approval of it. It is scheduled for this week.

***Here is a Bloomberg video from June 2019 previously posted in PETITION wherein Jason Mudrick of Mudrick Capital Management discusses the effect Windstream had on Frontier and predicted Frontier would be in bankruptcy by the end of the year. He got that wrong. But did it matter to him? He also notes a CDS-based short-position that would pay out if Frontier filed for bankruptcy within 12 months. For CDS purposes, looks like he got that right. By the way, per Moody’s, here was the spread on the CDS around the time that Mudrick acknowledged his CDS position:

Here it was a few months later:

And, for the sake of comparison, here was the spread on the CDS just prior to the bankruptcy filing last week:

Clearly the market was keenly aware (who wasn’t given the missed interest payment?) that a bankruptcy filing was imminent: insurance on FTR got meaningfully more expensive. Other companies with really expensive CDS these days? Neiman Marcus Group (which, Reuters reports, may be filing as soon as this week), J.C. Penney Corporation Inc., and Chesapeake Energy Corporation.

****Notably, Aurelius Capital Management LP pushed for an exchange of its unsecured position into secured notes higher in the capital structure — a proposal that would achieve the triple-frontier-heist-like-whammy of better positioning their debt, protecting the CDS they sold by delaying bankruptcy, and screwing over junior debtholders like Elliott (PETITION Note: we really just wanted to squeeze in a reference to the abominably-bad NFLX movie starring Ben Affleck, an unfortunate shelter-in indulge). On the flip side, funds such as Discovery Capital Management LLC and GoldenTree Asset Management LP pushed the company to file for bankruptcy rather than engage in Aurelius’ proposed exchange.

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

• Capital Structure: $850mm RCF, $1.7b first lien TL (JP Morgan Chase Bank NA), $1.7b first lien notes (Wilmington Trust NA), $1.6b second lien notes (Wilmington Savings Fund Society FSB), $10.95mm unsecured senior notes (The Bank of New York Mellon), $100mm sub secured notes (BOKF NA), $750mm sub unsecured notes (U.S. Bank Trust National Association)

• Professionals:

  • Legal: Kirkland & Ellis LLP (Stephen Hessler, Chad Husnick, Benjamin Rhode, Mark McKane, Patrick Venter, Jacob Johnston)

  • Directors: Kevin Beebe, Paul Keglevic, Mohsin Meghji

  • Financial Advisor: FTI Consulting Inc. (Carlin Adrianopoli)

  • Investment Banker: Evercore Group LLC (Roopesh Shah)

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

• Other Parties in Interest:

  • Major equityholders: BlackRock Inc., Vanguard Group Inc., Charles Schwab Investment Management

  • Unsecured Notes Indenture Trustee: Bank of New York Mellon

    • Legal: Reed Smith LLP (Kurt Gwynne, Katelin Morales)

  • Indenture Trustee and Collateral Agent for the 8.500% ‘26 Second Lien Secured Notes

    • Legal: Riker Danzig Scherer Hyland & Perretti LLP (Joseph Schwartz, Curtis Plaza, Tara Schellhorn)

  • Credit Agreement Administrative Agent: JPMorgan Chase Bank NA

    • Legal: Simpson Thacher & Bartlett LLP (Sandeep Qusba, Nicholas Baker, Jamie Fell)

  • DIP Agent: Goldman Sachs Bank USA

    • Legal: Davis Polk & Wardwell LLP (Eli Vonnegut, Stephen Piraino, Samuel Wagreich)

  • Ad Hoc First Lien Committee

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Brian Hermann, Gregory Laufer, Kyle Kimpler, Miriam Levi)

    • Financial Advisor: PJT Partners LP

  • Second lien Ad Hoc Group

    • Legal: Quinn Emanuel Urquhart & Sullivan LLP (Susheel Kirpalani, Benjamin Finestone, Deborah Newman, Daniel Holzman, Lindsay Weber)

  • Ad Hoc Senior Notes Group

    • Legal: Akin Gump Strauss Hauer & Feld LLP (Ira Dizengoff, Philip Dublin, Naomi Moss)

    • Financial Advisor: Ducera Partners LLC

  • Ad Hoc Committee of Frontier Noteholders

    • Legal: Milbank LLP (Dennis Dunne, Samuel Khalil, Michael Price)

    • Financial Advisor: Houlihan Lokey Inc.

  • Ad Hoc Group of Subsidiary Debtholders

    • Legal: Shearman & Sterling LLP (Joel Moss, Jordan Wishnew)

  • Official Committee of Unsecured Creditors

    • Legal: Kramer Levin Naftalis & Frankel LLP (Amy Caton, Douglas Mannal, Stephen Zide, Megan Wasson)

    • Financial Advisor: Alvarez & Marsal LLC (Richard Newman)

    • Investment Banker: UBS Securities LLC (Elizabeth LaPuma)

⛽️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 - Vanguard Natural Resources Inc.⛽️

Vanguard Natural Resources Inc.

March 31, 2019

It’s raining SCARLET 22s! Freefall!! We still STILL have a feasibility problem!!!

Vanguard Natural Resources Inc. ($VNRR) and affiliated debtors find themselves in bankruptcy court again — the second time in nearly exactly two years (its predecessor confirmed a plan of reorganization in July 2017). And they do so in crash and burn fashion: while discussions have been happening over the last several weeks with various constituencies within the company’s capital structure, the company has no deal agreed to — merely the outlines of a restructuring term sheet. This is curious given that, under the company’s proposed DIP credit facility ($130mm, of which $65mm is new money), the company has a mere 30 days from the petition date to file a plan of reorganization and must emerge from chapter 11 within 120 days. Send hopes and prayers to the Kirkland attorneys working on this one over the next few weeks.

The debtors are an oil and natural gas company with production and development activity in the Rocky Mountain, Mid-Continent, Gulf Coast and West Texas regions of the United States; they operate in eight states across nine geologic basins. They are a remnant of the first bankruptcy which saw the predecessor entity shed $850mm of debt and wipe out the existing equity. The current capital structure looks like this:

The second lien noteholders include Fir Tree Capital Management LP and York Capital Management Global Advisors LLC. And the company’s equity holders are:

Source: Chapter 11 Petition

This is another pretty cut and dry oil and gas bankruptcy given where oil and natural gas prices are. Many investors who took ownership of distressed E&P companies circa 2015-2017 were playing an option on oil and gas trading levels. That option is clearly out of the money.

Interestingly, that option was underwritten, in part, on the company’s projections. And, so, this statement by the company’s now-CEO was particularly intriguing to us and fits nicely within our recent general theme of inquiring as to whether the industry has a feasibility problem (see Paragon Offshore here, Gymboree here, and Payless here):

I understand that the Vanguard I Plan was predicated on various assumptions that ultimately did not materialize. As discussed further herein, it is my understanding that these may have included certain assumptions about: (a) commodity prices and basin differentials; (b) the pace and volume of divestments and the existence of valuable undeveloped resources to be sold; and (c) the expected returns on a number of capital investments pursued by Vanguard upon emergence—many of which have failed to come to full fruition and have challenged the Debtors’ liquidity over the last 18 months.

Former management, meet a big bad bus. You’ve just been thrown under it.

In fact, as if saying it wasn’t enough, the new CEO spared PETITION the trouble of having to dive into the 2017 filings to see just how badly these guys botched their liquidity projections:

Source: First Day Declaration

The following compounded matters: (a) mismanagement of the company’s hedge book, (b) borrowing base redeterminations, (c) refi roadshows met with “tepid” interest, (d) a series of asset sales that failed to live up to expectations — both in terms of time to completion and proceeds, and (e) capital investments that “delivered lower economic returns than expected.” It’s almost as if distressed investors who sit on boards of directors and hire their own operators have absolutely no effing clue how to run an oil and gas company. Who knew?

And so the company came dangerously close to tripping a series of covenants. That’s when the company brought in Kirkland & Ellis LLP and Evercore Group LLC and re-engaged Opportune LLP to help the company. The various advisors engaged in a number of processes that would have provided the company with crucial liquidity — including new financing, bank facility amendments and various discreet asset sales. But all prospective parties quickly realized that the assets…well…for lack of a better description…kinda, like, suck.

And so nothing could get done. Well, other than the company obtaining a commitment for $130mm of DIP financing to fund the cases (of which only $65mm is new money). What happens from here will be interesting to watch. Suffice it to say, distressed-investors-cum-oil-and-gas-owners are learning a ROUGH lesson.

And, once again, we have to ask whether company projections ought to get a bit more scrutiny than they have to date.

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

• Capital Structure: $677.7mm RCF and $123.4mm TL (Citibank NA), $80.7mm second lien notes (Delaware Trust Company)

• Professionals:

  • Legal: Kirkland & Ellis LLP (James Sprayragen, Christopher Marcus, Brian Schartz, Aparna Yenamandra, Richard Howell, Yates French, Kent Hayden, Timothy Bow, James Fedell, Allyson Smith Weinhouse) & (local) Blank Rome LLP (James Grogan, Philip Guffy)

  • Board of Directors: Randall Albert, Patrick Bartels Jr., W. Greg Dunlevy, Joseph Hurliman Jr., Andrew Schultz, R. Robert Sloan, L. Spencer Wells

  • Financial Advisor: Opportune LLP

  • Investment Banker: Evercore Group LLC

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

• Other Parties in Interest:

  • DIP Agent ($130mm, $65mm New Money): Citibank NA

    • Legal: Latham & Watkins LLP (Mitchell Seider, Annemarie Reilly, Adam Malatesta) & (local) Hunton Andrews Kurth LLP (Timothy Davidson II, Joseph Rovira)

  • Ad Hoc Group of First Lien Lenders

    • Legal: Brown Rudnick LLP (Robert Stark, Steven Pohl, Justin Cunningham, Alexander Fraser) & (local) Quinn Emanuel Urquhart & Sullivan LLP (Patricia Tomasco)

  • Second Lien Ad Hoc Group (Fir Tree Capital Management LP, York Capital Management Global Advisors LLC)

    • Legal: Davis Polk & Wardwell LLP (Brian Resnick, Benjamin Schak) & (local) Porter Hedges LLP (John Higgins, Eric English, M. Shane Johnson)

  • Official Committee of Unsecured Creditors

    • Legal: Locke Lorde LLP (Philip Eisenberg)

    • Restructuring Advisor: Parkman Whaling LLC (Thomas B. Hensley Jr.)

    • Financial Advisor: The Claro Group LLC (Douglas Brickley)

Updated 5/10 at 12:25pm (#48)

New Chapter 11 Bankruptcy Filing - Gastar Exploration Inc.

Gastar Exploration Inc.

October 31, 2018

The fallout from the oil and gas downturn appears to have a long tail.

Gastar Exploration Inc. ($GST), an oil and natural gas exploration and production company focused on shale resource plays in Oklahoma filed a prepackaged bankruptcy in the Southern District of Texas.

For anyone looking for a short primer on what exactly transpired in oil and gas country upon the 2014 downturn in commodity prices is in luck: the company provides a succinct explanation in its bankruptcy filings. It notes:

The market difficulties faced by the Debtors are consistent with those faced industry-wide. Oil and gas companies and others have been challenged by low natural gas prices for years. Since January 2014, natural gas prices fell from a peak of $5.39 per MMBtu in January 2014 to $1.73 per MMBtu by March 2016, and remain at approximately $3.17 per MMBtu. The price of crude oil has similarly plummeted from a high of $107.26 per barrel in June 2014 to a low of $29.64 per barrel in January 2016. Crude oil prices remain at approximately $67 per barrel. Additionally, NYMEX futures curves for both natural gas and crude oil are backward dated, indicating an expectation among real-money traders in the derivatives market that these commodity prices are expected to decline over the next several years.

These market conditions have affected oil and gas companies at every level of the industry around the world. All companies in the oil and gas industry (not just E&P companies) have felt these effects. However, independent oil and gas companies have been especially hard-hit, as their revenues are generated from the sale of unrefined oil and gas. Over 160 oil and gas companies have filed for chapter 11 since the beginning of 2015. Numerous other oil and gas companies have defaulted on their debt obligations, negotiated amendments or covenant relief with creditors to avoid defaulting, or have effectuated out-of-court restructurings.

The Debtors were not immune to these macro-economic forces.

With hundreds of millions of dollars of debt, the company managed to avoid a bankruptcy filing during that time. This is primarily due to a 2017 refinancing transaction that it consummated with Ares Management LLC pursuant to which the company took on new first lien term loans, new second lien converts, and obtained a $50mm equity investment from Ares. The capital structure, at the petition date, is comprised of these term loans and converts. The company intended the new financing to help it weather the downturn and bridge it to a more favorable operational performance and capital markets environment. Alas, it’s in bankruptcy. So, we guess we know how those intentions played out in reality. Indeed, the company experienced significant operational challenges that resulted in a decreased in well production performance — a result that came to pass only after the company incurred the costs of production. Sheesh.

Now the company seeks, in partnership with Ares, to push through a speedy chapter 11 bankruptcy that would have the effect of deleveraging the balance sheet by approximately $300mm, handing all of the equity to Ares (on account of their second lien notes claims), and wiping out the preferred and common equity — which would only be entitled to warrants in reorganized Gastar if they don’t object to the restructuring or seek the appointment of an official committee of equity security holders. Which in the case of both common equityholders (Fir Tree Capital Management LP & York Capital Management Global Advisors LLC) and preferred equityholders…uh…is exactly what they’re doing. Clearly those warrants weren’t much of a carrot. And Judge Isgur happens to have previously demonstrated a soft spot in his heart for equity committees. See, e.g., Energy XXI.

Prior to the first day hearing, Fir Tree and York (by attorneys Quinn Emanuel - a sign of seriousness) filed an emergency motion seeking the appointment of an equity committee alleging, among other things, that the company’s plan is a pure Ares jam fest. They seek an investigation of Ares’ actions (including the refinancing transaction), citing the Energy XXI case, and noting in the process that with unsecured creditors riding through the plan, there is no viable adversary to the debtor other than the zeroed-out equity. Which makes this a private equity vs. hedge fund hootenanny!

Subsequently, an ad hoc committee of preferred stockholders filed a motion joining the arguments of Fir Tree and York, noting, however, that as a preferred equity they’re liquidation preference trumps the interest of the common stockholders. They, too, want an investigation into Ares’ involvement in these cases.

A hearing is scheduled for later this week.

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

• Capital Structure: see below (+$13.3mm in hedging obligations).     

• Company Professionals:

  • Legal: Kirkland & Ellis LLP (Ross Kwasteniet, Anna Rotman, John Luze, Ciara Foster, Brett Newman) & (local) Jackson Walker LLP (Patricia Tomasco, Matthew Cavenaugh)

  • Financial Advisor: Dacarba LLC

  • Investment Banker: Perella Weinberg Partners LP (Kevin Cofsky)

  • Claims Agent: BMC Group (*click on company name above for free docket access)

• Other Parties in Interest:

  • Financial Sponsor: Ares Management LLC

    • Legal: Milbank Tweed Hadley & McCloy LLP (Paul Aronzon, Thomas Kreller, Robert Liubicic, Haig Maghakian)

  • Minority Shareholders: Fir Tree Capital Management LP & York Capital Management Global Advisors LLC

    • Legal: Quinn Emanuel Urquhart & Sullivan LLP (Emily Smith, K. John Shaffer, Benjamin Finestone, Kate Scherling)

  • Ad Hoc Committee of Preferred Stock Holders (Aedes LLC)

    • Legal: Hunton Andrews Kurth LLP (Paul Silverstein, David Zdunkewicz, Brian Clarke, Timothy Tad Davidson II)

  • DIP Agent & TL Agent: Wilmington Trust NA

    • Legal: Arnold & Porter Kaye Scholer LLP (Christopher Odell, Hannah Sibiski, Brian Lohan, Seth Kleinman)

Source: First Day Declaration

New Chapter 11 Filing - FirstEnergy Solutions Corp.

FirstEnergy Solutions Corp. 

March 31, 2018

#MAGA!!

FirstEnergy Solutions Corp. ("FES"), the wholly-owned subsidiary of publicly-traded (non-debtor) FirstEnergy Corp. has filed a "freefall" bankruptcy in the Northern District of Ohio. FES is a provider of "unregulated"-yet-regulated energy-related products and services to retail and wholesale customers primarily in Illinois, Maryland, Michigan, New Jersey, Ohio and Pennsylvania. It owns and operates (a) fossil generating facilities (read: coal) in Ohio (three) and Philadelphia (one) through its FirstEnergy Generation subsidiary ("FG") and, (b) 3 nuclear generating facilities (two in Ohio and one in Philadelphia)through its FirstEnergy Nuclear Generation LLC ("NG") subsidiary. 

For those of you who aren't power geeks - and we confess that we are not - this filing gives a pretty solid primer on how United States' power production and distribution works. Or doesn't work - depending on your point of view, we suppose. We summarize some high points here but if you're especially nerdy and want to understand the power industry better, read docket number 55. You can find it via the case name link above. 

A big piece of this bankruptcy filing is the debtors' retail electricity business. Retail sellers of electricity are subject to state-applied "Renewable Portfolio Standards" ("RPS") that requires sellers to obtain a certain percentage or amount of its power supply from renewable energy sources. One way to comply is through the purchase of renewable energy credits ("RECs"). Historically, FES has obtained RECs to comply with the RPS via eight power purchase agreements entered into between 2003-2011 with various wind and solar power producers. But apparently things have changed considerably since then. And FES no longer wants the RECs. 

What's changed? Now FES's actual and projected sales are much lower. Per the company in more detail: 

"The main drivers to the collapse in prices include:

• Lower natural gas prices due to continued improvements in natural gas fracking;

• Excess generating capacity due in part to lower than expected load growth;

• Lower cost of construction for renewable technologies, and/or improved performance (e.g., higher capacity factors); and

• Surplus of RECs."

Also, future market prices and outlook for power and RECs are projected materially lower. RPS mandates are less demanding (#MAGA!!). And the supply of RECs is significantly greater. Said another way: energy disruption. From frackers pushing a rapid expansion in nat gas supplies which, in turn, caused plummeting electricity prices and reduced profits. From regulation and the rise of renewables. From energy efficient electronics. 

Per the company, "While the PPAs made sense to FES at the time they were entered into, a dramatic downturn in the energy market and prices of RECs now renders these contracts extremely burdensome and uneconomic to FES." They're also, according to the debtor, unnecessary: FES is phasing out its retail business and, today, expects to sell less than half of the amount of power this year that it sold in 2013. Consequently, FES seeks to reject those PPAs in bankruptcy.

Which is not the only PPA it seeks to reject. The debtor also seeks to shed its multi-party intercompany PPA pursuant to which it and several other power companies purchase power generated via fossil fuel from the Ohio Valley Electric Corporation ("OVEC"). The debtor alleges that this obligation is priced at above-market rates. And because FES sells very little wholesale power emanating out of the OVEC PPA, it stands to lose approximately $268 million from the deal. Yikes. 

The issue, though, is whether the rejection of the nine PPAs will cause disruption to the continued supply of wholesale electricity or impact the reliability of the transmission grid in the regional transmission organization that governs FES and FG. That generally means YOUR electricity - if you live in the Northeast. Naturally, the debtor argues it won't. The federal government may think otherwise. And this is precisely why the company filed an action seeking a declaratory judgment and injunction against the Federal Energy Regulatory Commission ("FERC") to prevent the feds from hindering -- on the basis of the Federal Power Act -- the company's attempts to reject the PPAs under the federal bankruptcy code. FERC regulates the wholesale power market. It is also why the company has filed a request for assistance from Rick Perry, President Trump's Energy Secretary. This is some real dramatic sh*t folks: a conflict between federal statutes with efforts for executive branch intervention. Someone dial up Daniel Day-Lewis and bring him out of retirement: this could be the next "Lincoln." 

So, in a nutshell: the company filed for bankruptcy because it needs to leverage the bankruptcy code's debtor-friendly provisions to shed some burdensome contracts - including the PPAs. It also needs to address its cost structure, its over-levered balance sheet (in terms of interest payments and near-term maturities), and lease payments under certain sale-leaseback arrangements related to one of its power facilities. Said another way, this is a full-stop restructuring: both operational and financial in nature. There is a "Process Support Agreement" with various parties in interest which reflects a good faith commitment to cooperate on first day motions, implementation of employee retention and severance programs, and establishing a protocol for the disposition of company assets. Sounds great but it doesn't really promise any certainty given the various claims and regulatory issues. Buckle your seat belts. 

Some additional things of note:

• "Just when I thought I was out, they pull me back in!" (Long Don Corleone). Ironically in the week that Westinghouse Electric Corp. emerged out of its own bankruptcy proceeding, it may now find itself back in bankruptcy court for purposes of adjudicating its $2.36 million trade claim.
• Coal (#MAGA!!). A first order of business is the debtor is seeking to reject its coal transportation agreements with BNSF Railway Company ((owned by Berkshire Hathaway ($BRK.A)) and Norfolk Southern Railway Company ($NSC). Why? It expects to order 200,000 tons of coal less than the 2.5 million tons of coal minimum requirement delineated in the contract. The debtor claims that rejection of the contract will save it $105.6 million over the next 12 months as it replaces rail with barge transportation. 
• Commodities. The company also seeks to reject certain uranium supply contracts because (i) it already has enough uranium inventory for the rest of 2018 and 2019, (ii) the spot price for uranium has dropped precipitously since entering into the agreements (from $36 and $48 per pound, respectively, to $22 per pound), and (iii) there is "ample supply of uranium available in the market." 
• Professional Retentions: Two law firms represent the Ad Hoc Group of Holders of the 6.85% Pass Through Certificates due 2034 because George Davis departed O'Melveny & Myers LLP for Latham & Watkins LLP. 

• Jurisdiction: N.D. of Ohio (Judge Koschik)
• Capital Structure: $3.8 billion funded debt     

  • FES

    • $700 million secured revolving credit facility, ~$332 million of '21 6.05% unsecured notes; (c) ~$363 million of '39 6.80% unsecured notes; and (d) $150 million revolving credit note with Allegheny Energy Supply Company, LLC under which $102 million is currently outstanding and is due on April 2, 2018. 

  • FG

    • ~$328 million of secured fixed-rate pollution control revenue notes ("PCNs"); ~$677 million of unsecured fixed-rate PCNs

  • NG

    • ~$285 million of secured PCNs; ~$842 million of unsecured PCNs

• Company Professionals:
  • Legal: Akin Gump Strauss Hauer & Feld LLP (Ira Dizengoff, Lisa Beckerman, Brad Kahn, Scott Alberino, Kate Doorley, David Applebaum, Todd Brecher, Sean O'Donnell, Rachel Presa, Brian Carney, Abid Qureshi, Joseph Sorkin, David Zensky) & (local) Brouse McDowell LPA (Marc Merklin, Kate Bradley, Bridget Franklin) & (conflicts) Willkie Farr & Gallagher LLP
  • Financial Advisor/CRO: Alvarez & Marsal North America LLC (Charles Moore)
  • Investment Banker: Lazard Ltd. 
  • Claims Agent: Prime Clerk LLC (*click on company name for docket)
  • Special Nuclear Regulatory Counsel: Hogan Lovells US LLP
  • Industry Consultants: ICF International Inc.
  • Special Litigation Counsel: Quinn Emanuel Urquhart & Sullivan LLP
  • Tax Consultant: KPMG US LLP
  • Communications Consultant: Sitrick and Company
• Other Parties in Interest:
  • Board of Directors of FirstEnergy Corp. 
    • Legal: Squire Patton Boggs (US) LLP (Stephen Lerner, Peter Morrison, Julia Furlong)
  • Wilmington Savings Fund Society FSB
    • Legal: KIlpatrick Townsend & Stockton LLP (Todd Meyers, Michael Langford) & (local) McDonald Hopkins LLC (Michael Kaczka, Scott Opincar, Maria Carr)
  • Indenture Trustee: Bank of New York Mellon Trust Company, N.A.
  • Indenture Trustee to PCNs: UMB Bank, National Association
  • Ad Hoc Group of Holders of the 6.85% Pass Through Certificates due 2034
    • Legal: O'Melveny & Myers LLP & Latham & Watkins LLP
    • Financial Advisor: Guggenheim Partners LLC
  • Ad Hoc Group of Holders of PCNs issued by FG and NG
    • Legal: Kramer Levin Naftalis & Frankel LLP 
    • Financial Advisor: GLC Advisors & Co.
  • Contract Counterparty: BNSF Railway Company
    • Legal: Whitmer & Eherman LLC (Mary Whitmer, James Ehrman, Robert Stefancin)
  • Non-debtor Parent: FirstEnergy Corp.
    • Legal: Jones Day (Heather Lennox, Thomas Wilson)

New Chapter 11 Filing - iHeartMedia Inc.

iHeartMedia Inc.

3/14/18

iHeartMedia Inc., a leading global media company specializing in radio, outdoor, mobile, social, live media, on-demand entertainment and more, has filed for bankruptcy -- finally succumbing to its $20 billion of debt ($16 billion funded) and $1.4 billion of cash interest in 2017. WOWSERS. The company purports to have "an agreement in principle with the majority of [its] creditors and [its] financial sponsors that reflects widespread support across the capital structure for a comprehensive plan to restructure...$10 billion..." of debt.

The company notes $3.6 billion of revenue and unparalleled monthly reach ((we'll have more to say about this in this Sunday's Members-only newsletter (3/18/18) - this claim deserves an asterisk)). 

Still, as it also notes, the company faces significant headwinds. It states in its First Day Declaration,

"Among other factors, the global economic downturn that began in 2008 resulted in a decline in advertising and marketing spending by the Debtors’ customers, which resulted in a corresponding decline in advertising revenues across the Debtors’ business. Then, as the economy recovered, the Debtors’ industry faced new and intense competition from the rapidly-growing internet and digital advertising industry and the entry of on-demand streaming services, both of which siphoned off the share of advertiser revenues allocated by agencies and brands to broadcast radio. The Debtors have taken various operational steps to stem the negative effect of these trends; among other initiatives, the Debtors have successfully developed emerging platforms including its industry-leading iHeartRadio digital platform and nationally-recognized iHeartRadio-branded live events that are audio and video streamed and televised nationwide."

The company ought to expect these trends to continue.

Large creditors include Cumulus Media Inc. (~$5.6 million...yikes) and Spotify (~$2 million).  

• Jurisdiction: S.D. of Texas
• Capital Structure:    

• Company Professionals:
  • Legal: Kirkland & Ellis LLP (James Sprayragen, Anup Sathy, Brian Wolfe, William Guerrieri, Christopher Marcus, Stephen Hackney, Richard U.S. Howell, Benjamin Rhode, AnnElyse Gibbons) & Jackson Walker LLP (Patricia Tomasco, Matthew Cavenaugh, Jennifer Wertz)
  • Financial Advisor to the Company: Moelis & Co. 
    • Legal: Latham & Watkins LLP (Caroline Reckler, Matthew Warren)
  • Restructuring Advisor to the Company: Alvarez & Marsal LLC
  • Legal for the Independent Directors: Munger Tolles & Olson LLP (Kevin Allred, Seth Goldman, Thomas Walper, John Spiegel)
  • Financial Advisor to the Independent Directors: Perella Weinberg Partners LP
  • Claims Agent: Prime Clerk LLC (*click on company name above for free docket access)
• Other Parties in Interest:
  • Large Equity Holders: Bain Capital & Thomas H. Lee Partners
    • Legal: Weil Gotshal & Manges LLP (Matthew Barr, Christopher Lopez, Gabriel Morgan)
  • Potential Buyer: Liberty Media Corporation & Sirius XM Holdings Inc.
    • Legal: Weil Gotshal & Manges LLP (Stephen Karotkin, Ray Schrock, Alfredo Perez)
  • Successor Trustee for the 6.875% '18 Senior Notes and 7.25% '27 Senior Notes: Wilmington Savings Fund Society, FSB
    • Legal: White & Case LLP (Thomas Lauria, Jason Zakia, Erin Rosenberg, J. Christopher Shore, Harrison Denman, Michele Meises, Mark Franke, Michael Garza) & Pryor Cashman LLP (Seth Lieberman, Patrick Sibley, Matthew Silverman) & (local) Andrews Kurth Kenyon LLP (Robin Russell, Timothy A. Davidson II, Ashley Harper)
  • Successor Trustee for the 11.25% '21 Priority Guaranty Notes
    • Legal: Kelley Drye & Warren LLP (Eric Wilson, Benjamin Feder, Kristin Elliott)
  • Successor Trustee for the 14.00% Senior Notes due 2021
    • Legal: Norton Rose Fulbright (US) LLP (Jason Boland, Christy Rivera, Marian Baldwin Fuerst)
  • Term Loan/PGN Group
    • Legal: Jones Day (Thomas Howley, Bruce Bennett, Joshua Mester)
  • Ad Hoc Group of Term Loan Lenders
    • Legal: Arnold & Porter Kaye Scholer LLP (Michael Messersmith, Tyler Nurnberg, Sarah Gryll, Christopher Odell, Hannah Sibiski) 
  • TPG Specialty Lending Inc.
    • Legal: Schulte Roth & Zabel LLP (Adam Harris, David Hillman, James Bentley) & (local) Jones Walker LLP (Joseph Bain, Laura Ashley) 
  • Special Committees of the Board of Clear Channel Outdoor Holdings Inc.
    • Legal: Willkie Farr & Gallagher LLP (Matthew Feldman, Paul Shalhoub, Christopher Koenig, Jennifer Jay Hardy)
  • Ad Hoc Committee of 14% Senior Noteholders of iHeart Communications
    • Legal: Gibson Dunn & Crutcher LLP (Robert Klyman, Matt Williams, Keith Martorana, Matthew Porcelli) & (local) Porter Hedges LLP (John Higgins, Aaron Power, Samuel Spiers)
  • 9.00% Priority Guarantee Notes due 2019 Trustee: Wilmington Trust NA
    • Legal: Stroock & Stroock & Lavan LLP (Jayme Goldstein, Daniel Fliman, Brian Wells) & (local) Haynes and Boone, LLP (Charles Beckham Jr., Martha Wyrick, Kelsey Zottnick)
  • Citibank N.A.
    • Legal: Cahill Gordon & Reindel LLP (Joel Levitin, Richard Stieglitz Jr.) & (local) Locke Lord LLP (Berry Spears)
  • Delaware Trust Company
    • Legal: Quinn Emanuel Urquhart & Sullivan LLP (Benjamin Finestone, K. John Shaffer, Monica Tarazi, Victor Noskov)
  • Official Committee of Unsecured Creditors
    • Legal: Akin Gump Strauss Hauer & Feld LLP (Ira Dizengoff, Philip Dublin, Naomi Moss, Charles Gibbs, Marty Brimmage)

Updated 3/30/18

New Chapter 11 Filing - Orexigen Therapeutics Inc.

Orexigen Therapeutics Inc. 

3/12/18

Orexigen Therapeutics is a publicly-traded ($OREX) biopharmaceutical company with one FDA-approved product - "Contrave" - an adjunct to a reduced-calorie diet and exercise for chronic weight management in certain eligible adults. (Before we continue, please take a minute to appreciate the exquisite creativity these folks deployed with the name, "Contrave." Control + crave = Contrave. We hope they didn't shell out too much cash money to the brand consultants for that one). 

Anyway, the drug could theoretically service the 36.5% of adults the Center for Disease Control & Prevention has identified as obese, a potential market of 91-93 million people in the United States alone. And that number is predicted to rise to 120 million people in the next several years. Yikes: that's 33% of the U.S. population. Apropos, the drug is the number one prescribed weight-loss brand in the US with over 1.8 million prescriptions written to date, subsuming 700,000 patients. The drug is also approved in Europe, South Korea, Canada, Lebanon, and the UAE. 

All of that surface-level success notwithstanding, the company has lost approximately $730 million since its inception. This is primarily because it has been spending the last 16 years burning cash on R&D, clinical studies for FDA approval, recruitment, manufacturing, marketing, etc., both in and outside the U.S. And people wonder why drugs are so expensive. The company believes it could be profitable by 2019 under its existing operating model and revenue forecasts; it enjoys a patent until 2030. 

Obviously the patent is critical because the company, through its banker, attempted a sale prior to the bankruptcy filing but proved unsuccessful. The goal of the bankruptcy filing, therefore, is to effectuate a sale with the benefit of "free and clear" status. While no stalking horse bidder is lined up, The Baupost Group LLC, is leading a group of secured noteholders (including Ecori Capital, Highbridge Capital and UBS O'Connor) to provide a $35 million DIP credit facility and buy the company some time. Will they end up owning it? 

• Jurisdiction: D. of Delaware 
• Capital Structure: $165mm 0% '20 convertible notes (The Baupost Group LLC), $115mm 2.75% '20 convertible notes ($25 million outstanding, Wilmington Trust NA), $49.6mm 2.75% '20 convertible exchange senior notes ($38.9 million outstanding, US Bank NA) 
• Company Professionals:
  • Legal: Hogan Lovells LLP (Christopher Donolo, Eric Einhorn, Christopher Bryant, Jon Beck, Sean Feener) & (local) Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Andrew Remming, Jose Bibiloni)
  • Financial Advisor: E&Y
  • Investment Banker: Perella Weinberg Partners 
  • Claims Agent: KCC (*click on company name above for free docket access)
• Other Parties in Interest:
  • Prepetition Collateral Agent & Prepetition Trustee: U.S. Bank NA
    • Legal: Kelley Drye & Warren LLP (James Carr, Benjamin Feder)
  • DIP Lenders
    • Legal: Quinn Emanuel Urquhart & Sullivan LLP (Eric Winston)
  • DIP Administrative Agent: Wilmington Trust Company
    • Legal: Arnold & Porter (Tyler Nurnberg)
  • DIP Lender: Highbridge Capital Management LLC
    • Legal: Brown Rudnick LLP (Robert Stark, Stephen Levine, Uchechi Egeonuigwe) & (local) Whiteford Taylor & Preston LLC (Christopher Samis, L. Katherine Good, Aaron Stulman)
  • Official Committee of Unsecured Creditors
    • Legal: Elliott Greenleaf PC (Rafael Zahralddin-Aravena, Eric Sutty) & (local) Irell & Manella LLP (Jeffrey Reisner, Michael Strub Jr., Kerri Lyman)

Updated March 30, 2018

New Chapter 11 Bankruptcy - Cenveo Inc.

Cenveo Inc.

• 2/2/18 Recap: Publicly-traded ($CVO) large envelope and label manufacturer with roots tracing back 100 years filed for bankruptcy. Interestingly, you, our treasured PETITION readers, probably interact with Cenveo's products in your day-to-day life. Cenveo prints comic books you can buy at the bookstore, produces specialized envelopes used by JPMorgan Chase Bank ($JPM) and American Express ($AMEX) to deliver credit card statements, and manufactures point of sale roll receipts used in cash registers and prescription labels found on medication at national pharmacies. Why did it file for bankruptcy? Disruption. And debt. The company notes that its filing was necessary to tame its burdensome funded debt and corresponding annual $99.4mm debt payments (inclusive of cash and "principle" payments). In light of its leverage, the company apparently also suffered from other pressures on the business, including restrictive trade terms and/or the departure of business from vendors. But, wait! There's more. And its textbook disruption. Per the company, "In addition to Cenveo’s leverage issues, macroeconomic factors, including the introduction of new e-commerce, digital substitution for products, and other technologies, are transforming the industry. Consumers increasingly use the internet and other electronic media to purchase goods and services, pay bills, and obtain electronic versions of printed materials. Moreover, advertisers increasingly use the internet and other electronic media for targeted campaigns directed at specific consumer segments rather than mail campaigns." Ouch. To put it simply, every single time you opt-in for an electronic bank statement, you're f*cking over Cenveo. More from the company, "As society has become increasingly dependent on digital technology products such as laptops, smartphones, and tablet computers, spending on advertising and magazine circulation has eroded, resulting in an overall decline in the demand for paper products, and in-turn lowering reliance on certain of Cenveo’s print marketing business. In addition, there is generally a decline in supply of paper products in the industry, such that only a handful of paper mills control the majority of the paper supply. As a result, paper mills and other vendors that sell paper products have a large amount of leverage over their customers, including Cenveo. The overall decline in the paper industry combined with the diminished supply in paper products has led to overall decline in the industry, dramatically impacting Cenveo’s revenues." Consequently, the company has spent years trying to streamline operations and cut costs: it is not entirely clear from the company's filing, but this disruption clearly led to the "downsizing [of] its workforce," a reduction in its geographic footprint, and asset dispositions. But, ultimately, earnings couldn't manage the balance sheet. The company engaged its various parties in interest and was able to secure a (shaky?) restructuring support agreement and a commitment of financing in the amount of a $190 million ABL DIP Facility provided by the Prepetition ABL Lenders and a new $100 million DIP Term Facility backstopped by more than a majority of the holders of First Lien Notes. It will need to address its underfunded pensions (approximately $92.9mm). 
• Jurisdiction: S.D. of New York 
• Capital Structure: see below.
• Company Professionals:
  • Legal: Kirkland & Ellis LLP (Jayme Sprayragen, Jonathan Henes, Joshua Sussberg, Michael Slade, Gregory Pesce, Melissa Koss, George Klidonas, Natasha Hwangpo)
  • Financial Advisor: Zolfo Cooper LLC (Eric Koza)
  • Investment Banker: Rothschild Inc. (Neil Augustine, Dan Skolds, Matthew Chou, Philip Engel, Daniel Flanary, Thomas Galluccio, Trip Burke, Farhat Suvhanov)
  • Real Estate Consultants: VanRock Real Estate Consulting LLC
  • Claims Agent: Prime Clerk LLC (*click on company name above for free docket access)
  • New Independent Director: Eugene Davis
• Other Parties in Interest:
  • Prepetition ABL Agent; $190mm ABL DIP Facility Agent: Bank of America NA
  • $100mm DIP Term Facility Agent: Wilmington Savings Fund Society FSB
  • FILO Notes Trustee/First Lien Notes Trustee/Second Lien Notes Trustee/Unsecured Notes Trustee: Bank of New York Mellon
    • Legal: Riker Danzig Scherer Hyland & Perretti LLP (Joseph Schwartz, Curtis Plaza, Tara Schellhorn)
  • FILO Noteholder: Allianz GI US High Yield Fund
  • First Lien and Second Lien Noteholder: Brigade Capital Management, LP
    • Legal: Akin Gump Strauss Hauer & Feld LLP (Michael Stamer, David Zensky, Stephanie Lindemuth, James Savin, Kevin Eide)
  • Ad Hoc Committee of First Lien Noteholders
    • Legal: Stroock & Stroock & Lavan LLP (Brett Lawrence, Erez Gilad, Matthew Garofalo, Gabriel Sasson)
    • Financial Advisor: Ducera Partners LLC
  • Examiner: Susheel Kirplani
    • Legal: Quinn Emanuel Urquhart & Sullivan
  • Official Committee of Unsecured Creditors
    • Legal: Lowenstein Sandler LLP (Kenneth Rosen, Mary Seymour, Bruce Buechler, Bruce Nathan)
    • Financial Advisor: FTI Consulting Inc. (Samuel Star)

Source: DIP Motion

Updated 4/2/18

New Chapter 11 Filing - GenOn Energy Inc.

GenOn Energy, Inc.

• 6/14/17 Recap: NRG Energy Inc. ("$NRG") owned deregulated wholesale power generation corporation and operator of 32 power plants in 8 states (Mid-Atlantic & California) filed a bankruptcy case with a restructuring support agreement agreed to by NRG and holders of 90% of the funded debt. The plan for the restructuring is to delever the company by $1b with the holders of the unsecured senior notes obtaining equity in the reorganized entity from NRG (and the right to participation in rights offering for $900mm in exit financing). This is another in a line of recent power cases including Panda Temple Power, Homer City Generation LP, Illinois Power Generating Co., La Paloma Generating Company LLC. And it probably won't be the last. The company cited the following causes - in addition to its over-levered capital structure - for the bankruptcy filing: (i) flat demand for power over the past five years, (ii) excess capacity (in part due to insufficient power plant retirements), (iii) lower cost structure for competitors, and (iv) significantly depressed natural gas prices. "This combination has caused energy and capacity prices to fall. So has the Debtors' profitability as a result." In the mid-Atlantic, electricity cleared $100 per megawatt hour in early 2014 and now the price hovers around $30 per megawatt hour. And nat gas isn't predicted to recover to industry price highs at least until 2030. So, looks like the merger that created this combined mid-Atlantic/California entity and levered this sucker up to the sky was a bit ill-timed, hey? 
• Jurisdiction: S.D. of Texas (Judge Jones)
• Capital Structure: $ '18 RCF (NRG Energy Inc. & U.S. Bank NA), $691mm '17 7.875% Senior Notes & $649mm '18 9.50% Senior Notes & $490mm '20 9.875% Senior Notes (Wilmington Trust Company NA), $366mm '21 8.50% Senior Notes & $329mm '31 9.125% Senior Notes (Wilmington Savings Fund Socieity FSB)    
• Company Professionals:
  • Legal: Kirkland & Ellis LLP (James Sprayragen, David Seligman, Steven Serajeddini, W. Benjamin Winger, Christopher Hayes, AnnElyse Scarlett Gibbons) & (local) Zack A. Clement PLLC (Zach Clement)
  • Financial Advisor: McKinsey Recovery & Transformation Services U.S., LLC (Kevin Carmody, Tanner MacDiarmid, Sam Jacobs)
  • Investment Banker: Rothschild & Co. (Todd Snyder)
  • Claims Agent: Epiq Bankruptcy Solutions LLC (*click on company name above for free docket access)
• Other Parties in Interest:
  • Ad Hoc Committee of GenOn Note and GAG Notes
    • Legal: Ropes & Gray LLP (Keith Woffard, Stephen Moeller-Sally, Marc Roitman, Meredith Parkinson) & (local) Porter Hedges LLP (John Higgins, Joshua Wolfshohl, Rachel Thompson)
  • Ad Hoc Steering Committee of GAG Notes
    • Legal: Quinn Emanuel Urquhart & Sullivan LLP (David Gerger, Emily Smith, Benjamin Firestone, Daniel Holzman)
  • NRG Energy Inc.
    • Legal: Baker Botts LLP (Emanuel Grillo, Ian Roberts, Christopher Newcomb)
  • Wilmington Trust Company
    • Legal: Covington & Burling LLP (Ronald Hewitt, Dianne Coffino)
  • Issuing Bank: Citibank NA
    • Legal: Latham & Watkins LLP (Richard Levy, David Hammerman)

Updated 7/11/17 6:47 pm CT

New Filing - Stone Energy Corporation

Stone Energy Corporation

• 12/14/16 Recap: Louisiana-based oil-and-gas producer files prepackaged chapter 11 case to sell its Appalachia assets to TH Exploration III LLC (an affiliate of Tug Hill Inc.), and shed approximately $850mm of debt and $46mm of annual interest expense. The company faces a potential equity committee appointment - all the rage these days.
• Jurisdiction: S.D. of Texas
• Capital Structure: $360mm RCF, $300mm '17 1.75% convertible unsecured notes, $775mm '22 7.5% unsecured notes     
• Company Professionals:
  • Legal: Latham & Watkins LLP (David Heller, Josef Athanas, Caroline Reckler, Matthew Warren, Matthew Dillard, Christopher Harris) & (local) Porter Hedges LLP (John Higgins, Joshua Wolfshohl, Aaron Power)
  • Financial Advisor: Alvarez & Marsal LLC (Dean Swick)
  • Investment Banker: Lazard (David Kurtz) & Tudor Pickering & Holt & Co. (Chad Michael)
  • Claims Agent: Epiq Bankruptcy Solutions LLC (*click on company name for docket)
• Other Parties in Interest:
  • Agent of RCF (BofA)
    • Legal: O'Melveny & Meyers LLP (George Davis, Suzzanne Uhland, Michael Lotito, Sean Davis)
    • Financial Advisor: RPA Advisors
  • Bank of New York Mellon Trust Company N.A.
    • Legal: Heller Draper Patrick Horn & Dabney LLC (William Patrick III, Tristan Manthey, Cherie Dessauer Nobles)
  • Ad Hoc Group of Unsecured Lenders
    • Legal: Akin Gump (Charles Gibbs, David Zensky, Kevin Zuzolo, Meredith Lahaie, Michael Stamer)
    • Investment Banker: Intrepid Partners
  • Buyer: TH Exploration III LLC
    • Legal:
  • Exxon Mobil Corporation
    • Legal: Haynes & Boone LLP (Charles Beckham)
  • Independent Directors of the Board of Directors
    • Legal: Andrews Kurth Kenyon LLP (Robin Russell, Timothy Davidson, Ashley Harper)
  • Ad Hoc Committee of Shareholders
    • Legal: Quinn Emanuel Urquhart & Sullivan LLP (K. John Shaffer, Benjamin Finestone, David Gerger, Emily Smith, Victor Noskov)

Updated 1/20/17.