Arch Coal bank lenders seek to block exchange offer for three series

By Susanna Moon

Chicago, July 29 – Arch Coal, Inc. said some of its lenders are trying to prevent the company from carrying out its exchange offer for three series of notes, directing its term loan administrative agent to refuse cooperation.

Arch Coal believes the claims are “without merit and will contest vigorously,” according to a company press release.

As previously announced, the company began the private offer on July 2 to exchange its outstanding $1 billion of 7% senior notes due 2019, $375 million of 9 7/8% senior notes due 2019 and $1 billion of 7¼% senior notes due 2021.

In the exchange offer, the company will issue new 6¼% trust certificates due 2021, 8% senior secured notes due 2022 and 12% senior secured second-lien notes due 2023.

In order to fund the offers, however, Arch Coal plans to obtain incremental term loans and revolving loans under its amended credit agreement dated June 14, 2011, which requires approval by the administrative agent.

In a letter July 28, “certain unidentified term loan lenders under the credit agreement purporting to hold more than 50% of the term loans” asked the administrative agent to refrain from executing documentation for the exchange offers and the establishment of the new term loans and approving the new intercreditor agreement, the release contended.

No approval by or consent of the existing term loan lenders is required for the transactions, the company said.

In addition, the letter includes other assertions about the exchange offers, the proposed revolver amendments, the new intercreditor agreement and the existence of a default under the credit agreement.

Arch Coal said it “has evaluated the assertions made in the letter and believes they are without merit,” as follows:

• First, the letter asserts that the proposed revolver amendments require consent of a majority of all lenders under the credit agreement.

Arch contends, however, that the proposed revolver amendments require the consent of only a majority of lenders making revolving loans;

• Second, the letter states that the new term loans trigger the “most favored nation” provisions in the credit agreement because the effective yield under the new term loans is more than 50 basis points higher than the effective yield on the existing term loans.

Arch counters that the effective yield of the new term loans will not exceed the effective yield for the existing term loans because the definition of “effective yield” under the credit agreement takes into consideration only “applicable interest rate margins, interest rate benchmark floors and all fees, including recurring, upfront or similar fees or original issue discount (amortized over four years following the date of incurrence thereof...) payable generally to the lenders making such class of loans....”

The interest rate for the new term loans is 6¼% and there are no fees for the new term loans. Also, given that Arch Coal is exchanging more than $367 million of existing debt at a substantially higher interest rate for $154 million of new term loans with a lower interest rate and $22 million of cash, there is no original issue discount in the nature of fees for the exchange offers, the company contended;

• Third, the letter contends that the credit agreement does not allow the new term loans to be borrowed in a transaction for non-cash consideration.

The company says, however, that there is no provision in the credit agreement requiring that a borrowing of new term loans must be funded in cash by the lender;

• Fourth, the letter states that Arch Coal is in default under the credit agreement for failure to pay previously invoiced legal expenses of counsel to a group of lenders under the agreement.

The company responded by saying that the credit agreement provides that a lender is entitled to reimbursement of “reasonable out-of-pocket expenses” only “in connection with the enforcement or protection of its rights” in connection with the credit agreement or the loans, including such expenses “incurred during any workout restructuring or negotiations” with respect to the loans.

• Fifth, the letter asserts that the new intercreditor agreement is unacceptable to the lenders.

The company says that this assertion is irrelevant, because the credit agreement requires intercreditor documentation “acceptable to the administrative agents in their sole discretion.”

• Sixth, the letter states that the proposed replacement of the collateral agent is unacceptable to the lenders.

The company finds this assertion irrelevant as well because “the administrative agents shall have the right, with the approval from the borrower . . . to appoint a successor, such approval not to be unreasonably withheld or delayed.”

The collateral agent is a well-regarded national bank, Arch Coal said, and believes any objection is unreasonable.

Arch Coal said it believes that the assertions are without merit and that it intends to contest them “vigorously,” but that it cannot predict what effect the claims might have on the exchange offers.

Exchange offer details

As of 5 p.m. ET on July 21, holders had tendered for exchange about $487 million principal amount of the 7% notes, $169 million of the 9 7/8% notes and $398 million principal amount of the 7¼% notes.

That compared with tenders for about $477 million of the 7% notes, $148 million of the 9 7/8% notes and $398 million of the 7¼% notes as of 5 p.m. ET on July 16.

The early tender deadline was previously extended to midnight ET on Aug. 4, which coincides with the offer expiration.

As previously announced, holders must choose whether to receive the exchange payment in the form of trust certificates, new 8% notes or new 12% notes.

The total exchange value per $1,000 principal amount will be $400 for the 7% notes and the 7¼% notes, both with a priority acceptance level of 1, and $450 for the 9 7/8% notes, with a priority level of 2.

The total value includes an early tender premium of $30 per $1,000 of notes tendered by the early tender date.

Those who tender their notes for exchange after the early deadline will receive the total value less the early premium.

Holders whose notes are accepted for exchange in the offer will receive at settlement 50% of the accrued interest in cash, but will not otherwise recover additional amounts for accrued interest, the company noted.

The amount of new securities to be issued under the exchange offer will be based on the acceptance priority levels, with priority given to 7% notes and 9 7/8% notes, the maximum exchange amount and on when the notes are tendered.

The tender caps will limit the amount of new securities to be issued to

• $404 million for the trust certificates, minus the aggregate principal amount of trust certificates issued under the concurrent exchange offer and consent solicitation;

• $200 million for the 8% notes, minus the aggregate principal amount of new 8% notes issued in the concurrent offer; and

• $150 million for the 12% notes.

The exchange offer was previously extended from July 30. The early tender deadline was extended from 5 p.m. ET on July 21, the early tender date, extended from July 16. Tendered notes may no longer be withdrawn, as of the original early tender date.

Concurrent exchange offer

Arch Coal said on July 17 that it secured the needed majority consents in the private exchange offer for new 6¼% trust certificates due 2021 and a cash payment in exchange for any and all of its $500 million outstanding 7¼% senior notes due 2020.

The supplemental indenture to the indenture had been executed, but the provisions will not be operative until all of the tendered notes have been accepted for exchange, as previously noted.

Arch is soliciting consents to amend the notes indenture to modify restrictive covenants to conform to Arch’s other indentures, including for the issue of additional secured debt.

The exchange offer will end at midnight ET on July 31, extended from July 30. The early tender deadline was extended to 5 p.m. ET on July 17 from 5 p.m. ET on July 16.

Tendered notes may no longer be withdrawn as of the original early tender deadline.

As of the original early tender date, holders had tendered about $414 million principal amount of the 2020 notes.

In addition to cash, holders would receive about $173 million principal amount of trust certificates.

The exchange value for each $1,000 principal amount will be $418.69 of trust certificates plus $60 in cash for notes tendered by the early tender date and $30 in cash after that.

Holders also will receive at settlement 50% of the accrued interest in cash on the notes but will not recover any additional accrued interest.

The amount of new term loans and revolving loans outstanding at any time may not exceed $404 million and will equal to the principal amount of trust certificates issued in the exchange offer and in a concurrent exchange offer.

Holders who tender their notes will be deemed to consent to the proposed amendments, and holders may not deliver consents without tendering their notes for exchange.

The exchange offer is conditioned on the receipt of consents from holders of a majority of the outstanding notes not owned by Arch or any of its affiliates, which has now been satisfied.

The company previously said that holders of about 56.9% of the outstanding notes had executed agreements with Arch committing to participate in the exchange offer and consent solicitation.

More offer details

The trust certificates represent a fractional undivided interest in Arch Pass Through Trust, a Delaware statutory trust whose only assets will be senior secured term loans due 2021 issued as incremental debt under Arch’s existing credit agreement and senior secured revolving commitments.

The new revolving loans will be transferred to the trust either by the assignment of existing revolving commitments or by the creation of an incremental revolving credit facility in lieu of the existing revolving credit facility, and all existing commitments would be terminated at the close of this transaction.

The principal amount of new term loans and new revolving loans outstanding at any time may not exceed $404 million and will equal the principal amount of trust certificates issued in the exchange offer and in a concurrent exchange offer. The trust is not a subsidiary or affiliate of Arch, and the trust certificates will not be guaranteed or insured by any person or entity, including Arch, the release noted.

“The private offer is being made as part of Arch’s efforts, in light of challenging market conditions, to deleverage its balance sheet and improve its liquidity profile. These efforts may include additional private offers or repurchases of Arch’s other outstanding debt securities,” the press release said.

The exchange offer is conditioned upon the completion of the concurrent exchange offer and consent solicitation with holders of at least a majority of Arch’s outstanding 7¼% senior notes due 2020 executing a consent and exchanging their 2020 notes for trust certificates or new 2022 secured notes in the concurrent exchange offer, the press release added.

The information agent is Ipreo LLC (888 593-9546 or 212 849-3880).

Arch Coal is a St. Louis-based coal producer.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.