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Sanchez Energy Corporation – Unsecured Noteholders Launch Broadside at DIP Financing from Pre-Petition First Lien Noteholders, Question Board Competency and Executive Compensation


August 13, 2019 – Certain holders of the Debtors' unsecured notes (the “Ad Hoc Group”) objected [Docket No. 74] to the Debtors' request for $350.0mn in debtor-in-possession ("DIP") financing on numerous grounds: accusing the Debtors of ignoring their pleas for a place at the pre-petition table; accusing the holders of the Debtors' 7.25% Senior Secured First Lien Notes due 2023 (the "First Lien Notes," the holders of which are also the Debtors' DIP lenders) of unilateral and unlawful efforts to skew creditor recoveries; and accusing the Debtors' board (and in particular its nominally independent directors) of being asleep at the switch, focusing on efforts to protect themselves as opposed to the bankrupt estates (eg obsessing with releases) and otherwise complicit in improper payments to executives. 

The Ad Hoc Group is comprised of holders of more than 65% of the aggregate amount of the Debtors' (i) 7.75% senior notes and (ii) 6.125% senior notes (the “Unsecured Notes”). Given the vitriolic nature of the objection (including its frontal attack on the competence of the Debtors' "utterly futile" independent Directors), the quantum of debt held by the Ad Hoc Group (the Unsecured Notes total $1.75bn, vis-a-vis $500.0mn of First Lien Notes) and the Debtors' $2.16bn in assets (as per their Petition, there is clearly a lot to play for after the $500.0mn of First Lien Notes is made whole), this objection underscores hardening battle lines between the Debtors (allied with the First Lien Noteholders) and the Ad Hoc Group.

The Objection states, “Few bankruptcy estates demand close judicial supervision under the Bankruptcy Code as these Debtors’ estates do. Beginning in December 2018, and for more than seven months the Ad Hoc Group repeatedly requested that the Debtors engage meaningfully with the Ad Hoc Group—so that losses could be curtailed and value maximized without paying any creditor more than full compensation for its claims and without leakage to insiders, affiliates, and/or opportunistic third-parties. At first, the Debtors ignored the Ad Hoc Group’s requests (literally— for three months), and then deflected, while significant and egregious sums of cash were paid on account of executive compensation (in a fashion that could never have been approved under section 503(c) of the Bankruptcy Code) and to affiliates who appear to have happily capitalized on Sanchez Energy’s financial distress and conflicted governance.

During this same period prior to the filing of these chapter 11 cases, the holders of the Debtors’ 7.25% Senior Secured First Lien Notes due 2023 ('First Lien Notes') also took certain actions. Most notably, on June 26, 2019—squarely within the § 547, 90-day preference period and when all parties understood that bankruptcy was inevitable—the First Lien Noteholders sought to improve significantly their position relative to all other creditors. When the Debtors refused to facilitate the transfer, the First Lien Noteholders acted unilaterally, causing their collateral agent to attempt an involuntary transfer of eight oil, gas, and mineral leases for which any lien securing the First Lien Notes was unperfected. This action takes on particular significance because included in those eight leases is Debtor SN Catarina’s single most valuable lease—the 'HIL' lease. The Ad Hoc Group believes this unilateral step was of no legal effect, but assuming that an involuntary transfer of property actually occurred, the transfer was not in the “ordinary course of business” and is avoidable under section 547(e)(2)(B) of the Bankruptcy Code.

For this reason alone, among others, the Debtors’ request to approve debtor in possession financing from these same parties requires close scrutiny.

Through this all, as the estates’ residual stakeholders, the Ad Hoc Group stood ready and willing to support a fair and reasonable restructuring. The Ad Hoc Group proposed to address the Debtors’ capital needs in order to maximize value and offered very generous treatment to the First Lien Noteholders in order to minimize the administrative burn of lengthy and contested chapter 11 cases. The Ad Hoc Group’s efforts to do so, captured in proposals sent to the Debtors on May 7 and July 12, and to the First Lien Noteholders on July 10 and July 26, proved unsuccessful. The First Lien Noteholders—their screaming collateral shortcomings and exposure to avoidance actions notwithstanding—demanded a greater paydown, and while the Debtors now have the ability to restructure favorably the First Lien Noteholders’ obligations, the Debtors have showed no inclination to do so, focusing instead on entrenching, and procuring releases for, management.

The prepetition process devolved into a complete failure.  Now all parties enter these chapter 11 cases with a heavy lift before them.  Significant issues need to be investigated and resolved with redress against various parties.

On the eve of bankruptcy, the Debtors’ executives awarded themselves excessive bonuses and golden parachutes in a (conservative—ignoring targeted compensation) estimated dollar amount of $36.6 million—approximately $16.9  million  in  bonuses  and  $19.6  million  in  golden  parachutes—that countermand section 503(c) of the Bankruptcy Code.

One thing is clear: the incumbency of purportedly independent directors, Mssrs. Eugene Davis and Adam Zylman—appointed in the wake of a shareholder suit being filed against Sanchez Energy for excessive director compensation—has proven utterly futile. Indeed, many of the occurrences described above—including the ‘eve of bankruptcy’ executive compensation and passively allowing SNMP to unilaterally jack up midstream tariffs—took place after the appointment of such individuals. Under no circumstances should this purported ‘Special Committee’ be allowed to ‘investigate, pursue, settle, and/or otherwise resolve any and all potential claims or causes of action the Debtors may have related to SOG, SNMP, or any of their respective affiliates or joint ventures’ as the Debtors have positioned them to do.”

Pre-Petition Capital Structure



 Principal Amount

First-Out Senior Secured Revolving Credit Facility



7.25% Senior Secured Notes



Aggregate Secured Debt



7.75% Senior Notes



6.125% Senior Notes



Aggregate Unsecured Debt



Aggregate Total Debt



Further Background

The Debtors' DIP financing motion stated: "After a hard-fought, arm’s length negotiation with the Secured Notes Ad Hoc Group, the parties ultimately agreed to the terms of a superpriority, priming, senior secured delayed-draw term loan credit facility (the ‘DIP Facility’ and the loans thereunder, the “DIP Loans”), in an aggregate principal amount of $350 million, consisting of: (i) a new money term loan credit facility in the aggregate principal amount of $175 million (the “New Money Facility” and the loans thereunder, the “New Money Loans”), backstopped by the members of the Secured Notes Ad Hoc Group, $50 million of which will be available for the Debtors to draw on an interim basis (the “Interim DIP Draw”); and (ii) subject to the entry of the Final Order and the Challenge Period (as defined in the Interim Order), a roll-up of $175 million of the obligations arising under the Secured Notes Indenture held by the DIP Lenders (as defined below), or held by funds or accounts managed or held by such DIP Lenders(the “Roll-Up Loans”). As described in more detail herein, a portion of the Interim DIP Draw will be used to effect a Discharge of First-Out Obligations (as defined below)by repaying $7.9 million in principal amount outstanding under the Prepetition Credit Agreement (as defined below) and cash collateralizing an approximately $17.1million Prepetition L/C (as defined below), which if drawn upon by the beneficiary would give rise to a secured claim against the Debtors’ estates.

The Debtors' DIP financing motion states: “…the Debtors currently project that absent the DIP Loans and assuming the Debtors would be able to utilize all cash collateral without restriction, they will fall below minimum liquidity levels needed to safely operate by January 2020. The Debtors’ preexisting cash balances and cash generated from operations simply are not sufficient to fund business operations and the administration of these cases, and a significant cash infusion is critical to the continued operation of the Debtors’ businesses and the preservation of going concern value.

Key Terms of the DIP Financing

  • Borrower: Sanchez Energy Corporation
  • Guarantors: Each of the Restricted Subsidiaries (as defined in the DIP Credit Agreement and collectively, with the Borrower, the “Loan Parties”).
  • Administrative Agent: Wilmington Savings Fund Society, FSB (the “DIP Agent”).
  • DIP Lenders: The financial institutions listed in Schedule 2.01 of the DIP Credit Agreement (the “DIP Lenders” and together with the DIP Agent, collectively, the “DIP Secured Parties”).
  • Term: 9 months following the Petition Date.
  • Principal Amount of Loan: The aggregate principal amount of the DIP Facility shall be $350.0mn consisting of: (i) New Money Loans: $175.0mn ($50.0mn on an interim basis) and (ii) Roll-Up Loans: $175.0mn.
  • Interest Rates: The DIP Facility shall bear interest at the following rates: (i) New Money Loans: LIBOR plus 8.0% per annum (the “Applicable Margin”), (ii) Roll-Up Loans: 7.25% per annum (i.e., the contract non-default rate provided under the Secured Notes Indenture).
  • Default Rate: (i) New Money Loans: Applicable Margin plus 2.00% per annum and (ii) Roll-Up Loans: 8.25% per annum.
  • Fees: 
    • DIP Agent and DIP Lender Expenses: All reasonable and documented out of pocket costs and expenses of the DIP Agent incurred in connection with the preparation and execution and delivery of, and any amendment, waiver, supplement or modification to, the DIP Credit Agreement and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby.
    • Professional Fees and Expenses: Reasonable and documented fees and expenses of the professionals retained by any of the DIP Agent and the DIP Lenders, including, without limitation, the reasonable and documented fees and expenses.
    • Agent Fee Letter: Certain fees to the DIP Agent in the amounts and at the times specified in the letter agreement between the Borrower and the DIP Agent.
    • Backstop Fee: A one-time backstop fee to each Initial Lender (as defined in the DIP Credit Agreement) equal to the product of (i) 5.00% and (ii) each Initial Lender’s commitment for the New Money Loans.
    • Commitment Fee: A Commitment Fee in the amount of 0.5% per annum, payable monthly upon entry of the Final Order on account of any New Money Commitments that are not drawn.
    • Exit Fee: A nonrefundable exit fee in an amount equal to 1.00% of the aggregate amount of the New Money Loans.

About the Debtors

Sanchez Energy Corporation (OTC Pink: SNEC) is an independent exploration and production company focused on the acquisition and development of U.S. onshore unconventional oil and natural gas resources, with a current focus on the Eagle Ford Shale in South Texas. Through organic and significant acquisition activities, the Debtors have assembled a strategic, highly concentrated position in the Eagle Ford Shale and are generally considered among the most active operators in the basin. The Debtors, along with certain of their non-Debtor subsidiaries, also hold certain other producing properties and undeveloped acreage, including in the Tuscaloosa Marine Shale (the “TMS”) in Mississippi and Louisiana.

For more information about Sanchez Energy Corporation, see: www.sanchezenergycorp.com and the Debtors' SEC filings.

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The post Sanchez Energy Corporation – Unsecured Noteholders Launch Broadside at DIP Financing from Pre-Petition First Lien Noteholders, Question Board Competency and Executive Compensation appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.

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