CanArgo files Chapter 11; noteholder to provide $1.2 million DIP loan

By Angela McDaniels

Tacoma, Wash., Oct. 28 - CanArgo Energy Corp. filed for Chapter 11 bankruptcy with the U.S. Bankruptcy Court for the Southern District of New York on Wednesday, according to an 8-K filing with the Securities and Exchange Commission.

Persistency Capital LLC, the holder of the company's 12% subordinated convertible guaranteed notes due June 28, 2010, has agreed to provide a $1.2 million debtor-in-possession credit facility to the company. CanArgo will seek approval of the DIP facility from the bankruptcy court.

If the plan of reorganization is confirmed before the maturity of the DIP facility, the facility will be converted into convertible preferred stock at the rate of one preferred for each $1.00 amount outstanding.

The DIP facility will have a tenor of 90 days and can be extended by up to 30 days under some circumstances.

The DIP facility will carry no interest unless it is not repaid or converted by maturity, in which case interest will begin to accrue at 15% per year.

The proceeds will be used, among other things, to repay outstanding amounts due under a bridge loan of up to $550,000 previously provided by Persistency to subsidiary CanArgo Ltd. and for general corporate purposes.

Plan of reorganization

On Oct. 22, the company entered into a plan support and lock-up agreement with Persistency, the holders of its senior subordinated convertible guaranteed notes due Sept. 1, 2009 and the other creditors under which the parties agreed to support a plan of reorganization of the company.

Under the proposed plan, treatment of creditors would include:

• Holders of administrative, priority tax and other priority claims would receive the amount of their claims in cash or the claim would be left unimpaired;

• Convenience claims would be paid in full;

• Holders of senior lender claims would receive $5,367,116 principal amount of new 8% payment-in-kind senior notes.

Beginning nine months after issuance, the notes would be repaid in installments of $1 million per quarter until they were fully repaid. The notes would be callable, and a discount of 25% would be applied if they were prepaid in full by Dec. 31, 2009;

• Persistency, the holder of the senior subordinated lender claims, would receive 100% of the common stock of the reorganized company. However, if holders of general unsecured claims vote to approve the plan, Persistency would give the shares to the general unsecured claims holders.

In that case, both Persistency and general unsecured claims holders would be entitled to receive the tranche A interests in a liquidating trust that will be established to pursue the litigation against the company's underwriters in connection with a 2008 failed securities offering. The tranche A interests would entitle the holder to payment of up to $7 million;

• Holders of general unsecured claims would also be entitled to participate in a rights offering of $2 million of convertible preferred stock. The subscription price will be $1.00 per preferred, and the conversion price will be $0.40 per share of common stock.

Persistency will backstop the rights offering, and the proceeds will be used for working capital;

• Equity holders will receive tranche B interests in the liquidation trust, which will entitle them to any value remaining in the liquidating trust after the tranche A interests are paid.

In its court filings, CanArgo reported $1 million to $10 million of assets and $10 million to $50 million of liabilities.

Persistency Capital is the largest unsecured creditor with a claim of $12.73 million for the 2009 senior subordinated notes. Yvonne Koenig, care of, Ingalls & Snyder is the second largest unsecured creditor with a claim of $1.97 million for 2010 senior notes, followed by Robert Gipson and Thomas Gipson, both also care of Ingalls & Snyder, each with a $1.69 million claim for 2010 senior notes. Weus Holdings Ltd. of Aberdeen, Scotland, has a $1.2 million settlement claim. All other unsecured claims are under $1 million.

CanArgo is an oil and gas exploration and production company based in Guernsey, Channel Islands. Its Chapter 11 case number is 09-16453.

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