November 9, 2019 – With the clock ticking towards a November 12th Plan confirmation hearing,the Debtors have changed restructuring paths, yet again. Having surprised their creditors with an eleventh hour announcement heralding a toggle to an asset sale; they have now toggled back to an equitization transaction; apparently unable to drum up sufficient support from their pre-petition lenders (specifically, the "Required Consenting Secured Lenders," ie the Debtors' revolving lenders and the term lenders). In what may be viewed as a vote of support for the Debtors' post-emergence potential (especially given market conditions), the Required Consenting Secured Lenders holding an estimated $609.0 in debt rejected a $328.0mn cash offer from Crossing Rocks Energy Operating, LLC and opted instead for "Plan A," which provides them with 95% of the emerged Debtors' equity and a $50.0mn tranche of the Debtors' exit financing, together providing an estimated recovery of 55.8%.
As a reference point, the Debtors' valuation analysis (Exhibit D to Disclosure Statement, Docket No. 9) provides the following: "As a result of the analysis described herein, Evercore estimated the Total Enterprise Value of the Reorganized Debtors to be approximately $350 million to $500 million, with a midpoint of $425 million as of the assumed Emergence Date of October 31, 2019. Based on the assumed pro forma net debt of $160 million as of the Emergence Date, the Total Enterprise Value implies an Equity Value range of $190 million to $340 million, with a midpoint of $265 million."
Given the energetic finish to the Debtors' pre-Plan confirmation hearing efforts (and the relative parity of the cash and equity consideration being offered), it would not be entirely surprising to see yet another last minute turn. On November 8th, the Debtors' claims agent filed a tabulation of Plan voting (which we cover separately), reflecting 100% support for the Plan, including from subordinated noteholders holding $495.0mn of the Debtors' $1.1bn of pre-petition debt and who are in line to receive 5% of the emerged Debtors' equity, or an estimated 2.6% recovery. Clearly those votes were cast prior to the emergence of a cash offer (the voting deadline almost 2 months prior); $328.0mn in cash has a way of changing creditors' viewpoints which may make for an interesting confirmation hearing tomorrow (November 12th).
In a notice withdrawing the asset sale notification and a Plan supplement that included documents memorializing the short-lived asset sale toggle, the Debtors stated: “on November 5, 2019, the Debtors filed the Notice of Filing of Second Supplement to Plan Supplement…pursuant to the Asset Sale Election Notice, the Debtors reserved the right to withdraw the Asset Sale Election Notice at any time prior to confirmation of the Plan…pursuant to the Plan, there was insufficient support from the Required Consenting Secured Lenders [ie revolving lenders and the term lenders] to proceed with the Asset Sale Restructuring…therefore, the Debtors hereby withdraw the Asset Sale Election Notice and the Second Amended Plan Supplement."
Overview of the Plan
In a brief filed in support of Plan confirmation [Docket No. 206], the Debtors provide this latest state of play: “The Plan is the culmination of almost a full year’s effort dating back to early 2019. Over the course of six months leading up to the Petition Date, the Debtors engaged with their lenders to explore potential value-maximizing restructuring transactions. Ultimately, these hard-fought and arms’-length negotiations led to entry into the RSA executed by holders of approximately 99 percent of the Debtors’ secured debt and holders of approximately 96 percent of their subordinated debt that provides the Debtors with a clear and viable path to long-term financial success.
Pursuant to the RSA, the Debtors solicited votes on the prepackaged Plan in advance of the Petition Date. The RSA contemplates either an asset sale restructuring or an equitization restructuring—which were both embodied in the “toggle” Plan—that eliminates approximately $900 million of the Debtors’ funded debt in all circumstances. Following an extensive marketing process, the Debtors will not pursue the asset sale restructuring and intend to implement the equitization restructuring. Although the Debtors previously filed a conditional asset sale election notice and related Plan Supplement documents, the Debtors have withdrawn those filings due to insufficient Senior Secured Lender support for an asset sale.
The equitization restructuring provides that the Debtors’ $100 million DIP financing facility will convert into a new exit facility. Holders of the Debtors’ $609 million of prepetition secured debt will receive a $50 million last-out tranche of the exit facility, plus 95% of the new common stock. Holders of the Debtors’ $495 million of prepetition subordinated debt will receive 5% of the new common stock. Limited partnership and other equity interests will be canceled and released with no recovery."
Restructuring Support Agreement
The Debtors have entered into a restructuring support agreement (the "RSA") with holders of each of their three groups of funded debt (see, "Pre-petition Capital Structure," below) further to which these "Lenders" have agreed to a debt-for-equity restructuring subject to a toggle to a Section 363 assets sale.
The Disclosure Statement provides: "Beginning in early 2019, the Debtors entered into comprehensive restructuring negotiations with the lenders under the Sheridan II Term Loan Facilities (the ‘Sheridan II Term Lenders’), the lenders under the Sheridan II Revolving Credit Facilities (the ‘Sheridan II Revolving Lenders’ and, together with the Sheridan II Term Lenders, the ‘Senior Secured Lenders’), and the lenders under the Sheridan II Subordinated Term Loan Facilities (the ‘Sheridan II Subordinated Term Lenders’ and, together with the Senior Secured Lenders, the ‘Lenders’)….Over the course of six months leading up to the Petition Date, the Debtors and Lenders engaged in hard-fought, good-faith negotiations around the terms of the Plan.
The RSA and Plan contemplate that the restructuring transactions will involve the equitization of the vast majority of the Sheridan II secured and unsecured debt (the ‘Equitization Restructuring’), unless the Debtors, with the consent of a specified threshold of the Senior Secured Lenders, agree to sell all or substantially all their assets to a third-party purchaser pursuant to the Plan (the “Asset Sale Restructuring”). If the restructuring transactions are consummated through the Equitization Restructuring, the Debtors’ corporate structure will be streamlined under a single holding company, New Sheridan, owned by the current Lenders, which holding company, either directly or through one of its subsidiaries, will acquire all of the assets of the Debtors. Whether confirmed and consummated through the debt-for-equity transaction or a sale transaction, the Plan will resolve these Chapter 11 Cases, will cut off the expense of bankruptcy, and will permit the Debtors to distribute value to their stakeholders in a timely manner. Alternatively, and to ensure the restructuring transactions maximize value for all stakeholders, the Plan includes a sale “toggle” feature, allowing for a potential Asset Sale Restructuring if supported by the Required Consenting Secured Lenders (as defined in the Plan) and accomplished through the Plan. In parallel with the restructuring negotiations, the Debtors, with the assistance of their advisors, and at the request of the Senior Secured Lenders, commenced an exhaustive marketing process for a going-concern sale in connection with a potential Asset Sale Restructuring."
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The post Sheridan Production Company, LLC – Debtors’ Withdraw from Asset Sale; Toggle Back to Equitization Restructuring in Latest Surprise Ahead of November 12th Confirmation Hearing appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.