Quarterly report pursuant to Section 13 or 15(d)

Subsequent Events

v3.20.2
Subsequent Events
3 Months Ended
Mar. 31, 2020
Subsequent Events [Abstract]  
Subsequent Events
Subsequent Events

Please read Note 3 - Liquidity for information regarding certain events subsequent to March 31, 2020 that relate to the events described in this Note 20.

Restructuring Support Agreement

On June 30, 2020, the Company and Rosehill Operating (together with the Company, the “Company Parties”) entered into the RSA, which includes the term sheet attached thereto as Exhibit A (the “Term Sheet”), with (i) Tema, as (a) the holder of approximately 66.8% of the voting equity interests of the Company and 35.2% of the equity interests in Rosehill Operating and (b) party to the Tax Receivable Agreement, (ii) certain beneficial holders of, or investment advisors, sub-advisors, or managers of discretionary accounts that are beneficial holders of claims under the Amended and Restated Credit Agreement among the Company Parties, JPMorgan and the lenders from time to time party thereto (the “Consenting Lenders”), and (iii) certain beneficial holders of, or the investment advisors, sub-advisors, or managers on behalf of discretionary funds, accounts or entities that are beneficial holders of claims under the Note Purchase Agreement, and 100% of the Company’s issued Series B Preferred Stock (the “Consenting Noteholders,” and together with Tema and the Consenting Lenders, the “Consenting Creditors”).

The RSA contemplates that the Company Parties will (i) file voluntary cases (the “Chapter 11 Filings”) under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”) to effect a restructuring through a prepackaged chapter 11 plan of reorganization (the “Plan”) to be filed with the Bankruptcy Court on or before July 15, 2020 at 11:59 p.m. (prevailing Central Time) and (ii) enter into a proposed junior convertible debtor in possession delayed draw term loan facility (the “DIP Facility”), as evidenced by the DIP Credit Agreement (as defined in the RSA).

The RSA contains certain covenants on the part of each of the Company Parties and the Consenting Creditors including that the Consenting Creditors use commercially reasonable efforts to support the Restructuring Transactions (as defined in the RSA), to vote in favor of the Plan and to otherwise use good faith when negotiating the forms of the Definitive Documents (as defined in the RSA) with the Company Parties. The RSA also provides for certain conditions to the obligations of the parties and for termination upon the occurrence of certain events, including without limitation, the failure to achieve certain milestones and certain breaches or other actions by the parties under the RSA.

Proposed Plan of Reorganization

The Plan as contemplated by the RSA will provide for the following, among other things:

after the time on which all conditions to the effectiveness of the Plan have been satisfied or waived in accordance with the terms thereof and the Plan becomes effective (the “Effective Date”), either a reorganized Rosehill Operating or a newly created legal entity that would be the successor to the Company Parties (either entity constituting “New Rosehill”) will be established;

the entry by New Rosehill into an exit RBL credit agreement to refinance indebtedness under the Amended and Restated Credit Agreement (the “Revolving Credit Facility”), with a term of 4 years and a maximum initial borrowing base of $235.0 million;

the principal of the DIP Facility will be converted to 24.15% of the shares of the equity of New Rosehill (the “New Common Shares”), and the backstop fee earned in connection with the DIP Facility will be converted to 1.69% of the New Common Shares, in each case, subject to dilution from the post-emergence management incentive plan that will be adopted by the board of directors of New Rosehill (the “MIP”);

each Consenting Noteholder will receive its pro rata share of 68.60% of the New Common Shares, subject to dilution from the MIP, in exchange for all of the Secured Note Claims (as defined in the Term Sheet);

Tema, as the holder of claims under that Tax Receivable Agreement, will receive its pro rata share of 4.08% of the New Common Shares, subject to dilution from the MIP, in exchange for all of the TRA Claims (as defined in the Term Sheet);

subject to specific conditions, including acceptance of the Plan by and lack of any objection to confirmation of the Plan by the holders of Series A Preferred Stock and Series B Preferred Stock (each as defined in the Term Sheet) (collectively, the “Preferred Holders”), the Preferred Holders will receive their pro rata share of 1.48% of the New Common Shares, subject to dilution from the MIP, in exchange for all of the Series A Preferred Stock and Series B Preferred Stock;

the Existing Common Stock (which includes the Company’s Class A Common Stock) and Other Existing Interests (each as defined in the Term Sheet) will be cancelled and receive no recovery;

the RSA requires that Tema and the Consenting Noteholders work in good faith to finalize substantially final forms of governance documents or term sheets in respect thereof before the date the Chapter 11 Cases are filed (the “Petition Date”);

certain claims relating to borrowings outstanding under the Amended and Restated Credit Agreement are to be paid with net cash proceeds from the orderly unwind of all of the Company’s existing commodity hedging and derivative instruments, which is anticipated to occur between the execution of the RSA and the Petition Date; and

the Gas Gathering Agreement will be amended after the execution of the RSA and before the Petition Date.

The terms of the Plan are subject to approval by, among other parties, the Consenting Creditors (pursuant to the terms set forth in the RSA) and the Company, as well as the Bankruptcy Court, among other conditions to the effectiveness of the Plan. The Company Parties intend to solicit votes from the Consenting Creditors with respect to the Plan prior to the Petition Date, and to commence solicitation of votes from the Preferred Holders prior to the Petition Date but to receive such votes after the Petition Date. Accordingly, no assurance can be given that the transactions described herein will be consummated. If a termination of the Plan occurs prior to the Chapter 11 Filings, then the Company’s lenders and noteholders could exercise remedies for Events of Default (as defined in the respective agreements) (including accelerating debt, sweeping cash and foreclosing on its assets). During the Chapter 11 proceedings, a termination of the RSA may result in the loss of support for the Plan, which would adversely affect the Company’s ability to confirm and consummate the Plan. If the Plan is not consummated, there can be no assurance that the Company could achieve a restructuring alternative and its Chapter 11 proceedings could become protracted or terminate, which would have a material adverse effect on the Company’s liquidity and ability to continue as a going concern.

Following the Chapter 11 Filings, the Company and Rosehill Operating (together, the “Debtors”) expect to operate the business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code. Subject to certain exceptions under the Bankruptcy Code, the Chapter 11 Filings will automatically enjoin or stay the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover, collect or secure a claim arising prior to the filing of the Bankruptcy Petitions. Under the Plan, the Company intends to ask the Bankruptcy Court to grant certain relief requested by the Debtors enabling the Company to conduct its business activities in the ordinary course, including, among other things and subject to the terms and conditions of such orders, authorization to pay employee wages and benefits, to pay certain taxes and governmental fees and charges, to continue to operate our cash management system in the ordinary course, to secure debtor-in-possession financing, to remit funds we hold from time to time for the benefit of third parties (such as royalty owners), and to pay the prepetition claims of certain of our vendors that hold liens under applicable non-bankruptcy law.

Debtor-in-Possession Financing

The RSA contemplates that the Company Parties will file a motion with the Bankruptcy Court (the “DIP Motion”) seeking, among other things, interim and final approval of debtor-in-possession financing on the terms and conditions set forth in the DIP Credit Agreement. If approved by the Bankruptcy Court, the RSA provides that the DIP Credit Agreement will provide for the following, among other things:

the DIP Facility, in the aggregate amount of $17.5 million, shall be junior to the Adequate Protection Liens (as defined in the Term Sheet), superpriority liens securing postpetition hedges, the Revolving Credit Facility and the Note Purchase Agreement but senior to all other Claims (as defined in the Term Sheet) and Interests (as defined in the Term Sheet);

$15.0 million of the DIP Facility will be backstopped by the Consenting Noteholders, and $2.5 million shall be backstopped by Tema;

Tema will have the right to subscribe to provide up to $7.5 million of the DIP Facility;

the Company Parties will draw half of the DIP Facility within three business days after the entry of the Interim Order, and the remaining half of the DIP Facility within three business days after the entry of the Final Order;

the DIP Facility will mature at the earliest of (i) six months after the Petition Date , (ii) the Effective Date; (iii) the closing of a sale of substantially all of the equity interests or assets of the Company Parties (unless done pursuant to the Plan); (iv) the date of prepayment in cash in full by the Company of all claims under the DIP Facility and termination of all commitments in respect of the DIP Facility in accordance with the terms of the DIP Credit Agreement; and (v) the date of termination of the commitments in respect of the DIP Facility and/or acceleration of any outstanding extensions of credit following the occurrence and during the continuance of an event of default under the DIP Facility;

borrowings under the DIP Facility will bear interest at 8% per annum, paid, in kind monthly, with an additional 2% per annum default rate paid in kind, provided that such interest may only be paid in cash upon the Effective Date subject to certain conditions;

the Company Parties will pay an upfront fee of 100 bps, paid-in-kind, provided that such upfront fee may only be paid in cash upon the Effective Date subject to certain conditions;

the DIP Credit Agreement will provide for certain customary covenants applicable to the Company;

the DIP Credit Agreement will require that the Company Parties (a) enter into commodity hedge transactions pursuant to standards agreed in advance by the Company, the Majority DIP Lenders (as defined in the Term Sheet), and JPMorgan in their reasonable discretion such that, as soon as practical after the Petition Date (and in any case no later than ten (10) Business Days after the Petition Date), the notional volumes of such commodity hedge transactions represent at least 70% of reasonably anticipated projected production from oil and gas properties constituting proved developed producing reserves of Rosehill Operating for each of the following 24 months (August 2020 to July 2022 based on the most recent reserve report) for each of crude oil and natural gas, calculated separately, (b) receive prior written consent from Majority DIP Lenders and JPMorgan (acting at the direction of the Required Revolving Credit Agreement Lenders (as defined in the Term Sheet)) for any asset sales or dispositions outside the ordinary course of business in excess of $200,000 in the aggregate or investments in excess of $200,000 in the aggregate, and (c) provide certain periodic reporting packages and budgets to the Majority DIP Lenders and JPMorgan; and

the DIP Credit Agreement will provide for certain customary conditions for debtor-in-possession facilities of this type and certain other conditions as required by the Majority DIP Lenders.

The terms of the DIP Credit Agreement are subject to approval by the DIP Lenders, the Company, and the Bankruptcy Court, among other conditions. Accordingly, the terms of the DIP Credit Agreement are subject to change and there can be no assurance that the DIP Credit Agreement will be consummated. The Company anticipates closing the DIP Credit Agreement promptly following approval by the Bankruptcy Court of the DIP Motion.

Despite the liquidity that may be provided by the DIP Credit Agreement, the Company’s ability to maintain normal credit terms with our suppliers and vendors may become impaired. The Company may be required to pay cash in advance to certain vendors and may experience restrictions on the availability of trade credit, which would further reduce its liquidity. If liquidity problems persist, suppliers could refuse to provide key products and services in the future. In addition to the cash requirements to fund ongoing operations, the Company has incurred significant professional fees and other costs in connection with the RSA and expect that it will continue to incur significant fees and costs throughout the Chapter 11 proceedings.

Even if the Company obtains financing under the DIP Credit Agreement, it is uncertain the Company’s liquidity will be sufficient to allow it to satisfy its obligations related to the Chapter 11 proceedings or that it will be able to confirm a Plan with the Bankruptcy Court that allows it to emerge from bankruptcy. In addition, the Company will be required to comply with the covenants and conditions of our DIP Credit Agreement in order to continue to access borrowings thereunder.

In connection with the Chapter 11 Filings, as contemplated by the Term Sheet, the Company intends to delist its Class A Common Stock, Class A Common Stock Public Units and Class A Common Stock Public Warrants from Nasdaq. The Company also expects to terminate and suspend its reporting obligations under the Exchange Act when it is eligible to do so.

If the Chapter 11 Filing is not completed or the Plan is not consummated within the timeframe expected, the Company does not expect to have sufficient liquidity to fund capital expenditures. The Chapter 11 Filings will constitute an Event of Default under the credit agreement and Second Lien Notes and the delisting of the Class A Common Stock will constitute an Event of Default under the Second Lien Notes. The creditors under these debt agreements are subject to a forbearance under the RSA and, after the Chapter 11 Filings, will be stayed from taking any action against the Company as a result of an event of default.