Shakespeare bemoaned "the law's delay." Dickens brought us Jarndyce v. Jarndyce, a case spanning generations. However, a new Chapter 11 case filed in Corpus Christi demonstrated the opposite of delay, blazing from petition to confirmation in just fifteen days. Case No. 16-20111, In re Southcross Holdings, LP (Bankr. S.D. Tex. 2016). The case is all the more remarkable because it involved an energy sector debtor that did not rely on a section 363 sale, but actually raised new capital and restructured its debts.
About the Debtors
The Southcross entities consist of two halves of a broad, interconnected enterprise providing services across the midstream oil and gas sector. The Debtor entities, which are shown in blue in the chart below comprise the holding company portion of the corporate structure, while the non-debtor affiliates, shown in salmon below, carry out the operations. The Debtors own a 2% general partner interest and a 60% limited partnership interest in Southcross Energy Partners, LP, a publicly traded master limited partnership (MLP).
Southcross owns and operates approximately 4,000 miles of pipelines, two sour gas treating facilities, three processing facilities, two fractionating facilities, and one facility with both processing and fractionating capabilities. The Southcross assets that are owned by the Debtors are located in the Eagle Ford shale in South Texas (the “Eagle Ford”) and include approximately 880 miles of natural gas gathering and NGL transportation pipeline, one sour gas treating facility, and one fractionating facility.
Southcross Holdings had two groups of equity holders. The Class A Unitholders, also known as the Sponsors, consisted of Charlesbank, EIG and Tailwater. The Class B Unitholders consisted of GE Energy Financial Services and Energy Capital Partners.
The entity's 280+ employees were all employed at the non-debtor MLP level.
The Debtors had $826 million in funded debt and preferred equity obligations. These consisted of a revolving senior debt in the amount of $50 million (Holdings Revolver), a senior secured term loan in the amount of $575 million (Holdings Term Loan) and $210 million in Class B units which constituted preferred equity.
The plan was based upon the infusion of new equity, conversion of some debt to equity while cancelling other interests while leaving unsecured creditors unimpaired. Specifically, the Sponsors agreed to contribute $170 million in new capital. In return, they were to receive 66.66% of the equity in the reorganized debtor. The Class B units were to be canceled in return for a payment of $100,000. The Holdings Revolver received a restructured debt in the amount of $50 million. The Holdings Term Loan was to be reduced from $575 million to $75 million in return for a 33.34% equity stake. The unsecured creditors were to be left unimpaired. Thus, the Plan raised $170 million in new cash and eliminated about $500 million in debt.
The Pre-Petition Process
In August 2014, the Debtors began a costly process to upgrade their facilities. They spent $50 million connecting and integrating legacy systems and $100 million to bring a new fractionater plant online. Around the same time, the price of oil and gas began to slide precipitously.
In August 2015 and October 2015, the Debtor made unsuccessful efforts to raise new capital. As negotiations continued, the Debtors engaged Kirkland & Ellis to assist with restructuring their debt. According to Debtor's counsel, Chad Husnick, he learned that the company was in imminent need of cash on New Year's Eve. After spending New Year's Eve and the first week of January negotiating, they were able to obtain an emergency loan from the Sponsors.
While this process was going on, the Debtor's General Partner added two disinterested directors who retained their own counsel.
By March 21, 2016, the Debtors and the major players entered into a Restructuring Support Agreement (RSA) and began soliciting acceptances of their plan. The Debtors received votes in favor of the Plan from approximately 70.7% of the entities owning the Holdings Term Loan, 66.7% of the entities owning the Holdings Revolver and all of the Class A and B Noteholders.
The Board of the General Partner met on March 27, 2016, which was Easter Sunday, and authorized the filing of the cases which were filed that day.
Thus, the parties working on the case had to give up both their New Years' Eve plan and spending Easter Sunday with their families.
The Swift March Through Bankruptcy
Two days into the case on March 29, Judge Marvin Isgur held first day hearings. The Debtors requested an unusually truncated proceeding because the non-debtor MLPs had a deadline of April 15 to present an unqualified audit report. Failure to confirm the plan by this date would cause the non-debtor entities to default on their funded debt obligations, which would in turn cause them to file bankruptcy. As a result, they requested confirmation hearing for April 11.
Minutes into the first day hearings, the Court expressed concern about the timing of the case. Judge Isgur stated,
And to me, the big question that people have to worry about is whether I'm going to be wiling to hold a hearing on April 11th that's the final hearing in the case. . . . I'll hold a hearing on April 11th. As to what I'll do there, just going to wait and see what happens.
Transcript of First Day Hearings, p. 5. A few moments later, the Court stated
I want a plan from the Debtors on how to get actual notice out to parties so that their due process rights are protected. So I don't know whether you can construct a plan for me , , , to be sure that anyone that hasn't affirmatively accepted the plan and the prepetition solicitation would get email, telephone, fax, hand-delivery, FedEx, some sort of tangible, actual notice so that they don't have to be opening their mail and then find out suddenly that there's a hearing the next day.
Transcript of First Day Hearings, p. 6.
Debtor's counsel sought to assuage the Court's concerns by itemizing the parties affected. Approximately 750 general unsecured creditors were left unimpaired by the plan and thus had less due process concerns.
All of the prepetition equity holders had signed on to the RSA and voted for the plan so they were not a concern.
Among the holders of the Holdings Term Loan, 93% had already voted on the plan. The remaining parties consisted of a holder of 4.1% of the debt who was represented by counsel but had affirmatively chosen not to participate, 0.7% who signed the RSA but couldn't vote for the plan due to regulatory considerations and two parties who had not been heard from. With regard to the Holdings Revolver, two out of three lenders had signed on. Thus, out of $826 million in debt and preferred obligations, there were less than ten creditors who needed to vote upon the plan.
At the end of the hearing, the Court asked the U.S. Trustee if "You all are okay with where the case is going?" and received an affirmative response. The Court stated:
With that, I do want to thank just everyone today for all the preparation and all the hard work and all the candor and it's been an extraordinary hearing. . . . I know I have never been through one like this and it's very appreciated how much everybody's working together. We'll see how long that lasts.
Transcript of First Day Hearings,p . 105.
The parties reconvened thirteen days later for the confirmation hearing. The hearing was held in Judge Isgur's courtroom in Houston even though it was a Corpus Christi case. However, attorneys who wanted to appear in Corpus Christi were allowed to appear by video and two of them did.
Only one creditor, an equipment lender, objected to the plan. However, given the short time frame, the Court called for oral objections.
Does anybody else wish to register an objection given the notice issues? If somebody believes that they didn't have adequate opportunity to file a written objection, I want to know today if anyone has an oral objection that they wish to register.
Transcript of Confirmation Hearing, p. 5.(No audible response)
Debtor's lawyer Chad Husnick described the case as "the first sponsor-backed prepackaged case in the oil and gas industry."
Mr. Husnick also compared the Debtor's efforts to secure responses from all parties in interest to "pigs in a pipeline trying to flush out all of the agnostic parties in this case so that we could either get them to say yes or no on the plan or let us know if they had any type of objection on due process grounds or otherwise." Transcript of Confirmation Hearing, p. 8. He accounted for each impaired party as to whether they had voted against the plan (two creditors), had been contacted and indicated that they did not oppose the plan and in one case, had been contacted and remained silent.
The Court found that the Debtors had provided sufficient evidence that it provided due process.
THE COURT: The evidence of compliance with due process that we required at the last hearing in my view has been fully satisfied. The Court was concerned that constructive notice or mail notice even might be inadequate given the very short timeframe in which confirmation was sought. And so we did inform the Debtors that at this hearing, if they hadn't gotten actual notice out in sufficient time to comply with the due process clause, that we would have to make other arrangements within the confirmation order or delay confirmation in order to satisfy that. The presentation made by the Debtor today, . . .demonstrate the due process efforts that were made by the Debtor as a demonstrative exhibit, combined with the various affidavits that have been filed today, demonstrate that absolutely every impaired -- every holder of an impaired claim has actual notice of today's hearing.
Transcript of Confirmation Hearing, p. 30. After overruling the only objection to the plan, the Court went through the confirmation order in detail discussing language that needed to be adjusted. The Court spent the lunch hour ensuring that the confirmation order was signed and docketed.
Thus, a case proceeded from petition to confirmation in just fifteen days. The case went to confirmation so quickly that the Court was able to dispense with filing schedules and the first meeting of creditors.
The Debtor was able to accomplish this remarkable feat based on several important factors. First, the heavy lifting was all done before the petition was filed. This is all the more impressive since the process to negotiate and paper the plan largely took place between New Years' Eve and Easter Sunday. Second, the Debtor was able to take a complex case with nearly one thousand parties and narrow it down to less than ten who had not previously consented. Finally, the case benefited from a Court that demanded that due process be provided but was flexible in scheduling hearings. The Court was also user friendly as shown by the fact that it wordsmithed the confirmation order live in the Courtroom and got it entered over the lunch break.
Thanks to Debtors' local counsel Zack Clement who graciously provided me with transcripts and briefs which allowed me to provide the color of the case.