Relevant Document:Hearing Agenda
The PHI debtors' first day hearing before Judge Harlin Hale will continue tomorrow, Tuesday, March 19, at 10 a.m. ET. During today's hearing, the court granted the debtors' motion for joint administration, and also authorized employees to be paid in the ordinary course, as requested in the employee wages motion. Judge Hale will address the balance of the debtors' requested
first day relief at tomorrow's hearing. The judge said that he expects tomorrow's hearing to last "an hour or so."
Live updates from today's hearing can be accessed
HERE.
At today's hearing, Thomas Califano of DLA Piper, counsel to the debtors, said that the debtors had submitted “fairly non-controversial” first day motions. The debtors were “surprised” to see a
limited objection to the debtors’ cash management motion filed by Delaware Trust Co., indenture trustee for the 5.25% senior notes, earlier in the day, Califano said. In the filing, Delaware Trust said that the debtors had engaged in “offensive” prepetition conduct to benefit insiders, and argued that PHI’s entry into a $70 million term loan with Blue Torch Capital on March 13 was the debtors’ attempt to secure the benefits of DIP financing without the accompanying reporting obligations and court oversight.
Andrew Leblanc of Milbank, counsel to Delaware Trust, questioned the witnesses at the first day hearing on the debtors’ decisions to reject a DIP financing proposal from an ad hoc group of 5.25% noteholders and to enter into the Blue Torch loan shortly before bankruptcy.
Leblanc also referenced a DIP proposal submitted to PHI earlier today, but Califano, for the debtors, said that he had not even seen this noteholder proposal. Leblanc also asked whether one of the motivations for closing the Blue Torch facility prepetition was to create an impaired voting class for plan confirmation purposes. Ultimately, counsel for the indenture trustee stressed that it was important for the court to hear the witnesses’ testimony on the issues, but confirmed that the limited objection was resolved with the debtors’ agreement to provide the trustee with weekly financial reporting as requested in the objection.
Counsel from the Office of the U.S. Trustee said that a formation meeting for an official committee of unsecured creditors has been scheduled for next Monday, March 25. Counsel also said that the UST had received a letter requesting the appointment of an official equity committee.
During today’s hearing, counsel for the debtors called the following witnesses:
- Mike Genereux of PJT Partners, advisor to the 5.25% notes indenture trustee
- Lance Bospflug, PHI president and COO
- Robert Del Genio of FTI Consulting, the debtors’ CRO
- Matthew Niemann, managing director at Houlihan Lokey, the debtors’ financial advisor
Genereux of PJT testified on prepetition negotiations between the debtors and the 5.25% noteholders. When debtors’ counsel asked about the size of the proposed DIP from the noteholder group, Genereux said, “I believe our proposal was $400 million,” but upon further questioning from debtors’ counsel, he said he was not positive about this figure. PHI declined to engage on the noteholders’ DIP proposal, he remarked.
Genereux also said that PHI had presented a “straw man” restructuring proposal to PJT and Milbank, but at the time, PJT did not share the proposal with its clients because the 5.25% noteholders were not restricted. He questioned how the company could expect a response to the restructuring proposal when the noteholders were not yet restricted, saying that the process was “completely backwards.” Genereux also said that he did not see the terms of the Blue Torch facility before it closed.
When asked by Leblanc, for the 5.25% notes indenture trustee, whether it was true that the noteholders’ proposed DIP “was not a priming facility in any respect,” Genereux agreed. When Leblanc asked, “Is it fair to say that the first proposal from us was not significantly worse than the Blue Torch facility?” Genereux replied, “From a financial standpoint, it’s significantly better,” saying that the noteholders’ proposal featured lower fees. As for the collateral package, the noteholders would have liened up only unencumbered assets under the DIP proposal, he added.
PHI president and COO Bospflug provided the court with an overview of PHI’s business units and operations. He said that the “energy crunch” since 2015 had a “major impact” on the debtors’ business and noted the volatility in the oil and gas markets as an adverse factor. Bospflug also addressed PHI’s entry into the $130 million working capital loan with Thirty Two LLC, which is owned by chairman and CEO Al Gonsoulin. Bospflug said that the company entered into the Thirty Two loan to refinance a loan from Whitney Bank after the company failed to meet certain covenants under the Whitney Bank loan. The company sought other proposals, but “we did not receive any proposals that cleared the bonds,” Bospflug said.
Addressing pre-bankruptcy negotiations, Bospflug also said that PHI’s decision not to execute a nondisclosure agreement with the noteholders was “risk-based,” as the company would have needed to provide material nonpublic information to the noteholders one week before the bonds were due. The parties were also far apart on restructuring terms at the time, and the company decided entry into an NDA was “a risk we shouldn’t be taking,” he remarked. Bospflug also said that the company took steps to address conflicts arising from Gonsoulin’s involvement through the appointment of independent directors on the board. He said that PHI’s goal is to be in and out of chapter 11 very quickly, saying, “we want to get out as soon as we can.”
Del Genio, the debtors’ CRO, was next on the stand. He stated that the debtors have not submitted a cash collateral motion at this time because there is no emergency need for use of cash collateral, and the proceeds from the Blue Torch financing are sufficient for the debtors’ liquidity needs at this time. Del Genio also previewed that the debtors expect to request use of cash collateral later in the case, saying, “I expect to be back here asking for use of cash collateral” by the final hearing, if not sooner. On cross-examination, Leblanc, for the notes trustee, asked Del Genio if it was true that about 7% of the $70 million loan was “lost” to fees, expenses and OID, and Del Genio responded that in “round numbers,” this was true. Del Genio also said that “somewhere in the neighborhood of $400,000” of the loan was used to fund a retainer for Blue Torch.
Niemann of Houlihan Lokey, the last witness of the day, stressed that PHI was not soliciting DIP proposals prepetition. The company did solicit out-of-court proposals, and the one from Blue Torch was the most attractive, he remarked. Niemann stated that the debtors decided to pursue the Blue Torch financing out of court “because we could,” and it is permitted under the 5.25% notes indenture. He added that it was an unusual facility, but “it is pretty cool that we could structure this.” He said that there was no “nefarious purpose” to the Blue Torch financing.
In response to a question from Leblanc, counsel to the indenture trustee, about whether Niemann had ever suggested that a reason for the Blue Torch financing was to create an impaired accepting class in bankruptcy and cram down the noteholders, Niemann asserted, “I never said that to anybody.” Niemann said that he may have mentioned that it’s a truism that a third party may be a consenting or non-consenting impaired class in bankruptcy. Niemann also remarked that the company is “very comfortable” that it can meet
all covenants over the life of the Blue Torch loan, including the 4x monthly minimum total appraisal ratio.
Near the conclusion of the hearing, Judge Hale granted the debtors’ motion for joint administration. He also said that the debtors can let their employees know that they will be paid in the ordinary course as requested in the employee wages motion. The court observed that the 5.25% notes trustee’s limited cash collateral objection had been resolved, although the U.S. Trustee’s requested modifications and language tweaks with respect to various proposed orders remained outstanding. Judge Hale noted that he will address the debtors’ motions on taxes, insurance, critical vendors, shippers, warehousemen and other lien claimants tomorrow. The hearing will resume tomorrow, Tuesday, March 19, at 10 a.m. ET.