California Resources Corporation – Emerges from Bankruptcy after Equitizing $4.4bn of Debt; Strengthened Balance Sheet Leaves Debtors with $345mn of Liquidity

Register, or to view the article

October 27, 2020 – The former Debtors notified the Court that their Amended Chapter 11 Plan of Reorganization had become effective as of October 27, 2020 [Docket No. 657]. The Court had previously confirmed the Debtors’ Plan on October 13th [Docket No. 626].

On July 15, 2020, California Resources Corporation and 22 affiliated Debtors (NYSE: CRC; “CRC” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-33568 (Judge Jones). At filing, the Debtors, a California-centric oil and gas E&P, noted estimated assets of $4.068bn and estimated liabilities of $6.116bn ($5.235bn in total funded debt).

The Debtors were represented by Paul E. Heath of Vinson & Elkins LLP. Further board-authorized engagements included: (i) Alvarez & Marsal North America, LLC as financial advisors, (ii) Perella Weinberg Partners as investment banker and (iii) Epiq Corporate Restructuring, LLC as claims agent.

The Administrative Expense Claim bar date is set for November 26, 2020.

In a press release announcing the emergence, CRC advised: “that it will today complete its financial restructuring and emerge from the bankruptcy process with a significantly stronger balance sheet. CRC’s Joint Plan of Reorganization (‘Plan’) in its Chapter 11 case cancelled pre-existing debt, consolidated CRC’s ownership in the Elk Hills power plant and cryogenic gas plant, and provided for the payment in full of all valid and undisputed trade and contingent claims in the ordinary course of business.

As previously reported, CRC entered into a Settlement and Assumption Agreement with certain affiliates of Ares Management L.P. (‘Ares’) related to CRC’s and Ares’ Elk Hills joint venture. Under this agreement, CRC acquired the equity interests of the joint venture and 100% ownership of the Elk Hills power plant and a cryogenic gas processing plant in exchange for approximately 20.8% of the new common stock in CRC and $300 million of secured notes issued by EHP Midco Holding Company, LLC, a subsidiary of CRC. As a result, the joint venture’s assets are now wholly owned by CRC.

Under the Plan approved by the bankruptcy court, approximately $4.4 billion of loans and notes outstanding as of June 30, 2020 have been equitized. Additionally, all of the Company’s previously existing equity interests have been cancelled and ceased to exist after the market close on October 27, 2020. In connection with its emergence, shares of the Company’s new common stock have been approved for listing on the New York Stock Exchange under the ticker symbol ‘CRC’ and trading is expected to commence on October 28, 2020

At emergence, CRC will have approximately 83.3 million shares of new common stock issued and outstanding, which includes shares representing 32.5% of our new common stock issued to holders of loans and notes pursuant to the Plan, shares representing 45.7% of our new common stock issued in connection with a fully backstopped $450 million rights offering that was fully subscribed and is effective upon emergence, as well as shares representing 20.8% of our new common stock issued in the Ares settlement described above. CRC also issued Tier 1 Warrants and Tier 2 Warrants (each as defined in the Plan) to acquire up to 2% and 3% of new common stock, respectively, at a ‘strike price’ to be calculated using a $3 billion aggregate equity value, which are valid for four years.

At emergence, CRC entered into a new revolving credit facility with a $1.2 billion borrowing base and a commitment level of $540 million. The facility matures on April 27, 2024. CRC has a net borrowed position of approximately $37 million on the facility at emergence, which is net of unrestricted cash of $70 million and $118 million used to cash collateralize on an interim basis certain letters of credit outstanding under CRC’s senior debtor-in-possession credit facility. CRC’s capital structure also includes a $200 million second lien term loan and $300 million of secured notes due 2027 issued to Ares in connection with the Ares settlement described above. CRC is well-capitalized at emergence with over $345 million of available liquidity.”

The following table shows CRC’s principal amount of debt and mezzanine equity as of June 30, 2020 and at emergence:

(*) – Certain letters of credit outstanding under our senior debtor-in-possession facility have been cash-collateralized on an interim basis until transferred to our New Revolving Credit Facility. This interim cash collateralization resulted in $118,0mn temporarily funded under the New Revolving Credit Facility. Excluding this amount, the balance outstanding on our New Revolving Credit Facility, net of unrestricted cash of $70.0mn, would have been $37.0mn.

Plan Overview and RSA

The Debtors' memorandum in support of Plan confirmation [Docket No. 599] provides the most recent summary: "The Debtors submit to the Court a plan of reorganization that will eliminate over $5 billion of debt, consolidate CRC’s ownership in the Elk Hills power plant and cryogenic gas plant, provide a substantial capital infusion into the Debtors through a new money backstopped Rights Offering, and pay all General Unsecured Claims in full.

The Plan is the result of months of engagement by the Debtors’ board of directors, management, and advisors with the Debtors’ various parties-in-interest. On July 15, 2020, the Debtors’ efforts culminated in a restructuring support agreement…with certain supporting creditor parties holding 84.4% of the 2017 Term Loans, 50.8% of the 2016 Term Loans, 8.2% of the Second Lien Notes and Ares. On July 24, 2020, after further negotiations, the Debtors entered into an Amended and Restated Restructuring Support Agreement [Docket No. 214] (the 'Restructuring Support Agreement') with supporting creditors holding 87.4% of the 2017 Term Loans and 67.3% of the 2016 Term Loans, the Second Lien Notes and the Unsecured Notes, as well as Ares (the 'Supporting Creditors'). The Restructuring Support Agreement provides for the restructuring of the Debtors and their continuation of their businesses as a going concern through the Confirmation of the Plan, including through the provision of $450 million of new money via a fully backstopped rights offering, as set forth in the amended and restated backstop commitment agreement (the “Backstop Commitment Agreement”), among California Resources Corporation and the Backstop Parties thereto, a copy of which is attached hereto as Exhibit A."

[As detailed at filing] On July 15, 2020, the Debtors entered into a restructuring support agreement (the “RSA”, attached to Docket No. 20 at Exhibit B), which has the support of 84.4% of the 2017 Term Loan Lenders, 50.8% of the 2016 Term Loan Lenders, 8.2% of the Second Lien Noteholders and Ares.

The key financial components of the restructuring are as follows:

  • the DIP Financing (see below);
  • a commitment for a second lien exit facility in an aggregate principal amount of $200 million;
  • a $450 million equity rights offering, backstopped by certain of the parties to the Restructuring Support Agreement; and
  • a global settlement with respect to all issues relating to Ares’ interest in EHP.

The Restructuring Support Agreement contemplates stakeholder recoveries as follows:

  • holders of claims on account of the RBL Facility will be paid in full;
  • holders of claims on account of the 2017 Term Loan will be bifurcated into a stipulated secured claim and a stipulated deficiency claim, where holders of the stipulated secured claim will receive 93% of the common stock in the reorganized CRC (subject to dilution) and 93% of the subscription rights offered under the equity rights offering;
  • holders of stipulated deficiency claims on account of the 2017 Term Loan will be combined with the holders of claims on account of the 2016 Term Loan, the Second Lien Notes and the Unsecured Notes into a single “Deficiency/Unsecured Debt Claims” class which, if the class votes to accept the Plan, will receive 7% of the common stock in the reorganized CRC (subject to dilution) and 7% of the subscription rights offered under the equity rights offering, or, if the class votes to reject the plan, will receive their share of the common stock in the reorganized CRC that the Court determines the class is entitled to under the Bankruptcy Code’s “best interests of creditors” test; 
  • if the class of Deficiency/Unsecured Debt Claims votes to accept the Plan, then the Debtors will continue to pay or dispute all other general unsecured claims in the ordinary course of business, otherwise the holders of the other general unsecured claims will receive their share of the common stock in the reorganized CRC that the Court determines the class is entitled to under the best interests of creditors test; and
  • existing equity interests in CRC will receive no recoveries.

The Restructuring Support Agreement is premised in part on the Debtors entering into a settlement and assumption agreement with Ares and EHP.

In a press release announcing the filing, CRC advised that it has: “entered into a Restructuring Support Agreement ('RSA') with holders of approximately 84% of the Company’s 2017 term loans, 51% of the Company’s 2016 term loans and its Elk Hills midstream joint venture partner, Ares Management L.P. ('Ares').

Upon plan confirmation, the implementation of the RSA would reduce CRC’s debt substantially, enabling the Company to operate safely through the current downturn in commodity prices and establishing a solid financial foundation to enhance future value creation. 

Ares has agreed to contribute its equity interests in Elk Hills Power, LLC, which is a joint venture between CRC and a portfolio company of Ares. At emergence, Ares would exchange its joint venture interests for equity and new CRC notes in the reorganized company subject to the terms and conditions of the RSA. The joint venture’s cryogenic gas plant, 500-megawatt power plant and related assets will continue to operate in the ordinary course and upon emergence will be wholly-owned by CRC.”

The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are in the Plan and/or Disclosure Statement, see also Summary of Recoveries and Liquidation Analysis below):

  • Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $0 and expected recovery is 100%.
  • Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $0 and expected recovery is 100%.
  • Class 3 (“RBL Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $0 and expected recovery is 100%.
  • Class 4 (“2017 Term Loan Secured Claims”) is impaired and entitled to vote on the Plan. The 2017 Term Loan Secured Claims will be allowed in an aggregate amount of $537.0mn. On the Effective Date, each Holder of a 2017 Term Loan Secured Claim will receive its Pro Rata share of (i) 83.6% of the total New Common Stock subject to dilution by the Rights Offering, the Backstop Commitment Premium, the Eligible Stock, the Exit Premium, the New Warrants and the MIP; and (ii) 100% of the Tranche A Subscription Rights.
  • Class 5 (“Unsecured Debt Claims”) is impaired and entitled to vote on the Plan. Expected recovery is 17.1% The 2017 Term Loan Deficiency Claims shall be Allowed at an aggregate amount equal to $794.0mn; the 2016 Term Loan Claims shall be Allowed in an aggregate amount equal to $1,045,453,264; the Second Lien Notes Claims shall be Allowed in an aggregate amount equal to $1,893,358,228; and the Unsecured Notes Claims shall be Allowed in an aggregate amount equal to $247,590,679. On the Effective Date, each Holder of an Unsecured Debt Claim shall receive the treatment set forth below:
  1. Each Holder of a 2017 Term Loan Deficiency Claim shall receive its Pro Rata share, based on the aggregate amount of Allowed Unsecured Debt Claims, of (A) 16.4% of the total New Common Stock subject to dilution by the Rights Offering, the Backstop Commitment Premium, the Eligible Stock, the Exit Premium, the MIP and the New Warrants; and (B) 100% of the Tranche B Subscription Rights; provided that the receipt and retention of all New Common Stock and Tranche B Subscription Rights by Holders of Unsecured Debt Claims shall not be subject to any turnover or similar provisions in any of the Intercreditor Agreements or similar agreement requiring turnover of such New Common Stock or Tranche B Subscription Rights.
  2. Each Holder of a Backstop Unsecured Debt Claim shall receive (A) its Pro Rata share, based on the aggregate amount of Allowed Unsecured Debt Claims, of the Stock and Tranche B Rights Distribution; and (B) its Pro Rata share, based on the aggregate amount of 2016 Term Loan Claims, Second Lien Notes Claims and Unsecured Notes Claims, of the Tier 1 Warrants.
  3. Each Holder of a Non-Backstop Unsecured Debt Claim shall receive (A) its Pro Rata share, based on the aggregate amount of Unsecured Debt Claims, of the Stock and Tranche B Rights Distribution; (B) its Pro Rata share, based on the aggregate amount of 2016 Term Loan Claims, Second Lien Notes Claims and Unsecured Notes Claims, of the Tier 1 Warrants; and (C) its Pro Rata share, based on the aggregate amount of Non-Backstop Unsecured Debt Claims, of the Tier 2 Warrants.
  • Class 6 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is [•] and expected recovery is 100%.
  • Class 7 (“Interests in CRC”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is [•] and expected recovery is 0%.

Significant Prepetition Shareholders

  • The Vanguard Group: 7.47%
  • Blackrock Inc.: 6.30%

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Stevens Declaration”) [Docket No. 20], Todd A. Stevens, the Debtors’ President and Chief Executive Officer, detailed the events leading to CRC's Chapter 11 filing. The Stevens Declaration provides: “CRC was spun-off by Occidental in 2014 with over $6 billion of funded debt and had over $6.7 billion of debt at its peak in the second quarter of 2015. The spin-off coincided with a severe dislocation in commodity markets in late-2014 and a sharp decline in Brent crude oil prices, resulting in a diminished asset base compared to CRC’s initial debt burden. CRC adapted to the new commodity price environment by reducing overall capital expenditures and executing on various deleveraging strategies, including liability management transactions and asset monetizations. 

As a result of CRC’s prudent capital management and the successful execution of various deleveraging strategies since the spin-off, CRC had reduced its debt to approximately $5 billion as of December 31, 2019.

Although commodity prices partially recovered in the latter half of 2017 permitting CRC to increase activity and investment at that time, the period of price declines beginning in late 2018, and in particular the disruptions to commodity markets during the first few months of 2020 and the exacerbation thereof by the COVID-19 global pandemic, have required CRC to further reduce its rig count and overall investment and focus on value preservation.”

Prepetition Indebtedness

As of the Petition date, the Debtors have approximately $5.235bn in total funded debt, excluding accrued interest. The following table summarizes the Debtors’ prepetition indebtedness:

Debt

Maturity

Approximate Principal Amount

RBL Facility

June 30, 2021

$883,010,655

2017 Term Loan

December 31, 2022

$1,300,000,000

2016 Term Loan

December 31, 2021

$1,000,000,000

Second Lien Notes

December 15, 2022

$1,808,000,000

Senior Unsecured Notes

September 15, 2021

$100,000,000

Senior Unsecured Notes

November 15, 2024

$144,000,000

Total:

 

$5,235,010,656

Key Documents

The Debtors filed five Plan Supplements [Docket No. 411, 543, 579, 606 and 621] which attached the following documents:

Docket No. 411

  • Exhibit A: Form of Amended and Restated Certificate of Incorporation of California Resources Corporation
  • Exhibit B: Form of Amended and Restated Bylaws of California Resources Corporation · Exhibit C: Form of Registration Rights Agreement
  • Exhibit D: Form of First Amendment to the Second Amended and Restated Limited Liability Company Agreement of Elk Hills Power, LLC
  • Exhibit E: Form of Officer’s Certificate of California Resources Corporation
  • Exhibit F: Form of Mutual Release Agreement by and among CRC, CREH and the Ares Entities (as defined therein)
  • Exhibit G: Form of Bill of Sale by and between CREH and Elk Hills Power, LLC with respect to certain plants owned by CREH
  • Exhibit H: Form of State of Delaware Certificate of Formation of Limited Liability Company of Elk Hills Power Holding Company LLC
  • Exhibit I: Form of Limited Liability Company Agreement of Elk Hills Power Holding Company LLC
  • Exhibit J: Form of Assignment Agreement by and among ECR Corporate Holdings L.P. and CRC
  • Exhibit K: Form of Contribution and Assignment Agreement by and among CRC, CREH and Elk Hills Power Holding Company LLC
  • Exhibit L: Form of Third Amended and Restated Limited Liability Company Agreement of Elk Hills Power, LLC
  • Exhibit M: Schedule of Rejected Contracts
  • Exhibit N: Identity of the Members of the Reorganized CRC Board and the Officers of Reorganized CRC

Docket No. 543

  • Exhibit A: Schedule of Assumed Executory Contracts and Unexpired Leases

Docket No. 579

  • Exhibit A: First Lien Exit Financing Term Sheet
  • Exhibit B: Second Lien Exit Financing Term Sheet

Docket No. 606

  • Exhibit A: Form of Warrant Agreement
  • Exhibit B: Exit Facility Letters

 Docket No. 621

  • Exhibit A: Draft of First Lien Exit Facility Credit Agreement
  • Exhibit B: Draft of Second Lien Exit Facility Credit Agreement

Summary of Recoveries and Liquidation Analysis (please see Appendix B of Disclosure Statement [Docket No. 421] for notes)

 

About the Debtors

According to the Debtors: "California Resources Corporation (NYSE: CRC) is an oil and natural gas exploration and production company committed to environmentally sustainable and responsible development of properties exclusively in the State of California. CRC explores for, produces, gathers, processes and markets crude oil, natural gas and natural gas liquids. CRC has a large portfolio of lower-risk conventional opportunities in each of California’s four major oil and gas basins: San Joaquin, Los Angeles, Ventura and Sacramento.

CRC is California’s largest oil and natural gas producer with the state’s most diverse operations. The company’s highly-qualified workforce typically comprises more than 3,000 employees and contractors who specialize in applying advanced technology to operate the state’s critical energy infrastructure in a safe, efficient and environmentally responsible manner under California’s leading standards."

Corporate Structure Chart

 

Read more Bankruptcy News