United States: Foresight Energy Refinancing Results In Big Win For Stroock's Clients

Due to a combination of factors, including a winning litigation strategy and execution thereon, noteholders represented by Stroock and Houlihan Lokey in the Foresight Energy situation, whose notes traded as low as 70% of par, recently benefited from a redemption at par plus a make-whole premium. Noteholders also received and still hold warrants that could have significant value. All in, the Foresight matter was a huge victory for the noteholders and a case study in how pushing back on an issuer's overreach can pay large dividends.

This Stroock Special Bulletin details how that victory was achieved.

Chancery Court Litigation

In early 2015, the founder of Foresight Energy LP (together with its subsidiaries, "Foresight"), Christopher Cline, agreed to sell control of Foresight to a competitor, Murray Energy Corporation ("Murray Energy"). Foresight and Murray Energy attempted to structure the sale to avoid triggering the change of control provision contained in the indenture governing Foresight's $600 million in 7.875% senior unsecured notes due 2021 (the "Prior Notes"). That provision obligated Foresight to make an offer to purchase the Prior Notes at 101% of par upon a change of control.

After initial attempts to negotiate a consensual resolution failed, the indenture trustee for the Prior Notes, represented by Stroock and Young Conaway Stargatt & Taylor, LLP, filed a lawsuit on May 22, 2015 in the Delaware Court of Chancery, claiming that the sale triggered the change of control provision and required Foresight to make an offer to purchase the Prior Notes. While the language of the indenture at issue was common to many indentures, several of the arguments crafted and argued by Stroock in the litigation had, to our knowledge, never been decided or even argued in a reported case.

On December 4, 2015, Vice Chancellor J. Travis Laster issued a decision holding that the issuers' failure to make a timely offer to purchase the Prior Notes constituted an "Event of Default" under the governing indenture. The decision was a matter of first impression on several critical issues and expanded the protections now available to bondholders when an issuer seeks to assert that it has "structured around" the change of control obligations under an indenture.

Restructuring Negotiations

Due to the decision, Foresight faced bankruptcy if it could not reach a consensual restructuring of its entire $1.4 billion capital structure. At that point, Stroock and Houlihan, together with our clients, entered into protracted negotiations with Foresight, its two equity sponsors, Cline and Murray Energy, and the first lien bank group concerning the terms of new debt instruments and governance documents for Foresight.

Ultimately, our clients and the other third-party holders of the Prior Notes received a 100% recovery, comprised of:

  • approximately $105.4 million in cash;
  • approximately $333.9 million in senior secured second lien PIK notes due 2021 (the "Second Lien Notes");
  • approximately $120 million in senior secured second lien exchangeable PIK notes due 2017 (the "Exchangeable PIK Notes"); and
  • warrants to acquire 4.5% of the adjusted fully diluted equity of Foresight Energy LP (subject to certain anti-dilution protections) exercisable if the Exchangeable PIK Notes are timely redeemed or otherwise retired.

Stroock, Houlihan, and our clients developed the package of consideration to allow our clients to share in any resurgence in the post-restructuring value of Foresight while ensuring that they would be protected should no such resurgence occur.

Second Lien Notes

The Second Lien Notes accrued interest at 9% per annum until August 15, 2018 and 10% per annum thereafter payable in cash and 1% per annum until maturity payable in kind and had a customary "T+50" basis point make-whole premium if redeemed prior to August 31, 2018.

Because the Second Lien Notes were senior secured instruments, our clients were protected should Foresight's equity value ultimately return to distressed territory. However, the make-whole premium ensured that our clients would receive a substantial recovery upon a redemption prior to August 31, 2018.

Exchangeable PIK Notes

The Exchangeable PIK Notes would exchange automatically into 75% of the equity of Foresight if not redeemed within approximately 13 months of issuance. This automatic exchange ensured that holders would be protected whether or not Foresight could afford to timely redeem the notes. In the event of a redemption of the Exchangeable PIK Notes, holders would be paid 15% annual interest accrued since issuance. If Foresight was not able to timely redeem the notes, the holders of such notes would benefit from the deleveraging of the company's capital structure as the new majority equity owners of Foresight.

Because that benefit would come directly at the expense of Murray Energy, Murray Energy had a strong incentive to instead cause Foresight to timely redeem the notes. We put further pressure on Murray Energy to use all efforts to redeem the Exchangeable PIK Notes by negotiating terms that would cause Murray Energy to lose significant control rights over Foresight should the notes not be timely redeemed.

Like the Second Lien Notes, the Exchangeable PIK Notes were senior secured instruments, providing our clients with protection should  Foresight's equity value ultimately return to distressed territory.

Warrants

While the payments owed to holders upon a redemption of the Exchangeable PIK Notes would be substantial, such a redemption would prevent those holders from participating in the equity upside from the presumably growing business of Foresight.

To provide such equity upside, Stroock, Houlihan, and our clients negotiated for the non-affiliate holders of the Exchangeable PIK Notes to receive warrants exercisable into 4.5% of the adjusted fully diluted equity of Foresight Energy LP (subject to certain anti-dilution protections) upon a redemption of the Exchangeable PIK Notes.

Foresight Announces Refinancing

On March 28, 2017, the work that went into structuring this package came to fruition when Foresight announced that it had refinanced both the Second Lien Notes and the Exchangeable PIK Notes for cash and at a price equal to par plus accrued and unpaid interest, as well as the make-whole premium on the Second Lien Notes.

The redemption allows holders of Foresight debt to realize the value in their warrants, which may now be exercised and used to acquire valuable newly issued common units of Foresight Energy LP at a highly discounted price.

The value of the cash and equity that our clients received far exceeded their likely return had the litigation not been prosecuted and won and the subsequent restructuring not been crafted as carefully as it was.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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