Gastar Exploration – Ares Funds Object to Appointment Equity Security Holders Committee, Arguing that Equity is Simply Too Far Out of the Money

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November 5, 2018 – A group of certain funds affiliated with Ares Management (“Ares”) filed an objection [Docket No. 116] to two related motions seeking appointment of an equity committee in these cases [Docket Nos. 42 and 77]. 
 
The objection asserts, “Movants fail to acknowledge the heavy burden they carry, choosing instead to rely on a series of unsubstantiated attacks on both the Debtors and Ares. Those accusations are disproved below. Stripped bare of that empty rhetoric, it is clear that Movants are unable to meet the burden of proof that they clumsily attempt to sidestep. 
 
First, the undisputed evidence shows that there is virtually no likelihood that shareholders will receive a meaningful distribution in this case—and certainly not the substantial likelihood required to justify the appointment of an equity committee.  As a substantial common shareholder, Ares takes no joy in this outcome.  But this stark conclusion flows from the simple reality that the Debtors’ obligations to creditors overwhelm the value of their assets. All in, the creditor claims that by definition rank ahead of the preferred and common shareholders total approximately $580 million (excluding administrative expenses due at emergence)….Comparing the value of the Debtors’ assets of $332.5 million (based upon the only credible valuation evidence presented to the Court) to the aggregate claims pool senior to equity interests of $580 million leads to the conclusion that, in this case, preferred shareholders are at least $247 million out of the money and, based upon the liquidation preference due to preferred shareholders of approximately $155 million, common shareholders are approximately $402 million out of the money. 
 
Flying in the face of this evidence, Movants claim that ‘Gastar is likely to prove solvent’ because (i) it has ‘significant value’ in its ‘STACK Play’ acreage, and (ii) the Debtors’ insolvency rests on ‘an errant legal position’ relating to $74 million of purportedly disallowable claims….Even if the Movants were somehow able to succeed in challenging the $74 million in Ares’ claims that they complain about, that would still leave them out of the money to the tune of at least $174 million for the preferred shareholders and $329 million for the common shareholders.  And their ability to attack those claims is dubious at best—as the Court is well aware, several courts have upheld the validity of ‘make whole’ and yield protection claims where, as here, the documents are drafted soundly and the facts warrant enforcement of those claims. Second, Movants fail to make the requisite showing that they are unable to represent their interests in this matter without the appointment of a committee.  The Movants are sophisticated institutional investors with significant resources and are easily able to afford counsel to protect their interests in this case….it is beyond dispute that the Movants have ample resources to litigate their interests in this case if they so choose. The Movants do not argue otherwise, and their longstanding retention of Quinn Emanuel reflects this reality. At bottom, notwithstanding their ability to represent themselves in this matter, the Movants are seeking a shifting of their fees onto the Debtors through the appointment of an official committee.  It would be neither equitable nor a wise use of resources for the Debtors to be saddled with the cost of an equity committee that in the end would not recover any value for the Movants, given the Debtors’ clear insolvency.”

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