BJ Services, a Texas-based provider of hydraulic fracturing (i.e., “fracking”) and cementing services for upstream oil and gas companies, filed for chapter 11 protection on July 20, 2020, in the US Bankruptcy Court for the Southern District of Texas, along with three of its affiliates.  Their chapter 11 filings were prompted by unsuccessful restructuring negotiations with one of their equity sponsors—CSL Capital Management—which would have provided a $75 million new money investment, including $30 million in the form of DIP financing, in exchange for the majority of the reorganized equity.  Citing commodity price volatility and an unmanageable capital structure, the debtors have been pursuing an orderly wind-down and confirmation of a chapter 11 liquidation plan, the cornerstone of which was a sale process for six asset packages:  (a) cementing business; (b) fracking business; (c) certain equipment related to the cementing business; (d) certain equipment related to the fracking business; (e) shared lab equipment; and (f) other miscellaneous equipment (e.g., tractors).

On August 20, 2020, following an auction for the various packages, the debtors filed a Notice detailing the winning bids for five of the six asset packages.  With respect to the asset package consisting of certain equipment related to the fracking business, the Debtors selected a $1 million bid from Alamo Pressure Pumping (“Alamo”) as the winning bid, despite the debtors’ equipment term loan agent, GACP Finance Co., LLC (“GACP”), having submitted a credit bid for higher consideration of $1.1 million.  The debtors explained that they decided to move forward with the Alamo bid, as opposed to the GACP, “due to uncertainty with respect to GACP’s right to credit bid and potential for job creation at Alamo for certain of the Debtors’ former employees.”  Notice, n.3.

GACP objected to the debtors’ characterization of its credit bid rights as “uncertain,” and argued that its bid should have been chosen as the highest and best bid.  Each of GACP, the debtors and a group of senior lenders submitted briefing on the “highest and best” issue in advance of the August 21, 2020 sale hearing:

  • According to GACP, its $1.1 million credit should have been selected as the winning bid for the straightforward reasons that it provided the highest consideration —representing $100,000 more than the next closest bid put forth by Alamo. See GACP’ Brief, ¶ 9 (“In conducting the sale process, the Debtors are ‘duty bound’ to maximize the value of their estates . . . [and GACP] is not aware of any case where a court approved a lower bid over a higher credit bid.”).
  • The debtors, on the other hand, maintained that GACP’s bid (a) presented significant execution risk and (b) was weaker than the winning bid in several ways. See generally Debtors’ Brief.  With respect to execution risk, the debtors argued that GACP’s bid ran afoul of a subordination agreement by and between GACP and the senior lenders.  See , ¶¶ 12-13; see also discussion infra (below).  With respect to value, the debtors compared the “net benefit” of the competing Alamo and GACP bids, arguing that the net benefit of naming Alamo as the winning bidder “is that at least ten current or former employees of the Debtors will have a job operating the [e]quipment during one of the direst economic crises in the nation’s history”—while arguing, in comparison, that the only net value to the estate of the GACP credit bid is that the debtors would “owe approximately $100,000 less to [GACP] (or 0.053% of the $190 million of outstanding debt).”  Id., ¶¶ 9-11.  Accordingly, the debtors argued that the potential for significant execution risk, coupled with the public policy considerations (i.e., preservation of jobs amidst a novel, global pandemic) constituted “cause” for accepting a lower cash bid over a higher credit bid pursuant to sections 363 and 1506 of the US Bankruptcy Code.  See id.
  • The senior lenders asserted that GACP’s credit bid ran afoul of their January 28, 2019 Agreement Among Lenders which they claimed required the senior lenders’ consent for any GACP credit bid. See generally First-Out Lenders’ Objection.

To resolve the credit bid issue vis-à-vis the senior lenders, GACP bought out the senior lenders’ claims. With respect to what was “highest and best,” at the conclusion of the sale hearing and before taking the issue under advisement, Judge Isgur indicated to the parties that public policy considerations could weigh in any decision he issued on the sale.  Notably, Judge Isgur indicated that, under the law, he would be permitted to declare the Alamo bid the best and winning bid, despite it being for $100,000 less than the GACP bid, because of the preservation of 10 jobs.  Perhaps taking Judge Isgur’s cue, the parties subsequently settled, with GACP agreeing to up its credit bid to $3.4 million and to maintain the 10 jobs included in the Alamo bid.

While the near term result was that Judge Isgur did not need to rule on the relative values of job preservation versus a slightly higher bid amount, the parties’ conflicting positions on each of these issues demonstrates certain potential roadblocks lenders might face when trying to exercise what they might otherwise view as straightforward credit-bid rights.  While each transaction will be different, in that regard, lenders should consider these risks when developing their strategy with respect to a distressed credit.