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In re Peabody Energy Corporation

United States District Court, E.D. Missouri, Eastern Division

March 30, 2017




         This matter arises out of the Chapter 11 bankruptcy of Peabody Energy Corporation and its subsidiaries (“Debtors”). The United States Bankruptcy Court for the Eastern District of Missouri entered an order confirming the Debtors' plan of reorganization (the “Plan”) on March 17, 2017 (the “Confirmation Order”). The Ad Hoc Committee of Non-Consenting Creditors (“Ad Hoc Committee”) now appeals. The Ad Hoc Committee is comprised of a group of beneficial holders and/or investment advisors to certain holders of second lien notes (“Second Lien Notes Claims”) and senior unsecured notes (“Class 5B Claims”) who objected to confirmation. Before the Court is the emergency motion of the Ad Hoc Committee for a stay pending appeal, pursuant to Federal Rule of Bankruptcy Procedure 8007, or, in the alternative, to expedite the appeal under Rule 8013. The parties filed expedited briefs, and the Court heard argument on the motion on March 29, 2017. Upon careful review of the record and arguments, the Court will deny the motion.


         The Debtors filed for Chapter 11 bankruptcy on April 13, 2016. At that time, the coal industry was continuing to experience a decline, and the Debtors had approximately $8.8 billion in outstanding principal long-term debt. Approximately $4.3 billion of this debt was secured by collateral that included real property at Debtors' larger mines. The “First Lien Lender Claims, ” claims arising under a first lien credit agreement between Debtors and certain first lien lenders, represented more than $3 billion of this secured debt. The remainder was comprised mostly of Second Lien Note Claims.

         A significant dispute existed with respect to how much of the property secured the First Lien Lender Claims and the Second Lien Note Claims (the “CNTA dispute”). As resolution of this dispute-involving a difference of over $1 billion-proved essential to any efforts to reorganize, the Debtors agreed, in a post-petition financing agreement approved by the bankruptcy court, to file an adversary proceeding, seeking declaratory judgment related to this dispute among the Debtors, the First Lien Lender Claims, and the Second Lien Note Claims. The bankruptcy court ordered all parties to that adversary proceeding, and parties who later intervened, to participate in non-binding mediation beginning on September 7, 2016. Because of the significance of the CNTA dispute to any reorganization plan, the mediation was subsequently expanded to cover plan negotiations as a whole. The Ad Hoc Committee admitted at oral argument that it knew the scope of the mediation had expanded and that it could have moved to intervene and participate in the mediation, but that it elected not do so.[1]

         The Debtors assert that they approached these negotiations with four overarching goals: (1) to ensure that after reorganization, the Reorganized Debtors had adequate liquidity to operate their business in the normal course, both in the short- and long-term, particularly given the volatile and cyclical nature of the coal industry; (2) to ensure that the emergence capital structure of the Reorganized Debtors, including their funded debt balance at emergence, was of such a size that the Reorganized Debtors could service debts as they came due at every point in the business cycle, including during market highs and lows; (3) to maximize the value of the Debtors' estates for the benefit of creditors; and (4) to achieve broadest possible consensus among various stakeholders with respect to the Plan. The Debtors ultimately determined that the best way to achieve these goals was to raise approximately $1.5 billion in new money in the form of an equity investment, which would allow them to satisfy the claims of their creditors holding first lien notes and to provide meaningful recovery to their unsecured creditors.

         Through mediation, the Debtors negotiated commitments for $1.5 billion in new money equity from some of the mediation participants, as part of a larger global settlement package that included settling the CNTA dispute and other disputes, and agreeing on the terms of a reorganization plan. The $1.5 billion new equity raise involved two components. First, the Debtors would raise $750, 000 through a private placement of preferred equity of the Reorganized Debtors, sold at ¶ 35% discount[2] (the “Private Placement Agreement” or “PPA”). Second, the Debtors would raise another $750, 000 through a rights offering exempted from registration under Section 1145 of the Bankruptcy Code, sold at ¶ 45% discount (the “Rights Offering”). The entities that Dated: to the PPA also committed to provide a full “backstop” of the Rights Offering (“Backstop Commitment Agreement”), such that if the Debtors did not raise the full $750, 000 in the Rights Offering, these entities would be obligated to exercise subscription rights that remained unfulfilled at the conclusion of the offering.

         Participation in the PPA was initially limited to a small group of holders of Second Lien Notes Claims and Class 5B Claims (“Noteholder Co-Proponents”). The Ad Hoc Committee has represented that the Noteholder Co-Proponents hold 40% of such claims, and they were also involved in the CNTA dispute. Under the PPA, the Noteholder Co-Proponents would have exclusive rights to purchase the first 22.5% of preferred equity. The remaining amount of preferred equity could then be purchased by the Noteholder Co-Proponents and any Second Lien Notes Claims and Class 5B Claims holders who elected to participate and conditionally agreed to support the Plan. The opportunity to participate occurred on several dates, with those committing to the earlier dates gaining a larger share. The agreement to support the Plan was subject to the bankruptcy court's approval of the disclosure statement required under the Bankruptcy Code. The Second Lien Notes Claims and Class 5B Claims holders who did not agree to support the Plan were not entitled to purchase the private equity available under the PPA.[3]

         The PPA and related agreements include a series of important deadlines, consistent with the Debtors' goal of emerging promptly from bankruptcy. For example, the PPA and Backstop Commitment Agreement each requires payment of a “ticking premium, ” in the form of a monthly fee equal to $18, 750, 00 per month, beginning on the Plan's proposed effective date of April 3, 2017, and ending on the closing date. The Plan Support Agreement allows an election to terminate on two business days' prior written notice if “the order confirming [the Plan] is reversed, stayed, dismissed, vacated, reconsidered or is materially modified or materially amended” in a manner not acceptable to the Debtors and the Requisite Creditor Parties. Plan Support Agreement § 12.02(m). The PPA and Backstop Commitment Agreements contain similar termination provisions.

         On December 22, 2016, the Debtors filed a motion in the bankruptcy court to approve the disclosure statement related to the Debtors' proposed reorganization plan. The next day, the Debtors moved to approve the PPA and related agreements. The Ad Hoc Committee objected to these motions, and a hearing was set in the bankruptcy court for January 26, 2017.

         The PPA and Backstop Commitment Agreement were subject to an unqualified “fiduciary out” provision to permit the Debtors to pursue any alternative transactions they determined to be superior. Pursuant to this provision, during the time between the initial filing of the Plan on December 22, 2016, and the hearing on the PPA and Backstop Commitment Agreement on January 26, 2017, the Debtors received a series of alternative proposals by the Ad Hoc Committee, including proposals submitted on January 16 and January 20, 2017, and a proposal made on March 1, 2017. The Unsecured Creditors Committee also reviewed the alternative proposals in its fiduciary capacity. At least one of the alternative proposals offered the Debtors more money than the PPA provided for the preferred equity, up to $1.77 billion, but did not include all of the same terms as the PPA and related agreements. The Debtors, in consultation with the Unsecured Creditors Committee, rejected these alternative proposals.

         On January 26, 2017, the bankruptcy court heard oral argument on the Debtors' motions, and on January 27, 2017, the bankruptcy court entered orders granting the motions, and approving the disclosure statement and the PPA and related agreements, over the Ad Hoc Committee's objections. The bankruptcy court's order included findings that:

(i) the relief requested in the Motion is in the best interests of the Debtors and their estates and creditors;
(ii) the decision to enter into the Plan Support Agreement, Private Placement Agreement and Backstop Commitment Agreement is an appropriate exercise of the Debtors' business judgment; [and]
(iii) the proposed dates and deadlines for the implementation of the Section 1145 Rights Offering, as set forth in the Section 1145 Rights Offering Procedures, are reasonable and appropriate and allow a reasonable amount of time for Rights Offering Eligible Creditors to make an informed decision regarding whether to exercise their respective subscription rights[.]

         The Ad Hoc Committee appealed these orders to the United States Bankruptcy Appellate Panel for the Eighth Circuit, but that appeal was dismissed on February 8, 2017 as interlocutory, with the panel noting that the Ad Hoc Committee could raise its objections if the Plan was ultimately confirmed.

         Approximately 95% of the Second Lien Notes Claims and Class 5B Claims holders agreed to participate in the PPA, support the Plan, and provide the backstop commitment. The Ad Hoc Committee represents those holders who did not so agree.

         After obtaining the equity commitments, the Debtors were able, in February 2017, to secure exit financing, including a term loan commitment for $1.95 billion in exit debt financing, which commitment expires May 1, 2017; a commitment from PNC Bank for an expanded $250 million accounts receivable securitization facility upon emergence, that also expires on May 1, 2017, and may be terminated by PNC if the Confirmation ...

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