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  1. 1. Drilling Down on Strategic Alternatives in the Current Energy Crisis Part III: Finding Hidden Value in Financial Distress Wednesday, May 13, 2015 12:00-1:00 pm Central WEBINAR SERIES
  2. 2. Housekeeping Items This Webinar is Being Recorded A recording of todays webinar will be emailed after the webinar. We will also have the recording on our website (www.burlesonllp.com) We Welcome Questions Enter questions into the Questions Pane and we will respond in the Q&A session at the end Think of Something Later? Email marketing@burlesonllp.com 2 DISCLAIMER: The viewing of online seminars and the use of the Internet for communications with Burleson LLP, Gibson, Dunn & Crutcher LLP, M1 Energy Capital, and OFSCap will not establish an attorney-client or other relationship and messages containing confidential or time-sensitive information should not be sent. In order to protect past, present or potential clients, we cannot treat unsolicited e-mails as confidences or secrets. Nothing contained herein shall constitute legal or other professional advice from, or to create an attorney-client or other relationship with, any of Burleson LLP, Gibson, Dunn & Crutcher LLP, M1 Energy Capital, or OFSCap. Parties are urged to consult their own advisors for such advice.
  3. 3. Speakers 3 Trent Rosenthal (moderator) | Restructuring & Reorganization Partner Burleson LLP Board Certified in Business Bankruptcy Law by the Texas Board of Legal Specialization Over 3 decades of experience in restructuring and bankruptcy law Handled numerous oil & gas restructurings and workouts James (Jim) C. Row, CFA | Managing Director & Founder OFSCap, LLC Background in energy investment banking (international/domestic) Securities and valuation expert Former E&P operator and former CFO Michael Rosenthal | Co-Head, Restructuring & Reorganization Practice Gibson Dunn Represents debtors/creditors in complex, high profile national & cross-border restructurings and Chapter 11 cases Provides insolvency-related board advice to large public and privately held companies Experience with corporate separateness and successor strategies and defenses Rich Bernardy | Managing Director M1 Energy Capital Over 25 years of banking and finance, management and entrepreneurial experience Experience includes project and structured finance, private equity, debt securities, sponsorship of equity investments, financial risk management, accounting, forecasting and capital budgeting
  4. 4. Agenda Overview of Distressed Investments Out of Court Acquisitions Section 363 Acquisitions Acquisitions Through Chapter 11 Plans Investing in Distressed Debt Risks of Distressed Investments 4
  5. 5. Goals Give you a better understanding of options for acquiring distressed assets Highlight specific action items and concerns Provide practical advice on investing in distressed debt and risks of distressed investments 5
  6. 6. Acquisitions of Distressed Assets and Businesses
  7. 7. 7 Major Capital in The Marketplace Overleveraged Capital Structures Record Leveraged Loan and High Yield Issuance Not So Smart Money Chased Return in Historic Low Interest Rate Setting Expected Increase in Corporate Default Rates Weak Oil and Gas Pricing Pressures on E&P and Service Companies Significant Distressed Investment Opportunities Reasons Distressed Investing Presents Opportunities WHO ARE TODAYS ASSET BUYERS?
  8. 8. Out of Court Distressed Asset Purchases Asset Purchases (within Chapter 11) o Acquisition of a distressed companys assets or businesses through section 363 sale or through plan o Purchase subject to auction process o Purchase at fair market value; days of bargain basement prices are long gone Debt Purchases o Debt for return - Acquiring debt of distressed company with goal to exert control over refinancing/restructuring/right-sizing of the company and realize appreciation o Loan to own - Acquiring debt of distressed company with goal of leveraging the rights of that debt into ownership of the company o Debt can be purchased for less than 100% o Analysis of capital structure, applicable documents and company-side leverage is critical 8 General Overview of Acquisition Alternatives
  9. 9. Chapter 11 Distressed Investment Methods 9 363 SALE PLAN SALE CLAIMS PURCHASE/LOAN TO OWN PLAN FUNDING May be quicker than a plan sale Transaction can be consummated over creditor objections Assets can be acquired free and clear of claims, liens and encumbrances More flexibility in terms of form and timing of consideration No need to register securities issued in the transaction Assets can be acquired free and clear of claims, liens and encumbrances Capitalize on discount between fair market value and trading price of claims Ability to block competing plans Ability to drive plan structure from fulcrum position May be appealing to existing equity depending on valuation May be appealing to banks if cash is used to reduce leverage Subject to higher and better offers (buyer may be used as a stalking horse) Auction procedures will be imposed Can not influence structure of POR More costly and time- consuming Buyer may become embroiled in plan conflicts Ability to consummate sale depends on creditor acceptance May be subject to higher and better offers Attempt to convert to equity may be thwarted Management has right to exclusivity and can lock-up major parties- in-interest Investment may be illiquid Purchases of equity could destroy certain tax benefits Investment will likely be subject to market tests Success may depend on debtors need for an equity infusion Advantages Disadvantages
  10. 10. Out of Court Acquisitions 10
  11. 11. Overview of Out of Court Distressed Acquisitions 11 Many acquisitions occur without the filing of a Chapter 11 case When the seller is in financial distress, however, the value of the business makes it risky and unwise to buy equity of the seller Purchasing assets of a company in financial distress pose issues and risks for the purchaser. First, seller may not be able, with certainty, to convey title to assets free and clear. Second, purchaser will have risk of successor liability and risk that transaction will be avoided as a fraudulent conveyance The avoid these risks, many purchasers of distressed assets require that the sale be consummated through a Section 363 sale or Chapter 11 plan
  12. 12. Section 363 Acquisitions
  13. 13. Section 363 Purchase of Assets Free and Clear of Liabilities Chapter 11 allows a company to reorganize and continue operations as a going concern If distressed company cannot restructure or refinance, the only recourse may be a sale of the business Section 363 of the Bankruptcy Code authorizes a trustee or debtor in possession to sell property of the bankruptcy estate Assets may be sold as a going concern, or in a piecemeal break-up of the company The debtor must obtain the highest and best value for the assets 13
  14. 14. Benefits of 363 Sale Buyer Allows Buyer to acquire business or assets free of liabilities and adverse claims Eliminates fraudulent transfer risk Reduces successor liability risk Potential stalking horse protections Court blesses the purchase 14 Seller No need for stockholder approval of sale Provides protection to directors and officers of Seller against good faith based claims Reduced stress in dealing with remaining liabilities and adverse claims Court blesses the sale
  15. 15. Negatives to 363 Sale Buyer 363 sale requires bankruptcy auction process in most cases (even if auction was conducted pre-bankruptcy) Gives Buyer reduced assurance of successful acquisition and may have to negotiate deal twice Lengthens sale process Break-up fees, expense reimbursement, overbid protections and agreed sale procedures may be altered by the Bankruptcy Court 15 Seller Requires chapter 11 filing which may adversely affect the business Employee defections, shortening of vendor terms, customer fears Bankruptcy option is expensive Company actions are under microscope
  16. 16. Limitation of Section 363 Sale Option Sale must not be a sub rosa plan that circumvents the Chapter 11 plan process; limits ability to impact how purchase price consideration is distributed Assets can only be sold free and clear if one of the following apply: Applicable law allows the sale free and clear Property is to be sold for more than the aggregate value of all liens on the property If sold for less than value of liens, the lien holder consents or the lien is in bona fide dispute The lien holder could be compelled to accept a money satisfaction Lien holders and DIP lender are key players and may, in fact, be the buyer 16
  17. 17. Credit Bidding Limitations In re Fisker Automotive Holdings, Inc. o Court in Delaware capped credit bid amount to amount holder paid for the debt, and not face value, to encourage competitive bids. o See also In re Free Lance-Star Publishing In re Momentive (upheld on appeal on 5/4/2015) o The Court held that the lenders were not entitled to a make whole and other prepayment penalties upon acceleration of the debt caused by a bankruptcy filling, unless the agreement expressly provides for same upon acceleration. Moreover, the lenders were crammed down to an interest rate using a formula approach (e.g. T-Bill rate plus small risk premium) and not a market rate interest In re R.L. Adkins Corporation o The Fifth Circuit held that a creditor/prospective purchaser failed to timely exercise its credit bid rights and therefore would lose the right 17
  18. 18. 363 Process Stages Pre-petition marketing and negotiation with potential buyers Indications of interest and letters of intent Formal executed agreement with lead bidder (the Stalking Horse); debtors obligation is subject to cour

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