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Hi-Crush Inc. – Another Frac Sand Producer Files Chapter 11; Pre-Arranged, 90-Day, Plan Anticipates $450mn Debt-for-Equity Exchange and Rejection of Railcar Leases

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July 12, 2020 – Hi-Crush Inc. and 21 affiliated Debtors (NYSE: HCR; "Hi-Crush" or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-33495 (Judge Jones). The Debtors, a frac sand producer, are represented by Timothy A. Davidson II of Hunton Andrews Kurth LLP. Further board-authorized engagements include (i) Latham & Watkins LLP as general bankruptcy counsel, (ii) Alvarez & Marsal North America LLC as financial advisors, (iii) Lazard Frères & Co. LLC as investment banker and (iv) Kurtzman Carson Consultants LLC as claims agent. 

The Debtors’ lead petition notes between 1,000 and 5,000 creditors, estimated assets of $953.1mn and estimated liabilities of $699.1mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) U.S. Bank National Association (as Trustee for $450.0mn of 9.5% "Senior Unsecured Notes"), (ii) Trinity Industries Leasing Company ($2.5mn trade claim) and (iii) Chicago Freight Car Leasing ($2.4mn trade claim). The Debtors' list of top 30 unsecured creditors is dominated by claims held in respect of rail car leasing arrangements.

In 2019, the Debtors’ revenue was $636.4mn with a net loss of $413.6mn.

Overview of “Pre-arranged” Plan and RSA 

On July 12, 2020, the Debtors executed a restructuring support agreement (the “RSA,” term sheet attached to Docket No. 24) with an ad hoc group of holders of the Senior Unsecured Notes (the “Ad Hoc Group”) which included the following key terms:

  • The Chapter 11 Cases will be financed by two debtor-in-possession financing facilities, including (a) a $25.0mn superpriority secured asset-based revolving loan financing facility (the “DIP ABL Facility”) and (b) a $40.0mn superpriority secured delayed- draw term loan financing facility (the “DIP Term Loan Facility” and, together with the DIP ABL Facility, the “DIP Facilities”);
  • The DIP ABL Facility will refinance and satisfy in full the Debtors’ obligations under the prepetition ABL Agreement;
  • On the effective date of the Plan, the reorganized Debtors will enter into a new credit agreement providing for a new senior secured asset-based revolving loan facility with an aggregate principal commitment amount of $25.0mn and a $25.0mn letter of credit sub-limit, which will refinance and replace the DIP ABL Facility;
  • The Debtors will conduct a $43.3mn Rights Offering to eligible holders of Allowed Senior Notes Claims and Allowed General Unsecured Claims pursuant to which the rights offering participants will be offered the right to purchase New Secured Convertible Notes;
  • The Rights Offering will be backstopped by the Backstop Parties on the terms and conditions set forth in the Backstop Commitment Agreement; and
  • The claims arising under the DIP Term Loan Facility will be paid in full in cash from the proceeds of the Rights Offering.
  • The treatment of certain Classes of Claims and Equity Interests will be as follows:
    • Payment in full of all administrative expense claims, priority tax claims, other priority claims, and other secured claims (or such other treatment rendering such claims unimpaired);
    • With respect to holders of Senior Notes Claims and General Unsecured Claims:
      •  rights to participate in the Rights Offering (which shall be attached to each applicable claim and transferable with such allowed claim as set forth in the Rights Offering Procedures, but the rights may only be exercised to the extent the holder is an Accredited Investor); and 
      • its pro rata share of 100% of the New Common Stock, subject to dilution on account of (i) the New Common Stock issued upon conversion of the New Secured Convertible Notes and (ii) the MIP Equity; and
    • The Old Parent Interests will be cancelled, and each holder of an Old Parent Interest will not receive any distribution or retain any property on account of such Old Parent Interest."

Milestones include (i) filing of the Plan and the Disclosure Statement, and a motion seeking entry of a solicitation order, by no later than 14 days following the Petition date and (ii) effectiveness of the Plan within 90 days of the Petition date.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “McCormick Declaration”), J. Philip McCormick, Jr., the Debtors’ Chief Financial Officer, detailed the events leading to Hi-Crush's Chapter 11 filing. The McCormick Declaration provides: “The Debtors face dual stresses of decreasing earnings and increasing costs. The Debtors’ earnings have experienced a significant decline as a result of depressed demand for NWS, the effects of the COVID-19 pandemic, and the Saudi-Russian oil price war, and their costs are significantly inflated due to the above-market rates associated with the Railcar Leases, as well as the oversupply of leased railcars that the Debtors no longer require.”

The impact of the the COVID-19 pandemic and the Saudi-Russian oil price war on the Debtors' clients, already floored by a prolonged period of depressed commodity prices, is well known. For these Debtors, those macro-level concerns only heighten a fundamental flaw in their business model, their primary product Northern White Sand (“NWS,” see "About Frac Sand" below for a primer on frac sands) once considered a premium product is existentially challenged by changing customer preferences for lower quality and "in-basin" frac sand. To get a sense of just how widespread the pain is being felt by frac sand providers, on July 9th Vista Proppants and Logistics ("Vista") filed for Chapter 11…and Vista is an "in-basin" frac sand provider, ie offering cheaper sand and and not saddled with the same expensive need for railcars.

The McCormick Declaration continues: "Current trends in the North American sand market and changes in the preferences of E&P companies have negatively impacted the demand outlook for the Debtors’ NWS product. Some E&P companies have recently been willing to sacrifice the quality of NWS in exchange for lower priced, local in-basin reserves, so long as the local reserves meet minimum acceptable quality levels. In addition, while E&P companies located in the Bakken, DJ, Powder River and Appalachia regions are currently still using meaningful quantities of NWS, there are indications that in-basin supply may become available in the near future. As a result of these developments, the Debtors expect that only the lowest cost NWS production facilities will survive (and at nominal margins), with Canada and the Northeast likely to become the last bastions of NWS usage. As a result of this shift in the market, NWS currently only accounts for approximately 36% of total frac sand supply, down from 75% in 2014. NWS prices have also fallen dramatically during that period of time, and are expected to remain below $20 per ton in the near to medium term. Downward pressure on NWS prices is further exacerbated by increasingly common 'fire sales,' with operators selling NWS with pricing in the low teens per ton as they struggle to clear inventory and generate cash proceeds. Demand is likely to be capped, and pricing range bound, since capacity already exists to satisfy marginal increases in demand. These issues have led to an oversupply of NWS relative to demand, which in turn has necessitated mine closures as producers attempt to rebalance cost structures against lower prices and reduced demand."

DIP and Exit Financing

The Debtors have announced a pair of debtor-in-possession financing facilities, including (a) a $25.0mn superpriority secured asset-based revolving loan financing facility (the “DIP ABL Facility”) and (b) a $40.0mnn superpriority secured delayed-draw term loan financing facility (the “DIP Term Loan Facility” and, together with the DIP ABL Facility, the “DIP Facilities”). The DIP ABL Facility will be used to roll-up in full the Debtors’ obligations under the prepetition ABL Agreement.

On the effective date of the Plan, the reorganized Debtors intend to enter into a new credit agreement providing for a new senior secured asset-based revolving loan facility with an aggregate principal commitment amount of $25.0mn and a $25.0mn letter of credit sub-limit, which will refinance and replace the DIP ABL Facility.

Prepetition Indebtedness

  • ABL Agreement. The Debtors are party to an August 2018 credit agreement (the  “ABL Agreement”), by and among Hi-Crush Partners LP, as borrower, JPMorgan Chase Bank, N.A., as administrative agent and as an issuing lender, and the other lenders party thereto from time to time (the “ABL Lenders”), providing for a $200.0mnn commitment (subsequently reduced to $100.0mn asset-based revolving loan facility (the “ABL Facility”). Availability of funds under the ABL Facility is subject to a borrowing base, which is currently approximately $7 million excluding line of credit reserves. The ABL Agreement provides for interest at a rate equal to, at the Debtors’ option, either (i) a base rate plus an applicable margin ranging between 0.75% per annum and 1.50% per annum, based upon the Debtors’ leverage ratio, or (ii) a LIBOR rate plus an applicable margin ranging between 1.75% per annum and 2.50% per annum, based upon the Debtors’ leverage ratio. Based on the Company’s current leverage ratio, the current weighted average interest rate for all borrowings under the ABL Agreement is 4.75%. As of the Petition Date, there were no outstanding borrowings under the ABL Agreement, but the Debtors had approximately $22.3mn in outstanding letter of credit commitments under the ABL Facility.

On June 22, 2020, the Debtors entered into a forbearance agreement (the “Forbearance Agreement”) with the ABL Lenders following the occurrence of an event of default with respect to the ABL Agreement’s fixed charge coverage ratio covenant. That agreement was subsequently amended to extend the forbearance period until July 12, 2020.

  • Senior Unsecured Notes. In August 2028,  Hi-Crush Partners LP issued approximately $450.0mn in 9.500% senior unsecured notes due 2026 (the “Senior Unsecured Notes”). Each of Hi-Crush Inc.’s wholly-owned domestic subsidiaries—all Debtors in these Chapter 11 Cases—have guaranteed the issuer’s obligations. As of the Petition Date, the Debtors remain obligated under the Indenture for an outstanding principal amount of approximately $450.0mn, plus accrued but unpaid interest, fees, costs, and expenses.
  • Miscellaneous Notes. The Debtors are party to various promissory notes and short-term obligations arising from on-property mining sand exchanges, equipment financing and insurance premium financing programs (the “Miscellaneous Notes”). As of the Petition Date, the Debtors are obligated under the Miscellaneous Notes for approximately $5.3mn, plus any accrued but unpaid interest, fees, costs, and expenses.

Railcar Leases

As of the Petition date, Debtor D & I Silica, LLC was party to seven master railcar leases (the “Railcar Leases”) pursuant to which the Debtors lease an existing fleet of approximately 4,800 railcars. Approximately 20% of the Railcar Leases expire between 2020- 2021, approximately 65% of the Railcar Leases expire between 2022-2025, and approximately 15% of the Railcar Leases expire in 2028. All of the Railcar Leases contain significantly above- market rates. The Debtor Lessee’s annual lease expense on account of the Railcar Leases is approximately $28.0mn. The Debtors gave already filed a motion to reject certain of these leases.

About Frac Sand

Frac sand is suspended in water or other fluid to create “proppant,” which is injected into wells at high pressure to keep fractures open to stimulate the extraction of hydrocarbons. There are three main types of raw frac sand: Northern White Sand (“NWS”), Brady Brown, and what is commonly referred to as “in-basin” frac sand. NWS is a commonly-used designation for premium white sand produced in Wisconsin and other parts of the upper Midwest region of the United States. NWS is known for its high crush strength, low turbidity (i.e., low levels of contaminants), roundness and sphericity, and monocrystalline grain structure and, as such, has historically commanded premium prices. Brady Brown, or regional sand, had been preferred by some E&P companies due to its proximity to the Permian Basin and Eagle Ford shale plays and, therefore, its lower costs due to reduced logistics costs (which do not include rail shipment costs) compared to NWS. In-basin frac sand, however, which began to be developed and produced in 2017 in the Permian Basin, has also been developed and produced in the Eagle Ford, Haynesville, and Mid-Con basins, and has been quickly adopted due to its proximity to wellsites, resulting in greatly reduced logistics costs (which consist almost exclusively of direct trucking costs).

About the Debtors

The Debtors are a fully-integrated provider of proppant and logistics services used in hydraulic fracturing of oil and gas wells. Proppant is sand (also known as “frac sand”) or similar particulate material suspended in water or other fluid injected into wells at high pressure to keep fractures open to stimulate the extraction of hydrocarbons. In addition to frac sand production, the Debtors also offer their customers advanced wellsite storage systems, flexible “last mile” transportation services, and innovative software for real-time supply chain visibility and management from loadout terminals to wellsites. The Debtors’ strategic suite of solutions provides operators and service companies in all major U.S. oil and gas basins with the ability to build safety, reliability and efficiency into every well completion. 

The Debtors’ headquarters are located in Houston, Texas and they maintain regional offices in Denver, Colorado, and Odessa, Texas. The Debtors own and operate six production facilities located in Wisconsin and Texas and utilize an extensive logistics network of rail-served destination terminals strategically located throughout Pennsylvania, Ohio, New York, Texas, and Colorado. As a result, the Debtors are effectively positioned to reach all areas of unconventional well completion activity ranging from the Permian and DJ basins to the Marcellus, Utica, Bakken and Eagle Ford shales.

In 2019, the Debtors’ revenue was $636,370,000, but the Debtors ended the year with a net loss of $413,559,000. Approximately $432,466,000 (68%) of the Debtors’ 2019 revenue is attributable to excavating, processing, and delivering frac sand, approximately $194,577,000 (30.5%) is attributable to logistics and wellsite services, and approximately $9,327,000 (1.5%) is attributable to the sale of silo systems and related equipment to third parties.

Corporate Structure Chart

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The post Hi-Crush Inc. – Another Frac Sand Producer Files Chapter 11; Pre-Arranged, 90-Day, Plan Anticipates $450mn Debt-for-Equity Exchange and Rejection of Railcar Leases appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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