Patriot Coal on Oct. 5 filed arguments with its bankruptcy court calling for the judge to reject objections of certain pre-bankruptcy petition lenders to a reorganization plan based around the sales of most assets to Blackhawk Mining LLC (basically the operating mines in southern West Virginia) and Virginia Conservation Legacy Fund (VCLF, including the operating Federal No. 2 longwall mine in northern West Virginia).
Said Patriot: “In April of this year, the Debtors faced difficult circumstances. The historically bad coal market that had precipitated their last chapter 11 cases had only gotten worse. Their CEO and CFO had quit. They were running out of cash. And they knew that, as their Chief Restructuring Officer, Ray Dombrowski, testified at the DIP hearing, a ‘cold idle’ of their mines would destroy the Company’s assets leaving barely enough to pay off their Prepetition ABL Facility. Such a cold idle would have left their other secured lenders with a pittance of a recovery, if any, cost approximately 2,400 miners their jobs, and dumped a mess of environmental liabilities on four states and the Federal government.
“The path of least resistance for the Debtors’ management at that point would have been to quit. It would have been easy for them to simply throw up their hands, blame the ‘war on coal,’ and move on to other endeavors. They chose not to do that. Instead, they made battlefield promotions of a new CEO and CFO. They retained able restructuring advisors to help them conserve cash, navigate difficult next steps, and improve operations. Through the efforts of their investment banker, they located a prospective purchaser for the bulk of their assets and secured postpetition financing to allow the company to avoid a cold idle and run a managed sale and marketing process. And other than resistance from the Prepetition LC Facility Lenders at the hearing to consider entry into the Debtors’ proposed postpetition financing facility (resistance that did not meaningfully rebut Mr. Dombrowski’s testimony that a cold idle was imminent and would devastate the value of their collateral), each of the Debtors’ secured creditor constituencies has generally supported the idea of pursuing an orderly process to market and sell the Debtors’ assets as a going concern. Every single party understood that the strategy of selling the assets as a going concern depended heavily on the Debtors’ ability to confirm a chapter 11 plan and that any alternative was not viable.
“Despite long odds, the strategy worked. The Debtors have proposed a chapter 11 plan that fully pays off the Prepetition ABL and DIP Lenders, returns $155 million in take-back paper to the Prepetition LC Lenders, saves approximately 2,400 jobs, and responsibly addresses the environmental obligations associated with the business of mining coal. There is no dispute that the results of the Debtors’ auction process are vastly superior to the grim alternatives available to the Debtors at the outset of these Chapter 11 Cases.
“The Prepetition LC Lenders would have this Court believe that somehow things got worse for them during these Chapter 11 Cases. They need the Court to accept this theory because they hope to establish that they are owed ‘diminution in value’ claims, which would be entitled to administrative expense priority, and thereby block the Debtors’ ability to confirm a chapter 11 plan. The Prepetition LC Lenders attempt to demonstrate diminution by pointing to the adverse changes in the terms of the Blackhawk [Asset Purchase Agreement] during these Chapter 11 Cases. But there was no Blackhawk APA on the Petition Date. The Debtors negotiated the Blackhawk APA over the first month of these Chapter 11 Cases, and even then the agreement remained subject to financing contingencies. As it turns out, financing was not available to support the original Blackhawk APA, and the total amount of consideration offered under the Blackhawk APA declined during the case. But that has nothing to do with the value of the Prepetition LC Lenders’ collateral as of the Petition Date.”
Patriot says asset sale deals are the best ones possible
After conducting an auction, the Patriot companies, in consultation with their key creditor constituents, named Blackhawk the winning bidder and stand ready to confirm a chapter 11 plan predicated on the Blackhawk APA, Patriot added. “Additionally, VCLF is prepared to purchase the assets Blackhawk is not acquiring and assume material environmental obligations as part of that same chapter 11 plan,” it added.
The company said: “The Debtors’ employees and management worked heroically under incredibly difficult conditions and in the face of great uncertainty to preserve the Debtors’ operations as a going concern, to satisfy staggering diligence and discovery requests from creditors, and to negotiate the vast number of agreements and transactions that have gotten the Debtors to this point.”
It noted that the United Mine Workers of America (UMWA) union made wage and benefit concessions. The Retiree Committee also agreed to benefit concessions. Environmental creditors, most notably including the West Virginia Department of Environmental Protection, have worked cooperatively to find ways to resolve their environmental objections and address the most pressing of their environmental obligations first. Many trade creditors extended credit to the debtors on a postpetition basis.
To the extent that the debtors and Blackhawk or VCLF are unable to reach resolution of the respective contract and lease objection, the debtors request that such contract and lease objection be fully preserved and reserved for consideration at the Omnibus Hearing scheduled for Oct. 22.
On a Sept. 4 bid deadline, the debtors received a competing bid for the Blackhawk assets from Coronado Mining LLC. The debtors did not receive any additional bids for any of the Blackhawk Excluded Assets, which would go to VCLF. Coming out of a Sept. 21 live auction, Blackhawk was identified as the “Winning Bidder” and Coronado Mining was identified as the “Backup Bidder” for those assets.
Barclays Bank PLC, in its capacity as Prepetition LC Agent, on Sept. 19 told the court 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’s case is being handled at the U.S. Bankruptcy Court for the Eastern District of Virginia.
Said Barclays Bank in its Sept. 19 filing: “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.”
DIP Lenders say they will loan no more money
In an Oct. 5 brief filed with the court, the debtor-in-possession lenders (DIP Lenders), which loaned Patriot the money to stay afloat after it entered bankruptcy and in turn get first priority on repayment out of asset sales, said they will lend no further money. The term “DIP Lenders” means certain funds and/or accounts managed or advised by Knighthead Capital Management LLC and certain other financial companies.
Their brief said: “[T]he DIP Lenders have done nothing but lose money on Patriot for the benefit of every Patriot constituency other than the DIP Lenders. To recap, the DIP Lenders’ prepetition claims are now virtually worthless; the $100 million DIP Facility will not be repaid any time in the near future; and the DIP Lenders are the only creditors participating in the $130 million additional financing needed to consummate the Plan. It is reckless and counter-factual for any objector to allege that any of the DIP Lenders ‘planned’ serial chapter 11 cases to the detriment of other creditor constituencies.
“The DIP Lenders have opened their checkbooks for the last time. There is no more money or appetite for investment. The only alternative before the Court is a cash sale of assets to the Debtors’ backup bidder, Coronado Mining, LLC, in which case the DIP Lenders will be paid, the rest of the cash goes into a pot to be fought over for the foreseeable future, there is no deal with the United Mine Workers, and some or all Patriot employees lose their jobs.”
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.