Halcon Resources Corporation (2019) – Delaware Basin E&P Files Prepackaged Chapter 11, Senior Noteholders to Swap $644.5mn of Debt for 91% of Emerged Company

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August 7, 2019 − Halcón Resources Corporation and six affiliated Debtors (“Halcón” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 19-34446. The Debtors, an independent energy company focused on the acquisition, production, exploration and development of onshore liquids-rich oil and natural gas assets primarily in the Delaware Basin, are represented by Alfredo R. Pérez and Gary T. Holtzer of Weil, Gotshal & Manges LLP. Further board-authorized engagements include: (i) FTI  Consulting, Inc. as restructuring advisor (and to provide a Chief Restructuring Officer), (ii) Perella Weinberg Partners as investment banker and (iii) Kurtzman Carson Consultants LLC as claims agent.

The Debtors’ lead petition notes between 5,000 and 10,000 creditors; estimated assets of $1.8bn and estimated liabilities of $945.2mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) US Bank N.A. (as trustee in respect of $644.5mn of 6.75% Senior Notes), (ii) Zurich North America (Fidelity & Deposit) ($5.3mn litigation claim) and (iii) Streamline Innovations, Inc. ($5.2mn trade debt). All 30 of the Debtors top 30 unsecureds have claims in excess of $200k.

This is the Debtors' second recent turn through Chapter 11, having filed in Delaware in 2016 (lead case 16-11724). Upon their exit from Chapter 11 in September 2016, the Debtors trumpeted that "Approximately $1.8 billion of the Company's debt has been eliminated under the Restructuring Plan along with more than $200 million of annual interest expense going forward."

As of the writing of this article, the Debtors had not yet filed their Prepackaged Plan and Disclosure Statement; these are, however, attached to an 8-K filed with the SEC.

In an August 7, 2019 press release announcing the filing, the Debtors advised that "The terms of the Plan provide that holders of the Company’s $625 million outstanding 6.75% Senior Notes (the “Unsecured Noteholders”) will receive 91.0% of the common stock of reorganized Halcón (the “New Common Shares”) and existing common shareholders will receive 9.0% of the New Common Shares (each prior to dilution and subject to certain other exceptions).  Existing common shareholders will also be granted warrants that provide them with the opportunity to purchase up to 30% of the New Common Shares at prices based on Unsecured Noteholders achieving certain recovery levels.  As part of the transaction, certain members of the Ad Hoc Group have also committed to backstop a $150,150,000 new money equity rights offering of New Common Shares, which is being offered to Unsecured Noteholders on a pro rata basis.  Existing holders of common stock will also be offered the right to participate in a $14,850,000 new money equity rights offering on a pro rata basis.  The rights offerings will provide the Company with $165 million of proceeds if fully subscribed."

Restructuring Support Agreement 

In an August 2, 2019 press release, the Debtors announced that they had entered into a restructuring support agreement (the “RSA”) with certain holders of its 6.75% Senior Unsecured Notes due 2025 (the “Unsecured Notes”), representing 67.3% of the amount of Unsecured Notes currently outstanding.  The RSA anticipates a comprehensive restructuring of the Company’s balance sheet that would eliminate more than $750 million of debt and an ongoing reduction in annual interest expense of more than $40 million.  

The RSA press release reads: "The terms of the RSA provide that holders of the Company’s $625 million outstanding Unsecured Notes (the 'Unsecured Noteholders') will receive 91.0% of the common stock of reorganized Halcón (the 'New Common Shares') and existing common shareholders will receive 9.0% of the New Common Shares (each prior to dilution from a new money common stock rights offering and a management incentive plan). Existing common shareholders will also be granted warrants that provide them with the opportunity to purchase up to 30% of the New Common Shares at prices based on Unsecured Noteholders achieving certain recovery levels.  As part of the transaction, the Unsecured Noteholders have also committed to backstop $150 million of a $165 million new money equity rights offering of New Common Shares (the 'Rights Offering') on a pro rata basis.  The Rights Offering will be open to existing shareholders on a pro rata basis giving effect to pro forma Restructuring Plan ownership (i.e. 9.0% allocated to existing Halcón shareholders, or approximately $15 million, for a total Rights Offering of $165 million if fully subscribed)."

Debtor-in-Possession (“DIP”) and Exit Financing

The Debtors have arranged a junior secured DIP credit facility in an aggregate principal amount of $35.0mn (the “DIP Financing”) with Wilmington Trust, N.A., as administrative agent and certain of the Unsecured Noteholders as DIP lenders. Halcón has also received an underwritten commitment from BMO Harris Bank, N.A. for a new $750.0mn senior secured revolving credit facility, which will be arranged by BMO Capital Markets Corp., effective upon exit from bankruptcy with an expected initial borrowing base of $275 million. The Company expects to have liquidity in excess of $150 million upon exit from the chapter 11 cases, with leverage below 1.5x (net debt/LTM EBITDA).

Summary of Pre-petition and Post-petition Capital Structure

Pre-Restructuring Capital Structure

Post-Restructuring Capital Structure (Estimated)

Prepetition Revolving Facility

$225.0mn

Exit RBL

$115.0mn

Senior Notes (including interest)

$644.5mn

 

 

Total Funded Debt

$869.5mn

Total Funded Debt

$115.0mn

 

Summary of classes, claims, voting rights and projected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement; only classes 4 and 7 are entitled to vote)

  • Class 1 ("Other Priority Claims") is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 2 ("Other Secured Claims") is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 3 ("RBL Claims") is unimpaired, deemed to accept and not entitled to vote on the Plan. The RBL Claims shall be allowed in the aggregate principal amount up to $225.0mn  and all other amounts that are outstanding under the RBL Agreement as of the Effective Date. On the Effective Date, each holder of an Allowed RBL Claim shall receive payment in full, in Cash of all Allowed RBL Claims, including by a refinancing, and all outstanding letters of credit shall either be replaced, cash collateralized or otherwise secured to the satisfaction of the Issuing Bank (as defined in the RBL Agreement) in accordance with the terms of the RBL Agreement.
  • Class 4 ("Senior Notes Claims") is impaired and entitled to vote on the Plan. The Senior Notes Claims shall be allowed in the aggregate principal amount of $625.0mn. On the Effective Date, each holder of an Allowed Senior Notes Claim shall receive such holder’s Pro Rata share of (i) 91% of the total New Common Shares issued pursuant to the Prepackaged Plan on the Effective Date, subject to dilution by the Rights Offering Equity, the Warrant Equity, the MIP Equity, and the New Common Shares issued pursuant to the Backstop Commitment Premium, and (ii) the Senior Noteholder Subscription Rights.
  • Class 5 ("General Unsecured Claims") is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 6 ("Intercompany Claims") is unimpaired, deemed to accept and not entitled to vote on the Plan. 
  • Class 7 ("Existing Equity Interests") is impaired and entitled to vote on the Plan. On the Effective Date, Existing Equity Interests shall be cancelled, released, and extinguished and shall be of no further force and effect. Each holder of Existing Equity Interests shall receive on account of such holder’s Existing Equity Interests: (1) if a Registered Holder holds fewer than or equal to 2,000 shares of Existing Equity Interests, Cash in an amount equal to the inherent value of such Registered Holder’s Pro Rata share of (i) 9% of the total New Common Shares issued pursuant to the Prepackaged Plan on the Effective Date, subject to dilution by the Rights Offering Equity, the Warrant Equity, the MIP Equity, and the New Common Sharesissued pursuant to the Backstop Commitment Premium, (ii) the Warrants and (iii) the Existing Equity Interests Subscription Rights; or (2) for any other holder of Existing Equity Interests, such holder’s Pro Rata share of (i) 9% of the total New Common Shares issued pursuant to the Prepackaged Plan on the Effective Date, subject to dilution by the Rights Offering Equity, the Warrant Equity, the MIP Equity, and the New Common Shares issued pursuant to the Backstop Commitment Premium; provided, however, that the amount of total New Common Shares available to be issued pursuant to this provision shall be reduced by the amount of New Common Shares that would have been distributed to holders of Existing Equity Interests in the absence of the immediately preceding clause (1), (ii) the Warrants, and (iii) the Existing Equity Interests Subscription Rights.
  • Class 8 ("Other Equity Interests") is impaired, deemed to reject and not entitled to vote on the Plan. On the Effective Date, Other Equity Interests shall be cancelled, released, and extinguished and shall be of no further force and effect.
  • Class 9 ("Intercompany Interests") is unimpaired, deemed to accept and not entitled to vote on the Plan.

About the Debtors

Halcón is an independent energy company focused on the acquisition, production, exploration and development of onshore liquids-rich oil and natural gas assets in the United States. During 2017, the Debtors acquired certain property in the Delaware Basin and divested their assets located in the Williston Basin in North Dakota and in the El Halón area of East Texas. As a result, the Debtors’ properties and drilling activities are currently focused in the Delaware Basin (yes, thats in Texas).

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