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Sheridan Holding Company I, LLC – Debtors Emerge from Bankruptcy in Under a Week as Pre-Packaged Plan Shaves Off $470mn of Debt

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March 30, 2020 – The Debtors notified the Court that their Amended Joint Prepackaged Chapter 11 Plan had become effective as of March 30, 2020 [Docket No. 116] . Previously, on March 24, 2020, the Court confirmed the Debtors’ Amended Joint Prepackaged Plan [Docket No. 76]. 

The Debtors also filed amended versions of key exit financing and governance documents [Docket No. 115] as listed below.

The Court has set a deadline for filing professional fee claims of May 8, 2020.

On March 23, 2020, Sheridan Holding Company I, LLC and six affiliated Debtors (“Sheridan I” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-31884. In their lead Petition, the Debtors, oil and gas focused investment funds backed by Warburg Pincus, noted estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $500.0mn and $1.0bn.

On January 17, 2020, Sheridan Production Company, LLC (“SPC”) and eight affiliated Debtors (together "Sheridan II") emerged from bankruptcy having shed approximately $900.0mn of debt. Like Sheridan I,  Sheridan II is one of three series of private-placement investment funds managed by Sheridan Production Partners Manager, LLC and is part of the larger Sheridan Group. see "Sheridan II Cases and Transition of Shared Services" below.

Goals of the Chapter 11

The Stewart Declaration (defined below) states: "The Debtors commenced these chapter 11 cases to implement this restructuring through a prepackaged plan of reorganization (the ‘Plan’) [which] reduces the Debtors’ prepetition debt by approximately $470 million, deleverages their balance sheet, provides a four-year path for an orderly disposition of the Debtors’ oil and gas assets, and leaves trade creditors unimpaired." As discussed further below, the Debtors cite the impact of sustained lower oil and gas prices and the particularly acute impact of the "shale revolution" on independent oil and gas companies as key factors in the diminished performance and value of their investments properties.

Overview of the RSA and the Plan

The RSA and Plan contemplate an equitization of the majority of the Sheridan I secured debt through the issuance of the New Sheridan Equity, subject to dilution by the New Warrants issued to limited partner equity holders, and a $150 million take-back exit facility (the “Exit Facility”). Limited partners will receive the New Warrants exercisable into 25% of the number of shares of the New Sheridan Equity issued and outstanding on the Effective Date, on the terms set forth in the New Warrant Term Sheet, in exchange for the release by such limited partners of the Debtors, Secured Lenders, Manager Parties, and other parties and their affiliates and related parties, as further set forth in the Plan. Following emergence, the Debtors’ corporate structure will be streamlined under a new holding company, New Sheridan, owned by the current Secured Lenders, which holding company, either directly or through one of its subsidiaries, will acquire all of the assets of the Debtors. The Reorganized Debtors shall seek bids for the sale of certain asset packages in accordance with milestones under the Exit Facility to facilitate an orderly wind-down of the Debtors’ assets.

The Plan contemplates the following stakeholder recoveries:·

  • Holders of Administrative Claims and Other Priority Claims will receive payment in full in cash;·
  • Sheridan I Revolving Lenders and Sheridan I Term Lenders will receive (i) new term loans under the Exit Facility, (ii) New Sheridan Equity (subject to dilution by the Warrant Shares), and (iii) the Excess Balance Sheet Cash, if any; and
  • General Unsecured Claims will be Reinstated or otherwise receive payment in full in cash. Given the overwhelming support for the Debtors’ restructuring, the Debtors elected to pursue an expedited prepackaged restructuring to maximize value by minimizing both the costs of restructuring and the impact on the Debtors’ businesses. The Debtors anticipate commencing the Chapter 11 Cases on or March 24, 2020, and requesting confirmation of the Plan on the same day, or as soon as reasonably practicable thereafter. The Debtors intend to file motions to avoid the need for schedules of assets and liabilities and statements of financial affairs, which will provide them with significant cost savings. Accordingly, the RSA contains certain milestones, including both securing confirmation of the Plan and the occurrence of the Effective Date by March 31, 2020 and additional milestones as set forth herein. The timeline from the submission of this Disclosure Statement to the anticipated confirmation hearing provides all parties in interest a full and fair opportunity to participate in the process.

The Stewart Declaration add the following Plan overview: "Specifically, the Plan provides for:

  • The Debtors’ secured lenders to receive (i) their pro rata share of 100% of new equity, subject to dilution on account of the warrants, (ii) their pro rata share of a $150 million term exit facility, and (iii) cash, if any, in excess of $20 million (subject to certain adjustments) on the Debtors’ balance sheet as of the effective date of the plan; 
  • all other creditors to be either paid in full or to receive such treatment that will render their claims unimpaired; and 
  • limited partners who do not opt out of the mutual and consensual releases granted under the plan to receive warrants for 20% of new equity on a fully-diluted basis, which may be exercised once the Lenders have received distributions equal to the outstanding debt as of the Petition Date plus certain enhanced economics."

Summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement)

  • Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Estimated recovery is 100%.
  • Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Estimated recovery is 100%..
  • Class 3(a) (“SIP I RBL Credit Agreement Claims”) is impaired and entitled to vote on the Plan. Estimated claims are $143,012,743 and estimated recovery is 49%. Each holder will  receive its ratable share (measured by reference to the Secured Lender Claim Amount) of: (i) the New Term Loans under the Exit Facility; (ii) the New Sheridan Equity (subject to dilution by the Warrant Shares); and (iii) the Excess Balance Sheet Cash, if any.
  • Class 3(b) (“SPP I-A RBL Credit Agreement Claims”) is impaired and entitled to vote on the Plan. Estimated claims are $18,950,360 and estimated recovery is 49%. Each holder will  receive its ratable share (measured by reference to the Secured Lender Claim Amount) of: (i) the New Term Loans under the Exit Facility; (ii) the New Sheridan Equity (subject to dilution by the Warrant Shares); and (iii) the Excess Balance Sheet Cash, if any.
  • Class 3(c) (“SPP I-M RBL Credit Agreement Claims”) is impaired and entitled to vote on the Plan. Estimated claims are $11,574,991 and estimated recovery is 49%. Each holder will  receive its ratable share (measured by reference to the Secured Lender Claim Amount) of: (i) the New Term Loans under the Exit Facility; (ii) the New Sheridan Equity (subject to dilution by the Warrant Shares); and (iii) the Excess Balance Sheet Cash, if any.
  • Class 4(a) (“SIP I Term Loan Credit Agreement Claims”) is impaired and entitled to vote on the Plan. Estimated claims are $378,022,811 and estimated recovery is 49%. Each holder will  receive its ratable share (measured by reference to the Secured Lender Claim Amount) of: (i) the New Term Loans under the Exit Facility; (ii) the New Sheridan Equity (subject to dilution by the Warrant Shares); and (iii) the Excess Balance Sheet Cash, if any.
  • Class 4(b) (“SPP I-A Term Loan Credit Agreement Claims”) is impaired and entitled to vote on the Plan. Estimated claims are $50,091,119 and estimated recovery is 49%. Each holder will  receive its ratable share (measured by reference to the Secured Lender Claim Amount) of: (i) the New Term Loans under the Exit Facility; (ii) the New Sheridan Equity (subject to dilution by the Warrant Shares); and (iii) the Excess Balance Sheet Cash, if any.
  • Class 4(c) (“SPP I-M Term Loan Credit Agreement Claims”) is impaired and entitled to vote on the Plan. Estimated claims are $30,595,949 and estimated recovery is 49%. Each holder will  receive its ratable share (measured by reference to the Secured Lender Claim Amount) of: (i) the New Term Loans under the Exit Facility; (ii) the New Sheridan Equity (subject to dilution by the Warrant Shares); and (iii) the Excess Balance Sheet Cash, if any.
  • Class 5 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Estimated claims are $6,755,596 and estimated recovery is 100%. 
  • Class 6 (“Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Estimated claims are N/A and estimated recovery is 100%/0%.
  • Class 7 (“Intercompany Interests”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Estimated claims are N/A and estimated recovery is 100%/0%.
  • Class 8 (“Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. Estimated claims are N/A and estimated recovery is 0%.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Stewart Declaration”) [Docket No. 5], Lisa A. Stewart, the Debtors' Executive Chairman, President, Chief Investment Officer, and Chief Executive Officer, detailed the events leading to the Debtors' Chapter 11 filing. The Stewart Declaration states: "For the year ended December 31, 2019, the Debtors reported $116 million of total revenue, down from $152 million of total revenue in 2018. 

The Debtors’ businesses recently have come under significant pressure stemming from the steep decline in the oil and gas industry in late 2014. The lack of a sustained market recovery and corresponding volatility in commodity prices negatively impacted the expected cash flow from the Debtors’ oil and gas properties, which were acquired prior to the downturn in 2014.Current and future commodity prices—which oil and gas industry analysts expect to trend downward—also have a significant impact on the Debtors’ reserves and overall asset value. The volatile commodities market as well as the failure of a major asset sale to close resulted in the Debtors being unable to refinance the Sheridan I RBL Facilities in advance of their May 2019 maturities."

The Disclosure Statement adds: "Oil and natural gas prices have declined substantially since 2014. The difficulties faced by the Debtors are consistent with those faced industry-wide. Historically, the markets for oil, natural gas and natural gas liquids (‘NGLs’) have been volatile, and they likely will continue to be volatile, especially given current geopolitical and economic conditions. Among the factors causing such volatility are the domestic and foreign supply of oil and natural gas, the ability of members of the Organization of Petroleum Exporting Countries (‘OPEC) to comply with the agreed upon production cuts and the cooperation of other producing countries to reduce production levels, social unrest and political instability, particularly in major oil and natural gas producing regions outside the United States, and the levels and growth of domestic and global economic activity. In particular, the U.S. 'Shale Revolution'—the implementation of horizontal drilling and hydraulic fracing techniques to unlock oil and natural gas from previously non-producible shale formations—has resulted in a dramatic increase in U.S. crude oil and natural gas production, greatly increasing supplies at a time of uncertain demand. Although prices have recovered somewhat from their lows at the beginning of 2016, NYMEX futures curves for both natural gas and crude oil indicate an expectation among traders in the derivatives market that these commodity prices are expected to decline over the next several years.

These market conditions have affected oil and gas companies at every level of the industry around the world.  Although all companies in the oil and gas industry have been affected at some level, independent oil and gas companies such as Sheridan I have been especially hard-hit, as their revenues primarily are generated from the sale of unrefined oil, natural gas, and NGLs".

The Sheridan II Cases and Transition of Shared Services

On January 17, 2020, Sheridan Production Company, LLC (“SPC”) and eight affiliated Debtors (together "Sheridan II") emerged from bankruptcy having shed approximately $900.0mn of debt. Like the current Debtors, Sheridan II is one of three series of private-placement investment funds managed by Sheridan Production Partners Manager, LLC and is part of the larger Sheridan Group. Also like Sheridan II, the current Debtors (see the corporate structure chart below) effectively manage their investments through SPC, which further to the Sheridan II bankruptcies is nearing the end of a management transition period, including a significant headcount reduction, which ends on March 31st. As explained in both the Stewart Declaration and at the Plan confirmation hearing, part of the Debtors’ urgency to emerge from their own bankruptcy cases is to do so allowing enough time to transition to new management (or rehire old management) in advance of the headcount reduction at SPC. Completion of the Sheridan I cases will allow the Debtors to line up management resources as to a business with a future. 

The Stewart Declaration states: “It is in the best interest of the estates that the Debtors remain in bankruptcy for as short a time-period as possible. The Plan provides that the Reorganized Debtors will transition to a new management team following Sheridan I’s emergence from bankruptcy. In connection with the recent chapter 11 cases of the Debtors’ affiliates, Sheridan Holding Company II, LLC and certain of its affiliates (collectively, ‘Sheridan II’), Sheridan II is also transitioning operation of its assets to a new management team following a brief transition period that expires on March 31,2020 (subject to the continued provision of certain accounting and regulatory reporting functions through April 30, 2020)… the Debtors and Sheridan II do not have their own employees, who are instead employed by a non-Debtor affiliate, Sheridan Production Company, LLC (‘SPC’), which provides services on behalf of the Debtors and Sheridan II. Due to the end of the Sheridan II transition period, it is anticipated that SPC will make significant workforce reductions on or around March 31, 2020. Following these reductions, SPC’s capacity to provide transition services to the Reorganized Debtors will either be significantly reduced or will require the Debtors to incur significant increased personnel costs. Accordingly, it is critical that the Debtors emerge from these chapter 11 cases as quickly as possible to provide for an orderly transition to new management in advance of the March 31 deadline."

Prepetition Debt

As of December 31, 2019, the Debtors have approximately $616.1mn of funded debt, consisting of:

  • three first-lien revolving credit facilities with approximately $167.1mn in aggregate principal outstanding (the “Sheridan I RBL Facilities”); and
  • three first-lien term loan credit facilities with approximately $449.0mn in aggregate principal outstanding, which share an equal lien with the Sheridan I RBL Facilities (the “Sheridan I Term Loan Facilities”).

Exit Financing

The Debtors have filed a term sheet (see Exhibit A to the Plan) in respect of $150.0mn of anticipated take back exit financing, the principal terms of which are as follows:

  • Borrower: One or more wholly-owned subsidiaries of Reorganized Sheridan I.
  • Guarantors: Reorganized Sheridan I and its subsidiaries (other than the Borrower).
  • Administrative Agent: Bank of America, N.A.
  • Collateral Agent: Bank of America, N.A.
  • Exit Facility Lenders: Each of the lenders under the Existing Sheridan I RBL Facilities and the Existing Sheridan I Term Facilities immediately prior to the commencement of the Restructuring.
  • Majority Lenders: Exit Facility Lenders holding a majority of the New Term Loans.
  • Maturity Date: Four years from the Effective Date.
  • Fees: TBD
  • Interest Rate: L + 6.5% cash pay interest or base rate + 5.5% cash pay, at Borrower’s option. (the “Cash Pay Interest”). Borrower may, at the determination of the board of directors of Reorganized Sheridan I, (the “Board”), elect to pay a portion of the Cash Pay Interest by capitalizing such amount and adding it to the outstanding principal amount of the New Term Loans (the “PIK Interest”) at a ratio of 2:1 as follows:           
    • For each interest payment date occurring on or prior to September 30, 2020, the Board may elect to pay the Cash Pay Interest for the applicable interest period in the form of PIK Interest at a rate of up to 6.0% per annum of aggregate outstanding principal amount of the New Term Loans;
    • For each interest payment date following September 30, 2020 and occurring on or prior to March 31, 2021, the Board may elect to pay Cash Pay Interest for the applicable interest period in the form of PIK Interest at a rate of up to 6.0% per annum of the aggregate outstanding principal amount of the New Term Loans; provided that the average price realized by the Borrower and its subsidiaries for oil and gas sold in the most recently ended fiscal three-month period (after giving effect to the settlement of any Swap Contracts) is less than or equal to $28.00 per a barrel of oil equivalent; provided, further, that notwithstanding anything to the contrary, the Board shall at all times be permitted to elect to pay Cash Pay Interest in the form of PIK Interest on such interest payment date in an amount not to exceed 1.50% per annum of the aggregate outstanding principal amount of the New Term Loans; and
    • For each interest payment date following March 31, 2021, the Board may elect to pay Cash Pay Interest for such periods in the form of PIK Interest at a rate of up to 6.0% per annum of the aggregate outstanding principal amount of the New Term Loans; provided that both (i) the average price realized by the Borrower and its subsidiaries for oil and gas sold in the most recently ended fiscal three-month period (after giving effect to the settlement of any Swap Contracts) is less than or equal to $25.00 per a barrel of oil equivalent and (ii) unrestricted balance sheet cash as of the end of such fiscal quarter is less than $20mn; provided, further, that notwithstanding anything to the contrary, the Board shall at all times be permitted to elect to pay Cash Pay Interest in the form of PIK Interest on such interest payment date in an amount not to exceed 1.50% per annum of the aggregate outstanding principal amount of the New Term Loans; and 2% PIK Interest.
  • Mandatory Prepayments: The New Term Loans shall be prepaid with the proceeds of (i) asset sales and, to the extent not required for repairs, casualty events, (ii) a quarterly sweep of all unrestricted cash in excess of $20mn and (iii) such other mandatory prepayments to be determined.

To the extent balance sheet cash does not equal to $20mn as of the Effective Date, Reorganized Sheridan I can retain proceeds from the first asset sale after the Effective Date in an amount equal to the lesser of the difference of (i) $20mn and balance sheet cash as of the Effective Date and (ii) $20mn and balance sheet cash as of the closing date of the first asset sale after the Effective date, in each case such that unrestricted cash on the balance sheet (pro forma for asset sale proceeds) equals $20mn.

Voting Results

On March 23, 2020, the claims agent notified the Court of the Plan voting result [Docket No. 23]:

The voting result were as follows:

  • Class 3(a) (“SIP I RBL Credit Agreement Claims”) – 13 claim holders, representing $128,282,417.53 (or 100%) in amount and 100% in number, accepted the Plan.
  • Class 3(b) (“SPP I-A RBL Credit Agreement Claims”) – 13 claim holders, representing $16,998,471.06 (or 100%) in amount and 100% in number, accepted the Plan.
  • Class 3(c) (“SPP I-M RBL Credit Agreement Claims”) – 13 claim holders, representing $10,382,765.71 (or 100%) in amount and 100% in number, accepted the Plan.
  • Class 4(a) (“SIP I Term Loan Credit Agreement Claims”) – 68 claims holder, representing $365,809,402.57 (or 100%) in amount and 100% in number, accepted the Plan.
  • Class 4(b) (“SPP I-A Term Loan Credit Agreement Claims”) – 68 claims holder, representing $48,472,742.79 (or 100%) in amount and 100% in number, accepted the Plan.
  • Class 4(c) (“SPP I-M Term Loan Credit Agreement Claims”) – 68 claims holder, representing $29,607,434.51 (or 100%) in amount and 100% in number, accepted the Plan.

The following documents were attached to the Disclosure Statement

  • Exhibit A: Plan of Reorganization (includes exit faciltiy term sheet)
  • Exhibit B: RSA 
  • Exhibit C: Financial Projections
  • Exhibit D: Valuation Analysis
  • Exhibit E: Liquidation Analysis

The following documents were attached to the initial Plan Supplement  [Docket No. 17, see Plan Supplement at Docket No. 115 for updated versions]:

  • Exhibit A: Form of Exit Agreement
  • Exhibit B: Form of Transition Services Agreement
  • Exhibit C: Form of Warrant Agreement
  • Exhibit D: Form of New Organizational Documents
  • Exhibit E: Restructuring Transactions Memorandum
  • Exhibit F: 1129(a)(5) Disclosure Regarding Directors and Officers
  • Exhibit G: Schedule of Retained Causes of Action

The First Amended Plan Supplement [Docket No. 115] attached the following documents:

  • Exhibit A: Exit Agreement
  • Exhibit A-1: Redline of the Exit Agreement to the version filed in the Original Plan Supplement
  • Exhibit B: Transition Services Agreement
  • Exhibit B-1: Redline of the Transition Services Agreement to the version filed in the Original Plan Supplement
  • Exhibit C: Warrant Agreement 
  • Exhibit C-1: Redline of the Warrant Agreement to the version filed in the Original Plan Supplement
  • Exhibit D: New Organizational Documents
  • Exhibit D-1: Redlines of the New Organizational Documents to the versions filed in the Original Plan Supplement 
  • Exhibit E: Restructuring Transactions Memorandum
  • Exhibit E-1: Redline of the Restructuring Transactions Memorandum to the version filed in the Original Plan Supplement

Liquidation Analysis (see Exhibit D of Disclosure Statement for notes) 

Corporate Structure Chart

About the Debtors

The Debtors are part of the broader Sheridan Group, which was established in 2006 by oil and gas executives with Warburg Pincus LLC (‘Warburg Pincus"), a private equity firm, as the co-sponsor. Headquartered in Houston, Texas, Sheridan I comprises the first of three series of private-placement investment funds managed by Sheridan Production Partners Manager, LLC ("Manager").Sheridan I consists of three sub-funds, each intended for a different type of investor: taxable entities; tax-exempt entities; and members of Warburg Pincus and the Sheridan Group management team.

Read more Bankruptcy News

The post Sheridan Holding Company I, LLC – Debtors Emerge from Bankruptcy in Under a Week as Pre-Packaged Plan Shaves Off $470mn of Debt appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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