Arch Coal Creditor Sues to Save Debt Swap as Deadline Looms

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An Arch Coal Inc. creditor sued a group of lenders it says is seeking to block a plan to swap the struggling miner’s existing bonds for new securities with longer maturities.

GSO Special Situations Master Fund LP, a New York-based investment fund that holds some of Arch’s unsecured notes, accused the defendants of making “improper and legally unsupportable efforts” to block the swap. The deadline for the exchange is Sept. 23.

A group of senior lenders -- including Oaktree Capital Group LLC, Archview Investment Group and Caspian Capital, which claim to own a majority of Arch’s $1.9 billion in bank loans -- have moved to block the deal on concern that it would harm the value of the higher-ranking debt they hold. The lenders said that the bondholders agreeing to the swap would receive preferential treatment, violating provisions of the loan pact.

Arch, the second-largest U.S. coal producer by volume, is seeking to restructure part of its $5.1 billion debt. The company’s cash and untapped borrowings are being watched closely by investors during a downturn that has driven other U.S. coal producers, including Patriot Coal Corp., Walter Energy Inc. and Alpha Natural Resources Inc., into bankruptcy this year.

‘Tenuous Position’

The defendants “are acutely aware of the tenuous position in which the company finds itself, and are attempting to wrongfully exploit it,” GSO said in the suit.

Slowing demand from China, environmental regulation and competition from cheap natural gas are undermining U.S. coal producers. Gas may account for 31 percent of U.S. power generation this year, up from 27 percent in 2014, while coal’s share may drop to 35 percent from 39 percent, according to the U.S. Energy Information Administration.

The suit, filed Wednesday in state court in Manhattan, seeks a declaration that the exchange transaction is permissible under the company’s credit agreement without the consent of the defendants and an order barring them from blocking the restructuring.

The only named defendant in the case is Wilmington Trust NA, selected last month by the opposing lenders to replace Bank of America Corp. as their agent as of Sept. 1. Kent Wissinger, a spokesman for Wilmington Trust, said the company was unable to comment on the suit.

The opposing lenders had asked Arch Coal for a new plan that wouldn’t impair their holdings, but talks on a compromise between the company and the opposing lenders haven’t progressed this month, said people with knowledge of the discussions who asked not to be identified because they’re private.

“Time is running out,” GSO said in the suit. “Plaintiff can no longer stand idly by while the directing defendants obstruct the company’s only chance for an out-of-court restructuring.”

The case is GSO Special Situations Master Fund LP v. Wilmington Trust NA, 653110/2015, New York State Supreme Court (Manhattan).

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