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November 3, 2020 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) objected to the Debtors’ Disclosure Statement and proposed solicitation procedures; arguing that (i) the Disclosure Statement is informationally deficient, (ii) the Plan "patently unconfirmable" and (iii) the Debtors have simply run out of time to provide creditors with adequate notice of what is a moveable feast in advance of the scheduled November 5th hearing to confirm the Disclosure Statement [Docket No. 955]. That hearing has been delayed twice and the Committee is clearly seeking to see it delayed yet again.
The Committee continues to focus on what it has seen from the outset as an unreasonably short timetable to effectively pursue a possible sale transaction (legitimate possibilities left lying on the table the Committee argues, as a too short sales "clock simply ran out") casting doubt on whether the Debtors, and their prepetition senior noteholders, were ever really interested in the sales option. On October 22nd, the Debtors filed a Plan and Disclosure Statement signaling their choice of a standalone restructuring transaction, with details of that single path simply as to its impact on unsecured creditors missing by design..as a result of a hasty process…or both.
The Committee's objection is broken down into three areas:
(i) informational deficiencies, including as to claims estimates, proposed exit financing and (especially) the dilutive impact of "the ever-increasingly expensive equity rights offering,"
(ii) the unsettled state of the Plan and its key agreements, including the still-moving "Backstop Commitment Agreement" and exit financing documentation leaving "it…unclear how the Debtors expect to provide creditors with adequate notice and move forward with the [November 5th] hearing," and
(iii) a Plan which is patently unconfirmable, "discriminating [largely as the result of the dilutive equity rights offering] against the class of General Unsecured Claims, the Plan also engenders a blatant violation of the absolute priority rule. Specifically, the Plan offers existing preferred shareholders and common shareholders a distribution package consisting of 3% of the new common shares plus warrants to acquire 15% of the new common shares, notwithstanding the fact that a significant portion of unsecured creditors oppose the Plan and stand to be substantially impaired."
The Committee’s objection reads: “As far as the Committee is aware, (a) the Backstop Commitment Agreement has not been finalized (the draft currently on file with the Court is incomplete, with materials term still being negotiated); (b) discovery has not yet been (and is incapable of being) completed; (c) the Debtors have not yet obtained committed exit financing; (d) the exit facility term sheet has not yet been filed with the Court, such that general unsecured creditors have zero visibility into its terms; (e) the Debtors’ Plan, which is patently non-confirmable as initially proposed, is supposedly in the process of being revised (purportedly to address certain of the Committee’s concerns); and (f) the Debtors’ Disclosure Statement has yet to be updated to reflect major developments in the case, including yesterday’s Court rulings on the rejection of certain of the Debtors’ midstream contracts and its potential ramifications upon the Debtors’ business model.
Without each of these elements in place sufficiently in advance of Thursday’s Disclosure Statement hearing, it is unclear how the Debtors expect to provide creditors with adequate notice and move forward with the hearing. To the extent the Debtors nonetheless determine to charge forward, the Disclosure Statement (at least in its current form) falls well short of disclosing material facts and operational risks that would be critical to general unsecured creditors’ assessment of the Plan. Among other things, the Disclosure Statement must include information regarding the following: (a) classwide claim estimates, including the estimated range of rejection-related claims, along with the corresponding impact on creditor recovery estimates (including a note as to the Committee’s differing estimates); (b) the legal and operational risks associated with the twilight status of various midstream contracts that may be the subject of appeal as of the Plan’s effective date, as well as the potential business ramifications of the Court-approved rejection of those contracts; (c) the terms of the proposed exit facility; (d) adequate information regarding the Debtors’ business plan; (e) pro forma equity ownership and the dilutive impact of the ever-increasingly expensive equity rights offering; and (f) other information necessary to enable creditors to assess the new equity being distributed under the Plan as well as determine whether to vote to accept or reject the Plan. Ultimately, the Disclosure Statement lacks adequate information necessary for unsecured creditors to evaluate the basis for their treatment, the value of their proposed recovery and the risks associated with the Debtors’ business plan.
Beyond informational deficiencies, the Disclosure Statement cannot be approved because the Plan (at least in its current form) is patently non-confirmable. The Plan is premised on a highly dilutive equity rights offering backstopped by the Debtors’ Senior Noteholders. The Plan, coupled with the Backstop Commitment Agreement, (a) diverts substantially all of the Debtors’ reorganized equity to one class of unsecured creditors—the Senior Noteholders— through an expensive Backstop and Equity Rights Offering; (b) substantially dilutes the recovery offered to other similarly situated general unsecured creditors; (c) proposes a distribution of primary equity and warrants to out-of-the-money equity holders, even while creditors with hundreds of millions of dollars of unsecured claims remain unpaid and stand opposed to the Plan; and (d) provides senior management with significant day-one compensation and, by virtue of the draft Backstop Commitment Agreement on file, offers management an exclusive opportunity to invest in the highly-dilutive rights offering as backstop parties at substantial discounts to plan value. The Committee recognizes that the focus of a disclosure statement is adequacy of disclosure. However, the Disclosure Statement fails to adequately describe the risks associated with these patently non-confirmable aspects of the Plan.”
The objection continues, “In addition, the Disclosure Statement should at least attempt to justify the Backstop Commitment Agreement’s ever-increasing fee structure. As described more fully in the Committee’s objection to the Backstop Approval Motion, the version of the Backstop Commitment Agreement originally filed with the Court two months ago provided for a 9% Backstop Commitment Premium payable in New Common Shares at a 30% discount to Plan Equity Value, as compared to a 35% discount in the October 22nd draft filed with the Court (and the Committee understands that the latest version of the Backstop Commitment Agreement not yet on file with the Court contemplates even higher economics). The Disclosure Statement lacks any description of the negotiations or justification for the increasingly expensive costs and dilutive impact associated with the Equity Rights Offering. The Disclosure Statement also fails to adequately describe the basis or impact of capping the Equity Rights Offering’s purchase price per share to ‘Plan Equity Value’. Specifically, the Plan caps the purchase price at $641 million, which locks in value for purposes of the Rights Offering without giving effect to this Court’s determination as to the actual inherent value of the Debtors’ assets. Doing so may tie parties’ hands for purposes of challenging enterprise value and/or confirmation. Moreover, the Equity Rights Offering’s set-up value deducts significant working capital deductions from equity value, but the Disclosure Statement fails to justify the basis for those deductions, which have the effect of suppressing the purchase price of the new equity and, potentially, further increasing the discount and dilutive impact of the Equity Rights Offering. Creditors entitled to vote on and object to the Plan should understand that these rights are being impacted if the Court determines to approve the Backstop Commitment Agreement as proposed. In addition, the Disclosure Statement must provide absolute transparency with respect to management’s prospective participation in the Backstop. The notion that the Debtors’ management team has been or is in the process of negotiating an opportunity to participate in an exclusive, expensive and highly dilutive backstop requires further creditor and judicial inquiry, including as to the good faith nature of the Plan and Disclosure Statement and potential (if not actual) conflicts of interest.”
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