Less than a year after shedding its MLP roots, Permian Basin operator Legacy Reserves Inc. is on its way to bankruptcy.

The company reached a restructuring agreement with its lenders on June 14 following months of negotiations that also included exploring for strategic alternatives.

Legacy Reserves is an independent energy company focused on the horizontal development of unconventional plays in the Permian Basin. The Midland, Texas-based company also has assets in the East Texas, Rocky Mountain and Midcontinent regions.

Formerly a MLP, Legacy completed a corporate reorganization in September 2018 to convert into a C-corporation as a result of the MLP model falling out of favor with investors. A large part of MLP’s waning popularity is due to changes of tax law in the U.S. by President Donald Trump, said Tim Perry, managing director and co-head of global oil and gas at Credit Suisse, during an industry conference in Houston last month.

“There’s not that much of a legal or tax advantage to being an MLP,” Perry told attendees of the Mergermarket Energy Forum on May 21. “Then the second thing is a C-corp is a much wider group of investors.”

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Despite the reorganization, Legacy faced debt hurdles and began exploring potential strategic alternatives in March.

The most pressing issue for Legacy is the maturity of its $575 million revolver, which was due April 1, according to Mike Kelly, senior analyst with Seaport Global Securities LLC. In a March research note, Kelly estimated Legacy had only $52 million of liquidity remaining as of year-end 2018.

Legacy had previously said it had made several forbearance agreements with its secured lenders followed by a restructuring support agreement on June 10. The company’s current agreement includes both secured and unsecured lenders though.

As per the agreement, Legacy will receive a $256.3 million backstopped equity commitment and rights offering, $500 million in committed exit financing from certain of the existing reserve-based revolving credit facility (RBL) lenders and the equitization of roughly $797.2 million of principal outstanding debt. The agreement also includes a potential additional equity investment of $125 million plus the payment in full of Legacy’s trade and other unsecured creditors.

Dan Westcott, CEO of Legacy, said in a statement on June 14: “After exploring all options and months of negotiations, we are very pleased to have reached an agreement for a consensual restructuring with our RBL lenders, second lien lenders and the noteholder group.”

Westcott added that he believes the restructuring agreement will provide Legacy with “the capital structure and liquidity to compete and grow in today’s challenging oil and gas environment.”

Legacy plans to file voluntary petitions for reorganization in the U.S. Bankruptcy Court for the Southern District of Texas, according to the company press release.

The company secured a debtor-in possession financing for an additional $100 million to support Legacy’s day-to-day operations and also finance the restructuring process. Westcott said he expects the company to experience minimal operational disruptions during the restructuring process.

Legacy Reserves Asset Map (Source: Legacy Reserves Inc. December 2018 Conference Presentation)
Legacy Reserves Asset Map
(Source: Legacy Reserves Inc. December 2018 Conference Presentation)

Perella Weinberg Partners and its affiliate, Tudor Pickering Holt & Co., is Legacy’s financial adviser. Sidley Austin LLP is its legal adviser, and Alvarez & Marsal is the company’s restructuring adviser.

For Legacy’s second lien lenders, PJT Partners LP is acting as financial adviser and Latham & Watkins LLP is providing legal counsel. The company’s note holder group is receiving financial advice from Houlihan Lokey and Davis Polk & Wardwell LLP is acting as the group’s legal adviser. RPA Advisors LLC is financial adviser to Wells Fargo Bank, as administrative agent for the RBL lenders, and Orrick Herrington & Sutcliffe LLP is their legal adviser.

Kurtzman Carson Consultants LLC is the noticing agent for the Legacy Reserves restructuring.

Emily Patsy can be reached at epatsy@hartenergy.com.