Private equity firms pump $170 million into Southcross Holdings LP
Poor economics driven by low oil prices is the harsh reality being faced by many operators since the end of 2014, forcing 42 companies to file for bankruptcy in 2015, but none of those operators have made it through the Chapter 11 process as quickly as Southcross Holdings LLP.
Just two weeks after filing for bankruptcy, Southcross Holdings is reorganizing with an infusion of capital from private equity firms EIG Global Energy Partners and Tailwater Capital. The company announced April 13 that would restructure and emerge from bankruptcy. A Texas judge signed off on the pipeline owner’s plan which will cut almost $700 million in funded debt and preferred equity obligations from the company’s balance sheet.
“We’ve seen cases like this before, but it takes unanimous consent from the creditors,” Haynes and Boone Partner Patrick Hughes told Oil & Gas 360®. “They left the unsecured creditors unimpaired,” meaning holders of unsecured debt were paid a value for their debt which they agreed to in order to complete the restructuring of Southcross. (EDITOR’S NOTE: Neither Haynes and Boone nor Hughes have any direct professional relationship with the Southcross case.)
“Southcross will emerge from Chapter 11 with a new balance sheet and capital structure, presumably ready to resume operations,” said Hughes. “Part of the process for exiting bankruptcy is proving commercial feasibility.”
The two private equity sponsors will each receive approximately a 33% stake in the company for their collective $170 million infusion of capital into Southcross. Other term lenders were owed some $556 million in debt obligations will receive the remaining third equity stake in the company.
“The debtors — and Southcross generally — are highly dependent on production activity the Eagle Ford shale in South Texas,” a Southcross court filing says. “While the Eagle Ford has traditionally been considered one of the more attractive shale plays, its upstream producers have been uniformly hit hard by the recent market malaise. With oil prices currently at approximately $40 per barrel, it has become uneconomic to drill new wells in the Eagle Ford.”
“Capitalism without bankruptcy is like Christianity without hell” – Frank Frederick Borman
While the speed at which Southcross completed the bankruptcy process is not entirely unheard of, it is unusual, said Haynes and Boone’s Hughes. Compared to other oil and gas companies who have filed, Southcross had a relatively small group of creditors who did not like the deal though, making it easier to close quickly.
Also likely helping push for a quick conclusion to the bankruptcy process was the fact that other holdings belonging to Southcross would have likely been forced into bankruptcy as well—if the restructuring was not concluded by April 15. Southcross said in court filings it would it would face challenges as a going concern if the deal was not reached before mid-April.
Included in those holdings is Southcross Energy Partners LP, a midstream MLP. Southcross Partners is affiliated with the debtors, but was not part of the Chapter 11 procedure. The restructuring transactions do not affect MLP investors, court papers said.
“This was intensely negotiated and planned over many months in advance. It did not ‘just happen,'” said Hughes.
Most companies do not have the benefit of creditors agreeing on the best path forward, however, said Hughes. What made the Southcross deal run so smoothly was the agreement with unsecured creditors.
“In most cases, there’s a tension between the holders of first-lien debt and the unsecured debt holders,” said Hughes. “It can be difficult for those groups to come to an agreement about what the unsecured debt is worth.”
Given the volatility of oil prices over the last 16 months, this has become even more pronounced, as few are sure what assets might be worth in six months.
