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James River Coal nets court nod for asset sale to Blackhawk Mining

The bankruptcy court overseeing the Chapter 11 proceedings of James River Coal Co. yesterday approved the sale of the company’s assets to JR Acquisition, an affiliate of Blackhawk Mining, for an aggregate purchase price of $52 million, plus assumption of certain liabilities.

As reported, according to court filings the purchased assets include those assets known as the Hampden Complex (including the assets of debtor Logan & Kanawha Coal Company); the Hazard Complex (other than the assets of debtor Laurel Mountain Resources); and the Triad Complex.

According to its website, Blackhawk Mining was formed in 2010 to acquire and operate idled coal reserves, mines, preparation-plant and loading facilities formerly owned by Black Diamond Mining in Floyd County, Ky. Among other things, Blackhawk operates a combination of underground continuous miner sections and contour-surface mines, with a high-wall miner in the Elkhorn and Fireclay, Ky., and coal seams, with production processed through a preparation plant and train-loading facility at Spurlock, Ky. – Alan Zimmerman

 

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James River Coal assets to be acquired by Blackhawk Mining for $52M

James River Coal Co. said it has selected JR Acquisition, a subsidiary of Blackhawk Mining, as the successful bidder for certain of its assets for an aggregate purchase price of $52 million, plus assumption of certain liabilities.

According to an Aug. 21 notice of the selection of the bidder filed with the bankruptcy court in Richmond, Va., the purchased assets include those assets known as the Hampden Complex (including the assets of debtor Logan & Kanawha Coal Company); the Hazard Complex (other than the assets of debtor Laurel Mountain Resources; and the Triad Complex.

A hearing to approve the sale is scheduled for tomorrow.

As reported, the auction for the company’s assets was initially set for July 8, but was delayed five times, finally occurring on April 18 and, according to court filings, lasting through Aug. 20. According to court filings, Blackhawk Mining was disclosed as the stalking-horse bidder for the auction on Aug. 16, just two days before it got underway, with an aggregate purchase-price bid of $50 million, plus the assumption of certain liabilities.

Proceeds are to be used to pay certain expenses now facing the company and to repay existing outstanding DIP loans. There is roughly $90 million outstanding under the facility, according to the company’s July 30 operating report filed with the bankruptcy court.

According to its website, Blackhawk Mining was formed in 2010 to acquire and operate idled coal reserves, mines, preparation-plant and loading facilities formerly owned by Black Diamond Mining in Floyd County, Ky. Among other things, Blackhawk operates a combination of underground continuous miner sections and contour-surface mines, with a high-wall miner in the Elkhorn and Fireclay, Ky., coal seams, with production processed through a preparation plant and train-loading facility at Spurlock, Ky. – Alan Zimmerman

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Revel to cease operations by Sept. 10, company continues to ‘hope for sale’

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Revel AC said that it would cease operations by Sept. 10, subject to regulatory approvals.

According to a statement issued this morning by the company, “challenges have arisen in our attempts to sell Revel as a going concern.”

The company added, “[w]hile we continue to hope for a sale of Revel, in some form, through the pending bankruptcy process, Revel cannot avoid an orderly wind down of the business at this time.”

As reported, an auction for the company’s assets had been scheduled for Aug. 7, but was postponed one week, to Aug. 14, with the company saying it needed “additional time to fully analyze and evaluate the bids received.” – Alan Zimmerman

 

 

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LightSquared aims for Oct. 20 confirmation hearing amid deep divides

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The bankruptcy court overseeing the Chapter 11 proceedings of LightSquared has set a confirmation hearing for Oct. 20 on the various reorganization plans that have now been proposed in the case.

That schedule is designed to see a reorganization plan confirmed by Oct. 31.

But given the events in the case over the past week, arriving at that date was no simple matter, even as Bankruptcy Court Judge Shelly Chapman stressed the need for a “definitive schedule” to bring the case to a conclusion. Indeed, based on the deep disagreements expressed by the various warring parties in the case late yesterday afternoon at a hearing in Manhattan, and the myriad issues related to conducting a confirmation hearing for three reorganization plans in a case that is, to put it mildly, extremely contentious, it is unclear whether that schedule will be met.

Consider, yesterday’s status conference, the purpose of which was simply to set a confirmation hearing schedule, took nearly two hours.

Still, if Chapman and the many attorneys appearing at the hearing, which stretched into the early evening, were able to agree on anything it was that the case had now reached an inflection point at which a resolution – one reached sooner rather than later – was in the interests of all of the parties, even if they disagreed on what that resolution would look like.

“We have a schedule. We’re sticking to the schedule,” Chapman said.

Thomas Lauria, the attorney for the ad hoc panel of secured lenders in the case that jointly filed a proposed reorganization plan last week with the company, discussed the economic pressure driving the case at this point. According to Lauria, when LightSquared went into Chapter 11 in 2012 it owed creditors $2 billion, but that the amount had now grown to $3 billion. That tab would increase by another $300 million by the time the company emerges from Chapter 11 in the first quarter of 2015, Lauria said, even if all goes according to the current schedule, and could climb as high as an additional $400 to $500 million if the confirmation process is delayed beyond October and emergence leaks into the second quarter of 2015.

The logistical problem facing the parties now is that in the wake of the breakdown of the global consensus coming out of mediation, there are three potential reorganization plans at play in the case.

One plan is the proposed plan filed last week by the company and the ad hoc LP lender panel that would reorganize the company – which has its secured debt split between its parent company (LightSquared Inc., with roughly $322 million of secured pre-petition debt outstanding) and a limited partnership unit that is the issuer of the company’s larger pre-petition secured facility (LightSquared LP, with about $2 billion outstanding) – on a consolidated basis (see “LightSquared files revised reorganization plan,” LCD, Aug. 7, 2014). Among other things, the consolidated structure addresses various intracompany issues, most significantly LightSquared Inc.’s guarantee of LightSquared LP’s secured debt.

But the sole holder of the LightSquared Inc. secured debt, MAST Capital Management, has said it intends to reject the plan, because it does not want the recovery offered to it in the consolidated plan, one comprised of new debt and equity in the reorganized company. Under the consolidated plan, MAST’s rejection would result in LightSquared LP reorganizing on a standalone basis, leaving LightSquared to reorganize on its own as well, with the intracompany issues to be resolved by post-confirmation litigation.

As for LightSquared Inc. reorganizing as a standalone company, there are currently two potential reorganization plans for the parent company on the table.

MAST is seeking to reprise a plan it filed earlier in the case that calls for LightSquared Inc. unit One Dot Six, a Reston, Va.-based communications company, to be auctioned off, with MAST acting as the stalking-horse bidder with a credit bid of its DIP claims in the case.

Meanwhile, Harbinger Capital filed a new proposed plan yesterday for LightSquared Inc. that would pay MAST’s claim in full. That plan would be financed with a new $460 million DIP facility that would convert into a new $360 million first-lien term exit facility and a $100 million first-lien exit revolver, along with junior investment in the form of $100 million of new equity financing from Harbinger, $160 million of new equity financing from an affiliate of JP Morgan Chase, and $40 million of new subordinated debt from JP Morgan Chase.

An attorney for MAST said today that MAST would vote in favor of the Harbinger plan, though several parties at today’s hearing questioned whether financing to back to plan would materialize. An attorney for JP Morgan Chase, however, expressed confidence that the plan could attract the needed funding.

Beyond that consideration, each of the proposed plans, to one degree or another, carry various uncertainties and contingencies that could have ripple effects with respect to the other plans, and would therefore affect the issues that need to be addressed at confirmation.

For example, if the parties are able to agree on a consolidated plan, it would simplify matters considerably. But if there are separate reorganization plans for LightSquared Inc. and LightSquared LP, it would give rise to a contested valuation hearing in order to determine the value of the recovery for LightSquared LP’s secured lenders, a determination that would need to be made to determine the extent to which, if any, LightSquared Inc. would remain on the hook as a guarantor of the LP debt. That could be time consuming, both at a potential hearing and in the discovery disputes that would be sure to occur leading up to contested valuation fight.

And that’s not even to mention the poisoned atmosphere in which the parties are operating. There is a split between the Charles Ergen controlled vehicle SPSO, which holds LP secured debt potentially subject to equitable subordination, and other holders of the LP debt. Referring to Ergen’s interests in LightSquared competitor DISH, Lauria noted that while Ergen could benefit from LightSquared’s collapse, other holders of the debt are simply seeking the maximum recovery possible on their investment.

Rachel Strickland, an attorney for Charles Ergen-controlled vehicle SPSO, both a key player and key source of controversy in the case, described the atmosphere in the case as one of “mistrust and paranoia on all sides.” – Alan Zimmerman

 

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Bankruptcy: LightSquared says new reorg plan not consensual

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When LightSquared yesterday filed a revised reorganization plan in its Chapter 11 case, it was unclear whether that plan – which contained terms different than those that had been previously disclosed and discussed in court filings and hearings – reflected an evolved version of the consensual agreement reached in the case mediation that was announced last month, or whether it represented a breakdown of that deal and was simply yet another stab at a reorganization proposal by the company and its most senior creditors.

Wonder no more. According to a disclosure statement the company and an ad hoc committee of senior secured lenders jointly filed today with the bankruptcy court in Manhattan, it is the latter.

According to the disclosure statement, “Notwithstanding LightSquared’s good faith efforts to negotiate and file a consensual plan, such plan did not materialize … and it does not appear that the agreement-in-principal reached during the mediation will materialize into a Chapter 11 plan to be filed with the bankruptcy court.”

The disclosure statement continued, “Meanwhile, secured claims against the debtors continue to accrue interest, and the debtors continue to incur administrative expenses that will need to be satisfied pursuant to a plan. With each passing day, the debtor’s ability to successfully reorganize becomes more difficult. Recognizing this fact, the plan proponents propose the plan.”

But if the disclosure statement at least clarifies where the case stands, where it is headed appears as murky as it has ever been.

A status hearing is scheduled in the case for 5:30 p.m. EDT on Aug. 11, and the process moving forward is sure to be discussed. Ahead of that status conference, and in light of this latest proposal, it is perhaps worthwhile to take a look at the recent machinations in the case concerning efforts to negotiate a consensual deal in order to set some historical context.

Confirmation denied
As is widely known, the key dispute in the case is between LightSquared’s founder and equity sponsor, Harbinger Capital, which is controlled by Philip Falcone, and DISH Corp. founder and owner Charles Ergen, who took advantage of LightSquared’s distressed asset prices in 2012 as it faced bankruptcy to purchase a blocking position in LightSquared’s senior bank debt in order to exert control over the company’s Chapter 11 process. According to a Harbinger lawsuit filed against Ergen, Ergen’s objective was to manipulate the Chapter 11 process to acquire LightSquared and its wireless spectrum on the cheap (see “Harbinger RICO suit against DISH, Ergen over LightSquared seeks $4B,” LCD, July 9, 2014).

Much litigation concerning the legality of these purchases has already occurred in the context of this bankruptcy case (and if Harbinger has its way, more will follow), and while the details are complex, suffice it to say that while Ergen was cleared of technical violations of the indenture governing the bank debt he acquired, sufficient concerns were raised with respect to at least some of his actions that Bankruptcy Court Judge Shelley Chapman found that at least a portion of his debt claim in the case, which Ergen held through an investment vehicle know as SPSO, would be subject in an amount to be determined to equitable subordination.

Still, in her May 8 decision on the validity of Ergen’s claim, Chapman also denied confirmation to the company’s proposed reorganization plan because of its discriminatory treatment of the claim, which proposed to distribute third-lien debt to Ergen and SPSO, as opposed to the cash distribution to other senior lenders.

Chapman gave the parties two weeks to negotiate a new plan, after which she said she would appoint fellow bankruptcy court judge Robert Drain to act as a mediator in the case. (see “LightSquared plan denied; judge gives lawyers 2 weeks to make deal,” LCD, May 8, 2014).

Mediation
In a result that surprised no one, the parties could not come to terms, and on May 27, Chapman said she would, as promised, appoint Drain as mediator.

In a status report filed with the bankruptcy court on June 27, Drain reported that all key stakeholders in the case, with the exception of Ergen, had reached a deal on a confirmable reorganization plan.

A plan wasn’t filed, but at a status conference held in Manhattan on July 1, the company disclosed the outlines of a proposal under which JPMorganChase, Cerberus Capital and Fortress Investment Group would contribute about $1.75 billion of new money to the company, with the company raising an additional $1.3 billion through a debt issuance. The JPMorgan/Cerberus/Fortress group would receive 74% of the reorganized company, with Harbinger retaining 12.5% of the new equity. The company’s senior lenders, meanwhile, would be repaid in full, in cash, with the exception of Ergen, who would receive $470 million in cash and a $492 million unsecured note, in exchange for his claim (see “LightSquared plan due July 14; confirmation hearing set for Aug. 25,” LCD, July 8, 2014).

Drain’s report, it should be noted, slammed Ergen, saying he did not participate in the mediation “in good faith” and “wasted the parties’ and the mediator’s time and resources.” (see “LightSquared reaches deal on plan; mediator slams holdout Ergen,” LCD, June 30, 2014).

On July 14, however, Drain filed a supplemental report with the bankruptcy court stating that LightSquared had now reached an agreement with Ergen. According to Drain’s supplemental filing, Ergen had “concluded a good-faith negotiation by agreement with the plan sponsors on the key terms of SPSO/Ergen’s treatment under a Chapter 11 plan as well as new funding that is fundamentally consistent with the consensual plan terms previously negotiated by the other parties.”

Details, again, were not provided in the filing, but according to report from Bloomberg, an attorney for a special committee of LightSquared said at a status conference held on July 14 that under the revised deal, the contemplated $1.3 billion of debt financing in the agreed-upon prior deal would now be provided by Ergen, who would convert his senior debt claim, which Ergen had asserted was about $1.3 billion, into $1 billion of new debt, and provide an additional $300 million in new financing. The equity role of JPMorgan, Cerberus, and Fortress was not addressed.

The Bloomberg report did say, however, that Harbinger appeared less than thrilled with the new plan, quoting one Harbinger attorney as saying the Ergen settlement was a “stunning reversal,” and that Harbinger’s position has been that Ergen should not be part of the company’s capital structure after it emerges from Chapter 11.

Leaving that concern aside, however, the company said it would file the revised plan within a week, on July 21. A status hearing was scheduled for July 22.

The new proposal
But no plan was filed on July 21, and on July 22, just hours before the scheduled hearing, the company adjourned the status conference to “a date and time to be determined.” No reason was provided (although the reason is now clear – no deal was reached and it was back to the drawing board).

On Aug. 4, the company filed a notice rescheduling the status conference for Aug. 11, again without explanation, and yesterday, the company filed the proposed reorganization plan (see “LightSquared files revised reorganization plan,” LCD, Aug. 7, 2014).

Under the proposed plan, Ergen’s allowed claim is reduced by another $100 million, to $900 million. Rather than Ergen providing the debt financing, the company’s senior secured lenders, including Ergen, would all receive pro rata shares of a new $1 billion term loan and 100% of the equity in the reorganized company. Ergen and the senior lenders would also back an additional $500 working capital facility for the company that would, among other things, be used to repay the existing DIP facility and provide the company with working capital.

While the debt and equity to be received by Ergen under the plan (designated as Tranche B) would carry certain transfer restrictions not applicable to other lenders, and the equity distributed to Ergen (designated as Class B common) would carry reduced voting power, the economic terms of the distribution would be equal for all senior lenders.

The plan also prohibits Ergen from acquiring any additional debt or equity in the company without the consent of the board of directors.

Harbinger, meanwhile, would not see any recovery under the plan, although the plan does provide for an alternative process under which the company’s equity would be auctioned. According to the disclosure statement, that process is designed “to test the value of the debtor’s assets” in lieu of a valuation of the company, but depending on its results, and based on the terms of the proposed reorganization plan, a sale of the company for more than roughly $3 billion (assuming no debt) could conceivably create residual value for Harbinger.

Last, but not least, the plan further provides that if Ergen and SPSO voted to reject the plan, then Ergen would share in the recovery of debt and stock along with other lenders, but his claim would be treated as a disputed claim, to be litigated by the bankruptcy court, with the ultimate amount of his allowed claim and recovery simply left in Chapman’s hands. Any amount that Chapman determines should be subordinated would not see any recovery.

In addition, the term loan recovery portion for senior lenders in the event Ergen rejects the plan would be increased to $1.2 billion. –Alan Zimmerman

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Bankruptcy: LightSquared files revised reorganization plan

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LightSquared filed its revised reorganization plan today, calling for holders of senior lender claims, including the claims held by Charles Ergen’s investment vehicle SPSO that have been at the center of bitter disputes in the case, to be paid with a combination of $1 billion in new term debt and 100% of the equity in the reorganized company.

Senior lender claims are estimated at $2.3-2.4 billion.

The filing of the plan comes in advance of a status conference scheduled for Monday afternoon.

As reported, the company reached an agreement last month with senior lenders and Ergen on a reorganization plan (see “LightSquared reaches deal with Ergen on reorganization plan,” LCD, July 15, 2014).

In addition to the $1 billion term loan, senior lenders, including Ergen, will also “backstop, arrange or fund” a new working-capital facility for the reorganized company of at least $500 million, plus any amounts required to repay the company’s outstanding DIP facility obligations. As reported, the bankruptcy court in June approved a new $80 million DIP facility for the company.

As for Ergen and the SPSO claim, Ergen had previously asserted that the SPSO claim, representing roughly $844 million in face value of the company’s senior bank debt, was $1.3 billion, but the bankruptcy court ruled earlier this year that the SPSO claim would be partially subordinated in an amount to be determined (see “LightSquared plan denied; judge gives lawyers 2 weeks to make deal,” LCD, May 8, 2014). According to the proposed plan filed today, the SPSO claim will be allowed in the amount of $900 million, plus interest that accrues between the date of the plan’s confirmation and the plan’s effective date.

In addition, the SPSO recovery under the plan carries several limitations.

According to the court filing, the equity to be distributed on account of the SPSO claims will be class B common equity, which will have one fifth of the voting power of the class A common that is slated to be distributed to senior lender claim holders other than SPSO. The economic rights of each class of equity, however, are equal.

Similarly, the portion of the term and working capital loans funded by SPSO will be “tranche B” loans (compared to “tranche A” loans to be distributed to other lenders) that will be “stapled” to the class B common equity distribution, and thus transferrable only as a single strip. Once transferred, the strip will convert to tranche A term and working capital loans, and the equity to class A common equity (including elimination of the class B voting restriction), provided that any such transfer of the strip is subject to approval by the reorganized company’s board of directors.

In addition, SPSO and its affiliates are prohibited from acquiring any “additional debt or securities” of the reorganized company, except as permitted by the company’s board. To the extent that SPSO does subsequently acquire any class A common equity, it will automatically convert to class B equity.

As for Ergen’s nemesis in the case, Phil Falcone, the plan does not provide for any recovery for LightSquared’s common equityholders, primarily Falcone’s Harbinger Capital, except to the extent that there are excess proceeds from the auction of the equity (see below) remaining after payment in full of all outstanding senior lender and DIP facility claims.

The plan also contemplates litigation against Harbinger “to stay, bar, enjoin, preclude, or otherwise limit Harbinger and/or any of its affiliates from asserting against the GPS industry and/or the United States of America any claim or cause of action that is, or directly affects, any property of one or more of the debtors’ estates or the reorganized debtors.”

That would seem to potentially affect Harbinger’s pending lawsuit against the FCC charging that the federal agency’s regulatory actions wrongly stripped LightSquared of the value of the wireless spectrum in which it had invested billions, but would appear to leave Harbinger free to pursue its private RICO claim against Ergen and the DISH network alleging wrongdoing in its conduct during the bankruptcy case (see “Harbinger RICO suit against DISH, Ergen over LightSquared seeks $4B,” July 9, 2014).

Finally, as noted, the proposed reorganization plan also provides an alternative process for the auction of the reorganized company’s equity. According to the procedure set out in the plan, the winning bid is subject to approval by the ad hoc senior lender panel “in consultation with the company.” The process provides for a minimum bid comprised of cash in an amount equal to all of lender claims in the case, less the amount of new term loans to be issued under the proposed plan, or roughly $1.3-1.4 billion.

The plan sets a deadline of Oct. 31 for confirmation. – Alan Zimmerman

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Lawsuits fly between Caesars and 2nd-lien lenders; fraudulent transfers to parent co at issue

caesarsSecond-lien bondholders of Caesars Entertainment Operating Co. (CEOC) last night filed a lawsuit against the company alleging, among other things, that a series of transactions undertaken in recent years that transferred assets from CEOC to other affiliated units of the company constituted both actual and constructive fraudulent transfers designed to enrich CEOC’s parent company, Caesars Entertainment Corp. (CEC) and its shareholders at the expense of CEOC, “and to move CEOC’s assets beyond the reach of CEOC’s creditors.”

According to the lawsuit, filed in Chancery Court in Wilmington, Del., the company’s transfer of the assets for less than fair value constitutes a default under the second-lien note indenture.

The lawsuit is the latest salvo in an ongoing dispute between the company and second-lien noteholders as the company has sought to restructure $20 billion of debt incurred in the 2008 leveraged buyout of Harrah’s by Apollo Management and TPG Capital. As reported, according to SEC filings, second-lien lenders have objected to the asset transfers at least since March (see “Caesars secured debt edges higher amid claims of improper transfers,” LCD, March 27, 2014), and more specifically sent a notice of default to the company in early June (see “Caesars bonds fade after volatile week; co. objects to default note,” LCD, June 6, 2014) specifically citing the challenged asset transfers.

The company, however, countered with its own lawsuit, filed today in New York State Supreme Court in Manhattan, against “certain institutional holders” of the second-lien debt. In a news release announcing the suit, the company didn’t name the second-lien lenders (which have previously been reported as including Appaloosa Management, Oaktree Capital, Canyon Capital Advisors, Caspian Capital, and Contrarian Capital Management), but specifically called out Elliott Management, which the company said was a holder of both first-lien debt and a “significant [credit default swap] position,” alleging that the institutional holders were trying to push the company into default “against the best interest of the enterprise and other creditors to inflate the value of credit default swap positions or improve other unique securities positions.”

Elliott Management, of course, has been in the news lately as the prime driver behind litigation that has resulted in a debt default by Argentina.

According to the company, its lawsuit “seeks declaratory and injunctive relief to prevent further damage to Caesars and CEOC. The complaint also seeks damages from the defendants.”

Among the allegedly “meritless” actions taken by the institutional investors that were cited by the company are “demand letters, disruptive appearances before gaming regulators, and the transmission by second-lien holders of what Caesars and CEOC believe is a baseless default notice.”

Caesars, no doubt, will be adding last night’s lawsuit to that list.

Meanwhile, that suit, filed by Wilmington Savings Fund Society, the indenture trustee for the 10% second-lien exchange notes due 2018 issued by CEOC in 2009, alleges that the company ran into trouble “within months of the [2008] buyout” as “the global financial crisis and ensuing recession crippled Caesars’ business.

Noting that the company initially responded to its “unsustainable capital structure” with distressed exchange offers and credit facility amendments, the complaint alleges that “the sponsors’ response to CEOC’s difficulties soon changed,” and “beginning in the summer of 2010, the sponsors began to strip CEOC of valuable assets.”

According to the lawsuit, the transactions in issue over the next four years include the transfer of certain trademarks in 2010 from CEOC to other CEC subsidiaries; the 2011 transfer of CEOC’s interactive gaming operations to CEC; the 2013 transfer of certain significant Las Vegas properties, Project Linq and the Octavius Tower, to a newly-created entity known as Caesars Entertainment Resort Properties; the 2013 transfers to Planet Hollywood in Las Vegas and a new casino project in Baltimore to another newly-created subsidiary, Caesars Growth Partners; and the 2014 sale of three additional Las Vegas properties (The Cromwell, The Quad and Bally’s Las Vegas) and Harrah’s New Orleans from CEOC to Growth Partners.

According to the complaint, the consideration received by CEOC in each of these transactions was “woefully inadequate.”

The lawsuit also complains that a management services agreement entered into in connection with the 2013 transactions gave Growth Partners access to CEOC’s highly successful customer-loyalty program, known as “Total Rewards” – described in the suit as “CEOC’s crown jewels” – for “little compensation” and “on profoundly unfair and uneconomic terms.” That agreement left Growth Partners “in control of some of CEOC’s best assets,” the lawsuit said.

“The net effect of the transactions,” the compliant charges, “has been to divide Caesars into two segments – one, a ‘Good Caesars,’ consisting of Growth Partners and Resort Properties that owns the prime assets formerly belonging to CEOC, and the other, a ‘Bad Caesars,’ consisting of CEOC which remains burdened by substantial debt and whose remaining properties consist primarily of regional casinos that are unprofitable or far less profitable than those taken from CEOC by the sponsors.”

The complaint continues, “Only the ‘Bad Caesars’ remains liable for the vast majority of the debts incurred in the 2008 buyout transaction,” concluding, “Thus, the sponsors and CEC have sought to deprive CEOC’s lenders and creditors of the ability to seek recourse against CEOC’s most valuable assets when CEOC inevitably defaults on its debts as they come due.”

The suit claims that the transfers violated the indenture covering the second-lien debt, which prohibits asset sales for less than fair market value. “Moreover,” the suit states, “the transfers were unlawful and voidable. The transfers were also intended to hinder or delay CEOC’s creditors, making them intentional, as well as constructive, fraudulent transfers.”

The lawsuit asks the Delaware court to either avoid the transfers or return the value of the assets to CEOC.

The suit also names as defendants the officers and directors of CEC, including, among others, David Bonderman, founder of TPG, and Mark Rowan, a co-founder of Apollo, both of whom serve on CEC’s board of directors, alleging they are liable for unspecified damages.

Finally, the lawsuit seeks a declaratory judgment that CEC remains a guarantor of the debt issued by CEOC.

The company has argued that because it sold 5% of its interest in CEOC earlier this year, it was released as a guarantor of CEOC’s debt because CEOC was no longer a “wholly owned subsidiary” of CEC.

According to the suit, however, “this is untrue. Under the 2009 Indenture, the [stock sale] does not result in a release of the guarantee by CEC.” The suit argues that the fact that CEOC is no longer a “wholly owned subsidiary” does not, in and of itself, release CEC from its guarantee. Rather, the complaint states, the indenture sets out additional legal conditions that must be, but have not been, met to release CEC from its obligations. – Alan Zimmerman

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Bankruptcy: As it nixes its RSA, Energy Future’s old, vexing issues return

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Energy Future Holdings said it would conduct a “court supervised bid process with respect to” its restructuring and that of its unit, Energy Future Intermediate Holdings (EFIH), the intermediate holding company that is the direct owner of the company’s 80% interest in regulated utility Oncor, in order “to maximize their respective enterprise values for all stakeholders.”

Meanwhile, according to a Form 8-K the company filed this morning with the Securities and Exchange Commission, the company sent official notice that it would terminate its restructuring support agreement. The agreement, reached by the company and various clusters of creditor groups in late April ahead of Energy Future’s April 29 filing for Chapter 11, will officially terminate on July 31.

The pact’s termination was expected. As reported, the company told the bankruptcy court overseeing its Chapter 11 case last Friday that it would either terminate the agreement in coming days, or amend it to expire by its own terms on Aug. 8. Obviously, immediate termination won the day, but as reported the RSA was, for all intents and purposes, dead regardless of the path the company followed (see “Energy Future to scrap current reorg deal; sees potential new offers,” July 18, 2014).

At last week’s bankruptcy court hearing in Wilmington, Del., the company explained that the RSA was being terminated because since it was negotiated, higher trading prices for the company’s debt in secondary markets, along with amplified interest in the company’s assets (and higher valuations resulting from that interest) as exemplified by the efforts of NextEra Energy to acquire EFIH, had resulted in “parties … reaching out to the company to suggest transactions that were not previously available to it.”

Among other things, the company said during last week’s hearing that the NextEra offer for EFIH was “very promising.”

Looking ahead
In today’s Form 8-K filing, the company provided the first clues as to the shape of the coming negotiations over the company’s future. At this early stage, at least, it appears to present a mixed picture for the company’s prospects, suggesting that notwithstanding the improved opportunities the company says it sees in the market, the difficult issues arising from the company’s size, complexity, and capital structure that consumed nearly a year of pre-filing negotiation among creditors, and ultimately its entry into a RSA that is now being abandoned three months into the Chapter 11 process, have not significantly changed.

Among other things, the termination of the RSA suggests that the company’s stay in Chapter 11 will be longer than the 11 months the company was hoping for when it filed for Chapter 11. Indeed, the company filed a motion today with the bankruptcy court seeking to extend the exclusive period during which only the company could file a reorganization plan by 180 days, through Feb. 23, 2015. The company is also seeking to extend the corresponding exclusive period to solicit votes to a reorganization plan through April 25, 2015. A hearing on the exclusivity motion is set for Aug. 6.

The company’s initial exclusivity period is set to expire on Aug. 27, according to the motion, so even if the RSA remained in place the company was going to require an extension. That said, in its motion, the company states, “While the debtors remain focused on reaching consensus, they recognize that full consensus may not come right away or, at the end of the day, be possible given the diverse interests of their stakeholders.”

The EFIH bid process
In the Form 8-K, meanwhile, the company reiterated its comments from last week’s bankruptcy court hearing in Wilmington, Del., saying in the filing that it was “encouraged by the interest in EFIH and its subsidiaries, including Oncor.” In addition to pursuing a court-supervised bid process, the company said, it “intends to continue to negotiate with each party that has submitted bids to date with respect to the reorganization of EFH and EFIH.”

One of those bids, incorporated into the now defunct RSA, would have left EFH and EFIH in the hands of holders of unsecured 11.25% toggle notes due 2018 at EFIH and holders of unsecured debt, primarily Fidelity, at parent Energy Future Holdings (EFH), through a combination of the exchange of a proposed $1.9 billion second-lien DIP that EFIH and EFH unsecured creditors were to back for about 65% of the reorganized company’s equity, and the remainder of the equity distributed to EFIH and EFIH unsecured holders via the terms of a reorganization plan (with a small amount of equity reserved for holders of EFH legacy debt and EFH’s equity holders).

That transaction was premised on an enterprise value of EFIH and EFH of about $3.325 billion.

On June 18, however, NextEra, acting together with a group of EFIH second-lien lenders, submitted an offer to acquire the company out of Chapter 11 that valued EFIH and EFH at about $3.6 billion. NextEra and the second-lien lenders upped that offer on July 16, proposing a two-step merger transaction that it said would provide an additional $180 million of value for EFIH and EFH creditors (see “NextEra, noteholder group up offer for Energy Future Holdings,” July 17, 2014).

One significant difference between the two offers on the table, at least insofar as second-lien lenders are concerned, is the payment of a make-whole claim asserted by holders of the second-lien debt. The total claim is roughly $700 million, according to an affidavit filed by CFO Paul Keglovic in connection with the company’s Chapter 11 filing.

Under the RSA and the unsecured creditor proposal for EFH/EFIH, the company offered second-lien lenders a settlement offer of 50% of the asserted make-whole claim, launching a tender offer encompassing the settlement offer on May 9 (see “Energy Future launches tender offer for EFIH second-lien debt,” LCD, May 12, 2014). According to the company, 43% of second-lien holders had participated in the tender offer by the early participation deadline of June 11.

The NextEra/second lien acquisition proposal, in contrast, would pay the second-lien make-whole claims in full.

Meanwhile, adversary actions are also pending in the case as to whether, first, the second-lien lenders are entitled to the make-whole payment, and second, whether first-lien lenders at EFIH (who also claim a make-whole payment in excess of $700 million) need to be paid in full before any make-whole claim can be paid to second-lien lenders, in light of inter-creditor agreements among the secured lenders governing the treatment of collateral (see “EFIH first-lien lawsuit opens new front in make-whole claims fight,” LCD, June 24, 2014).

Those second-lien make-whole issues, at least, appear to have been mooted for the time being by the recent developments. According to the Form 8-K, the tender offer for the second-lien settlement, which will terminate on July 25, will not be extended or consummated due to the termination of the RSA.

The TCEH tax-free spin-off
Meanwhile, the company said that it “remains committed” to a tax-free spin off of Texas Competitive Electric Holding (TCEH), the intermediate holding company for Energy Future’s unregulated power generation and sales units, TXU Energy and Luminant.

The spin-off of TCEH remains on the table, obviously, because of the company’s plan to pursuing a bid process for the restructuring of EFIH and EFH. Indeed, the rationale the company provides for pursuing this bidding process – increasing valuation – suggests that the same dynamic that drove the structure of the RSA and the tax free spin-off of TCEH – the growing and stable enterprise value of the company’s regulated utility, Oncor, as compared to the uncertainty of its unregulated operations that are at the mercy of volatile and unpredictable energy markets – remains in place today. That said, the contrast between the company’s two sides is arguably not as stark as it had been over the prior year of negotiations leading up to the Chapter 11 filings thanks to rising natural gas prices that benefit TCEH.

The tax-free spin-off of TCEH was a critical component of the RSA, arising out of a determination that, in light of intractable disputes over the company’s enterprise value and how to allocate that value in any reorganization among the many layers of its complex capital structure, the company’s only path to a consensual reorganization was through a deconsolidation. That deconsolidation strategy, however, would potentially give rise to significant tax liabilities, either immediately or in the future, that would come to rest either with the first-lien TCEH lenders, or the unsecured creditors at EFIH and EFH.

The proposed tax-free spin-off of TCEH, combined with the application of certain of EFH’s tax attributes to the transaction – a structure that, incidentally, remains subject to approval of the Internal Revenue Service – was the key to securing the agreement of TCEH first-lien lenders, who would acquire the reorganized TCEH equity, to the deal in that it would permit the transaction to occur quickly, and let TCEH’s new owners (the lenders) to offset tax liabilities they would incur as a result of the tax-free spin-off.

But the proposed tax-free spin-off of TCEH potentially presents an issue for junior creditors at TCEH, comprised of holders of about $1.57 billion of second-lien notes and $4.9 billion of unsecured debt issued in connection with the company’s 2007 LBO. Under the RSA, both groups would have been, for the most part, out of the money. At last week’s hearing, an attorney for second-lien lenders suggested that a reorganization structure that was not based on a tax-free spin off of TCEH could yield significant enterprise value for TCEH. – Alan Zimmerman

 

 

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Energy Future to scrap current reorg deal; sees potential new offers

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Energy Future Holdings‘ pre-arranged reorganization plan, negotiated by the company prior to its bankruptcy filing, is, for all intents and purposes, dead.

 

During a brief status update that preceded this morning’s omnibus hearing in the case in Wilmington, Del., attorneys for the company told Bankruptcy Court Judge Christopher Sontchi that while the restructuring support agreement backing the pre-arranged plan has not yet been terminated, “it remains terminable.” The attorney said he expects in coming days that parties to the RSA will either move to terminate the agreement, or the agreement will be amended to terminate by its own terms on Aug. 8, giving the parties a few weeks to work on a replacement deal (see “IRS support for Energy Future’s tax deal is the key to reorg,” LCD, May 1, 2014, for a detailed description of the pre-arranged reorganization deal).

 

Either way the termination of the company’s current pre-arranged reorganization scheme as embodied in the RSA is the result.

 

The attorney blamed the disintegration of the pre-arranged deal on the increased trading prices of Energy Future debt in secondary markets since the company’s bankruptcy filing. He said he did not know whether the increase in debt prices would be permanent or temporary, or even the reasons behind the increasing prices, but he pointedly noted, “Trading prices do impact behavior.”

 

As a result of the increased prices, “parties have been reaching out to the company to suggest transactions that were not previously available to it,” he said, citing the recently sweetened offer from NextEra to acquire the company’s regulated utility, Oncor, as an example (see “NextEra, noteholder group up offer for Energy Future Holdings,” LCD, July 17, 2014, also reported on HighyieldBond.com, for a detailed description of the NextEra offer).

 

Going forward, the attorney said, Energy Future intends to conduct a process to “vigorously pursue” new potential transactions.

 

As for the NextEra offer, the attorney characterized it as “very promising,” and said discussions over it would continue. Toward that end, he said the company would abandon its proposed $1.9 billion second-lien DIP for unit Energy Future Intermediate Holdings, the intermediate holding company for Energy Future’s 80% interest in Oncor.

 

As reported, that DIP, which was to have been provided by a combination of certain holders of unsecured toggle notes at EFIH and holders of unsecured debt at parent Energy Future Holdings, was to be converted into equity in the reorganized company and was a key feature of the pre-arranged deal negotiated by the company. But as also reported, the NextEra deal would, depending upon how it shakes out, either make such a DIP unnecessary, or would replace that proposed DIP with a different second-lien DIP facility, provided by NextEra and a group of EFIH second-lien lenders, that would be incorporated into the overall merger transaction.

 

One other area of note that generated discussion during the status update portion of the hearing was the anticipated structure of any contemplated reorganization scheme and whether it would need to be based upon a tax-free spin-off of unit Texas Competitive Electric Holdings, the intermediate holding company for the company’s unregulated power producing and retailing operations. As reported, addressing the complex tax implications of any reorganization have been a major sticking point as the company has sought to strike a deal among its creditors.

 

In opting for the tax-free spin-off in the pre-arranged plan scheme, Energy Future’s attorney said that the company had “explored the universe of potential structures.” But in comments delivered after the company provided its status update, an attorney for the indenture trustee for second-lien lenders at TCEH suggested that a transaction structure not based on retaining tax-free attributes for TCEH could be accretive by $2-3 billion of the unit, creating residual value for second-lien holders. – Alan Zimmerman

 

 

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Energy Future Holdings’ TCEH debt weakens in active trading


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Debt backing bankrupt Energy Future Holdings’ subsidiary Texas Competitive Electric Holdings 

Over in the loan market, the EFH pre-petition term debt, which sits at TCEH, slid to a 78.5/79 context, from levels bracketing 80 yesterday, sources said. Moreover, that’s down from an 84 context two weeks ago amid hopes for improved recoveries as investors learned of an intercompany loan of $774 million by the unit to the parent company

Press reports circulated with news that TCEH first-lien lenders plan to withdraw support for the EFH restructuring plan. The lenders plan to terminate their support because of higher valuation at the Energy Future Intermediate Holdings entity, and disclosure of the intercompany loan provided further pause, according to a Debtwire report, citing unnamed sources. – Staff reports