For Bill Gates, Too Little Debt is a Big Problem in Optim Case

For the super-rich like Bill Gates, not having enough debt can sometimes be a problem.

The lack of enough creditors owed enough money could end up blocking the world’s richest man from using Chapter 11 to reacquire two remaining power plants of which he’s already the secured lender and owner, as a consequence of a technical provision in the Bankruptcy Code.

Gates’s Optim Energy LLC, once the owner of three electric power plants, has plenty of debt, but mostly to Gates-owned Cascade Investment LLC, a secured creditor still owed $596.5 million following the sale of one of the three plants.

The problem for Gates, co-founder of Microsoft Corp., is that Optim doesn’t have enough creditors, because the main one aside from Cascade is a former coal supplier now owned by an affiliate of Blackstone Energy Partners LP that’s adamantly opposed to the plan.

If Blackstone ends up killing Optim’s plan, the bankruptcy community would learn something. If the plan fails and Cascade is forced to foreclose, it will show in a real-world test case how much more expensive or difficult it is for a secured lender to take over through foreclosure rather than from confirmation of a Chapter 11 plan.

Class Needed

The hitch in Optim’s plan comes from Section 1129(a)(10) of the Bankruptcy Code, which requires that at least one class of non-insider creditors must vote in favor of a reorganization plan. Consequently, Cascade’s vote won’t count as the required accepting class.

Blackstone-owned Walnut Creek Mining Co. is dead set against the plan because Optim proposes to pay only about 2 percent on a claim of $3.9 million. Walnut Creek said it’s owed an additional $190 million from termination of the coal-supply agreement for the plant that was sold during Chapter 11.

And that’s another hitch that might favor Gates. Blackstone bought the coal-fired plant on the condition that it also acquire coal supplier Walnut Creek from a third party. Optim claims that the intertwined deals preclude Blackstone from making a claim for damage from terminating the coal-supply contract.

There might be no problem for Optim were there significant unsecured creditors to vote for the plan, but there aren’t. Among the multiple classes, the largest class of unsecured creditors has no more than $150,000 in claims.

Blackstone said it should be in that class, not separately classified. If Blackstone were in the unsecured class along with everyone else, that class would vote against the plan and there would be no non-insider class to vote for the plan.

Judge’s Challenge

The issue for U.S. Bankruptcy Judge Brendan Shannon is this: Can Optim put Blackstone in a separate class so the small class of unsecured creditors votes for the plan? The judge isn’t yet ready to sign off on the bona fides of the plan.

April 21 was supposed to be the hearing date for approval of disclosure materials explaining the plan. Shannon put that off until May 13, after an auction for the two remaining gas-fired plants.

Gates intends to reacquire the two plants through the plan unless a third party bids more than $355 million. On April 21, Shannon approved auction procedures, with bids due May 1. The auction would take place a week or more later. If a third party emerges as the winner, the sale is to be approved as part of the confirmation process for approval of the plan.

Gates’s Alternatives

The problem will be solved if Gates reaches into his pocket and pays Blackstone enough in a settlement to drop opposition. Absent settlement, Optim won’t be stuck in Chapter 11 limbo, even if Shannon decides he can’t approve the plan for lack of a non-affiliated accepting class.

Optim could have the Chapter 11 case dismissed or lift the so-called automatic stay, allowing Cascade to foreclose. That’s not a perfect solution because foreclosure would be more time-consuming than straightforward plan confirmation, especially if Blackstone attempts to slow or halt foreclosure.

Optim listed assets of less than $500 million and liabilities exceeding $500 million when it filed for Chapter 11 protection in February 2014.

The case is In re Optim Energy LLC, 14-bk-10262, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE