Lender Group Lambasts Patriot Coal Bankruptcy Plan
An unhappy group of Patriot Coal Corp.’s lenders on Wednesday urged a bankruptcy judge to deny the coal miner’s sale and debt-payment plan, arguing that its chapter 11 case was unfairly run for the benefit of key creditor Knighthead Capital Management LLC.
The New York hedge fund “dominated this case, which will enrich it at the expense of other creditors,” Jeffrey Jonas, the lawyer representing lenders opposing Patriot’s chapter 11 plan to sell its mines and resolve its debts, told the U.S. Bankruptcy Court in Richmond, Va., at a hearing that continued Wednesday afternoon.
Knighthead helped fund Patriot’s exit from bankruptcy in 2013 and is among the lenders financing the miner’s current chapter 11 case. Mr. Jonas said it is also a lender to, and equity owner of, one of Patriot’s proposed buyers, Blackhawk Mining LLC.
Reached Wednesday, a Knighthead representative said: “Knighthead provided debtor-in-possession and other secured financing to Patriot Coal [and Blackhawk Mining] to help ensure that an orderly reorganization of Patriot’s assets could be achieved. Knighthead has not committed capital in any other manner in the case. We are confident that the court will approve the plan of reorganization presented by Patriot, as we believe it is the best outcome for all stakeholders.”
As of June, court filings by Knighthead’s lawyers show its holdings included two types of debt issued before Patriot’s second bankruptcy: $24.7 million of its approximately $250 million in term-loan debt and $130.8 million of roughly $300 million in second-lien notes. It also held warrants to acquire Patriot’s equity and provided at least $45 million of Patriot’s $100 million-plus current bankruptcy financing package, court papers show.
According to Mr. Jonas, Knighthead has used its involvement in the case to dictate a sale that will ultimately leave his clients---a lender group led by Cortland Capital Market Services LLC---essentially empty-handed while ensuring a “rich” recovery for Knighthead.
Under the plan, a significant portion of Patriot’s debt would be converted into new debt held by the combined Patriot and Blackhawk. The Cortland lender group, owed $250 million, would be able to participate in a rights offering of new debt. According to the court papers, Knighthead is among the lenders on tap to provide $80 million in cash to the combined company, in exchange for which the lenders will share in 35% of the equity in that company.
Patriot’s investment banker, Marc Puntus, testified that Knighthead and fellow investors lost more than $200 million from Patriot’s first bankruptcy. He said “only time will tell” as to whether Knighthead’s ongoing investment in Patriot will pay off. He said no other sources of financing were available to Patriot and that Knighthead is entitled to whatever return it can get in light of the significant risk it is taking on given the widespread distress plaguing the coal industry.
“To me, based upon where we are and based upon the fact that nobody else in this case, no other lender, was willing to make that investment...I don’t think today they’re getting a bargain,” Mr. Puntus said. “If they were, others would be participating.”
Patriot has warned that not allowing it to sell its mines to Blackhawk and another buyer would result in its certain liquidation and the loss of hundreds of jobs, but Mr. Jonas said the judge shouldn’t let that drive him to approve a payment plan that Mr. Jonas said is illegal and unfair.
“However much you feel that burden, it is not appropriate for you to shoulder it,” Mr. Jonas, of Brown Rudnick LLP, told Judge Keith Phillips, who is overseeing the case.
Patriot filed its second bankruptcy case in May. Wednesday’s hearing on its chapter 11 plan had been delayed to allow the company time to resolve creditor objections to its plan. It has reached deals with several key groups, including environmental regulators concerned about the fate of its cleanup obligations. Some objections remain, including from the lenders represented by Mr. Jonas.
The hearing is set to continue Thursday afternoon with additional testimony and arguments on the plan before the judge rules.