Murray Energy Holdings Co − Citing Defaulted $350mn DIP Facility and Debtor Mismanagement, Creditor CONSOL Energy Seeks Conversion to Chapter 7 or Appointment of Chapter 11 Trustee

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April 22, 2020 – Citing lack of continued funding under a now defaulted debtor-in-possession (“DIP”) facility and debtor mismanagement, creditor CONSOL Energy Inc., (“CONSOL”) has filed a motion seeking conversion of the Debtors’ Chapter 11 cases to cases under Chapter 7 or in the alternative, the appointment of a Chapter 11 Trustee [Docket No. 1318]. 

The CONSOL motion notes that at an April 14th hearing, the Debtors’ notified the Court that negative financial performance had created an alleged Event of Default in respect of their $350.0mn DIP financing arrangements and that the DIP lender was refusing to allow the Debtors to draw on the remaining portion of that financing. Much of the rest of the motion paints a picture of Debtors unable to pay bills, notwithstanding attempts to slash costs that include reducing salaries, idling of mines, discontinuing retention/incentive programs, halting pension plan contributions, etc. 

The motion hammers home the point of the inadequacy of these efforts in the face of discontinued DIP funding: "During the [February 14] Murray Met DIP hearing, the Debtors’ CEO Robert Moore testified that the Debtors’ were current on post-petition expenses….That testimony has turned out to be inaccurate. Numerous creditors have come forward regarding the Debtors’ failure to make postpetition payments and the Debtors’ unpaid postpetition expenses will only continue to mount as a result of the Debtors’ liquidity issues.

Additionally, the Debtors themselves project that their liquidity and finances will continue to decline over the next few months, due in part to the DIP Lenders’ refusal to continue funding the Debtors as a result of an Event of Default under the DIP Term Loan. While the Debtors have implemented some ‘cash-preserving measures,’…they have failed to present any long-term plan to combat their financial struggle…Robert Campagna [Managing Director at financial advisor Alvarez & Marsal] highlights the severity of the Debtors’ current and projected liquidity, stating that the ‘Debtors cannot be confident’ that cash preservation efforts ‘will be enough to consummate a going-concern sale and exit chapter 11 before the Debtors exhaust their remaining liquidity'…

Based on the ongoing and worsening liquidity concerns, it is apparent that without a substantial infusion of liquidity from the DIP or otherwise, the Debtors have no reasonable likelihood of a rehabilitation, regardless of whether they receive the relief requested in the 9019 Motion. For these reasons, unless the Debtors’ Event of Default is resolved immediately and the Debtors are permitted to draw on the remaining DIP Term Loan to pay postpetition administrative expenses, CONSOL avers that cause exists to convert the within chapter 11 bankruptcy cases to cases under chapter 7. 

…if the Court does not convert these chapter 11 cases to chapter 7 cases, then on request of CONSOL who is an interested party, the Court must appoint an examiner pursuant to § 1104(c)(2) to investigate the Debtors’ affairs for the purposes of discovering potential irregularity, misconduct, and/or mismanagement of the Debtors’ affairs, as well as the level and extent of the Debtors’ administrative expenses and their ability to pay such expenses on the effective date of the Plan, and report all findings to the Court."

The CONSOL motion saves special wrath for one payment which it views as sign of the Debtors' mismanagement, a $10.7mn payment to non-Debtor Murray Met.

The motion states, “Even though the Debtors’ liquidity and overall financial outlook has been declining since the commencement of this Case, the Debtors argued in February that it was in their best interests to provide $10.7 million in capital to an affiliate and non-debtor in this case, Murray Met. CONSOL opposed such funding at the time due to the financial constraints it would put on this case, and the Debtors’ Interim 1113/1114 Motion proves that such funding was just another example of the mismanagement of the estate."

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