March 30, 2020 – Citing an “unprecedented market downturn,” the Debtors have asked the Court for permission to stop paying certain retiree healthcare benefits. The suspension of payments, the Debtors argue, would save the Debtors an estimated $200k a day without prejudicing the medical coverage of any of their retired employees. This because the U.S. Treasury would be obligated to pick up the tab.
Without the relief, the Debtors argue, they are unlikely to survive and "a value-destructive enterprise-wide liquidation" looms as a near certainty: "The bottom line is that if the Debtors do not cut off these obligations in the near term, they will likely exhaust liquidity during these cases—leaving no business to restructure and no go-forward employment opportunities for thousands."
When the Court meets to discuss the request on April 14th, it will undoubtedly be asked to consider whether (i) a savings of $6.0mn a month for several months (the Debtors insist this would be interim relief) really changes the economics and viability of a the Plan of a coal company that filed for bankruptcy protection with $2.7bn of funded debt citing (a then) "perfect storm?" and (ii) whether it should set a precedent in respect of bankruptcy code provisions that clearly set a very high bar (the Debtors concede "rare" and "dire" circumstances) for allowing collective bargaining arrangements to be modified mid-case. Should the Court allow for the shifting of the Debtors' legacy medical coverage obligations from themselves (or, rather the prepetition lenders who have agreed to purchase the Debtors with $1.2bn of debt) to the U.S. Treasury and the U.S. taxpayer?
Sections 1113(e) and 1114(h)
The Debtors are urging the Court to see their predicament as meriting the relief offered by sections 1113(e) and 1114(h) of the Bankruptcy Code; those sections allowing a debtor to modify a collective bargaining agreement mid-case if those modifications are “essential to the continuation of the debtor’s business, or in order to avoid irreparable damage to the estate.”
The Debtors plead: "In sections 1113(e) and 1114(h) of the Bankruptcy Code, Congress recognized that, in rare instances, a debtor’s situation can be so dire that mid-case modifications are necessary to save the enterprise. These provisions are designed to allow a struggling debtor to carry on its business for the benefit of all, while the parties renegotiate a CBA or modify retiree obligations….While Congress sets a high standard for those interim modifications, these Debtors meet it. The deteriorating coal markets, global economic crisis, and costly chapter 11 proceedings have wreaked havoc on the Debtors’ finances. Forecasts once thought conservative were re-written and, then weeks later, re-written again. The Debtors have just $6 million of cash on hand. While the Debtors also have untapped liquidity under their DIP facility, the Debtors’ access to those funds is presently in jeopardy."
The Motion
The motion states: "The Debtors desperately need interim relief to get to the finish line. Importantly, it would in no way prejudice current UMWA employees or Union Retirees because federally funded programs are in place to assume the Debtors’ liabilities once this Court authorizes the Debtors to cease payments. The bottom line is that if the Debtors do not cut off these obligations in the near term, they will likely exhaust liquidity during these cases—leaving no business to restructure and no go-forward employment opportunities for thousands. The Debtors and the UMWA would be left with no proposal to implement, the Debtors risk defaulting under their DIP Facility, and they may be faced with no choice but to begin a value-destructive enterprise-wide liquidation."
Although the motion cites a number of factors that have worsened the Debtors' prospects; they are, with the exception of a warmer than expected winter, the same macroeconomic factors that drove the Debtors to seek bankruptcy shelter in the first place; namely excess coal supplies, pressures faced from a continued transition to renewable energy sources and cheap natural gas prices. When the Debtors' filed for Chapter 11 protection five months ago looking to restructure $2.7bn of funded debt, they then cited the arrival of “perfect storms” in the domestic and international coal markets.
The Debtors argue that it is COVID-19, however, that has pushed them to an existential brink that they argue meets the exacting requirements of sections 1113(e) and 1114(h) of the Bankruptcy Code; COVID-19 that has rendered their recently agreed $350mn of new money debtor-in-financing ("DIP") arrangements in short hindsight already lacking; COVID-19 that threatens a plan of reorganization predicated on the purchase of the Debtors' assets by senior lenders (now DIP lenders) who have agreed to credit bid $1.2bn in respect of those assets.
The Debtors state: "In the last month, the pandemic has caused the Debtors’ business to deteriorate unexpectedly and rapidly from both a supply and demand perspective. On the demand side, many Asian countries have not transitioned to using renewable energy sources as rapidly as the United States and European countries and therefore are an important source of demand for the Debtors. The dramatic spread of the coronavirus had drastic negative effects on that demand from Asian coal markets, which has become yet another headwind for the Debtors’ business. [NB: nothing further is added about "supply" issues related to the pandemic.]"
At times the Debtors argument seems to turn on itself, arguing that "Even if the Debtors continue to maintain access to the unused DIP Funds, the Debtors project just $30 million at emergence, which is insufficient to responsibly manage the business in this (or any) environment. That is the best case scenario, yet the Debtors are just beginning to feel the impacts of the global crisis. Every dollar spent in chapter 11—this motion would save the Debtors about $200,000 per day—puts a successful emergence in increasing jeopardy." Can that make sense? Can a best case scenario where $30.0mn of capital is woefully inadequate and where we have just begun to feel the impact of a global really be saved by saving $220k a day ($6.0mn a month)?
DIP Financing and Liquidity
On November 1, 2019, the Debtors got the go ahead to access the first $200.0mn of $350.0mn in new money, DIP term loans (a final DIP order unlocked the $150.0mn balance in December). So where has that new money gone? Actually, some of it is not yet gone. Although the Debtors highlight that they are down to their last $6.0mn, a $112.0mn of further DIP financing is still available, albeit "presently in jeopardy" given that DIP Lenders may be able to declare the DIP facility in default based on the tripping of financial covenants. Allthough, the DIP lenders might see a strategic advantage in declaring the Debtors to be in default in respect of the DIP financing, it is hard to see why they would restrict access to existential financing to Debtors whom they have agreed to purchase in their role as prepetition lenders. The other painfully honest fact in the Debtors' motion (in light of arguments that the coronavirus is largely to blame here) is the admission that the Debtors' liquidity dropped by $180.0mn in January and February, ie was dropping precipitously before the coronavirus would have become a dominant factor. In addition to noting ending cash balances of $323.4mn, $284.2mn and $202.7mn in their December 2019, January 2020 and February 2020 monthly operating reports, respectively ("MORs," the October and November 2019 MORs also including significant cash level drops if the DIP financing is netted out); the February MOR notes total professional fees of $38.7mn as at the end of that month.
The Debtors' current motion states: "In response to the headwinds and high costs, the Debtors re-evaluated what were once thought to be conservative estimates at the outset of these chapter 11 cases. When the Debtors sized their DIP financing needs immediately prior to the filing in October 2019, they forecasted a new money need of approximately $250 million (exclusive of approximately $190 million of funding required to replace their prepetition ABL / FILO facility, for a total DIP facility of $440 million). The DIP was sized to fund the Debtors’ operations and restructuring costs over the course of a potential nine-month case, through July 2020. The DIP forecast reflected projected cumulative EBITDA for November 2019 through January 2020 of $109.2 million. Actual results for this same time period, however, were $69.4 million, a shortfall of $39.8 million. And while results for February 2020 have not yet been fully closed, the negative trends have continued (indeed, accelerated), with preliminary results indicating a shortfall of approximately $40 million as compared to the EBITDA projected for February 2020 in the DIP forecast."
The Debtors’ recent results have put increased pressure on their liquidity position. As of March 14, 2020, the Debtors had approximately $118 million of remaining liquidity, consisting of approximately $6 million of cash on hand and $112 million of funds from the DIP Facility remaining in a segregated escrow account, available for use in accordance with the terms of the DIP credit agreement. The Debtors’ access to those escrowed DIP funds, however, is presently in jeopardy because the Debtors are concerned they may default under one or more financial covenants that they must satisfy to access that liquidity.
Further, for context, the Debtors had $300 million of liquidity at the end of December 2019, meaning the Debtors’ liquidity has been reduced by approximately $180 million in only two months. Looking forward, the Debtors’ most recent 13-week cash flow forecast reflects estimated remaining liquidity of $85 million as of the end of March 2020, $47 million as of the end of April 2020, $42 million as of the end of May 2020, and $30 million as of the end June 2020. Based upon recent shortfalls in tons sold and overall market uncertainty, there are further downside risks associated with these most recent estimates. If these negative trends continue and further exacerbate, the Debtors may fully expend their remaining liquidity over the next three months or be left with insufficient liquidity to emerge from Chapter 11."
Background on Asset Sale
On March 20, 2020, further to the requirements of a January 9th bidding procedures order [Docket No. 742], the Debtors notified the Court that, absent any further qualified bids beyond that of an entity comprised of an “Ad Hoc Group of Super-priority Lenders” (the “Stalking Horse Bidder”), the auction scheduled for March 26th had been cancelled and the Stalking Horse Bidder (with a $1.2bn credit bid) designated as the successful bidder [Docket No. 1076].
A sale hearing remains scheduled for June 2, 2020.
On February 24th, as contemplated by their restructuring support agreement (the "RSA"), the Debtors filed a "form of" stalking horse asset purchase agreement (the "APA") to be entered into amongst the Debtors and the Stalking Horse Bidder [Docket No. 914]. On March 16th, the Debtors filed an executed version of the APA and a blackline showing changes to the "form of" APA filed on the 24th and naming the Stalking Horse Bidder as "Mining Purchaser, Inc." The executed version of the APA does not make any material changes as to $1.2bn (plus assumed liabilities) credit-bid purchase price [Docket No. 1064].
The Debtors RSA currently has the support of over 80 percent of the Debtors’ superpriority term loan lenders and noteholders holding more than 52 percent of the Debtors’ 1.5 lien notes, and 62 percent of the Debtors’ second lien notes.
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The post Murray Energy Holding Co. – Debtors Urge Court to Allow for Shifting of $6.0mn Monthly Cost of Retiree Medical Benefits to U.S. Treasury Citing Unprecedented Market Downturn appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.