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Fridson on the Third Avenue Affair: The Difference Between Distressed Debt and High Yield

The shutdown of the distressed debt fund known as Third Avenue Focused Credit (TAFC), announced on the management company’s website on Dec. 9, has understandably created anxiety among retail investors. Until now, they have assumed that they could always get their money out the day they decided to.

With no warning, Third Avenue locked investors into its fund for a period it said might be up to one year or more by putting its assets into a liquidating trust. The company did not even bother to seek Securities and Exchange Commission approval for its action.

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There are valid concerns about high-yield market conditions, highlighted by poor secondary market liquidity and the fact that the low point in the default-rate cycle is behind us. It would be a mistake, however, for investors to conclude that open-end mutual funds holding conventional high-yield bond portfolios are all at risk of being unable to meet redemptions and therefore pose a danger of a TAFC-like liquidation. Investors must understand the difference between distressed debt and ordinary high-yield bonds.

Currently, the BofA Merrill Lynch US High Yield Distressed Index accounts for just 11.62% of the market value of the BofA Merrill Lynch US High Yield Index. It has an option-adjusted spread (OAS) of 22.41%, and investors should expect about 30% of its issues to default within the next 12 months. The 88.38% of the high-yield universe represented by the BofA Merrill Lynch US High Yield Non-Distressed Index has an OAS of 508 bps. Over the next 12 months, the default rate for bonds currently in this index should be close to zero, as it is rare for the market to fail to identify bonds at high risk of default at least one year in advance.

Ownership of distressed bonds (those quoted at option-adjusted spreads of 1,000 bps or more) by ordinary high-yield mutual funds is usually inadvertent. The funds sometimes buy seemingly healthy credits that unexpectedly go bad. Occasionally, they decide not to sell, thinking the troubled issuer will turn around, only to wind up holding a defaulted bond. They do not, as a rule, deliberately play in defaulted debt, as was Third Avenue Focused Credit’s practice, as that paper generally provides no current yield.

Neither do conventional high-yield funds concentrate their holdings to the extent that TAFC did, with 28.4% of its assets in its top 10 positions. As a result, mainstream high-yield funds do not put themselves in a position of being unable to satisfy redemptions when default rates inevitably reach the point in the cycle where they stop going down and start going up.

Notwithstanding the stark dissimilarities between TACF, a distressed fund offering daily liquidity, and conventional high-yield funds, the search for the next domino to fall began soon after TAFC’s shutdown. Over the weekend the Wall Street Journal published a table entitled, “Throwing Out the Junk”.

It presented the 10 funds classified as high-yield under SEC rules, including Third Avenue’s distressed debt fund, with the largest year-to-date net outflows, ranked by the percentage of assets that those outflows represented. TAFC topped the list at 41%. The next three funds had net outflows ranging from 39% to 29%.

The four funds shared one characteristic that could contribute to an inability to meet redemptions, namely, very large requests for redemption. TAFC, however, was an outlier in terms of another key characteristic—humongous exposure to the sort of paper that is hardest to sell in order to meet redemptions. Based on Bloomberg data, 75.60% of TAFC’s market value was represented by bonds rated CCC to D or non-rated. The comparable figures for the other three funds ranged from 14.67% to 25.67%.

High-yield mutual fund shareholders should certainly take a close look at this simple metric for their own funds. Given that 63% of CCC-C issues within the BofA Merrill Lynch US High Yield Index are currently quoted at distressed levels, a ratio approaching TAFC’s would be a strong indication that the fund is in reality a distressed debt player, regardless of how it is classified by SEC rules.

In the present environment, that sort of fund could well find itself unable to continue offering daily liquidity. Conventional high-yield funds should not find themselves in that position, even though they may take sizable hits when they sell bonds to raise cash for redemptions. – Martin Fridson

This story is part of Marty’s regular weekly commentary for LCD News. The full analysis, available to subscribers, is here. 

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Distressed Debt: Arch Coal Skips Interest Payment, Enters 30-Day Grace Period

Arch Coal has elected not to make a $90 million interest payment due to bondholders today as it continues discussions with various creditors “in an effort to implement a comprehensive plan” to restructure its balance sheet, the company announced today.

America’s second-largest coal miner will instead enter into a customary 30-day grace period with holders of the 9.875% notes due 2019, the 7.00% notes due 2019, and the 7.25% notes due 2021, after the company was forced to cancel its proposed exchange offer with the junior lenders that it said was “the best option” for keeping the deeply distressed miner out of bankruptcy.

Arch Coal further disclosed that events of default will exist under the company’s term loan facility and receivables facility as a result of the missed interest payment and other recent events, but does not anticipate the lenders taking any remedial action in respect of any such event of default.

As reported, Arch Coal, which is saddled with a $5.1 billion debt load from its $3.4 billion acquisition of International Coal Group Inc. in 2011 and three consecutive annual losses, said in its quarterly earnings announcement that it will require a “significant restructuring” of its balance sheet if it is to continue to operate as a going concern, and further warned that it may file for Chapter 11 protection in the “near term.”

Arch Coal’s covenant-lite term loan due 2018 (L+500, 1.25% LIBOR floor) is quoted little changed at around 45/47. There is about $1.88 billion outstanding under the term loan as of Sept. 30, SEC filings show. Wilmington Trust is administrative agent.

Arch Coal 7% notes due 2020—the main notes targeted in the failed exchange offer—have not traded this morning, though the notes were recently in and around a near-worthless one cents on the dollar.

The St. Louis–based company ended the Sept. 30 quarter with liquidity of $704.4 million—$694.5 million of that was composed of cash and liquid securities.

The coal market has been dealt a devastating blow over the past couple of years as historically low coal prices, increased competition from natural gas, and environmental regulation has had a considerable impact on liquidity-constrained issuers in the coal sector. Those that have filed for Chapter 11 in the past six months include Alpha Natural Resources, Walter Energy, and Patriot Coal.

Foresight Energy last week received a written notice of default from the administrative agent on behalf of lenders under its revolving credit agreement, as a result of the previously announced opinion of the Delaware Chancery Court, the company announced late today. — Rachelle Kakouris

Follow Rachelle on Twitter for distressed debt news and insight. 

More distressed debt news on www.lcdcomps.com, LCD’s subscription website. 

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Neiman Marcus Credit Protection Cost Widens After 1Q Sales Drop

Amid heavy market conditions, debt backing Neiman Marcus is weaker today after the high-end retailer late this morning released fiscal first-quarter results showing a 5.6% drop in same-store sales.

The company’s nearly $2.9 billion covenant-lite term loan due 2020 (L+325, 1% LIBOR floor) slid to an 87.5/88.5 market, from levels bracketing 91 ahead of the results this morning, according to sources.

Over in the crushed bond market, it was worse. The Neiman 8% cash-pay notes due 2021 fell to a 72/74 market in the Street, from trades at 80.5 on Friday, and the 8.75% PIK toggle notes due 2021 fell to 70/72, versus 78/79 on Friday and trades at 80 on Thursday, according to sources and trade data. Recall that both CCC+/Caa2 series were just above par roughly a month ago prior to the market inflection and the weight of disappointments in the retail space, especially Macy’s.

Five-year credit protection gapped out 20% this morning, to 290/320 bps, according to Markit. That’s a record wide for the derivative security, which was in a 175 bps context a month ago, also prior to Macy’s disappointing results.

The company¸ which is controlled by Ares Management and Canada Pension Plan Investment Board, reported adjusted EBITDA of $164.3 million, down about 15% from $194.3 million in the year-ago quarter, which sources characterized as below expectations.

Revenue declined to about $1.16 billion, from $1.19 billion.  The company reported a net loss of $10.5 million compared to net earnings of $0.2 million for the first quarter of fiscal 2015.

A conference call to discuss the results is scheduled for 2:30 p.m. EST today.

Today’s drop adds to recent losses in the loans and bonds, which have been under pressure in recent weeks amid a negative bias towards the sector. This is the first time the TLB—which dates to the 2013 LBO, but was repriced early last year—has fallen into the 80s, according to Markit. There was about $2.89 billion outstanding as of Oct. 31. Credit Suisse is administrative agent.

Neiman Marcus is rated B/B3. The term loan is rated B/B2, with a 3L recovery rating from S&P. — Kerry Kantin/Matt Fuller

This story was first published on LCD’s subscription news service. More info here.

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High Yield Bond Issuance Shuts Down As Withdrawals, Oil Worries Roil Markets

Issuance in the U.S. leveraged finance market all but shut down last week as junk bond players watched a highly visible fund liquidate and leveraged loan players remained largely on the sidelines, with one eye on year-end and the other on the careening high yield market.

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Third Avenue Management last week barred redemptions from a $788 million junk bond fund – opting instead to liquidate – spooking many in market who had been watching high yield ETFs sputter along for much of the year. (If you were unfortunate enough to be on or near Twitter on Friday you might have been convinced a financial apocalypse is nigh, with the iShares iBoxx high yield ETF fund the lead horseman).

“Activity ramped down more quickly than anticipated for new issues [last] week as the secondary market fell hard alongside plunging oil, gas, and iron ore prices,” explains Matthew Fuller, who covers high yield for S&P Capital IQ’s LCD unit.

The high yield worries come alongside a hefty investor retreat from funds. Last week saw a withdrawal of $3.5 billion from high yield mutual funds and ETFs, the largest such sum in 70 weeks, according to Lipper. Year to date, high yield funds have seen a net outflow of $2.1 billion, says Fuller, quoting Lipper.

YTD high yield issuance in the U.S. is $263 billion, a 15% drop from the $310 billion at this point in 2014, according to LCD.

The U.S. leveraged loan market was largely quiet last week, with a handful of smallish new issues. Year-to-date U.S. issuance stands at $424 billion, down almost 20% from the $526 billion at this point last year. - Tim Cross

For full leveraged loan and high yield bond market analysis check out our subscription site, www.lcdcomps.com.

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Third Ave’s liquidating debt fund holds concentrated, inactive paper

The leveraged finance marketplace is abuzz this morning ahead of a conference call to address to a plan of liquidation for the Third Avenue Focused Credit mutual fund following big losses this year, mild losses last year, heavy redemptions, and now a freeze on withdrawals. The news was publicly announced last night by the fund, and there will be a call at 11 a.m. EST for shareholders with lead portfolio manager Thomas Lapointe, according to the company.

Market sources yesterday relayed rumors of a near-$2 billion redemption from the asset class, and as one sources put forth, “the odd thing was it was difficult to trace the money that left, what was sold, and where it went.”

That was followed up by last night’s whopping, $3.5 billion retail cash withdrawal from mutual funds (72%) and ETFs (18%) in the week ended Dec. 9, according to Lipper, although it’s not entirely clear if that figure—the largest one-week redemption in 70 weeks—can be linked to Third Avenue. (LCD subscribes to weekly fund flow data from Lipper, but cannot see inside the aggregate observation.)

Nonetheless, it’s worthy of a dive into the open-ended fund, which trades under the symbol TFVCX. The fund shows a decline of 24.5% this year, versus the index at negative 2.94%, after a 6.3% loss last year, versus the index at positive 2.65%, according to Bloomberg data and the S&P U.S. Issued High Yield Corporate Bond Index.

It’s an alternative fixed-income fund that’s “extremely concentrated,” and “hardly representative of a ‘high yield’ or ‘junk bond’ fund,” outlined Brean Capital’s macro strategist Peter Tchir in a note to clients this morning. He highlighted that Bloomberg analytics show a portfolio that’s almost 50% unrated, nearly 45% tiered at CCC or lower, and just 6% of holdings rated BB or B.

The holdings are all fairly to extremely off-the-run, hence the trouble selling assets to meet redemption, and thus, the liquidation. The remaining assets have been placed into a liquidating trust, and interests in that trust will be distributed to shareholders on or about Dec. 16, 2015, according to the company.

Top holdings follow, and none have traded actively or very much in size of late, trade data show:

  • Energy Future Intermediate Holdings 11.25% senior PIK toggle notes due 2018; recent trades in the Ch. 11 paper were at 107.5.
  • Sun Products 7.75% senior notes due 2021; recent trades were at 87.5, versus 90 a month ago and the low 70s a year ago.
  • iHeartCommunications 14% partial-PIK exchange notes due 2021; block trades today were at 30 and 32, from 27 last month.
  • New Enterprise Stone & Lime 11% senior notes due 2018; odd lots traded recently in the low 80s, versus mid-80s last month.
  • Liberty Tire Recycling 11% second-lien PIK notes due 2021 privately issued in an out-of-court restructuring; trades reported in the mid-60s.

Amid those any many others of a similar ilk, the fund also reports a holding in Vertellus B term debt due 2019 (L+950, 1% LIBOR floor). The chemicals credits put the $455 million facility in place in October 2014 as part of a refinancing effort, pricing was at 96.5, and it’s now at 78/82, sources said.

“Investor requests for redemption … in addition to the general reduction of liquidity in the fixed income markets, have made it impracticable for FCF going forward to create sufficient cash to pay anticipated redemptions without resorting to sales at prices that would unfairly disadvantage the remaining shareholders,” according to the company statement.

“In line with its investment approach, FCF has some investments in companies that have undergone restructurings in the last eighteen months, and while we believe that these investments are likely to generate positive returns for shareholders over time, if FCF were forced to sell those investments immediately, it would only realize a portion of those investments’ fair value given current market conditions,” the statement outlined.

Further details are available online at the Third Avenue Management website. — Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and more.

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Huge high yield bond fund outflows: Why it’s not as bad as it seems

An LCD News story earlier today passed on incorrect information from data administrator Lipper regarding the Third Avenue Focused Credit fund that halted redemptions and is being liquidated. There was, in fact, a $111 million redemption from that fund this past week. A corrected story follows:

U.S. high-yield funds saw a net $3.5 billion retail cash withdrawal in the week ended Dec. 9, marking the largest one-week redemption since the record $7.1 billion outflow 70 weeks ago, or since the week ended Aug. 6, 2014, but it’s not as bad as it seems. Lipper today clarified with LCD that mutual funds this past week reported large seasonal distributions, but reinvestment has not yet been recognized, so it’s essentially a mid-read and look for a “catch up” in the weeks ahead.

This is a time of year when distributions “wreak havoc” with the flows data, according to Lipper. It’s possible that we’ll see the reinvestment characterized as inflows next week, but there also may be more distributions, Lipper added.

As per the flurry of news surrounding the liquidation of the alternative fixed income mutual fund Third Avenue Focused Credit, Lipper relayed that the fund-management group overall reported multiple outflows this past week, with $111 million specifically pulled from that open-ended fund. (LCD subscribes to weekly fund flow data from Lipper, but cannot see inside the aggregate observation.)

As for the one-week figure, see “US HY funds report largest cash outflow since record 70 weeks ago,” LCD News, Dec. 10, 2015. — Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and more.

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Fridson: Found! The Turning Point for High Yield Bond Overweighting

This article was originally published by LCD News, for subscribers, on Sept. 29, 2015.

Synopsis: A simple rule derived from the definition of distressed debt has consistently generated alpha for tactical asset allocators in past high-yield recoveries from market lows.

The challenge: When to pull the trigger?

The large variance in short-run returns among asset classes during major market turns produces huge payoffs for successful tactical asset allocation. Consider, for example, what a fixed-income manager could have achieved following the 2001 recession by astutely varying the relative weights of investment-grade and high-yield corporates. In the second quarter of 2002, the investment grade BofA Merrill Lynch US Corporate Index trounced the BofA Merrill Lynch US High Yield Index, 4.37% to -6.98%. One year later, the tables turned, with the HY index crushing the IG index, 10.02% to 2.47%, in the second quarter of 2003.

Given these rewards, why doesn’t every money manager grab oodles of alpha by reallocating during major market turns? The problem is that it requires calling the turn. Classically, the relatively undervalued asset may get more undervalued before the market comes to its senses. Jumping in too early can be disastrous for managers who do not have the luxury of being evaluated only on a multiyear basis. For those trying to put up good quarterly numbers, it is not good enough to say, “I am confident that in the fullness of time the market will recognize the wisdom of my positioning, even if I suffer a year or two of underperformance in the interim.”

Here is the good news: A startlingly simple timing signal has consistently paid off over a three-month horizon in recoveries from high-yield cyclical bottoms. Recognize upfront that the methodology does not guarantee capturing the cyclical rebound’s highest three-month return and the historical sample size is small. With those caveats, the trading strategy is a bona fide no-brainer and has reliably generated very substantial alpha.

Breaking through 1,000

The easy-to-remember rule for deciding when to step up high-yield exposure is to pull the trigger the day after the option-adjusted spread (OAS) on the BofAML High Yield Index falls below 1,000 bps.

High-yield cognoscenti will recognize the 1,000 bps level as the threshold for defining distressed bonds, a standard I introduced some 25 years ago. At an OAS of 1,000 bps, the market is essentially saying that the high-yield asset class as a whole is distressed. When the spread moves out of that territory, the market is signaling that financial distress is receding.

To test this trading rule, I measured three-month returns on the BofAML High Yield Index, the BofA Merrill Lynch US Non-Distressed High Yield Index, the BofA Merrill Lynch US Distressed High Yield Index, the BofA Merrill Lynch US Treasury & Agency Index, and the investment-grade BofAML Corporate Index. I started each trial on the first trading day after the spread first fell below 1,000 bps. Future users of this strategy do not have to predict anything or exercise any judgment, but can instead wait to act until the decisive piece of information has arrived.

For the period preceding OAS availability on the BofAML High Yield Index, that is, prior to Dec. 31, 1996, I used the yield-to-maturity (YTM) difference between the BofAML High Yield Index and the BofA Treasury & Agency Index. (Yield-to-worst figures are also unavailable prior to Dec. 31, 1996.) This substitution is justified by a comparison of the YTM spread and OAS during the period in which both are available. From Dec. 31, 1996 to Dec. 31, 2014, the median monthly difference between the two versions of the spread, when OAS was in a range of 900-1,000 bps, was – remarkably enough – one basis point. (The YTM version was higher by that amount.) As a point of interest, the gap increased as OAS declined.

Note, in addition, that the inception date of the BofAML Non-Distressed High Yield Index and the BofAML Distressed High Yield Index is, you guessed it, Dec. 31, 1996, so returns are not available on those indexes for the first two trials depicted in the table. Finally, the high-yield market had just one cyclical low in the early 1990s, but the high-yield spread exited the distressed zone twice. After falling below 1,000 bps on Dec. 24, 1990, the spread later rose above that threshold before definitively dropping below it on Feb. 12, 1991. (The first trial in the table commences after the market’s closure for Christmas on Dec. 25, 1990.)

Results

In all five trials high-yield outperformed governments by at least 5.10 percentage points and in the most extreme case, by 13.28 percentage points. Note that these are non-annualized, three-month returns. On an annualized basis, the high-yield returns during the five episodes documented here ranged from 30.32-78.99%. High-yield similarly outperformed IG corporates every single time, by margins ranging from 2.75-12.13 percentage points.

In the three trials in which returns are broken out by distressed and non-distressed, dynamic asset allocators following the 1,000 bps rule and achieving average results would have beaten governments by 2.51 to 4.90 percentage points without needing to own a single distressed issue. The non-distressed high-yield performance edge over IG corporates was likewise substantial in both 2001 and 2009. Naturally, coming off the bottom, the distressed component of the high-yield market turned in exceptionally high returns, ranging from 63.29-174.40% in annualized terms.

Not engineered to catch the absolute bottom

Based on an admittedly limited historical record, the simple 1,000 bps rule generates a substantial three-month performance bonus for tactical asset allocators. Adopters of the trading rule should be forewarned, however, that I have not solved the problem of precisely calling the bottom. Indeed, the high-yield OAS may narrow by hundreds of basis points, producing sizzling high-yield returns, before it finally cracks the 1,000 bps barrier.

The table below compares the high-yield returns captured by the 1,000 bps rule during the high-yield market’s four cyclical recoveries with the peak quarterly returns observed in those cycles. In 2001 the 1,000 bps rule actually produced a return slightly higher than that of the best quarter of the cyclical rebound. In the others, an asset allocator astute enough to have entered at the start of the peak quarter did materially better than followers of the 1,000 bps rule. For mere mortals, however, adding hundreds of basis points over comparable-period returns on high-quality bonds is an outstanding achievement.

Marty Fridson, Chief Investment Officer of Lehmann Livian Fridson Advisors LLC, is a contributing analyst to S&P Capital IQ. His weekly leveraged finance commentary appears exclusively on S&P Capital IQ LCD. Marty can be reached at marty@fridson.com.

 

Research assistance by Yueying Tang and Zizhen Wang.

 

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US High Yield Bond Funds See Massive, $3.5B Investor Cash Withdrawal

U.S. high-yield funds saw a net $3.5 billion retail cash withdrawal in the week ended Dec. 9, according to Lipper. This is the largest one-week redemption since the record $7.1 billion outflow 70 weeks ago, or since the week ended Aug. 6, 2014.

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The inflow was light on the ETF segment, with $2.8 billion of mutual funds outflows expanded upon by $637 million of ETF withdrawals. This is the first coordinated outflow from the two segments in 10 weeks, or since the week ended Sept. 30 at the depths of the September sell-off.

The big outflow wipes out by many times the inflow of $398 million last week, and it’s the fourth outflow of the past five weeks for a net redemption of $6.7 billion over that span. And with that, the trailing-four-week average deepens to negative $1.2 billion this past week, from negative $815 million last week and negative $402 million two weeks ago.

The full-year reading drops into the red, at negative $2.1 billion, with an inverse measurement to ETFs. Indeed, the full-year reading is negative $4.3 billion for mutual funds against positive $2.2 billion for ETFs, for an inverse 105% reading. Last year, after 48 weeks, it was squarely negative, at $1.9 billion of outflows, with 10% ETF-related.

The change due to market conditions last week was deeply negative amid the market sell-off, at negative $3.1 billion, or nearly 1.7% against total assets, which were $184.7 billion at the end of the observation period. This is the largest move lower on market momentum also in 10 weeks, since the week ended Sept. 30′s negative $3.2 billion observation. Recall that was the largest one-week negative market change in 2.3 years at the time, dating to a $3.7 billion deterioration in the week ended June 26, 2013.

At present, ETFs account for $36.5 billion of total assets, or roughly 20% of the sum. — Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and more.

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High Yield Bond Bids Slide Again In Secondary, Deeper Into 6.5-Year Low

The average bid of LCD’s flow-name high-yield bonds slipped 48 bps in today’s reading, to 86.47% of par, offering an average yield to worst of 10.16%, from 86.95 on Thursday, yielding 10.07%. Momentum was broadly negative, with 12 constituents in the red against two unchanged and a sole gainer.

Today’s decline builds on the plunge of 181 bps in Tuesday’s reading for a 229 bps erosion this week. It’s modestly worse dating back two weeks, at negative 256 bps, but it’s much lower in a trailing-four-week observation, at negative 625 bps. The declines amid this week’s damaging market conditions take the average price down to a 6.5-year low, or a context not seen since 86.26 on July 23, 2009, surpassing what last week had just been an approximate four-year low, or low of 87.93 on Oct. 4, 2011. - Matthew Fuller

LCD News subscribers can read the full version of this story here.

twitter icon Follow Matthew on Twitter for high yield bond news and insight. 

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Bankruptcy: Walter Energy Reaches Global Settlement With Lenders, Creditor Panel

Walter Energy has reached a global settlement in its Chapter 11 proceedings with a steering committee of first-lien lenders and the unsecured creditors’ committee appointed in the case, according to a Dec. 9 motion seeking approval of the pact.

“The global settlement is a substantial achievement in the debtors’ efforts to preserve their businesses as going-concerns and to pave the way to a consensual resolution of these Chapter 11 cases,” the company said in the filing.

As reported, after determining that it did not have sufficient liquidity to continue its operations past early 2016, the company said in early November that it would reorganize via a Section 363 sale of substantially all of its assets. The company further entered into a stalking-horse sales agreement with Coal Acquisition LLC, an entity comprising the company’s first-lien lenders, for a $1.25 billion credit bid (plus $5.4 million in cash) for most of the company’s assets.

The Birmingham, Ala., bankruptcy court approved bidding procedures in late November, setting an auction for Jan. 5, 2016, and a hearing to approve a sale for Jan. 6, 2016.

The unsecured creditors’ committee in the case, however, even as it acknowledged the “importance of moving … the sale process forward,” argued that the first-lien lenders’ credit bid was potentially subject to diminution in value resulting from a successful challenge to the liens allegedly securing the lenders’ debt.

The committee also argued that it had “identified portions of the debtors’ real property interests that are not subject to such prepetition liens,” and had “identified a potential defect in the first lien creditors’ prepetition collateral package providing grounds to dispute the extent and validity of certain of the … prepetition liens allegedly covering certain of the debtors’ real property interests,” which would free up assets to pay unsecured claims.

According to the settlement, the stalking-horse purchaser/first-lien lenders agreed, among other things, to assume an estimated $115–122 million in liabilities as a part of the proposed sale, including obligations related to the company’s assumption of post-petition trade liabilities, reclamation liabilities, and Black Lung liabilities.

In addition, the stalking-horse purchaser agreed to distribute a 1% ownership interest to unsecured creditors (with those creditors that are “accredited investors” receiving their pro rata ownership share directly, and those that are not participating in a post-emergence equity trust funded by their pro rata equity interest and $200,000 cash provided by the stalking-horse purchaser), along with proportionate participation rights in any exit financing or rights offering.

Lastly, the stalking-horse purchaser/first-lien lenders agreed to fund the professional fees and expenses incurred by the panel up to a maximum of $5.2 million.

For its part, the creditors’ committee said it would consent to the sale motion and not challenge or object to the first-lien lenders’ adequate protection claims and liens, including claims related to the alleged diminution in value of the lenders’ collateral and, by implication, the value of its credit bid.

A hearing on approval of the settlement motion is scheduled for Dec. 22.

Notwithstanding the settlement, litigation with the unions representing hundreds of the company’s employees and thousands of retirees, the United Mine Workers of America and the United Steelworkers, over the company’s efforts to terminate its collective bargaining agreement and pension obligations under Sections 1113 and 1114 of the Bankruptcy Code continues to loom over the case.

The asset sale is conditioned on, among other things, the company’s successful rejection of its CBAs and pension obligations. The union, meanwhile, has warned that if the company is successful in rejecting the CBA and its pension obligations, it could lead to a strike.

A hearing on the Section 1113/1114 motions is set for Dec. 15. — Alan Zimmerman