There has been a push by Breitburn Energy Partners' (OTCPK:BBEPQ) unitholders to get an equity committee formed after the U.S. Trustee initially declined to appoint one. I've come across discussions of the website that is attempting to harness unitholder support for an equity committee on various message boards, as well as a Google ad for it when I was doing a search for some additional information on Breitburn. I've mentioned before that I don't see much in the way of value for Breitburn's equity (especially for the common equity where the CODI effect is likely to result in taxes that exceed the value of any potential recovery). However, if one plans on continuing to hold Breitburn's equity, it makes sense to support the formation of an equity committee.
About The Equity Committee
The formation of an equity committee gives equity holders representation during the official negotiations about restructuring. Not surprisingly, the academic literature around equity committees indicates that the formation of equity committees is associated with an increased chance of a deviation from the absolute priority rule as well as improved performance/recovery for the equity.
However, the bankruptcy judge is not obligated to approve an equity committee, nor is the formation of an equity committee a guarantee of a recovery for equity holders (although as mentioned above it improves the odds of a recovery). Since an equity committee will cost Breitburn money, Breitburn's management and debtholders are likely to file objections to the formation of an equity committee.
The SunEdison Case
Although it is in a different industry, the SunEdison bankruptcy case is one that shares many characteristics with Breitburn. The judge in the SunEdison case is also U.S. Bankruptcy Judge Stuart Bernstein. SunEdison filed with its balance sheet listing $20.7 billion in assets and $16.1 billion in liabilities, similar to how Breitburn's balance sheet lists more assets than liabilities. However, SunEdison's unsecured bonds are listed at pennies on the dollar (they are trading at around 5 cents, even lower than Breitburn's bonds), while its common shares also trade for pennies. That indicates a high degree of skepticism that the market value of the company is enough to cover much of the unsecured debt.
The SunEdison case is also interesting since it started a bit earlier than Breitburn's case. Judge Bernstein entered an "Order To Show Cause Why an Official Committee of Equity Security Holders Should Not Be Appointed" and SunEdison and creditors responded with various arguments opposing the formation of an equity committee. The hearing about SunEdison's potential equity committee occurred on June 7, and there is an expectation that a decision about the equity committee will come soon. As many of the same arguments around balance sheet values and market values are likely to be repeated in the two cases, an approval of an equity committee in the SunEdison case would indicate a good chance of an equity committee for Breitburn. Similarly if an equity committee is not approved for SunEdison, the chances of an equity committee for Breitburn would be dim.
Notes About CODI
The challenge for common unitholders is that any restructuring outcome also needs to make the unsecured noteholders nearly whole to avoid CODI taxes offsetting the value of any recovery for the common units. For example, if absolute priority is violated and unsecured bondholders receive a 60% recovery and common unitholders get $200 million in new company equity, the result would be around $462 million in CODI. The tax costs associated with the CODI will vary according to each unitholder's individual tax situation, but in some cases the tax costs could exceed the value of the new equity.
The Atlas Resource Partners restructuring does indicate that CODI probably won't be assigned to unitholders until a restructuring plan actually goes into effect though. That likely gives Breitburn unitholders the opportunity to fight for a recovery now and then decide if the recovery (if any) is worth taking the CODI hit once the restructuring plan is finalized. It will be interesting to see what sort of market there is for the common units if the final restructuring plan results in a large CODI hit and minimal/no recovery for the common units though. Theoretically there shouldn't be much in the way of buyers for the common units in that case, but there may be enough daytraders and uninformed investors for many Breitburn positions to be dumped with such an outcome.
It is in the best interests of Breitburn's equity holders to push for the formation of an equity committee, as an equity committee would certainly improve the odds of a recovery. If an equity committee is not approved, then the chance of a recovery beyond out-of-the money warrants is likely quite small.
Even if an equity committee is approved, common unitholders probably face a difficult challenge in getting enough of a recovery to more than offset the CODI tax costs. However, the allocation of CODI may take until the final restructuring plan goes into effect. In that case, unitholders have the ability to fight for an equity committee now and then offload their position if positive results aren't forthcoming. The SunEdison case probably will be a good preliminary tell as to whether an equity committee will be formed for Breitburn, as the two cases share many similarities.
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