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Bayou Steel BD Holdings, L.L.C. – Post-Sale, At Odds Stakeholders Agree on One Thing…Conversion to Chapter 7


January 21, 2020 – Each of the Debtors' Official Committee of Unsecured Creditors (the “Committee”) and Black Diamond Commercial Finance, L.L.C. (“BDCF,” agent under the Debtors' Term Loan Facility, $36.5mn outstanding as at Petition date) filed motions seeking conversion of the Debtors’ Chapter 11 cases to cases under Chapter 7 [Docket Nos. 417 and 419, respectively]. 

The Committee, sitting behind BDCF in the distributable proceeds pecking order has eyed BDCF warily throughout the Debtors' bankruptcy, but now finds itself in agreement with BDCF as to the pressing need to convert the Debtors' estates to cases under Chapter 7. The agreement on the procedural path forward, however, is hardly indicative of a more general rapprochement amongst these stakeholders, with the Committee clearly looking to use Chapter 7 (and the appointment of a Chapter 7 Trustee) as a path for pressuring BDCF in respect of potential estate claims that the Committee values at up to $30.0mn.

The math here is pretty straightforward, proceeds from the Debtors' $28.0mn sale to Liberty BSG Holdings ("Liberty") simply do not stretch to potentially cover any general unsecured claims and the consensus is that the Debtors are administratively insolvent. So why does the Committee bother to file a motion to convert? That answer is simple: To avoid the "dismissal" alternative which would let BDCF off the hook in respect of "potential estate claims [relating to the] $30 million equity distribution made to  Black Diamond in March 2017." The Committee clearly intends to continue using the threat of pursuing the potential claims, or having a Chapter 7 Trustee do so, to induce BDCF into leaving something on the table for their own class.

Committee Motion

In its motion, the Committee, largely conceding that the Debtors' sale to Liberty BSG Holdings ("Liberty") leaves dim prospects for unsecured creditors, states, “The Debtors commenced these cases in October 2019 with a plan to liquidate on-hand inventory and pursue a sale of their idle business operations using the lenders’ cash collateral. At the outset, the Committee raised concerns with the Debtors’ cash collateral request, arguing that it threatened to leave the estates administratively insolvent while providing both the ABL Lenders and Black Diamond with sweeping protections. The negotiated final cash collateral order reserved certain protections, including advance 506(c) and 552(b) waivers, in the hope that the sale would generate sufficient value to obviate the Committee’s concerns. Unfortunately, the $28 million sale to Liberty BSG Holdings (‘Liberty’) does not achieve this goal. While the Committee remains supportive of the Liberty sale, unless Black Diamond agrees to fund the costs associated with these cases, the estates simply cannot support the expense associated with remaining in chapter 11. Cause, therefore, exists to convert these cases to chapter 7 of the Bankruptcy Code.

Following the sale closing, the Debtors’ only remaining assets will be outstanding receivables and estate causes of action, including potential claims against Black Diamond. The Debtors, however, represented to the court that they are administratively insolvent by more than $4 million as of December 23, with expenses continuing to accrue. Despite the benefits provided to the lenders from liquidating their collateral and conducting a sale process within the confines of chapter 11, neither the ABL Lenders nor Black Diamond is willing to fund these costs. Remaining in chapter 11, therefore, will serve only to further diminish the value of the estates for the Debtors’ creditors.

The Debtors are also unable to confirm a chapter 11 plan. The Debtors are hopelessly insolvent with no continuing operations and no agreement from their lenders to fund these cases. The Debtors are similarly unable to wind down these cases in a way that would satisfy known administrative claims."

On the subject of the potential estate claims, the Committee continues: "Although both conversion and dismissal would end the administrative burn in fees and costs associated with chapter 11, conversion to chapter 7 is clearly preferable. The only remaining assets following the sale closing will consist of outstanding accounts receivable and potential estate causes of action. Conversion, therefore, would result in a chapter 7 trustee investigating, and if appropriate, pursuing such causes of actions for the benefit of all creditors. 

In particular, the Committee believes there are potential estate claims with respect to, among other things, the $30 million equity distribution made to Black Diamond in March 2017. The distribution was made at a time when the Debtors were operating at a loss and there is a question as to whether they were insolvent. Upon information and belief, based upon documentation reviewed by the Committee to date, there was no corporate authorization with respect to such equity distribution, including any documentation or board presentations supporting the basis for such distribution. 

Accordingly, there may be claims against Black Diamond and/or the Debtors’ D&Os (some of whom were Black Diamond appointees) with respect to such distribution. Such claims could recover upwards of $30 million for the benefit of unsecured creditors. However, these claims would be eliminated if the Debtors’ cases were dismissed. Further, Black Diamond has itself indicated that it does not oppose conversion of these cases to chapter 7. The appointment of a chapter 7 trustee would allow the Debtors’ assets to be orderly liquidated and to distribute such proceeds to the Debtors’ creditors in an efficient manner.

BDCF Motion

For its part, BDCF clearly remains unwilling to foot the bill for continued Chapter 11 cases: “At present, the Debtors’ estates appear to be administratively insolvent. The Debtors’ authority to use Cash Collateral is coming to an end, all of the Debtors’ employees have been terminated, and the Debtors maintain no operations. Once the sale closes at the end of this month, the Debtors will, effectively, be nothing but a pot of cash and avoidance actions and other potential causes of action. There is simply no need to dig a deeper administrative expense hole by continuing the Debtors’ cases in chapter 11. In order to avoid unnecessarily incurring additional administrative claims that run a material risk of nonpayment, these cases should be converted to chapter 7.

On December 23, 2019, this Court held a hearing to approve the sale. At the hearing, BDCF did not object to the sale itself, only to any distribution of the sale proceeds to anyone other than BDCF, or to any notion that BDCF be required to foot the administrative expense bill as a precondition to approval of the sale. At the conclusion of the sale hearing, the Court approved the sale to Liberty and ordered the sale proceeds be held in abeyance pending further order of this Court."

Background on Liberty Sale

On December 12, 2019, the Court issued an order approving the $28.0mn sale of substantially all of the Debtors' assets to Liberty BSG Holdings Inc. (the “Buyer”) [Docket No. 371]. The asset purchase agreement (“APA”) memorializing the sale is attached to the order as Exhibit 1. 

Acquisition vehicle Liberty BSG Holdings Inc. is affiliated with the British mining group Liberty House Group ("Liberty House"). Liberty House was founded by its current Executive Chairman Sanjeev Gupta in 1992 and had a 2018 turnover of nearly $15.0bn. The famously discrete Gupta (listed on the APA's Exhibit A-1, "Knowledge of the Buyer") also heads the GFG (Gupta Family Group) Alliance, who are listed on the APA as recipients of any notice sent to the Buyers (albeit at a WeWork address in Manhattan).

Commenting on the acquisition, Mr. Gupta stated, "While the plant requires upgrades to be restarted competitively, we see good potential for the business. Bayou benefits from reliable access to supplies of recycled steel, competitive power prices and its own deep-water port.” Grant Quasha, GFG Alliance’s chief investment officer for North America, also noted that the Debtors' LaPlace Louisiana mill should eventually bring the Buyer's total U.S. production capacity to 3 million tons a year. The Buyer currently owns steel operations in Illinois, Ohio, New Mexico and South Carolina

The APA provides the following as to purchase price: "The purchase price (the ‘Purchase Price’) for the Acquired Assets shall be equal to (i) $28,000,000 (the ‘Base Purchase Price’), minus (ii) the amount of Taxes payable by Sellers to Buyer pursuant to Section 4.5.2, minus (iii) the Additional Cure Amounts, if any (the sum of the amounts set forth in clauses (i), (ii) and (iii) of this sentence, the ‘Cash Purchase Price’), plus (iv) the assumption of the Assumed Liabilities, plus (v) the payment of the cure amounts, as determined by the Court to be necessary to cure all defaults and to pay all actual or pecuniary losses that have resulted from such defaults under the Assumed Contracts/Leases, to the extent set forth on Schedule 1.1.3 (collectively, the “Cure Amounts”), plus (vi) the amount of the Administrative Bridge."

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