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February 23, 2022 – The Chapter 11 Trustee appointed to the Debtors' cases notified the Court that Permico Founders, LLC (the “Purchaser," an affiliate of Texas midstream assets specialist Permico Energia) had been designated as the successful bidder ($3.7mn bid) in a sale of substantially all of the Debtors' assets [Docket No. 388]. The Purchaser's APA is attached to the Debtors' notice at Exhibit A.
It has been a busy few weeks for the Chapter 11 Trustee and Permico Energia since the Debtors' sales process suddenly reignited at the beginning of February. On January 18th, the Chapter 11 Trustee filed a notice of milestone default [Docket No. 380] in respect of the preferred recapitalization prong of the Debtors' already confirmed "toggle" Plan and on February 11th the Chapter 11 Trustee filed an expedited sale motion further to which invetsment bankers "Gulfstar immediately contacted parties that previously expressed interest, along with multiple other parties that reached out to GulfStar and/or the Trustee directly. In total, GulfStar contacted 80 potentially interested parties, and 6 parties executed non-disclosure agreements."
By way of background, Permico Energia founded the lead Debtor in October 2017 when it entered a crowded field of contenders looking to link Texas' Permian Basin and Eagle Ford shale regions to refining and fuels export center Corpus Christi.
By the spring of 2020, however, Permico Energia's aspirations for a $3.0bn pipeline had gone seriously awry as their relationship with South Korean lenders (the Hanwha Group) deteriorated into a complete meltdown.
On May 4, 2020, the nominal Debtors filed for Chapter 11 protection. The Chapter 11 Petitions were authorized by board members appointed by Hanwha affiliate HGC Midstream Inv, LLC (“HGC”) after HGC had removed non-Hanwha (ie Permico Energia) board members and replaced Permico Energia as the manager of Debtor Permico Holdings, LLC. Permico Energia responded by filing a motion to dismiss the petitions which argued that Hanwha had no right to replace the Board with the illegitimate replacement Board lacking authority to file for bankruptcy on the Debtors’ behalf.
That motion to dismiss accused Hanwha of refusing to honor its prepetition financing committments (constituting "repeated material, precedent breaches of the Company Agreement") and otherwise impeding Permico Energia prepetition efforts to source replacement financing.
Further to the May 22, 2020 appointment of the Chapter 11 Trustee that motion to dismiss was abated. Thereafter, it took almost a year (and mediation commenced in April 2021) to arrive at Plan settlement term sheet providing for a consensual plan.
With that settlement in hand, the Debtors filed the "toggle" Plan at the end of June 2021 which was confirmed in August 2021.
As detailed below, the preferred path was a recapitalization which had Permico Energia commiting to an "Initial Contribution of no less than $25 million." The failure to meet milestones, however, resulted in a toggle to a sale path further to DIP lender Midstream Partners, LLC ("Integra," now in line for a $175k break-up fee) agreed to serve as a stalking horse.
The Sale Order
The order provides as to the use of sale proceeds and the payment of a break-up fee to stalking horse Integra: "Within two (2) business days of payment of the Purchase Price Proceeds, the Trustee shall pay Integra Midstream Partners, LLC ('Integra') the outstanding amount due under the post-petition $750,000 loan by Integra to the Trustee ('the DIP Loan') is $870,251.71, as of March 1, 2022, plus $369.86 of additional interest for every day following March 1, 2022 that the DIP Loan remains unpaid. Within two (2) business days of receipt of the Purchase Price Proceeds, the Trustee shall pay Integra the Break-Up fee of $175,000.00. Upon payment of the DIP Loan balance and Break-Up fee as set forth immediately above, any and all liens, claims, rights or interests of Integra related to the Trustee, the Debtors, and the Debtors’ estates, including, without limitation, the Purchase Price Proceeds and any proceeds from settlements or other property of the Debtors’ estates received by the Trustee, shall be and hereby are released, waived, and extinguished."
Key Terms of APA:
- Seller: Permico Midstream Partners Holdings, LLC and Permico Midstream Partners LLC
- Purchaser: Permico Founders, LLC
- Purchase Price: The aggregate purchase price shall be: (i) $3.7 million plus (ii) the assumption of the Assumed Liabilities (the “Purchase Price”). The Purchase Price is inclusive of the amount of any required Deposit. At the Closing, the Purchase Price, less the amount of the Deposit, shall be paid by Purchaser to Seller by wire transfer of immediately available funds to the bank account designated by Seller (the “Cash Payment”). The Purchase Price shall be subject to prorations and adjustment in accordance with subsection (d).
A sale hearing is scheduled for March 1, 2022.
On February 11, 2022, the Debtors filed a motion to approve a $3.5mn sale of assets to Integra [Docket No. 385].
The motion notes, “The Debtors’ confirmed Chapter 11 Plan (the ‘Plan’) provides for the sale of substantially all of the Debtors’ assets for $3.5 million to Integra Midstream Partners LLC or its designee (‘Integra’), subject to better and higher offers within the timelines provided for under the Plan, if the Plan’s Toggle 1 recapitalization transaction does not timely occur. The milestones for the recapitalization transaction did not timely occur. Accordingly, to implement the Plan’s Toggle 2 sale, and consistent with the confirmed Plan, the Trustee respectfully requests entry of an order, substantially in the form attached hereto, approving the sale of substantially all of the Debtors’ assets (the ‘Purchased Assets’), free and clear of all claims, rights, and interests for $3.5 million to Integra or, to the extent the Trustee receives higher and better offers prior to the close of the auction, the successful bidder (including Integra, to the extent there is an auction and Integra is the successful bidder, the ‘Purchaser’), pursuant to the terms of the Asset Purchase Agreement substantially in the form attached to the Sale Notice, at Dkt. No. 382 (the ‘APA’) and the Plan.”
On August 20, 2021, the Court hearing the Permico Midstream Partners Holdings cases confirmed the Plan element of the Debtors' combined Chapter 11 Plan of Reorganization and Disclosure Statement (the “Combined Document”) [Docket No. 324]. The Combined Document was filed by William R. Greendyke, the Court-appointed Chapter 11 trustee (the “Trustee”) acting on behalf of the Debtors, HGC Midstream Inv, LLC (“HGC”), Permico Energia, LLC (“Energia”), Corpac Steel Products Corp. (“Corpac”) and Edgen Murray Corporation (“Edgen”, and together with the Trustee, HGC, Energia and Corpac, the “Plan Proponents”).
On May 4, 2020, Permico Midstream Partners Holdings, LLC and one affiliated Debtor (“Permico” or the “Debtors,” Houston-based companies engaged in midstream oil and gas operations) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-32437. At filing, the Debtors’ noted between 1 and 50 creditors; estimated assets between $100.0mn and $500.0mn (Disclosure Statement specifies book values of $41,634,687 for Permico Midstream and $0 for Permico Holdings); and estimated liabilities between $100.0mn and $500.0mn (Disclosure Statement specifies book values of $225,391,586 for Permico Midstream and $31,136,301 for Permico Holdings).
The Combined Document states, “The proposed Plan described herein and agreed to among the Mediation Parties under the Plan Settlement Term Sheet, is a toggle plan, proposing classes and treatments under two scenarios: (i) a Project Transaction with Permico Founders; and, (ii) in the event of an uncured Milestone Default prior to the Toggle 1 Effective Date, a Sale of all Estate assets other than Estate Causes of Action and the Pipe. Under both scenarios, and pursuant to the Plan Settlement Term Sheet and Pipe Sale Order, Edgen and Corpac have the immediate right to begin liquidating 100% of the Corpac Pipe and Edgen Pipe, as the case may be subject to certain escrow requirements, distributions and the Retained HGC Lien as set forth the Plan Settlement Term Sheet, Pipe Sale Order and described below.
The Project Transaction — The Toggle 1 Plan Scenario
The Project Transaction under Toggle 1 contemplates (i) Permico Founders acquiring 100% of the new equity in the Reorganized Debtors for the Initial Contribution of no less than $25 million to be made on the Effective Date; (ii) Reorganized Debtors’ assumption of all obligations of the Debtors unless settled or compromised pursuant to the Plan; (iii) assumption of the Assumed Corpac Contracts and the Corpac Effective Date Assumed Allowed Claim in accordance with the terms of the Plan and Exhibit B to the Plan Settlement Term Sheet, provided, however, that the Corpac Pipe shall be ‘as is,' further, provided, however that warranties, if any, shall continue to apply in accordance with the terms of the Corpac Purchase Orders as may be amended; (iv) assumption of the Edgen Purchase Orders and the Edgen Assumed Obligations in accordance with Exhibit C to the Plan Settlement Term Sheet; (v) assumption by the Reorganized Debtors of all obligations to HGC, including payment obligations as of the Effective Date and at FID/Financial Close; and (vi) mutual releases among the Plan Proponents (other than any Claims and Causes of Action by and between Energia and HGC).
The Sale Transaction — The Toggle 2 Plan Scenario
In the event that an uncured Milestone Default occurs prior to the Toggle 1 Effective Date, under Toggle 2 of the Plan, substantially all of the Debtors’ assets, other than Estate Causes of Action, the Edgen Pipe and the Corpac Pipe, shall be sold for $3.5 million to Integra Midstream Partners LLC or its designee (the ‘Buyer’), free and clear of all rights, titles and interests, with any such rights, title and interest attaching to the proceeds subject to the same, extent, validity and priority as existed on the Petition Date, subject to higher and better bids received by the Trustee within 14 days of the filing of the Sale Notice (the ‘Bid Deadline’). The Trustee shall file a notice of the proposed sale and asset purchase agreement within 7 days of an uncured Milestone Default (the ‘Sale Notice’). To the extent the Trustee receives one or more higher or better offers prior to the Bid Deadline, the Trustee will hold an auction within 7 days following the Bid Deadline and select the highest and best bid. If Integra (Buyer) is not accepted as the highest and best bid, Integra shall receive a break-up fee and expense reimbursement of $175,000 (the ‘Break-Up Fee’) paid out of the proceeds from the Sale at the closing, and Corpac shall be entitled to credit the Break-Up Fee against the Corpac Toggle 2 Trustee Payment.”
Events Leading to the Chapter 11 Filing
According to the Combined Document (which understandably …given the eventual settlement….skates over the fight between Permico Energia and Kanwha; for details as to that see Permico Energia's dismissal motion at Docket No. 22), "Prior to the Petition Date, the Debtors were in the process of developing the Project, which has an estimated capital cost of over three billion dollars to complete phase one. When all three phases of the Pipeline Project are completed, the Debtors’ commercial management team believes that the Pipeline Project will have a market value of over eighteen billion dollars.
Debtor Permico Midstream required interim development financing to keep the Pipeline Project moving forward, while it negotiated with multiple lenders to obtain final debt and equity project financing for the Pipeline Project. Permico Midstream ultimately selected the Hanwha Group, a South Korean conglomerate, over several other competitors to provide the interim development financing in the approximate total sum of $80,000,000. As of April 30, 2019, Permico Midstream and the Hanwha Group’s newly-formed American subsidiary, HGC, entered into a Development Loan Agreement ('Development Loan Agreement'), under which Hanwha would make advances to Permico Midstream in two tranches. The first $30,000,000 tranche was funded at closing. The second $6,000,000 tranche was made in the form of an equity infusion, which was funded later.
The remaining balance of the $80,000,000 — roughly $44,000,000 — was to be funded via capital calls made on HGC under the terms of that certain Amended and Restated Limited Liability Company Agreement ('Company Agreement') for Permico Holdings. HGC also received Series A convertible membership interests in Permico Holdings, in connection with the interim development financing and under the terms of the Company Agreement.
The Company Agreement was executed by the common members, Energia, and Conquista and the Series A Member HGC. Energia was granted two seats on the Board of Directors, Conquista was granted one seat, and HGC was granted the fourth and final seat. As part of the Company Agreement, HGC was granted the right to replace the Manager and Board of Directors of Permico Holdings upon the occurrence of certain conditions, one of which was the failure to close on final project financing and redeem HGC’s Series A membership interest by April 30, 2020.
Subsequently, a dispute arose between Permico Holdings and HGC, which resulted in HGC purporting to exercise certain rights in replacing the Debtors board with their own appointees. That newly replaced Board ultimately authorized the filing of the Debtors’ Bankruptcy Cases. Energia has disputed the validity of HGC’s actions."
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