All American Oil & Gas Incorporated – Files Chapter 11, Accuses New Senior Lenders of Forcing Bankruptcy with “Loan to Own” Strategy

November 12, 2018 – All American Oil & Gas Incorporated (“AAOG”) and two affiliated Debtors (Western Power & Steam, Inc. (“WPS”) and Kern River Holding Inc. (“KRH”) and together with AAOG and WPS, the “Company” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Western District of Texas, lead case number 2018-52693 [Docket No. 1]. The Company, an independent oil company located in San Antonio, Texas, is represented by Deborah D. Williamson of Dykema Gossett. Further board-authorized engagements include Hogan Lovells as counsel and Houlihan Lokey as financial adviser. The Company’s petition notes between 1 and 50 creditors; estimated assets between $100 million and $500 million; and estimated liabilities between $100 million and $500 million. Documents filed with the Court list the Company’s three largest unsecured creditors as (i) Camden Financial Services (a $4.2 million claim), (ii) Air Quality Consultants, Inc. (a $1.8 million claim) and (iii) Kern USA, Inc. (a $700,000 claim). 

Events leading up to the Chapter 11 filing

In a declaration in support of the Chapter 11 filing (the “Morris Declaration”) [Docket No. 27], Patrick Morris, the Company’s President, detailed the events leading to the Company’s Chapter 11 filing. The Morris Declaration makes it very clear that the Company’s view is that its predicament has little to do with economic performance and much to do with corporate skulduggery. After noting that KRH is the “rare E&P company that has successfully weathered the great disruptions in the oil and gas market of the last several years” and that KRH “is cash flow positive-with approximately $25 million in EBITDA in 2017 and a similar, but slightly higher EBITDA projected for 2018,” the Morris Declaration details the efforts of a newly formed company to leverage its purchase of senior debt to acquire the Company through a “loan to own strategy.”

The Morris Declaration asserts that, “KRH is the borrower on an $87.6 million first lien credit facility (the ‘First Lien Facility’)  and  a $50 million second  lien credit facility (the ‘Second Lien Facility’ and together with the First  Lien Facility,  the ‘Credit  Facilities’),  both   of which  were issued  by a fund  of Alliance-Bernstein (‘AB’) in September 2016 and August 2015, respectively, and are due on December 31, 2019 and June 30, 2020, respectively. AAOG and WPS are each guarantors of these Credit Facilities. Given its strong financial performance, and the substantial increase in oil prices from when it entered into these loans, KRH anticipated refinancing its Credit Facilities over the next 14 months, in advance oft heir scheduled maturities, as it has repeatedly done in the past.   It was forced to  change  that  plan,  however,  when  newly  created  Kern  Cal  Oil 7 LLC (‘KCO7’), which, upon information and belief, is an affiliate of Grade 6 Oil, LLC (‘Grade 6’), itself a newly created company, acquired the Company’s secured debt from AB in mid-October 2018.

From the outset, KCO7 did not act as a typical lender but began to implement a predatory ‘loan to own’ strategy. This culminated in the written declaration of a covenant default delivered to two AAOG Board members, myself and the Company’s general  counsel only minutes into the meeting that KCO7 had called to discuss purchasing the Company’s operating assets, and before KCO7 had even closed on the purchase of the secured debt. KCO7’s principals include two former investment bankers (Cary Meadow and Paul Kromwyk) who were fired allegedly for cause from AAOG’s and KRH’s former investment banker and financial advisor Cappella Capital Corporation (“Cappella”)….Based, I believe, on the insights gained from access to the Company’s confidential materials and inside information, Messrs. Kromwyk and Meadow, having left Cappella, and first acting as principals of Grade 6 Oil, approached the Company in August 2018 while doing diligence on their anticipated AB debt purchase. During the parties’ initial conversations, they stated to me and others in my presence their belief that AAOG’s equity was worthless, a  belief premised on  the fact that AB was allegedly willing to sell its debt at a discount. They also stated that they (and their still unidentified investor) had no real interest in being a lender to the Company but rather intended to use their debt interest to acquire the Company and its assets. In early October-about two weeks before their purchase of  AB’s  debt  would  close, the  KCO7 principals began to execute on their strategy, proposing an (unworkable) sale transaction for little to no value to the AAOG shareholders. 

The Morris Declaration Continues, “KRH was scheduled to make an interest payment to KCO7 under the Second Lien Credit Agreement on November 8, 2018. On November 5, 2018, KCO7 provided an interest notice to KRH requesting an interest payment at a default rate of 3% above the base rate in the Second Lien Credit Agreement in a total cash amount of $1,492,853.45 and a payment-in-kind interest of $1,274,340.84. Given the current circumstances-including the disputed Event of Default for the alleged covenant breach, the now-accruing default interest, the vast difference of views between the paities regarding the Company’s equity value, and the unlikelihood that the Company could successfully refinance KCO7’s debt under this confluence of circumstances­ KRH determined that making the interest payment under the present circumstances, and continuing to engage with KCO7 without bankruptcy court protection, jeopardized bath the Company’s short term ability to meet its going concern obligations and its long term ability to maximize the value of their businesses for their stakeholders. The Company thus decided not to make the scheduled interest payment, and to instead file these cases to protect the interests of unsecured creditors, the equity value of their shareholders and to restructure or refinance their secured debt.”