There have been a lot of developments since I last wrote an article covering securities of companies in Chapter 11 bankruptcy. It is critical for investors who trade these securities to not only follow the companies in which they have financial interest but also to keep current with other bankrupt companies. A Ch. 11 bankruptcy process does not occur in a vacuum. Many investors, including hedge funds, have been burned badly with illogical bankrupt securities trading recently.
EXCO Resources Could Be A Long Boring Ch.11 Case
EXCO Resources (OTCPK:XCOOQ) has been in Ch. 11 for six months, but has still not filed a reorganization plan. On May 8, the court extended the exclusive period to a file a plan until August 13 (docket 710) and until October 12 to solicit acceptance for the plan. I would not be surprised if an additional extension is requested.
In its motion to get an extension, EXCO noted that 100 non-disclosure agreements were signed by various parties interested in purchasing some or all of the assets. It has received 25 non-binding indications of interest. If the reorganization plan is basically a sale of assets, it could lengthen the time period needed to negotiate asset sales or to sell assets under Section 365 of the Bankruptcy Code. Some of the secured lenders may also use credit bids to acquire assets.
It seems that employees are leaving the company fearing that asset sales would mean that their jobs would go as well. A hearing is set to allow for $750k in retention payments to non-insider employees.
It is extremely unlikely that current XCOOQ shareholders will get any recovery under a reorganization plan even if energy prices trend higher. I also do not expect any "gifting" from a higher priority class to shareholders.
Bon-Ton Stores - Complete Liquidation
The Bon-Ton Stores (OTCPK:BONTQ) continues with its liquidation that needs to be completed by August 31. The court approved purchase of assets by a group that included the 2lien holders (B. Riley Financial, Tiger Capital, and other hedge funds) at a hearing in April (docket 623). The purchase price of $780 million included the use of a "credit bid" for part of the total purchase price. (Credit bid is using the face amount of a secured claim as if it were cash even if the market value of that claim is less than face amount).
The winning bid competed against a group of investors (DW Partners, Namdar Realty Group, and Washington Prime Group) that wanted to purchase assets with the hopes of continuing operating some stores. The 2lien holders on the other hand wanted total liquidation.
The 251 stores will be closed and over 20,000 employees will be let go. The asset based loan and DIP will get full recovery with cash payments, It remains to be seen how much the 2lien noteholders will recover because that would depend, in part, on the success of the inventory liquidation. BONTQ shareholders are getting no recovery.
It will be interesting to see how much the liquidation sales have on other stores, such as Sears Holdings (SHLD) and J.C. Penney (NYSE:JCP) when these companies report second-quarter results.
iHeartMedia Is Getting More Interesting
iHeartMedia (OTCPK:IHRTQ) bankruptcy case could drag on for a long time, which actually may be better for investors.
The court approved at a July 10 hearing (docket 1098) an extension to its exclusive period to November 24 and an extension to solicit approval to January 23, 2019. The exclusive period was set to expire on July 12. Currently a hearing to approve the adequacy of the disclosure statement (docket 982) is set for August 2.
The company seems to be following a timeline for two different paths. The first is to confirm the proposed reorganization plan. The second path is to get another third-party either investing into a newly reorganized company or an actual sale of some assets. The company even stated this in court filing (docket 997):
"The Debtors will continue to endeavor to develop alternatives to the Plan that provide even greater value for their stakeholders, including by continuing to engage in discussions with potentially interested third-party investors around such an alternative transaction."
On June 15, John Malone withdrew his proposal to buy a 40% equity in a newly reorganized iHeart for $1.16 billion. According to a NY Post article on July 5, Silver Lake Partners is looking at making some deal with iHeart. The WSJ reported that Malone still has an interest in buying new equity.
Wilmington Savings Society, the indenture trustee for Legacy Notes, is litigating, asserting that the Legacy Notes should be secured equally and ratably on certain properties as PGN noteholders. This type of litigation is fairly common in Ch. 11 bankruptcy.
It is interesting to note that IHRTQ's price dropped from around $0.50, when I wrote an article on Seeking Alpha suggesting investors sell the stock, to as low as $0.23. The price has moved back to over $0.50, but I think at this point that any gains from deals with third-parties will benefit the "middle" claim classes and that IHRTQ shareholders will still only get their 1% equity in a new company. This 1% is still a "gift" from higher priority claim classes to current shareholders. Some investors may be bidding up the shares hoping that a third-party participation will enhance the value of the new iHeart.
SDRL Shareholders Did Not Listen And Were Burned
Seadrill Ltd. (SDRL) exited Ch. 11 on July 2. Since I already recently published an article about the impact on shareholders, I will not go into any details here except a simple valuation of the new SDRL shares.
Using the low-end projections for total distributable value by Houlihan Lokey in the disclosure statement (docket 1002) of $10.239 billion and reducing the value by 10% for a cushion/error factor (new total value of $9.215 billion), the projected new equity value is $2.2 billion after deducting $7.015 projected long-term debt. Since there are now 100 million new SDRL shares, that would mean that the "fair" value for "new" SDRL is $22 per share (about $0.08 per "old" SDRL).
Ch. 11 - Who Is Next? - Westmoreland Coal
Westmoreland Coal (OTCPK:WLBA) was able to avoid bankruptcy when other coal mining companies were filing for Ch.11, but it seems that it will be filing for bankruptcy in the near future. It did not pay a $15 million interest payment due on July 1 and is under a forbearance agreement with certain creditors that expires September 30. Some investors were encouraged with a $110 loan from an ad hoc creditor group in May, but that was more of a structural change for secured assets than a long-term solution to its financial problems. The $110 million loan was used to pay off the San Juan loan and the revolver, and was secured by some assets that were not previously encumbered. The San Juan mine was just bought in January 2016 for $121 million from BHP Billiton (NYSE:BHP).
Besides having about $1.048 in debt, its mining operations model is imploding. The "mine-mouth" model has become a disadvantage as the nearby power plant closes part or all operations. (Mine-mouth is a coal mine that has a sole near-by power plant. The low transportation costs are a major advantage for this mining model). Once that power plant closes, it is almost impossible for the mine to continue operations because of transportation issues trying to competitively sell that coal to different power plant.
If and when Westmoreland Coal files for Ch. 11, I expect that 93.9% owned Westmoreland Resource Partners LP (NYSE:WMLP-OLD) will also be included in the joint filing because WMLP has a $314 million term loan maturing December 31, 2018. It is unlikely at this point that it will be able to refinance it. I don't expect any recovery for WLBA or WMLP shareholders under a reorganization plan.
One of the reasons that the 8.75% secured notes are trading at just around 25 is that mine reclamation liabilities have a higher priority in Ch. 11 than even secured debt. Reclamation liabilities cannot be voided and survive post-bankruptcy. A serious problem for secured debt holders is what the court will determine is the appropriate reclamation claim amount- 1) discounted present value $474 million; 2) projected final non-discounted and non-inflation adjusted $776 million; and 3) inflation adjusted non-discounted $950 million. With such a wide range, investors in the secured notes face a major challenge in estimating future recoveries under a reorganization plan. In addition, I expect regulators and environmental groups will litigate this issue.
Some Westmoreland investors were not happy with recently announced annual base salary increases for the CFO from $375k to $650k and for the chief legal officer from $370k to $445k
Energy XXI - A Disaster Saved By A Buyout Offer
(Note: The company's old name was Energy XXI and traded under EXXI and EXXIQ)
Energy XXI Gulf Coast, Inc. (NASDAQ:EGC) has been out of Ch. 11 for about 18 months and has been followed by many interested in trading bankruptcy securities. The new equity paid to various debt classes (EXXIQ shareholders received nothing) started trading around $30 per share, but plunged to as low of $3.41.
On June 18, EGC agreed to be purchased for $9.10 cash or a total of $322 million by privately held Cox Oil. While the purchase price is much higher than the stock was trading at a few weeks before, the purchase price of $322 million is far below the $425 million-$625 million estimated value for equity by PJT Partners in the bankruptcy disclosure statement. The official equity committee estimated the equity value at a staggering $3.55 billion and various noteholder committees also had very high valuations that turned out to be way too high.
The offer by Cox Oil came after a very complex deal with Orinoco Natural Resources was announced on May 10. Under that complex deal, Orinoco would assume $320 plugging and abandonment obligations, and would get a $100 million 2lien 9% note, and 35% of EGC stock. There were a number of other parts to this very complicated transaction. This proposed transaction with Orinoco was terminated, but it did put EGC into "play".
Some funds that trade bankruptcy securities that received the new equity under the Ch. 11 reorganization plan got burned on EXXI/EGC.
*Oaktree Capital owned 3,998.251 shares (12%)
*Hotchkis & Wiley Capital 3,485,420 shares (10.5%)
*Franklin Resources 2,786,360 shares (8.3%)
Ultra Petroleum - Complete Disaster For Investors Post-Ch. 11
Shareholders of Ultra Petroleum (NASDAQ:UPL) received a significant recovery under a Ch. 11 reorganization plan in April 2017, but it has been almost straight downhill ever since. Holders of the $1.3 billion Ultra Petroleum HoldCo Notes have suffered major losses on the new equity they received.
The plan equity value per share was negotiated to be $17.30 under complicated future energy price scheme, which compares to the current price of only $1.77. There was a rights offering as part of the reorganization plan, and the rights offer price was set at $13.85 (20% discount from plan value).
The "old" UPL shares were trading over $8 per share shortly before the company exited Ch. 11. If an "old" UPL shareholder still has their new shares and participated in the rights offer, their effective recovery, using the current UPL stock price of $1.77, is only about $0.10 per share - almost nothing:
0.521562 new UPL shares times $1.77 = $0.92 per "old" share
0.068258 rights per share times ($1.77-$13.85) = loss $0.82 per "old" share
Net value of amount received per "old" UPL share = $0.10
Holders of the OpCo Notes received full recovery under the reorganization plan, but the $1.3 billion HoldCo Notes were investors that "loaned to own" and received new stock and rights. The "expected" value for 70.579 million new shares that they received would have a total value of $1.221 billion using the plan equity value of $17.30 per share. That would have given them about 94% recovery (not factoring rights offer participation nor the amount of their unpaid interest claim). Using the current stock price, their recovery is only 9.6%, and if they participated in the rights offer, their recovery is actually negative. The hedge fund Fir Tree has suffered severe losses on its UPL investment.
UPL has mediocre assets, poor management, and too much debt. With very low Opal Hub prices earlier this year and long-term debt of $2.12 billion, investors now value the equity at just under $350 million. While it is too early to talk about Ch. 11 Part 2, investors are clearly worried.
Many energy companies have exited Ch. 11 and are operating within "normal" expectations. Other companies have a disaster for investor under reorganization plans and post-bankruptcy. Even professional "loan to own" hedge fund managers have been hurt by their inept and incompetent analysis of the Ch. 11 process. Because of retail investor restrictions on rights offerings, it is even difficult for small investors to make profitable trades on some bankrupt securities.
Investing in bankrupt securities can be profitable in some limited cases, but one must constantly follow court filings and other events. These are not usually buy-and-hold, long-term investment ideas.
Disclosure: I am/we are long IHRTQ NOTES. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am no longer short UPL
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