Corporate Restructuring as a Strategic Tool for the Energy Industry
By Jonathan A. Carson

As the energy sector grapples with complex corporate challenges including rising natural gas prices and increased competition, Chapter 11 increasingly has evolved from stigma to powerful corporate strategy.

According to bankruptcydata.com, approximately 70 energy companies with assets of more than $50 million have filed for Chapter 11 bankruptcy in the last decade. Aside from the highly publicized Enron fall-out, many other social, economic and cultural issues have fueled this industry-wide restructuring.

An example of a successful emergence and recovery from corporate bankruptcy is NRG Energy, Inc., a leading competitive energy provider that owns and operates a diverse portfolio of power-generating facilities. Its operations include competitive energy production and co-generation facilities, thermal energy production and energy resource recovery facilities.

In 2003, NRG, together with 26 of its subsidiaries and affiliates filed for Chapter 11 in the Southern District of New York, to balance debt incurred during an aggressive five-year growth period of construction and acquisitions. The company emerged from Chapter 11 exactly seven months after it commenced its Chapter 11 case. Due to its restructuring efforts, NRG eliminated approximately $6 billion in corporate level debt and other claims. Industry analysts have stated that NRG's efficient and rapid restructuring process serves as a model for one of the most sophisticated and well-run cases in history.

More recently, some view Calpine's bankruptcy filing as a positive sign that the industry is repositioning itself for long-term growth. Rather than struggling for short-term survival, Calpine now can focus on restructuring its debt and attending to its capital structure, while preparing to leverage changing market conditions and hopefully emerge from Chapter 11 expeditiously.

The entrance of hedge fund financing in the energy sector has added a new twist to recent bankruptcy proceedings, resulting in more complex, and at times, more conflicted inter-creditor negotiations. This has been driven in part by the need to fund building of new power plants. As troubled energy companies find themselves on the brink of insolvency, second-lien lenders are playing a more prominent role in the restructuring process than anticipated, at times creating additional inter-creditor issues due to the differing concerns of other stakeholders.

According to Fitch ratings, the issuance of second-lien loans has grown rapidly from $7.7 billion in 2003 to $22 billion in 2005. As distressed energy companies enter bankruptcy, second-lien investors seek to maximize short-term investments and recover value as quickly as possible. Among other points of contention, the provision of debtor-in-possession (DIP) financing has been a source of disagreement between first and second-lien lenders. The energy industry, among other distressed sectors, is likely to see this trend develop further as hedge funds continue to play a significant role in today's corporate restructuring process.

While there may be significant challenges for distressed energy companies to overcome, corporate restructuring can provide a powerful strategy to see these companies through to brighter times ahead. As current and future energy sector bankruptcies play out, we are likely to see stronger, more competitive energy companies emerge as dominant market leaders.

To learn more about how KCC can help ensure your success, email or call us at 866.381.9100.