The Sable Permian Resources debtors obtained all of their requested first day relief, subject to certain changes directed by Judge Marvin Isgur, at the first day hearing in their
chapter 11 cases today. The debtors received approval to access $30 million of interim availability under their proposed $150 million DIP facility after the court directed certain changes to lenders’ remedies upon an event of default as detailed below.
Although there were no objections to the proposed first day relief, Damian Schaible of Davis Polk appeared for the ad hoc group of secured noteholders holding “in excess of 55%” of the secured notes to note concerns with the debtors’ governance, namely assertions of improper control over the company’s various subsidiary boards by prepetition equity sponsors.
Schaible said the ad hoc group may file a motion for appointment of an examiner “in the coming days,” stressing that time was of the essence for a limited scope examination of governance mechanics that would, he asserted, provide more trust in the process. Judge Isgur responded with certain concerns about the appointment of an examiner and a reminder that independent of any state law fiduciary duties directors may have - or have waived at LLC entities, an issue raised by Schaible - now that chapter 11 cases have commenced all directors also have fiduciary duties to the bankruptcy estate under the Bankruptcy Code.
A second day hearing is scheduled for July 23 at 12 p.m. ET.
Jeffrey Bjork of Latham & Watkins, counsel to the debtors, began the hearing with an overview of the debtors’ business and planned strategy for the cases. Bjork noted that the bidding procedures that are required pursuant a DIP milestone to be filed early next week are “still being negotiated.” Bjork also referenced the prepetition restructuring proposals, first from the secured notes and RBL lenders, then a counter-offer by the company, described in the first day declaration. Bjork said the debtors believe those discussions “will continue.”
Schaible said the ad hoc group is prepared to continue to work on finding consensus among all parties but has had “concerns about” the debtors’ governance “for some time” and said the ad hoc group is focused on addressing “how we can all take comfort in” the proposed sale and general restructuring process going forward. The debtors’ rejection of the joint RBL and noteholder proposal referenced earlier by Bjork was “somewhat surprising[],” Schaible said, noting further that the process used to reject the offer, which Schaible submitted would have provided for a “comprehensive” restructuring out-of-court or a quick prepackaged case, furthered the noteholders’ concerns.
The ad hoc group’s governance concerns arise from the debtors’ “very complicated” capital and corporate structures. Schaible asserted that certain of the debtors’ subsidiary boards - despite facially having independent directors - have been “dominated by” the company’s private equity sponsors. Their “Machiavellian strategies” to exert control, in Schaible’s words, include governance provisions that allow the equity sponsors to prevent certain boards from even convening, which the ad hoc group believes “has happened recently.” As an example, Schaible noted the procedural difficulties lenders had recently faced in obtaining board signatures to forbearance agreements and delayed response times from the debtors allegedly caused by the questioned board dynamics. Schaible also pointed to potential issues from the waiver of fiduciary duties by LLC boards.
Schaible said the ad hoc group wants there to be a “high level of trust” and a “fully open” and arm’s-length process, but the “lack of transparency” to date and facially “troubling” board dynamics have brought the ad hoc group to the conclusion that an examiner with a “very narrow scope” to investigate intercompany decisionmaking procedures and transactions and a “very cabined budget” may be warranted. Schaible argued that a trustee would be the proper fiduciary because neither independent directors nor a future official committee of unsecured creditors would be appropriate under the current facts and circumstances of the case. Noting that he did not mean to impugn any independent board member’s integrity, Schaible said the problematic control by prepetition sponsors meant the independent directors have “been in the room for all of” the questionable prepetition governance issues yet “have not been able to stop this.” Schaible said leaving an investigation to a future UCC would also be inappropriate because time is of the essence and it is not clear whether and where potentially multiple UCCs would be appointed throughout the complex corporate structure. One or more UCCs may “not ... be able to bring this all to ground,” he posited.
Judge Isgur responded that examiner appointments “make me nervous” because of their tendency, even if starting with a limited proposed scope, to become “runaway train[s]” and expand greatly in scope. Nevertheless, the court noted “we may be required” to appoint an examiner under the facts of the case. Judge Isgur also referred to the “Houston Regional Sports Network” case for the proposition that notwithstanding state law waivers of fiduciary duties that may exist, once a bankruptcy case has commenced a board has fiduciary duties to the estate under federal bankruptcy law. Any director who does not honor such fiduciary duties will “have big problems with the court,” Judge Isgur cautioned generally.
Elisha Graff of Simpson Thacher, counsel to prepetition RBL and DIP agent J.P. Morgan, appeared immediately following Judge Isgur’s remarks and said the RBL lenders “have a great deal of confidence” in the sale process to be run because of the court’s oversight. “We view ourselves as the fulcrum,” Graff also noted.
Bjork limited the debtors’ response to Schaible’s comments, noting disagreement with Schaible's characterizations of the boards and their functioning, but said the debtors would reserve fuller comment for a response to any future examiner motion if one is filed by the ad hoc group.
Before approving the DIP motion, Judge Isgur directed the debtors to revise a provision that would allow the DIP lenders to exercise the full spectrum of remedies after an emergency motion and hearing on whether an event of default had occurred. Judge Isgur has previously forced debtors to alter provisions that would provide for less notice. Today, Judge Isgur focused on the point that the court must be free, after determining whether an event of default has occurred, to then further fashion an appropriate remedy rather than leaving that discretion purely to the DIP lenders. Judge Isgur told counsel to the DIP lenders that in terms of lender protections the court
would approve terms that would, upon an event of default, terminate lenders’ obligation to make further DIP funding and consent to use of cash collateral, but again noted that the unconstrained ability to take any action including foreclosure merely upon the court’s finding of whether an event of default has occurred is something that would be “completely extraordinary” on a first day basis and that the court may not approve at the final hearing stage either.