MTE Holdings LLC – Citing “Pattern and Practice of Gross Mismanagement,” Credit Facility Administrative Agent Urges Court to Appoint Chapter 11 Trustee

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November 12, 2019 – Natixis, New York Branch (“Natixis”), in its capacity as the administrative agent on behalf of lenders to a $60.0mn credit facility filed a motion (i) to appoint a chapter 11 trustee for Debtors MDC Energy LLC (“MDC”), Ward I, LLC (“Ward”) and MDC Reeves Energy LLC (“Reeves”) or (ii) in the alternative, appoint an examiner for MDC, Ward, and Reeves [Docket No. 71]. MDC is owned by Debtor MTE Holdings LLC and each of Ward and Reeves are wholly owned by MDC (see structure chart below). Natixis joins Riverstone Credit Management LLC ("Riverstone"), the administrative agent for a group of lenders owed $410.0mn, by the Debtors in slamming the Debtors and their CEO Mark Siffin. The Natixis motion alleges that the Debtors have "acted with impunity by steadfastly refusing to deliver monthly, quarterly, and annual audited and unaudited financial statements; financial forecasts; operational reports regarding MDC’s production capacity and expectations; reports detailing the value of MDC’s oil and gas reserves" which will certainly draw into question the Debtors' insistence that they are operationally robust (ie, on target to triple annualized EBITDA to $120.0mn) and that they are sitting on 164 million barrels of recoverable oil. Riverstone has filed equally scathing motions, asking the Court hearing the MTE Holdings LLC cases to lift certain of the automatic stay provisions normally accorded Chapter 11 Debtors [Docket No 6.3], stating: "As of October 21, 2019, with respect to loans in existence for only a twelve-month time period, MTE has already caused more than thirty Events of Default…"

The current Natixis motion notes, “The immediate appointment of a chapter 11 trustee is critical to preserve the value of MDC by stopping the ongoing mismanagement, stabilizing the insecurity of MDC’s trade creditors, and putting MDC’s financial affairs in order so that these bankruptcy proceedings can proceed efficiently and the creditors can avoid the acrimonious disputes that are certain to worsen without confidence in the accuracy of the financial and operational data essential to charting a path forward.

Although MDC proclaims that it ‘adopts a culture of complete and total transparency with its credit partners, giving them unique access to its people and operations at all times,’ the Agent’s experience with MDC has been plagued by a near complete lack of transparency and MDC’s obstinate refusal to meet its contractual obligations.

Almost immediately after MDC executed the credit agreement, MDC violated its contractual obligations to provide the Agent even the most basic financial reporting requirements. Over time, those violations became the rule, not the exception; MDC acted with impunity by steadfastly refusing to deliver monthly, quarterly, and annual audited and unaudited financial statements; financial forecasts; operational reports regarding MDC’s production capacity and expectations; reports detailing the value of MDC’s oil and gas reserves; and certifications that it remained in compliance with the financial covenants meant to protect the Agent against unauthorized debt increases and impairment of the extensive collateral package securing the $60 million underlying loan.

What little information the Agent has managed to decipher from stale bank statements, which it obtained only by exercising its rights directly with those banks pursuant to account control agreements, and its own diligence illustrates a pattern and practice of gross mismanagement. MDC’s finances reveal inter-company transfers in violation of multiple provisions of the applicable credit agreement, including improper distributions to MDC’s parent company, inexplicable transfers to non-Debtor affiliates, and large monthly payments to two non-Debtor affiliates for purported management services that seem illusory, considering MDC is incapable of providing any of the required financial or operational reporting.

MDC’s gross mismanagement is also evident from the meteoric rise in MDC’s aging accounts payable and trade creditor liens – some 85 trade creditors, who provide services without which MDC is incapable of operating, have filed over 615 liens totaling in excess of $110 million, nearly all of which has been amassed in the past six months.

In addition, conflicts of interest pervade the Debtors’ and its web of non-Debtor affiliates’ management. MDC CEO Mark Siffin controls every Debtor, the two companies allegedly providing MDC with management services, and a host of other companies, at least some of which are receiving transfers for unknown reasons.

Moreover, a pre-petition corporate governance dispute between Debtor and MDC parent MTE Holdings LLC and Riverstone Credit Management LLC, the administrative agent for a group of lenders who loaned $410 million, over the lawful control of MDC means that any post-petition action taken by existing management is in doubt. Given the gross mismanagement to date, the existence of this dispute raises serious questions about existing management’s ability and willingness to preserve the value of MDC for the benefit of its creditors.

Absent the requested relief, existing MDC management will continue to mismanage the business, which threatens the viability of the company’s real enterprise value – its oil and gas reserves. A chapter 11 trustee is necessary to provide creditor confidence and to stabilize the situation in the field so that these oil and gas reserves are not damaged or rendered inaccessible through critical work stoppages…the risk of loss is not just monetary, but also includes serious safety, environmental, and health risks that cannot be ignored.”

Further Background

The Debtors’ Pre-Petition Capital Structure

  • Reserve Based Lending Credit Agreement: The Debtors (specifically MDC) are parties to a September 2018 reserve based lending agreement with Natixis, New York Branch as Administrative Agent and Issuing Bank (the “RBL Agreement”). Pursuant to the RBL Agreement, MDC could borrow funds from Natixis and the other lenders to the RBL Agreement (the “MDC Secured Lenders”) against its oil and gas reserves in an amount based, in part, on MDC’s “Proved Reserves” attributable to its oil and gas properties, together with, among other things, a projection of MDC’s “rate of production and future net income, taxes, operating expenses and capital expenditures.” 

MDC’s initial borrowing under the RBL Agreement was $60 million, and it was permitted to borrow and the MDC Secured Lenders committed to provide additional amounts periodically, up to a maximum of $300 million, as MDC’s “Borrowing Base” was recalculated to account for its growth in its oil and gas assets. The Debtors note that “MDC significantly increased its Proved Reserves since September 2018; however, the RBL balance remained at $60 million.” 

  • Term Loan Credit Facility:  The Debtors (specifically MTE Holdings LLC) are parties to a September 2018 Term Loan Credit Agreement with a group of lenders (“MTE Lenders” and collectively with the MDC Secured Lenders, the “Lenders”) for which Riverstone Credit Management LLC (“Riverstone”) acts as administrative agent The MTE Credit Facility provided for loan commitments totaling $475 million, but, the Debtors add “because the MTE Lenders refused to honor the final $65 million borrowing notice, the principal amount outstanding as of the Petition Date is $410 million.”

Events Leading to the Chapter 11 Filing

The Siffin Declaration details the events leading to the Debtors' Chapter 11 filing, specifically attributing the Debtors' need for Chapter 11 protection to the "failure to fund" and "material breach" of Riverstone and other Lenders; notwithstanding the funding obligation of those Lenders to do so under the credit arrangements discussed above. This alleged failure to fund occurs against the backdrop of a "precipitous" decline in oil and gas prices; a decline which impacted revenues and necessitated further borrowing; it also clearly made Lenders, who watched borrowing levels soar to $410.0mn, very nervous. In addition to claiming copious reserves (164 million barrels of oil equivalent), the Declaration goes to some lengths to detail the Debtors' recent success and a rapid tripling of annualized EBITDA to $120.0mn (see more beow)

The Siffin Declaration states: "In the months that followed the execution of the MTE Credit Facility and the RBL Agreement, the prices of oil and gas began to decline precipitously. Confronted with this sharp market reversal, it was critical for MDC to maintain and even increase its drilling operations to maintain the cash flow necessary to meet its projections and satisfy the covenants in the MTE Credit Facility and the RBL Agreement. 

Thus, to maintain the necessary drilling program, MTE and MDC continued to borrow the funds to which they were entitled under the respective agreements. By mid-April 2019, MTE had drawn down all of but $65 million of the available funds under the MTE Credit Facility for a total amount drawn down of $410 million. These funds were used to finance MDC’s operations. 

At this time, MDC has drawn on the initial $60,000,000 under the RBL Agreement, but the MDC Secured Lenders did not fund any further amounts thereunder. 

On April 18, 2019, in accordance with the terms of the MTE Credit Facility, MTE sent a borrowing notice (the ‘April 18 Borrowing Notice’) to Riverstone calling for the MTE Lenders to fund the remaining $65 million that was committed and available.

While Riverstone (and the MTE Lenders) knew that these funds were to be used to provide operating capital for MDC’s drilling operations, most notably, to pay MDC’s trade creditors, Riverstone failed to provide the requested funds within ten days as required by the MTE Credit Facility or at any time thereafter. This material breach of the MTE Credit Facility directly led to a cascade of harm to MTE and MDC by causing a significant liquidity shortfall and precluding MDC from being able to fund its operations and make orderly payments on its accounts payable, which largely consisted of its trade creditors."

Corporate Structure

About the Debtors

MTE was formed in June 2014 to hold membership interests in MDC and MDC Texas Operator LLC ("MDC Operator") and their subsidiaries. MDC conducts oil and gas exploration, drilling and development operations in the Permian Basin in Texas. MDC Operator acts as operator of the properties owned by MDC and its subsidiaries pursuant to an operating agreement. 

MDC currently produces, approximately, 20,000 barrels of oil equivalent per day, 11,500 net acres of controlled contiguous blocks, 490 horizontal well drilling locations, and 164 million barrels of oil equivalent of total estimated ultimate recovery. 

The Company has no employees. Pursuant to management services agreements with MDC and MDC Operator, Maefield Development Corporation (“Manager”), a non-debtor affiliate of the Company, provides management and related services to the Company utilizing its own employees. This includes the services of 23 dedicated fulltime employees located at the offices of the Manager in Midland, Texas. The Company reimburses the Manager for the direct costs of providing these services without a mark-up. These employees are also eligible to participate in the healthcare plan provided by the Manager. Typical monthly payroll plus healthcare is approximately $305,000.

The Siffin Declaration adds: "In the past year, MDC significantly expanded its operations. Specifically, it has: 

  • successfully drilled and completed 44 permitted horizontal wells and developed associated surface facilities and infrastructure; 
  • approximately doubled its average net daily production; 
  • begun generating approximately $120 million in annualized EBITDA – a nearly threefold increase in one year; 
  • more than doubled its proven reserves of crude oil and natural gas; and 
  • developed a new platform for water sourcing and disposal to support MDC’s own operations and those of third-party producers. 

As a result, MDC currently produces, approximately, 20,000 barrels of oil equivalent per day, 11,500 net acres of controlled contiguous blocks, 490 horizontal well drilling locations, and 164 million barrels of oil equivalent of total estimated ultimate recovery."

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