Arch Coal’s relatively fast bankruptcy reorganization hits a speed bump

The U.S. Bankruptcy Court for the Eastern District of Missouri is due for a July 6 hearing on a June 23 petition by the Official Committee of Unsecured Creditors in the Arch Coal bankruptcy case asking for the appointment of a mediator to work out ssues among the committee, Arch Coal and the ad hoc group of first lien lenders (called the “Lender Group”) over Arch Coal’s latest reorganization plan.

Said the committee in its June 23 petition: “These chapter 11 cases are at an important crossroads. Over the past 8 weeks, the Committee, the Debtors, and the Lender Group have been engaged in substantial, and often contentious, negotiations over the terms of a chapter 11 plan that would resolve all major case issues, provide unsecured creditors with meaningful distributions, and avoid the cost and delay associated with litigation. While those negotiations initially bore fruit, the parties’ successes were short-lived. After reaching an agreement in principal on the terms of a global settlement at the end of May, the parties were ultimately unable to agree on the final, documented terms of the agreement in the weeks that followed.

“As a result of the breakdown in negotiations – and the Lender Group’s unwillingness to further extend the Committee’s challenge period under the Final DIP Order – the Committee was forced to file motions seeking authority to pursue estate claims against the first lien lenders and certain of the Debtors’ directors and officers, and the Debtors filed a new Plan and Disclosure Statement shortly thereafter.

“The Committee strongly opposes the new Plan. The new Plan and Disclosure Statement contain a never-before-seen settlement of the estates’ claims for inadequate or no consideration, and provide materially different (and insufficient) treatment for unsecured creditors. Absent a resolution of the issues surrounding plan confirmation and the prosecution of estate claims, these cases could easily devolve into lengthy and expensive litigation.

“Importantly, however, all of the parties appear to agree that consensus should be reached, and that such consensus is in the best interests of all creditors and the estates. In fact, the Committee remains hopeful that even before this Motion is heard by the Court, the parties may resolve their issues. However, assuming the parties are unable to resolve their differences, the Committee submits that the appointment of a mediator is the best means of achieving a settlement. The oversight of a mediator and the structure of a formal mediation will force each of the parties and their principals to the table to address Plan issues, including most importantly the treatment of unsecured creditors under the Plan.

The committee said a brief delay now to allow for mediation could yield enormous dividends and avoid the long delay that would certainly result from a “litigation Armageddon.”

St. Louis.-based Arch Coal is a leading coal producer and marketer, with 128 million tons of coal sold in 2015. Arch is the most diversified U.S. coal company, representing over 13% of America’s coal supply from active mining complexes in Wyoming, Colorado, Illinois, West Virginia, Kentucky and Virginia. It filed for Chapter 11 bankruptcy protection on Jan. 11, saying it had a deal worked out with lenders that should allow a fast reorganization process.

Other creditors also join the call for mediation

On June 24, Bucks Funding LLC, GSO Aiguille Des Grands Montets Fund I LP, GSO Aiguille Des Grands Montets Fund II LP, GSO Aiguille Des Grands Montets Fund III LP, GSO Cactus Credit Opportunities LP, GSO Churchill Partners LP, GSO Coastline Credit Partners LP, GSO Credit-A Partners LP, GSO Palmetto Opportunistic Investment Partners LP, GSO Special Situations Master Fund LP, and Steamboat Credit Opportunities Master Fund LP (calling themselves the “Adversary Plaintiffs”), unsecured creditors of the debtors and certain parties in interest filed their own brief with the court.

They noted that on May 5, Arch Coal and subsidiaries filed an initial plan of reorganization and related disclosure statement. On May 27, the Adversary Plaintiffs commenced an adversary proceeding, which is something like a lawsuit and pursued at the bankruptcy court level, against the certain holders of First Lien Credit Facility Debt (called the “Directing Lenders”). In that complaint, the parties said that in July 2015, Arch Coal sought to de-lever its balance sheet and materially improve liquidity through an out-of-court restructuring that would have reduced its total indebtedness by nearly $1 billion, and lowered interest expense by approximately $74 million per annum (called the “Exchange Transactions”). The Exchange Transactions involved a series of exchanges whereby certain of Arch Coal’s unsecured creditors, including GSO, would have exchanged up to $1.6 billion of unsecured debt for up to $400 million of secured debt and certain other consideration.

Said the June 24 brief from the GSO companies: “Although the Exchange Transactions were in strict accord with the Credit Agreement governing the Company’s First Lien Loans, the Directing Lenders, as majority owners of the Company’s secured debt, fought the restructuring tooth and nail, and managed to block the Exchange Transactions by, among other things, improperly directing the Term Loan Agent under the Credit Agreement to refrain from executing the necessary administrative documents to consummate the exchanges under the guise of manufactured and meritless claims. In short, the Directing Lenders refused to live up to the express terms of the bargain they entered into when they acquired the Debtors’ secured debt. The Credit Agreement explicitly permitted the Debtors to issue an additional $400 million of secured debt. Accordingly, the Directing Lenders and the Debtors’ other secured lenders knowingly assumed the risk of dilution when they purchased their debt. But once the Debtors announced the Exchange Transactions, which turned that risk into a reality, the Directing Lenders sought to unilaterally rewrite the terms of their bargain by improperly and in bad faith blocking the Exchange Transactions from being consummated.”

On June 14, Arch Coal filed an amended plan of reorganization and related amended disclosure statement. Said the GSO companies: “The Amended Plan, among other things, purports to settle, pursuant to Bankruptcy Rule 9019, all claims against certain Released Parties (as defined in the First Amended Plan), including claims against the Directing Lenders related to their interference with the Exchange Transactions—the very claims that the Committee seeks to pursue via the Standing Motions and the very claims that the Adversary Plaintiffs are pursuing already against the Directing Lenders in the Adversary Proceeding.

“The Amended Disclosure Statement, among other things, fails to provide adequate information concerning the Adversary Proceeding—even though the Debtors intend on intervening in this litigation. And the Amended Plan itself is patently unconfirmable. It seeks, for example, to settle virtually all of the estate claims for inadequate or no consideration. And it fails to account for potential recoveries owing to the Adversary Plaintiffs based on the outcome of the Adversary Proceeding.

“In short, the parties are heading toward a long and costly litigation, involving a host of complex issues, and it is for this reason that the Adversary Plaintiffs respectfully join in the Committee’s Mediation Motion, so that the parties can make a final good faith attempt to resolve their disputes amicably and in an expedited fashion.”

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.