Arch Coal told its bankruptcy court in a Feb. 22 brief that a proposed debtor-in-possession (DIP) financing package, which will provide it with money to operate during this bankruptcy proceeding, is the best financial option for the company, despite the objections of various parties.
Arch and its subsidiaries told the U.S. Bankruptcy Court for the Eastern District of Missouri: “The Debtors seek final approval of an arms’-length, heavily negotiated DIP financing and adequate protection package, which includes a superpriority, priming lien debtor-in-possession financing (the ‘DIP Financing’), consisting of a $275 million delayed draw term loan facility, as well as the consensual use of the collateral of the prepetition secured lenders (‘Secured Lenders’), including cash collateral (‘Prepetition Collateral’).
“The DIP Financing will enable the Debtors to continue their operations during chapter 11 and will assure stakeholders of the Debtors’ ability to restructure expeditiously, all in the face of unprecedented, continued declines in the coal market. As set forth in detail herein and in the DIP Motion, the DIP Financing is an appropriate exercise of the Debtors’ business judgment, approval of the DIP on an interim basis has already assisted the Debtors, and the Court should approve the Final Order in its entirety.
“The proposed DIP Financing also reflects the best terms available given the Debtors’ existing secured indebtedness and the rapid and continuing deterioration of the coal market. In fact, the terms of the DIP Financing are objectively better, less burdensome, and less expensive than virtually all comparable financings.”
Among other things, the company said the DIP Financing offers the following:
- A cost of borrowing that is the lowest cost of all DIP facilities received by metals and mining debtors over the last year, including Alpha Natural Resources, James River Coal and Patriot Coal. James River Coal and Patriot Coal have been dismembered in bankruptcy. Alpha has a request pending at its bankruptcy court to auction its primary assets, with lenders to get a priority crack at them.
- An effective interest rate of 5 percent for the first six months of the loan facility (or until the DIP is drawn) and 10 percent thereafter – far lower than any comparable DIP facility.
- A delayed draw feature that is far more flexible and less costly to the Debtors than an immediate draw (which would require the Debtors to begin paying interest on the entire principal amount immediately).
- Financial covenants and milestones that are reasonable and achievable, and that have been amended in recent days to further benefit the Debtors and their estates, including to grant the Debtors access to an additional $75 million in liquidity.
- A bonding carve-out that has enabled the Debtors to fulfill their self-bonding obligations in the State of Wyoming by having to obtain only approximately $17 million of third-party surety bonds, which is critical to the Debtors’ continued successful operations in Wyoming, where 84 percent of their coal is produced.
- Substantial incremental liquidity to the Debtors, to the tune of nearly $265 million.
- The ability to access, and spend, over $100 million of cash collateral, which would not be available outside of the context of the DIP Financing package that was negotiated with the secured lenders.
“These terms are particularly noteworthy in light of the unprecedented challenges facing the coal industry, which have made financings on favorable (or any) terms difficult to find,” Arch Coal added.
It said that four of the objections to this finance package rise and fall on the argument that the Debtors – even without access to the DIP – have unfettered access to approximately $620 million in cash. “They do not,” Arch said. “Absent the DIP Financing, the Debtors do not have the consent of their secured lenders to use Prepetition Collateral, including cash, and the Debtors’ minimal unencumbered assets would not offer sufficient liquidity to maintain the Debtors’ operations. The last of the five Objections betrays a misunderstanding of the bonding carve-out, and was filed despite the fact that the Debtors had previously agreed to amend the Final Order to allay the stated concerns.
“The Objectors also seek cherry-picked modifications to the financing and adequate protection package to serve their interests. Some of the disputed terms fall squarely within the Debtors’ business judgment; other terms are supported by unambiguous case law; and still other terms have been modified in a good-faith effort to resolve the disputes. Not one of the disputed terms provides grounds for denying the DIP Motion, and the Objectors do not have a line-item veto that permits them to modify the DIP Financing to suit their preferences.”
The following parties filed Objections to the DIP Motion: the Official Committee of Unsecured Creditors; Wyoming Machinery Co.; Cecil I. Walker Machinery Co.; Whayne Supply Co.; Boyd Fabrication Inc.; and the Western Organization of Resource Councils. Kinder Morgan Inc. filed a joinder to the committee’s objection.
St. Louis-based Arch Coal filed for Chapter 11 protection on Jan. 11, saying it had already worked out a financial arrangement with lenders that should get it out of bankruptcy quickly and largely intact. It is one of the nation’s largest coal producers.