Restructuring

Contributed by Sara Coelho
The Dynegy bankruptcy cases have been closely followed because they involved a set of prepetition transfers that were challenged by multiple creditor constituents after the Dynegy debtors filed bankruptcy cases in November of 2011.  On Friday, the United States Bankruptcy Court for the Southern District of New York approved a settlement among the debtors and all the major creditor constituents in the Dynegy cases, setting the stage for a plan consistent with the terms of the settlement, and resolving numerous claims in one of the most contentious bankruptcy cases in recent times.
The prepetition restructuring and transactions involved an internal restructuring of Dynegy Holdings LLC (“Holdings”) subsidiaries that concentrated the enterprise’s gas assets in certain entities and its coal assets in certain other entities, enabling the debtors to borrow money secured by the enterprise’s gas and coal-related assets.  That internal restructuring was challenged by debt holders with claims against at the Holdings level, who were structurally subordinate to the new debt incurred by the subsidiaries.  As we previously wrote, the Delaware Court of Chancery refused to enjoin those transactions.  Subsequently, equity interests in the companies that held the coal assets (referred to as “CoalCo”) were transferred from a subsidiary of Holdings to Holdings’ parent, Dynegy Inc. (“Inc.”).  In exchange for the transfer, Inc. provided an “undertaking” to one of Holdings’ subsidiaries, under which Inc. would provide a stream of payments that match certain of Holdings’ debt payments.  The undertaking was later assigned to Holdings, and amended to adjust Inc.’s liability as payments were made under the instrument.  Notably, Inc., which is a publicly traded holding company, did not file a bankruptcy case with the other Dynegy debtors.
These transfers inspired howls of protest from bondholders and other debt holders at the Holdings level, and, when Holdings filed its bankruptcy case, the case was immediately contentious.  In January, an examiner was appointed.  He issued a report in March finding that “[r]educed to its essence, the [CoalCo] transaction transferred hundreds of millions of dollars away from Dynegy’s creditors in favor of its stockholders” and concluded, among other things, that the CoalCo transfer was an actual and constructive fraudulent transfer.  Following issuance of the examiner report, the court ordered the parties into mediation overseen by the examiner.
The key terms of the settlement, filed on the docket, and presented on the record of the hearing, include a return of the equity interests in “CoalCo” from Inc. to the debtors, and cancellation of the “undertaking” and related intercompany liabilities that were created in connection with the CoalCo transfer.  The settlement also includes payment by Inc. of fees incurred by the settling parties, settlement of prepetition lawsuits challenging the CoalCo transfer, and agreement regarding the treatment of subordinated bond debt claims and claims associated with leveraged leases entered into by certain of the debtors.  The treatment granted to the holders of subordinated debt is for an agreed claim in an amount substantially less than the face amount of the subordinated debt, but, under the terms of the settlement, the claim will be treated as a general unsecured claim and will share in recoveries on a pari passu basis with other holders of general unsecured claims.  The settlement provides for consensual releases of claims by all the parties to the settlement and resolves the controversy over the prepetition CoalCo transfer.
The settlement also provides for additional consideration to Inc. in exchange for Inc.’s entry into the settlement and certain consideration provided by Inc., including assistance in avoiding certain change of control issues.  Specifically, it provides that Inc. will have an unliquidated administrative expense claim, which will be deemed satisfied if Inc. receives, under a plan, a distribution of 1% of the equity in the reorganized debtors (subject to dilution) and certain warrants, with an exercise price determined using a net equity value for the surviving entity of $4 billion.
The settlement was supported by the examiner, as well as declarations from an independent manager appointed to act for the debtors, a representative of Inc., and a declaration from the financial advisor to the official creditors’ committee appointed in the cases.  No one challenged the settlement at the hearing, and the debtors reported that all objections were resolved or withdrawn.
The court approved the settlement from the bench and applauded the result.  In connection with the settlement, the debtors and the other creditor groups entered into a plan support agreement to support a plan that is premised on the terms of the settlement.  Interestingly, the debtors pointed out that they were not asking the court to approve the plan support agreement (postpetition approval of plan support agreements that bind the debtor can be controversial), but stated on the record that the agreement was a statement of the debtors’ intent.  Following approval of the settlement, the court also granted a 45 day extension of the time period during which the debtors have the exclusive right to propose a plan.
The global settlement resolves numerous claims, which all the parties agreed would involve contentious and complex litigation to resolve outside of a settlement.  It also provides a conclusion for everyone watching the cases and wondering how the CoalCo transfers would be resolved.