A dispute between two groups of creditors could lead to a lengthy Chapter 11 process for the 635 MW Empire Generating gas-fired combined-cycle project in Rensselaer, N.Y., which filed for bankruptcy protection on May 19.
The Empire project has been owned by Tyr Energy, Tokyo Gas Co. and Kansai Electric Power Co. since the Japanese consortium acquired it from Energy Capital Partners in 2016 (PFR, 10/18/16).
They are eager to hand over the keys to new owners, but a disagreement between the project’s two biggest creditors has complicated matters, say people familiar with the situation.
"It’s going to be a messy one," says one of the people. "Appears a protracted case could be in store."
There is $353 million outstanding under the project's term loans B and C and revolving credit facility. Deutsche Bank, Barclays and Crédit Agricole were the bookrunners on the term loan issuance in 2014, which refinanced a previous deal (PFR, 2/27/14).
The plant’s creditors signed a forbearance agreement a year ago, after two breaches to its debt covenants, which prompted S&P Global Ratings’ analysts to describe a restructuring as a “virtual certainty” (PFR, 4/30/18, 5/17/18).
As the project teetered toward bankruptcy, holders of the term loan, led by Bridge Capital, formed an ad hoc creditor group. At the end of 2018, this group traded its positions to two new groups. Stroock & Stroock & Lavan was legal adviser to the now-disbanded ad hoc group.
As a result, hedge fund Black Diamond Capital Management holds some 51% of the senior debt and has joined forces with a minority lender that holds another 4%. Law firm Skadden is representing this group in the Chapter 11 proceedings.
Funds controlled by Ares Management, meanwhile, hold about 34% and are being represented by Vinson & Elkins. Ares disagrees with Black Diamond over the terms of a credit bid in a potential bankruptcy court sale process that could take place as part of the restructuring.
Ares is said to want its long-time asset management partner Power Plant Management Services to run the plant, whereas Black Diamond is leaning toward Daniel Hudson’s team at Woodlands Energy Management.
One of the original lenders, GE Energy Financial Services, sold its 10% portion of the deal to Starwood Property Trust as part of its divestment of its entire project finance loan book last year (PFR, 9/20/18). Starwood is said to have taken Ares' side in the intercreditor dispute and has hired Kirland & Ellis as legal adviser.
The debt is not split into first and second lien tranches, so all of the senior lenders are pari passu. The court will decide on bidding auction procedures on June 4.
“The question is the extent to which intercreditor disputes have any place in bankruptcy court,” says one of the sources. “Courts are trending towards ignoring the contractual disputes between creditors from these cases.”
Regardless of which side prevails in the dispute, several financial and legal advisers are set to earn fees.
Restructuring advisory firm RPA Advisors and law firms Hunton Andrews Kurth and Steinhilber Swanson are assisting the debtors, while Houlihan Lokey and Davis Polk are advising the collateral agent. PFR attempted to contact several attorneys for the various parties but they either declined to comment or could not be reached.
Moody’s Investors Service withdrew its Caa3 rating on the outstanding term loans on May 23.
Additional reporting by Richard Metcalf