Stoneway Capital Ltd. – Highly Leveraged Operator of Argentine Power Facilities Files Chapter 11 with $1bn of Funded Debt After Environmental Court Ruling Sinks RSA-Supported Restructuring Hopes

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April 7, 2021 – Stoneway Capital Ltd. and five affiliated Debtors (“Stoneway” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 21-10646 (Judge ). The Debtors, whose principal business is the construction, ownership and operation of four power generation facilities located in Argentina, are represented by Fredric Sosnick of Shearman & Sterling LLP. Further board-authorized engagements include Prime Clerk as claims agent. 

The Debtors are 100% held by Vancouver-based, non-Debtor GRM Energy Investment Limited (“GRM”). Although currently a non-Debtor, that status is largely dependent on the favor of Term Lenders (defined below) who "have agreed to a standstill agreement with respect to the Term Lenders’ ability to exercise remedies against GRM." To provide some context as to why GRM remains outside of Chapter 11, the Debtors' now up-in-the-air September 2020 RSA stipulates that: "the Term Loan would be converted into 50% of the common shares and 100% of the preferred shares of GRM."

The Debtors’ lead petition notes between 1 and 50 creditors; estimated assets between $500.0mn and $1.0bn; and estimated liabilities between $1.0bn and $10.0bn (almost $1.0bn of funded debt, see below). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Siemens Energy Inc. ($22.5mn disputed litigation claim), (ii) DF/Mompresa, S.A.U.Parque Cientifico Tecnologico ($4.5mn disputed litigation claim) and (iii) Siemens Energy AB ($1.7mn). The Debtors also list Simpson Thacher ($151k), like Shearman boasting a premium Latin American finance practice, amongst their top five unsecured creditors.

Highlights

  • Operators of Four Argentine Power Facilities File Chapter 11 with $1.0bn of Funded Debt
  • Argentine Court Upholds Shutdown of Largest Facility Indefinitely by Regulator Citing Environmental Concerns
  • In Addition to Regulatory Setback and "Highly-Leveraged Capital Structure," Debtors Cite Argentine Economy, Issues with Electricity Market Administrator CAMMESA and Exchange Rate Controls as Contributing to Need to Seek Bankruptcy Protection
  • Term Loan Lenders and Noteholders Execute September 2020 RSA which Originally Envisaged Canadian Proceedings (now Shelved in Favor of Chapter 11)
  • Plant Closure Leads to RSA Parties Refusing to Extend Standstill/Forbearance Periods Past April 7th

As noted above the Debtors are owners/operators of four (highly leveraged) power plants in Argentina, with the largest (the Matheu Generation Facility, which accounts for about 40% of generating capacity) now indefinitely offline as the result of an Argentine court order. The four facilities are:

  • The Las Palmas Generation Facility: Reached full commercial operations in May 2018 and produced approximately 12,150 MWh per month in 2019.
  • The Matheu Generation Facility: Reached full commercial operations in May 2018 and produced approximately 21,403 MWh per month in 2019. In August 2020 operations at this facility were suspended “due to outstanding noise and other violations,” with the Debtors ultimately unable to resolve regulatory concerns in advance of the expiration of creditor agreed standstill arrangements. 
  • The Luján Generation Facility: Reached full commercial operations in May 2018 and produced approximately 15,270 MWh per month in 2019.
  •  The San Pedro Generation Facility. The San Pedro Generation Facility reached full commercial operations on or about February 7, 2018 and produced approximately 5,445 MWh per month in 2019.

Goals of the Chapter 11 Filings

The Mack Declaration (defined below) provides: "As a result of the looming expiration of the informal standstill arrangement, the Debtors have commenced these chapter 11 cases in order to put the automatic stay in place, maintain the status quo pending resolution of the various issues in Argentina, and ensure that neither the Indenture Trustee…nor the Argentine Trustee…take any action that could be detrimental or value destructive to the Company."

The Mack Declaration also notes that, dependent on whether "Argentine Concurso Proceedings" are filed, "it also is possible that the Company (through the relevant foreign representatives) may either seek recognition of the Argentine Concurso Proceedings under chapter 15 of the Bankruptcy Code or seek to treat the Argentine Concurso Proceedings as dual proceedings."

As to the proceedings commenced by the Debtors under the Canada Business Corporations Act (the “CBCA” and the proceedings thereunder, the “CBCA Proceedings”), the Debtors "anticipate that, following the commencement of these chapter 11 cases, the CBCA Proceedings will be abandoned." The CBA proceedings had been at the center of the Debtors' [now often-revised] restructuring support agreement when it was first executed in September 2020.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Mack Declaration”),  David Mack, a director and/or general partner at each of the the Debtors, detailed the events leading to Stoneway’s Chapter 11 filing. The Mack] Declaration provides: “The Company financed the construction of the Generation Facilities primarily through the proceeds of the Notes and other secured indebtedness that was ultimately refinanced with the proceeds of the Term Loan. As a result of the capital-intensive nature of construction projects of this type, the Company commenced operations in mid-2018 with a e.

Despite generating over $100 million of EBITDA since its inception, the Company has struggled to generate sufficient free cash flow to support its working capital requirements and satisfy its ongoing principal and interest repayment obligations under its secured indebtedness. The Company’s liquidity position also deteriorated significantly as a result of a number of industry and Company-specific challenges, including the following:

  1. Slower economic growth in Argentina, which resulted in a decline in aggregate energy consumption, and which coincided with the addition of generation capacity from new hydroelectric and renewable energy projects in the Argentine power market;
  2. The Company has experienced timing issues with respect to its revenue receipt from CAMMESA [the administrator of the wholesale electricity market in Argentina] due to a number of reasons, including currency devaluation;
  3. SGLP incurred significant refinancing costs in relation to the Argentine Revolving Credit Facilities between September 2019 and February 2020, and several of its working capital facilities that matured in the third and fourth quarters of 2019 were not renewed; and
  4. the Argentine Operating Subsidiaries were required temporarily to adjust the form of upstream payments made to SCC due to Argentine exchange rate controls, resulting in delays and additional taxes on those payments.

As a result of these business challenges, the Company has struggled to generate the liquidity necessary to satisfy its working capital, supplier and financial obligations. These issues are exacerbated by the Company’s highly-leveraged capital structure.”

Defaults, Standstill  and RSA

Following a series of defaults in early 2020 (the “Initial Defaults”), and a limited exercise of remedies (the “2020 Exercise of Remedies”) by Term Loan Parties Gramercy Energy Secured Holdings II LLC, Gemcorp Fund I Limited and Gemcorp Multi Strategy Master Fund SICAV SCS the Company entered into a series of informal standstill agreements with the Term Lenders and holders of approximately eighty percent (80.0%) of the total principal amount of the Notes (the “Ad Hoc Group”).  On May 18, 2020, the Company, Term Lenders and Ad Hoc Group parties entered into a formal standstill and forbearance agreement (the “May 2020 Forbearance Agreement”).  During the standstill and forbearance period contemplated by the May 2020 Forbearance Agreement, as extended from time to time, the Company, the Term Lenders, and the Ad Hoc Group worked diligently to agree on a consensual restructuring arrangement.

On September 21, 2020, the parties entered into a Restructuring Support Agreement (the “RSA”), which contemplated a restructuring transaction (the “Consensual Restructuring”) to be implemented pursuant to a corporate plan of arrangement (the “Plan of Arrangement”) to be commenced by the Company under the CBCA.

Under the terms of the Consensual Restructuring, upon consummation of the Plan of Arrangement, (i) the Notes, would be converted into new secured new senior secured notes (the “New Notes”) issued by the Company with a principal amount equal to the principal amount of the Notes and (ii) the Term Loan would be converted into 50% of the common shares and 100% of the preferred shares of GRM.

Although the CBCA Proceedings had been commenced in the Ontario Superior Court of Justice (Commercial List) (the “Canadian Court”) on October 8, 2020, and the Debtors were well on the way toward closing the Consensual Restructuring, on December 4 , 2020, the Argentine Supreme Court issued a decision (the “Argentine Supreme Court Decision”) in an ongoing noise discharge dispute (the “Matheu Dispute”) involving the Matheu Generation Facility. 

The Argentine Supreme Court Decision created significant uncertainty as it overturned a decision of the federal appeals court in San Martin, Buenos Aires (the “Argentine Federal Court of Appeals”), which previously had invalidated a 2017 injunction issued by the Campana Federal Court (the “ 2017 Matheu Injunction”) regarding the construction and operation of the Matheu Generation Facility.

Due to the uncertainty caused by the Argentine Supreme Court Decision, on December 22, 2020, the meeting of holders of Notes that had been scheduled to approve the Plan of Arrangement (the “Noteholders’ Meeting”) was adjourned to a date to be determined. On March 15, 2021, the Company, Term Lenders and Ad Hoc Group agreed to certain further amendments to the RSA (press release covering additional termination events, including developments as to the Matheu Generation Facility here) in light of the developments with respect to the Argentine Environmental Claims…including the addition of certain additional covenants of the Company and the inclusion of a provision that would automatically terminate the RSA at 12:01 a.m. New York City Time on March 31, 2021 (the “Expiration Date”), unless extended by members of the Ad Hoc Group holding a majority of the Notes (the “Majority Members”) by providing written notice at least three business days prior to such date (the “Extension Deadline”). On March 16, 2021, the Argentine Federal Court of Appeals issued its decision (the “March 2021 Decision”) to uphold the 2017 Matheu Injunction and remanding the case to the trial court for further consideration.

Late in the evening of March 30, 2021, an informal standstill through 11 :59 pm on April 7, 2021 was agreed to among counsel to the Debtors, counsel to the Ad Hoc Group and counsel to the Term Lenders. During the period of that informal standstill, discussions among the parties continued, however, as the expiration of the standstill approached, it became apparent that the discussions would not prove fruitful, and that the standstill would not be extended."

Prepetition Indebtedness

The Debtors’ obligations for funded debt consists of: 

  1. senior secured notes in an aggregate outstanding principal amount, together with accrued and unpaid interest, of approximately $686.6mn (the “Notes”) issued by SCC, and which are guaranteed by two of the Debtors (SEI and SELP) and benefit from pledges of equity interests and other assets from each of the other Debtors; 
  2. approximately $26.1mn in outstanding principal due under revolving credit facilities (“Argentine Revolving Credit Facilities”) for which certain of the Argentine Operating Subsidiaries are borrowers, but which also benefit from the same guaranty and collateral package as the Notes; and 
  3. a term loan (the “Term Loan”), the borrower of which is non-debtor GRM, but which is guaranteed by Stoneway Capital, SGLP and Stoneway Power (the “Term Loan Guarantors” and, together with GRM, the “Term Loan Parties”), under which the outstanding principal amount, together with accrued and unpaid interest, is approximately $271,680,900, plus fees, expenses, costs, and other charges arising under or related to the Term Loan.

About the Debtors

The Mack Declaration provides: "The Debtors are holding companies that do not directly carry on material business operations (except for SCC, which leases turbines to the Argentine Operating Subsidiaries), other than maintaining their ownership interests in their non-Debtor operating subsidiaries: Araucaria Power Generation SA (‘Araucaria Power’), Araucaria Energy SA (‘Araucaria Energy’), SPI Energy SA (‘SPI Energy’) and Araucaria Generation SA (“Araucaria Generation” and collectively, with Araucaria Power, Araucaria Energy and SPI Energy, the ‘Argentine Operating Subsidiaries’).

The principal business of the Argentine Operating Subsidiaries is the construction, ownership and operation of four power-generating plants in Argentina (the ‘Generation Facilities’) that provide electricity to the wholesale electricity market in Argentina."

Corporate Structure Chart (poor image quality as filed with the Mack Declaration)

 

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