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Murray Energy lender says coal company breached bankruptcy financing agreement

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Essential Energy Insights - February 2021

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Murray Energy lender says coal company breached bankruptcy financing agreement

Murray Energy Corp. lenders say the company engaged in "blatant and unequivocal" breaches of its bankruptcy financing agreement by manipulating the value of its reported assets to include items contrary to their agreement and avoid dropping below thresholds required by their loan agreement.

GACP Finance Co. LLC, an affiliate of Great American Capital Partners LLC, provided Murray with a $90 million first-in-first-out loan facility that was rolled up into Murray Energy's debtor in possession financing facility. Part of the agreement requires that the value of Murray Energy's coal assets do not fall below $160 million for any weekly period, or below $175 million for more than three consecutive weeks.

GACP warned Murray Energy's coal assets "have fallen off a cliff" and are already well under the asset value threshold.

"As a result, [GACP] faces severe erosion of its collateral on a daily basis, there is a very real risk that its primary collateral will be permanently depleted, and there is no reasonable likelihood that such collateral will be replenished or that sufficient alternative sources of recovery will be available to [GACP]," the filing states.

The parties agreed that GACP was allowed to freeze Murray Energy's bank accounts in the event of default without notice, the GACP filing states. The lender said it is seeking a court order prohibiting Murray Energy or other parties from exercising that right to block or limit bank account withdrawals.

GACP claims Murray Energy acted in bad faith when it submitted recent reports of its assets. For the first 25 weeks, the reports included only coal receivables. That was true even when they dipped below the $175 million threshold on the week of April 3, the filing states. By mid-April, GACP said it encouraged Murray Energy to engage in talks to avoid an impending default on the agreement. Instead, Murray Energy allegedly continued to submit current asset reports that included noncoal receivables that GACP said were inappropriate.

GACP said Murray Energy's May 1 report "showed a catastrophic decline" in coal assets to an amount below the $160 million floor set by their financial covenants. The actual amount, like many of the specific financial details in the filing, were redacted. GACP wrote that it believes Murray Energy suddenly turned to include the "improper assets" in its calculation due to disagreement about a potential solution to Murray Energy being unable to repay its loan under the current terms once the bankruptcy plan is confirmed.

GACP said Murray did not provide details of the noncoal receivables but noted they included "questionable insider 'management fees' due from related parties." Meanwhile, the coal assets underlying the loan "are rapidly disappearing at an alarming rate."

An emergency hearing on GACP's motion is scheduled for May 19. The new details around Murray Energy's finances could add fuel to a May 22 hearing in which competitor Consol Energy Inc. is set to argue for a motion to convert the case to a Chapter 7 liquidation hearing. Most stakeholders in the case are opposing the motion.

The court also recently published an opinion supporting the denial of Consol's attempt to block a settlement involving Murray Energy and certain healthcare and retiree benefit obligations. The judge said the settlement's benefits to multiple parties in the bankruptcy case "far outweigh" any harm to Consol.

Consol, which could eventually be stuck with the liabilities as it previously owned the related mines, appealed the decision.

Pointing to the motion from GACP and other financial concerns around Murray Energy, Consol filed a reply on May 13 reiterating its argument for liquidation. If the sale and confirmation hearing occurred now, Consol wrote, Murray Energy would not have the financial wherewithal to fund its obligations.

"They therefore plead for more time, while CONSOL and other creditors must hold their breath during the interim hoping the debtors can pull this off," Consol wrote.

In the meantime, they noted Murray Energy's debtor in possession facility has gone from trading between 80 cents to 90 cents on the dollar last month to just 45 cents as of May 12.

"Such a drastic drop indicates that even the market does not have faith in the debtors' ability to reorganize and emerge from bankruptcy," Consol wrote.