Relevant Document:Agenda
At today’s second day hearing in the Sanchez Energy chapter 11 cases, Judge Marvin Isgur denied the debtors’ proposed final
DIP financing based on the debtors’ failure to meet their burden of showing that the financing is justified under the circumstances. The court previously approved the DIP financing on an interim basis on Aug. 15. The court did not, however, deny the DIP financing motion “outright” today because that would “send[] the wrong signal.” Instead, Judge Isgur indicated that the parties could have a further hearing when they are ready, noting that the interim DIP order remains in effect.
Given that the debtors have enough unencumbered cash to last for at least 45 days, Judge Isgured said he would not approve the debtors’ proposed DIP financing when the debtors are “not under time pressure.” He also remarked that the debtors appear to be seeking to avoid a priming fight without actually analyzing their prospects of winning that fight.
“At a time when there’s no urgency for new money,” the court explained, the debtors made the “precipitous” decision to pursue their proposed financing, even though the debtors have acknowledged that the alternative DIP financing proposal proposed by the ad hoc group of unsecured noteholders is “superior” to the financing the debtors propose, except with respect to the prospect of priming litigation.
According to the court, the debtors’ “only reason” for pursuing their proposed DIP financing over the alternative proposal is to avoid a priming fight. Although the potential for such a fight is “one” factor for the debtors to consider, it cannot the the “only” factor, the court said. Judge Isgur indicated that the debtors’ decision to pursue their proposed DIP financing “may still be the correct decision,” but the court concluded that, as of today, the debtors have failed to meet their burden, including because they have not sufficiently analyzed “whether it’s worth it” to engage in a priming fight. For example, noting that the debtors’ ability to provide adequate protection to existing secured creditors is the “single most important factor” for the court to consider in a priming fight, Judge Isgur pointed out that the debtors “simply do[] not know” the value of their unencumbered assets.
In describing the provisions of the debtors’ proposed DIP financing as
“substantially harmful” to the estates, Judge Isgur noted, among other things, that the proposed financing would give the official unsecured creditors committee limited funds and limited time to investigate and pursue potential claims and would require the estates to give up various bankruptcy rights.
According to the court, the “only difficult question today” is whether to deny the DIP financing motion outright, with prejudice, or to continue the motion to allow further analysis. As noted above, the court declined to deny the motion outright and left open the prospect of the debtors meeting their applicable burden in the future. The court emphasized, however, that it is not going to be a “rubber stamp” and would not approve any proposed DIP financing “without proof.”
After expressing concern about parties being “misled” by the strength of his ruling, Judge Isgur explained that he understands the difficulty of a priming fight, but reiterated that the debtors must actually analyze the considerations surrounding a priming fight. Without “predicting the outcome” of that analysis, Judge Isgur said he “really do[es]n’t think it’s a hopeless situation.”
At today’s contested hearing, the parties largely echoed the arguments set forth in their respective
objections and
replies. In providing certain “initial observations and perspective on the case[s],” the UCC’s counsel noted that the UCC has “had a number of in-bound” communications regarding prepetition activities that the UCC would investigate and that the UCC is exploring the months of prepetition negotiations between the debtors and various restricted parties, whether lien filings related to the Catarina assets are sufficient, whether transfers involving guarantor subsidiaries were proper and “all prepetition payments” on account of related party transactions, including such items as the
shared services agreement, midstream arrangements and “price hikes that occurred shortly before” the petition date.
Testimony was provided today by CFO Cameron George, Bassam Latif of Moelis and Donald Koetting of Alvarez & Marsal, whose declarations were filed in support of the
debtors’ reply. In denying the debtors’ DIP financing motion, Judge Isgur indicated that he found George’s testimony “troubling” because it reflects that either the company has not duly evaluated its options or George did not testify truthfully given “what he did” during his deposition. The court indicated that the debtors cannot “hide the ball” and rely only their professionals’ advice and analysis. The debtors themselves must analyze the applicable considerations, including their professionals’ advice, and decide the appropriate courses of actions.
The court also granted today the debtors’ motion to perform under their
tolling agreement with GSO and a number of routine second-day orders, including the wages motion, NOL motion and insurance motion, each on a final basis. Although there was some argument on the surety bonds motion earlier in today’s hearing, the argument and testimony on the DIP financing consumed the remainder of the hearing and the discussion of the surety bonds motion was not resumed.