Fairway Energy – Houston Crude Oil Storage Business Files Chapter 11, Anticipates Going Concern Sale, Lines Up DIP Financing from Prepetition Lenders

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November 26, 2018 – Fairway Energy, LP and 2 affiliated Debtors (collectively, “Fairway” or the “Company”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 18-12684 [Docket No. 1]. The Company, an independent salt dome crude oil storage business based in Houston, is represented by Edmon L. Morton of Young Conaway Stargatt & Taylor. Further board-authorized engagements include Haynes and Boone as bankruptcy and restructuring counsel and Alvarez & Marsal as financial advisor. The Company’s petition notes between 50 and 100 creditors; estimated assets between $100 million and $500 million; and estimated liabilities between $100 million and $500 million. Documents filed with the Court list the Company’s three largest unsecured creditors as (i) ISFI Constructors LLC ($547,918.65 trade claim), (ii) Ann Harris Bennet, Tax Assessor ($366,710.43 tax claim) and (iii) Underground Storage LLC ($136,274.04 trade claim).
Events leading up to the Chapter 11 filing 
In a declaration in support of the Chapter 11 filing (the “Flavin Declaration”) [Docket No. 3] Robert Flavin, the Company’s Chief Financial Officer, detailed the events leading to Fairway’s Chapter 11 filing. 

Fairway’s capital structure is comprised of (i) approximately $390 million in equity capital, held by 63 “unitholders” and (ii) borrowings under a senior secured term loan credit agreement dated March 29, 2017 and procured from Riverstone Credit Partners, L.P. (“Riverstone”) as lead arranger and administrative agent (the “Prepetition Facility”). According to the Flavin Declaration, as at the petition date total borrowings under the Prepetition Facility were approximately $94 million. The Flavin Declaration states, “Since the spring of 2018, Fairway has experienced liquidity issues given operational and market issues that impeded use of the Facility [the Company’s 10 million barrel salt dome crude storage facility]. For the nine (9) months ended September 30, 2018, Fairway had an operating loss of $38,600,000 (before interest, expense, and other income). Fairway’s financial performance has been negatively affected by (i) reduced and delayed demand for its services, (ii) cost overruns on the Facility, (iii) commercial restrictions on accessing the Facility by existing pipeline connections, and (iv) general market conditions that undermine the demand for crude oil storage.
The Debtors’ liquidity constraints impacted both their ability to operate and to comply with their obligations under the Prepetition Credit Agreement. Anticipating a liquidity crisis, Fairway engaged in negotiations with Riverstone beginning in March 2018 regarding the terms on which Fairway could obtain additional runway and avoid defaulting under the Prepetition Credit Agreement….Riverstone made certain concessions to give Fairway time to raise equity capital to address its emerging liquidity constraints.
Ultimately, promising candidates for raising equity capital failed to materialize as expected. To allow the Debtors to pursue a potential candidate, if necessary, and to prepare for these chapter 11 filings, Riverstone provided the Incremental Facility. Discussions with this potential candidate terminated on November 19, 2018, at a time when Debtors had largely exhausted their operating funds. As a result, Fairway was left with a default under the Prepetition Credit Agreement and a near complete lack of liquidity.”
Anticipated sale and DIP financing
The Flavin Declaration makes it clear that the Company’s preferred path is the sale of the Company’s business and/or assets as a going concern and that any such sale effort is dependent on immediate debtor-in-possession (“DIP”) financing to be provided by Riverstone. The Flavin Declaration continues, “Following the Debtors’ comprehensive marketing process for equity and debt financing that did not result in any commitments, and due to financial constraints and the termination of interest from several possible investors, the Debtors determined that a bankruptcy process was the optimal way to complete its marketing process and transition the business to new ownership….The Debtors intend to file, in short order, a motion seeking approval of a sale process by which heretofore sidelined strategic and investment candidates can have a full and fair opportunity to acquire the assets. By such process all stakeholders gain the chance to obtain repayment or return of capital.” The Flavin Declaration, in pressing its arguments as to the need for authority to enter into DIP financing arrangements, states, “Absent access to cash collateral and the DIP Facility, the Debtors could not operate and bridge to a value-maximizing sale. No sale process could be implemented that permits all stakeholders some opportunity to obtain recovery. The going concern value of its business would be severely impaired and the Debtors could lose access to the Facility. Accordingly, on behalf of the Debtors, I respectfully submit that the DIP Motion should be approved.” The DIP motion [Docket No. 8] indicates that Riverstone is willing to provide up to $20 million in new borrowings.

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