Blackhawk Mining, LLC – Kentucky Coal Miner Files Prepackaged Chapter 11, Pre-Petition Lenders to Own Emerged Debtors in Exchange for $582mn Debt Reduction

July 19, 2019− Privately held Blackhawk Mining, LLC and 21 affiliated Debtors (“Blackhawk” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-11595. The Debtors, a Kentucky-based operator of ten coal mining complexes in West Virginia and Kentucky, are represented by Christopher M. Samis of Potter Anderson & Corroon LLP. Further board-authorized engagements include (i) Vinson & Elkins as counsel, (ii) Centerview Partners LLC as financial advisor and investment banker, (iii) AlixPartners as restructuring advisor and (iv) Prime Clerk as claims agent. 

The Debtors’ lead petition notes between 5,000 and 10,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) PCC Liquidating Trust ($16.2mn notes claim), (ii) Joy Global Underground Mining ($13.5mn EQP repair claim) and (iii) Jennmar Corporation ($11.2mn roof claim). All 30 of the Debtors' top 30 creditors have claims in excess of $850k.

In a July 15th press release (see attachment 1.3 below) announcing the imminent filing of the pre-packaged Chapter 11, the Debtors advised that they had “reached an agreement with over 90% of its lenders on the terms of a financial restructuring. The transformative transaction will eliminate over 60% of the Company’s total debt and provide over $150 million of incremental liquidity. The transaction will be effectuated through a 'pre-packaged' bankruptcy filing that will allow the process to move swiftly to completion within 60 days and with no disruption to the Company’s employees, customers, or vendors.” The Debtors also began soliciting votes on July 15th.

Overview of the Restructuring Support Agreement (the "RSA") and Plan

Blackhawk has entered into a Restructuring Support Agreement with over 90% of its lenders and more than 80% of its equity holders and has commenced solicitation on a Plan of reorganization further to which the lenders under Blackhawk’s first and second lien term loans will receive a combination of debt and equity. Specifically, on the effective date of the Plan, the Debtors' $639.0mn first lien term loan will be discharged and lenders will receive 71% of the emerged Debtors' equity and $225.0mn of a newly issued $375.0mn first lien term loan. The Debtors' current $318.0mn second lien term loan will also be discharged and lenders will receive 29% of the emerged Debtors' equity. Based upon the Company’s current projections, pro forma leverage will be less than 2.0x debt to EBITDA and in line with industry peers.

The Disclosure Statement provides the following (more detailed) summary: "The RSA contemplates a comprehensive financial restructuring of the Debtors achieved through the Plan that will de-lever the Debtors’ balance sheet by approximately $650 million, while paying in full all non-funded debt claims against the Debtors. The key financial components and commitments of the restructuring are as follows:

• a commitment for senior secured super-priority debtor-in-possession financing facilities—the DIP ABL Facility and the DIP Term Facility—in an aggregate principal amount of $240 million, pursuant to the terms and conditions set forth in the DIP ABL Agreement and the DIP Term Agreement, respectively;
• a commitment for a post-Effective Date exit facility in an aggregate principal amount of $90 million, pursuant to the terms and conditions set forth in the Exit ABL Facility Documents;and
• the New First Lien Loan, a secured, first-lien term loan facility in an aggregate principal amount of $375 million issued on the Effective Date pursuant to the New First Lien Loan Documents.

The Plan contemplates stakeholder recoveries as follows:

• each holder of an Allowed First Lien Term Loan Claim shall receive on the Effective Date, in exchange for such Claim, its Pro Rata share of (1) 71% of the New Common Stock; and (2) $225 million of the New First Lien Loan on the terms and conditions set forth in the New First Lien Loan Documents;
• each holder of an Allowed Second Lien Term Loan Claim shall receive on the Effective Date, in exchange for such Claim, its Pro Rata share of 29% of the New Common Stock;
• all outstanding and undisputed General Unsecured Claims against the Debtors will be unimpaired and unaffected by the restructuring and will be paid in full in Cash, unless otherwise agreed to by Holders of General Unsecured Claims;
• all holders of Interests in Blackhawk will have the opportunity to accept the Plan in exchange for receiving the benefit of the releases under the Plan;
• settlement of more than $7 million of accounts payable owed to significant vendors, as contemplated by the RSA, by extending or otherwise modifying the payment terms thereof;
• cancellation of the Patriot Unsecured Note in exchange for (1) a $500,000 distribution to the Patriot Trust, to be made no later than the Effective Date; and (2) amendment of a prior settlement between Blackhawk and the Patriot Trust regarding the treatment of Blackhawk’s administrative claim in the Patriot Coal Corporation bankruptcy to reflect that the Patriot Trust will make no payment of any kind to Blackhawk;
• all Administrative Claims, Priority Tax Claims, and Other Secured Claims will be paid in full in Cash or receive such other treatment that renders such Claims unimpaired under the Bankruptcy Code; and
• mutual releases among the Debtors and the Consenting Parties, among others."

Below is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement)

• Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%
• Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%
• Class 3 (“First Lien Term Loan Claims”) is impaired and entitled to vote on the Plan. Estimated allowed claims are $539.0mn and expected recovery is 93.8% (The projected recovery for First Lien Term Loan Claims excludes debt rolled up pursuant to the Plan). Each holder of an Allowed First Lien Term Loan Claim shall receive its pro rata share of: (i) $225.0mn of the New First Lien Loan; and (ii) 71% of the New Common Stock in Reorganized Blackhawk.
• Class 4 (“Second Lien Term Loan Claims”) is impaired and entitled to vote on the Plan.  Estimated allowed claims are $318.3mn and expected recovery is 39.0%.  Each holder of an Allowed First Lien Term Loan Claim shall receive its pro rata share of 29% of the New Common Stock in Reorganized Blackhawk.
• Class 5 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%.
• Class 6 (“Debtor Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Expected recovery is 100% / 0 %.
• Class 7 (“Non-Debtor Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Expected recovery is 100% / 0 %.
• Class 8 (“Section 510(b) Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. Expected recovery is 0%.
• Class 9 (“Intercompany Interests”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Expected recovery is 100% / 0 %.
• Class 10A (“Class A Blackhawk Interests”) is impaired and entitled to vote on the Plan. Expected recovery is 0%.
• Class 10B (“Class B Blackhawk Interests”) is impaired and entitled to vote on the Plan. Expected recovery is 0%.
• Class 10C (“Class C Blackhawk Interests”) is impaired and entitled to vote on the Plan. Expected recovery is 0%.

Debtor-in-Possession ("DIP") Financing

The Debtors have announced that they have lined up DIP financing comprised of (i) up to $50.0mn in new money funding (the “New Money DIP Loans”) and (ii) a roll-up of up to $100.0mn of the Debtors’ pre-petition first lien term loans (the "DIP Term Facility"). The New Money DIP Loans will be made available in two tranches: $35.0mn upon issuance of an interim DIP financing order and the $15.0mn balance upon issuance of a final DIP financing order. Concurrently with entering into the DIP Term Facility, the Debtors will enter into a DIP asset-based revolving facility in an aggregate principal amount of up to $90.0mn.

Key Terms of the DIP Financing

• DIP Term Borrower: Blackhawk Mining LLC
• Guarantors: Each domestic subsidiary of the DIP Term Borrower (other than the Non-Filing Subsidiaries)
• DIP Term Agent: Cantor Fitzgerald Securities, as administrative agent and collateral agent 
• DIP Term Lenders: Funds managed or advised by the Consenting First Lien Lenders (including Knighthead Capital  Management, LLC ,  Solus Alternative Asset Management LP, Redwood Capital Management, LLC, the Ad Hoc First Lien Lender Group (as defined in the Restructuring Support Agreement and, together with Knighthead, Solus and Redwood, the “Specified  Lenders”) and the other Prepetition First Lien Term Lenders  that choose to participate in the DIP Term Facility, (collectively, the “DIP Term Lenders”)
• Amount & Type: A multiple-draw senior secured debtor-in-possession U.S. dollar term loan credit facility in an aggregate principal amount not to exceed $150.0mn (the commitments under the DIP Term Facility, the “DIP Term Commitments”; the loans under the DIP Term Facility, the “DIP Term Loans”), consisting of: (i) up to $50.0mn in respect of new money funding (the “New Money DIP Loans”) and (ii) a roll-up of up to $100.0mn of Prepetition First Lien Term Loans as provided below, subject to the terms and conditions of this DIP Term Facility Term Sheet and the DIP Term Documents. The borrowing of DIP Term Loans shall permanently decrease the DIP Term Commitments, and any DIP Term Loans repaid may not be reborrowed. The DIP Term Lenders shall make the New Money DIP Loans available to the DIP Term Borrower in up to two draws in the following manner (in each case upon the satisfaction of the conditions precedent described below): 
  1. A first draw of New Money DIP Loans on the Closing Date (as defined below) in an aggregate principal amount of up to $35 million (the related commitments, the “Initial New Money DIP Commitments”).
  2. A second draw of New Money DIP Loans within one business day after the entry of the Final DIP Order in an aggregate principal amount of up to $15 million (the related commitments, the “Delayed Draw New Money DIP Commitments” and, together with the Initial New Money DIP Commitments, the “New Money DIP Commitments”).An amount of Prepetition First Lien Term Loans held by DIP Term Lenders will be automatically substituted and exchanged for DIP Term Loans (“Roll-Up DIP Loans”) in an amount equal to $2.00 for each $1.00 of New Money DIP Loans funded by the DIP Term Lenders on each borrowing date (the “Roll-Up”).
• DIP ABL Facility: Concurrently with entering into the DIP Term Facility, the Debtors will enter into a debtor-in-possession asset-based revolving facility in an aggregate principal amount of up to $90.0mn (the “DIP ABL Facility” and, together with the DIP Term  Facility,  the  “DIP  Facilities”),  with  MidCap  Financial  Trust  as  the administrative agent thereunder (the “DIP ABL Agent” and, together with the DIP Term Agent, the “DIP Agents”).
• Exit Facility: Upon confirmation of the Acceptable Plan (as defined below) and the Company’s emergence from bankruptcy, the DIP Term Loans will be converted into exit term loans in accordance with the Acceptable Plan and the Restructuring Support Agreement and otherwise upon terms satisfactory to the Required DIP Term Lenders.
• Interest Rate: LIBOR + 9.50% per annum, with a LIBOR floor of 2.00%.
• Default Interest: All overdue amounts will bear interest at a rate equal to 2.00% per annum plus the rate otherwise applicable to the relevant DIP Term Loans.
• Fees: 
  • Upfront  Fee/Original  Issue  Discount: 1.00% of the aggregate principal amountof the New Money DIP Commitments, which shall be due and payable on the applicable funding date thereof to the DIP Term Lenders in cash ratably based on their respective New Money DIP Commitments, which fee may, at the election of the Required DIP Term Lenders, be in the form of original issue discount 
  • Unused  Line  Fee: 1.00% per annum on the actual daily amount of the unused Delayed Draw New Money DIP Commitments, which shall be paid on the funding date thereunder to the DIPTerm Lenders in cash ratably  based  on  their  respective  Delayed  Draw  New  Money  DIP Commitments.
  • Exit Fee: 1.00% of the aggregate principal amount of the New Money DIP Loans, which shall be due and payable in cash on the Termination Date or, in the case of New Money DIP Loans prepaid in whole or in part prior to the Termination Date, on the date of such prepayment.

Pre-petition Capital Structure

As of July 15, 2019, the Debtors had approximately $1.09bn in total funded debt obligations, consisting of: 

1. approximately $85.0mn outstanding under the Prepetition ABL Facility;
2. approximately $639.0mn in aggregate principal amount outstanding under the First Lien Term Loan Facility;
3. approximately $318.0mn in aggregate principal amount outstanding under the Second Lien Term Loan Facility;
4. approximately $16.0mn in aggregate principal amount outstanding under the Patriot Unsecured Note; and
5. approximately $28.0mn in aggregate principal amount of Other Secured Debt outstanding.

The following table summarizes the Debtors’ prepetition capital structure:

Events Leading to the Chapter 11 Filing

The Disclosure Statement provides the following overview as to the events leading to Blackhawk’s Chapter 11 filing: "[The] Company pursued a strategic acquisition strategy starting around 2014 to acquire various metallurgical assets, including those out of large coal bankruptcies, anticipating that the pricing environment in the metallurgical coal market would improve starting in late 2015. In part to effectuate these transactions, the Debtors took on certain debt, and ultimately entered into the First Lien Term Loan Agreement and the Second Lien Term Loan Agreement. 

The Company’s strategic growth proved to be a double-edged sword. On one hand, it significantly increased the Company’s position in the metallurgical coal market at a time when asset prices were depressed relative to today’s prices. The Company continues to benefit from this position in the current market. The price of high volatile A metallurgical coal has risen from $75 per ton to an average of $188 per ton over the last two years, providing a significant tailwind for the Company. On the other hand, the pricing environment for metallurgical coal did not improve until late 2016, and the debt attendant to the Company’s acquisition strategy in 2015 placed a strain on the Company’s ability to maintain its then-existing production profile while continuing to reinvest in the business. 

During this time, to defer expenses, the Company permanently closed over 10 coal mines (with over 5 million tons of productive capacity), idled the Triad complex, and depleted inventories of spare equipment, parts, and components. Furthermore, once the coal markets began to improve, the Company was forced to make elevated capital expenditures and bear unanticipated increases in costs—for example, employment costs rose approximately 25% between 2016 and 2018—to remain competitive. The confluence of these factors eventually made the Company’s financial position untenable."

Key Dates

• Record Date: July 11, 2019
• Commencement of Prepetition Solicitation: July 15, 2019
• Voting Deadline: July 26, 2019
• Objection Deadline: August 20, 2019, 
• Anticipated Confirmation Hearing Date: August 27, 2019 

The Disclosure Statement attached the following documents:

• Exhibit A: Plan of Reorganization
• Exhibit B: Corporate Structure of the Debtors
• Exhibit C: Restructuring Support Agreement 
• Exhibit D: Financial Projections
• Exhibit E: Valuation Analysis
• Exhibit F: Liquidation Analysis

About the Debtors

The Debtors are a privately-owned coal producer headquartered in Lexington, Kentucky and operating in the Central Appalachian Basin of the United States. Since its founding in 2010, the Debtors have steadily grown from a single mining complex producing thermal coal to ten active mining complexes in West Virginia and Kentucky producing metallurgical coal, thermal coal, pulverized coal injection, and stoker coal, which the Debtors sell domestically and abroad to a diverse set of end markets. The Debtors control 1.37bn tons of proven and probable reserves, with an additional 0.8bn tons of resources. Over 55%, or 0.7bn tons, of the Debtors' reserves are associated with its metallurgical coal segment. 

In 2018, the Debtors produced approximately 8.8mn tons of metallurgical coal and 4.6mn tons of thermal coal, generating approximately $1.09bn in revenue?76% attributable to its metallurgical segment and 24% attributable to its thermal segment. The Debtors employ approximately 2,8 00 employees, consisting of approximately 50 employees located at its corporate headquarters and 2,749 employees located at the Debtors' ten active mining complexes.

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