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Altera Infrastructure L.P. – Noteholders Object to Brookfield-Supplied DIP Financing as Entrenching Brookfield Interests, Argues Brookfield’s August 2021 Exchange of $411mn of Unsecured Bonds Should be Treated as Preferential, Insider Transaction

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August 14, 2022 – The Ad Hoc Group of TopCo Noteholders (the “Ad Hoc Group” or the “TopCo Noteholders*”) objected to the Debtors’ requested DIP Financing [Docket No. 49]. The Ad Hoc Group argues that an August 2021 repayment/exchange of Brookfield’s approximately $411.0mn in unsecured Altera Parent notes with secured notes issued by Debtor Altera Infrastructure Holdings, L.L.C. ("Holdings," see structure chart below) left members of the Ad Hoc Group still holding the unsecured Altera Parent notes (until the exchange identical to those held by Brookfield) in a suddenly subordinated position; and that the promotion of those notes held by Brookfield should be viewed as "a preferential, insider transaction."  

*Members of the Ad Hoc Group include funds or accounts managed by the following entities or their affiliates: Blackrock Financial Management, Inc., Capital Research and Management Company, CastleKnight Management LP, CI Investments Inc., Manulife Investment Management (US) LLC and Manulife Investment Management Limited, Mesirow Financial Investment Management, Inc., and SSGA Trust Company.

The objection notes: "Late last night (Saturday night), the Debtors filed an RSA for a plan of reorganization under which the TopCo Noteholders would receive virtually no recovery. By contrast, pursuant to the RSA, the Debtors’ private equity sponsor — Brookfield — will maintain close to 100% of the equity in the reorganized company on account of claims that, less than a year ago, were identical to those of the TopCo Noteholders….In these chapter 11 cases, a central issue will be whether Brookfield — the Debtors’ equity sponsor — should be allowed to retain the benefits of the August 2021 exchange, under which it procured repayment of its own notes through issuance of new, purportedly senior secured notes."

So what does this have to do with the Debtors' DIP motion? The Ad Hoc Group continues: "…the TopCo Noteholders are simply trying to ensure that nothing happens on the first day of this case that changes the status quo to their detriment. Unfortunately, the interim relief sought in the DIP Motion would change the status quo, and in profound ways….The Interim DIP Order should not be entered in the form presented. It should be revised to take out the provisions that would release claims against Brookfield on a very short timeline (outside a plan) and severely curtail the committee’s ability to fulfill its duties in investigating and pursuing claims. No relief should be granted now with respect to releases, challenge periods, investigation budgets, limitations on estate fiduciary actions, and the proposed roll-up and milestones."

Case Summary

On August 12, 2022, Altera Infrastructure L.P. and 37 affiliated debtors (fka “Teekay Offshore Partners L.P.,” and together “Altera*” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case No. 22-90130 (Judge Isgur). At filing, the Debtors, “a global energy infrastructure services partnership primarily focused on the ownership and operation of critical infrastructure assets in the offshore oil regions of the North Sea, Brazil and the East Coast of Canada,” noted estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn ($1.6bn of funded debt, see table below).

*Altera's preferred units trade on the New York Stock Exchange under the symbols "ALIN PR A", "ALIN PR B" and "ALIN PR E", respectively.The Debtors are controlled by Brookfield Asset Management which purchased what was then known as Teekay Offshore in January 2020 and rebranded the acquired business as Altera.

On August 13th, the Debtors requested Court authority to obtain debtor-in-possession (“DIP”) financing to be provided by an affiliate of Brookfield Asset Management ("Brookfield," the Debtors' ultimate parent and Plan sponsor) consisting of (a) a $50.0mn new money term loan facility ($25.0mn interim) and (b) a $20.0mn roll-up of bridge financing provided by Brookfield in January 2022 [Docket No. 18].

Ad Hoc Group Objection

The objection notes, “Late last night (Saturday night), the Debtors filed an RSA for a plan of reorganization under which the TopCo Noteholders would receive virtually no recovery. By contrast, pursuant to the RSA, the Debtors’ private equity sponsor — Brookfield — will maintain close to 100% of the equity in the reorganized company on account of claims that, less than a year ago, were identical to those of the TopCo Noteholders.

The differential treatment is based on a preferential, insider transaction that Brookfield orchestrated in August 2021. Through that transaction, described below, Brookfield’s notes (and only Brookfield’s notes) were repaid using value that formerly belonged to Altera Parent and all its unsecured noteholders.

In particular, in connection with emergency interim approval of post-petition financing, Altera wants to impose an arbitrary, short-term deadline to pursue causes of action against Brookfield, and to limit the committee investigation budget to just $100,000. Altera also wants to provide Brookfield with sweeping releases upon entry of the final DIP order — outside of a plan, regardless of the committee’s position, and before the committee and others have reasonable time for investigation. Those extraordinary provisions should not be permitted in an interim order, especially in the circumstances presented, where the DIP lender is a sponsor looking to retain control and to obtain releases relating to highly consequential transactions.

For purposes of this objection, the key facts are as follows: Altera is a portfolio company of Brookfield. Brookfield owns substantially all of Altera Parent’s common equity. Altera Parent in turn owns 100% of the equity of the debtor Altera Infrastructure Holdings, L.L.C. (‘Holdings’), and Holdings holds the equity of substantially all of the entities that operate Altera’s global offshore oil and gas services business.

Altera Parent’s only material indebtedness consists of senior unsecured notes and unsecured guarantees of certain subsidiary-level debt. As of August 2021, Brookfield owned around 60% of those unsecured notes, approximately $411 million in principal amount. The remaining 40%, approximately $276 million, were held by non-insider noteholders, including members of the Ad Hoc Group.

In August 2021, in the face of financial distress at Altera, Brookfield decided that Altera Parent should repay Brookfield’s approximately $411 million in unsecured Altera Parent notes with secured notes issued by Holdings. Material value of Altera Parent was thereby diverted to those new Holdings notes, which were used to repay Brookfield.

Among other differentiators, Brookfield was contractually precluded from voting the original Altera Parent notes — a necessary protection given Brookfield’s conflicted sponsor status. By contrast, when Brookfield was repaid with the new Holdings notes, the new notes not only permitted Brookfield to vote, but also provided Brookfield with control over the exercise (or non-exercise) of remedies against its own portfolio company. Most noteholders rejected that offer rather than agree to standstill indefinitely from and after the closing of the transaction.

In these chapter 11 cases, a central issue will be whether Brookfield — the Debtors’ equity sponsor — should be allowed to retain the benefits of the August 2021 exchange, under which it procured repayment of its own notes through issuance of new, purportedly senior secured notes. Another central issue, related to the first issue, will be whether Altera Parent and its estate fiduciaries can in good faith defend and prosecute a plan (of the kind embedded in the RSA and Brookfield’s DIP) that provides minimal value, through warrants, to non-insider noteholders while providing the sponsor Brookfield with 100% of the new equity. Valuation issues, as well as issues relating to Brookfield’s asserted claims (including a large make-whole), will also be front and center. To address all of those issues, an Official Committee of Unsecured Creditors will need to conduct a thorough investigation of the August 2021 exchange and the proposed RSA. Discovery will be needed from Brookfield and Altera. Insider releases will require careful scrutiny, and causes of action will need to be pursued or resolved.

At this stage, rather than litigating any of the issues referenced above, the TopCo Noteholders are simply trying to ensure that nothing happens on the first day of this case that changes the status quo to their detriment. Unfortunately, the interim relief sought in the DIP Motion would change the status quo, and in profound ways. Contrary to Paragraph 8(i) of this Court’s Procedures for Complex Cases, which requires an ‘extraordinary showing’ to obtain approval of a ‘provision that limits the ability of estate fiduciaries to fulfill their duties,’ the proposed interim order (including but not limited to Paragraph 28) would — at the very outset of the case — curtail and cut off an official committee’s ability to investigate highly significant conflict transactions that benefited Brookfield.

The Interim DIP Order should not be entered in the form presented. It should be revised to take out the provisions that would release claims against Brookfield on a very short timeline (outside a plan) and severely curtail the committee’s ability to fulfill its duties in investigating and pursuing claims. No relief should be granted now with respect to releases, challenge periods, investigation budgets, limitations on estate fiduciary actions, and the proposed roll-up and milestones. Those issues should be addressed and decided on fair notice and a fair record after a committee is appointed.”

Prepetition Indebtedness

As of the Petition date, the Debtors were liable for approximately $1.6bn in aggregate principal amount of funded debt obligations, and, through Altera Parent, had issued approximately $408.0mn of outstanding preferred equity. In addition, the entities comprising the Shuttle Tankers business, the FPSO joint ventures, and certain other non-Debtors are liable for approximately $2.1bn in additional funded debt obligations. The table below summarizes the prepetition capital structure of the Debtors and that of Altera Parent’s affiliated non-Debtor subsidiaries:

About the Debtors

According to the Debtors: “Altera Infrastructure L.P. is a leading global energy infrastructure services partnership primarily focused on the ownership and operation of critical infrastructure assets in the offshore oil regions of the North Sea, Brazil and the East Coast of Canada. Altera has consolidated assets of approximately $3.8 billion comprised of 44 vessels, including floating production, storage and offloading (FPSO) units, shuttle tankers, floating storage and offtake (FSO) units, long-distance towing and offshore installation vessels and a unit for maintenance and safety (UMS). The majority of Altera’s fleet is employed on medium-term, stable contracts."

The Declaration adds: "Altera is a leading international midstream services provider to the oil and gas industry, supplying critical infrastructure assets to its customers primarily in offshore regions of the North Sea, Brazil, and the East Coast of Canada. Altera has approximately 2,450 employees who either serve as crew or in onshore support roles for Altera’s 41 vessels around the world. 

Altera operates in five principal business segments:

  1. the processing and storage of hydrocarbons through Altera’s four wholly owned and two joint-venture floating production, storage, and offloading vessels
    ('FPSO'), as well as the management of FPSOs owned by third parties;
  2. the provision of supplementary storage capabilities through Altera’s two floating storage and off-take vessels ('FSO');
  3. the deployment of eight long-distance towage vessels to assist with, among other things, the tow from yard to operating area and installation of large floating production facilities, storage units, exploration units, and other vessels ('Towage');
  4. the operation of one unit to provide accommodations and maintenance and safety services to projects on offshore installations ('Accommodation' and together with FPSO, FSO and Towage, 'FFTA'); and 
  5. the transportation of hydrocarbons from offshore oil field installations to terminals and refineries located onshore, as well as conventional tanking operations, using Altera’s 24 shuttle tanker vessels ('Shuttle Tankers').

The Debtors consist only of FFTA entities. The FPSO joint ventures and the Shuttle Tankers entities are not Debtors in these chapter 11 cases."

Capital Structure (see also Exhibit B to Docket No. 17 for a second more detailed/complete chart]

Altera’s corporate and capital structure, along with the goals of its restructuring process, are summarized in the chart below.

 

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The post Altera Infrastructure L.P. – Noteholders Object to Brookfield-Supplied DIP Financing as Entrenching Brookfield Interests, Argues Brookfield’s August 2021 Exchange of $411mn of Unsecured Bonds Should be Treated as Preferential, Insider Transaction appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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