Emerge Energy Services LP – Plan Voting Results Reveal Deep Divide as $208.5mn of Pre-petition Notes Claims Vote For and $403.5mn in General Unsecured Claims Vote Against

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October 23, 2019 – The Debtors' claims agent notified the Court hearing the Emerge Energy Services LP cases of Plan voting results [Docket No. 542]. Led by railcar lessor Trinity Industries Leasing Company ($320.5mn claim), general unsecured creditors (Class 6) have resoundingly rejected the Debtors' offer of a $0-2.2mn recovery in respect of an estimated $573.9mn owed by the Debtors to those creditors. General unsecured creditors and a considerable tranche of equity holders also chose to opt out of the Plan's releases which is likely to lead to the Debtors' insiders feeling very much exposed and wondering whether they will pay a price at their October 24th confirmation hearing (and beyond) for misjudging what sort of inducement should be left for Class 6. As expected, holders of the Debtors' senior, pre-petition notes claims (led by HPS Investment Partners, "HPS," $55.0bn under management) have voted strongly (100%) in respect of the Plan. Will they be able to cram down Class 6 and, given the opt outs, will a Plan confirmation be an end of creditor challenges?

In April, the Debtors' Official Committee of Unsecured Creditors objected to the Debtors' Plan and Disclosure Statement, accusing the Debtors, the Debtors' Board and HPS of an unholy alliance, stating: "“Pursuant to the terms of an agreement mandated by HPS Investment Partners, LLC (‘HPS’), which holds dominant, controlling positions in each layer of the Debtors’ prepetition and post-petition secured debt, the Debtors seek approval of a disclosure statement and authority to solicit a plan that, if confirmed, would deliver substantially all (or potentially all) of the Reorganized Debtors’ value (in the form of debt and equity) to the HPS-controlled Prepetition Noteholders …Indeed, over the past eight months, HPS has maneuvered to put itself in a position to exercise undue control over the Debtors and these Chapter 11 Cases so as to fast track the restructuring set forth in the pre-negotiated RSA and attendant Plan, thereby achieving its goal of wiping out hundreds of millions of dollars of debt (including, by the Debtors’ estimation, a staggering $574 million of unsecured debt) for its own benefit." See below for more on the objection.

The voting results were as follows:

  • Class 5 (“Prepetition Notes Claims”): 18 holders, representing $208,512,307.81 (100%) in amount and 100% in number, accepted the Plan.
  • Class 6 – (“All Debtors”) 37 holders, representing $16,219,545.16 (3.86%) in amount and 45.68% in number, accepted the Plan. 44 Claims holders, representing $403,510,261.78 (96.14%) in amount and 54.32% in number, rejected the Plan. 8 Claims holders abstained representing $13,684.78.

Class 6 as sub-divided:

  • Class 6 – GUC – (“Emerge Energy Services LP”) 11 holders, representing $326,884.49 (0.10%) in amount and 64.71% in number, accepted the Plan. 6 claims holders, representing $332,724,624.33 (99.90%) in amount and 35.29% in number, rejected the Plan.
  • Class 6 – GUC – (“Emerge Energy Services GP LLC”): no votes were received.
  • Class 6 – GUC – (“Emerge Energy Services Operating LLC”) 2 holders, representing $7,157,020.08 (35.47%) in amount and 40% in number, accepted the Plan. 3 claims holders, representing $13,022,590.74 (64.53%) in amount and 60% in number, rejected the Plan.
  • Class 6 – GUC – (“Superior Silica Sands LLC”) 24 holders, representing $8,735,640.59 (13.14%) in amount and 40.68% in number, accepted the Plan. 35 Claims holders, representing $57,763,046.71 (86.86%) in amount and 59.32% in number, rejected the Plan. 8 claims holders abstained representing $13,684.78
  • Class 6 – GUC – (“Emerge Energy Services Finance Corporation”): no votes were received.

The following is a summary of classes, claims, voting rights and expected recoveries (Defined terms are as in the Plan and/or Disclosure Statement): The amendments showing changes to the treatment of creditor classes which are summarized below:

  • Class 1 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is $1,790,000 and the estimated recovery is 100% in cash.
  • Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is $441,000 and the estimated recovery is 100% in cash.
  • Class 3 (“Secured Tax Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is $2,288,000 and the estimated recovery is 100% in cash.
  • Class 4 (“Prepetition Credit Agreement Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is $27,260,000 and the estimated recovery is 100% to be paid in cash from exit facility loans.
  • Class 5 (“Prepetition Notes Claims”) is impaired and entitled to vote the Plan. The estimated aggregate amount of claims is $208,512,308 and the estimated recovery is 38–55%. If  Class 6 votes to accept the Plan, each Holder of an Allowed Prepetition Notes Claim shall receive its Pro Rata share of (i) the New Second Lien Notes, if any; (ii) the New Emerge GP Equity Interests; (iii) one hundred percent (100%) of the Perpetual Preferred Interests less any Preferred Interests issued to satisfy DIP Credit Agreement Claims; and (iv) 95% of the New Limited Partnership Interests issued and outstanding on the Effective Date prior to dilution by the New Management Incentive Plan Equity and any issuances pursuant to the New Warrants.  If  Class 6 votes to reject the Plan, each Holder of an Allowed Prepetition Notes Claim shall receive its Pro Rata share of (i) the New Second Lien Notes, if any; (ii) the New Emerge GP Equity Interests; (iii) one hundred percent (100%) of the Perpetual Preferred Interests less any Preferred Interests issued to satisfy DIP Credit Agreement Claims; and (iv) 100% of the New Limited Partnership Interests issued and outstanding on the Effective Date prior to dilution by the New Management Incentive Plan Equity and any issuances pursuant to the New Warrants.
  • Class 6 (“General Unsecured Claims”) is impaired and entitled to vote the Plan. The estimated aggregate amount of claims is $573,909,000 and the estimated recovery is 0.4 -1.3% If Class 6 votes in favor of the Plan, each Holder of an Allowed Class 6 Claim shall receive its pro rata share of (i) 5% of the New Limited Partnership Interests issued and outstanding on the Effective Date prior to dilution by the New Management Incentive Plan Equity and any issuances pursuant to the New Warrants and (ii) New Warrants representing 10.0% of the New Limited Partnership Interests issued and outstanding on the Effective Date prior to dilution by the New Management Incentive Plan Equity. If Class 6 does not vote in favor of the Plan, each Holder of a Class 6 Claim shall receive nothing.
  • Class 7 (“Intercompany Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is $0 and the estimated recovery is 100%
  • Class 8 (“Old Emerge GP Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. Estimated recovery is 0%.
  • Class 9 (“Old Emerge LP Equity Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. Estimated recovery is 0%.
  • Class 10 (“Old Affiliate Equity Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Estimated recovery is 100%.

The valuation analysis attached as Exhibit E to the Disclosure Statement provides the following insight as to the potential value being offered to Class 6 in order to encourage a vote in favor of the Plan: "Houlihan Lokey estimates the Total Enterprise Value of the Reorganized Debtors operations on a going concern basis to be approximately $180–220 million. Based on the range of Total Enterprise Value and the capital structure pro forma for the transaction contemplated by the Plan and outlined in the Financial Projections, the implied range of potential equity value is de minimis to approximately to $35.0 million. Based on the estimated range of the Reorganized Debtor’s equity value above, the value of the 15% New Warrants is estimated to be de minimis to approximately $2.2 million using a BlackBlack-Scholes valuation model at 70% volatility."

Creditors Committee Objection

August 30, 2019 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) objected to the Debtors' Disclosure Statement and Plan solicitation procedures [Docket No. 277] arguing that they are purposefully rushed and un-informative as part of a concerted effort by parties to the Debtors' restructuring support agreement (the "RSA") to line their own pockets at the expense of the Debtors' unsecured creditors.

The objection states, “Pursuant to the terms of an agreement mandated by HPS Investment Partners, LLC (‘HPS’), which holds dominant, controlling positions in each layer of the Debtors’ prepetition and post-petition secured debt, the Debtors seek approval of a disclosure statement and authority to solicit a plan that, if confirmed, would deliver substantially all (or potentially all) of the Reorganized Debtors’ value (in the form of debt and equity) to the HPS-controlled Prepetition Noteholders just over 100 days from the Petition Date…Indeed, over the past eight months, HPS has maneuvered to put itself in a position to exercise undue control over the Debtors and these Chapter 11 Cases so as to fast track the restructuring set forth in the pre-negotiated RSA and attendant Plan, thereby achieving its goal of wiping out hundreds of millions of dollars of debt (including, by the Debtors’ estimation, a staggering $574 million of unsecured debt) for its own benefit. 

Yet, the Disclosure Statement is nearly devoid of detail regarding, among other things, HPS’s role in hand-picking the two members of the Special Restructuring Committee created by the RSA and empowered with sole authority to act for the Debtors in prosecuting the onerous one-sided Plan4 , and HPS’s role in ‘negotiating’ the so-called Global Settlement (which is anything but ‘global’) and releases, touted as the very cornerstone of the Plan and the RSA.5 Remarkably, the RSA also provides that if the Court does not confirm a plan containing the release and exculpation provisions set forth in the Term Sheet attached to the RSA, then HPS, as the controlling owner post-Effective Date, will cause the Reorganized Debtors to agree to provide such releases and exculpation ‘as promptly as reasonably possible after the occurrence of the Effective Date.’ Not only has HPS stacked the deck in order to control the Debtors’ restructuring, but HPS also intends, as the proposed majority owner of the postemergence Reorganized Debtors, to grant itself and others, including the directors and officers, a release, even if this Court does not do so. Perhaps equally culpable is Insight Equity, the Debtors’ controlling equity holder, in enabling the undue control exercised by HPS over the RSA, the Special Restructuring Committee, these Chapter 11 Cases and the Plan process in exchange for an improper payoff: warrants for reorganized equity (despite the virtually nonexistent recovery of 0.4% – 0.8% for, by the Debtors’ estimation, approximately $574 million in general unsecured claims) and a coveted full release of claims against it by the Debtors (and most creditors). This suspect and manipulative conduct by HPS, Insight Equity, and the other parties to the RSA cannot be swept under the rug by the Debtors through a lack of disclosure to creditors. In fact, the Committee has already sought discovery by way of a Bankruptcy Rule 2004 motion in an effort to determine whether any of HPS’s, Insight Equity’s or the Debtors’ directors’ and officers’ prepetition conduct may be actionable.

According to the Disclosure Statement, only two classes of creditors are entitled to vote: (1) holders of the Prepetition Notes Claims (Class 5), which class is controlled by HPS; and (2) holders of General Unsecured Claims (Class 6) (the ‘General Unsecured Creditors’). As the holders of the Prepetition Notes Claims will be the majority equity owners post-Effective Date and thus, will undoubtedly vote to accept the Plan, holders of General Unsecured Claims are the only ‘hypothetical investors’ whose vote on the Plan actually matters. 11 U.S.C. § 1125(a). Accordingly, it is imperative that unsecured creditors have adequate information to make an informed decision regarding the Plan. Despite the Debtors’ apparent ability to fast track a chapter 11 process, the Debtors have been unable, or more likely unwilling, to timely provide even the most basic information necessary for unsecured creditors to assess the Plan. For these reasons and others set forth herein, the Disclosure Statement does not enable a ‘hypothetical reasonable investor’ to make an educated decision as to whether to vote for or against the Plan. he upshot of these deficiencies and last minute filings is that the Debtors are seeking this Court’s approval of an inadequate Disclosure Statement for a Plan that, unless substantially revised, is targeted to virtually eliminate unsecured creditor recoveries and expose the Debtors’ estates to protracted litigation. Even if the pervasive informational deficiencies discussed herein could be remedied with appropriate disclosures, the Disclosure Statement Motion should nevertheless be denied as the Plan described therein is unconfirmable as a matter of law. Courts have long acknowledged that solicitation of a Plan that is unconfirmable on its face wastes estate resources and, in such instances, courts have not authorized solicitation of the Plan to proceed…The proposed Debtor Releases are particularly egregious and inappropriate in light of the pending discovery surrounding the Board’s abdication of many of its powers, authority and fiduciary duties to the hand-picked Special Restructuring Committee and Insight Equity’s ‘global’ deal that enabled such abdication in HPS’s favor. The Plan also contains improper and unjustified third party releases and overly broad exculpation provisions that violate applicable law. The Committee respectfully submits that in light of these substantive flaws, instead of proceeding with solicitation of the Plan at this time, the Disclosure Statement Motion should be denied. The Debtors and HPS should engage with the Committee to develop a negotiated plan that is fair to all stakeholders and legally supportable and generate a disclosure statement that provides adequate information so that a plan can be confirmed with a minimum of litigation expense.”

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