The energy patch: where
rights offerings are 'sexy' again
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[August 01, 2017]
By Tom Hals and Tracy Rucinski
WILMINGTON, Del./CHICAGO (Reuters) - Energy
businesses that are trying to exit bankruptcy are finding a savior in
some of their own creditors, which have been scooping up newly issued
stock from the companies at hefty discounts.
More than a dozen so-called rights offerings have raised billions of
dollars over the past 18 months, according to data compiled by Reuters,
to help revitalize these energy companies in return for large fees and
juicy investment returns.
But those benefits have not been equally shared among all the creditors
providing the cash. The deals are coming under increasing scrutiny by
creditors and shareholders in some bankrupt companies over how to divvy
the returns, and whether these companies should be looking for a
different strategy altogether.
Breitburn Energy Partners <BBEPQ.PK> is a case in point. An official
committee representing shareholders hopes to derail a $1 billion rights
offering that the company is considering, which would be the biggest
such offering in years.
In these deals, a company sells newly issued stock - typically
discounted around 20 percent to its estimated value - to its creditors,
which are usually hedge funds that hold its bonds. The technique has
proven lucrative for a select group of hedge funds such as Elliott
Management that specialize in distressed investing.
From January 2016 to June 2017, 17 of 56 bankrupt publicly-traded energy
companies have sought to refinance through a rights offering, according
to a Reuters review of court and regulatory filings. By comparison, in
2015, six of the 41 bankrupt publicly traded energy companies did so.
In the past year, coal producer Peabody Energy Corp <BTU.N>, oil and gas
producer Ultra Petroleum Energy <UPL.O> and oilfield service provider
Basic Energy Services <BAS.N> are among companies that have raised a
combined $3.6 billion through rights offerings. (For a graphic, click
Bankrupt companies in other sectors are starting to adopt the strategy,
including in recent months children's clothing retailer Gymboree Corp [BNCPLY.UL]
and leading cancer treatment chain 21st Century Oncology Holdings Inc [VECAPT.UL].
"The recent wave of bankruptcy cases in the energy sector has made
rights offerings sexy again. Their appeal to distressed investors has
become irresistible," said Vincent Indelicato of Proskauer Rose LLP,
which is representing Breitburn's shareholders.
So far, rights offerings have won approval in bankruptcy courts from
Dallas to New York as lawyers argued that a commodities slump thwarted
energy companies' financing options.
Judges must consider different facts in each case. In Breitburn, as oil
prices have stabilized the equity committee has asked the company to
market its land in the oil-rich Permian Basin, where multi-billion
dollar deals have unfolded in the shale industry this year.
The committee argues that the rights offering pursued by Breitburn would
enable bondholders including Elliott and an investment firm founded by
Commerce Secretary Wilbur Ross to scoop up Breitburn on the cheap, while
shareholders receive nothing.
The case of Breitburn is particularly thorny because the company is
structured as a master limited partnership, meaning that equity holders
could also be stuck with a hefty tax bill of up to $14 per unit, or
share. The next hearing is scheduled on Aug. 24.
Rights offerings are typically negotiated by several hedge funds that
collectively hold enough of a company's bonds to have veto power over a
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The logo and trading information for U.S. coal miner Peabody Energy
Corp. are displayed on a screen on the floor of the New York Stock
Exchange (NYSE) in New York, U.S., April 4, 2017. REUTERS/Brendan
In general, the right to buy discounted stock is offered to all bondholders. The
hedge funds that negotiated the deal act as a "backstop" by promising to buy any
stock that is declined by others, such as bond fund managers who cannot hold
The company gets to exit bankruptcy flush with cash and often virtually
debt-free. The hedge funds gain sizeable stakes in the company, and benefit if
the stock rises in value.
Elliott, for example, gained roughly 25 percent of Peabody - the world's largest
private sector coal producer - through stock offerings at discounts between 35
percent and 45 percent. The stock is trading more than double the offering
Another regular backstop investor, Contrarian Capital Management and its
affiliates, disclosed a 9 percent stake in the coal miner.
Contrarian also backstopped offerings that led to a 7 percent stake in oil
producer Penn Virginia, which has risen about 485 percent from the offering
price, and in April it registered to sell about 11 percent of oilfield services
company Key Energy Services <KEG.N>. The stock was trading around 110 percent
above the rights offering price.
Contrarian declined to comment.
Contrarian also received typical fees of 6 percent to 8 percent on those deals.
Companies say the fees, which are often paid in stock, compensate these backstop
investors for committing to finance a rights offering and for the months spent
negotiating a deal.
Some creditors have called the fees "exorbitant" and complained the deals are
structured to lock up value for select investors and buy votes for
reorganization plans, violating the bankruptcy code.
In the bankruptcy of CHC Group, a company that flies workers to oil rigs, funds
associated with Bain Capital and Wayzata Investment Partners and others split
$30 million for backstopping a $300 million offering.
CHC said it was a 10 percent fee. Investment firm Angelo, Gordon & Co, which was
blocked from becoming a backstop investor, estimated the fee was actually 32
percent because the backstop funds were receiving most of the rights to buy
The U.S. Bankruptcy judge in Dallas sided with CHC and overruled the objection,
in part because the company followed industry precedent for calculating the fee.
Angelo, Gordon declined to comment.
In the case of a rights offering from renewable energy firm SunEdison, a U.S.
Bankruptcy judge in Manhattan overruled objections from creditors CNH Partners
LLC and AQR Capital Management LLC who said the solar power developer's proposed
$300 million rights offering was aimed at locking up votes from creditors such
as Centerbridge Partners.
SunEdison said the new funding was necessary for the reorganization.
Charles Beckham, a Haynes & Boone bankruptcy attorney in Houston, said companies
often have no affordable alternative to a rights offerings, and the technique
assures the creditors that want to take control of a company they will not
compete for ownership.
"There is nothing wrong with that, but it sometimes leaves a bad taste in the
mouths of those not getting paid," he said.
(Reporting by Tom Hals in Wilmington, Delaware and Tracy Rucinski in Chicago;
Editing by Noeleen Walder and Edward Tobin)
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