Talen Energy Supply LLC – Bank of New York Mellon Objects to Plan as Unconfirmable Unless Accredited and Not Accredited Claim Holders in Class Four (“Unsecured Notes Claims”) Receive Equal Treatment

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October 17, 2022 – The Bank of New York Mellon (“BNYM*” or the “Trustee”) objected to the Debtors’ Disclosure Statement, arguing that it would fail to treat all members of Class 4 ("Unsecured Notes Claims") equally in the event that the Debtors proceed with an "Equitization Transaction" [Docket No. 1364]. As it stands, the Trustee argues, the Plan would disparately treat accredited investors (ie those who qualify for the private placement exemption under section 4(a)(2) of the Securities Act) and not accredited investors (the "Low Net Worth Holders"), with not accredited investors obligated to exercise their 1145 Subscription Rights if it wants to receive a distribution on account of their 4(a)(2) Subscription Rights. NB: The objection would be moot if the Debtors toggled to a "Sale Transaction" which would not involve distributions of equity.

"This infirmity, the Trustee continues, "is easily solved by removing the conditionality requiring Low Net Worth Holders to fully exercise 1145 Subscription Rights to receive their distributions in lieu of the 4(a)(2) Subscription Rights…"

*BNYM serves as trustee under the Indentures for approximately $1.4bn of unsecured notes and bonds issued by Talen and PEDFA for the benefit of the Debtors.

Key Definitions

  • “1145 Rights Offering” means, solely with respect to an Equitization Transaction, the portion of the Rights Offering to be conducted in reliance upon the exemption from registration under the Securities Act provided in section 1145 of the Bankruptcy Code, in such amount that the New Common Equity issued pursuant to the 1145 Rights Offering, together with the New Common Equity issued in exchange for the Unsecured Notes, or General Unsecured Claims, as applicable, are principally in exchange for a Claim pursuant to section 1145 of the Bankruptcy Code.
  • “4(a)(2) Rights Offering” means, solely with respect to an Equitization Transaction, the portion of the Rights Offering to be conducted in reliance upon the exemption from registration under the Securities Act provided in section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder, in such amount that is equal to the total size of the Rights Offering minus the size of the 1145 Rights Offering.

Case Status

On May 9th, Talen Energy Supply LLC and 71 affiliated debtors (together, “TES**” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $10.0bn and $50.0bn; and estimated liabilities between $10.0bn and $50.0bn ($4.46bn of funded debt).  At filing, the Allentown, Pennsylvania based Debtors, “one of the largest* competitive power generation and infrastructure companies in North America,” noted that liquidity constraints had left them unable to redeem their 2021 notes or post additional collateral as required under hedging arrangements (the latter hitting $451.0mn in October 2021).

**TES owns and/or controls approximately 13,000 Megawatts of generating capacity in wholesale U.S. power markets, principally in the Mid-Atlantic, Texas and Montana. In December 2016, the Debtors became wholly owned by affiliates of Riverstone Holdings LLC (“Riverstone”).

On June 17th, the Court hearing the Talen Energy Supply cases issued a final order authorizing the Debtors to: (i) access a further $200.0mn of new money, debtor-in-possession (“DIP”) term loans and (ii) access a further $225.0mn of new money under a DIP revolving credit facility [Docket No. 588]. This tranche of DIP funcing is part of a $1.75bn DIP package, being provided by a syndicate led Citigroup, Goldman Sachs and RBC Capital Markets, and is comprised of: (i) $1.0bn of new money term loans ($800.0mn previously made available by a May 11th interim DIP order), (ii) a $300.0mn new money revolving credit facility ($75.0mn of headroom greenlighted by the interim order), including a letter of credit sub-facility of up to $75.0mn to issue new letters of credit and (iii) continued access to letter of credit facilities totaling $457.9mn. 

On August 29th, the Court issued an order authorizing the Debtors to enter into an August 4th amended and restated commitment letter (the “Backstop Commitment Letter”) further to which certain unsecured noteholders (the "Backstop Parties") have agreed to backstop up to $1.55bn of a proposed $1.9bn rights issue [Docket No. 1133, which attached the Amended and Restated Backstop Commitment Letter at Exhibit A]. The Backstop Commitment Letter replaces in its entirety a May 31st commitment letter further to which the Backstop Parties, signatories to the Debtors' May 9th Restructuring Support Agreement (revised to reflect the upsized rights offering on August 4th), had committed to backstop $1.3bn of a $1.65bn rights issue. In requesting the authority to enter the augmented arrangements, the Debtors noted that "capital needs have evolved and that almost $3.0bn infusion of capital will not be enough to fund the Debtors' revised business plan."

On October 7th, the Debtors filed a Revised Chapter 11 Plan of Reorganization and a related Disclosure Statement [Docket Nos. 1318 and 1320, respectively]; and separately filed redlines of each showing changes to the versions filed on September 9, 2022 [Docket Nos. 1319 and 1322, respectively].

The Debtors are looking to have their Disclosure Statement approved at an October 26th hearing and have requested a December 15th Plan confirmation hearing.

BNYM Objection

The Trustee's objection [Docket No. 1364] states, ”As a general matter, the Trustee supports the proposed Restructuring under the Plan: either pursuant to the Equitization Transaction, which would turn over control of the Debtors to members of the Ad Hoc Group holding the majority of the Unsecured Notes and Series A PEDFA Bonds or the Sale Transaction. However, pursuant to the Bankruptcy Code, if the Equitization Transaction moves forward, the Plan must provide equal treatment to all members of Class 4 which is comprised of the holders of the Unsecured Notes and the Series A PEDFA Bonds. As proposed, the Plan fails to treat all members of Class 4 equally and is therefore patently unconfirmable. Solicitation of the Plan, in its current form, would be a futile exercise.

Under the Equitization Transaction, holders of the Unsecured Notes and the Series A PEDFA Bonds would receive three forms of distribution on account of their claims – (i) New Common Equity, (ii) 1145 Subscription Rights and (iii) 4(a)(2) Subscription Rights. However, in order to qualify for the private placement exemption under section 4(a)(2) of the Securities Act of 1993, the Debtors can only offer these rights to certain types of holders, i.e., accredited investors. Accordingly, in order to assure that holders who are not accredited investors (the ‘Low Net Worth Holders’) receive equivalent value under the Plan, the Plan proposes to give them additional New Common Equity or Cash in the amount of the value of the 4(a)(2) Subscription Rights. However, notwithstanding this intent to provide equivalent distributions to Low Net Worth Holders, the Plan conditions such holder’s right to receive a distribution on account of 4(a)(2) Subscription Rights upon whether it decides to exercise its 1145 Subscription Rights. As further discussed herein, the Trustee believes that this condition reduces the opportunity for recovery for some but not all members of the same class. This is prohibited under section 1123(a)(4) of the Bankruptcy Code and is statutorily improper since the Bankruptcy Code does not give a debtor the power to provide a different distribution to a class member of an accepting class based upon what that creditor does with the rest of its distribution. Additionally, there is no good business justification for this condition since, regardless of the amount of holders who exercise their rights under the rights offerings, the backstop assures that the Debtors will raise the amount of funds required by the Plan. Moreover, the Backstop Commitment Letter does not impose this condition.

This disparity and disparate treatment between holders eligible and ineligible to exercise 4(a)(2) Subscription Rights is fundamentally unfair and violates the equal treatment provision of the Bankruptcy Code. Accordingly, the Plan cannot be confirmed in its current form. At the very least, the Court should not allow the Debtors to pre-condition confirmation of the solicited Plan on this issue and should require that the Plan, if approved for solicitation in its current form, go forward regardless of how this issue is resolved.

This infirmity under the Plan is easily solved by removing the conditionality requiring Low Net Worth Holders to fully exercise 1145 Subscription Rights to receive their distributions in lieu of the 4(a)(2) Subscription Rights – a result which assures that the Plan (which is otherwise supported by the Trustee), if confirmed, provides for equal treatment for all holders of Class 4 Unsecured Notes Claims.

Overview of the Plan

The Revised Disclosure Statement [Docket No. 1320] states, “The Plan provides for a comprehensive restructuring (the ‘Restructuring’) pursuant to either (i) a debt-for-equity exchange in which the equity of New Parent will be distributed to Holders of Unsecured Notes Claims and General Unsecured Claims on account of their Claims and to Holders of Unsecured Notes Claims and General Unsecured Claims that participate in the Rights Offering (the ‘Equitization Transaction’); or (ii) one or more sale transactions in which one or more third-party bidder(s) will acquire either the equity of New Parent or all or substantially all of the Debtors’ assets, including the equity in the Debtors’ subsidiaries (a ‘Sale Transaction’).

Under the terms of the [restructuring support agreement (the ‘RSA’)], the Debtors may solicit, initiate, facilitate, encourage, develop and negotiate one or more alternative restructuring proposals from third parties (an ‘Alternative Restructuring’), including a potential Sale Transaction, and may toggle to a Sale Transaction if certain conditions are met, as described more fully below. In the event an actionable Sale Transaction does not occur, the Debtors believe the Equitization Transaction provided for in the RSA and the Plan will maximize value and allow the Debtors’ business to reorganize with a substantially reduced debt load and increase their cash flow on a go-forward basis.

Equitization Transaction 

The Equitization Transaction is anchored by the Consenting Parties’ commitment to equitize their respective holdings of the approximately $1.4 billion in principal amount of Unsecured Notes Claims and backstop $1.55 billion of an up to $1.9 billion equity rights offering. Specifically, in the event an actionable Sale Transaction does not occur, the proposed Equitization Transaction provides for, among other things:

  • an up to $1.9 billion common equity rights offering (the ‘Rights Offering’), $1.55 billion of which will be backstopped by the Backstop Parties (the ‘Rights Offering Amount’), pursuant to which eligible Holders of Unsecured Notes Claims and General Unsecured Claims will be distributed subscription rights to purchase shares of New Common Equity issued by New Parent (the ‘Rights Offering Equity’) in accordance with the Restructuring Transactions Exhibit (as defined in the Plan), to be included in the Plan Supplement;
  • repayment of the DIP Facilities in full in Cash;
  • payment in full of Allowed Other Priority Claims and payment in full, reinstatement or such other treatment of Allowed Other Secured Claims as to render such Claims Unimpaired; 
  • Holders of Allowed Prepetition CAF Claims to receive payment in full in Cash of the Settled CAF Claim Amount; 
  • Holders of Allowed Prepetition First Lien Non-CAF Claims to receive payment in full in Cash of the Settled First Lien Non-CAF Claim Amount; 
  • Holders of Allowed Unsecured Notes Claims to receive their Pro Rata share of 99% of the new common equity in the New Parent (the ‘New Common Equity’), less any New Common Equity distributed to general unsecured creditors pursuant to the Plan (the ‘GUC Recovery Equity Pool’) or on account of the Retail PPA Incentive Equity (as defined in the Plan), subject to dilution from the Rights Offering, the Employee Equity Incentive Plan, the New Warrants Equity, the Backstop Periodic Premium, and the Backstop Put Premium (each as defined in the Plan); 
  • Holders of Allowed Unsecured Notes Claims and Allowed General Unsecured Claims to receive their Pro Rata share e (on a Claim by Debtor basis) of the 1145 Subscription Rights (as defined in the Plan) and (i) with respect to an Eligible Holder, the 4(a)(2) Subscription Rights (as defined in the Plan) or (ii) with respect to an Ineligible Holder, solely to the extent such Holder fully exercises its 1145 Subscription Rights, New Common Equity or Cash, at the option of the Requisite Consenting Parties, in the amount equal to the value of the 4(a)(2) Subscription Rights that would have been distributable to the Holder if such Holder was an Eligible Holder
  • Holders of Allowed General Unsecured Claims to receive their Pro Rata share (on a Claim-by-Debtor basis) of the GUC Recovery Equity Pool, subject to dilution from the Rights Offering, the Backstop Periodic Premium, the Backstop Put Premium, the New Warrants Equity and the Employee Equity Incentive Plan;
  • Holders of Claims that would otherwise be Allowed General Unsecured Claims (i) in an amount of $1,000 or less or (ii) reduced to $1,000 that are designated as General Unsecured Convenience Claims will receive payment in full in Cash; 
  • the Debtors’ collective bargaining agreements, pension obligations and asset retirement obligations to be assumed and/or otherwise unimpaired; 
  • the Debtors’ entry into any credit facility in accordance with the RSA, including a priority revolving credit facility in a principal amount of at least $1,000,000,000 with the capacity for the issuance of letters of credit (the ‘Exit Facility’); and 
  • if the TEC Global Settlement remains in effect as of the Effective Date of the Plan, the Reinstatement of Existing Equity Interests so as to maintain the organizational structure of the Company as such structure exists on the Effective Date.

Sale Transaction

Pursuant to the Plan, the Debtors may elect to pursue a Sale Transaction premised on an Eligible Alternative Restructuring. The RSA provides that the Consenting Parties will support a Sale Transaction that is an Eligible Alternative Restructuring. An ‘Eligible Alternative Restructuring’ is an Alternative Restructuring that provides for: 

  • satisfaction in full, including any accrued but unpaid interest (including postpetition interest at the contract rate, as increased due to the Company’s default), of all Claims arising under (i) the DIP Documents, (ii) the Prepetition First Lien Debt Documents (as defined in the DIP Order), including as set forth in the CAF Settlement and the First Lien Non-CAF Settlement, as applicable, and (iii) the Unsecured Notes Indentures; 
  • payment of any fees due and payable in accordance with the Order (I) Authorizing the Debtors to Enter into Backstop Commitment Letter, (II) Approving All Obligations Thereunder and (III) Granting Related Relief [Docket No. 1133] (the ‘Backstop Order’); and
  • treatment of all other Claims against the Company on terms that are no less favorable than as provided in the RSA.”

The following is an updated summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement, see Liquidation Analysis attached below):

  • Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 3A (“Prepetition First Lien NonCAF Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $2.1382bn and estimated recovery is 99%. Each Holder will receive payment in full in Cash of such Holder’s Pro Rata share of the Settled First Lien Non-CAF Claim Amount on the Effective Date.
  • Class 3B (“Prepetition CAF Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1.0420bn and estimated recovery is 88%. Each Holder will receive payment in full in Cash of such Holder’s Pro Rata share of the Settled CAF Claim Amount on the Effective Date.
  • Class 4 (“Unsecured Notes Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $1.5042bn and estimated recovery is 24%-47%.Each Holder will receive, in accordance with the Restructuring Transactions, its Pro Rata share of, as applicable:
    • If the Equitization Transaction occurs:
    • 99% of the New Common Equity, less the New Common Equity distributed on account of the Retail PPA Incentive Equity and the GUC Recovery Equity Pool, and subject to dilution from the Rights Offering, the Backstop Periodic Premium, the Backstop Put Premium, the New Warrants Equity and the Employee Equity Incentive Plan;
    • the 1145 Subscription Rights; and
    • with respect to:
      • Eligible Holders of Unsecured Notes Claims: the 4(a)(2) Subscription Rights; or
      • Ineligible Holders of Unsecured Notes Claims (if any): solely if such Holder fully exercises its 1145 Subscription Rights, New Common Equity or Cash, at the option of the Requisite Consenting Parties, in the amount equal to the value of the (4)(a)(2) Subscription Rights that would have been distributable to such Holder if such Holder was an Eligible Holder of Unsecured Notes Claims; or
    • if the Sale Transaction occurs, the Waterfall Recovery; provided, however, that in no event will the Holders of Unsecured Notes Claims receive, on account of such Claims, a recovery greater than 100% of the Unsecured Notes Claims, including after payment of postpetition interest on any Unsecured Notes Claims from the Petition Date through the date of payment of such Claim, plus any additional amounts due under the Unsecured Notes Documents, to the maximum extent permitted by law, in each case as provided for in the relevant indenture and as allowed under the Bankruptcy Code.
  • Class 5 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $0.3195bn and estimated recovery is 0%. Each Holder will receive, in accordance with the Restructuring Transactions, its Pro Rata share (on a Claim by Debtor basis) of:
    • If the Equitization Transaction occurs:
    • the GUC Recovery Equity Pool, subject to dilution from the Rights Offering, the Backstop Periodic Premium, the Backstop Put Premium, the New Warrants Equity and the Employee Equity Incentive Plan;
      • the 1145 Subscription Rights; and
    • with respect to:
      • Eligible Holders of General Unsecured Claims: the 4(a)(2) Subscription Rights; or
      • Ineligible Holders of General Unsecured Claims (if any): solely if such Holder fully exercises its 1145 Subscription Rights, New Common Equity or Cash, at the option of the Requisite Consenting Parties, in the amount equal to the value of the 4(a)(2) Subscription Rights that would have been distributable to such Holder if such Holder was an Eligible Holder of General Unsecured Claims; or
    • if the Sale Transaction occurs, the Waterfall Recovery; provided, however, that in no event shall the Holders of General Unsecured Claims receive, on account of such Claims, a recovery greater than 100% of the General Unsecured Claims.
  • Class 6 (“General Unsecured Convenience Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $0.1mn and estimated recovery is upto 100%. Each Holder will receive:
    • if the Equitization Transaction occurs, payment in full in Cash of such Holder’s General Unsecured Convenience Claim; or
    • if the Sale Transaction occurs, such Holder’s rights and entitlements hereunder as a Holder of a General Unsecured Claim and this Class will be deemed vacant pursuant to Article III.E of the Plan.
  • Class 7 (“Prepetition Cumulus Intercompany Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 8 (“Prepetition Intercompany Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $20.1536bn and estimated recovery is 100%.
  • Class 9 (“Section 510(b) Claims”) is impaired, deemed to reject and not entitled to vote on the Plan.
  • Class 10 (“Intercompany Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 11 (“Existing Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.

Restructuring Support Agreement

The Debtors have reached an agreement with the Unsecured Notes Group (an ad hoc group of holders of the Senior Unsecured Notes represented by Kirkland & Ellis LLP and Rothschild & Co US Inc.) on a restructuring term sheet (the “Restructuring Term Sheet”) and a restructuring support agreement (the “RSA”) [attached at Docket No. 16]. The Restructuring Term Sheet provides for an up to $1.65 billion rights offering (the “Rights Offering”) that would provide for the payment of secured claims in full, backstopped by certain members of the Unsecured Notes Group (the “Backstop Parties”) pursuant to a form of backstop commitment letter (the “Backstop Commitment Letter” appended to the RSA as Exhibit C).

Additionally pursuant to the RSA, the Unsecured Notes Group has agreed to equitize the $1.4 billion of Senior Unsecured Notes held by their group.

Creditors: Who is Who?

Prior to the Debtors' Chapter 11 filings, the Debtors’ creditors had organized into several groups, including: (i) an ad hoc group of CAF Lenders represented by Akin Gump Strauss Hauer & Feld LLP and Houlihan Lokey Capital, Inc. (the “CAF Lender Group”), (ii) an ad hoc group of 2026 TLB Lenders and holders of Senior Secured Notes represented by King & Spalding LLP and Houlihan Lokey Capital, Inc. (the “2026 TLB Lender Group” and, together with the CAF Lender Group, the “Secured Creditor Group”), (iii) an ad hoc group of “crossholder” creditors consisting of 2026 TLB Lenders and holders of Senior Secured Notes and Senior Unsecured Notes represented by Paul, Weiss, Rifkind, Wharton & Garrison LLP and Perella Weinberg Partners LP (the “Crossholder Group”), and (iv) an ad hoc group of holders of the Senior Unsecured Notes represented by Kirkland & Ellis LLP and Rothschild & Co US Inc. (the “Unsecured Notes Group” and, collectively with the Secured Creditor Group and the Crossholder Group, the “Ad Hoc Groups”).

Capital Structure

The following table provides a summary of the Debtors’ funded debt:

Senior Secured Notes

Senior Unsecured Notes

Municipal Bonds

About the Debtors

According to the Debtors: “Talen Energy Corporation, through its subsidiary, TES, is one of the largest competitive power generation and infrastructure companies in North America. TES owns and/or controls approximately 13,000 Megawatts of generating capacity in wholesale U.S. power markets, principally in the Mid-Atlantic, Texas and Montana.

Through its non-filing subsidiary, Cumulus Growth, Talen Energy Corporation is developing a large-scale portfolio of renewable energy, battery storage, and digital infrastructure assets across its expansive footprint.”

Collectively, the Debtors consist of TES and all of its wholly-owned subsidiaries—except for LMBE-MC HoldCo I LLC and its three subsidiaries (“LMBE-MC”) and Talen Receivables Funding LLC (“TRF”)—totaling 72 entities formed under the laws of Delaware, Massachusetts, New Jersey, and Pennsylvania. The Company’s headquarters are located in The Woodlands, Texas.

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