In bankruptcy cases, things often move more slowly than people would like or expect. In addition to dealing with oversight by the bankruptcy court and the United States Trustee, a debtor typically spends significant time engaging with its lenders and secured creditors, committees of unsecured creditors, and any number of other key stakeholders. Court approval is needed for most significant events in the case, for anything out of the ordinary course of business, and, at times, even for small matters. Transparency, adequate notice and opportunity to object, and due process are hallmarks of an effective bankruptcy case. And all the while, chapter 11 costs and expenses continue to mount as the debtor pushes forward in its efforts to reach the goal line – confirmation of a plan of reorganization, consummation of a section 363 sale, a structured dismissal, or some other exit strategy.
With this as background, a seventeen day long bankruptcy case becomes all the more dramatic. On March 27, 2016, Southcross Holdings LP and affiliated debtors each filed chapter 11 cases in the Southern District of Texas, Jointly Administered Case No. 16-20111. Less than three weeks later, their plan of reorganization was confirmed and had gone effective.
The Southcross debtors, together with non-debtor subsidiaries and affiliates, provide a number of services across the “midstream” oil and gas sector. According to court filings, Southcross collectively “owns and operates approximately 4,000 miles of pipelines, two sour gas treating facilities, three processing facilities, two fractionating facilities, and one facility with both processing and fractionating capabilities.” The debtors’ most valuable assets, however, were their ownership interests in two non-debtor entities, one of which is publicly traded, who “carry out the majority of operations and drive value enterprise wide.” The emergency timing in the case was primarily due to the need of these two non-debtor entities to issue a clean audit report by April 15, 2016, which in turn was dependent upon the successful consummation of the debtors’ restructuring. Failure to so issue the audit report would have caused a default and potentially dragged these two entities into the bankruptcy cases, destroying value along the way.
But, under applicable Bankruptcy Rules, at least 28 days’ notice of a proposed disclosure statement must be given. The big questions are how the debtors were able to accomplish plan confirmation so quickly and can other oil and gas companies learn something from the strategies employed?
Boiling it down, the facts of this case were very unique. Over a three month period, the debtors and their advisors successfully negotiated a Restructuring Support Agreement and a fully consensual prepackaged plan of reorganization prior to commencing the bankruptcy case. The cornerstone of the plan was a $170 million new money equity infusion, half of which would be initially funded as DIP financing and then converted into new equity upon emerging from bankruptcy, and a significant deleveraging of the balance sheet. Importantly, unsecured creditors were paid in full and the plan received nearly unanimous support from all parties. Only one objection to confirmation was filed by a term lender, which was ultimately overruled.
But the key was getting the bankruptcy court comfortable that due process was given and that parties had received a full and fair opportunity to object. The debtors went to great lengths to demonstrate that they had given ample notice, including by contacting every creditor in an impaired class to ensure that actual notice was given and to solicit votes. As a result of these efforts, the debtors were able to represent to the court that 100% of impaired creditors either had (a) signed on to the Restructuring Support Agreement, (b) actually cast a vote on the plan, or (c) received actual notice and provided no indication that they objected on due process grounds.
Taken together, the circumstances of this particular restructuring were indeed very unique. Had there not been consensus prepetition, had unsecured creditors not received payment in full, had the plan not been accepted nearly unanimously, had the debtors not undertaken extensive noticing efforts, the results would likely have been very different. The lesson to be learned is one for all parties involved in distressed situations: recognize that through building consensus and achieving a negotiated resolution before commencing the case, value will be maximized and the time spent in a chapter 11 proceeding could be drastically reduced. Too many times, prepetition efforts to reach a negotiated resolution fail for the wrong reasons. If resolution can be achieved, the end result could be much less painful for all involved – and may be over in as quick as seventeen days.