The bankruptcy court overseeing the Chapter 11 proceedings of Energy XXI has delayed the hearing on the adequacy of the company’s proposed disclosure statement by one week, to June 30, at which time the bankruptcy court will consider further delays in the case in order to give the company and its creditors an opportunity to renegotiate a reorganization plan.
The disclosure statement hearing had been scheduled for June 23.
The one-week delay follows an order from the bankruptcy court on June 15 requiring the appointment of an equity security holders committee in the case and, in the wake of that decision, an emergency motion from the unsecured creditors’ committee in the case filed on June 17 seeking a three-week delay in the disclosure statement hearing on the grounds that “these cases must now either change direction or become mired in expensive, time consuming litigation.”
A hearing on the committee’s motion is scheduled for June 30, as well, according to the case docket.
In its motion, the creditor panel noted that at the June 15 hearing on the appointment of an equity committee, the bankruptcy court “expressed serious concerns regarding, among other things, allegations of misrepresentations by the debtors’ management, the personal loans provided to the debtors’ CEO, and proposed distributions under the plan to management pursuant to a management incentive plan contemplated by the plan.”
The committee asked the Houston, Texas, bankruptcy court to delay the disclosure statement hearing, saying that the case “should be placed, at least for a short time period, on a track of negotiation … to nudge the debtors and the second lien noteholders to engage with the committee on serious negotiations for a consensual plan.”
The committee said that the company’s current proposed plan cannot be crammed down, and that the changes sought by the panel “would be too fundamental” to provide for a modification of the disclosure statement and a re-solicitation of votes if the court were to approve the disclosure statement now, prior to the negotiations and potential sought-after changes.
As reported, under the company’s proposed reorganization plan filed on May 20, the company’s second-lien lenders are to receive 100% of the equity in the reorganized company.
According to a valuation analysis filed June 4, the company estimated its reorganized total enterprise value to be roughly $500–800 million, with a mid-point of $675 million. Further, based on forecasted pro forma debt of $75 million post emergence, the company said the estimated TEV implied an equity value range for the reorganized company of $475–725 million, with a mid-point of $600 million.
As also reported, under the proposed plan, holders of the company’s unsecured and convertible notes would receive a package of out-of-the-money warrants equal to an aggregate of up to 10% of the new equity (subject to dilution from the management incentive plan) with a maturity of 10 years, and an equity strike price equal to the principal amount of the second-lien notes claims less the original issue discount of approximately $53.5 million, plus accrued and unpaid interest.
The committee said that if the bankruptcy court delays the disclosure statement hearing, the committee would use the time to negotiate a reorganization plan that eliminated the current plan’s “death trap” structure, “appropriately” allocated the value of unencumbered assets among creditors, and tailored liability releases to “avoid prejudice to creditors and interest holders.”
Meanwhile, an ad hoc committee of unsecured noteholders of the company’s unit Energy XXI Gulf Coast (EGC) also said in court filings that the company has “significantly understated the value … available for distribution to unsecured creditors of EGC,” and argued that the company’s proposed plan was “fatally flawed because it misallocates value that is available for distribution to unsecured creditors and, instead, proposes to gift such value to secured creditors.” (Although it is worth noting that at the same time the noteholder panel argued that the company understated its value, it also argued that there was not sufficient residual value to provide a recovery for equity holders.)
In any event, the ad hoc noteholder group agreed in a June 17 court filing that the disclosure statement hearing should be delayed, arguing that the company’s proposed plan and disclosure statement was “fundamentally flawed in at least three ways.”
First, the ad hoc group argued, the company’s valuation disclosures failed to explain why the company’s estimated valuation of $675 million on the confirmation date “differs so dramatically from the debtors’ own statements showing $4.1 billion of enterprise value in December 2015, only four months before the [Chapter 11] filing.”
Second, the group said, the company failed to provide adequate information with respect to “several unencumbered sources of value for EGC unsecured noteholders, foremost of which is a $325 million intercompany secured loan from ECG” to EPL, a separate unit of the company. As the noteholders see that transaction, ECG’s secured claim on the intracompany note is senior to any claims EPL’s unsecured creditors may have against the unit, adding that insofar as EGC creditors are concerned, it is “indisputable” that the proceeds of the note are “unencumbered [and] available for recovery by EGC unsecured noteholders free of any liens asserted by EGC’s secured creditors.”
And finally, the noteholders state, the disclosure statement and reorganization plan fail to reflect additional sources of unencumbered assets that can be used to satisfy unsecured creditor claims, including about $22.3 million of unencumbered cash, real property not subject to mortgages, potential claims of action and other personal property.
With respect to the appointment of an equity panel, on June 2, an ad hoc committee of equity holders sought appointment of an official committee, arguing that on March 31, the company “essentially created the perception of massive insolvency by downgrading” its “proved undeveloped [energy] reserves” to “probable reserves,” thus creating a $2.67 billion writedown.
The ad hoc panel further noted that this writedown occurred despite the fact that oil prices bottomed out in January at around $26.88 per barrel, and are currently trading at more than $48 per barrel.
“The creation of this perception of massive insolvency was apparently done in an attempt to justify management’s decision to eliminate all of the existing equity and give the vast majority of it to the second lien note holders, who will then hire existing management to run the company without any disclosure of compensation other than the mention of an incentive plan where management can retain up to 10% of the equity in the reorganized debtors,” the ad hoc committee said.
The court order did not state a reason for the appointment of an equity committee, but typically, the existence of such a committee in a Chapter 11 proceeding rests on the twin findings that there would be residual value available in the case for equity holders, and the equity holders’ interests are not adequately represented by the unsecured creditors’ committee.
As of today, the U.S. Trustee for the bankruptcy court had not yet appointed an official equity committee. The ad hoc equity committee comprised 16 individual shareholders.
Last, but not least, the ad hoc equity committee had also raised questions in its motion regarding $16.4 million in so-called bonus payments and expense reimbursements over the past year to the company’s management, including $4.6 million to CEO John Schiller.
Note that the unsecured creditors’ committee said in its motion that even as it sought to renegotiate the terms of a plan with the company, it would continue to investigate the company’s pre-petition transactions with management as potential claims that could belong to the company. — Alan Zimmerman
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