💥 Griddy Flicks Off ERCOT💥

More Fallout from the TX Storm. Citi Goes Ballistic. E&P Heats Up.

Sooooooo this one was predictable. The writing was on the wall a few weeks ago and we noted in “💥Is Texas F*cked?💥” that Griddy Energy LLC was a likely bankruptcy candidate.* On Sunday, we further noted how recent PUCT/ERCOT decisions to extend the deadline “…for electric retailers to dispute the ridonkulous liabilities imposed upon them after the now-infamous Texan storm” — liabilities that already claimed Just Energy Group Inc.($JE) and Brazos Electric Power Cooperative Inc. as victimsmight buy time for certain other players in the stack to figure out their futures.** By then, however, it was already too late for Griddy. On February 26, 2021, ERCOT forced the mass transition of Giddy’s customers to other electricity providers. It’s been a dead man walking ever since.

Griddy’s whole business model was passing through wholesale pricing sans mark-up to 29,000 retail end customers in exchange for a monthly fixed fee of $9.99. Through this model, Griddy claims to have saved its customers more than $17mm since 2017. Griddy argues that at no point since its inception was its model targeted as problematic by the PUCT. PUCT, after all, granted Griddy’s license.

That all obviously changed with February’s big storm. Per the debtor:

During the winter storm in Texas in February 2021, Griddy and its customers suffered as a result of (a) inaccurate information from ERCOT about the preparedness of the electricity grid for the 2020-2021 winter season, (b) the decision by the PUCT to order electricity prices be set to $9,000 per megawatt hour (“MWh”), and (c) ERCOT’s decision to hold electricity prices at $9,000 per MWh for 32 hours after firm load shed had stopped. Prior to the PUCT order, the real-time electricity price had reached $9,000 per MWh for a total of only 3 hours since 2015. In contrast, after the PUCT order, the electricity price was set to $9,000 per MWh for 87.5 hours between February 15, 2021 and February 19, 2021.

This obviously creates a whole host of issues when, in turn, you’re only getting $9.99 per customer per month (plus other passthrough expenses) for a total of $289.7k in revenue a month. Prior to the storm, Griddy was solvent. As of the petition date, it has only $1.448mm of pre-petition debt outstanding (due to Macquarie Investments US Inc.). Griddy obviously blames the reversal of that fortune on ERCOT’s missteps and poor planning. Per the debtor:

Prior to the mid-February winter storm event, Griddy was solvent. As discussed above, the failures of ERCOT and resulting actions taken by the PUCT during the winter storm event resulted in Griddy’s loss of all of its customers and forced Griddy to file this case. The winter storm event also left Griddy in an untenable position – engage in aggressive collection actions against customers for exceedingly high prices for wholesale electricity and ancillary services (which is not its preference) and fight baseless lawsuits – or file for bankruptcy and distribute its remaining cash in an orderly manner.

Be that as it may, Griddy now owes a contingent and disputed $29mm nut to ERCOT — its largest general unsecured creditor. Its customers — who generally tend to be on the lower end of the socioeconomic spectrum — have bills far in excess of historical norm and expectation. So now what?

Griddy is basically flicking the bird to ERCOT (🖕):

In the weeks since the winter storm event, Griddy has created a chapter 11 plan whereby (i) Macquarie would compromise a portion of the remaining amount of money owed to it by Griddy for the benefit of Griddy’s other creditors, (ii) Griddy would give former customers with unpaid bills releases in exchange for such customers’ releases of Griddy and certain other parties, (iii) other general unsecured creditors would share pro rata in remaining available cash, and (iv) upon emergence, a plan administrator would take over ownership of Griddy and, in his or her discretion, pursue causes of action, whether against ERCOT for potential preference claims, fraudulent transfers or other claims related to the winter storm event, or otherwise. Griddy has filed its proposed chapter 11 plan, disclosure statement and related motions concurrently herewith. Griddy intends to seek confirmation of its proposed chapter 11 plan on as expedited basis as possible.

“Certain other parties” no doubt includes Macquarie.

Texas Attorney General Ken Paxton is already taking a victory lap:

“My office sued Griddy Energy, under the Texas Deceptive Trade Practices Act, to hold them accountable for their escalation of last month’s winter storm disaster by debiting enormous amounts from customer accounts as Texans struggled to survive the storm,” said Attorney General Paxton. “I ensured that Griddy’s proposed bankruptcy plan takes an important step forward by offering releases to approximately 24,000 former customers who owe $29.1 million in unpaid electric bills. Griddy and my office are engaged in ongoing good faith negotiations to attempt to address additional relief for those Griddy customers who have already paid their storm-related energy bills.”

All of this seems so strangely … American. Thousands of innocent people sign up for a product that they don’t fully understand, most likely thinking that there are systems in place to protect them. Turns out the systems are broken. Those people lose electricity for days and ultimately get billed up the wazoo and, naturally, nobody wants to take any responsibility for that. Lawsuits commence. Bankruptcies ripple through the area.*** Meanwhile, the lenders do everything in their power to shed any and all liability risk. To help accomplish that, the lenders and debtor agree to what amounts to a bailout of retail customers owing an average bill of $1100, provided that those customers agree to drop any and all potential lawsuits related to this epic f*ckuppery. God bless America.

*We said we “smell a chapter 7 filing” which, it turns out, was perhaps a bit too flippant. While the spirit of the comment is correct in that there is no future for the company as a going concern and it IS liquidating, we neglected to consider some of the benefits of a chapter 11 filing including, among other things, the sought-after releases.
**Not Brilliant Energy LLC. It also succumbed to this whole shebang, filing for chapter 7 on March 16 in Houston.
***One interesting side note — given that this is a uniquely Texan fact pattern — is that it took this catastrophe to finally hour-up some Texas-based lawyers rather than enrich some Chicago or New York attorneys. Putting aside Just Energy Group Inc. (represented by Kirkland & Ellis LLP), Brazos Electric Power Cooperative Inc. is represented by Norton Rose Fulbright and Griddy is represented by Baker Botts LLP. The lender, Macquarie, is counseled by Haynes and Boone LLP and ERCOT is represented by Munsch Hardt Kopf & Harr P.C. The local folks must seriously be thinking “it’s about time.” All it took was Texas literally freezing over to keep out the Yanks.

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💄Revlon: Lipstick on a Pig? Part XV (Citi's Revenge).💄

Like a velociraptor in Jurassic Park, you can bet your a$$ that a big bank is going to adapt to its surroundings.

As you all know by now, Judge Jesse Furman shocked a lot of people when he recently decided against Citibank Inc. ($C), ruling that a group of hedge funds could keep money that Citibank accidentally sent to them in connection with Revlon Inc’s ($REV) debt. As the litigators no doubt prep an appeal, the bank’s commercial lawyers also quickly got to work, revising documents and making sure the go-forward “form” has prophylactic language that imposes an affirmative obligation upon an unintended recipient to return monies. Bloomberg’s Matt Levine dubbed thisDe-Revlon-ing.

There’s an old adage somewhere that the law is always light years behind innovation but, as Levine astutely pointed out, no one can be blamed for previously failing to bake in failsafes to a “Finders Keepers” doctrine specific to New York law.

Now though.

Here we are: the latest technology in credit docs is a provision that protects against future fat fingering. This is why capital markets lawyers get paid the big bucks. Per Levine:

In a note yesterday, Xtract Research reported that “in the weeks following the decision, Citibank and other agent banks have added Revlon Clawback language to credit agreements.” “Revlon Clawback” means that, if you get money by mistake, like Revlon’s lenders did, you have to give it back, like Revlon’s lenders didn’t. Here’s a sample, also from Xtract:

If a payment is made by the Administrative Agent (or its Affiliates) in error (whether known to the recipient or not) or if a Lender or another recipient of funds is not otherwise entitled to receive such funds at such time of such payment or from such Person in accordance with the Loan Documents, then such Lender or recipient shall forthwith on demand repay to the Administrative Agent the portion of such payment that was made in error (or otherwise not intended (as determined by the Administrative Agent) to be received) in the amount made available by the Administrative Agent (or its Affiliate) to such Lender or recipient, with interest thereon, for each day from and including the date such amount was made available by the Administrative Agent (or its Affiliate) to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation. Each Lender and other party hereto waives the discharge for value defense in respect of any such payment.

We particularly love the bit about how interest will also be due on erroneous payments.

Per The Financial Times:

Since the start of 2021, at least 10 deals have included accidental payment terms, according to [Covenant Review senior covenant analyst, Justin] Forlenza, who also expects more deals to follow suit. “This is probably going to become pretty standard . . . There’s no harm in putting it in,” he said.

Anyway, the law may be slow to change but it clearly isn’t opposed to change — especially when it is forced to. Nobody should be surprised by this development.

*****

Likewise, nobody should be surprised that Citibank is looking for pay back. Nothing says “big bank energy” like revenge.

A quick digression: Johnny recalls a time when he was told to stand down and sell out of a position because Oaktree Capital Management’s Ken Liang had called his boss and turned up the heat. Stop making waves and sell out of this position, the thinking went, and Oaktree will make it up to us “on the next one.” Never mind that the next one may not come. Or Oaktree may get (selective) institutional amnesia. Or the investors may be different that time around. Or a different fund may be implicated. Fiduciary duties? Psssst. What are those??!? 🤷‍♀️🖕

In finance — much like in baseball — there are unwritten rules. In baseball, you don’t attempt a bunt to break a no-hitter. And you don’t showboat after clobbering a home run and embarrass the opposing pitcher.

In finance, the unwritten rules sometimes dictate horse-trading on one deal for the next. It probably shouldn’t happen but, well, it does. Why else would funds be so up in arms when the creditor-on-creditor violence escalates as much as it has recently? There are a few funds known for delivering gut punches and then there are others who know that the ecosystem is small and f*cking over someone today may mean you’re the one getting f*cked tomorrow. It’s the threat of mutually assured destruction that, at least previously, prohibited all but the nastiest of funds from intentionally going out and throwing gut punches. This notion also explains why, despite fees hitting the stratosphere in recent years, there are relatively few fee objections in bankruptcy cases. Nobody wants to start rolling that rock down the hill.

And so it comes as absolutely no shock whatsoever that Citi is (reportedly) going all Liam Neeson on these funds now.

Per Bloomberg:

Citigroup Inc. is punishing investment firms that kept payments the bank accidentally sent to Revlon Inc. lenders by blocking them from certain new debt offerings led by the bank, according to people with knowledge of the matter.

The bank is choosing to not invite these money managers, who hung on to over $500 million, to its new-issue debt deals, the people said, asking not to be identified discussing a private matter. Firms targeted include Brigade Capital Management, HPS Investment Partners and Symphony Asset Management, the people said.

These firms and others tangled in a lawsuit with Citigroup can still participate if an issuer specifically requests for them to be able to join their offering, one of the people added.

This, much like the new credit doc tech mentioned above, is 100% predictable. So much so, in fact, that people speculated that this would happen on Twitter immediately after the ruling. The responses were generally something like this…

…or this (again, per Bloomberg):

It’s not clear how big of a blow Citigroup’s actions will be for the targeted firms, some of which focus on buying discounted assets in secondary trading rather than new offerings. But it’s difficult to avoid Citigroup in debt markets.

So, this may be much ado about nothing really. Those funds are still rolling in their dough and Citi’s ability to punish them appears pretty limited given where they play in the capital markets. To the extent those funds have affiliates, however, that participate in primaries, well, that’s a different story. Except, Matt Levine casts shade on that too:

…Citi has a legal right to be in a snit about it and refused to let them into new debt deals.

Well, it doesn’t really. When Citi leads a new debt deal, it is working for a client—the issuer of the debt—and has to put the client’s interests first. Citi can’t really go to an issuer client and say “hey we tried to syndicate this loan for you but we came up short so you’re not getting your money; we could have gotten the deal done with the orders from Brigade, HPS and Symphony, but we’re not talking to those jerks.”

Except, well, maybe it does? First, Citi could argue that these funds are full of bad dudes who will do bad things if they’re part of the issuer’s cap stack and, therefore, it’s in the issuer’s best interests to keep them out to the extent they can. Sure, if they’re gonna trade in the secondary, there’s not much to be done about that. But, in the first instance, why not try and control who is involved?

And, second, have you seen what’s happening in the capital markets today? A blind monkey could syndicate a deal in this environment. Investors are clamoring for yield baby yield: nearly every single deal is over-subscribed by a multiple (see, e.g., American Airlines Inc. ($AAL)) and terms repeatedly constrict in the issuer’s favor. Surely issuers aren’t that concerned about a few “bad dudes” being denied entry to the party when the party is ripping like this one.

Which gets us back to the unwritten rules. Levine writes:

In general, if you get a payment that wasn’t meant for you, you have to give it back; what happened in this case is a somewhat odd exception. But it is also a matter of repeat-player relationships. If you’re a petty jerk to Citi on one deal, Citi is going to be a petty jerk to you on the next deal. You will generally do the sensible, helpful, pro-social thing, because you are all part of a mutually beneficial ecosystem and you depend on each other for information and access and deal flow.

Unless Citi sends you $500 million by mistake to pay off a loan that you were in a huge fight about; then you keep it and say “meh, deal flow, I’d rather have the money.”

This may be right. But, to us, the deal flow matter isn’t the crux of this story. The key point is that Citi is affirmatively looking for ways to get back at these funds. This story isn’t over by a long shot. We may find out whether Citi is not only too big to fail but too big to f*ck with.

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⛽️New Chapter 11 Bankruptcy Filing - Nine Point Energy Holdings Inc.⛽️

Colorado-based Nine Point Energy Holdings Inc. (along with three affiliates, the “debtors”) is and independent oil and gas exploration and production company focused on the Williston Basin in North Dakota and Montana. It is the successor to Triangle USA Petroleum Corporation, which filed for chapter 11 bankruptcy in June 2016 and confirmed a plan in March 2017. Four years later, it’s back in bankruptcy court. 😬

Followers of E&P bankruptcies have become accustomed to disputes relating to E&P companies and their midstream gathering, transportation and processing providers. Here, Caliber Midstream Partners LP was the debtors’ largest midstream services provider — “was” being the operative word after the debtors terminated the long-term midstream services agreements on the eve of bankruptcy. The story, however, doesn’t end there.

The debtors are willing to enter into a new arrangement with Caliber going forward. It’s unclear how the new arrangement might differ from the existing arrangement because redaction, redaction, redaction. The economic terms of the contract have not been disclosed. 🤔

And so here we are with another potential “running with the land” scenario. If you’re unfamiliar with what this is, you clearly haven’t been paying attention to E&P bankruptcy cases. Just Google it and you’ll pull up probably 8928394829248929 law firm articles on the topic. As this will be a major driver in the case, it probably makes sense to refresh your recollection.

Why are the debtors in bankruptcy? All of the usual reasons, e.g., the big drop in oil prices thanks to COVID-19 and Russia/OPEC. Nothing really new there.

So what does this filing achieve? For starters, it will give the debtors an opportunity to address the Caliber contracts. Moreover, it will avail the debtors of a DIP facility from their pre-petition lenders in the amount of ~$72mm — $18mm in new money and $54mm on a rollup basis (exclusive of an additional $16.1mm roll-up to account for pre-petition secured swap obligations)(8% interest with 2% commitment fee). Finally, the pre-petition-cum-DIP-lenders have agreed to serve as the stalking horse purchaser of the debtors’ assets with a credit bid floor of $250mm.

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📚Resources📚

We have updated our compilation of a$$-kicking resources covering restructuring, tech, finance, investing, economics and disruption. You can find the full compilation here.


📤Notice📤

Lucy Kweskin (Partner) joined Mayer Brown from Proskauer Rose LLP.

🙌Congratulations to:🙌

Adam Haberkorn on his promotion to Counsel at O’Melveny & Myers LLP.

Daniel Denny on his promotion to Special Counsel at Milbank LLP.

Gabriel Olivera on his promotion to Counsel at O’Melveny & Myers LLP.

James Bardenwerper on his promotion to Vice President at Configure Partners LLC.


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