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Sanchez Energy Corporation – Coronavirus and Crash of Commodity Prices Likely Leaves DIP Lenders Impaired, Failure to File Credible Plan by March 23rd Deadline Leaves Debtors in Breach of DIP Facility

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March 23, 2020 – On March 23rd, the Debtors filed an emergency motion requesting a status conference to discuss the impact of the coronavirus pandemic on the Debtors' Plan. Most pressing for the Debtors: a looming deadline of 8pm on March 23rd to file a Plan or else find themselves on the wrong side of a required milestone in their debtor-in-possession ("DIP") credit agreement. 

Notwithstanding encouragement from some to somehow get a "compliant" Plan filed by that deadline, that did not happen; in no small part because a compliant Plan would require a commitment that DIP borrowings be paid "indefeasibly in full in cash on or before the effective date of such plan." As was made clear by the status conference (discussed below) that is no longer a commitment that the Debtors can credibly make.

The motion stated, "We find ourselves in unprecedented times. The coronavirus crisis coupled with oil prices plummeting and major disruption in the financial markets have complicated an already difficult situation. A status conference is necessary to update the Court and parties in interest regarding the status of these chapter 11 cases. The Debtors are considering various alternatives and, while no path has been finalized, believe a status update would be beneficial. Emergency consideration is necessary because of the volatile industry and market conditions, coupled with various imminent deadlines facing the Debtors."

At the hastily arranged status meeting, Debtors counsel read a statement noting a 50% drop in commodity prices and disruption of the financial markets before conceding that the "bottom line is…recoveries have just changed…[and we are] facing the possibility of not paying off the DIP facility in full and in cash."

Counsel for the DIP lenders commented as to the Plan filing requirement (initially set for March 9th, but extended several times until the current March 23rd deadline): "its pretty clear no way that is going to happen" before reading the riot act to the assembled professionals as to professional fees which now total $75mn (with a further $10.0mn likely to be incurred going forward). The DIP lenders' counsel warned that "if estate professionals continue to incur fees at the rate they have…this company will be unable to reorganize" with professional fees potentially creating an "insurmountable hurdle" for the Debtors. 

Noting that almost half of the $75.0mn remains unpaid, counsel pressed the Court to issue an order suspending payments until all parties had a "better view of the cases going forward." Judge Isgur declined to issue such an order (for now) but agreed that the "need for counsel in times of crisis" and the need to cut professional fee expenses will have to be balanced. A hearing to consider professional fees is to be held on March 31st.

One commenter voiced the opinion probably shared by all of the professionals on the call given the specter of impaired DIP lenders cracking the fee whip: "I would hope that parties will not not use professional fees to gain leverage."

NB: Perhaps chastened by the sudden collapse of the EP Energy Plan which he had confirmed despite strong objections as to the impact of the coronavirus on that Plan's viability, Judge Isgur went to lengths to make it clear that he was willing to pull out all the stops in this time of crisis. To an audience which was itself already part of an emergency effort he made it clear that: "Within the limits of the Due Process Clause of the Constitution, the Court is available to hear emergency matters when they need to be heard…nothing that you ask for will be rejected without consideration, we should be committed to dealing with emergency…Don’t feel like you are bothering the Court..we will get that done…”

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The post Sanchez Energy Corporation – Coronavirus and Crash of Commodity Prices Likely Leaves DIP Lenders Impaired, Failure to File Credible Plan by March 23rd Deadline Leaves Debtors in Breach of DIP Facility appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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