Gastar Exploration – Debtors Emerge from Chapter 11 as Gastar Exploration LLC, Minus $350mn in Debt and Owned by Ares Management LLC

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January 22, 2019 – The Debtors filed notice that their Amended Joint Prepackaged Chapter 11 Plan of Reorganization became effective as of January 22, 2019 [Docket No. 315]. The Court had previously confirmed the Plan on December 21, 2018 [Docket No. 282]. The Debtors, a pure play Mid-Continent independent energy company engaged in the exploration, development and production of oil, condensate, natural gas and natural gas liquids in the United States, filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 18-36057 with estimated assets of approximately $341,500,000; and estimated liabilities of approximately $453,800,000.

In a press release announcing the (former) Debtors emergence from Chapter 11. the Company stated, “Through this process, the Company has significantly enhanced its financial position by eliminating more than $350 million of debt and preferred equity obligations from its balance sheet. Pursuant to the Plan, the Company also converted its corporate form from a Delaware corporation to a Delaware limited liability company and, therefore, is now known as Gastar Exploration LLC.

The Company completed an effective balance sheet restructuring that involved a debt-for-debt exchange, a debt-to-equity conversion, and a cash payment to holders of the Company’s existing preferred and common equity.  The Company emerged from bankruptcy with a significantly stronger balance sheet and renewed ability to focus on creating value from its compelling asset base.”

Cancellation of Equity and Termination of SEC Reporting Obligations

In a Form 15 filed with the SEC, the Company stated, “Pursuant to the Plan, on the Effective Date, among other things: (1) all previously issued 8.625% Series A Cumulative Preferred Stock, par value $0.01 per share and all previously issued 10.75% Series B Cumulative Preferred Stock, par value $0.01 per share, listed in this Form 15, issued and outstanding immediately prior to the Effective Date (the “Old Preferred Equity”) were cancelled and extinguished, (2) all previously issued Common Stock, par value $0.001 per share (the “Old Common Stock”), listed in this Form 15, issued and outstanding immediately prior to the Effective Date were cancelled and extinguished and (3) new limited liability company interests (the “New Interests”) in new indirect holding companies of the Company, which holding companies indirectly hold all of the ownership interests in the Company, were issued to affiliates of Ares Management LLC in exchange for certain indebtedness of the Company held by such affiliates that were cancelled pursuant to the Plan. The number of holders of record of the New Interests is 18.”

Prepackaged Plan of Reorganization Terms

In an 8-K summarizing the terms of the plan, the Debtors stated, “In connection with the Chapter 11 Cases and the Plan, Gastar effectuated certain restructuring transactions whereby, among other things, Gastar Merger Sub LLC, a newly formed Delaware limited liability company ( ‘Merger Sub ‘), merged with and into Gastar (the  ‘Merger ‘), with Gastar surviving the merger (Gastar, as the surviving entity, the  ‘Company ‘ or  ‘Reorganized Gastar ‘). As a result of the Merger, all outstanding equity interests of Merger Sub were converted into 100% of the outstanding capital stock in Reorganized Gastar (the  ‘Gastar Stock ‘) and Reorganized Gastar became a direct, wholly-owned subsidiary of Gastar Topco Holdings LLC ( ‘Topco ‘). 

Immediately thereafter, Topco contributed 100% of the Gastar Stock to Gastar Midco Holdings LLC ( ‘Midco ‘) in exchange for all of the limited liability company interests in Midco, and Midco, in turn, contributed 100% of the Gastar Stock to Gastar Holdco LLC ( ‘Holdco ‘) in exchange for all of the limited liability company interests in Holdco.  As a result of the foregoing, Reorganized Gastar became a direct, wholly-owned subsidiary of Holdco, Holdco became a direct, wholly-owned subsidiary of Midco and Midco became a direct, wholly-owned subsidiary of Topco.

After giving effect to the transactions described above and certain other transactions provided for under, or contemplated in, the Plan, on the Effective Date, 100% of the indirect equity ownership interests in Reorganized Gastar, which are comprised of limited liability company interests in Topco and Midco (collectively, the  ‘New Interests ‘), were received by the holders of indebtedness issued under the Term Credit Agreement (as defined below), the Second Lien Indenture (as defined below) and Gastar’s superpriority debtor-in-possession financing (the  ‘DIP Facility ‘) affiliated with Ares Management LLC ( ‘Ares ‘).  The claims of such affiliates of Ares in respect of (i) the Term Credit Agreement and the Second Lien Indenture were cancelled in their entirety pursuant to the Plan and (ii) the DIP Facility were cancelled in part pursuant to the Plan (the foregoing, the  ‘Specified Debt Cancellation ‘).  Indebtedness under the DIP Facility not subject to the Specified Debt Cancellation was rolled over into the First Lien Exist Facility and the Midco Exit Facility (each as defined below).

Merger Agreement. Pursuant to the Plan, Gastar entered into a merger agreement dated the Effective Date, by and among Gastar, Merger Sub and Topco (the  ‘Merger Agreement ‘).  Pursuant to the Merger Agreement, Merger Sub merged with and into Gastar, with Gastar surviving as Reorganized Gastar. As a result of the Plan, including the Merger and certain other restructuring transactions effected pursuant to the Plan, all of Gastar’s existing capital stock (comprised of its 8.625% Series A Cumulative Preferred Stock, par value $0.01 per share, and 10.75% Series B Cumulative Preferred Stock, par value $0.01 per share (collectively, the  ‘Existing Preferred Stock ‘) and its Common Stock, par value $0.001 per share (the  ‘Existing Common Stock ‘) were automatically canceled and retired and ceased to exist.  Pursuant to the Plan, holders of the (i) Existing Preferred Stock are entitled to receive their pro rata share of $150,000 and (ii) Existing Common Stock, other than affiliates of Ares, are entitled to receive their pro rata share of $150,000.  

First Lien Exit Facility. Pursuant to the Plan, Reorganized Gastar entered into a $100 million, delayed draw first lien term loan credit facility (the  ‘First Lien Exit Facility ‘) dated as of the Effective Date, by and among Reorganized Gastar, the lenders party thereto, and the administrative agent thereunder.  As of the Effective Date, approximately $20 million was outstanding under the First Lien Exit Facility.  The First Lien Exit Facility matures 5 years after the Effective Date.  At the election of Reorganized Gastar, borrowings under the First Lien Exit Facility will bear interest at the rate of either (a) the Adjusted LIBOR Rate plus 6.00% per annum (subject to a 2.00% LIBOR floor) if paid in cash or (b) the Adjusted LIBOR Rate plus 8.00% per annum (subject to a 2.00% LIBOR floor) if paid in-kind, in each case, payable quarterly. During the continuance of an event of default, past due amounts under the First Lien Exit Facility will bear interest at an additional 3.00% per annum above the interest rate otherwise applicable.  Borrowings under the First Lien Exit Facility are secured by a first priority lien on the assets of Reorganized Gastar. The First Lien Exit Facility contains customary affirmative and negative covenants and events of default for credit facilities of this nature. 

Midco Exit Facility
. Pursuant to the Plan, Midco entered into a $200 million term loan credit facility (the  ‘Midco Exit Facility ‘) dated as of the Effective Date, by and between Midco and AF V Energy I Holdings, L.P. The Midco Exit Facility matures 5 years after the Effective Date.  At the election of Midco, borrowings under the Midco Exit Facility will bear interest at the rate of either (a) the Adjusted LIBOR Rate plus 8.00% per annum (subject to a 2.00% LIBOR floor) if paid in-kind or (b) the Adjusted LIBOR Rate plus 6.00% per annum (subject to a 2.00% LIBOR floor) if paid in cash, in each case, payable quarterly. During the continuance of an event of default, past due amounts under the Midco Exit Facility will bear interest at an additional 3.00% per annum above the interest rate otherwise applicable. Borrowings under the Midco Exit Facility are unsecured. The Midco Exit Facility contains customary affirmative and negative covenants and events of default for credit facilities of this nature. 
The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan):
  • Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Estimated recovery is 100%.
  • Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Estimated recovery is 100%.
  • Class 3 (“Hedge Party Claims”) is impaired and entitled to vote on the Plan. Holders will receive cash in an amount equal to 100% of the Allowed amount, with payments to be made in installments as further described in the Plan.
  • Class 4 (“Statutory Lien Claims”) is impaired and entitled to vote on the Plan. Holders will receive cash in an amount equal to 100% of the Allowed amount in two 50% installments, one on the effective date and one six months later.
  • Class 5 (“Term Loan Claims”) is impaired and entitled to vote on the Plan. Holders shall receive (i) only to the extent there is remaining availability under the Second Lien Exit Facility after the refinancing and satisfaction of all Allowed DIP Claims in accordance with Article II.B of this Plan, its Pro Rata share of participation in such remaining availability under the Second Lien Exit Facility in an equal face amount not to exceed $200 million; and (ii) to the extent there are remaining Allowed Class 5 Claims not refinanced or otherwise satisfied pursuant to the Second Lien Exit Facility (which remaining amounts shall constitute Equitized Senior Obligations), its Pro Rata share (measured by reference to the aggregate amount of Equitized Senior Obligations, Second Lien Notes Claims, and, as applicable upon the occurrence of a DIP Toggle Event, General Unsecured Claims) of 100% of the New Common Equity, subject to dilution on account of, as applicable, the Management Incentive Plan and the New Warrants. 
  • Class 6 (“Second Lien Notes Claims”) is impaired and entitled to vote on the Plan. Holders will receive 100% of the New Common Equity, subject to dilution on account of, as applicable, the Management Incentive Plan and the New Warrants. .
  • Class 7 (“General Unsecured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Holders will receive cash in an amount equal to such Allowed General Unsecured Claim.
  • Class (“8 Intercompany Claims”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Estimated recovery is 0%.  Class 8 Claims shall be, at the option of the Debtor, with the consent (such consent not to be unreasonably withheld) of the Consenting Parties, either Reinstated or cancelled and released without any distribution. 
  • Class 9 (“Interests in Debtors other than Gastar”) is unimpaired/impaired, deemed to accept/reject and not entitled to vote on the Plan. Estimated recovery is 0%. Class 9 Claims shall be, at the option of the Debtor, with the consent (such consent not to be unreasonably withheld) of the Consenting Parties, either Reinstated or cancelled and released without any distribution. 
  • Class 10 (“Existing Preferred Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. Holders will receive their pro rata share of cash in an amount equal to $150,000.
  • Class 11 (“Existing Common Interests and Subordinated Securities Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. Other than the Ares Equity, holders shall receive their pro rata share of cash in an amount equal to $150,000.
Restructuring Support Agreement
On October 26, 2018, Gastar announced that it had entered into a restructuring support agreement (the “RSA”) with the Company’s only funded-debt creditors and largest common shareholders, certain funds affiliated with Ares Management LLC (collectively, “Ares”) which holds approximately 25.9% of the Debtors’ voting equity. Subject to the terms and conditions of the RSA, Ares has agreed to support the Company’s restructuring, which is expected to leave trade creditors and other operational obligations unimpaired, eliminate more than $300 million of the Company’s funded-debt obligations and preferred equity interests (OTCQB: GSTPA and GSTPB), cancel existing common equity interests, and provide $100 million in new, committed financing.

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