July 10, 2022 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) filed a redacted version of their sealed July 8th objection to the Debtors' proposed debtor-in-possession ("DIP") financing motion [Docket No. 399, with sealed objection filed at Docket No. 390] which argues that the Debtors' $85.0mn Term DIP Loan "inappropriately and impermissibly elevate[s] the prepetition claims of the Ad Hoc Noteholder Group," ie holders of approximately $205.5mn outstanding under the Debtors' 10.875% priming secured notes due 2024 (the "10.875% Notes"). As detailed further below, the Committee argues that a proposed roll up of the entirety of the 10.875% Notes with a final DIP order, which it calculates comes with an 6.25:1 ratio of roll up to new money, is not only unseemly as to the ratio…but even worse comes in respect of new money which the Debtors do not actually need.
On June 1, 2022, TPC Group Inc. and seven affilliated debtors ("TPC" or the “Debtors”) filed for Chapter 11 protection noting estimated liabilities between $1.0bn and $10.0bn (funded debt of $1.241bn). At filing, the Debtors*, "a global leader in providing a diverse range of quality products to chemical and petroleum-based companies worldwide," cited “a series of unprecedented events including the COVID-19 pandemic, supply chain issues, commodity price increases, higher energy costs and operational challenges resulting from 2021 Winter Storm Uri, and the explosion at our Port Neches plant in November of 2019 have caused financial strain for the Company” as necessitating bankruptcy shelter.
*TPC was acquired in 2012 by private equity firms First Reserve and SK Capital.
The Debtors entered bankruptcy having executed a restructuring support agreement (the "RSA") with the Ad Hoc Noteholder Group (aka the "Consenting noteholder Group"), holding approximately 88% the 10.875% Notes and approximately 78% of the Company’s $930.0mn outstanding 10.5% secured notes due 2024 (the "10.5% Notes") and the Company’s equity sponsors, among others.
At a June 3rd first day hearing, the Court hearing the TPC Group cases issued an order approving the Debtors' request to: (i) access a first $32.0mn tranche of the the Term DIP Loan Facility and (ii) access $200.0mn under a DIP revolving credit facility (“ABL DIP Loan Facility,” to which the Committee does not object).
Access to the balance of the Term DIP Loan was initially to be considered at a June 29th hearing with that hearing now delayed until July 15th (see our separate coverage of a new resolved, gating dispute as to the relative seniority of the 10.875% Notes (more senior, hence the "priming" designation) and the 10.5% Notes.
On June 16th, the Debtors filed the first drafts of their Plan of Reorganization and Disclosure Statement [Docket Nos. 216 and 217, respectively].
Prepetition Capital Structure
As of the Petition date, the Debtors have approximately $1.241bn in aggregate principal amount of secured funded debt, as follows:
The Commitee Objection
The Committee's principal gripe (and there are many) relates to the roll up element of the Term DIP Loan Facility which they calculate as coming with a 6.25:1 ratio of roll up to new money. That roll up, which results in higher interest and a broadened collateral package for the 10.875% Notes promoted to DIP status, would result in an unacceptable distribution of the Debtors' assets away from unsecured creditors even if the Term DIP Loan was providing the Debtors' estates with some advantage. Making the roll up particularly egregious as proposed, the Committee argues, is that the Debtors (after the interim order) don't actually need the financing at all; with the Debtors' budget showing that "projected liquidity will remain in excess of $164.7 million" throughout its forecasted period (September 23, 2022).
The objection states, “The Committee understands and is fully supportive of the Debtors’ actual needs for adequate liquidity to operate during these chapter 11 cases. The Committee is not supportive, however, of postpetition financing that may not be needed and that has been structured to advantage one subset of the Debtors’ creditor constituency at the expense of the Debtors’ other creditors, including unsecured creditors, which consist largely of individual and commercial victims of the November 27, 2019 explosions at the Port Neches facility and creditors that provided services and products to the Debtors prior to the commencement of these chapter 11 cases. Accordingly, and by this Objection, the Committee objects to approval of the Term DIP Loan Facility which, among other things, seeks to inappropriately and impermissibly elevate the prepetition claims of the Ad Hoc Noteholder Group (the ‘Consenting Noteholder Group’) and restrict the exercise of the Committee’s fiduciary duties in these cases.
The Debtors seek approval of two senior secured superpriority priming debtor in possession credit facilities in the form of (i) a $200 million asset-based facility (the ‘ABL DIP Loan Facility’) provided by Eclipse Business Capital and (ii) a $322.8 million term loan facility (the ‘Term DIP Loan Facility’ and, together with the ABL DIP Loan Facility, the ‘DIP Facilities’) consisting of (x) a new money multiple draw term loan in the aggregate principal amount of up to $85 million (the ‘New Money Term DIP Loans’) from members of the Consenting Noteholder Group and (y) a roll up of all of the Prepetition Senior Priority Notes, which are held exclusively by members of the Consenting Noteholder Group, in the amount of $237.8 million.
The Committee has several significant concerns with the proposed Term DIP Loan Facility and proposed Final DIP Order. First, the Debtors drastically overstate the new money benefits to their estates that would be derived from the Term DIP Loan Facility. Although the Debtors tout a headline amount of $322.8 million with respect to the Term DIP Loan Facility, that facility, if approved on a final basis, will provide the Debtors with no more than $38.1 million of new money financing. That is because, under the terms of the Term DIP Loan Agreement, insurance proceeds approved by insurers (x) after the closing date of the Term DIP Loan Facility and (y) prior to the date of the borrowing request with respect to the last draw of the Term DIP Loan Facility that are received by the Debtors during the pendency of the chapter 11 cases must be used to either indefeasibly repay Term DIP Loans or reduce the amount of New Money Term DIP Loans that will be available to be drawn on a dollar for dollar basis…Since the Petition Date, the Debtors have received $7.1 million in insurance proceeds, reducing the new money that may be borrowed under the Term DIP Loan Facility by a corresponding amount. Moreover, the Debtors’ Approved Budget reflects that the Debtors anticipate receiving an additional approximately $39.9 million in insurance proceeds in the near term.
The Term DIP Loan Facility’s overstated new money commitments give rise to the Committee’s concerns that the Roll Up and other significant benefits pledged to the Term DIP Loan Lenders remain constant regardless of the actual amount of liquidity available to the Debtors under Term DIP Loan Facility and despite the Debtors’ failure to demonstrate a true need for the dwindling new money commitments thereunder. In exchange for access to the New Money Term DIP Loans (commitments for which are projected to be reduced by as much as $46.9 million early in these cases), the Debtors have agreed to ‘roll up’ all of the Debtors’ obligations under the Prepetition Senior Priority Notes, inclusive of interest and a prepayment penalty—totaling $237.8 million—regardless of the amount of New Money Term DIP Loans actually funded. All $237.8 million of Roll Up obligations will accrue interest during the chapter 11 cases at a higher interest rate than the Prepetition Senior Priority Notes and be secured by assets that were not collateral for the Prepetition Senior Priority Notes.
As evidenced by the Approved Budget, however, during the budget period, the Debtors do not project to need access to the New Money Term DIP Loans above and beyond what was borrowed under the Interim DIP Order, which refutes any asserted justification for approval of the Roll Up, the marginal—and unnecessarily expensive—liquidity provided to the Debtors under the Term DIP Loan Facility and the Term DIP Loan Facility’s other overreaching proposed terms (including exhaustive case controls) that do little to protect the value of the Debtors’ estates. Despite the Debtors’ blanket assertions, they have failed to meet their burden for approval of the Roll Up.
On their face, the terms of the Roll Up imply that the Debtors have immediate liquidity needs and that the Term DIP Lenders were the only game in town when the Debtors agreed to seek approval of the Term DIP Loan Facility. This is not the case. First, the Committee understands that, as of the week ending June 24, 2022, the Debtors had $158.4 million cash on hand and $56.8 million in availability under the ABL DIP Facility, for total liquidity, excluding availability under the Term DIP Loan Facility, of $215.2 million. The Debtors project to receive, in the near team, $39.9 million of insurance proceeds, and, even after significant, newly negotiated projected cure payments, the Debtors’ projected liquidity will remain in excess of $164.7 million, the lowest point over the forecast period through the week ending on September 23, 2022. Even without the expected insurance proceeds, the Debtors’ liquidity is projected to be at least 67.8% higher than the Debtors’ stated minimum operational liquidity requirement of $75 million. Second, the Debtors have failed to prove that no alternatives, without the onerous terms of the Roll Up, existed when they filed the DIP Motion. Yet, even if the Debtors did not have any alternatives, the terms of the Term DIP Loan Facility, and the Debtors’ purported justification for such terms, do not satisfy the applicable legal standards in this district.
Further, upon information and belief, proponents of the Term DIP Loan Facility may argue that the Roll Up does not harm unsecured creditors because the Prepetition Senior Priority Notes are over secured. To the contrary, the Final DIP Order provides that DIP Collateral includes certain collateral that was not used to secure the Prepetition Senior Priority Notes, including: all assets of T PC Holdings, Inc. (including hundreds of millions of dollars in tax attributes) and certain infrastructure and real property interests. Even if the Roll Up does not harm unsecured creditors, which the Committee believes is wrong, the Debtors cannot explain why the Term DIP Loan Facility is superior than the alternatives, given the limited new money required by the Debtors (if any). There simply is no justification for the Roll Up. Indeed, a roll up of this magnitude, with the expectation of an approximately 6.25:1 ratio of Roll Up to new money advanced would be an abuse of the system, particularly when the Debtors simply do not need the new money financing at this time. In fact, judges in this district have noted that ‘cases where you’ve had $15 million of prepetition liability being rolled up and another [$1.5 million] of new money coming in.. that’s, I think, the kind of circumstance that the proposed rules speak to and that I find to be an abuse of the system…’
The unsupported Roll Up and additional onerous Term DIP Loan Facility terms are compounded by the Committee’s concerns regarding potential deficiencies in the Prepetition Secured Parties’ collateral package, including, but not limited to, the Prepetition Secured Parties’ purported liens on the Debtors’ business interruption insurance policies and related proceeds. Indeed, while the Committee has not yet had sufficient time to complete a thorough review of the Debtors’ prepetition debt and all liens related thereto, the results of the Committee’s ongoing investigation could result in significant unencumbered value being available to satisfy the claims of unsecured creditors. Approval of the Term DIP Loan Facility as proposed assumes that the Prepetition Secured Parties claims and liens are pristine. Approving a 6.25: I Roll Up of prepetition debt to new money advanced not only would grant a significant windfall to the Prepetition Senior Priority Noteholders, but also improperly shift the burden to unsecured creditors to have to convince the Court of an appropriate remedy to fashion in the event of a successful challenge to the claims and liens in respect of the Prepetition Senior Priority Notes.
In addition to the overreaching Roll Up, there are a number of other infirmities that must be remedied before any reasonable Term DIP Loan Facility can be approved on a final basis. These infirmities include, among other things, the following:
a) Adequate Protection Should Be Subject to Recharacterization: Given that the Debtors have conceded that the Prepetition Junior Priority Notes are undersecured, there is no entitlement to the ‘payment’ of interest in kind or the payment of Adequate Protection Fees and Expenses (as defined below) in respect of the Prepetition Junior Priority Notes. Moreover, with respect to the Prepetition Senior Priority Notes and the Prepetition Junior Priority Notes, any adequate protection should be subject to recharacterization or automatic disgorgement, as applicable, in the event it is determined that the Prepetition Senior Priority Notes or the Prepetition Junior Priority Notes are undersecured.
b) The DIP Collateral Should Not Include Liens on Avoidance Actions or Their Proceeds: The Final DIP Order should not grant DIP Liens or Adequate Protection Liens on, or superpriority administrative claims with recourse to, the Avoidance Actions or their proceeds, which should remain available and unencumbered for the benefit of unsecured creditors as the Bankruptcy Code intends. There is no basis in the law for liens on Avoidance Actions themselves, and Avoidance Action Proceeds should be reserved for unsecured creditors. At a minimum, neither the DIP Lenders nor the Prepetition Secured Parties should have recourse to any Avoidance Actions or any Avoidance Action Proceeds arising from successful challenges by the Committee to the claims and liens of the Prepetition Secured Parties.
c) Proposed Bankruptcy Code Section 552(b) and 506(c) Waivers Are Inappropriate: The proposed Final DIP Order would (x) waive the ‘equities of the case’ exception of Bankruptcy Code section 552(b) and (y) waive the provisions of Bankruptcy Code section 506(c). Blanket waivers of these rights are particularly inappropriate here, where there are meaningful, undetermined legal issues regarding the Prepetition Secured Parties’ purported liens on, and security interests in, the Prepetition Collateral, including specifically the Debtors’ insurance policies, which may provide over $400 million in additional value to these estates and their unsecured creditors.
d) The Proposed Waiver of the Marshaling Doctrine Should Not Be Permitted: The Debtors should not be permitted to waive any rights with respect to the marshaling doctrine in the Final DIP Order. If the Court upholds the Debtors’ request to encumber Avoidance Action Proceeds, the DIP Lenders and Prepetition Secured Parties, as applicable, should be required to exhaust all other DIP Collateral before seeking satisfaction from the Avoidance Action Proceeds or other prepetition unencumbered assets (including assets unencumbered as a result of a successful challenge), the value of which would otherwise be available for the benefit of unsecured creditors.
e) The Committee’s Professional Fees Should Not Be Subject to a Cap: The Final DIP Order purports to cap the fees and expenses of the Committee’s advisors in accordance with the Approved Budget. There is no similar restriction on the Debtors’ professionals and, regardless, no cap on either the Debtors or the Committee is appropriate. The Term DIP Loan Lenders and the Prepetition Secured Parties cannot use the chapter 11 process for their benefit and not pay the costs that come with it, including the reasonable fees and expenses of the Committee’s professionals. The cap must be removed.
f) The Challenge Period Should Not Apply to Valuation Issues: Pursuant to the terms of the proposed Final DIP Order, the Debtors and DIP Term Lenders appear to be restricting the Committee’s ability to challenge the value of the Prepetition Collateral or the amount of the Diminution in Value that may give rise to Adequate Protection Claims and Adequate Protection Liens. Under no circumstances should the Challenge Period apply to valuation related issues, whether during the Challenge Period or later in the chapter 11 cases.
g) The Committee’s Investigation Budget Is Too Restrictive: The proposed Final DIP Order would unduly restrict the Committee’s ability to challenge the Prepetition Secured Parties’ claims and liens by limiting the funds available to the Committee to investigate the claims against the Prepetition Secured Parties to $50,000 (the ‘Investigation Budget’). Given the significant legal issues to review in these cases, the Committee respectfully submits that the Committee’s Investigation Budget should be increased from $50,000 to $250,000.”
About the Debtors
According to the Debtors: “TPC Group, headquartered in Houston, is a leading producer of value-added products derived from petrochemical raw materials such as C4 hydrocarbons, and provider of critical infrastructure and logistics services along the Gulf Coast. The Company sells its products into a wide range of performance, specialty and intermediate markets, including synthetic rubber, fuels, lubricant additives, plastics and surfactants. With an operating history of more than 75 years, TPC Group has a manufacturing facility in the industrial corridor adjacent to the Houston Ship Channel and operates product terminals in Port Neches, Texas and Lake Charles, Louisiana.”
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