White Stallion Energy, LLC – Creditors’ Committee Objects to “Inappropriate and Offensive” DIP Financing Proposals of Stallion Turned Poodle

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December 17, 2020 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) objected to the Debtors’ "inappropriate and offensive" debtor-in-possession ("DIP") financing proposals on multiple grounds relating to the outsized control of DIP lenders over the Debtors and their bankruptcy cases [Docket No. 128]. 

The Committee argues that the DIP lenders, leveraging that control over the Debtors, have left little time to meaningfully pursue an asset sale or to examine potentially valuable claims; all the while pocketing excessive fees and enhancing collateral. The whole effort, the Committee argues, "nothing more than bridge financing to facilitate a liquidation of the Debtors’ assets while giving the DIP Lenders significant fees, a potential full roll-up of their prepetition debt, and the right to dictate the direction and timing of these cases."

Looking on in jealous amazement (the amazement largely feigned), the Committee ticks off the bounty that the DIP Lenders have awarded themselves for a modest $4.0mn of new money DIP financing ($3.0 after advisors are paid): (i) A breakneck 25-day sale process to preclude meaningful progress, (ii) an $8.6mn interim roll-up (with the balance of $90.0mn of prepetition debt with a final DIP order), (iii) interest and fees of 14% (including interest on the roll-up), (iv) liens on unencumbered assets and (v) control over the budget, including as to what to budget on investigations and fees for the Committee's professionals.

The objection notes, “Having bypassed an organized process of prepetition marketing, the Debtors careened into these cases on a breakneck pace to a credit bid sale, with only $3,000 in the bank and very little cash to fund anything other than a direct path to the DIP Lenders’ preferred result of obtaining all value while leaving none behind. In so doing, the Debtors created financial and procedural conditions designed to maximize the control of the DIP Lenders over the estates while minimizing the possibility of meaningful returns to holders of general unsecured claims.

The proposed DIP Facility unfairly enables the DIP Lenders to (i) control all aspects of the Debtors’ cases, (ii) obtain excessive fees and unwarranted protections, and (iii) enhance their collateral in an effort to increase the likelihood of payment in full on account of their prepetition claims. The proposed DIP Facility is for the DIP Lenders’ sole benefit and fails to provide the Debtors with sufficient time or funds to finance a full, competitive marketing and sale process to maximize the value of the Debtors’ assets and increase the likelihood of a going concern sale.

Indeed, the DIP Facility is nothing more than bridge financing to facilitate a liquidation of the Debtors’ assets while giving the DIP Lenders significant fees, a potential full roll-up of their prepetition debt, and the right to dictate the direction and timing of these cases.

Specifically, in exchange for approximately $4 million in new money ($1 million of which will go into the pockets of the DIP Lenders’ professionals), the DIP Lenders seek:

  • a 25-day sale process for the DIP Lenders’ exclusive benefit;
  • roll-up of $8.6 million of the Prepetition Term Loan Facility on an interim basis and potentially the entire balance of the Prepetition Term Loan Facility on a final basis;
  • a 2% repayment fee calculated on the aggregate principal amount of the DIP Facility plus12% PIK interest plus 2% default interest payable in cash;
  • waivers of the Debtors’ rights under Sections 506(c) and 552(b) of the Bankruptcy Code, including the waiver of marshaling rights; 
  • payment of the DIP Lenders’ legal fees with no cap;
  • liens on unencumbered assets of the Debtors, including avoidance action proceeds; and 
  • control over the Budget

The Budget provides insufficient funding for the Committee to (a) investigate liens and perfection issues during the Challenge Period and (b) investigate and pursue potential causes of action against the Debtors’ former directors and officers, thereby limiting the Committee’s ability to perform its statutory duties. When viewed in light of these circumstances and the fact that the Debtors never sought an alternative source of financing, it becomes patently clear that the terms and conditions of the DIP Facility are both inappropriate and offensive.

The Committee recognizes that the Debtors require DIP financing and is willing to support the Debtors’ pursuit of a value-maximizing going concern sale and a post-petition financing facility that improves the Debtors’ ability to fund a robust sale process without unduly harming the Debtors’ unsecured creditors. The proposed DIP Facility, however, falls woefully short in this regard. Accordingly, it is respectfully submitted that the DIP Motion be denied.”

Background

On December 8, 2020, the Court hearing the White Stallion Energy cases issued an interim debtor-in-possession ("DIP") financing order authorizing the Debtors to (i) access $3.0mn of new money DIP financing, (ii) roll-up of $8.6mn of the Debtors' prepetition term loan facility (the "Prepetition Term Loan Facility) and (iii) use cash collateral [Docket No. 69].

The DIP financing, provided by prepetition lenders Riverstone Credit Partners L.P., Summit Partners Credit Fund II, L.P., Summit Partners Credit Fund B-2, L.P., Summit Partners Credit Offshore Intermediate Fund II, L.P., Summit Investors Credit II, LLC and Summit Investors Credit II (UK), L.P. (collectively, the “DIP Lenders”), is comprised of (a) $4.0mn of new money term loans ($3.0mn available with this interim DIP order) and (b) the roll-up of $8.6mn of prepetition bridge loans (the “bridge” loans being drawdowns under the Prepetition Term Loan Facility).

in addition to the $8.6mn roll-up occurring with this interim DIP order, the Debtors have also requested a full roll-up of all amounts outstanding ($90.0mn at Petition date) under their Prepetition Term Loan Facility upon issuance of a final DIP order.

The motion notes, “The Debtors need immediate access to incremental liquidity in the form of postpetition financing to preserve the value of the Debtors’ estates and maximize recoveries for all stakeholders. Accordingly, the Debtors seek approval of an approximately $12.6 million loan provided by the certain lenders under the Debtors’ prepetition term loan facility (the ‘DIP Facility’). Because the DIP Facility is being provided by the Debtors’ Prepetition Facility Lenders under the Prepetition Credit Agreement, the Debtors are avoiding a potentially value-destructive litigation priming fight with a third-party lender seeking to prime the Debtors’ largest contingent of prepetition secured creditors.

If approved, the Debtors will use the proceeds of the DIP Facility to, among other things: (a) fund the administration of the Debtors’ chapter 11 cases; (b) fund the Debtors’ restructuring efforts, including a potential sale of substantially all of their assets; and (c) repay certain amounts outstanding under the Debtors’ Prepetition Credit Agreement. Obtaining an immediate injection of cash is critical. Without the liquidity provided by the DIP Facility and access to the prepetition lenders’ cash collateral, the Debtors will be unable to effectuate their restructuring efforts, preventing the Debtors from maximizing the value of their estate for all stakeholders.”

In a declaration in support of the DIP financing [Docket No. 29], the Debtors’ investment banker comments on the roll-up and fees: “Based on my review of the DIP Facility Term Sheet, I believe that the terms of the DIP Financing are reasonable and appropriate in light of the facts of this case and the prepetition capital structure. I understand that the DIP Facility contemplates a 'roll-up' of approximately $8.6 million of obligations under the Prepetition Term Loan Facility following entry of the Interim Order and up to the full remaining outstanding balance of the Prepetition Term Loan Facility following entry of the Final Order. Because the DIP Facility maintains the prepetition priority scheme, I do not believe that any creditor or stakeholder will be harmed by the proposed roll up and that such roll up is reasonable. 

I understand that the Debtors have agreed, subject to Court approval, to pay certain fees to the DIP Agent and the DIP Lenders. In particular, the Debtors have agreed to pay a fee equal to 2.0 percent of the aggregate principal amount of the DIP Facility upon the repayment in full of the DIP Facility. Based on my experience marketing and assisting companies in negotiating debtor-in-possession financing, I believe that the fees reflected in the DIP Facility are consistent with the range of fees I have seen in similar financings…”

Key Terms of the DIP Facility:

  • Borrower: White Stallion Energy, LLC
  • Guarantors: White Stallion Holdings, LLC (“Holdings”) and all wholly owned subsidiaries of the Borrower that are, or are required to be, guarantors under the Prepetition Credit Agreement (as defined in the DIP Term Sheet), each as a debtor-in-possession.
  • DIP Financing Lenders: Riverstone Credit Partners, L.P., Summit Partners Credit Fund II, L.P., Summit Partners Credit Fund B-2, L.P., Summit Partners Credit Offshore Intermediate Fund II, L.P., Summit Investors Credit II, LLC and Summit Investors Credit II (UK), L.P.
  • Term: The DIP Facility shall mature on the later of (such later date, the “DIP Maturity Date”) (a) January 15, 2021 (the “Stated DIP Maturity Date”) and (b) such other date acceptable to the DIP Lenders in their sole discretion.
  • Commitment: A superpriority senior secured debtor-in-possession delayed draw term loan credit facility in an aggregate principal amount of up to $12,614,779.72, composed of (a) a dollar-for-dollar roll up of $8,614,779.72 of outstanding loans and other obligations owed to, and made by, certain lenders under that certain Credit Agreement dated as of April 17, 2017, among Holdings, the Borrower, Riverstone Credit Management LLC, as administrative and collateral agent, and the Prepetition Facility Lenders (such rolled-up loans and obligations, the “Prepetition Facility Rolled Obligations”) and (b) $4.0mn of new term loans ($3.0mn with interim DIP order) made by and other obligations owed to the DIP Lenders on or after the Closing Date (such new loans and obligations, the “New Loans” and the “New Obligations” and New Loans collectively with the loans in respect of the Prepetition Facility Rolled Obligations, the “DIP Loans”). The New Loans shall be made at the request of the Borrower in an aggregate principal amount of up to (a) $2,000,000 at any time prior to the earlier of (x) the DIP Lenders being provided with the Agreed Duke Term Sheet and (y) the Stated DIP Maturity Date (such time, “Phase 1”), (b) an additional $1,000,000 at any time after Phase 1, but prior to the earlier of (x) entry by Duke Energy Corporation and the Borrower into a Duke Coal Supply Commitment or Duke Coal Supply Agreement and (y) the Stated DIP Maturity Date (such time, “Phase 2”) and (c) an additional $1,000,000 at any time after the entry of the Final DIP Order and Phase 2, but prior to the Stated DIP Maturity Date.
  • Interest Rates:
    • The DIP Loans under the DIP Facility shall bear interest at a rate equal to 12.00% per annum, payable monthly in kind and be capitalized as principal and accordingly added to the outstanding principal amount of the DIP Facility upon each such monthly payment.
    • At any time while an event of default under the DIP Documents has occurred and is continuing all amounts owing under the DIP Facility, including the DIP Loans, will bear interest at an interest rate equal to the interest rate applicable to the DIP Loans plus 2.00%, which shall be payable in cash on demand from time to time.
  • Fees
    • DIP Facility Exit Fee: Upon the repayment in full of the DIP Facility, for any reason, whether at maturity or otherwise, the Borrower shall pay to the DIP Agent, for the account of each DIP Lender, a fee in an amount equal to 2.0% of the aggregate principal amount of the DIP Facility (collectively, the “DIP Facility Fees”). For the avoidance of doubt, it is understood and agreed that the DIP Facility Fees shall be earned on the Closing Date and shall be payable in full on the date the DIP Facility is so repaid.
  • Use of Proceeds: (a) to fund costs and expenses approved by the DIP Lenders and (b) to pay the professional fees and expenses of legal and other advisors to the DIP Agent and the DIP Lenders.
  • New Money: $4.0mn ($3.0mn with interim DIP order)
  • Roll-Up: (a) $8.6mn roll-up occurring with interim DIP order and (b) a full roll-up of all amounts outstanding ($90.0mn at Petition date) under their Prepetition Term Loan Facility upon issuance of a final DIP order.

Prepetition Indebtedness

As of the Petition date, the Company’s secured debt liabilities total approximately $103.9m, including:

 Facility

 Maturity

 Interest Rate

Approx. Principal Amount Outstanding

 Security

Prepetition Term Loan Facility

October 2021

LIBOR plus 11.5%

$90.0mn

All Company assets

Prepetition ABL Facility

October 2021

Varies

$7.1mn

All Company assets

Real Estate Purchase Agreement

November 2024

5%

$2.0mn

Approximately 637 acres of real estate in Daviess County, Indiana

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