Dune Energy files for Chapter 11 Bankruptcy Protection | March 9, 2015
Dune Energy and 2 affiliates filed for protection under Chapter 11 of the United States Bankruptcy Code on March 9, 2015 In the United States Bankruptcy Court for the Western District of Texas (Austin Division) under Case No. 15-10336. Distress was caused by declining oil prices.
The Debtors in the proceedings are Dune Energy, Inc., Dune Operating Company and Dune Properties, Inc.
Donald R. Martin is the Chief Restructuring Officer of the debtors and debtors in possession (collectively, the “Debtors” or “Dune”) and discusses the filing:
“Dune Energy is an independent energy company that was formed in 1998 and operates through two wholly owned subsidiaries, Dune Operating and Dune Properties. Since May 2004, the Debtors have been engaged in the exploration, development, acquisition and exploitation of crude oil and natural gas properties in Texas and Louisiana. The Debtors’ interests in their oil and gas properties are held by Dune Properties, and their oil and gas operations are conducted by Dune Operating. The Debtors sell their oil and gas production primarily to domestic pipelines and refineries. The Debtors’ oil and gas properties cover over 74,000 gross acres across 15 producing oil and natural gas fields.
“As of September 30, 2014, the Debtors had outstanding obligations in the principal amount of approximately $37 million of borrowings and $2 million of letters of credit under the Amended and Restated Credit Agreement, dated as of December 22, 2011 (as amended, the “First Lien Credit Agreement”) among Dune Energy, as borrower, Bank of Montreal (“BMO”), as administrative agent, CIT Capital Securities LLC, as syndication agent, and the lenders party thereto (the “First Lien Lenders”). The Debtors also had outstanding obligations in the principal amount of approximately $67.8 million under the Floating Rate Senior Secured Notes due 2016 (the “Senior Notes”). The Debtors have granted liens on substantially all of their assets as security for their obligations under the First Lien Credit Agreement and the Senior Notes. The lien and security interests granted to secure the First Lien Credit Agreement are senior to those granted to secure the Senior Notes.
“The Debtors have experienced liquidity constraints due in part to borrowing base reductions under the First Lien Credit Agreement, and in August 2014, the Debtors were in default under the First Lien Credit Agreement due to the failure to meet certain covenant ratios in the First Lien Credit Agreement. As a consequence, the Debtors and the First Lien Agent entered into a number of amendments and forbearance agreements with respect to the First Lien Credit Agreement.
“To address the Debtors’ liquidity constraints and obtain additional working capital to further develop their oil and gas properties, Dune Energy entered into an Agreement and Plan of Merger dated September 17, 2014 (the “Merger Agreement”) with Eos Petro, Inc. (“Eos”) and Eos Petro Sub, Inc. (“Eos Sub”). On March 4, 2015, the Merger Agreement was terminated because Eos failed to close the tender offer and consummate the merger with Dune Energy. As a result, Eos is obligated to Dune Energy for approximately $5.5 million (the “Merger Termination Fee”) for their failure to perform under the Merger Agreement. On March 4, 2015, Dune Energy made a demand on Eos for the Merger Termination Fee. Following the termination of the Merger Agreement and facing dwindling liquidity, the Debtors determined that restructuring their affairs in Chapter 11 was in the best interests of their creditors and other stakeholders.
Dune’s Prepetition Organizational and Capital Structure
“Dune Energy was incorporated under the laws of the State of Delaware. Dune Operating and Dune Properties are wholly-owned subsidiaries of Dune Energy and were each incorporated under the laws of the State of Texas. The Debtors oversee their operations from their offices in Houston, Texas.
Dune’s Prepetition Capital Structure
“On December 22, 2011, Dune Energy, as borrower, BMO, as administrative agent (the “First Lien Agent”), and the First Lien Lenders entered into First Lien Credit Agreement, pursuant to which the First Lien Lenders made certain credit available to and on behalf of Dune Energy (the “First Lien Credit Facility”). As of September 30, 2014, the principal amount of approximately $37 million in borrowings and $2 million of letters of credit were outstanding under the First Lien Credit Facility (the “First Lien Obligations”).
“In connection with the First Lien Credit Agreement, the Debtors entered into that certain Amended and Restated Guarantee and Collateral Agreement dated as of December 11, 2011 (the “First Lien Guarantee and Collateral Agreement”) and the Amended and Restated Mortgage, Deed of Trust, Assignment of As-Extracted Collateral, Security Agreement, Fixture Filing and Financing Statement dated as of December 11, 2011 (the “First Lien Mortgage and Security Agreement”).1 To secure the obligations under the First Lien Credit Agreement, the Debtors granted first priority liens and security interests (the “First Liens”) on substantially all of the Debtors’ assets as described in the First Lien Credit Facility Documents (collectively, the “Prepetition Collateral”).2
“Dune Energy and U.S. Bank National Association (“U.S. Bank”), as trustee and collateral agent (“the Second Lien Trustee” and together with the First Lien Agent, the “Prepetition Agents”), are party to that certain Indenture (as amended, restated, supplemented, modified and/or refinanced from time to time, the “Second Lien Indenture”), dated as of December 22, 2011, pursuant to which Dune Energy issued $49,503,991 of its floating rate senior secured notes due 2016 (the “Second Lien Notes”). Holders of the Second Lien Notes (the “Second Lien Note Holders”) and the First Lien Lenders are collectively referred to herein as the “Prepetition Lenders”. As of September 30, 2014, the principal amount of approximately $67.8 million was outstanding under the Second Lien Notes (the “Second Lien Obligations”). The First Lien Obligations and the Second Lien Obligations are collectively referred to herein as the “Prepetition Debt Obligations”). In connection with the Second Lien Indenture, the Debtors entered into that Second Lien Collateral Agreement dated as of December 11, 2011 (the “Second Lien Collateral Agreement”) and the Second Lien Mortgage, Deed of Trust, Assignment of As-Extracted Collateral, Security Agreement, Fixture Filing and Financing Statement dated as of December 11, 2011 (the “Second Lien Mortgage and Security Agreement”). Pursuant to the Second Lien Loan Documents, the Debtors granted second priority liens and security interests (the “Second Liens” and together with the First Liens, the “Prepetition Liens”) on substantially all of the Prepetition Collateral.4 The priorities between the First Lien Lenders and the Second Lien Note Holders are governed by that certain Intercreditor Agreement, dated December 22, 2013, by and among the Debtors, BMO in its capacity as administrative agent under the First Lien Credit Agreement and U.S. Bank in its capacity as collateral agent under the Second Lien Indenture (the “Intercreditor Agreement”). The Second Liens are junior and subordinate to the First Liens.
“Dune Energy’s common stock is currently traded under the symbol “DUNR” on the OTCQB tier of the OTC Markets Group. Certain of the Second Lien Note Holders also own shares of Dune Energy’s common stock. As of May 9, 2014, the following Second Lien Note Holders beneficially owned more than five percent (5%) of the outstanding shares of Dune Energy’s common stock:
|Name of Beneficial Owner||Percent of Class|
|West Face Long Term Opportunities Global Master L.P.||14.9 %|
|Zell Credit Opportunities Side Fund, L.P.||6.3 %|
|TPG Funds||13.1 %|
|Strategic Value Special Situation Fund, L.P.||24.5 %|
|Highbridge International, LLC||5.0 %|
In addition, as of May 9, 2014, the Officers and Directors of Dune Energy also owned approximately 2.8% of the outstanding shares of common stock.
B. Dune’s Current Operations
“As noted above, Dune is an independent energy company engaged in the exploration, development, acquisition and exploitation of crude oil and natural gas properties in Texas and Louisiana. As of the Petition Date, the Debtors have 32 full-time employees. The Debtors are not a party to any collective bargaining agreements and have not experienced any strikes or work stoppages. The Debtors utilize the services of independent contractors to perform various field and other services.
“The Debtors’ primary focus has been development and exploration in their Gulf Coast properties to expand their reserve base through workovers and recompletions, field extensions, delineation of deeper formations within existing fields and exploratory drilling. The Debtors have also sought to grow their reserves through acquisitions of producing properties, leasehold acreage and drilling prospects in core operating areas that require minimal initial upfront capital. In evaluating acquisition opportunities, the Debtors have sought to acquire operational control of properties that they believe have a solid proved reserve base coupled with significant exploitation and exploration potential.
“The Debtors’ oil and gas properties cover over 74,000 gross acres across 15 producing oil and natural gas fields. The Debtors’ total proved reserves as of December 31, 2013 were 93.1 billion cubic feet of natural gas equivalent (“Bcfe”), consisting of 50.1 billion cubic feet of natural gas (“Bcf”) and 7.2 million barrels of crude oil (“Mmbbl”). At year-end 2013, the Debtors’ proved developed producing, or PDP, reserves of 23.6 Bcfe were 25.3% of their 93.1 Bcfe of total proved oil and natural gas reserves, the Debtors’ proved developed non- producing, or PDNP, reserves of 25.5 Bcfe were 27.4% of their total proved oil and natural gas reserves, and the Debtors’ proved undeveloped, or PUD, reserves of 44.1 Bcfe were 47.3% of their total proved oil and natural gas reserves.
“Approximately 58% of the Debtors’ total proved oil and gas reserves are located in three fields: Garden Island Bay, Leeville, and Bateman Lake. These fields have large acreage positions surrounding piercement salt domes. In the Garden Island Bay field, Dune controls sixteen (16) prospects and approximately forty (40) separate well locations. Dune maintains a 100% working interest in these prospects. At the Leeville field, Dune participates with a 40% working interest as a non-operator in a shallow drilling program encompassing five (5) to ten (10) primarily PUD locations per year. The Leeville field currently has twenty-eight producing wells, and Shoreline Energy is the operator and majority interest holder in the field. The Bateman Lake field has eleven (11) producing wells. The reserves attributed to the Bateman Lake field are 90% natural gas. As a result of low gas prices, the Debtors have not recently conducted drilling in this field.
“The Chocolate Bayou, Comite, and Live Oak fields comprise the Debtors’ next three (3) largest properties and consist of 26% of the Debtors’ total proved reserves. These assets are typically characterized as having fewer wellbores than the salt dome fields but present numerous opportunities for PUD drilling and fault blocks containing unproved reserves that have been identified with new 3-D seismic data. The remaining fields contain approximately 16% of the Debtors’ total proved oil and gas reserves and are characterized by occasional new drilling wells and workovers, but typically do not have the upside opportunities demonstrated in the other fields.
Events Leading to Chapter 11 and Prepetition Restructuring Initiatives
Events Leading to Chapter 11
“As described in detail above, as of September 30, 2014, Dune had outstanding Prepetition Debt Obligations of approximately $106.8 million. During 2014, as a result of a significant decline in oil prices, the Debtors’ revenues fell sharply. Although the Debtors were able to reduce expenses, the significant decline in revenue imposed a strain on the Debtors’ liquidity. Dune’s earnings before interest, taxes, depreciation, amortization and exploration expenses (“EBITDAX”) declined considerably from the prior year. For the twelve months ended December 31, 2014, Dune’s EBITDAX was $13.1 million, compared to EBITDAX of $20.6 million for the same time period in 2013. The reduction in Dune’s EBITDAX is primarily due to lower revenues. Revenues for the twelve months ended December 31, 2014 were approximately$43.0 million, compared to revenues of $55.5 million for the same time period in 2013. Although the Debtors’ $22.6 million in operating expenses for the twelve months ended December 31, 2014 were approximately $2.3 million (9.4%) less than the $24.9 million in operating expenses for the same time period in 2013, the decline in their revenues continued to outpace their cost savings efforts.
“In spite of their declining revenues, the Debtors continued to service their debt, making all scheduled interest installment payments on the First Lien Credit Facility and Second Lien Credit Facility. At the end of the second quarter of 2014, the Debtors were in default of the First Lien Credit Agreement due to the failure to meet certain covenant ratios in the First Lien Credit Agreement. In addition, on July 15, 2014, the First Lien Agent notified the Debtors that effective July 1, 2014, the Debtors’ borrowing base, which was $47.5 million at that time, would be reduced by $2.5 million and would be further reduced by $2.5 million each month until October 2014, resulting in a borrowing base of $37.5 million. The reduction in the borrowing base under the First Lien Credit Facility significantly restricted the Debtors’ liquidity.
“To address the Debtors’ liquidity constraints and obtain additional working capital to further develop their oil and gas properties, the Debtors engaged in numerous exploratory discussions with independent exploration and production companies regarding potential joint ventures or other strategic transactions. Prior to the Petition Date, the Debtors contacted a total of forty-five (45) prospective strategic and financial buyers. Thirty (30) of the companies declined to consider an acquisition of or merger with the Debtors. Fifteen (15) of the companies expressed an interest in considering an acquisition and proceeded with non-disclosure/standstill agreements, one of which was Eos.
“From May through July 2014, the Debtors received seven (7) indications of interest from potential buyers, including a non-binding indication of interest from Eos for the purchase of all of the Debtors’ outstanding shares of stock, with an estimation of the Debtors’ enterprise value at $140 million. After careful review of the indications of interest, the Debtors’ board of directors authorized the continued discussion and negotiation with Eos and one other prospective buyer in an effort to enter into a definitive agreement in connection with a merger transaction. As discussions continued, Eos lowered its offer price based on the Debtors’ enterprise value. The other interested party continued its due diligence review, but did not provide a formal offer.
“On September 17, 2014, Dune Energy, Eos, and Eos Sub entered into the Merger Agreement. The Merger Agreement provided for Eos Sub to commence a cash tender offer (the “Tender Offer”) for all of the issued and outstanding shares of the Company’s common stock for $0.30 per share payable to the holder in cash, without interest and less any applicable withholding taxes (the “Offer Price”), upon the terms and subject to the conditions set forth in the Offer to Purchase, dated October 9, 2014 (as amended or supplemented from time to time, the “Offer to Purchase”), and in the related Letter of Transmittal (the “Letter of Transmittal,” which, together with the Offer to Purchase and any amendments or supplements from time to time thereto, constitute the “Offer”). In addition to the Offer Price, Eos agreed to provide Dune Energy with sufficient funds to pay in full and discharge all of Dune Energy’s outstanding indebtedness and assume liability for all of Dune Energy’s trade debt, as well as fees and expenses related to the Merger Agreement and the transactions contemplated therein. The Offer Price was based on an implied enterprise value of $135.9 million.
“The Debtors also pursued alternative sources of financing to address their liquidity constraints. During the third quarter of 2014, the Debtors had executed non-disclosure agreements with five (5) potential financing sources and received four (4) term sheets from potential lenders for a new first lien debt facility that could replace the First Lien Credit Facility. In spite of this initial interest from potential financing sources, the Debtors’ negotiations with the potential financing sources proved unsuccessful.
“During the third quarter of 2014, the Debtors also engaged in discussions with the First Lien Agent regarding the reduction of the borrowing base and the default that occurred in the second quarter of 2014. The Debtors also informed the First Lien Agent that it would be unable to comply with certain covenant ratios in the First Lien Credit Agreement for the third quarter of 2014. The First Lien Agent indicated a willingness to grant the Debtors a forbearance under the First Lien Credit Facility if the Debtors entered into a strategic transaction.
“Following Dune Energy’s entry into the Merger Agreement with Eos, Dune Energy entered into the Forbearance Agreement and Fourth Amendment to Amended and Restated Credit Agreement (the “First Forbearance Agreement”) with the First Lien Agent and the First Lien Lenders. Under the First Forbearance Agreement, the First Lien Agent and First Lien Lenders agreed to a limited forbearance from exercising their rights and remedies with respect to the defaults under the First Lien Credit Agreement until December 31, 2014, unless earlier terminated in accordance with the terms of the First Forbearance Agreement. The First Lien Agent and First Lien Lenders also agreed to forego the October 1 reduction to the borrowing base and agreed to maintain the Debtors’ borrowing base at $40,000,000 until the next scheduled redetermination period.
“Following entry into the Merger Agreement, Eos commenced the Offer on October 9, 2014. On November 5, 2014, Eos informed Dune Energy that Eos Sub would not be able to complete the financing and consequently, would not be prepared to consummate the Offer, by the original expiration date of 12:00 midnight, New York City time, on November 6, 2014. Dune Energy, Eos, and Eos Sub then entered into a series of amendments to the Merger Agreement to extend the Offer to allow Eos Sub to complete the financing in order to fund the Offer and merger.
“On December 16, 2014, Eos informed Dune Energy that it could not complete the merger and Offer on the terms originally set forth in the Merger Agreement due to the recent severe decline in the price of oil. Due to such decline, Eos’ potential sources of financing for the merger and Offer were withdrawn. On December 22, 2014, Dune Energy, Eos, and Eos Sub agreed to extend the Offer’s expiration date to January 15, 2015 and the “End Date” set forth in the Merger Agreement to January 31, 2015 to allow the parties additional time to negotiate revised terms.
“In light of ongoing negotiations related to the Merger Agreement, on January 2, 2015, Dune Energy, the First Lien Agent, and the First Lien Lenders entered into the Amended and Restated Forbearance Agreement and Fifth Amendment to the Amended and Restated Credit Agreement dated effective as of December 31, 2014 (the “Second Forbearance Agreement”).
“Under the terms of the Second Forbearance Agreement, the First Lien Agent and the First Lien Lenders agreed to extend the limited forbearance until January 31, 2015, unless earlier terminated in accordance with the terms of the Second Forbearance Agreement. In addition, the First Lien Agent and the First Lien Lenders agreed to maintain the Debtors’ borrowing base at $40,000,000 during the forbearance period. The Debtors agreed to begin making monthly, rather than quarterly, interest payments to the First Lien Agent. The Second Forbearance Agreement also provided that all commitments of the First Lien Lenders under the First Lien Credit Agreement would terminate on January 31, 2015 without further notice.
“During January 2015, the Debtors continued to negotiate the revised terms of the Merger Agreement. Dune Energy, Eos, and Eos Sub entered into additional amendments to the Merger Agreement during this time to facilitate further negotiations. In addition, on January 30, 2015, the Debtors, the First Lien Agent, and the First Lien Lenders entered into the Second Amended and Restated Forbearance Agreement dated effective as of January 31, 2015 (the “Third Forbearance Agreement”). Under the terms of the Third Forbearance Agreement, the First Lien Agent and First Lien Lenders agreed to further extend the limited forbearance. The forbearance period under the Third Forbearance Agreement terminated on February 25, 2015.
“Despite numerous extensions of the expiration of the Offer, Eos was unable to complete the financing and consummate the proposed transaction with the Debtors. Facing a liquidity crisis in February 2015, the Debtors were unable to agree to any further extensions of the Offer. On March 4, 2015, the Merger Agreement was terminated.
Prepetition Restructuring Initiatives and Financing Alternatives
“Although the Debtors continued to negotiate revised terms of the merger with Eos before the termination of the Merger Agreement, the Debtors also recognized the need to prepare for a restructuring of their affairs in the event the merger was unable to be consummated. The Debtors have been engaged in constructive discussions with their prepetition secured creditors and have attempted to identify potential sources of debtor in possession (“DIP”) financing. The Debtors hired Deloitte to serve as their financial advisors and assist with analyzing restructuring alternatives.
“The Debtors and Deloitte began a search for potential sources of DIP financing. Naturally, the Debtors asked the First Lien Agent whether the First Lien Lenders would be willing to extend DIP financing in a chapter 11 case. As part of the DIP financing discussions, the Debtors also asked the First Lien Agent whether the First Lien Lenders would agree to allow a priming DIP loan provided by a third party lender. The First Lien Agent advised the Debtors that the First Lien Lenders would not agree to a priming DIP facility. Under the Intercreditor Agreement, the Second Lien Note Holders are not permitted to provide a DIP loan that primes the First Lien Lenders or to which the First Lien Lenders have not otherwise agreed.
“In addition to their negotiations with the First Lien Agent, the Debtors and Deloitte sought to obtain DIP financing from other sources. During their efforts to identify potential DIP lenders, the Debtors and Deloitte contacted eighteen (18) potential DIP lenders. Of those parties, six (6) potential DIP lenders executed non-disclosure agreements with the Debtors. Each of the parties that executed NDAs reviewed due diligence materials contained in the Debtors’ online data room. The Debtors did not receive any DIP financing term sheets from third parties.
“In the course of the Debtors’ and Deloitte’s efforts to seek out alternative financing, the Debtors gauged whether parties would be willing to provide postpetition financing on a non-superpriority, unsecured, or non-priming basis. The Debtors and Deloitte were unable to obtain financing, or even identify any indicative offers to provide such financing, on such terms. In particular, the Debtors’ significant prepetition secured debt precludes them from obtaining postpetition financing in the amount they require on terms other than on a senior secured and superpriority basis. Moreover, and in light of potential financiers’ unwillingness to provide financing on a priming basis, I believe potential lenders were unwilling to engage in a protracted priming fight with the First Lien Lenders — particularly within the available timeframe — thus deterring such parties from submitting financing offers
“Due to the lack of any offers from third parties for potential financing, the Debtors negotiated with the First Lien Lenders for debtor in possession financing. The Debtors and BMO, in its capacity as administrative agent and collateral agent (the “DIP Agent”), and BMO and CIT Bank, as proposed lenders (the “DIP Lenders”), negotiated a Post Petition Superpriority Loan Agreement (the “DIP Credit Agreement”). These negotiations, which were extensive and at arm’s length, culminated in the debtor in possession financing facility (the “DIP Facility”), which will provide the Debtors with a total revolving credit commitment of $10.0 million, and which will allow the Debtors to borrow $3.0 million on an interim basis. The DIP Credit Agreement permits the Debtors to obtain funding for expenditures in accordance with an approved budget (the “DIP Budget”). The DIP Budget is attached to the DIP Motion as Exhibit B. The proceeds of the DIP Facility, which the Debtors estimate will be sufficient to finance these Chapter 11 Cases, will be used (a) for working capital and general corporate purposes of the Debtors and (b) to pay fees and expenses related to the DIP Facility and the Chapter 11 Cases.
“The terms of the DIP Facility require the Debtors to complete a sale of their assets in accordance with certain milestones. To seek to maximize the value of their estates, and in compliance with the milestones under the proposed DIP Facility, the Debtors will file a motion seeking authority to conduct an auction process by which the Debtors will solicit offers and ultimately seek approval to sell substantially all of their assets to the bidder with the highest and best offer. The Debtors will also seek authority to retain Parkman Whaling LLC to serve as their investment bankers to assist with conducting the marketing and sale of their assets.
“As part of its restructuring initiatives, the Debtors recognized that a sale of their assets in the context of a Chapter 11 filing would maximize the value of their assets and would likely be required by the terms of a DIP financing facility. In the weeks leading up to the filing of the Chapter 11 Cases, the Debtors contacted the seven (7) parties who had previously indicated an interest in purchasing Dune or its assets to determine whether any of those parties would be willing to serve as a stalking horse in an auction process in the event of a bankruptcy filing. None of those parties was willing to agree to serve as a stalking horse bidder to acquire the Debtors’ assets in the available timeframe.
“The Debtors and their advisors considered a variety of potential transactions, including refinance and sale options. Based on all of the factors described herein, the Debtors deemed that it was in the best interests of their business to commence these Chapter 11 Cases and effectuate a comprehensive restructuring. The Debtors have also determined that the DIP Facility presents the only viable mechanism for providing the liquidity that the Debtors require to continue their operations during the Chapter 11 Cases. In addition, the Debtors have determined that a prompt and open sale of the assets in which all interested buyers are encouraged to participate is the best way to maximize value for their estates under the circumstances.
The DIP Facility
“As part of the Debtors’ First Day Pleadings, the Debtors filed the Debtors’ Emergency Motion for Entry of Interim and Final Orders (i) Authorizing the Debtors to Obtain Postpetition Financing and to Use Cash Collateral, (ii) Granting Adequate Protection to Prepetition Secured Parties, (iii) Scheduling a Final Hearing, and (iv) Granting Related Relief (the “DIP Motion”), seeking approval of the DIP Facility.
“Importantly, I believe the financial terms and covenants of the DIP Facility are standard and reasonable for financing of this kind. Based on the extensive negotiations that took place, I believe that these are the only terms on which the DIP Lenders will provide the financing. As the DIP Facility proceeds are necessary and the only financing available at this time, I believe that sufficient justification exists for agreeing to these provisions. Moreover, it is my understanding that the DIP Lenders would not have been amenable to providing financing without the heavily bargained-for protections contained in the DIP Credit Agreement.
The Terms of the DIP Facility are Fair and Reasonable
“The proceeds of the DIP Facility are sized to support the Debtors through the anticipated pendency of these Chapter 11 Cases. Moreover, I believe that the financial terms and covenants of the DIP Facility are standard and reasonable for financing of this kind. Based on the negotiations that took place, I believe that these are the only terms on which the DIP Lenders will provide the financing.
“Specific to these Chapter 11 Cases, the DIP Facility sets certain milestones for certain restructuring initiatives (e.g., approval of bid and sale procedures, conducting an auction, consummating a sale of all or substantially all of the Debtors’ assets) and entitles the DIP Lenders to certain fees. Based on the extensive negotiations that took place, I believe that these are the only terms on which the DIP Lenders will provide the financing. In addition, I am generally aware that terms similar to those included in the DIP Credit Agreement have been approved in other recent and/or ongoing cases.
“It is my further understanding that any alternative financing arrangement, including an arrangement provided by other potential DIP lenders, likely would have led to a lengthy and potentially value-destructive priming fight. Moreover, I understand that the DIP Lenders would not have been amenable to providing financing without these bargained-for provisions. In the course of negotiations with the DIP Lenders, the Debtors explored whether the DIP Lenders would provide the DIP Facility with lower or no associated fees and free from procedural milestones. The DIP Lenders made clear that they would not be willing to provide the DIP Facility on more favorable terms.
“The Debtors and the DIP Lenders engaged in discussions immediately prior to the Petition Date concerning certain provisions of the DIP Facility. I believe that the terms of the DIP Credit Agreement and associated loan documents (collectively, the “DIP Loan Documents”) constitute, on the whole, the most favorable terms the Debtors could achieve on which the DIP Lenders will extend the necessary postpetition financing. Although the Debtors explored whether the DIP Lenders would provide the DIP Facility without certain provisions, in the course of negotiations, the DIP Lenders indicated they would not be willing to provide the DIP Facility without such terms. In particular, it is my understanding that the provisions requiring: (a) the achievement of certain sale milestones, (b) the retention of Parkman Whaling LLC to serve as investment banker and assist with the sale process, and (c) the appointment of a chief restructuring officer are key components of consideration for the DIP Lenders without which they have indicated they are unwilling to provide the DIP Facility. Accordingly, the Debtors, Deloitte, and the Debtors’ other advisors—recognizing the absence of favorable competing proposals and the benefits to be provided under the DIP Facility—determined in their sound business judgment that the terms of the DIP Credit Agreement were and remain superior to any other set of terms reasonably available to the Debtors at this time. I therefore believe that the DIP Facility provides the Debtors with the best, most feasible and most value-maximizing financing option available at this time.
The Debtors Require Immediate Access to Cash Collateral and the DIP Facility
“I believe that the Debtors and their estates will suffer immediate and irreparable harm if the interim relief requested in the DIP Motion is not granted, including authorizing the Debtors’ use of Cash Collateral and borrowings of $3.0 million on an interim basis under the DIP Credit Agreement. I further believe that the commencement of these Chapter 11 Cases will significantly increase demands on the Debtors’ free cash as a result of, among other things, the costs of administering these Chapter 11 Cases and addressing key constituents’ concerns regarding the Debtors’ financial health and ability to continue operations. The Debtors’ projections reflect that their cash position will be negative at the end of the week ended March 14, 2015.
“Without Court approval of the DIP Facility, the Debtors will not have sufficient cash to make timely payments to vendors and employees that are required to support the Debtors’ continued operations. Failure to pay these expenses would result in immediate cessation of the Debtor’s operations. The Debtors’ ability to finance their operations and the availability to the Debtors of sufficient working capital and liquidity through the DIP Facility is vital to the confidence of the Debtors’ employees and vendors and to the preservation and maintenance of the going-concern value of the Debtors’ estates. The Debtors have an immediate need for access to liquidity to, among other things, continue the operation of their businesses in an orderly manner, maintain business relationships with vendors, pay employees and satisfy other working capital and operational needs—all of which are necessary to preserve and maintain the Debtors’ going-concern value and, ultimately, effectuate a successful reorganization. Based on these circumstances, the Debtors require the interim funding provided by the DIP Facility to avoid immediate and irreparable harm to their operations, businesses and estates.