Emerge Energy Services LP
CASE SUMMARY (Middle Market): Emerge Energy Services Files for Chapter 11, Seeks $35M DIP; RSA Contemplates Second Liens Receiving Most Reorganized Equity
Tue 07/16/2019 13:47 PM
Relevant Documents:
Voluntary Petition
First Day Declaration
DIP Financing Motion
First Day Hearing Agenda
Emerge Energy Services LP (“Emerge LP” or “the partnership”), a Fort Worth-based energy services company that mines, processes and distributes frac sand, together with its operating subsidiary, Superior Silica Sands LLC, and other subsidiaries filed for chapter 11 in the Bankruptcy Court for the District of Delaware Monday evening. The debtors report $329.4 million in assets and $266.1 million in liabilities.
The debtors entered into a restructuring support agreement on April 18 with lenders holding 100% in principal amount of outstanding obligations under the company’s revolving credit facility and noteholders holding 100% in principal amount of the company’s second lien notes. The RSA contemplated either an in-court or out-of-court restructuring. The company has about $66.7 million outstanding on the revolver (including letters of credit) and about $215.8 million outstanding on the second lien notes.
The RSA contemplates the revolver being paid in cash and second lien notes receiving nearly all reorganized equity along with a partial reinstatement. If they vote to accept the plan, GUCs would receive a “global settlement fund” (including 5% of reorganized equity that would otherwise go to the seconds).
The debtors propose a $35 million senior secured DIP facility ($7.5 million in interim funding), with HPS Investment Partners as agent. The company’s restructuring officer, Bryan Gaston of Ankura, in a declaration in support of the DIP financing highlights the debtors' urgent liquidity needs, noting cash on hand of only $1.3 million as of the petition date, and says that the DIP would permit the debtors to maintain minimum liquidity of $5 million throughout the chapter 11 cases "while timely honoring all budgeted disbursements, in contrast to the months leading to the Petition Date."
The first day hearing is scheduled for tomorrow, Wednesday, July 17, at 10:30 a.m. ET. Judge Karen Owens has been assigned to the case.
The debtors’ capital structure as of the petition date is below.
On May 17, Emerge received an expected notice from the New York Stock Exchange indicating noncompliance with listing requirements. On May 31, the company’s common units were delisted. As of July 16, there were about 31,139,306 common units issued and outstanding, with approximately 25,333 record holders of common units. This number does not include unitholders whose units are held in trust by other entities. The debtors’ ultimate parent, Emerge Energy Services GP LLC, is 80% owned by affiliates of Insight Equity Holdings LLC and 20% owned by Ted Beneski (who, along with Victor Vescovo, are the controlling equity owners of Insight Equity Holdings LLC).
Gaston’s first day declaration says the debtors filed chapter 11 filing in light of “a lack of viable restructuring options and dwindling liquidity.” Gaston says that even after the RSA was signed “the debtors (with the support of their secured lenders) continued to negotiate with their material railcar and terminal lessors for months in the hopes of consummating an out-of-court restructuring.” He adds that while the debtors reached agreement with three counterparties, “it became clear that there were no viable out-of-court restructuring option for the debtors to pursue as compared to the benefits that chapter 11 would provide - most importantly the ability to reject burdensome contracts and leases under section 365 of the Bankruptcy Code.”
The declaration details the chapter 11 plan milestones pursuant to the debtors’ proposed debtor-in-possession loan facility under a DIP facility term sheet which is to be separately provided:
While the debtors’ business experienced rapid growth from 2011 to 2014 due to technological advances in horizontal drilling and the hydraulic fracturing process, demand for frac sand decreased during 2015 and 2016 as a result of an industry downturn due to low commodity prices. Although commodity prices began to stabilize in the middle of 2016 and drilling activity improved during the third quarter of 2016 through early 2018, the market for frac sand began to “soften again in early August 2018, due to a decline in well completion activities resulting from the exhaustion of capital budgets for oil and gas exploration and production companies,” Gaston says. The declaration adds that these factors, along with the new production from in-basin frac sand competitors “led the frac sand market to turn from a state of short supply in the first half of 2018 to over-supply in the second half of 2018.”
The debtors are represented by Latham & Watkins and Richards Layton & Finger as counsel, Houlihan Lokey as financial advisor and KCC as claims and noticing agent. Gaston is serving as restructuring officer.
Background
Founded in 2012 by management of Insight Equity Management and its affiliated investment funds, Emerge Energy mines, processes and distributes silica sand proppant, a key component in oil and gas fracking. The debtors’ production of sand consists of three basic processes: mining, wet plant operations and dry plant operations. The company completed its initial public offering to become a publicly listed limited partnership in 2013. The debtors operate out of Wisconsin and Texas and have 236 employees, none of whom are unionized.
Emerge’s Wisconsin facilities comprise three dry plants, with a total permitted capacity of 6.3 million finished tons per year, and five wet plants and mine complexes that supply the dry plants with northern white silica sand, which, according to the company’s fiscal 2017 10-K filing, is said to be the highest-quality raw frac sand available. The company also has a fourth dry plant, in Kosse, Texas, with a capacity of 600,000 tons per year, that is supplied by a separate mine and wet plant that processes local Texas sand. As of Dec. 31, 2017, the company also had 14 transload facilities located throughout North America in the key basins where it delivers sand, as well as a fleet of 5,199 railcars.
More than 94% of the debtors’ sand is sold in the oil and gas proppants market to major oilfield services companies and fracking-based E&P companies, with the remaining 6% of output sold in the sports sands, construction and foundry industries. In 2018, Emerge’s two top customers accounted for 38% of the company’s revenue, and long-term contracts made up 60% of revenue.
The debtors characterize the frac sand market as “highly competitive,” composed of a small number of large, national “tier 1” producers and a larger number of small, regional or local producers. “Competition in the frac sand industry has increased recently,” the debtors note, adding they expect it to increase further “as significant new entrants began operations in 2018 with local, in-basin sand mines.” Suppliers compete based on numerous metrics including price, consistency, quality of product, site location, distribution capability and reliability, and customer service. The debtors say they believe they were one of the top producers of frac sand in 2018 by production capacity and sales.
The debtors purchased a site in San Antonio, Texas, in April 2017 and undertook a large capex project to develop it. The project experienced certain complications and “continues to produce below the facility’s nameplate capacity in its sixth full month of operation, in spite of reasonably strong customer demand and pricing,” according to Gaston. He adds that the facility has temporarily ceased mining operations at the facility’s A and B mines. The following chart details the San Antonio facility loadout and utilization per month from February to July of this year.
Reduced performance in June and in the first eight days of July is the result of a levee breach incident that occurred on June 21 where a 15-foot section of the west wall in the facility’s mud retention pond failed causing an “inundation of water and sediment to the southwest corner of the mine,” Gaston states. While no injuries occurred due to the breach, the U.S. Mining Safety and Health Administration issued an order on the entire mine area preventing the debtors from accessing any part of the impacted mine. Though the mining and wet plant operations in San Antonio have been shut down since June, the debtors are able to continue operating its drying facilities and delivering product to customers.
The debtors’ corporate organizational structure chart is below.
The debtors’ largest unsecured creditors are listed below.
The case representatives are as follows.
Restructuring Support Agreement
The debtors’ restructuring term sheet contemplates a global settlement and compromise if, and only if, the class of holders of general unsecured claims votes to accept the plan. The consenting noteholders would carve out from their collateral a settlement fund consisting of: (i) 5% of new common units in Emerge LP subject to dilution by units issued pursuant to a MIP and the new out-of-the-money warrants and (ii) out-of-the-money warrants for 15% of the new common units in Emerge LP subject to dilution by units issued pursuant to a MIP. The contingent warrants would represent 15% of the new ownership interests in Emerge LP, subject to dilution by interests issued pursuant to a MIP, with an expiration date of 10 years and exercisable only when and if the holders of new ownership interests have received cash or cash equivalent consideration of $190 million. Further, if the global settlement fund is established, the special restructuring committee “shall have sole discretion to determine the allocation of the Global Settlement Fund among the class of holders of General Unsecured Claims and the class of holders of Existing Emerge LP Common Units, in a manner that ensures confirmation of the Plan.”
The treatment of claims and interests under the in-court reorganization, according to the RSA, include:
The term sheet also contemplates a 100-day stay in chapter 11, consistent with the DIP milestones.
DIP Financing Motion
The DIP financing bears interest at L+8%, with an additional 2% for the default rate, and matures six months from closing, subject to milestones. The DIP proceeds may be used to pay professional fees and expenses, to cover prepetition and prefiling expenses approved by the court and to make required adequate protection payments, with typical limitations on the use of proceeds to challenge the secured parties’ liens and claims.
To secure the DIP financing, the debtors propose to grant first-priority and priming liens on all of the debtors’ assets, including proceeds of avoidance actions.
The proposed DIP contemplates the “incremental roll up” of the prepetition revolver into DIP loans. Specifically, under the proposed DIP, proceeds from the sale of prepetition collateral and collection of receivables are “deemed to repay, on a dollar-for-dollar basis, and discharge, until paid in full, the aggregate outstanding principal indebtedness under the Prepetition Revolving Credit Agreement.” Such proceeds are also “deemed borrowed by the Borrowers and deemed funded by each DIP Lender in the exact same principal amount equal to the aggregate outstanding principal amount of the Prepetition Revolver Obligations … on a dollar-for-dollar basis.”
The facility contemplates a commitment fee equal to 1% of undrawn advances, a 3% closing fee and a 5% “prepayment premium” or “DIP Fee” payable if debtors enter into “a debtor-in-possession financing arrangement in lieu of the DIP Facility or as a refinancing or replacement of, in whole or in part, the DIP Facility.”
In support of the proposed DIP financing, the debtors filed the declarations of Adam Dunayer of Houlihan Lokey, the debtors’ financial advisor, and the debtors’ restructuring officer, Bryan Gaston of Ankura. According to Gaston, the debtors only have $1.3 million in cash on hand but require a minimum of $2 million in cash plus revolver availability to operate.
According to Dunayer, “Without access to the DIP Facility, the Debtors would have extremely limited cash on hand” and could not be expected “to generate sufficient levels of operating cash flow in the ordinary course of business to cover their working capital needs and the projected administrative costs of these chapter 11 cases.” However, Dunayer says, the debtors’ prepetition secured debt burden “significantly” exceeds “the going-concern value of the Debtors’ assets,” and existing secured creditors “will not consent to the priming of their security interests by a third party,” making it “very unlikely that any third-party lenders would be willing to provide DIP Financing.” Thus, the prepetition secured parties’ DIP offer is the best available to the debtors and “will provide the Debtors with immediate access to liquidity that is necessary to ensure that the Debtors’ business is stabilized, chapter 11 administrative costs are paid in full, and value is preserved during the course of the Debtors’ reorganization.”
Adequate Protection
The company proposes the following adequate protection to prepetition secured parties: junior liens on DIP collateral, superpriority administrative expense claims, payment of accrued and unpaid interest on the prepetition facility at the default rate, typical stipulations regarding prepetition debt and liens, typical releases for DIP and prepetition secured parties and payment of the prepetition secured parties’ fees and expenses.
Under the proposed DIP, an unsecured creditors committee would have until 60 days after appointment to challenge the debtors’ stipulations, while other parties would have until 75 days after entry of an interim DIP order.
In addition, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).
The proposed DIP contemplates payment of professional fees during the case until an event of default, at which point a $1 million carve-out to be funded by cash swept or foreclosed after delivery of a default notice.
DIP Budget
The proposed budget for the use of the DIP facility is HERE.
DIP Milestones
The DIP financing is subject to the following milestones:
Other Motions
The debtors also filed various standard first day motions, including the following:
Voluntary Petition
First Day Declaration
DIP Financing Motion
First Day Hearing Agenda
Emerge Energy Services LP (“Emerge LP” or “the partnership”), a Fort Worth-based energy services company that mines, processes and distributes frac sand, together with its operating subsidiary, Superior Silica Sands LLC, and other subsidiaries filed for chapter 11 in the Bankruptcy Court for the District of Delaware Monday evening. The debtors report $329.4 million in assets and $266.1 million in liabilities.
The debtors entered into a restructuring support agreement on April 18 with lenders holding 100% in principal amount of outstanding obligations under the company’s revolving credit facility and noteholders holding 100% in principal amount of the company’s second lien notes. The RSA contemplated either an in-court or out-of-court restructuring. The company has about $66.7 million outstanding on the revolver (including letters of credit) and about $215.8 million outstanding on the second lien notes.
The RSA contemplates the revolver being paid in cash and second lien notes receiving nearly all reorganized equity along with a partial reinstatement. If they vote to accept the plan, GUCs would receive a “global settlement fund” (including 5% of reorganized equity that would otherwise go to the seconds).
The debtors propose a $35 million senior secured DIP facility ($7.5 million in interim funding), with HPS Investment Partners as agent. The company’s restructuring officer, Bryan Gaston of Ankura, in a declaration in support of the DIP financing highlights the debtors' urgent liquidity needs, noting cash on hand of only $1.3 million as of the petition date, and says that the DIP would permit the debtors to maintain minimum liquidity of $5 million throughout the chapter 11 cases "while timely honoring all budgeted disbursements, in contrast to the months leading to the Petition Date."
The first day hearing is scheduled for tomorrow, Wednesday, July 17, at 10:30 a.m. ET. Judge Karen Owens has been assigned to the case.
The debtors’ capital structure as of the petition date is below.
On May 17, Emerge received an expected notice from the New York Stock Exchange indicating noncompliance with listing requirements. On May 31, the company’s common units were delisted. As of July 16, there were about 31,139,306 common units issued and outstanding, with approximately 25,333 record holders of common units. This number does not include unitholders whose units are held in trust by other entities. The debtors’ ultimate parent, Emerge Energy Services GP LLC, is 80% owned by affiliates of Insight Equity Holdings LLC and 20% owned by Ted Beneski (who, along with Victor Vescovo, are the controlling equity owners of Insight Equity Holdings LLC).
Gaston’s first day declaration says the debtors filed chapter 11 filing in light of “a lack of viable restructuring options and dwindling liquidity.” Gaston says that even after the RSA was signed “the debtors (with the support of their secured lenders) continued to negotiate with their material railcar and terminal lessors for months in the hopes of consummating an out-of-court restructuring.” He adds that while the debtors reached agreement with three counterparties, “it became clear that there were no viable out-of-court restructuring option for the debtors to pursue as compared to the benefits that chapter 11 would provide - most importantly the ability to reject burdensome contracts and leases under section 365 of the Bankruptcy Code.”
The declaration details the chapter 11 plan milestones pursuant to the debtors’ proposed debtor-in-possession loan facility under a DIP facility term sheet which is to be separately provided:
- July 25: Filing of plan, disclosure statement and DS motion;
- Sept. 3: Entry of DS order; commencement of plan solicitation;
- Oct. 8: Entry of confirmation order; and
- Oct. 23: Plan effective date.
While the debtors’ business experienced rapid growth from 2011 to 2014 due to technological advances in horizontal drilling and the hydraulic fracturing process, demand for frac sand decreased during 2015 and 2016 as a result of an industry downturn due to low commodity prices. Although commodity prices began to stabilize in the middle of 2016 and drilling activity improved during the third quarter of 2016 through early 2018, the market for frac sand began to “soften again in early August 2018, due to a decline in well completion activities resulting from the exhaustion of capital budgets for oil and gas exploration and production companies,” Gaston says. The declaration adds that these factors, along with the new production from in-basin frac sand competitors “led the frac sand market to turn from a state of short supply in the first half of 2018 to over-supply in the second half of 2018.”
The debtors are represented by Latham & Watkins and Richards Layton & Finger as counsel, Houlihan Lokey as financial advisor and KCC as claims and noticing agent. Gaston is serving as restructuring officer.
Background
Founded in 2012 by management of Insight Equity Management and its affiliated investment funds, Emerge Energy mines, processes and distributes silica sand proppant, a key component in oil and gas fracking. The debtors’ production of sand consists of three basic processes: mining, wet plant operations and dry plant operations. The company completed its initial public offering to become a publicly listed limited partnership in 2013. The debtors operate out of Wisconsin and Texas and have 236 employees, none of whom are unionized.
Emerge’s Wisconsin facilities comprise three dry plants, with a total permitted capacity of 6.3 million finished tons per year, and five wet plants and mine complexes that supply the dry plants with northern white silica sand, which, according to the company’s fiscal 2017 10-K filing, is said to be the highest-quality raw frac sand available. The company also has a fourth dry plant, in Kosse, Texas, with a capacity of 600,000 tons per year, that is supplied by a separate mine and wet plant that processes local Texas sand. As of Dec. 31, 2017, the company also had 14 transload facilities located throughout North America in the key basins where it delivers sand, as well as a fleet of 5,199 railcars.
More than 94% of the debtors’ sand is sold in the oil and gas proppants market to major oilfield services companies and fracking-based E&P companies, with the remaining 6% of output sold in the sports sands, construction and foundry industries. In 2018, Emerge’s two top customers accounted for 38% of the company’s revenue, and long-term contracts made up 60% of revenue.
The debtors characterize the frac sand market as “highly competitive,” composed of a small number of large, national “tier 1” producers and a larger number of small, regional or local producers. “Competition in the frac sand industry has increased recently,” the debtors note, adding they expect it to increase further “as significant new entrants began operations in 2018 with local, in-basin sand mines.” Suppliers compete based on numerous metrics including price, consistency, quality of product, site location, distribution capability and reliability, and customer service. The debtors say they believe they were one of the top producers of frac sand in 2018 by production capacity and sales.
The debtors purchased a site in San Antonio, Texas, in April 2017 and undertook a large capex project to develop it. The project experienced certain complications and “continues to produce below the facility’s nameplate capacity in its sixth full month of operation, in spite of reasonably strong customer demand and pricing,” according to Gaston. He adds that the facility has temporarily ceased mining operations at the facility’s A and B mines. The following chart details the San Antonio facility loadout and utilization per month from February to July of this year.
Reduced performance in June and in the first eight days of July is the result of a levee breach incident that occurred on June 21 where a 15-foot section of the west wall in the facility’s mud retention pond failed causing an “inundation of water and sediment to the southwest corner of the mine,” Gaston states. While no injuries occurred due to the breach, the U.S. Mining Safety and Health Administration issued an order on the entire mine area preventing the debtors from accessing any part of the impacted mine. Though the mining and wet plant operations in San Antonio have been shut down since June, the debtors are able to continue operating its drying facilities and delivering product to customers.
The debtors’ corporate organizational structure chart is below.
(Click HERE to enlarge.)
The debtors’ largest unsecured creditors are listed below.
| 10 Largest Unsecured Creditors | |||
| Creditor | Location | Claim Type | Amount |
|---|---|---|---|
| Trinity Industries Leasing Co. |
Dallas | Trade | $ 8,923,600 |
| Market & Johnson Inc. | Eau Claire, Wis. | Trade | 6,206,700 |
| CIT Group/Equipment Financing Inc. |
Chicago | Trade | 4,054,895 |
| Stout Excavating Group LLC |
Bloomer, Wis. | Trade | 3,100,224 |
| TMT Solutions Inc. | San Marcos, Texas | Trade | 2,215,210 |
| SMBC Rail Services LLC |
St. Peters, Mo. | Trade | 2,115,968 |
| DI-Corp Sand Transloading LP |
Edmonton, Ala. | Trade | 2,006,306 |
| Pownall Services LLC | Sugar Land, Texas | Trade | 1,819,788 |
| Wells Fargo Rail Corp. |
Rosemont, Ill. | Trade | 1,652,113 |
| RBScott Co. Inc. | Eau Claire, Wis. | Trade | 1,479,605 |
The case representatives are as follows.
| Representatives | |||
| Role | Name | Firm | Location |
|---|---|---|---|
| Debtors' Co-Counsel | George A. Davis | Latham & Watkins |
New York |
| Keith A. Simon | |||
| Hugh K. Murtagh | |||
| Liza L. Burton | |||
| Debtors' Co-Counsel | John H. Knight | Richards, Layton & Finger |
Wilmington, Del. |
| Paul N. Heath | |||
| Zachary I. Shapiro | |||
| Brett M. Haywood | |||
| Debtors' Financial Advisor |
Adam L. Dunayer | Houlihan Lokey |
Dallas |
| Debtors' Restructuring Officer |
Bryan Gaston | Ankura Consulting |
Houston |
| Co-Counsel for the DIP Agent, DIP Lenders and Prepetition Secured Parties |
Matthew S. Barr | Weil, Gotshal & Manges |
New York |
| David Griffiths | |||
| Candace M. Arthur | |||
| Co-Counsel for the DIP Agent, DIP Lenders and Prepetition Secured Parties |
Laura Davis Jones | Pachulski, Stang, Ziehl & Jones |
Wilmington, Del. |
| U.S. Trustee | Juliet M. Sarkessian | Office of the U.S. Trustee |
Wilmington, Del. |
| Debtors' Claims Agent | Robert Jordan | KCC | El Segundo, Calif. |
Restructuring Support Agreement
The debtors’ restructuring term sheet contemplates a global settlement and compromise if, and only if, the class of holders of general unsecured claims votes to accept the plan. The consenting noteholders would carve out from their collateral a settlement fund consisting of: (i) 5% of new common units in Emerge LP subject to dilution by units issued pursuant to a MIP and the new out-of-the-money warrants and (ii) out-of-the-money warrants for 15% of the new common units in Emerge LP subject to dilution by units issued pursuant to a MIP. The contingent warrants would represent 15% of the new ownership interests in Emerge LP, subject to dilution by interests issued pursuant to a MIP, with an expiration date of 10 years and exercisable only when and if the holders of new ownership interests have received cash or cash equivalent consideration of $190 million. Further, if the global settlement fund is established, the special restructuring committee “shall have sole discretion to determine the allocation of the Global Settlement Fund among the class of holders of General Unsecured Claims and the class of holders of Existing Emerge LP Common Units, in a manner that ensures confirmation of the Plan.”
The treatment of claims and interests under the in-court reorganization, according to the RSA, include:
- Other Secured Claims: To be satisfied in full through (i) payment in full in cash, (ii) delivery of collateral securing any such claim and payment of any interest requested under section 506(b) of the Bankruptcy Code, (iii) reinstatement pursuant to section 1124 of the Bankruptcy Code, (iv) such other recovery necessary to satisfy section 1129 of the Bankruptcy Code, or (v) such other treatment as agreed to by such holder, the debtors and majority noteholders.
- Revolving Loan Facility: To be satisfied in full in cash.
- Second Lien Notes: To be partially reinstated in a principal amount and on terms satisfactory to the special restructuring committee and majority noteholders. In satisfaction of the remainder of the second lien notes obligations, the noteholders would receive: (i) if the class of holders of general unsecured claims votes to accept the plan, 95% of the new common units of Emerge LP subject to dilution by interests issued pursuant to a MIP and the out-of-the-money warrants or (ii) if the class of holders of general unsecured claims votes to reject the plan, 100% of the new common units subject to dilution by interests issued pursuant to a MIP. Further, as owners of the new common units, the noteholders would appoint a new general partner of Emerge LP.
- General Unsecured Claims: If the class votes to accept the plan, holders of general unsecured claims would receive their pro rata share of the settlement fund as determined by the special restructuring committee. If the class of general unsecured claims votes to reject the plan, the holders of general unsecured claims would receive no distribution under the plan.
- Existing Emerge LP Common Units: As part of the global settlement and compromise, to be canceled, and if the class of general unsecured claims votes to accept the plan, holders would receive their pro rata share of the settlement fund as determined by the special restructuring committee. If the class of general unsecured claims votes to reject the plan, there shall be no distribution to holders of existing Emerge LP common units.
- Intercompany Claims/Intercompany Interests: Compromised, reinstated or canceled as acceptable to the special restructuring committee and the majority noteholders.
The term sheet also contemplates a 100-day stay in chapter 11, consistent with the DIP milestones.
DIP Financing Motion
The DIP financing bears interest at L+8%, with an additional 2% for the default rate, and matures six months from closing, subject to milestones. The DIP proceeds may be used to pay professional fees and expenses, to cover prepetition and prefiling expenses approved by the court and to make required adequate protection payments, with typical limitations on the use of proceeds to challenge the secured parties’ liens and claims.
To secure the DIP financing, the debtors propose to grant first-priority and priming liens on all of the debtors’ assets, including proceeds of avoidance actions.
The proposed DIP contemplates the “incremental roll up” of the prepetition revolver into DIP loans. Specifically, under the proposed DIP, proceeds from the sale of prepetition collateral and collection of receivables are “deemed to repay, on a dollar-for-dollar basis, and discharge, until paid in full, the aggregate outstanding principal indebtedness under the Prepetition Revolving Credit Agreement.” Such proceeds are also “deemed borrowed by the Borrowers and deemed funded by each DIP Lender in the exact same principal amount equal to the aggregate outstanding principal amount of the Prepetition Revolver Obligations … on a dollar-for-dollar basis.”
The facility contemplates a commitment fee equal to 1% of undrawn advances, a 3% closing fee and a 5% “prepayment premium” or “DIP Fee” payable if debtors enter into “a debtor-in-possession financing arrangement in lieu of the DIP Facility or as a refinancing or replacement of, in whole or in part, the DIP Facility.”
In support of the proposed DIP financing, the debtors filed the declarations of Adam Dunayer of Houlihan Lokey, the debtors’ financial advisor, and the debtors’ restructuring officer, Bryan Gaston of Ankura. According to Gaston, the debtors only have $1.3 million in cash on hand but require a minimum of $2 million in cash plus revolver availability to operate.
According to Dunayer, “Without access to the DIP Facility, the Debtors would have extremely limited cash on hand” and could not be expected “to generate sufficient levels of operating cash flow in the ordinary course of business to cover their working capital needs and the projected administrative costs of these chapter 11 cases.” However, Dunayer says, the debtors’ prepetition secured debt burden “significantly” exceeds “the going-concern value of the Debtors’ assets,” and existing secured creditors “will not consent to the priming of their security interests by a third party,” making it “very unlikely that any third-party lenders would be willing to provide DIP Financing.” Thus, the prepetition secured parties’ DIP offer is the best available to the debtors and “will provide the Debtors with immediate access to liquidity that is necessary to ensure that the Debtors’ business is stabilized, chapter 11 administrative costs are paid in full, and value is preserved during the course of the Debtors’ reorganization.”
Adequate Protection
The company proposes the following adequate protection to prepetition secured parties: junior liens on DIP collateral, superpriority administrative expense claims, payment of accrued and unpaid interest on the prepetition facility at the default rate, typical stipulations regarding prepetition debt and liens, typical releases for DIP and prepetition secured parties and payment of the prepetition secured parties’ fees and expenses.
Under the proposed DIP, an unsecured creditors committee would have until 60 days after appointment to challenge the debtors’ stipulations, while other parties would have until 75 days after entry of an interim DIP order.
In addition, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).
The proposed DIP contemplates payment of professional fees during the case until an event of default, at which point a $1 million carve-out to be funded by cash swept or foreclosed after delivery of a default notice.
DIP Budget
The proposed budget for the use of the DIP facility is HERE.
DIP Milestones
The DIP financing is subject to the following milestones:
- Filing of Form 10-K for the fiscal year ended Dec. 31, 2018, and Form 10-Q for the quarter ended March 31, including audited financial statements and accountants’ opinion: July 31.
- Plan filing deadline: Within seven business days after petition date.
- Entry of final DIP order: Within 35 days after petition date.
- DS hearing: 37 days after plan filing deadline.
- DS approval: Three days after DS hearing deadline.
- Rejection of railcar leases: 60 days after petition date.
- Confirmation deadline: 35 days after DS approval deadline.
- Effective date: Earlier of 15 days after confirmation deadline and 100 days after petition date.
Other Motions
The debtors also filed various standard first day motions, including the following:
- Motion for Joint Administration
- The cases will be jointly administered under case No. 19-11563.
- Motion to Pay Prepetition Shippers, Lien Claimants and Royalty Owners
- The debtors propose the following payments: (i) $473,000 on an interim basis and $1.5 million on a final basis on account of shipping claims; (ii) $57,000 on an interim basis and $147,000 on a final basis on account of lien claims; and (iii) $186,000 on an interim basis and $211,000 on a final basis on account of royalty payments.
- Motion to Pay Employee Wages and Benefits
- On an interim basis, the debtors seek approval to pay up to $900,000 in workforce compensation, $32,500 in employee reimbursement programs and $67,500 in employee benefit programs. On a final basis, the debtors seek to pay an additional $60,000 in reimbursement program obligations.
- Motion to Reject Certain Railcar Lease Agreements and Enter Into Proposed New Railcar Lease Agreements
- The debtors say that because they hold excess, unused railcars, they incur significant costs associated with the extraneous railcars. These costs include what are now above market, monthly rental rates as well as storage costs, exceeding about $3 million per month in the aggregate. Such costs are detrimental to the debtors’ business and their estates, especially during this critical time.
- First Omnibus Motion to Reject Executory Contracts and Unexpired Leases
- A list of the leases and contracts sought to be rejected by the debtors can be found HERE.
- Motion to Use Cash Management System
- The company has seven bank accounts with PNC Bank.
- Motion to Continue Customer Programs
- Motion to Maintain Insurance Programs
- Motion to Pay Taxes and Fees
- The debtors propose to limit the aggregate amount of payments to be made on account of prepetition taxes and fees to $600,000 on an interim basis and $935,000 on a final basis.
- Motion to Provide Utilities with Adequate Assurance
- Application to Appoint Kurtzman Carson Consultants LLC as Claims Agent
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