Barclays Bank PLC, in its capacity as Prepetition LC Agent representing certain creditors, on Sept. 19 said that Patriot Coal is running out of cash to keep its mine open, has no confirmable Chapter 11 bankruptcy reorganization plan and that its case should be converted into a Chapter 7 dissolution.
Patriot Coal, a major coal producer out of several mines in West Virginia, filed earlier this year for Chapter 11 protection at the U.S. Bankruptcy Court for the Eastern District of Virginia. It has two ongoing deals to sell the operating mines to two different entities in “stalking horse” bid processes. The southern West Virginia mines would potentially go to Blackhawk Mining LLC and the Federal No. 2 longwall mine in northern West Virginia to the Virginia Conservation Legacy Fund (VCLF).
“From the outset of these cases, the LC Parties have expressed their deep reservation that the Debtors were pursuing a path that was ill-conceived and fraught with execution risk,” said Barclays in its Sept. 19 motion for Chapter 7 conversion. “While the Debtors have been apparently (and perhaps understandably) motivated by the hope of achieving a plan of reorganization that would somehow wrap up and pay for the complex issues that they face, the LC Parties have been very concerned that the Debtors have pursued this goal largely by putting the LC Parties’ recovery at risk. Nonetheless, the LC Parties have not been simply intransigent naysayers, and this history is important in the context of the relief the LC Parties now seek.
“As the Court will recall, the LC Parties did not object to the Debtors’ use of interim [debtor in possession] financing at the very start of the cases, but noted their concern that the Debtors had no defined path forward. Then, the LC Parties raised a limited objection in connection with the final approval of the DIP, again based on their concern that the Debtors’ path was uncertain and that allowing $100 million of priming liens in such circumstances was a direct threat to the collateral coverage that the LC Parties enjoyed at the commencement of these cases. Rather than derail the proceedings, however, the LC Parties requested only to adjourn the final approval of the DIP to give the Debtors time to formulate and describe their plan path.
“The Debtors instead convinced the Court to allow them to go ‘all in.’ According to the Debtors, the full priming DIP was needed to support their plan process, and was the way to a value-maximizing transaction. Thus, the Debtors asserted that the LC Parties’ collateral would be adequately protected by achieving the Blackhawk transaction. And, so the story went, the LC Parties would, in any event, be granted adequate protection comprised of liens immediately junior to the DIP financing on all property of the Debtors including all otherwise unencumbered property and super-priority administrative expense claims in case something went wrong.
“Things did go wrong. The first plan that the Debtors proposed provided inadequate treatment to the LC Parties for their secured claims. That treatment was, in general terms, to wipe out the LC Parties’ existing liens, but to give them new first lien notes in a combined Blackhawk-Patriot entity, but along with hundreds of millions of dollars in other debt and supported by an uncertain collateral pool. The notes had a notional value capped at $200 million, which, at the time, was slightly less than the full value of the LC Parties’ anticipated secured claims. At the same time, the balance of the LC Parties’ pre-petition collateral was to be transferred to VCLF, with no consideration at all flowing to the LC Parties. In connection with the Disclosure Statement hearing, the LC Parties noted that this plan would not be confirmable over their objection. The LC Parties also objected that information about the plan remained incomplete and inadequate. At the Disclosure Statement hearing, the Court recognized that the additional information promised by the Debtors in their anticipated plan supplement would be critical to the plan process.
“Instead of more information, the plan supplement was the next turn for the worse. Filed just 11 days after the Court approved the Disclosure Statement, the plan supplement was, in reality, a new and materially worse plan. Instead of being given first lien Combined Company notes, the LC Parties had been relegated to a second lien position, now squarely behind nearly $416 million in priority debt, and further, with a substantially reduced interest rate on those second lien notes. The plan supplement also maintained the lien-stripping VCLF component of the plan, including the lack of any consideration to the LC Parties on account of that disposition of their collateral. Even the Debtors’ own expert acknowledged that this treatment ‘reflects significant impairment to the LC [Parties].’
“Before the Debtors could seek confirmation of this new plan, things deteriorated even more dramatically. The Debtors postponed the September 16 Confirmation Hearing, and instead have now filed a term sheet outlining the latest plan.
“The Debtors’ chances of achieving confirmation of the currently proposed plan—or any other plan of reorganization, for that matter—are vanishingly small. The Debtors’ plan process, starting with a $100+ million priming of the LC Parties’ liens, has turned out to be a disaster for the LC Parties’ proposed recoveries. Nonetheless, the Debtors continue to use the LC Parties’ cash collateral. Plainly, the LC Parties are not adequately protected, and it is no longer appropriate for the Debtors to continue to burn through cash collateral in pursuit of a patently unconfirmable plan. Indeed, the Court’s order authorizing use of cash collateral expressly provides that authorization shall terminate in the circumstances here: where the Debtors have sought confirmation of a plan that will not pay the LC Parties in full. While the LC Parties could support use of this collateral to fund an orderly liquidation or other value-preserving alternative, use of cash to pursue a dead-end plan defies both logic and the law. This value must be preserved for the benefit of the Estate’s creditors. Accordingly, by this Motion, the LC Parties respectfully request that the Court terminate the Debtors’ authorization to use cash collateral.
“Additionally, the Court should convert these chapter 11 cases to cases under chapter 7 of the Bankruptcy Code. The requirements for conversion are easily met here. First, since the outset of this case, the Debtors consistently have experienced negative cash flow, which alone is sufficient to establish ‘continuing loss to or diminution of the estate.’ Moreover, there is no reasonable prospect of rehabilitation, and, indeed, the Debtors have never sought to maintain or reestablish their business operations. Theirs has been a liquidating plan from the start. In such circumstances, especially where the proposed liquidating plan is fatally flawed, conversion is required.
“The time has come for the Debtors to face reality: no confirmable plan is in sight. Each day that the Debtors ignore this hard truth, they bleed cash that could be used to satisfy senior claims. And, as the Debtors have conceded, the well is running dry. The Debtors claim they will run out of cash by no later than the end of October—a mere six weeks from now. There is no reasonable prospect of devising a confirmable plan of reorganization during that time. Indeed, with each passing day, the value of the Estate diminishes and the terms of the Debtors’ proposed plan worsen, dramatically increasing the odds that the LC Parties will be unable to realize the full value of their secured claims. Accordingly, in order to conserve what little value may remain for the benefit of the Debtors’ creditors, these chapter 11 cases should be converted to cases under chapter 7 of the Bankruptcy Code.”
The conversion motion is due for an Oct. 5 hearing at the bankruptcy court.
Patriot Coal offers latest reorganization plan under Chapter 11
Patriot Coal on Sept. 18 filed with the court the latest revision to its reorganization plan, saying in the accompanying disclosure statement: “As of the date hereof, the Debtors believe consummating the VCLF Transaction (subject to higher or better bids pursuant to the Bidding Procedures) is in the best interests of the estates and, together with the Blackhawk Transaction, facilitates the optimal available exit from the chapter 11 cases. To the extent the VCLF Transaction or a similar sale transaction cannot be consummated, however, the assets not acquired and the liabilities not assumed by Blackhawk in connection with the Blackhawk Transaction will vest in a Liquidating Trust, which, subject to the Claims compromised by the Plan, will assume all of the Debtors’ liabilities and obligations excluded from the Blackhawk Transaction, continue to hold all permits not assigned to Blackhawk in connection with the Blackhawk Transaction for active and inactive mining operations that require reclamation activities, and manage all future reclamation activities.
“The Bid Procedures provided September 9, 2015, as the date of the Auctions (as defined below) if such Auctions were necessary, or such later date as determined by the Debtors upon notice to parties in interest. The Debtors have engaged in discussions with potential purchasers and, in order to facilitate these negotiations, filed the Notice of Adjournment of Auction (the ‘Auction Scheduling Notice’), extending (a) the time and date of the Auctions to September 21, 2015, at 10:00 a.m. (prevailing Eastern Time) and (b) the deadline for the Debtors to notify each bidder whether its bid is a ‘Qualified Bid’ (the ‘Qualified Bid Deadline’) to September 18, 2015, at 5:00 p.m. (prevailing Eastern Time).
“As of the date of filing this Disclosure Statement, the Debtors are actively negotiating with a third party regarding its bid for the Blackhawk Purchased Assets. The potential purchase price is currently contemplated to be paid 100 percent with cash. In accordance with the Bid Procedures Order, the Debtors have notified the Consultation Parties (as defined in the Bid Procedures Order) regarding the bid. If the Debtors choose this bid as the winning bid, the Debtors may implement the consummation of the Plan pursuant to the Payout Event as set forth therein.”
The bankruptcy court has scheduled a confirmation hearing for Oct. 5. The court may adjourn the confirmation hearing from time to time.
The Patriot companies have eight active mining complexes located in West Virginia, which include company-operated mines, a contractor-operated mine, and coal preparation and loading facilities. In 2014, they sold about 22.4 million tons of coal, of which approximately 68% was sold to domestic and global electricity generators and industrial customers and approximately 32% was sold to domestic and global steel and coke producers.