As with many Ch.11 cases, equity holders, both common and preferred shareholders, will get no recovery. Holders of the modest amount of unsecured notes will most likely also get nothing. Rex is selling all their assets and it seems that the 2lien holders will make a credit bid (plus additional cash) for the assets. DIP and 1lien holders are expected to get cash for a full recovery. Rex is expected to exit Ch.11 in early November.
Retail holders of the unsecured notes are very unhappy because not only are they not getting anything but they could not participate in the March 2016 exchange offer that would have given them 2lien secured notes for their lower priority unsecured notes. The exchange offer was only open to “qualified institutional” holders and non-residents. As has been common for years, preferred shareholders are getting nothing. Their priority over common shareholders has almost become irrelevant.
Filed for Ch.11 on May 18, 2018
*50 days Order approving the procedure to sell assets
*75 days Order approving the disclosure statement
*115 days Bids deadline
*125 days Auction (if needed)
*170 days Closing of asset sales and distribution or effective date for re-org plan
Restructuring Support Agreement
The best location to read the RSA and other important information is in CEO Thomas Stabley’s declaration in docket 36. There are 2 paths that being followed simultaneously. The first path is the sale of assets with proceeds paying the classes in their priority order. The second path gives DIP and 1lien holders the equity in a newly reorganized company if an asset sale fails.
The asset sale is subject to a reserve price (1lien credit bid amount plus outstanding fees plus a maximum of $5 million to wind down Rex). I do not expect any outsider bidders. The mostly likely and only bid will come from 2lien holders. There are about $588 million in 2lien notes.
In theory 1lien holders could make a credit bid (Note: a credit bid is where the amount of the holders secured claim is considered the same as cash-even if the market values the claim at less than that amount.). There are two reasons that I do not expect 1liens will make a credit bid. First, according to the RSA, 1liens “agree to support and not object or interfere with such a bid (a 2lien credit bid). Second, the 1liens “agree not to submit a bid in excess of the credit bid plus funding for wind down” (maximum $5 million).
I am expecting that the 2liens will make a credit bid plus additional cash. At this point I am not sure about the status of 2lien holders that may not want to participate in the purchase and if there could be some potential litigation. Since 2liens can use a credit bid, it is very unlikely that a third party will be willing to bid and win. They would have to pay a price higher, in my opinion, than the assets are worth. Any sale will be structured to be able to maximize the use of the $257 million NOLs (net operating loss) for future income benefits.
The DIP financing of $411.3 million is being used to pay off the $261.3 million term loan plus $50 million “make whole” and $35.2 million for “Oil Patch Vendor” claims (docket 270). (These claims are not being classified as general unsecured claims, which would have about the same low priority as the unsecured notes) That leaves under $65 million for other expenses and normal operations
The wells in Carroll County, OH and Butler County, PA “remain unencumbered”. The proceeds from their sale under an expected bid from 2lien holders will not, however, be available to unsecured noteholders nor equity holders. That cash would be used to pay 1liens/DIP holders.
The Ch.11 case has the highly litigated issue of “Make Whole”. Instead of litigating, the various parties have agreed to a $50 million MW payment. (Note: “make whole” is where a loan agreement states that all future non-payments of interest payments are added-up and are due when the company files for bankruptcy.)
Since equity and unsecured notes are not getting any recovery there is no reason to keep those securities. Holders of 2lien notes may have the potential to make a respectable profit depending upon their cost for their notes.
I do not currently have a position in any security mentioned in this report. The report is meant for information only. The securities mentioned in the report are very speculative and may be inappropriate for many investors.