Drilling Down on Strategic Alternatives in the Current Energy Crisis: Finding Hidden Value in Financial Distress (May 13, 2015)

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<ol><li> 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 </li><li> 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&amp;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 &amp; 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 &amp; Crutcher LLP, M1 Energy Capital, or OFSCap. Parties are urged to consult their own advisors for such advice. </li><li> 3. Speakers 3 Trent Rosenthal (moderator) | Restructuring &amp; 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 &amp; gas restructurings and workouts James (Jim) C. Row, CFA | Managing Director &amp; Founder OFSCap, LLC Background in energy investment banking (international/domestic) Securities and valuation expert Former E&amp;P operator and former CFO Michael Rosenthal | Co-Head, Restructuring &amp; Reorganization Practice Gibson Dunn Represents debtors/creditors in complex, high profile national &amp; 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 </li><li> 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 </li><li> 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 </li><li> 6. Acquisitions of Distressed Assets and Businesses </li><li> 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&amp;P and Service Companies Significant Distressed Investment Opportunities Reasons Distressed Investing Presents Opportunities WHO ARE TODAYS ASSET BUYERS? </li><li> 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 </li><li> 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 </li><li> 10. Out of Court Acquisitions 10 </li><li> 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 </li><li> 12. Section 363 Acquisitions </li><li> 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 </li><li> 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 </li><li> 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 </li><li> 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 </li><li> 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 </li><li> 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 court approval Chapter 11 Filing Lock up Debtor in Possession Financing Evaluate DIP lending options Great way to lock up the case and deadlines, etc. and excellent interest rate and fees Advantages to provide DIP loan by pre-petition lender, i.e. rollover Court establishment of bid procedures Post-petition marketing or auction Sale hearing Closing 18 </li><li> 19. Considerations for Stalking Horse </li><li> 20. Considerations for Stalking Horse Advantages to the Stalking Horse Control of the initial terms of the transaction to set the standard Ability to influence the pacing of the transaction Generally has a head-start on due diligence and a longer period of negotiation with the Seller Regulatory issues In a regulated industry, Stalking Horse has opportunity to work with regulators to develop plan to obtain approval of acquisition Ability to begin seeking approvals and start waiting periods running prior to the auction process Opportunity to develop the confidence of the Seller, estate representatives and other constituents, and to develop relationships with management Stalking Horse has opportunity to obtain break-up fee or expense reimbursement 20 </li><li> 21. Considerations for Stalking Horse Risks and concerns for the Stalking Horse o Tethered Goat and Illusory Purchase o Investment of Stalking Horse will ultimately be used for the benefit of the debtor (including by making some material discovered or developed by the Stalking Horse available to other bidders) o Stalking Horse creates a clear target that other bidders know they need to beat o Court may refuse to approve agreement with Stalking Horse due to factors such as break-up fees, no-shops, overbid protections and lock-ups If court refuses to approve, proposed Buyer is faced with modifying agreement or losing deal 21 </li><li> 22. Acquisitions through Pre-Packaged Plans </li><li> 23. Types of Purchases through Plans (Buying assets) or (providing planned funding) in exchange for ownership of reorganized entity Purchases may be structured during the Chapter 11 process or in connection with a more streamlined pre-negotiated or pre- packaged Chapter 11 filing Pre-packaged and pre-negotiated bankruptcies: o Plan is negotiated with key constituencies prior to filing Pre-packaged bankruptcy: o Solicitation and vote occur prior to the filing o Company can typically emerge within six months of filing Pre-negotiated bankruptcy: o Solicitation and vote occur during the case o lock-up agreements generally require certain constituencies to vote in favor of Plan o Typically longer in duration than a pre-packaged bankruptcy, but significantly shorter than a free-fall bankruptcy 23 </li><li> 24. Acquiring Assets Through a Plan in Contrast to a 363 Sale 363 Purchases o Occurs during the case and often well before plan confirmation o Not dependent on meeting requirements of plan confirmation; however, sale must not be a sub rosa plan o Since creditor constituencies have no vote, must conduct as an open or public sale Purchases through a Plan o Occur as part of the Plan confirmation process o Creditors must vote to confirm the plan o Confirmation of plan equals approval of the purchase o Much lengthier, more expensive and complicated process o Structure is often far more flexible 24 </li><li> 25. Benefits of Purchasing Assets Under a Plan Despite stringent confirmation process, purchasing assets through a Plan allows purchaser more flexibility than a purchase of assets through 363 sale o Can purchase assets or acquire equity in reorganized entity o 363 sale purchaser can only offer dollars (or a credit bid) and cannot dictate which creditors obtain what portion of purchase price nor can it reorganize capital structure o Greater ability to obtain protection from successor liability o Greater ability to avoid competitive bidding o Ability to obtain protection from future asbestos and other tort liability Appointment of future claimants representative Section 524(g) statutory trusts Competitive bidding not generally required in plan context if creditors vote to confirm the plan o Different rule for new value contributions from equity owners 25 </li><li> 26. Investing in Distressed Debt </li><li> 27. Comparison of Distressed Investment Approaches 27 PURCHASE OUTSTANDING DEBT NEW MONEY INVESTMENT Purchase large portion of outstanding debt securities at levels below par Anticipate recapitalization transaction that converts fulcrum debt issue into equity (at face value) Or, refinancing/restructure transaction that results in appreciated debt return Investor injects new equity and/or debt capital into liquidity-starved situation Allows investor to capture discount in firm trading value If situation improves materially and recapitalization does not occur, investor can still realize attractive returns through sale of debt position at improved prices Provides investor with greater control Able to privately negotiate transaction terms May be difficult to acquire large position No inherent control over process/timing/ governance Situation may deteriorate and investor may no longer hold the fulcrum security Loan docs/intercreditor may limit options Debtors cards...</li></ol>