Legacy Reserves Inc. – Texas Unconventional Play Operator Files Pre-Arranged Chapter 11; Agrees RSA with RBL and Second Lien Lenders to Equitize $816.0mn of Prepetition Debt

June 18, 2019 − Legacy Reserves Inc. and 10 affiliated Debtors (NASDAQ: LGCY, "Legacy" or the "Debtors") filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 19-33395. The Midland, Texas based Debtors, an independent energy company focused on the horizontal development of unconventional plays in the Permian Basin, are represented by Duston McFaul of Sidley Austin LLP. Further board-authorized engagements include (i) Perella Weinberg Partners, and its affiliate Tudor Pickering Holt & Co., as financial advisor, (ii) Alvarez & Marsal as restructuring advisor and (iii) Kurtzman Carson Consultants LLC as claims agent. 

The Company’s petition notes between 25,000 and 50,000 creditors; estimated assets between $500mn and $1bn; and estimated liabilities between $1bn and $10bn. As required in respect of SEC reporting companies, the Debtors further note that as at March 31, 2019 their estimated assets were $1.42bn and estimated liabilities were $1.68bn. Documents filed with the Court list the Company's three largest unsecured creditors as
(i) Wilmington Trust, National Association (as Trustee in respect of $218.1mn of 8% Senior Notes Due 2020), (ii) Wilmington Trust, National Association (as Trustee in respect of $134.2mn of 6.625% Senior Notes Due 2021) and (iii) Wilmington Trust, National Association (as Trustee in respect of $112.3mn of 8% Convertible Senior Notes Due 2020).

The Debtors also list a number of significant unsecured creditors in respect of trade debt, notably (i) Jupiter JV, LP ($3.9mn), (ii) Terra Energy Holdings LLC ($3.1mn), (iii) FTS International Services LLC ($2.6mn), (iv) McVay Drilling Co ($1.7mn) and (v) B&L Pipeco Services Inc. The Debtors have stated their intention to pay trade creditors in full.

Chapter 11 Objectives

In a declaration in support of the Chapter 11 filing (the “Westcott Declaration”) [Docket No. 2], James Daniel Westcott, the Debtors' Chief Executive Officer (CFO from September 2012 until March 2019), summed up Legacy's Chapter 11 objectives: "Despite the Company’s efforts to navigate through the last several years of industry distress by reorganizing its corporate structure in an effort to facilitate the raising of additional capital, as well as efforts to optimize operations and reduce expenses, the Company, in consultation with its professionals, concluded that an open market process to market its assets and refinance its maturing debt was the best path forward. Based in large part on the results of this process, the Company ultimately determined that pursuing a potential restructuring of its funded debt was necessary to address impending defaults and its approximately $1.4 billion in aggregate funded indebtedness. By filing these chapter 11 cases, the Company intends to substantially de-lever its capital structure and reduce the go-forward cost of capital for its otherwise healthy business. The Debtors do not intend to conduct significant operational restructuring during the course of these chapter 11 cases. The proposed restructuring, as further described below, is intended to be a financial restructuring that will right-size the Debtors’ capital structure and provide the necessary go-forward liquidity to permit them to compete and grow in today’s challenging oil and gas environment. The Global RSA contemplates $256.3 million in backstopped equity commitments, $500.0 million in committed exit financing from the existing RBL Lenders, the equitization of approximately $815.8 million of prepetition debt, and payment in full of the Debtors’ general unsecured creditors."

On June 11th, the Legacy issued a press release announcing (i) its intention to imminently file a pre-arranged plan of reorganization (the "Plan") and (ii) the execution of a restructuring support agreement (the "Restructuring Agreement") with lenders under each of a reserve based revolving credit facility ("RBL Lenders") and second lien term loan ("Second Lien Lenders"). On June 14, 2019, the Debtors went one step further, announcing that a last critical stakeholder group (holders of Legacy's 6.625% Senior Notes due 2021, 8% Senior Notes due 2020 and 8% Convertible Senior Notes due 2023, together, the "Supporting Noteholders") had also signed up to the RSA. In the latter press release, Legacy stated: "The Global RSA represents a broad agreement of creditor constituencies across all tranches of the Company's capital structure on the terms of a pre-arranged plan of reorganization (the 'Plan') that the parties have agreed to support. The Global RSA contemplates a $256.3 million backstopped equity commitment and rights offering, $500 million in committed exit financing from certain of the existing RBL Lenders, the equitization of approximately $797.2 million of principal outstanding debt, a potential additional equity investment of $125 million, and payment in full of the Company's trade and other unsecured creditors."

Dan Westcott, the Debtors' Chief Executive Officer, added, "After exploring all options and months of negotiations, we are very pleased to have reached an agreement for a consensual restructuring with our RBL Lenders, Second Lien Lenders and the Noteholder Group.  We believe that the restructuring contemplated by the Global RSA will provide us with the capital structure and liquidity to compete and grow in today's challenging oil and gas environment. We plan to continue working with our creditor constituencies to move through the restructuring process expeditiously with minimal operational disruptions." 

Proposed Plan(s)

In a June 14, 2019 8-K, the Debtors detailed two versions of the their anticipate Chapter 11 Plan, one that includes the Supporting Noteholders…and one that does not. The 8-K states: "

The Amended Restructuring Support Agreement further contemplates that a Plan supported by the Supporting Creditors (the ‘Supporting Creditors Plan’) will be filed with the Bankruptcy Court, provided, however, if the Supporting Noteholders terminate the Amended Restructuring Support Agreement in accordance with the terms of the Amended Restructuring Support Agreement (a ‘Noteholder Termination’), a Plan, supported by only the Supporting Lenders (the ‘Supporting Lenders Plan’) will be filed with the Bankruptcy Court.

The Supporting Creditors Plan will provide for the following, among other things:

• all holders of claims arising under the DIP Facility (as defined below) will receive, in full satisfaction of their respective claims (i) on account of claims under the New Money Facility (as defined below), payment in full in cash, (ii) on account of claims under the Refinancing Facility (as defined below), distribution of cash and commitments under the Exit Facility and/or (iii) if the Exit Facility is not consummated, payment in full in cash;
• all holders of claims arising under the Prepetition RBL Credit Agreement will receive, in full satisfaction of their respective claims, (i) distribution of their pro rata share of commitments under the Exit Facility in exchange for the claims arising under the Prepetition RBL Credit Agreement or (ii) if the Exit Facility is not consummated, payment in full in cash;
• all holders of claims arising under the Prepetition Term Loan Credit Agreement will receive their pro rata share of 51.40% of the new common stock (the ‘New Common Stock’) to be issued by Legacy, as reorganized pursuant to and under the Plan (‘Reorganized Legacy’) approximately;
• holders of claims arising under the 2020 Notes Indenture, the 2021 Notes Indenture and the 2023 Notes Indenture (the ‘Noteholders’) will receive their respective pro rata share of (i) 2.50% of the New Common Stock, subject to dilution, (ii) subscription rights to participate in a $66.5 million rights offering (the ‘Supporting Creditor Plan Rights Offering’), which can be exercised to the extent that such Noteholders are “accredited investors” as defined under Regulation D promulgated under the Securities Act of 1933, as amended (“Securities Act”), and (iii) a share premium of 1.50% of  the New Common Stock, subject to dilution, available to accredited investors that participate in the Supporting Creditor Plan Rights Offering and non-accredited investors;
• all existing equity interests in Legacy will receive no recovery under the Plan and will be extinguished;
• a $189.8 million committed equity investment by the Supporting Term Lenders, as described below under the caption ‘Backstop Commitment Agreements – Sponsor Backstop Commitment Agreement;’
• at the option of the Supporting Term Lenders, an offering of up to $125 million of New Common Stock to third parties, the Supporting Term Lenders or the Noteholders; and
• the establishment of a customary management incentive plan at Reorganized Legacy under which 10% of the New Common Stock will be reserved for grants made from time to time to employees of Reorganized Legacy.

The Supporting Lenders Plan will provide for the following, among other things:       

• all holders of claims arising under the DIP Facility will receive, in full satisfaction of their respective claims (i) on account of claims under the New Money Facility, payment in full in cash, (ii) on account of claims under the Refinancing Facility, distribution of cash and commitments under the Exit Facility and/or (iii) if the Exit Facility is not consummated, payment in full in cash;
• all holders of claims arising under the Prepetition RBL Credit Agreement will receive, in full satisfaction of their respective claims, (i) distribution of their pro rata share of commitments under the Exit Facility in exchange for the claims arising under the Prepetition RBL Credit Agreement or (ii) if the Exit Facility is not consummated, payment in full in cash;
• all holders of claims arising under the Prepetition Term Loan Credit Agreement will receive their pro rata share of 98.00% of the New Common Stock, subject to dilution;
• the Noteholders will receive their respective pro rata share of (i) 2.00% of the New Common Stock, subject to dilution, and (ii) subscription rights to participate in a $100.0 million rights offering (the ’Supporting Lenders Plan Rights Offering‘ and, together with the Supporting Creditors Plan Rights Offering, the ’Rights Offering’) to the extent that such Noteholders are ’accredited investors’ as defined under Regulation D promulgated under the Securities Act;
• all existing equity interests in Legacy will receive no recovery under the Plan and will be extinguished;
• a $200.0 million committed equity investment by the Supporting Term Lenders, as described below under the caption ’Backstop Commitment Agreements – Lender Backstop Commitment Agreement;‘ and
• the establishment of a customary management incentive plan at Reorganized Legacy under which 10% of the New Common Stock will be reserved for grants made from time to time to management employees of Reorganized Legacy.

DIP and Exit Financing

The Restructuring Agreement contemplates that the Debtors will obtain debtor-in possession ("DIP") financing from certain existing RBL Lenders, including Wells Fargo Bank, National Association. The DIP financing, subject to Court approval, will refinance portions of the Company's existing reserve-based credit facility and provide an additional $100 million in new money to support the Company's day-to-day operations and finance the restructuring process.  The Restructuring Agreement further provides that, upon confirmation of the Plan and emergence from chapter 11, the Company will obtain access to a senior secured asset-based lending credit facility in a maximum amount of $500 million provided by certain of the existing RBL Lenders. 

The Debtors have provided the following key terms in respect of the DIP financing:

• Borrower: Legacy Reserves LP
• Facilities: A senior secured priming superpriority DIP revolving loan credit facility in an aggregate principal amount of up to $350.0mn (the “DIP Facility”), consisting of (i) a new money revolving loan facility in an aggregate amount of up to $100.0mn (the “New Money Facility”), $35.0mn of which would be available on an interim basis and which will include a sub-facility of up to $1.0mn for the issuance of letters of credit, and (ii) a refinancing term loan in the amount of  $250.0mn (the “Refinancing Facility”).
• Interest: Borrowings under the (i) New Money Facility will bear interest, at the option of the Company, at a rate per annum equal to the alternate base rate (the “ABR”) plus 4.25% or LIBOR plus 5.25% and (ii) the Refinancing Facility will bear interest at a rate per annum equal to the ABR plus 3.50%.
• Fees: The Debtors will be required to pay an unused commitment fee equal to 1.00% per annum to the lenders under the New Money Facility in respect of the unused commitments thereunder.
• Maturity: Earliest to occur of (i) eight months after the petition date, (ii) 35 days after the entry of the interim order of the Bankruptcy Court approving the DIP Facility on an interim basis, if the Bankruptcy Court has not entered the final order on or prior to such date, (iii) upon the Bankruptcy Court’s approval of a plan of reorganization and the Company’s exit from Chapter 11, (iv) upon the sale of substantially all of the equity or assets of the Company and (v) the termination of the DIP Facility during the continuation of an event of default under the DIP Credit Agreement or otherwise pursuant to the terms of the DIP Credit Agreement or by order of the Bankruptcy Court.
• Use of Proceeds: Proceeds of the DIP Credit Agreement may be used for (i) transaction costs, fees and expenses, (ii) working capital and general corporate purposes in accordance with a budget approved by the lenders, (iii) bankruptcy-related costs and expenses (including restructuring fees and adequate protection payments) and (iv) in the case of the Refinancing Facility, to refinance amounts existing under the Company’s existing credit agreements.
• Security: The obligations under the DIP Credit Agreement will be secured by a first priority lien on substantially all of the assets of the Company, subject to limited exceptions provided for in the DIP Motion.

Events Leading to the Chapter 11 Filing

The Westcott Declaration detailed the events leading to Legacy Reserve’s Chapter 11 filing, stating: 

"The oil price downturn in late 2014 dealt a blow to the oil and gas industry and to the Company in particular. The price of oil hit a high of $107.26/bbl on June 20, 2014, only to plummet to less than half that value by the year’s end. The price per barrel for oil ultimately bottomed out at $29.42/bbl over a year later on January 15, 2016, and has still not risen anywhere near its 2014 levels in the ensuing years. With such an oil price environment, investors’ confidence eroded and their interest in new-money equity investment waned, particularly with producers with high leverage metrics. 

For exploration and production MLPs like Legacy Reserves LP, the business model requires growth through acquisitions and is predicated on relatively consistent access to new equity or debt capital. Fortunately, just prior to the downturn in 2014, the Company was able to secure over $850 million of long-term capital: $300 million from the issuance of the 2021 Senior Notes, $237.5 million of perpetual preferred equity (which was converted into the right to receive shares of Legacy common stock in the Corporate Reorganization), and over $315 million of common equity. In addition, the Company entered into the Prepetition RBL Credit Agreement that year.

The Company entered 2015 poised with fresh capital and in a strong liquidity position relative to many of its peers, it began to see unique and attractive acquisition opportunities in the midst of the downturn. In mid-2015, the Company made two acquisitions of natural gas properties at a cost totaling over $540 million. These acquisitions were funded entirely by borrowings under the Prepetition RBL Credit Agreement. In hindsight, despite the GP Board’s and management’s favorable view of the potential future opportunities afforded by these acquisitions and the high-caliber employees hired by the Company in connection therewith, these two acquisitions consumed disproportionately large amounts of the Company’s liquidity during a difficult industry period."

Prepetition Capital Structure

The Debtors prepetition capital structure consists of:

About the Debtors

Legacy Reserves Inc. is an independent energy company engaged in the development, production and acquisition of oil and natural gas properties in the United States.  Its current operations are focused on the horizontal development of unconventional plays in the Permian Basin and the cost-efficient management of shallow-decline oil and natural gas wells in the Permian Basin, East Texas, Rocky Mountain and Mid-Continent regions. Additional information regarding the Company is available at www.legacyreserves.com.

Additional Engagements

PJT Partners LP is acting as financial advisor for sponsor GSO Capital and Latham & Watkins LLP is acting as GSO Capital's legal advisor.

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