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November 2, 2018 – Dixie Electric and twelve affiliated Debtors filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 18-12477 [Docket No. 1]. The Company, which provides services to the United States natural gas industry, is represented by Edmon L. Morton of Young Conaway Stargatt & Taylor. Further board-authorized engagements include Simpson Thacher & Barlett as counsel, PJT Partners as investment banker and BDO USA as tax consultant and restructuring advisor. Dixie Electric’s petition notes between 5,000 and 10,000 creditors; estimated assets between $100 million and $500 million; and estimated liabilities between $100 million and $500 million. The Company aims to complete the restructuring, and emerge from Chapter 11, before the end of the year. The Company’s executive leadership team is expected to remain in place.
Overview of Restructuring
On October 26, 2018, Dixie Electric announced that it had entered into a restructuring support agreement (the “RSA”) with an ad hoc group (the “Ad Hoc Group”) of its secured lenders (the “Secured Lenders”) holding more than two-thirds of the principal amount of its secured loans, along with certain other supporting parties, on the terms of a financial restructuring that is expected to result in the extinguishment of approximately $295 million in secured and unsecured debt and the provision by the Ad Hoc Group of additional liquidity in the form of a $30 million exit credit facility. The RSA provides for operations to continue as usual, without interruption, with employees, suppliers, vendors, contract counterparties and trade creditors to be paid in full in the ordinary course. Under the terms of the RSA, the Secured Lenders will receive 98.25% of the equity in reorganized Dixie (subject to dilution by a management incentive plan, “MIP”) in exchange for extinguishing their secured loans. The remaining equity in reorganized Dixie will be distributed to the lender under the Company’s unsecured loan (also subject to dilution by a management incentive plan).
Debtor-in-Possession (“DIP”) and Exit Financing
The Company has secured commitments from the Ad Hoc Group for a DIP facility, comprised of up to $17.5 million in new money term loans. The Company’s DIP financing will be used to fund working capital expenses and the costs associated with the restructuring process and will convert into an exit facility upon emergence, along with additional new money loans of up to $12.5 million available upon emergence. The DIP facility has a term of up to 3 months, “standard and customary covenants and terms for DIP facilities such as these,” and bears interest at the rate of LIBOR plus 10.00% per annum on drawn amounts, with a LIBOR floor of 1.00%, payable monthly in cash. The prepetition secured lenders also consented to the Debtors’ use of their prepetition cash collateral during the bankruptcy process, and to the priming of their liens with the liens securing the DIP Facility. The prepetition secured lenders’ agreement regarding the use of cash collateral does not require the Debtors to make any principal or interest payments with respect to the Debtors’ prepetition secured credit agreement during the bankruptcy.
On the effective date of the Plan, the reorganized Debtors will enter into a new first lien facility (the “New First Lien Facility”) which will provide a term loan facility in an aggregate principal amount of $30 million. Loans under the New First Lien Credit Facility agreement will mature 5 years from the effective date and will bear interest at a rate of LIBOR plus 10.00% per annum on drawn amounts, with a LIBOR floor of 1.00%.
Summary of classes, claims, voting rights and expected recoveries:
- Class 1 (“Secured Loan Claims”) is impaired and entitled to vote on the Plan. Expected recovery is approximately 33%. Holders will receive their pro rata share 98.25% of the Company’s post-emergence equity, subject to dilution by equity granted under the Company’s MIP.
- Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%. Holders are expected to be paid in cash, subject to alternative arrangements agreed by the Debtors, secured lenders and holders of the claims.
- Class 3 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%.
- Class 4 (“Unsecured Loan Claims”) is impaired and entitled to vote on the Plan. Expected recovery is approximately 22%. Holders will receive their pro rata share of 1.75% of the Company’s post-emergence equity, subject to dilution by equity granted under the Company’s MIP.
- Class 5 (“Intercompany Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%. Each allowed Intercompany Claim will be adjusted, continued, contributed to capital or discharged, as determined by the secured lenders in consultation with the Debtors.
- Class 6 (“Intercompany Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Expected recovery is 100%. On the effective date, all allowed Intercompany Interests will be reinstated and otherwise rendered unimpaired pursuant to section 1124 of the Bankruptcy Code.
- Class 7 (“Existing Parent Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. Expected recovery is 0%. On the effective date, all Existing Parent Interests will be cancelled.
Events leading to the Chapter 11 filing
In a declaration in support of the Chapter 11 filing (the “Coward Declaration”) [Docket No. , Jerrit Coward, Chief Executive Officer of Dixie Electric, outlined what has become a familiar story in the energy services sector: lower oil prices leading to decreased drilling and well activity, which in turn leads to a drop in demand for well site services from producers looking to cut costs. Operational difficulties ultimately also leading to reduced access to financing as rating agencies highlight the downward spiral.
The Coward Declaration states, “Due to prior pressures in the oil and gas industry from a severe and pervasive downturn in oil and commodities prices, the oil and gas industry has experienced significant declines in activity levels that began in late 2014….As a result of this sustained market downturn, oil and gas companies around the world have dramatically curtailed capital and operating expenditures dedicated to oil and gas exploration, development and production. In turn, the financial slump in the oil and gas industry has caused a commensurate drop in demand for the products and services offered by the well site servicers.
The Company thus experienced decreased drilling and well activity by operators beginning in late 2014, which adversely impacted the Company’s operations….The Company’s credit ratings deteriorated over this period as profitability and margins declined….Operators have become increasingly focused on service costs and have pushed for rate cuts and reduced overtime and fixed-priced work. The Company was also increasingly bidding against other firms for work, further putting pressure on margins.
The Company also entered into certain lump-sum contracts for fixed prices, which were bid with low margins. In particular, MAC Supply, Inc. Electrical Contractors and Strong Electric, LLC entered into these low margin arrangements with customers outside of the oil and gas industry. The Company was not able to leverage its industry expertise and was unable to profitably complete these contracts, thereby adversely impacting the overall profitability of the Company.”
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