Alta Mesa Resources
Alta Mesa Debtors Granted First Day Relief, Pursuing Dual-Track Reorganization/Sale of Both Debtor and Non-Debtor Assets; Ad Hoc Group Expects ‘Most Things’ to Center on Conflict Issues
Fri 09/13/2019 01:12 AM
Relevant Documents:
First Day Hearing Agenda
Interim Cash Collateral Order
Judge Marvin Isgur today granted all of the Alta Mesa Resources debtors’ relief requested in their first day motions, subject to certain modifications stated on the record. While the first day motions were largely uncontested, the debtors had faced some push back with respect to their cash collateral motion prior to the hearing, with administrative agent Wells Fargo filing a reservation of rights out of abundance of caution due to ongoing negotiations.
At the outset of the hearing, however, the debtors announced that they had resolved the issues with the motion and filed a revised cash collateral order shortly before the hearing. Although the hearing was intended to focus on the emergency relief, Judge Isgur also brought up the adversary proceeding filed early Thursday morning by the debtors against nondebtor affiliate Kingfisher Midstream seeking authority to “set aside” certain gathering agreements.
A full transcript of today’s live blog of the hearing is available HERE.
The second day hearing is scheduled for Oct. 7, at 11 a.m. ET, with objections due Oct. 2, at 6 p.m. ET. Additional hearings were scheduled for certain other motions, including a second interim hearing on the NOL motion on Sept. 19, at 12:15 p.m. ET and a final hearing on the utilities motion on Oct. 1, at 3 p.m. ET. The NOL motion was granted on an interim basis today; the further interim hearing was scheduled in response to Judge Isgur’s concern that certain parties may not have received adequate notice.
A full roster of attorneys from Latham & Watkins presented motions on behalf of the Alta Mesa debtors, with Caroline Reckler handling the majority of the debtors’ case-in-chief. Reckler described the events leading to the debtors’ filing, emphasizing that the debtors, lenders and their respective professionals had put in “a lot of hard work” to make a smooth landing into chapter 11. She indicated that in addition to resolving the cash collateral dispute, the case parties continue to negotiate on a number of fronts in hopes of reaching consensual resolutions on various aspects of the case within the next 30 days.
Debtor Structure & Ownership
Reckler began by providing an overview of the debtors’ business, corporate structure and board composition of the debtor entities. Reckler explained the debtors’ corporate structure using the organizational chart shown below:
Reckler explained that Alta Mesa Resources, or AMR - the ultimate parent of both the debtor upstream business (Alta Mesa Holdings, or AMH) and non-debtor midstream assets (KFM) - is a debtor, though does not itself have funded debt obligations. According to Gregory Pesce of Kirkland & Ellis, counsel for sponsor Bayou City Energy, AMH and KFM were set up in two separate silos for “very specific reasons,” a “configuration” that came into effect 18 months ago with diligent planning from numerous advisors and sufficient noticing provided to relevant parties. Pesce said that the purpose of the siloed structure was essentially risk mitigation - if one “didn’t work out,” then the other silo still might. He added that the equity sponsors believe there is equity value on the KFM side.
Pesce expressed disappointment at what he characterized as attempts to “bring these two silos together,” asserting that leakage of value from KFM as a result was “inappropriate.” Lamenting the relative lack of time to prepare for the filing, Pesce said that Bayou initially hoped for a forbearance, but ultimately the parties could not come to an agreement. However, Pesce concluded by noting that he was “heartened” by the fact that the debtors are not focused purely on a sale process and he expressed Bayou’s intention to work with other constituents.
Damian Schaible of Davis Polk, counsel to an ad hoc group of noteholders holding $485.9 million in senior unsecured notes, also expressed concerns regarding cross-silo value leakage, though, unlike Pesce, Schaible was worried about value flowing in the other direction, from AMH to KFM.
Sale Process & Value Maximization
Annemarie Reilly of Latham stated during the hearing that the debtors are pursuing a dual-track strategy of a marketing and sale process for all or substantially all of the debtors’ assets while continuing negotiations with key stakeholders regarding capital structure options. The debtors are interested in pursuing whichever transaction is value-maximizing for the estates, Reckler said later in the hearing.
Reckler informed the court that the debtors had begun today a marketing process led by Perella Weinberg for both the debtor and non-debtor assets, as Kingfisher has agreed that their assets may also be sold. Reckler further explained that the sale process is set up to be “as flexible as possible,” and noted that KFM can decide at any time to withdraw from the sales process.
Judge Isgur stressed during the hearing that it’s important to focus on the dual-track strategy instead of just an asset sale. He said that it is in everyone’s best interest to make both the restructuring route and asset sale route “the best they can be,” and then determine the best path forward. “If we can’t restructure the business, we are going to have to do a sale, but that’s why I don’t want to dictate which direction we proceed in,” Judge Isgur told the parties.
Commenting on the gathering agreement adversary proceeding filed by AMH against KFM, Judge Isgur noted that if a sale for the integrated business was completed, the gathering agreement litigation would become moot.
Reckler said that potential buyers may not be interested in the AMH and KFM assets on a consolidated basis and expressed the “very real” possibility that a buyer may only want the AMH assets without the gathering agreements, which was the underlying rationale for filing the adversary proceeding to reject those agreements. Reckler stressed that the adversary proceeding was not filed as a leverage tactic and that the debtors’ stated need to expedite the litigation was legitimate.
Governance & Conflicts
Due to the debtors’ complex corporate and ownership structures, including significant sponsor equity ownership, governance during the restructuring was a key focus of the hearing. Reckler stated that she is “crystal clear” that the sponsors are “not calling the shots.” She went on to explain that while the AMR board includes four sponsor representatives, it also includes four independent directors and one newly-appointed director in charge of conflicts issues, Patrick Bartels Jr., whom Judge Isgur asked to appear telephonically during the hearing. Bartels, Reckler explained, is an experienced distressed investor with significant experience serving on boards.
Describing Bartels’ role, Reckler explained that he would have full latitude to identify conflicts matters and had already informed the debtors of three such potential issues - cash collateral, sale process and any matters related to the plan process. As a result, the debtors have modified the cash collateral order to delegate these conflict matters solely to Bartels, who is represented by Robbins Russell. In response to questioning from Judge Isgur, Reckler confirmed that debtors’ counsel would be taking action at the direction of Bartels with respect to the three matters identified.
Schaible, of Davis Polk, spoke at some length regarding his clients’ concerns regarding governance and conflicts matters. “I believe most things that happen in this bankruptcy will be conflicts,” Schaible observed. Turning to the investigations, he somewhat tersely expressed that the ad hoc noteholder group is “not in love” with Bartels not being “the one operating this restructuring,” noting the ad hoc group’s unambiguous preference for delegating “absolute, sole authority” to Bartels. Schaible noted the potential existence of other related party transactions warranting investigation, but expressed confidence in Robbins Russell’s ability to execute the work.
Schaible also stated that while his clients did not want to engage in litigation if they did not have to, they were concerned due to “significant value destruction in 2019 alone.” “I do think that we are going to have to pursue more than dual tracks - rather, we should do multi tracks,” he continued.
Judge Isgur slightly paraphrased but appeared to broadly concur with Schaible’s sentiment, stating that Bartels will determine whether there is a conflict, and if such a conflict exists, Bartels will become the “czar” of the matter, free from interference from the rest of the board.
Cash Collateral
Turning to the previously-contested cash collateral issues, William “Trey” Wood of Bracewell, counsel to Wells Fargo, informed the court that the cash collateral issues have been resolved with the debtors on an interim basis. However, he noted that he has not received final sign off from the lenders that the proposed form of order is sufficient to serve as a final order.
At the same time, Wood said that the independent director “taking over” the cash collateral, plan and sale process is “news to us as of last night.” Correspondingly, he expressed the need to analyze the role of the “old board” and stated that if the parties are unable to agree regarding the proper scope of Bartels’ role, they may need the court to weigh in on the parameters vis-a-vis the responsibilities of the other board members.
Wood was unequivocal regarding urgency on timing. “We will be pushing the process” on behalf of Wells Fargo, he said. Noting the approximately $8 million monthly cash burn, Wood reiterated that “any delay . . . is very detrimental to our clients.” Wood then argued that his client should have the right to take possession of collateral in the event of a breach of a milestone in the cash collateral order.
Judge Isgur responded that “I will not let your clients seize assets if there is a breach of a milestone in an interim order.” Judge Isgur continued, explaining that he lacks the information needed for such a determination and correspondingly is “not giving away the farm on the first day.” Further, Judge Isgur stressed that he has never authorized seizure of assets upon a breach, not even subject to a final order. The court then proceeded to edit the cash collateral order, at one point asking counsel to dictate changes to him and entering them in real time.
First Day Hearing Agenda
Interim Cash Collateral Order
Judge Marvin Isgur today granted all of the Alta Mesa Resources debtors’ relief requested in their first day motions, subject to certain modifications stated on the record. While the first day motions were largely uncontested, the debtors had faced some push back with respect to their cash collateral motion prior to the hearing, with administrative agent Wells Fargo filing a reservation of rights out of abundance of caution due to ongoing negotiations.
At the outset of the hearing, however, the debtors announced that they had resolved the issues with the motion and filed a revised cash collateral order shortly before the hearing. Although the hearing was intended to focus on the emergency relief, Judge Isgur also brought up the adversary proceeding filed early Thursday morning by the debtors against nondebtor affiliate Kingfisher Midstream seeking authority to “set aside” certain gathering agreements.
A full transcript of today’s live blog of the hearing is available HERE.
The second day hearing is scheduled for Oct. 7, at 11 a.m. ET, with objections due Oct. 2, at 6 p.m. ET. Additional hearings were scheduled for certain other motions, including a second interim hearing on the NOL motion on Sept. 19, at 12:15 p.m. ET and a final hearing on the utilities motion on Oct. 1, at 3 p.m. ET. The NOL motion was granted on an interim basis today; the further interim hearing was scheduled in response to Judge Isgur’s concern that certain parties may not have received adequate notice.
A full roster of attorneys from Latham & Watkins presented motions on behalf of the Alta Mesa debtors, with Caroline Reckler handling the majority of the debtors’ case-in-chief. Reckler described the events leading to the debtors’ filing, emphasizing that the debtors, lenders and their respective professionals had put in “a lot of hard work” to make a smooth landing into chapter 11. She indicated that in addition to resolving the cash collateral dispute, the case parties continue to negotiate on a number of fronts in hopes of reaching consensual resolutions on various aspects of the case within the next 30 days.
Debtor Structure & Ownership
Reckler began by providing an overview of the debtors’ business, corporate structure and board composition of the debtor entities. Reckler explained the debtors’ corporate structure using the organizational chart shown below:
Reckler explained that Alta Mesa Resources, or AMR - the ultimate parent of both the debtor upstream business (Alta Mesa Holdings, or AMH) and non-debtor midstream assets (KFM) - is a debtor, though does not itself have funded debt obligations. According to Gregory Pesce of Kirkland & Ellis, counsel for sponsor Bayou City Energy, AMH and KFM were set up in two separate silos for “very specific reasons,” a “configuration” that came into effect 18 months ago with diligent planning from numerous advisors and sufficient noticing provided to relevant parties. Pesce said that the purpose of the siloed structure was essentially risk mitigation - if one “didn’t work out,” then the other silo still might. He added that the equity sponsors believe there is equity value on the KFM side.
Pesce expressed disappointment at what he characterized as attempts to “bring these two silos together,” asserting that leakage of value from KFM as a result was “inappropriate.” Lamenting the relative lack of time to prepare for the filing, Pesce said that Bayou initially hoped for a forbearance, but ultimately the parties could not come to an agreement. However, Pesce concluded by noting that he was “heartened” by the fact that the debtors are not focused purely on a sale process and he expressed Bayou’s intention to work with other constituents.
Damian Schaible of Davis Polk, counsel to an ad hoc group of noteholders holding $485.9 million in senior unsecured notes, also expressed concerns regarding cross-silo value leakage, though, unlike Pesce, Schaible was worried about value flowing in the other direction, from AMH to KFM.
Sale Process & Value Maximization
Annemarie Reilly of Latham stated during the hearing that the debtors are pursuing a dual-track strategy of a marketing and sale process for all or substantially all of the debtors’ assets while continuing negotiations with key stakeholders regarding capital structure options. The debtors are interested in pursuing whichever transaction is value-maximizing for the estates, Reckler said later in the hearing.
Reckler informed the court that the debtors had begun today a marketing process led by Perella Weinberg for both the debtor and non-debtor assets, as Kingfisher has agreed that their assets may also be sold. Reckler further explained that the sale process is set up to be “as flexible as possible,” and noted that KFM can decide at any time to withdraw from the sales process.
Judge Isgur stressed during the hearing that it’s important to focus on the dual-track strategy instead of just an asset sale. He said that it is in everyone’s best interest to make both the restructuring route and asset sale route “the best they can be,” and then determine the best path forward. “If we can’t restructure the business, we are going to have to do a sale, but that’s why I don’t want to dictate which direction we proceed in,” Judge Isgur told the parties.
Commenting on the gathering agreement adversary proceeding filed by AMH against KFM, Judge Isgur noted that if a sale for the integrated business was completed, the gathering agreement litigation would become moot.
Reckler said that potential buyers may not be interested in the AMH and KFM assets on a consolidated basis and expressed the “very real” possibility that a buyer may only want the AMH assets without the gathering agreements, which was the underlying rationale for filing the adversary proceeding to reject those agreements. Reckler stressed that the adversary proceeding was not filed as a leverage tactic and that the debtors’ stated need to expedite the litigation was legitimate.
Governance & Conflicts
Due to the debtors’ complex corporate and ownership structures, including significant sponsor equity ownership, governance during the restructuring was a key focus of the hearing. Reckler stated that she is “crystal clear” that the sponsors are “not calling the shots.” She went on to explain that while the AMR board includes four sponsor representatives, it also includes four independent directors and one newly-appointed director in charge of conflicts issues, Patrick Bartels Jr., whom Judge Isgur asked to appear telephonically during the hearing. Bartels, Reckler explained, is an experienced distressed investor with significant experience serving on boards.
Describing Bartels’ role, Reckler explained that he would have full latitude to identify conflicts matters and had already informed the debtors of three such potential issues - cash collateral, sale process and any matters related to the plan process. As a result, the debtors have modified the cash collateral order to delegate these conflict matters solely to Bartels, who is represented by Robbins Russell. In response to questioning from Judge Isgur, Reckler confirmed that debtors’ counsel would be taking action at the direction of Bartels with respect to the three matters identified.
Schaible, of Davis Polk, spoke at some length regarding his clients’ concerns regarding governance and conflicts matters. “I believe most things that happen in this bankruptcy will be conflicts,” Schaible observed. Turning to the investigations, he somewhat tersely expressed that the ad hoc noteholder group is “not in love” with Bartels not being “the one operating this restructuring,” noting the ad hoc group’s unambiguous preference for delegating “absolute, sole authority” to Bartels. Schaible noted the potential existence of other related party transactions warranting investigation, but expressed confidence in Robbins Russell’s ability to execute the work.
Schaible also stated that while his clients did not want to engage in litigation if they did not have to, they were concerned due to “significant value destruction in 2019 alone.” “I do think that we are going to have to pursue more than dual tracks - rather, we should do multi tracks,” he continued.
Judge Isgur slightly paraphrased but appeared to broadly concur with Schaible’s sentiment, stating that Bartels will determine whether there is a conflict, and if such a conflict exists, Bartels will become the “czar” of the matter, free from interference from the rest of the board.
Cash Collateral
Turning to the previously-contested cash collateral issues, William “Trey” Wood of Bracewell, counsel to Wells Fargo, informed the court that the cash collateral issues have been resolved with the debtors on an interim basis. However, he noted that he has not received final sign off from the lenders that the proposed form of order is sufficient to serve as a final order.
At the same time, Wood said that the independent director “taking over” the cash collateral, plan and sale process is “news to us as of last night.” Correspondingly, he expressed the need to analyze the role of the “old board” and stated that if the parties are unable to agree regarding the proper scope of Bartels’ role, they may need the court to weigh in on the parameters vis-a-vis the responsibilities of the other board members.
Wood was unequivocal regarding urgency on timing. “We will be pushing the process” on behalf of Wells Fargo, he said. Noting the approximately $8 million monthly cash burn, Wood reiterated that “any delay . . . is very detrimental to our clients.” Wood then argued that his client should have the right to take possession of collateral in the event of a breach of a milestone in the cash collateral order.
Judge Isgur responded that “I will not let your clients seize assets if there is a breach of a milestone in an interim order.” Judge Isgur continued, explaining that he lacks the information needed for such a determination and correspondingly is “not giving away the farm on the first day.” Further, Judge Isgur stressed that he has never authorized seizure of assets upon a breach, not even subject to a final order. The court then proceeded to edit the cash collateral order, at one point asking counsel to dictate changes to him and entering them in real time.
This article is an example of the content you may receive if you subscribe to a product of Reorg Research, Inc. or one of its affiliates (collectively, “Reorg”). The information contained herein should not be construed as legal, investment, accounting or other professional services advice on any subject. Reorg, its affiliates, officers, directors, partners and employees expressly disclaim all liability in respect to actions taken or not taken based on any or all the contents of this publication. Copyright © 2024 Reorg Research, Inc. All rights reserved.