There were no surprises when the gavel went down in the court of Judge Schurmer on March 16, 2017 in Federal Court in St. Louis. The Peabody Energy (BTUUQ) reorganization plan was approved. Generations of bankruptcy laws were essentially rewritten by the judge who confirmed a plan that violates many of them including 11 U.S.C §1123(a)(4). It requires the same treatment for each claim or interest of a particular class. In the Peabody Energy case, holders of claims in the same class receive demonstrably different consideration depending on whether they are plan proponents and whether and when they agreed to vote irrevocably in favor of the plan. You can read about this and other U.S. bankruptcy laws that are now destined for the dustbin of history in the The Ad Hoc Committee of Non-Consenting Creditors appeal.
Anyone who knows me knows I have devoted a good part of the last 3 months fighting for the rights of current Peabody Energy equity and retail noteholders. I have teamed up with many of the sharpest minds in investing who sadly became victims like myself, often making what looked like a good investment at the time in Peabody Energy retail notes but with catastrophic financial consequences when theft by the Peabody senior management team and co-proponents of the Peabody Energy reorganization plan entered the equation. Their profits were greatly enhanced at the expense of the retail noteholder. I'm talking about victims including CFAs and MBAs with a lifetime of investing experience, retired managers of billions of dollars in assets, a coal industry insider, and more.
Sadly I believe the battle to stop the cancellation of the current Peabody Energy stock and issuance of new Peabody Energy stock has been lost. I suspect there will be a class action suit on behalf of current Peabody Energy equity holders.
They know me well at the offices of the SEC, Attorney General of MO and NY, and the USDOJ. I wasn't getting much of a response from any until recently. I am now hopeful that there could be justice in the end. A U.S. Trustee trial attorney named Leonora Long introduced herself to a friend of mine/fellow Peabody retail noteholder who got to speak at the Peabody Energy confirmation hearing. She took down his name and information and said the U.S. Trustee Program appreciates his feedback which he provided. He followed up with an email to her where he provided expanded feedback including his concerns. Here is his email to her. He hasn't heard back yet but hopefully will in the near future and I have been working through the maze at the USDOJ. The U.S. Trustee is a component of the USDOJ. Read in Bloomberg Businessweek about Jones Day attorneys filling key posts in the new administration. Jones Day is Peabody Energy's law firm.
Here are comments based primarily on my conversation with my CFA friend who spoke at the Peabody Energy confirmation hearing.
In court on 3/16/17:
It was undisputed that the creditors (co-proponents) offered the institutions participation in the private placement in return for their support of the plan. This was one way to stack the results of the voting on the plan in their favor. Not only was this undisputed, Peabody CFO Amy Schwetz confirmed this to be the case. How can this be deemed anything but recovery? The judge simply said it is not. Retail noteholders were made a similar offer, minus the placement, to support the plan. Most rejected the plan. Would the judge also deem a cash payment not part of the recovery? How about the placement at a 99% discount? He even stated the placement represented significant value. To conclude that the placement is not recovery is to conclude there would have been support for the plan without participation in the placement. If this was the case, then there was no reason for the debtors to give away such a large portion of the company given that there was financing available at plan value with no stipulations by the Ad Hoc Committee of Non-Consenting Creditors, which was shown to be the case in court. Also, the terms of our notes were not discussed. I believe not only does bankruptcy law call for equal treatment, the notes do as well.
It was undisputed that individual investors are being shut out of a private placement of $750 million in newly minted Peabody preferred stock.
It was undisputed that co-proponents got greater recovery than the Ad Hoc Committee of Non-Consenting Creditors. It was undisputed the retail holders were cut entirely from placement.
It was undisputed that the notes in the hands of the institutions gave them something valuable in addition to the .21 cents recovery of retail noteholders excluding a group of 4 retail noteholders led by Joel Packer that negotiated their own settlement on 3/15/17. The judge stated that there is no right to participate in financing.
Peabody filed an 8-K on March 10 that reported its financial results for 2016. The fourth quarter adjusted EBITDA was $303.3 million compared to only $53 million during the same period in 2015. I suspect the large profits will be shown to potential new Peabody Energy investors. At the same time, Peabody Energy reported a 4th quarter loss of $11.13 for the 4th quarter with writedowns, etc. There was a similar strategy in January when the Peabody Energy senior management team told potential bond investors just how profitable they are and about the same time told the court how bad the company outlook was. How can this happen?
At the closing argument, the attorney for the debtors demonstrated a complete lack of understanding for how risk is compensated for. Given that the private placement is worth twice the capital invested, according to generally accepted corporate ethical standards that can be considered nothing but payment or recovery.
The judge disregarded the criteria of equal treatment. Actual law was read in court that everyone holding a single security must get equal recovery. In the end, there were at least 4 groups holding the same security that got different recoveries. The co-proponents of the plan, the Ad Hoc Committee of Non-Consenting Creditors, a group of 4 retail noteholders led by Joel Packer that settled on 3/15/17, and the rest of the retail noteholders including me and perhaps 1,000 other retail noteholders. There is a 5th group if you count retail noteholders that accepted the cash offer which turned out to be at the maximum of .50 with a $75 million maximum on the notes. Maybe there are even 6 groups; nobody with fiduciary responsibility could have selected the cash pool without a minimum guarantee.
An item brought up in court from my friend who attended the Peabody Energy confirmation hearing was how are buying bonds from private placement not part of the recovery? Participation in the private placement is proportional to the amount of bonds they owned. Can it just be financing which the judge said it is? Then why even buy the bonds?
Here is some background on this. U.S. bankruptcy rules require a 14-day stay (delay) in the effective date of a confirmed plan. With reason, that can be waived in some states. Of course, Peabody provided some contrived reasons to waive it, and the waiver was approved. What a cram through, this is unbelievable. I would assume this was to deter the effectiveness of appeals.
One word at the end of the hearing said it all and showed we've been had. BOOM! I believe it was a managing director of the restructuring group from Lazard who I have communicated with previously who said it and then shook hands with lots of young people, perhaps trainees at Lazard.
More puzzling questions:
U.S. judge says to approve Peabody's bankruptcy exit
The company struck a series of last-minute deals with some opponents of its plan, including with a group of individual investors who had argued they were wrongly blocked from a private stock sale meant to raise financing for the company.
This is the objection from the group of 4 retail noteholders led by Joel Packer that reached a settlement. Everything except perhaps being accredited investors applied to the 1,000 or so other retail noteholders that didn't get offered a similar deal. Some of the other retail noteholders are accredited investors. The settlement with the 4 retail noteholders was based on bonds with no more than $3 or $4 million face value. That is about 1% of the retail noteholder holdings in Peabody Energy debt that were part of the plan.
The group of four retail noteholders including a Joel Packer settled on a lawsuit on the Peabody Energy plan Judge Schermer approved. I suspect this article over Reuters had a lot to do with the settlement. I believe the settlement was the night before Judge Schermer confirmed the Peabody Energy plan and right after the article referenced above was published. I was shocked to hear about this settlement and even more shocked when I realized fellow retail noteholders with the exact security may still only get .21 recovery on our same unsecured notes. Most probably there was no admission of anything from the parties Joel Packer's group settled with and I suspect Joel Packer's group needs to remain silent about the settlement terms. Still, it gives the appearance of impropriety. It should be a concern for all highly rewarded players and the judge.
Here is a look at the objections from Joel Packer and the other 3 retail investors:
Objection of Tor Braham, Paul Edward Hindelang, Joel Packer, and Boris Senderzon to (A) the Motion of the Debtors and Debtors in Possession for an Order (I) Approving Disclosure Statement, (II) Establishing Procedures for Solicitation and Tabulation of Votes to Accept or Reject Joint Plan of Reorganization, (III) Scheduling Hearing on Confirmation of Joint Plan of Reorganization and (IV) Approving Related Notice Procedures and (B) Confirmation of Second Amended Joint Plan of Reorganization of the Debtors and Debtors in Possession
The judge didn't care about anything, he just wanted to rubber stamp the plan and I heard his closing remarks had something to do with his wanting to do what is best for society. All of that about the sanctity of mediation and there was nothing on the sanctity of equal treatment?
It was interesting 3/15's Reuter's article at the link above gave me the impression the group of 4 retail noteholders led by Joel Packer were fighting for the rights of retail noteholders and they were the only retail noteholders to settle no doubt for much more than the remaining thousand or so retail noteholders will get.
Hedge funds make 100%+ on their money (likely billions) and there were no disputes in court about this. Retail noteholders have a .21 recovery.
Co-proponents will own 45% of the new Peabody Energy stock from the private placement alone. No dispute from the judge, when co-proponents said it is just financing. Value of private placement not considered part of recovery. Private placement gets 45% or so of the new equity for $750 million - 35% = $488 million for a company with a lowball $3.1 billion market value retrofitted by the co-proponents and $5.4 value from Mark Hootnick, a restructuring expert at Millstein and Co. Ad Hocs offered same at full plan value and co-proponents would not consider. Read Mark Hootnick's declaration in support of the Ad Hoc Committee of Non-Consenting Creditors here.
Why didn't the Peabody Energy senior management team implement Fred Palmer's reinstate plan which showed how Peabody's debt could be reinstated and why shareholders don't need to be wiped out? I suspect the 10% of the new stock on the other side of the bankruptcy had a lot to do with it plus billions in profits to the co-proponents at everyone else's expense.
Why did Peabody Energy continuously rebuff SUEK, Yancoal, and Glencore from formally bidding for its prized assets? I suspect the 10% of the new stock on the other side of the bankruptcy had a lot to do with it plus billions in profits to the co-proponents at everyone else's expense. A Peabody Energy investor/coal industry insider filed a court document in support of Mangrove forming an equity committee with this kind of info and not only was this not included in the court agenda, this document never appeared in the dockets on the KCC site. I know he sent this document via certified express mail and email and he confirmed via email with Wynne Abernathy, the judge's assistant, that this court document was received.
You can hear what went on at the Peabody Energy confirmation hearing on 3/16/17 here, here, here and here.
Peabody's adversary creditors to appeal bankruptcy exit approval
Rebel creditors of Peabody Energy Corp's reorganization plan have said they intend to appeal a bankruptcy judge's decision to allow the world's largest private sector coal producer to exit Chapter 11 protection. Their complaints mostly center around the terms of a private stock sale that formed part of Peabody's plan to slash more than $5 billion of debt and exit bankruptcy. To participate in the private offering, Peabody required creditors to support the reorganization plan. The objecting creditors have said this "premature" buy-in violated the U.S. bankruptcy code.
U.S. judge signs Peabody bankruptcy exit after environmental deal
A U.S. judge formally approved Peabody Energy Corp's plan to emerge from bankruptcy late Friday after the coal producer struck a settlement with the U.S. government over legacy environmental claims at a gold and metal mining subsidiary. It was still in talks over a settlement with four individual investors who filed a lawsuit alleging that Peabody and other parties in the bankruptcy case violated their fiduciary duties by blocking individuals from the lucrative private stock sale. It was unclear whether the settlement would apply only to the four investors who filed the lawsuit or to all individual owners of the same unsecured bonds. At least one investor, Mark Gottlieb, told Reuters he had not been included in the deal. On behalf of all Peabody Energy retail noteholders, I'd like to know if the settlement will apply to all Peabody Energy retail noteholders.
Hedge funds to reap big stock gains from bankruptcy of coal miner Peabody
The exclusive offering for institutional investors will be challenged in bankruptcy hearings starting Thursday by a group of individual investors who were shut out.
Those investors - who said in court filings that they own between 5 and 7 percent of the unsecured bonds - will argue in U.S. Bankruptcy Court in St. Louis that Peabody's reorganization plan should be rejected because it violates a bankruptcy statute requiring equal treatment for owners of the same securities.
I believe the primary vehicle of the fraud was the baseless and artificially low Enterprise Value - which the co-proponents fully admit was a "negotiated" amount. That's a critical number that determines who gets all the new equity and who gets a little and who gets none. It should not be "negotiated", should be based on common methods, by independent parties (not the debtor and not the creditors).
Also see my other articles on Peabody Energy on SeekingAlpha if you haven't already:
Peabody Energy: How To Rig The Ballot Box In The Heist Of The Century
Peabody Energy - Are The Senior Management Team And Lawyers The Only Winners?
Peabody Energy And The 'Smash And Grab' Technique
Peabody Energy - Death Of The Junk Bond Market As We Know It
About me:
Peabody Energy: Set To Officially Shaft Retail Unsecured Bonds Holders On March 16th
Also see:
Former Peabody Energy Senior Executive Questions Management's Fiduciary Behavior
Hopefully there will be justice for all retail noteholders after the appeal from the Ad Hoc Committee of Non-Consenting Creditors to the Peabody Energy reorganization plan. Unfortunately, much of the damage may already be done by appeal time. I believe old Peabody Energy stock is due to be cancelled and replaced with new Peabody Energy stock perhaps in early April and the Ad Hoc appeal could be in May.
It would be great if the Ad Hocs win their appeal based on bankruptcy law 11 U.S.C §1123(a)(4). It requires the same treatment for each claim or interest of a particular class and all noteholders including retail noteholders would be treated the same as a result. I am not counting on this.
I was glad to read Absolute Priority Remains Absolute - the U.S. Supreme Court Holds Structured Dismissals Cannot Violate Priority Rules. The Supreme Court is upholding the letter of the law. The Circuit Court said there could be rare exceptions; the Supreme Court said this is not the case. As a result, the Ad Hocs could potentially take their appeal all the way to the Supreme Court if needed and win. This could make it difficult for Peabody Energy to exit Chapter 11 bankruptcy within the prescribed time limit and the Chapter 11 could change to a Chapter 7 liquidation of assets for maximizing their value. The Peabody Energy senior management team would then no longer be able to Smash Peabody Energy and Grab their 10% of Peabody Energy post reorganization and could lose their jobs. SUEK, Yancoal, Glencore, and/or others would finally be able to bid on Peabody Energy's prized assets. All holders of the same notes would receive equal recovery.
Please message me if you are a retail noteholder and are against the current Peabody Energy reorganization plan.
I believe there is strength in numbers. If you have issues with the Peabody Energy chapter 11 and subsequent reorganization plan, fill out this complaint form and send to the NY Attorney General. Also do the same with the Missouri Attorney General here. Also fill out the complaint form to the SEC here and write the USDOJ Fraud Section, Criminal Division at the address shown here. I believe the greater everyone's participation, the greater our chances are of getting justice for the Peabody Energy investor.
I own $130,000 face value of Peabody Energy subordinated bonds maturing in 2018 and 2020 and $47,000 face value of Peabody Energy convertible bonds maturing in 2066.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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