US Coal in the 21st Century: Markets, Bankruptcy, Finance and Law. Bankruptcy Basics

Transcription

1 US Coal in the 21st Century: Markets, Bankruptcy, Finance and Law Bankruptcy Basics

2 Recent Bankruptcies By mid-2015, nearly 40 :ilings in 3 years 50% of the :ilings are liquidations under Chapter 7 By early 2016, over 44% of domestic output is from :irms in bankruptcy Notable recent examples: 2

3 What is Chapter 11? Shareholders and creditors come together to bargain over extent to which the total debt must be reduced in order for the :irm to survive, whether some creditors must reduce their claims more than others, whether the :irm s assets or operations must be trimmed or sold off completely Chapter 11 provides a set of rules that encourage the parties to reach an agreement consensually if consensus cannot be reached, allow the debtor (or other proponent of a plan of reorganization) to impose the bargain on the creditors. 3

4 Enabling the Bargaining Environment Automatic stay: (Nearly) all creditors and counterparties must suspend collection and enforcement efforts. Claims valuation: The court values the claims of creditors; these claims are the starting point for negotiation in bankruptcy. All claims are valued, no matter how uncertain or disputed. Accounting for assets: Debtor chooses which contracts to continue or terminate and which assets to keep, sell, or abandon. 4

5 Traditional Bargaining The Plan: Debtor has up to 18 months to propose a plan of reorganization, which will place creditors in classes and propose payoffs to each class. Some debt will be converted to equity, some will be reduced, some will be wiped out, some will be reinstated. Old shareholders will typically get nothing. The Vote: Classes vote on the plan, and are deemed to favor the plan if a super-majority votes in favor. Dealing with Dissent: If a class votes against, the debtor can cram down the plan (overriding the dissent) by showing that the plan adheres to various rules, such as the absolute priority rule. 5

6 Modern Bargaining Speedy Going-Concern Sale: A debtor can sell itself to a buyer during the bankruptcy process (a 363 Sale ). The sale price is distributed to creditors in order of priority. The case ends. Speedy prepack/prenegotiated plan: Before :iling for bankruptcy, the debtor identi:ies key creditors, obtains their consent to a plan, and then :iles. 6

7 Examples Mines Stake in export terminal 7

8 Wrinkles Relevant to the Coal Industry: #1 Automatic Stay Doesn t stop governments from obtaining an injunction to force clean-up. If the statute (e.g., RCRA) doesn t permit a suit for compensation in lieu of an injunction, the order is likely not dischargeable in bankruptcy. If the government does the clean-up itself, it can demand compensation for clean-up costs. If clean-up is done post-:iling, the costs are administrative expenses and prime all other unsecured debts. Several courts have also said that automatic stay doesn t stop governments from forcing compliance with Xinancial assurance regulations (e.g., RCRA). 8

9 Wrinkle #2 Claims Valuation Bankruptcy court will try to estimate future clean-up costs and other liabilities related to mining operations, but this is a highly error-prone process. But some liabilities are so uncertain that the court won t value them. Example: Years from now, solid waste may leak from storage containers, contaminate drinking water, and harm people. The rights of these future victims are generally not claims under the Bankruptcy Code. These victims can sue the company (or its successor) after the bankruptcy case ends. 9

10 Wrinkle #3 Assets Debtor can abandon property that is burdensome and of inconsequential value to the estate. Many coal properties may fall into this category. Supreme Court gives us a confusing rule: Property can t be abandoned if that would pose imminent harm to the public. But what if there s no imminent danger? Rule may not matter: Secured creditors come before environmental claims. Even if property is not abandoned, there may be no money to pay for remediation. All value has gone to secured creditors. 10

11 Wrinkle #4 Contracts Collective Bargaining Agreements (CBAs), are terminable in bankruptcy under Section Pension and other employment bene:its (including Coal Act obligations) can be terminated under Termination must be necessary to permit the reorganization of the debtor Necessary in order to complete reorganization more successfully (2d Circuit) Necessary to avoid liquidation (3d Circuit) 11

12 CBA Rejection Process Debtor makes modixication proposal based most complete, reliable information Must be necessary to permit reorganization of debtor. Must assure that creditors, debtor, affected parties are treated fairly and equitably. Must provide Union with information necessary to evaluate the proposal. Debtor must meet at reasonable times with the Union. Must confer in good faith in attempting to reach mutually satisfactory modi:ications. Union must have refused to accept the proposal without good cause, and balance of the equities must clearly favor rejection of the collective bargaining agreement. 12

13 Illustration: Patriot Coal [O]n November 15, 2012, Debtors made their Original Proposals. On January 8, 2013, the UMWA made its First Counterproposal. On January 17, 2013, Debtors provided the Second 1113 Proposal. On February 5, 2013, the UMWA made its Second Counterproposal. On February 19, 2013, Debtors provided the Third 1113 Proposal. The UMWA made a Third Counterproposal on March 27, On April 10, 2013, Debtors provided the Fourth 1113, and on April 23, 2013, Debtors provided the Fifth 1113 Proposal. On April 27, 2013, the UMWA provided its Fourth Counterproposal. 13

14 Wrinkle #5 Financial Contracts Many forward sales/purchases and all hedging contracts qualify as :inancial contracts under the Bankruptcy Code. The Code s automatic stay does not stop counterparties from terminating these contracts and seizing collateral. Thus, many :irms must give favorable treatment to these counterparties in order to maintain the contracts. 14

15 Illustration 15

16 Wrinkle #6 Going-Concern Sales Assets can be sold free and clear of nearly all liabilities. A great washing machine for corporate assets. Can be sold free and clear of retiree bene:its, for example. Not all environmental liabilities wash off. Pre-bankruptcy payment obligations (e.g., SMCRA) do wash off. But remediation duties travel with the land. Permit-blocking: managers and owners of failed coal companies can be blocked from the industry. 16

17 A Note on Venue General rule: company can :ile for bankruptcy wherever it is incorporated, has its HQ, a subsidiary, or principal assets. Illustration Patriot Coal: created subsidiaries on eve-of-bankruptcy in order to manufacture SDNY jurisdiction. Court dismissed the case, even though it was convenient for most of the parties, and sent it to E.D. Mo. 17