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Debt Management Law News

January 16, 2010

‘Prepackaged’ deal helps Express Energy Services expedite court process

When Houston-based oilfield services company Express Energy Services Operating LP emerged from Chapter 11 proceedings in a mere nine weeks, it didn’t come as a big surprise to those who follow bankruptcy law.

This kind of rapid reorganization is apparently becoming the norm as so-called prepackaged bankruptcies become widely used.

“We did not invent the wheel on this,” says Jim Davis, Express Energy chief financial officer. “GM and Chrysler went through exactly the same process. GM was in and out in 45 days. Chrysler was pretty short.”

While General Motors Corp. and Chrysler Group LLC — which emerged from bankruptcy in two months — entered Chapter 11 on a far greater stage, the blueprint was the same for those corporate behemoths as it was for Express Energy.

“The key to it all is having a prenegotiated arrangement with your major lending group,” Davis says.

Gone are the days when companies will spend two, three or four years in Chapter 11, according to Houston bankruptcy specialists.

“It is a distinct trend,” says Henry Kaim, a partner in King & Spalding LLP’s financial restructuring group. “We’re going to see more of this. Right now, the most you’re going to have is a year, 18 months, and most are going to be much shorter.”

The rapid Express Energy proceedings come on the heels of another relatively quick Chapter 11 journey by a Houston energy company, Particle Drilling Technologies Inc. Formerly a publicly traded entity, Particle Drilling filed for Chapter 11 in May 2009 and laid off most of its employees.

The drilling technology company emerged four months later as a privately held entity backed financially by Chicago-area businessman Edward Heil, and began rehiring staff in October (see “Particle Drilling back in one piece,” Oct. 23, 2009).
Ownership transfer

Several 2005 amendments to the federal bankruptcy code helped pave the way for faster proceedings, but today’s trend is primarily a function of a secured lender or a group of secured lenders having liens on all assets of the borrower.

“There are no unencumbered assets,” Kaim says. “The lender has the lien and rights to all the property, so you have to make a deal with the lender.”

Express Energy management and private equity investors turned over all available company equity to the company’s institutional lenders, in a deal arranged by Credit Suisse Group AG. Essentially, the transaction transferred ownership of the company, which is not unusual in prepackaged or prenegotiated bankruptcy proceedings according to company CFO Davis.

“There was a lot of prep work before the filing from all the lawyers on our side and the lenders’ side, and accounting people,” Davis says. “Every detail was completely thought through and planned out. Prior to filing, we had a prenegotiated agreement that the lenders would support a filing and vote yes for the plan of reorganization.”

Davis, who described the expedited process as “grueling,” says Express started looking into Chapter 11 back in March 2009, after the company and the board acknowledged that the oilfield service industry was slumping severely.

“In all likelihood that slump would cause the company to consume a lot of cash, so the decision was made to not make our regular interest and principal payments to our secured lender on June 30,” he says. “That would preserve cash and give the company time to seek some kind of negotiated solution with our senior secured lenders.”

Express filed for Chapter 11 protection on Oct. 27, submitting a plan that was approved by 75 senior secured creditors who had outstanding claims worth $330 million. The plan was confirmed in U.S. Bankruptcy Court for the Southern District of Texas, Houston Division, on Dec. 7, and Express emerged Dec. 31, still privately held and essentially debt-free.
Recession’s role

While stopping short of saying the trend is a direct result of the recession, Kaim and fellow King & Spalding Senior Counsel Mickey Sheinfeld say that economic conditions have enhanced the use of prepackaged bankruptcies.

“The concept of a prepackaged reorganization is clearly the trend now because of the interest in coming out as quickly as possible and the economics in today’s market dictate a rapid reorganization,” Sheinfeld says. “It’s going to be an ongoing trend for the foreseeable future.”

“Being in Chapter 11 can have some negative business impact on your company, as far as employees, customers, vendors,” adds Davis. “You want to minimize the time that you’re in Chapter 11 to minimize the possibility and extent of any damage.”

Express Energy maintained liquidity throughout by using “a lot of cost control,” according to Davis. As a result, the company did not lose any key employees or customers, and most of its vendors remained loyal as well.

Express’ 2,050-person work force had dwindled to 1,300 by May 2009. It began 2010 with 1,200 employees, spread across 30 locations in six states.

As for the actions of creditors involved in other Houston-area bankruptcy cases, Kaim urges vigilance.

“Creditors need to be on their toes because things that would have taken two to three years are taking several weeks,” he says. “They need to monitor companies in trouble closely, and be ready to move. The prenegotiated plan is now the trend and will continue to be so.”

Sometimes, debt can be overwhelming, and bankruptcy becomes necessary.
Bankruptcy can sometimes be difficult. If you are considering bankruptcy, contact the Houston bankruptcy lawyers of Weston & Associates, PLLC at 713-623-4242

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