The last few weeks have seen a lot of movement in some of the major bankruptcy cases. Instead of getting simpler, the plans are becoming more and more complex. Some investors have done well lately trading bankrupt securities, but not all. As I have stated multiple times, investors need to follow other Ch. 11 cases closely and not just the ones they have a financial stake in, because these cases do not operate in a vacuum.
Bankrupt Rex Energy Being Bought for $600 Million
Many investors and SA readers often hope for some unknown outsider to come in and buy the assets of a bankrupt company. This, however, does not happen very often. It is happening in the case of Rex Energy (OTCPK:REXXQ). PennEnergy Resources LLC is paying $600 million under proposed asset sale (docket 783) that was filed late last week. PennEnergy is a privately held oil and gas company controlled by EnCap Investments and Wells Fargo Energy Capital. A hearing on the sale is set for August 30.
Originally, I expected the 2liens to make a "credit bid" for the assets in an auction. (Credit bid is being able to use the face amount of a secured claim as if it were cash even if the actual market value of that claim is below that amount.) 2liens would have been able to use about $588 million under a credit bid compared to a much lower market value for the 2lien notes. (They were trading at only 12-13 in June.) The 2liens, however, would have had to pay the priority 1lien claim and DIP loan in order to use the credit bid under some type capital raising scheme.
After the auction time was postponed, I wonder if there are third parties who are getting involved as potential buyers. These buyers would have to effectively bid higher than the value of the 2lien's claim to be successful. This is a critical issue investors need to remember when they dream of some outsider coming in. The value of secured claims is often a very high hurdle to get over for an outsider to buy secured assets.
There are some potential adjustments downward for the purchase price of $600 million, but I am waiting until after the hearing to get a better understanding of this issue.
The 2lien notes have more than doubled since I wrote about REXXQ. The 2liens are getting $162 million under the asset sale compared to about $588 million outstanding or about 27.6% recovery. (This is subject to potential adjustments). They were trading just over 26 today.
Originally, I expected shareholders to receive no recovery under a plan, but currently, I am not so certain because the SEC has filed an objection to the original plan (docket 696). The SEC is objecting to parties giving releases without being paid for those releases. (Releases are basically that interested parties will not be able to bring litigation against parties being released.)
The SEC stated:
Such releases have special significance for public investors because they may enable nondebtors to benefit from a debtor's bankruptcy by obtaining their own releases with respect to past misconduct, including violations of the federal securities laws or breaches of fiduciary duty under state law. This concern is implicated here where the Debtors are seeking to bar both public shareholders ...who are receiving nothing under the Plan, and public bond holders from asserting claims against the released parties.
The asset sale agreement also includes a provision requiring PennEnergy to be included in the group that is being released in a reorganization plan.
This raises the possibility of a payment to REXXQ shareholders under an amended plan, if they consent to giving releases. While I do not expect a release payment as large as Bonanza Creek Energy (BCEI) shareholders received, which was new stock and warrants (BCEI docket 493), it could be a token amount.
A hearing is set for September 17 to extend the exclusive period to file a reorganization plan to January 15, 2019, and to solicit acceptance until March 14, 2019 (docket 773).
EXCO Resources Drags On
As expected, the Ch. 11 case for EXCO Resources (OTCPK:XCOOQ) continues to drag on. Last month, Chief Judge David Jones was appointed mediator (dockets 891 and 894) in an attempt to bring the various parties closer together - not an easy task for this case. The exclusive period to file a reorganization plan was again extended until October 15 and solicit acceptance until December 14 (docket 964).
A Lot More Litigation Is Expected Before iHeartMedia Exits Bankruptcy
iHeartMedia (OTCPK:IHRTQ) filed an amended reorganization plan and disclosure statement (use docket 1304 that has the red-lined version at the end of the document to see changes made) on August 23 that greatly changed the claim class structure. There are now many sub-classes within each class, each with their own recovery. This is an extremely complex and confusing approach to list claims and recoveries. IHRTQ shareholders are still getting 1% of new equity.
One of the major changes is still unknown. That is the recovery of class 8, the unsecured claim of $1.03 billion Clear Channel Outdoor Holdings (CCO) for intercompany revolving promissory note that is classified as an unsecured claim. According to the disclosure statement: "Based on current projections and as of the date hereof, the Debtors estimate that they will provide, at a minimum, support to CCOH in the form of a $150 million distribution under the Plan on account of the Intercompany Revolving Promissory Note and consideration pursuant to Bankruptcy Rule 9019." (Rule 9019 allows for negotiated settlements that are in the best interest of the bankruptcy estate.)
The key issue here is who gets the $150 million? iHeart owns about 90% of CCO, so $135 million effectively would benefit the debt holders who are getting the CCO stock under the plan. So, is this just an additional recovery for debtholders? Or should the 10% minority shareholders of CCO get a major portion of the $150 million, and if so, how much?
The claim is for $1.03 billion, therefore, 10% allocated to minority CCO shareholders would imply they would have a $103 million claim. I would expect additional litigation on this issue.
The Official Committee of Unsecured Creditors seems to be trying to cause a lot of problems for the case, and I am not sure what their real objective is. They are planning to file an objection letter to the amended plan, but I have not seen it yet. A few weeks ago, they were trying to get standing to pursue a claim of constructive fraud and avoidance. The judge denied their request (docket 1236). Five of the seven committee members are just minor vendor claim holders. (They have been very successful in driving up legal fees.)
Pacific Drilling Parties Finally Agree on a Plan
The fight over Pacific Drilling SA (OTCPK:PACDQ) is between the top of the capital structure versus a shareholder, Quantum Pacific, that holds 70% of the stock. In Ch. 11, even the largest shareholders are often no longer in the driver's seat. After multiple meetings over an extended period of time with a court-appointed mediator, an agreement was reached last week and filed under a 6-K. The Ad Hoc Group will get most of the new equity and put in new capital. QP will be allowed to buy $100 million 1lien notes, $100 million 2lien notes, and $50 million in new equity via a private placement.
The 6-K filing was not the actual reorganization plan. The exclusive period to file that plan was recently extended until October 29 and the period to solicit acceptance until December 28. Many shareholders were expecting that since there was a shareholder holding 70% of the stock, that shareholders would get some recovery. It appears that expectation will not happen.
Shareholders could still file objections to the plan with the court because QP is able to buy new notes and new equity, while other shareholders are not being offered participation. Was this participation because QP are Pacific Drilling shareholders, or just because they want to invest in the new company? There is a difference. Is this participation right a de facto recovery for QP as a shareholder under a plan? Does the plan, therefore, violate sec 1123(a)(4) of the Bankruptcy Code that states a plan shall "provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to a less favorable treatment of such particular claim or interest"? Since there is no official equity committee, which would have the money to finance litigation, I would not hold out too much hope for shareholders on this issue.
It will be interesting to see if the courts in Luxembourg. where Pacific Drilling is incorporated, get involved at some point in this case. Luxembourg has not adopted the UNCITRAL Model Law that governs cross-the-border insolvencies. Minority shareholders getting nothing while the major shareholder gets participation in a plan could become a local political issue. Or the courts could just "rubber stamp" the plan.
These recent bankruptcy cases indicate a trend towards using court-appointed mediators to resolve issues. They also demonstrate that the first plan filed may have major changes/amendments before the final reorganization plan is confirmed by the court. Investors, therefore, must read important documents when filed.
Just because an outsider does actually sweep in and buys assets of a bankrupt company, it may not mean that shareholders get any recovery as the proposed Rex Energy asset purchase shows. The Rex case also shows that money can be made - 2lien buyers doubled their money since my article on Rex in June.
Disclosure: I am/we are long IHEARTMEDIA 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.
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