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Item 1.01
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Entry into a Material Agreement
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Restructuring Support Agreements
On June 10, 2019, Legacy Reserves Inc. (“Legacy”) and certain of its subsidiaries (together with legacy, the “Company”) entered into a restructuring support and lock-up agreement (the “Restructuring Support
Agreement”) with (i) certain lenders (the “Supporting Term Lenders”) under the Term Loan Credit Agreement dated as of October, 25, 2016 among Legacy Reserves LP, as borrower, the guarantors party thereto, Cortland Capital Market Services LLC, as
administrative agent, and the lenders party thereto (as amended, the “Prepetition Term Loan Credit Agreement”) and (ii) certain lenders (the “Supporting RBL Lenders” and, together with the Supporting Term Lenders, the “Supporting Lenders”). Under
the Third Amended and Restated Credit Agreement dated as of April 1, 2014 among Legacy Reserves LP, as borrower, the guarentors party thereto, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto (as
amended, the “Prepetition RBL Credit Agreement”).
Subsequent to entering into the Restructuring Support Agreement, on June 13, 2019, the Company entered into the First Amended and Restated Restructuring Support and Lock-Up Agreement (together with all exhibits and
schedules thereto, including the term sheet attached as Exhibit A thereto, the “Amended Restructuring Support Agreement”) with (i) the Supporting Term Lenders, (ii) the Supporting RBL Lenders and (iii) certain (a) holders of 6.625% Senior Notes due
2021 (the “2021 Note Holders”) issued under the indenture dated as of May 28, 2013, by and among Legacy Reserves LP, Legacy Reserves Finance Corporation, the guarantors party thereto and Wilmington Trust, National Association (as successor to Wells
Fargo Bank, National Association), as indenture trustee (as supplemented, the “2021 Notes Indenture”), (b) holders of 8% Senior Notes due 2020 (the “2020 Note Holders”) issued under the indenture dated as of December 4, 2012, by and among Legacy
Reserves LP, Legacy Reserves Finance Corporation, the guarantors party thereto and Wilmington Trust, National Association (as successor to Wells Fargo Bank, National Association), as indenture trustee (as supplemented, the “2020 Notes Indenture”)
and (c) holders of 8% Convertible Senior Notes due 2023 (together with the 2021 Note Holders and the 2020 Note Holders, the “Supporting Noteholders,” and the Supporting Lenders and the Supporting Noteholders, collectively, the “Supporting
Creditors”) issued under the indenture dated as of September 20, 2018, by and among Legacy Reserves LP, Legacy Reserves Finance Corporation, the guarantors party thereto and Wilmington Trust, National Association, as indenture trustee and
conversion agent (as supplemented, the “2023 Notes Indenture”).
The Amended Restructuring Support Agreement contemplates that the Company will: (i) file voluntary cases (the “Chapter 11 Cases”) 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 transaction through a pre-negotiated chapter 11 plan of reorganization (the “Plan”) to be filed with the Bankruptcy Court; (ii) enter into a proposed
senior secured superpriority debtor-in-possession credit agreement (the “DIP Credit Agreement”); (iii) consummate certain equity investments through a rights offering and committed equity backstops; and (iv) enter into a new senior-secured
revolving asset-based lending credit facility in a maximum amount of $500.0 million (the “Exit Facility”) funded by certain of the lenders under the Prepetition RBL Credit Agreement.
The Amended Restructuring Support Agreement contains certain covenants on the part of each of the Company and the Supporting Creditors, including that the Supporting Creditors vote in favor of the Plan and otherwise
use good faith efforts to negotiate, execute and implement the restructuring transactions contemplated by the Amended Restructuring Support Agreement and the Plan. Additionally, the Amended Restructuring Support Agreement 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 and/or other actions by the parties under the
Amended Restructuring Support Agreement.
Proposed Plan of Reorganization
The Amended Restructuring Support Agreement further contemplates that a Plan supported by the Supporting Creditors (the “Supporting Creditors Plan”) will be filed with the Bankruptcy Court, provided, however, if the
Supporting Noteholders terminate the Amended Restructuring Support Agreement in accordance with the terms of the Amended Restructuring Support Agreement (a “Noteholder Termination”), a Plan, supported by only the Supporting Lenders (the “Supporting
Lenders Plan”) will be filed with the Bankruptcy Court.
The Supporting Creditors Plan will provide for the following, among other things:
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all holders of claims arising under the DIP Facility (as defined below) will receive, in full satisfaction of their respective claims (i) on account of claims under the New Money Facility (as defined below), payment in full in cash,
(ii) on account of claims under the Refinancing Facility (as defined below), distribution of cash and commitments under the Exit Facility and/or (iii) if the Exit Facility is not consummated, payment in full in cash;
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all holders of claims arising under the Prepetition RBL Credit Agreement will receive, in full satisfaction of their respective claims, (i) distribution of their pro rata share of commitments under the Exit Facility in exchange for
the claims arising under the Prepetition RBL Credit Agreement or (ii) if the Exit Facility is not consummated, payment in full in cash;
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all holders of claims arising under the Prepetition Term Loan Credit Agreement will receive their pro rata share of 51.40% of the new common stock (the “New Common Stock”) to be issued by Legacy, as reorganized pursuant to and under
the Plan (“Reorganized Legacy”) approximately;
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holders of claims arising under the 2020 Notes Indenture, the 2021 Notes Indenture and the 2023 Notes Indenture (the “Noteholders”) will receive their respective pro rata share of (i) 2.50% of the New Common Stock, subject to
dilution, (ii) subscription rights to participate in a $66.5 million rights offering (the “Supporting Creditor Plan Rights Offering”), which can be exercised to the extent that such Noteholders are “accredited investors” as defined
under Regulation D promulgated under the Securities Act of 1933, as amended (“Securities Act”), and (iii) a share premium of 1.50% of the New Common Stock, subject to dilution, available to accredited investors that participate in the
Supporting Creditor Plan Rights Offering and non-accredited investors;
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all existing equity interests in Legacy will receive no recovery under the Plan and will be extinguished;
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a $189.8 million committed equity investment by the Supporting Term Lenders, as described below under the caption “Backstop Commitment Agreements - Sponsor Backstop Commitment Agreement;”
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at the option of the Supporting Term Lenders, an offering of up to $125 million of New Common Stock to third parties, the Supporting Term Lenders or the Noteholders; and
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the establishment of a customary management incentive plan at Reorganized Legacy under which 10% of the New Common Stock will be reserved for grants made from time to time to employees of Reorganized Legacy.
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The Supporting Lenders Plan will provide for the following, among other things:
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all holders of claims arising under the DIP Facility will receive, in full satisfaction of their respective claims (i) on account of claims under the New Money Facility, payment in full in cash, (ii) on account of claims under the
Refinancing Facility, distribution of cash and commitments under the Exit Facility and/or (iii) if the Exit Facility is not consummated, payment in full in cash;
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all holders of claims arising under the Prepetition RBL Credit Agreement will receive, in full satisfaction of their respective claims, (i) distribution of their pro rata share of commitments under the Exit Facility in exchange for
the claims arising under the Prepetition RBL Credit Agreement or (ii) if the Exit Facility is not consummated, payment in full in cash;
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all holders of claims arising under the Prepetition Term Loan Credit Agreement will receive their pro rata share of 98.00% of the New Common Stock, subject to dilution;
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the Noteholders will receive their respective pro rata share of (i) 2.00% of the New Common Stock, subject to dilution, and (ii) subscription rights to participate in a $100.0 million rights offering (the “Supporting Lenders Plan
Rights Offering” and, together with the Supporting Creditors Plan Rights Offering, the “Rights Offering”) to the extent that such Noteholders are “accredited investors” as defined under Regulation D promulgated under the Securities Act;
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all existing equity interests in Legacy will receive no recovery under the Plan and will be extinguished;
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a $200.0 million committed equity investment by the Supporting Term Lenders, as described below under the caption “Backstop Commitment Agreements - Lender Backstop Commitment Agreement;” and
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the establishment of a customary management incentive plan at Reorganized Legacy under which 10% of the New Common Stock will be reserved for grants made from time to time to management employees of Reorganized Legacy.
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The terms of the Plan are subject to approval by the Bankruptcy Court and Legacy’s board of directors, among other conditions. Accordingly, no assurance can be given that the transactions described herein will be
consummated. The foregoing description of the Amended Restructuring Support Agreement does not purport to be complete and is qualified in its entirety by reference to the Amended Restructuring Support Agreement filed as Exhibit 10.1 to this Current
Report on Form 8-K and incorporated herein by reference.
Debtor-in-Possession Financing
The Amended Restructuring Support Agreement contemplates that the Company 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 to be entered into among the among Legacy Reserves LP, as borrower, the guarantors from time to time party thereto, the lenders from time to time party
thereto and Wells Fargo Bank, National Association, as administrative agent and collateral agent. If approved by the Bankruptcy Court, the DIP Credit Agreement will provide for the following, among other things:
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a senior secured priming superpriority debtor-in-possession revolving loan credit facility in an aggregate principal amount of up to $350.0 million (the “DIP Facility”), consisting of (i) a new money revolving loan facility in an
aggregate amount of up to $100.0 million (the “New Money Facility”), $35.0 million of which would be available on an interim basis and which will include a sub-facility of up to $1.0 million for the issuance of letters of credit, and
(ii) a refinancing term loan in the amount of $250.0 million (the “Refinancing Facility”);
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borrowings under the (i) New Money Facility will bear interest, at the option of the Company, at a rate per annum equal to the alternate base rate (the “ABR”) plus 4.25% or LIBOR plus 5.25% and (ii) the Refinancing Facility will bear
interest at a rate per annum equal to the ABR plus 3.50%;
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the Company will be required to pay an unused commitment fee equal to 1.00% per annum to the lenders under the New Money Facility in respect of the unused commitments thereunder;
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the maturity of the DIP Facility to be the earliest to occur of (i) eight months after the petition date, (ii) 35 days after the entry of the interim order of the Bankruptcy Court approving the DIP Facility on an interim basis, if
the Bankruptcy Court has not entered the final order on or prior to such date, (iii) upon the Bankruptcy Court’s approval of a plan of reorganization and the Company’s exit from Chapter 11, (iv) upon the sale of substantially all of the
equity or assets of the Company and (v) the termination of the DIP Facility during the continuation of an event of default under the DIP Credit Agreement or otherwise pursuant to the terms of the DIP Credit Agreement or by order of the
Bankruptcy Court;
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proceeds of the DIP Credit Agreement may be used for (i) transaction costs, fees and expenses, (ii) working capital and general corporate purposes in accordance with a budget approved by the lenders, (iii) bankruptcy-related costs
and expenses (including restructuring fees and adequate protection payments) and (iv) in the case of the Refinancing Facility, to refinance amounts existing under the Company’s existing credit agreements;
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the obligations under the DIP Credit Agreement will be secured by a first priority lien on substantially all of the assets of the Company, subject to limited exceptions provided for in the DIP Motion;
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the DIP Credit Agreement will provide for certain customary covenants applicable to the Company, including covenants requiring delivery of a rolling 13-week operating budget and cash flow forecast, together with a variance report
setting forth material variances from the budget; and
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the DIP Credit Agreement will provide for certain customary events of default, including the failure to achieve certain milestones set forth in the DIP Credit Agreement.
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The DIP Credit Agreement is subject to approval by the Bankruptcy Court, which has not been obtained at this time. The Company anticipates closing the DIP Credit Agreement promptly following approval by the
Bankruptcy Court of the DIP Motion.
Backstop Commitment Agreements
Lender Backstop Commitment Agreement
On June 10, 2019, the Company entered into a backstop commitment agreement (the “Lender Backstop Commitment Agreement”) with the Supporting Term Lenders (together with any third parties later designated by the
Supporting Term Lenders and approved by the Company pursuant to the terms of the Lender Backstop Commitment Agreement, the “Lender Backstop Parties”). In accordance with the Plan and certain rights offering procedures to be filed as part of the
Plan, the Company will grant eligible Noteholders the right to purchase shares of New Common Stock pursuant to the Supporting Lenders Plan Rights Offering upon the closing of the transactions contemplated by the Lender Backstop Commitment Agreement
for an aggregate purchase price of up to $100.0 million. Under the Lender Backstop Commitment Agreement, the Lender Backstop Parties have agreed to purchase $200.0 million of shares of New Common Stock at the Per Share Price (as defined in the
Lender Backstop Commitment Agreement) subject to reduction on a dollar for dollar basis for any amounts raised in the Supporting Lenders Plan Rights Offering up to $100.0 million at the election of a majority in interest of the Lender Backstop
Parties (the “Lender Backstop Commitment”). In the event that the Company raises additional third party equity financing other than as contemplated by the Supporting Lenders Plan Rights Offering, a majority in interest of the Lender Backstop
Parties may elect to decrease the size of their Lender Backstop Commitment on a dollar for dollar basis by an amount equal to such third party equity financing.
Pursuant to the Lender Backstop Commitment Agreement, the Company will (i) pay a fee to the Lender Backstop Parties in an amount equal to 6% of the Lender Backstop Commitment (irrespective of any decreases in the
Lender Backstop Commitment permitted thereunder), payable in New Common Stock on the Effective Date or in cash, in certain circumstances and (ii) reimburse certain expenses of the Lender Backstop Parties in accordance with the terms of the Lender
Backstop Commitment Agreement.
The Lender Backstop Commitment Agreement was amended on June 13, 2019 to provide that the Lender Backstop Commitment Agreement shall not be effective until such time as a Noteholder Termination occurs.
Sponsor Backstop Commitment Agreement
On June 13, 2019, the Company entered into a backstop commitment agreement (the “Sponsor Backstop Commitment Agreement”) with the Supporting Term Lenders (together with any third parties later designated by the
Supporting Term Lenders and approved by the Company pursuant to the terms of the Sponsor Backstop Commitment Agreement, the “Sponsor Backstop Parties”). Under the Sponsor Backstop Commitment Agreement, the Sponsor Backstop Parties have agreed to
purchase $189.8 million of shares of New Common Stock at the Per Share Price (as defined in the Sponsor Backstop Commitment Agreement) (the “Sponsor Backstop Commitment”).
Pursuant to the Sponsor Backstop Commitment Agreement, the Company will (i) pay a fee to the Sponsor Backstop Parties in an amount equal to 6% of the Sponsor Backstop Commitment, payable in New Common Stock on the
Effective Date or in cash, in certain circumstances and (ii) reimburse certain expenses of the Sponsor Backstop Parties in accordance with the terms of the Sponsor Backstop Commitment Agreement.
The Sponsor Backstop Commitment Agreement may be terminated by a majority in interest of the Sponsor Backstop Parties in the event that a Noteholder Termination occurs.
Noteholder Backstop Commitment Agreement
On June 13, 2019, the Company entered into a backstop commitment agreement (the “Noteholder Backstop Commitment Agreement” and, together with the Sponsor Backstop Commitment Agreement and the Lender Backstop
Commitment Agreement, the “Backstop Commitment Agreements”) with certain Supporting Creditors (together with any third parties later designated by such Supporting Creditors and approved by the Company pursuant to the terms of the Noteholder
Backstop Commitment Agreement, the “Noteholder Backstop Parties” and, together with the Lender Backstop Parties and the Sponsor Backstop Parties, the “Backstop Parties”). Under the Noteholder Backstop Commitment Agreement, the Noteholder Backstop
Parties have agreed to fully exercise all subscription rights for New Common Stock issued to each Noteholder Backstop Party in the Supporting Creditors Plan Rights Offering and duly purchase such New Common Stock issuable to it pursuant to such
exercise. Further, certain of the Noteholder Backstop Parties have agreed to purchase unsubscribed shares in the Supporting Creditor Plan Rights Offering at the Per Share Price (as defined in the Noteholder Backstop Commitment Agreement),
backstopping the entire $66.5 million Supporting Creditors Plan Rights offering (the “Noteholder Backstop Commitment” and, together with the Lender Backstop Commitment and Sponsor Backstop Commitment, the “Backstop Commitment”).
Pursuant to the Noteholder Backstop Commitment Agreement, the Company will (i) pay a fee to the Noteholder Backstop Parties in an amount equal to 6% of the Noteholder Backstop Commitment, payable in New Common Stock
on the Effective Date or in cash, in certain circumstances and (ii) reimburse certain expenses of the Noteholder Backstop Parties in accordance with the terms of the Noteholder Backstop Commitment Agreement.
General
The rights to purchase any shares of New Common Stock pursuant to the Supporting Lender Plan Rights Offering or Supporting Creditors Plan Rights Offering, as applicable, and all shares issued to the Backstop Parties
in respect of their respective Backstop Commitment will be issued in reliance upon an exemption from registration under the Securities Act provided by Section 4(a)(2) thereof and Regulation D thereunder. As a condition to the closing of the
transaction contemplated by the Backstop Commitment Agreements, the Company will enter into a registration rights agreement with the Backstop Parties desiring to be a party thereto requiring the Company to register the Backstop Parties’ securities
under the Securities Act in certain circumstances.
The Backstop Parties commitments contemplated by the Backstop Commitment Agreements are conditioned upon the satisfaction of all conditions to the effectiveness of the Supporting Lender Plan or Supporting Creditor
Plan, as applicable, and other applicable conditions and termination rights set forth in the Backstop Commitment Agreements. The issuances of the New Common Stock pursuant to the Supporting Lender Plan Rights Offering or Supporting Creditors Plan
Rights Offering, as applicable, and the Backstop Commitment Agreements are conditioned upon, among other things, confirmation of the Supporting Lender Plan or Supporting Creditor Plan, as applicable, by the Bankruptcy Court, and the Supporting
Lender Plan’s or Supporting Creditor Plan’s, as applicable, effectiveness upon the Company’s emergence from its Chapter 11 Cases.
The foregoing description of the Lender Backstop Commitment Agreement, the amendment to the Lender Backstop Commitment Agreement, the Sponsor Backstop Commitment Agreement and the Noteholder Backstop Commitment
Agreement do not purport to be complete and are qualified in their entirety by reference to the Lender Backstop Commitment Agreement, the amendment to the Lender Backstop Commitment Agreement, the Sponsor Backstop Commitment Agreement and the
Noteholder Backstop Commitment Agreement filed as Exhibit 10.2, 10.3, 10.4 and 10.5, respectively, to this Current Report on Form 8-K and incorporated herein by reference.