December 4, 2020 – The Debtors notified the Court that their First Amended Plan of Liquidation had become effective as of December 4, 2020 [Docket No. 743]. The Court had previously confirmed the Debtors’ Plan on November 17, 2020 [Docket No. 673].

On June 28, 2020, Lilis Energy, Inc. and five affiliated Debtors (formerly NYSE American: LLEX; “Lilis” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-33274 (Judge Isgur). At filing, the Debtors, a Fort Worth-based independent E&P that operated in the Permian’s Delaware Basin, noted estimated assets of $258,599,000 and estimated liabilities of $251,226,000 (these are year-end 2019 numbers as reflected in a 10-K). In a subsequently filed Schedule A/B, the lead Debtors noted $482.3mn of assets and $387.6mn of liabilities [Docket No. 134].

The Debtors were represented by (i) Vinson & Elkins L.L.P as bankruptcy counsel, (ii) BDO, USA LLP as accountants and tax advisors, (ii) Barclays Capital Inc. as investment banker and financial advisors and (iv) Stretto as claims agent.

The deadlines for filing administrative claims and professional fee claims are January 4, 2020 and January 18, 2020, respectively.

Plan Overview

For these Debtors, who had filed their Chapter 11 cases with aspirations of a going concern restructuring only to find themselves pivoting to a sale process when their Plan sponsor withdrew its support, perhaps a disappointing result. A long and often delayed sale process ultimately delivered a purchaser (and price) at the lower end of the anticipated spectrum, just enough to cover DIP financing and administrative claims and, further to a settlement, leave a $787k pool to be shared amongst general unsecured creditors.

The Debtors' memorandum in support of Plan confirmation [Docket No. 673] provided the following pre-confirmation hearing summation: "The Plan, among other things, distributes the proceeds from the sale of substantially all of the Debtors’ Assets (the 'Sale') and effectuates a global settlement agreement (the 'Global Settlement Agreement,' and such settlement thereunder, the 'Global Settlement') reached between the Debtors, the DIP Facility Lenders, the Non-Affiliated RBL Lenders, Värde, and the Committee (collectively, the 'Settlement Parties') after extensive, arms’ length, and good faith negotiations. 

The entry of the 9019 Order and the approval of the settlement with the Värde Parties set forth in and approved by the 9019 Order (the 'Värde Settlement') paved the way for the value-maximizing Sale of substantially all the Debtors’ Assets to Ameredev for a cash purchase price of $46.6 million [sale closed on December 1, 2020].

As a result of the Sale and pursuant to the terms of the Global Settlement, Holders of Unsecured Claims will receive a cash recovery under the Plan of $786,750, as well as the contribution of certain claims and causes of action that may be pursued for the benefit of Holders of Unsecured Claims. Without the Global Settlement, no distribution at all would be available to unsecured creditors given that substantially all of the Debtors’ assets are subject to first priority priming liens of the DIP Lenders, as well as first priority liens securing $75.5 million of debt outstanding under the Prepetition RBL Facility. Moreover, recoveries for unsecured creditors are substantially increased as a result of the Global Settlement Agreement because both the Non-Affiliated RBL Lenders and the Affiliated RBL Lenders agreed to waive any recovery on account of their substantial unsecured deficiency claims."

The Amended Disclosure Statement adds: "Immediately prior to filing for chapter 11, on June 28, 2020, the Debtors, certain private funds affiliated with Värde Partners, Inc. (together with its affiliates, ‘Värde’), and the Non-Affiliated RBL Lenders entered into the Restructuring Support Agreement, which contemplated a dual-track process whereby the Debtors would either pursue a plan of reorganization funded, in part, by a $55 million new money equity commitment from Värde (the ‘Värde Sponsored Plan’) or the Debtors would pursue a process to sell substantially all of their assets through these chapter 11 cases (the ‘Sales Process’). On August 17, 2020, after Värde declined to go forward with the Värde Sponsored Plan, the Debtors immediately pivoted to the Sales Process.

On October 12, 2020, after extensive, arms’ length, and good faith negotiations, the Debtors, the DIP Facility Lenders, the Non-Affiliated RBL Lenders, the Värde Parties, and the Committee (collectively, the ‘Settlement Parties’) reached an agreement on a global settlement (the ‘Global Settlement’) as set forth in the Global Settlement Agreement, which resolves various complex and contentious actual and potential disputes between the Settlement Parties. While certain aspects of the Global Settlement are being effectuated through the Settlement Motion, certain other aspects of the Global Settlement are being implemented through the Debtors’ First Amended Joint Liquidating Chapter 11 Plan (the ‘Plan’), dated October 13, 2020.

Under the terms of the Debtors’ debtor-in-possession financing facility (the ‘DIP Facility’), any sale must close no later than November 2, 2020. Assuming the Debtors are able to attract one or more acceptable cash bidders for substantially all of their assets, the Plan sets forth the manner in which the Asset Sale Proceeds will be distributed.

Before any Asset Sale Proceeds are available for distribution to other stakeholders under a chapter 11 plan, the following Claims must be paid in full, in Cash, or appropriate reserves must be set aside for such Claims:

• the WLWI Fixed Settlement Amount, consisting of the first $3,750,000, plus, to the extent applicable, the WLWI Variable Settlement Amount, consisting of the first 5% of the amount of the Cash Purchase Price that exceeds $45 million, in each case payable in Cash from the Cash Purchase Price at the closing of the Asset Sale;
• approximately $30 million of DIP Facility Claims;
• all Administrative Claims, including Professional Claims, which currently are estimated to total approximately $18 million to $22 million; and
• any Priority Tax Claims, Other Priority Claims and Senior Priority Lien Claims.

As summarized in the two tables below, after such payments, Asset Sale Proceeds will next be distributed to the Prepetition RBL Agent for distribution to Holders of Class 3A – Non-Affiliated RBL Claims and Class 3B – Affiliated RBL Claims pursuant to the terms of the RBL Credit Agreement. RBL Claims total approximately $75.5 million, which includes an approximate $49.2 million senior tranche held by the Non-Affiliated RBL Lenders and an approximate $26.3 million junior tranche held by the Affiliated RBL Lenders. The RBL Facility is secured by first priority Liens on substantially all of the Debtors’ Assets.

As the Waterfall Analysis Summary above demonstrates, if the Sales Process does not yield a price in excess of $120.5 million (in a low Claim scenario) to $127.2 million (in a high Claim scenario), then Holders of Unsecured Claims would not be entitled to receive any proceeds from the sale and instead would be entitled to receive nothing under a chapter 11 plan.

Due to the Global Settlement, Holders of Unsecured Claims will now receive a distribution from the Unsecured Claim Pool even in scenarios where the senior secured claims are not being paid in full. Therefore, the Global Settlement and the Plan provide substantial benefits to the Estates and their creditors by paying administrative and priority creditors, some or all of the Debtors’ secured debt while also providing for a distribution to Holders of Unsecured Claims, and avoiding a value destructive chapter 7 liquidation.

"

The following is an amended summary of classes, claims, voting rights and expected recoveries highlighted below (defined terms are in the Plan and/or Disclosure Statement):

• Class 1 (“Senior Priority Lien 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 Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is undetermined and expected recovery is 100%.
• Class 3A (“Non-Affiliated RBL Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claim is $49.2mn and expected recovery is 0% unless Sale Proceeds Exceed approximately $45.0mn – $51.7mn.

Treatment: (i) In the event the Asset Sale is not a Successful Credit Bid, each Holder of an Allowed Non-Affiliated RBL Claim shall receive its Pro Rata share of (i) Net Sale Proceeds, (ii) the Series A Liquidation Trust Interests and all distributions from the Liquidation Trust Assets, other than distributions from the Unsecured Claim Pool, until the Non-Affiliated RBL Claims are paid in full, and (iii) any residual interest in the Claims Reserve or the Professional Claims Escrow Account, in each case, until the Non-Affiliated RBL Claims are paid in full.   The initial distribution, consisting of (x) all Net Sale Proceeds paid on or prior to the Effective Date, and (y) the Series A Liquidation Trust Interests, shall be made to the RBL Agent on the Effective Date. Following the Effective Date, all distributions from the Liquidation Trust, including any subsequently received Net Sale Proceeds, any recoveries on any RBL Secured Parties A/R, and any residual interests in the Claims Reserve or the Professional Claims Escrow Account, shall be paid by the Liquidation Trustee to the RBL Agent as and when determined by the Liquidation Trustee and the RBL Agent.

(ii) In the event the Asset Sale is a Successful Credit Bid, on account of the Allowed Non-Affiliated RBL Claims less the RBL Credit Bid Amount, each Holder of a Non-Affiliated RBL Claim shall receive its Pro Rata Share of (i) the Series A Liquidation Trust Interests and all distributions from the Liquidation Trust Assets, other than distributions from the Unsecured Claim Pool, and (ii) any residual interest in the Claims Reserve or the Professional Claims Escrow Account, in each case, until the Non-Affiliated RBL Claims are paid in full. The distribution consisting of the Series A Liquidation Trust Interests, shall be made to the RBL Agent on the Effective Date. Following the Effective Date, all distributions from the Liquidation Trust, any residual interests in the Claims Reserve or the Professional Claims Escrow Account, and any recoveries on any RBL Secured Parties A/R shall be paid by the Liquidation Trustee to the RBL Agent as and when determined by the Liquidation Trustee and the RBL Agent. Nothing in the Plan shall be deemed a commitment or agreement by the DIP Facility Agent or RBL Agent to submit a bid for the Assets.

To the extent the DIP Facility Agent and the RBL Agent are the successful bidders for the Debtors’ assets, pursuant to the Bidding Procedures, the Plan may be modified to provide, among other changes, that the Debtors will reorganize pursuant to chapter 11 of the Bankruptcy Code and in lieu of the treatment contemplated in this Article III.B.3 and Article II.E, the DIP Facility Lenders and/or Non-Affiliated RBL Lenders will receive 100% of the equity in the reorganized Debtors.

• Class 3B (“Affiliated RBL Claims”) is impaired and entitled to vote on the Plan. The aggregate amounts of claims is $26.3mn and expected recovery is 0% unless Sale Proceeds exceed approximately $94.2mn – $100.9mn. Treatment: Regardless of whether or not the Asset Sale is a Successful Credit Bid, each Holder of an Allowed Affiliated RBL Claim shall receive its Pro Rata share of (i) Net Sale Proceeds remaining after the payment in Cash in full of all Non-Affiliated RBL Claims (if any), (ii) the Series B Liquidation Trust Interests and, solely after the payment in Cash in full of all Non-Affiliated RBL Claims, all distributions from the Liquidation Trust Assets, other than distributions from the Unsecured Claim Pool, until the Affiliated RBL Claims are paid in full and (iii) solely after the payment in full of all Non-Affiliated RBL Claims, any residual interest in the Claims Reserve, RBL Secured Parties A/R, or the Professional Claims Escrow Account. The terms of the Series B Liquidation Trust Interests distributed to Holders of Affiliated RBL Claims shall provide that all distributions thereon shall be junior in right of payment to the Series A Liquidation Trust Interests distributed to Holders of Non-Affiliated RBL Claims.
• Class 4 (“Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $30.0mn – $100.0mn and expected recovery is a share of $786,750. Each holder shall receive its Pro Rata share of the Series C Liquidation Trust Interests; which includes the exclusive right to receive a recovery from the Unsecured Claim Pool.
• Class 5 (“Intercompany 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 0%.
• Class 6 (“Section 510(b) 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 0%.
• Class 7 (“Existing Preferred Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is 0%.
• Class 8 (“Existing Common Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is 0%.
• Class 9 (“Intercompany Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and expected recovery is 0%.

Voting Results

The Debtors' claims agent notified the Court of the Plan voting results [Docket No. 644], which were as follows:

• Class 3A (“Non-Affiliated RBL Claims”): 3 claim holders, representing $81,116,400.12 (or 100%) in amount and 100% in number, accepted the Plan.
• Class 3B (“Affiliated RBL Claims”): 1 claim holder, representing $26,412,644.41 (or 100%) in amount and 100% in number, accepted the Plan.
• Class 4 (“Unsecured Claims”): 48 claim holders, representing $4,439,335.72 (or 94.72%) in amount and 88.89% in number, accepted the Plan. 6 claim holders, representing $234,271.14 (or 5.28%) in amount and 11.11% in number, rejected the Plan.

Events Leading to the Chapter 11 Filing

In a declaration in support of DIP financing [Docket No. 16], the Debtors provide: "The Company has continued to face a challenging commodity price environment, which has constrained its liquidity and affected operations. These conditions have recently been exacerbated by significant declines in crude oil demand and prices due to the outbreak of COVID-19 and the inability of the members of the Organization of Petroleum Exporting Countries (‘OPEC’) and Russia to agree on production levels. 

Additionally…the Debtors begin facing severe liquidity constraints as the result of a January 2020 borrowing base redetermination that left the Debtors with a $25 million borrowing base deficiency. After paying approximately $17.25 million of borrowing base deficiency payments, on June 9, 2020, the Prepetition RBL Lenders liquidated certain of the Company’s swap positions for net proceeds of approximately $9.3 million, which, was applied to reduce the outstanding obligations of the Company under the Prepetition RBL Facility. As a result, the Debtors were left without access to significant capital. ”

Asset Sale

On November 13, 2020, the Court issued an order approving sale of substantially all of the Debtors’ assets to Ameredev Texas, LLC (“Purchaser”) at a $46.6mn purchase price [Docket No. 613] and the sale closed on December 1, 2020. The Successful Bidder is an affiliate of Ameredev II, LLC, an Austin, Texas-based, independent E&P.

Key Documents

Exhibits attached to the Disclosure Statement [Docket No. 472]:

• Exhibit A: Plan of Liquidation
• Exhibit B: Bidding Procedures
• Exhibit C: Corporate Organization Chart
• Exhibit D: Liquidation Analysis

The Debtors filed Plan Supplements at Docket Nos. 583 and 628 which attached the following documents:

Docket No. 583

• Exhibit A: Schedule of Retained Causes of Action
• Exhibit B: Liquidation Trust Agreement

Docket No. 628

• Exhibit B: Amended Liquidation Trust Agreement
• Exhibit B-1: Identity and biography of Liquidation Trustee
• Exhibit C: Wind Down Budget

NB: The Restructuring Support Agreement is at Exhibit B of Docket No. 30

Prepetition Capital Structure

Significant Shareholdings

• Varde Investment Partners LP: 10.37%
• Marc & Bryan Ezralow: 7.76%
• Ronald Ormand: 5.47%

NB: Cede & Co. is nominee on behalf of beneficial holders for 66.58% of the Debtors’ common stock

Funded Debt and Preferred Stock

As of the Petition date, the Debtors’ funded debt liabilities total approximately $97.8mn. The Debtors also have five series of preferred stock issued: 9.75% Series C-1 Participating Preferred Stock, 9.75% Series C-2 Participating Preferred Stock, 8.25% Series D Preferred Stock, 8.25% Series E Preferred Stock, and 9.00% Series F Preferred Stock. The Debtors’ funded debt obligations (excluding accrued interest) and preferred stock include:

About the Debtors

The Debtors are a Fort Worth-based independent oil and gas exploration and production company that operates in the Permian’s Delaware Basin, considered amongst the leading resource plays in North America. Lilis Energy’s primary business objective is to increase its Delaware Basin leasehold position, reserves, production and cash flows at attractive rates of return on invested capital in order to enhance shareholder value.

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