July 1, 2019 − Blackjewel L.L.C. and four affiliated Debtors ("Blackjewel" or the "Debtors") filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of West Virginia, lead case number 19-30289. Blackjewel, a miner and processor of metallurgical, thermal and other specialty and industrial coals, is represented by Joe M. Supple of Supple Law Office. Further board-authorized engagements include (i) Squire Paton Boggs (US) LLP as bankruptcy counsel, (ii) FTI Consulting, Inc as financial advisor, (iii) Jefferies LLC as investment banker and (iv) Prime Clerk as claims agent.
The Company’s petition notes between 1,000 and 5,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $500.0mn and $1.0bn. Documents filed with the Court list the Company's five largest unsecured creditors as (i) the Department of the Interior-ONRR ($60.1mn royalties claim), (ii) Campbell County Treasurer ($37.1mn tax claim), (iii) Wyoming Department of Revenue ($11.6mn tax claim), (iv) Internal Revenue Service ($10.3mn tax claim) and (v) United Central Industrial Supply ($8.9mn trade claim). All 30 of the largest unsecureds have claims in excess of $1.5mn.
In a press release announcing the filing, Jeff Hoops, Blackjewel's founder and CEO, stated: "Although Blackjewel was able to adequately manage its liquidity and continue its operations for several years while scores of its competitors filed for bankruptcy, it very recently lost the support of its senior secured lender. This impacted short-term liquidity which necessitated today's actions. Hoops added "the Company has arranged post-petition financing which is subject to court approval. Accordingly, no assurance can be given that a reorganization under Chapter 11 will be successful. If approved, the new DIP financing and cash generated from Blackjewel's ongoing operations is expected to provide the liquidity necessary to support the business during the reorganization process and allow the company to continue operations and customer shipments in an uninterrupted manner during the court-supervised process."
The Debtors are requesting authority to access $20.0mn of debtor-in-possession ("DIP") financing effectively to be provided by Mr. Hoops himself; $11.0mn of this DIP financing will be used to roll-up prepetition debt (owed to Mr. Hoops) with the balance comprising new money financing.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Hoops Declaration”), Hoops detailed the events leading to the Debtors’ Chapter 11 filing. The Hoops Declaration provides a particularly well presented, albeit now familiar, overview of the issues facing the coal sector in general and complements that with an unusually frank explanation of debtor-specific challenges: "Dating back to 2012, the coal industry has been under intense pressure driven by a combination of declining commodity prices, reduced domestic demand for thermal and metallurgical coal, and increased oversight and costs associated with regulatory compliance. As a result, the industry as a whole has been operating in a generally higher cost environment than prior periods.
A combination of an abundant, cheap and reliable alternative fuel in the form of natural gas, increased usage of renewable sources of energy, and the shutting down of coal fired power generation largely due to increased regulatory pressure and costs has severely impacted demand for thermal coal domestically. Thermal coal demand in the domestic electric power sector has declined from 935 million tons in 2011 to 636 million tons in 2018 and coal has seen its share of the domestic electricity generation market reduce from 43% in 2011 to 31% in 2017.
In this period of declining demand, increased federal and state regulatory scrutiny has significantly increased the cost of compliance. Changes to regulations surrounding health and safety, permitting and licensing requirements, environmental protection and the reclamation and restoration of mining properties along with increased enforcement of existing laws has had a ignificant impact, reducing mine productivity and increasing the cost of maintaining compliance.
The impact of the macro and regulatory environment is not isolated to the Debtors performance. The entire U.S. mining complex has been impacted by these events. A growing number of peers have filed for bankruptcy over the course of the past 5+ years. The entire industry either has gone through, or is currently going through, a period of financial distress and reorganization.
In addition to general industry pressure and downturn, the Debtors have encountered a number of operational issues since 2017. Specifically, the Debtors have faced, among others, the following:
- In October 2017, Noble Group, the Debtors’ former partner in MR Coal (the Company’s exclusive marketing partner prior to BJMS) informed the Debtors of its intention to exercise its put right and terminate its contractual relationship with the Debtors. Prior to this notification, MR Coal, at the direction of Noble, had started to unwind advances it had made to the Debtors under the operative agreements. These actions resulted in a significant reduction in liquidity at the Debtors.
- On November 6, 2017, a major roof collapse occurred at the Lone Mountain mining complex causing a shutdown that significantly impacted production. The Debtors believe that the associated impact on production resulted in approximately $1.4 million in lost revenues.
- On October 5, 2017, Kentucky made sweeping changes to its workers’ compensation laws, including increasing the compensation rate from 24% to 48% and shifting the burden of black lung claims entirely to insurance companies rather than a shared burden between the state and the insurance company. The resulting increase in workers’ compensation insurance rates cost the Debtors more $20 million dollars and then led the Debtors to decide to become largely self-insured. The decision to become self-insured also had significant costs and required the Debtors to maintain an escrow account with $11 million at a negative impact to liquidity.
- In the second half of 2017, at the request of its lenders, the Debtors locked-in pricing for its projected 2018 metallurgical coal volumes earlier than would have otherwise been typical. Unfortunately, this was followed by a sharp rise in the benchmark price for metallurgical coal that negatively impacted 2018 revenue by $100-150 million.
- Various flooding events across the midwest in 2019 have severely impacted rail shipments from the Debtors’ Western Division mining operations. Starting in March 2019, the Debtor started to experience a material reduction in shipments by rail due to severe damage to the rail lines used to move the Debtors’ coal. The impact from the flooding is ongoing, with an estimated $30 million in lost sales directly attributable to it."
Ultimately, the continued operational challenges led the Debtors' senior lender, Riverstone Credit Partners (“Riverstone”) to pull the plug on a 18-month, $28.0mn term loan with a maturity date of July 17, 2019. The Hoops Declaration continues: "On March 11, 2019, the Debtors became aware that they would not meet the leverage ratio negative covenant in the Riverstone Facility for the period ended December 31, 2018 and provided notice of that default to Riverstone. The existence of this default materially impacted the Debtors’ ability to refinance the Riverstone Facility and cut-off their right to extend it through January 17, 2020.
On June 26, 2019, Riverstone informed the Debtors that it was no longer willing to extend the maturity and that it expected to paid as and when due on July 17, 2019. Following that communication, and given the Debtors’ other liquidity challenges, the Debtors determined in their business judgment to engage a financial advisor and restructuring counsel to advise on strategic alternatives including the possibility of an emergency chapter 11 filing."
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