CASE PROFILE: Armstrong Energy first liens to serve as stalking horse in Chapter 11 auction - Debtwire

CASE PROFILE: Armstrong Energy first liens to serve as stalking horse in Chapter 11 auction

01 November 2017 - 12:00 am

Armstrong Energy entered Chapter 11 this morning with a restructuring support agreement (RSA) backed by holders of 78% of its USD 191m 11.75% first lien notes, who have agreed to serve as stalking horse bidder in an auction for the reorganized company.

The first lien lenders would credit bid USD 90m of their notes for 100% of the company’s post-restructuring equity. The debtor will run a 45-day marketing process in search of competing offers, with a goal of closing a sale of their assets by 24 February 2018.

Judge Kathy Surratt-States of the US Bankruptcy Court for the Eastern District of Missouri has scheduled a first day hearing for Thursday, 2 November at 1:15pm CT. The company is asking the court for approval to use cash collateral to fund its case and is not seeking debtor-in-possession financing.

CLICK HERE to view all Armstrong Energy Chapter 11 filings on Debtwire Dockets.

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The company

St. Louis, Missouri-based Armstrong is a producer of low-chlorine and high-sulfur thermal coal from surface and underground mines in the Illinois Basin coal region in Western Kentucky. The company operates three coal processing plants and markets its coal to proximate and investment grade utility electric companies to use as fuel in their generators.

Armstrong operates five active mines, all located in the Illinois Basin, controlling 445 million tons of proven and probable coal reserves in five Western Kentucky counties.

At the petition date, private equity firm Yorktown Partners owned substantially all of the company’s equity.

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The debt

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The 11.75% first lien notes last traded this morning at 13.6, up from 12.5 on 2 October, according to MarketAxess.

The descent

The restructuring started in earnest more than a year ago – Debtwire reported last October that an ad hoc group of first lien lenders had retained Houlihan Lokey as financial advisor following Armstrong’s retention of MAEVA Group as financial advisor and Kirkland & Ellis as legal counsel.

In December 2016, peer Rhino Resource Partners Holdings entered into an agreement with Royal Energy Resources, a Charleston, South Carolina-based distressed energy investment firm, to acquire Yorktown Partners’ 97% stake in Armstrong. The transaction, structured as a put call option, ultimately gave Rhino a 51% stake in Armstrong on a fully diluted basis. But since Yorktown also owned Rhino, Armstrong’s ultimate parent remained the same.

Thoroughbred Resources, another Yorktown-owned company, has gradually taken full control of Armstrong’s land and mineral reserves over the past six years. The parties entered into agreements in 2011 that allowed Armstrong to defer lease payments to Thoroughbred, in exchange exercising a sale-leaseback option that gave ownership of portions of Armstrong’s mineral reserves to Thoroughbred, which would then lease it back to Armstrong. By June 2016, Thoroughbred had obtained a 79.19% interest in the jointly-owned properties. A March 2017 settlement gave Armstrong’s remaining 20.81% interest to Thoroughbred.

As of 31 March 2017, Thoroughbred had taken all of Armstrong’s mineral properties and held a USD 171m claim against the company through the sale-leaseback transactions. Armstrong claimed in a 10Q report filed with the Securities and Exchange Commission for 2Q17 that it had suffered 24 months of operating losses and that there was substantial doubt about its ability to continue as a going concern over the next year.

On 2 February 2017, an ad hoc group of first lien lenders issued two letters claiming that the stock arrangement between Yorktown and Rhino constituted a change of control at Armstrong and that an event of default occurred when the company did not purchase the first lien notes within 30 days of that event. The first liens did not pursue remedies at that time, and on 15 June Armstrong missed a USD 1.75m semiannual interest payment on the notes and failed to cure the default within 30 days. Debtwire reported on 16 June that the first liens had retained Paul Weiss as legal counsel.

Despite those troubles, Armstrong and holders of 79% of the first lien notes entered a forbearance agreement through 14 August, later extended to 29 September.

Armstrong announced on 6 October that it had entered into a restructuring support agreement (RSA) with holders of USD 156m, or 78%, of the first lien notes that extended forbearance to 31 October as the parties worked to finalize a plan. The RSA included Knight Hawk Coal, an Illinois miner that agreed to operate Armstrong’s assets in a joint venture structure.

Debtwire reported on 10 October that the plan would give holders of the USD 191m first lien notes a payout from the company’s balance sheet cash. As of 30 June, Armstrong had USD 43.2m in cash, estimated to decline to USD 25m once the company paid advisor fees. A Debtwire source asserted that Knight Hawk was a lower-cost operator that would be able to significantly cut down overhead. Bondholders would see a split of the company’s future earnings, estimated to be USD 50m – USD 75m over five years. The company also reached a new go-forward royalty agreement with Thoroughbred that set Armstrong up to make lower recurring payments.

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The plan

Despite those early October agreements, the actual proposed plan will have the company move to sell its assets in a sale process backed by the first lien lenders.

The first lien bid consists of a USD 90m credit bid of their debt in exchange for 100% of the equity in NewCo, a new holding company that will hold all of Armstrong’s assets and certain liabilities. Knight Hawk will still operate the company’s post-reorganization assets and will receive a portion of the equity in exchange for funding to pay off cure costs. Thoroughbred will still enter into an amended royalty rights agreement.

The buyer would also assume the debtor’s asset retirement obligations while holders. Holders of general unsecured claims would receive their pro rata share of certain residual and unencumbered assets once all senior claims have been satisfied.

The RSA requires the company to file a plan and disclosure statement within seven days of the petition date; approval of the disclosure statement within 60 days of the petition date; plan confirmation within 100 days of the petition date; and sale closing within 15 days of the confirmation order.

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The advisors

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The case is In re: Armstrong Energy Inc, number 17-47541, in the US Bankruptcy Court for the Eastern District of Missouri.

CLICK HERE to view the petition.
CLICK HERE to view the first day declaration.
CLICK HERE to view the cash collateral motion.

by Pat Holohan and Paul Gunther