Murray Energy Holding Co. – Gets Go Ahead for $200mn of Interim DIP Financing Over Vigorous Objections of Pre-Petition Lenders; Howls About Rushed Financing and First Day Expenses of $101mn

October 30, 2019 – At a first day hearing, the Court hearing the Murray Energy Holding Co. cases has given the Debtors the green light to access $200.0mn of new money, debtor-in-possession ("DIP") financing over the vigorous objections of pre-petition term loan lender Black Diamond Commercial Finance L.L.C. ("Black Diamond"). In its nominally "limited" objection, Black Diamond threw the book at the proposed DIP financing arguing that underlying documentation rendered the proposed financing "invalid and unenforceable," that Black Diamond was entitled to be treated as the Debtors' senior and first lien lender, that the proposed financing was expensive and un-necessary at this early stage of the Chapter 11 process and that it would result in "immediate and irreparable harm" to the Debtors' estates. 

Black Diamond also argues that the efforts of investment bankers Evercore marketing efforts were rushed and that better, cheaper DIP financing is available, including from Black Diamond itself. In its ruling (the order is not yet available), the Court clearly chose to give the Debtors the benefit of the doubt, although it is hard to imagine that it had the time and resources to fully consider the underlying arguments (a full analysis of the pre-petition and DIP financing documents which are core to the objection would require days of consideration and the objection was filed only hours before the hearing) at a busy first day hearing in respect of a large bankruptcy involving Debtors teetering on the edge of a financial precipice.

In comments made from the bench, Judge Hoffman agreed that fees looked "very rich, but also said he was persuaded that Murray needed money right away. In approving the DIP financing on an interim basis, he stated that "he wouldn’t gamble on the company’s ability to secure better terms quickly enough to avoid a disruption to its business." Judge Hoffman then added, “The court isn’t willing to play a game of poker or call-the-bluff.” 

The Debtors may have gotten the benefit of the doubt for now, but the Court's ruling hardly touched on Black Diamond' underlying arguments and this problem is not likely to go away. The Court is going to find the time (perhaps even some in advance of its interim DIP order) to make sure that Black Diamond's objections get a fair hearing which makes an understanding of the objection critical going forward.

Black Diamond Objection

On October 30, 2019, the Black Diamond Commercial Finance (the “BDCF”), an Administrative Agent, objected [Docket No. 61] to the Debtors’ DIP Financing motion and interim order [Docket No. 28] arguing that the Debtors' CTA (defined below) and 2018 refinancing transaction are effectively invalid as breaching terms of the Debtors' 2015 credit agreement with BDCF/Black Diamond. Even if valid, BDCF argues, they are entitled to further protection, including by having the Debtors' estate diminished by un-necessary and expensive financing, the latter including a frothy combination of (i) interest of LIBOR plus 11.00%, (ii) a 5% backstop fee on the entire $350 million cash portion of the DIP facility (payable now) and (iii) a 3% upfront fee on the entire $350 million cash portion of the DIP facility (also payable now). The Objection notes, "The Debtors propose to pay not only the Prepetition ABL Facility, but also (a) fund a $7,163,000 professional fee escrow, (b) directly pay $4,360,000 of professional fees and (c) pay $28,814,000 of ‘DIP TL Related Fees.’ All told, including the repayment of the Prepetition ABL Facility, these ‘first day’ expenses total $101,357,000."

The objection states, “Despite assertions to the contrary, the CTA [ie, the Second Amended and Restated Collateral Trust Agreement], and moreover any provisions in the CTA that purport to prioritize the liens of the ‘Superpriority’ lenders in any way to the liens of the True Term Lenders under the Credit Agreement after the 2018 Refinancing Transaction) are invalid and unenforceable. Notwithstanding this, the Debtors have neither obtained the consent of the True Term Lenders for the Priming DIP Facility nor provided them with sufficient adequate protection. More importantly, even assuming the CTA were valid and enforceable, the amount of borrowings under the Priming DIP Facility, the timing of those borrowings, and the extent of fees proposed to be paid under the Interim Order are materially prejudicial to the True Term Lenders and to unsecured creditors in general, and cannot be approved on the first day of these chapter 11 cases because they are not required for the Debtors to avoid immediate and irreparable harm. In fact, limiting the amount and timing of approved borrowings and fees to those that are absolutely necessary will allow the Debtors to effectively shop for a better alternative financing prior to the Final Hearing, which will inure to the benefit of all creditors. Consequently, the Court should only approve the Priming DIP Facility only to the extent necessary to prevent immediate and irreparable harm to the Debtors’ estates and provide the True Term Lenders with appropriate adequate protection.”

Burrowing down, the objection continues: "All told, repayment of Prepetition ABL Facility and roll-up of the Prepetition ABL FILO Claims is extraordinary relief on the first day that materially prejudices the True Term Lenders (and unsecured creditors) and substantially, if not entirely, predetermines the outcome of these chapter 11 cases by dictating the terms of a bid or plan, which the Debtors have failed to show is necessary to avoid immediate and irreparable harm.

As the True Term Lenders will demonstrate at a subsequent hearing before this Court, the CTA is unenforceable, and consequently, the True Term Lenders are the actual senior and first lien lenders in these chapter 11 cases with respect to the Term Loan Collateral.

The New Term Loans purport to have obtained their ‘Superpriority’ status in connection with the 2018 Refinancing Transaction. But the 2018 Refinancing Transaction was not permitted by the Credit Agreement because, among other things, the auction conducted as part of the 2018 Refinancing Transaction was not conducted in accordance with the express terms of the Credit Agreement. The new obligations under the 2018 Restructuring Transaction also violated the Credit Agreement because they were secured by additional guarantors and by liens that purport to be senior to, and not pari passu with, the liens held by the True Term Lenders under the Credit Agreement, which violated the refinancing provisions of the Credit Agreement. Further, the subordination required a 100% vote under the Credit Agreement that was never obtained.

Accordingly, as will be demonstrated in a subsequent proceeding, the liens granted to the New Term Lenders in connection with the Superpriority Credit Agreement are actually subordinate to the liens of the True Term Lenders, and True Term Lenders are the actual senior and first lien lenders in these chapter 11 cases with respect to the Term Loan Collateral. 

Consequently, they are entitled to adequate protection beyond what has been provided under the proposed Interim Order and to which they have not consented and should not be deemed to consent. 

Even assuming, arguendo, that the CTA were valid and enforceable, the Priming DIP Motion should still not be approved without substantial changes. In particular, although the CTA provides for a ‘deemed consent’ to the Priming DIP Facility, the CTA expressly provides that the True Term Lenders nonetheless have the right to (1) contest the Priming DIP Facility because, among other things, it is ‘materially prejudicial to their interests,’ CTA §2.11(a); (2) take any actions and exercise any all rights that would be available to a holder of unsecured claims, CTA §2.11(a); and (3) request certain specified adequate protection that is not provided under the InterimOrder.CTA §2.11(b)(1)(C).

Under the Priming DIP Facility, the Debtors propose (a) to borrow $350 million, of which $200 million would be drawn immediately upon entry of the Interim Order and $150 million upon entry of the Final Order and (b) roll-up the $90 million prepetition FILO Facility. The Priming DIP Facility will bear interest at LIBOR plus 11.00%, and the Interim Order will (i) require payment of a 5% backstop fee on the entire $350 million cash portion of the Priming DIP Facility payable upon entry of the Interim Order, (ii) require payment of a 3% upfront fee on the entire $350 million cash portion of the Priming DIP Facility payable upon entry of the Interim Order, and (iii) lock in a 1% exit fee on the entire $350 million cash portion of the Priming DIP Facility. The amount of the Priming DIP Facility and the cost thereof are materially prejudicial to the True Term Lenders.

With the proceeds of the proposed Priming DIP Facility, the Debtors seek authority to repay in full the $61,020,000 outstanding under the Prepetition ABL Facility, which borrowing currently bears interest at LIBOR plus2.250%. Thus, on the first day of these chapter 11 cases, the Debtors propose to borrow at LIBOR plus11.00% under the Priming DIP Facility to repay over $61 million of debt that costs the Debtors only LIBOR plus 2.250%. This extra interest expense alone is materially prejudicial to the True Term Lenders. Even if the CTA were valid and enforceable, the True Term Lenders have a junior lien on the Prepetition ABL Collateral that is now further subordinated by the extra interest costs (and possibly the relaxation of the borrowing base requirements) associated with new money borrowings under the proposed Priming DIP Facility. Thus, the Debtors cannot reasonably dispute that the ‘refinancing’ of the Prepetition ABL Facility materially prejudices the True Term Lenders’ likelihood of receiving a recovery by unnecessarily subordinating the True Term Lenders’ secured claims to the additional interest expenses that will accrue and be paid ahead of them.

In addition, the Debtors propose to roll up $90 million of the Prepetition ABL FILO Claims into the Priming DIP Facility. Not only are the rolled up Prepetition DIP FILO Claims going to receive higher interest payments during the case, which payments are senior to the True Term Lenders’ secured claims, but also, as of the first day of these cases, the Debtors have in effect agreed that any future plan of reorganization must pay what were the Prepetition DIP FILO Claims in cash, in full, thereby relinquishing forever their right to provide a different treatment to the Prepetition DIP FILO Claims as a prepetition secured claim under a future plan of reorganization. 

Nor is the basis for such disparate treatment warranted on the first day of these chapter 11 cases. While the Debtors allege that repayment of Prepetition ABL Facility and roll-up of the Prepetition ABL FILO Claims was necessary to get access to cash collateral, there is no evidence that the repayment and roll-up could not occur at the Final Hearing.

Per the DIP Budget, a copy of which is attached hereto as Exhibit C, the Debtors propose to pay expenses during the interim period that are not necessary and will materially prejudice the True Term Lenders by subordinating the secured claims of the True Term Lenders to fees and interest expenses that the Debtors could avoid incurring, especially during the interim period. As set forth in the DIP Budget, with the proceeds of the initial borrowing, the Debtors propose to pay not only the Prepetition ABL Facility, but also (a) fund a $7,163,000 professional fee escrow, (b) directly pay $4,360,000 of professional fees and (c) pay $28,814,000 of “DIP TL Related Fees.” The DIP TL Related Fees in particular are both disproportionate and premature as they are applied to the entire final $350 million amount of the Priming DIP Facility, rather than the borrowing authorized under the Interim Order. 23.All told, including the repayment of the Prepetition ABL Facility, these ‘first day’ expenses total $101,357,000. During that same interim period, the Debtors’ liquidity never falls below $61 million, an amount well in excess of the minimum liquidity covenant required by the Priming DIP Lenders of $50 million. Each dollar that is borrowed and each fee that is paid further subordinates the True Term Lenders and materially prejudices them without a showing that these are necessary to avoid immediate and irreparable harm in the interim period. At the outset of these cases, the Debtors should only be permitted to borrow those funds and pay those fees that are necessary to avoid immediate and irreparable harm.

The overall cost of the Priming DIP Facility is simply excessive, and undoubtedly reflects the failure of the Debtors to timely seek adequate alternative financing. The Debtors’ prepetition cost of capital was (a) LIBOR+2.75% for the Prepetition ABL Facility, (b) LIBOR+9% for the FILO Asset Based Term Loan and (c) LIBOR+7.25%-7.75% for the New Term Loans. Based on a seven month6Priming DIP Facility, the annualized rate of return of the Priming DIP Facility is 28%. This is true despite the fact that the Priming DIP Facility primes nearly all the prepetition collateral, including part of the Prepetition ABL Priority Collateral. 

It appears, however, that Evercore only started marketing the Priming DIP Facility within the past 30 days and only approached 24 parties to provide the financing. Berube Declaration ¶17. Given the complexity of these cases and the diligence required to commit to a financing of this nature, a mere 30 day marketing period is too short. Given the annualized rate of return and the fact that the New Term Lenders have agreed to prime themselves and have agreed to allow subordinated lenders to participate in the Priming DIP Facility and prime them as well (Priming DIP Motion ¶48), before nearly $28 million in fees are approved and paid, the Debtors should be required to use the time between the interim and final hearings to re-market the Priming DIP Facility to see if better terms can be achieved. Indeed, if the Priming DIP Facility is approved as is, it will effectively foreclose the Debtors from being able to obtain better financing terms as it will lock the Debtors into both the payment of significant fees–$28 million –aggressive case milestones and plan treatments for certain creditors."

On the particularly sensitive subject of fees, the objection continues: :As set forth in the DIP Budget, with the proceeds of the initial borrowing, the Debtors propose to pay not only the Prepetition ABL Facility, but also (a) fund a $7,163,000 professional fee escrow, (b) directly pay $4,360,000 of professional fees and (c) pay $28,814,000 of ‘DIP TL Related Fees.’ The DIP TL Related Fees in particular are both disproportionate and premature as they are applied to the entire final $350 million amount of the Priming DIP Facility, rather than the borrowing authorized under the Interim Order. All told, including the repayment of the Prepetition ABL Facility, these ‘first day’ expenses total $101,357,000. During that same interim period, the Debtors’ liquidity never falls below $61 million, an amount well in excess of the minimum liquidity covenant required by the Priming DIP Lenders of $50 million. Each dollar that is borrowed and each fee that is paid further subordinates the True Term Lenders and materially prejudices them without a showing that these are necessary to avoid immediate and irreparable harm in the interim period."

Key Terms of DIP Financing 

The DIP financing is to be comprised of a $350.0mn DIP term loan facility (the “DIP Term Facility,” with $200.0mn available upon issuance of an interim DIP financing order) to be funded by the members of the Ad Hoc Group that choose to participate (the “DIP Term Lenders”). Upon entry of an interim DIP financing order (i) the Debtors’ prepetition first in, last out (“FILO,” $90.0mn outstanding) claims will convert into a new DIP FILO facility (the “DIP FILO Facility,” and together with the DIP Term Facility, the “DIP Facility”) and (ii) the Debtors’ prepetition ABL claims ($60.7mn) will be repaid in full with the cash proceeds of the DIP Term Facility. The approved budget for the DIP Facility will provide for up to $162.5 million in funding for payment of certain prepetition claims to providers of goods and services necessary to the Company’s ongoing operations and mine safety who agree to postpetition terms acceptable to the Company and the Requisite Consenting Superpriority Lenders.

DIP Term Loan Facility 

• Borrower: Murray Energy Corporation (the “Borrower”)
• Guarantors: Murray Energy Holdings Company (“Holdings”): All other direct and indirect domestic subsidiaries of the Borrower that are guarantors under the prepetition Superpriority Credit and Guaranty Agreement (the “Superpriority Credit Agreement”), each as a debtor and debtor-in-possession, and each other existing and future domestic direct or indirect subsidiary of the Borrower (including, for the avoidance of doubt, Murray Metallurgical Coal Properties, LLC and Murray Metallurgical Coal Properties II, LLC (each, a “Mission Holdco”)) other than (i) Foresight GP, Foresight LP and their respective subsidiaries and (ii) the subsidiaries of any Mission Holdco (collectively, the “Guarantors” and, together with the Borrower, the “Debtors”).
• DIP Lenders: To include participating lenders under the Superpriority Credit Agreement (the “DIP Lenders”): Each Prepetition Superpriority Lender will be given the opportunity to provide a ratable portion of the DIP Term Facility offered in syndication.
• Backstop Parties: Certain lenders under the Superpriority Credit Agreement that will backstop the full amount of the DIP Term Facility (the “Backstop Parties”).
• Commitment Amount: $350.0mn to be provided by the DIP Lenders and fully backstopped by the Backstop Parties
• Facility Structure: Term Loan with $200,000,000.00 funded upon entry of the Interim DIP Term Order and an additional $150,000,000.00 funded in one draw upon entry of the Final DIP order (the “DIP Term Facility”). Funding of the DIP Term Facility to be structured such that DIP Term Facility proceeds shall not constitute ABL collateral or additional ABL collateral, including by means of segregation of DIP Term Facility proceeds.
• Maturity: Earliest of (a) the date that is nine (9) months following the Petition Date, (b) the effective date of the Acceptable Plan of Reorganization or any other Reorganization Plan, (c) the consummation of a sale or other disposition of all or substantially all assets of the Debtors under section 363 of the Bankruptcy Code, and (d) the date of acceleration or termination of the DIP Term Facility in accordance with its terms
• Interest Rate: LIBOR + 11.00% cash interest paid monthly
• Fees: 
  • Put Premium: 5.00%, paid in cash upon entry of the Interim DIP Term Order
  • Upfront Fee: 3.00%, paid in cash upon entry of the Interim DIP Term Order 
  • Exit Fee: 1.00%, paid in cash upon repayment of the DIP Term Facility 
  • Agent Fee: $75,000
• Use of Proceeds and Budgets: The use of proceeds of the DIP Term Facility shall be subject to budgets agreed upon between the Debtors and the DIP Term Lenders, including the DIP ABL Refinancing Portion to refinance certain prepetition ABL obligations
• Existing ABL/FILO Facility Treatment: Certain outstanding amounts under the Prepetition ABL Loan Documents to be refinanced by a portion of the DIP Term Facilty proceeds (the “DIP ABL Refinancing Portion”). A portion of the DIP Term Facility equal to $65 million (the “Senior ABL Lien Amount”) shall be senior to the DIP FILO Facility with respect to the ABL collateral and proceeds therefrom.
• Milestones:
  • Petition Date + 1 calendar day: Deadline to file motion seeking relief of the Interim DIP Term Order Petition Date + 5 calendar days: Deadline for entry of Interim DIP Term Order
  • Petition Date + 35 calendar days: Deadline to file (x) Plan, Disclosure Statement, and Disclosure Statement Motion or (y) a Bidding Procedures Motion that contemplates the sale of all or substantially all of the assets of the Debtors, which sale shall be backstopped by a bid from the Superpriority Lenders (which bid may be in the form of a plan of reorganization) that contemplates, among other things, cash payment of administrative expenses and wind-down costs set forth in a wind down budget acceptable to the Superpriority Lenders in their sole discretion
  • Petition Date + 35 calendar days: Deadline to file KEIP Motion
  • Petition Date + 40 calendar days: Deadline for the Borrower to make proposal for collective bargaining agreement and retiree benefit modifications
  • Petition Date + 45 calendar days: Deadline for entry of Final DIP Term Order

DIP FILO 

• Borrower: Murray Energy Corporation (the “Borrower”)
• Guarantors: Murray Energy Holdings Company (“Holdings”). With respect to the DIP FILO Loans (as defined below), all direct and indirect domestic subsidiaries of the Borrower that are guarantors under the prepetition Amended and Restated Revolving Credit Agreement (the “ABL Credit Agreement”), each as a debtor and debtor-in-possession (the “DIP FILO Guarantors”) With respect to the DIP Term Loans (as defined below), all direct and indirect domestic subsidiaries of the Borrower that are guarantors under the prepetition Superpriority Credit and Guaranty Agreement (the “Superpriority Credit Agreement”), each as a debtor and debtor-in-possession, and each other existing and future domestic direct or indirect subsidiary of the Borrower (including, for the avoidance of doubt, Murray Metallurgical Coal Properties, LLC and Murray Metallurgical Coal Properties II, LLC (each, a “Mission Holdco”) and, excluding, (i) Foresight GP, Foresight LP and their respective subsidiaries and (ii) the subsidiaries of any Mission Holdco) (collectively, the “DIP Term Guarantors” and, together with the Borrower and the DIP FILO Guarantors, the “Debtors”)
• Facility Size: $350,000,000.00 of new money term loans (the “DIP Term Loans”) to be provided by the DIP Term Lenders and fully backstopped by the Backstop Parties. $90,000,000.00 of rolled up prepetition Last-Out Loans (under and as defined in the ABL Credit Agreement), equal to the total amount of the outstanding Last-Out Loans, provided by the DIP FILO Lender (the “DIP FILO Loans”).
• DIP FILO Lender: GACP Finance Co., LLC
• Facility Structure: DIP Term Loan with $200,000,000.00 funded upon entry of the Interim DIP Term Order and an additional $150,000,000.00 funded in one draw upon entry of the Final DIP Term Order. DIP FILO Lender to agree that proceeds of DIP Term Loans shall not constitute ABL Collateral or additional ABL Collateral. Entry into the DIP FILO Loans to be effective upon entry of the Interim DIP Term Order, subject to customary challenge rights prior to entry of the Final DIP Term Order.
• DIP FILO Loans Interest Rate: On amounts not rolled up: L + 9.75% On amounts rolled up: L + 9.50%.
• ABL Refinancing: Outstanding prepetition non-FILO ABL obligations under the ABL Credit Agreement to be refinanced by a portion of the DIP Term Facility proceeds

Pre-Petition Secured Indebtedness

• Superpriority Term Loan. The Debtors have a Superpriority Credit and Guaranty Agreement, dated as of June 29, 2018, among Holdings, Murray Energy Corporation, as Borrower, the guarantors from time to time party thereto, the various lenders from time to time party thereto (the “Superpriority Lenders”), and GLAS Trust Company LLC, as administrative agent. As at the Petition date, approximately $1.73bn (including unpaid interest and fees) was outstanding under this facility.
• Prepetition ABL Facility. The Debtors have an Amended and Restated Revolving Credit Agreement, originally dated as of December 5, 2013, as amended and restated as of June 29, 2018 (as amended, restated, modified, or supplemented from time to time prior to the date hereof, the “Prepetition ABL Facility”) among Holdings, Murray Energy Corporation, as Borrower, the guarantors from time to time party thereto, the various lenders from time to time party thereto, and Goldman Sachs USA. As at the Petition date, approximately $60.7mn (excluding unpaid interest and fees) was outstanding under this facility.
• Prepetition ABL FILO Facility. The Debtors have $90.0mn outstanding in FILO obligations (including unpaid interest) under the Prepetition ABL Facility; 
• Term Loan. The Debtors have a Credit and Guaranty Agreement, dated as of April 16, 2015, among Holdings, Murray Energy Corporation, as Borrower, the guarantors from time to time party thereto, the various lenders from time to time party thereto (the “Term Loan Lenders”) and Black Diamond Commercial Finance, L.L.C., as successor administrative agent to GLAS Trust Company LLC and Deutsche Bank AG New York Branch. As at the Petition date, approximately $51.1mn (including unpaid interest and fees) was outstanding under this facility.
• 1.5L Notes. Further to an indenture, dated June 29, 2018, by and among Murray Energy Corporation, as Issuer, the guarantors from time to time party thereto, The Bank of New York Mellon Trust, the Debtors issued approximately $490.mn (including unpaid interest) in 12.00% Senior Secured Notes.
• Stub 2L Notes. Further to an indenture, dated May 8, 2014, by and among Murray Energy Corporation, as Issuer, the guarantors from time to time party thereto, The Bank of New York Mellon Trust Company, N.A., as Indenture Trustee, and U.S. Bank National Association, as Collateral Trustee, the Debtors issued $1.9mn (including unpaid interest) in 9.5% Senior Secured Notes.
• 2L Notes. Further to an indenture, dated April 16, 2015, by and among Murray Energy Corporation, as Issuer, the guarantors from time to time party thereto, The Bank of New York Mellon Trust Company, N.A., as Indenture Trustee, and U.S. Bank National Association, as Collateral Trustee, the Debtors issued approximately $298.9mn in obligations (including unpaid interest) in 11.25% Senior Secured Notes.

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