Berry Noteholders Say They’ll Take Over From Linn in Bankruptcy

  • Companies will use Chapter 11 to split up after 2013 merger
  • Linn creditors protest $450 million transfer to senior lenders

The star-crossed marriage of Linn Energy LLC and Berry Petroleum Co., consummated just a year before the onset of the oil slump, looks to be all but over.

Low-ranking creditors of Berry laid claim to the company on the first day it and Linn appeared in court after filing for bankruptcy in Texas.

The list of the largest U.S. bankruptcies this year has been dominated by energy companies, as West Texas crude hovers around $45 a barrel, less than half its price in 2014. Linn went public in 2006 and expanded aggressively through the next decade, including the 2013 takeover of Berry, valued at $4.13 billion. 

Noteholders of Berry and Linn have formed separate groups to defend their interests as the companies move through Chapter 11. Linn has proposed splitting the companies and said it might shop Berry around.

The Berry group, which holds about two-thirds of the company’s $834 million in unsecured notes, will try to work out a consensual reorganization plan, attorney Benjamin Finestone of Quinn Emanuel Urquhart & Sullivan said in court Friday in Houston. Finestone represents the Berry noteholders

“We are going to own this company,” he told the judge, referring to Berry.

Separate Paths

Since the takeover, Berry and Linn have kept separate debt and asset structures, which means the bankruptcy cases may take different paths through court. Paul Basta of Kirkland & Ellis, a Linn attorney, said the companies may also reorganize on different timelines.

“They never got the debt together,” Spencer Cutter, a credit analyst for Bloomberg Intelligence, said by phone Friday. “For simplicity, you leave the Linn creditors with the Linn entity and the Berry creditors with the Berry entity.”

Kevin Kaiser, an analyst at Hedgeye Risk Management LLC, said the bankruptcy plan makes sense.

‘Massive Distributions’

“They were continuing to raise capital in the forms of new equity and debt and paying out massive distributions that the company couldn’t afford,” said Kaiser, who’d called Linn’s business model unsustainable in 2013. “That’s how the company got so badly over-levered,” he said by phone Friday. “As soon as the commodity price turned, it was so over-levered that of course it was going to go bankrupt.”

In court Friday, Linn noteholders made it clear they would fight a proposal worked out by the company and its senior lenders. Under that restructuring deal, the senior lenders would get $2.2 billion in new debt, while second-lien noteholders and unsecured creditors would get stock in the newly reorganized company.

Linn’s noteholders question the company’s decision to pay senior lenders $450 million before filing for bankruptcy, and they oppose plans to use more than $400 million in cash to keep operating during the reorganization. Linn’s restructuring efforts may have violated rules governing to pre-bankruptcy asset transfers, noteholder attorney Gerard Uzzi of Milbank, Tweed, Hadley & McCloy said in court.

“Our complaints are legitimate,” he said.

Defending Transfer

Basta defended the $450 million transfer, saying it bought the support of senior lenders for the reorganization plans. In bankruptcy, senior debt holders with collateral rights often have more influence over a case because they are the first to be paid.

Berry may be shopped to investors, possibly soliciting sponsors willing to fund a reorganization plan, Linn said in a regulatory filing this week.

“I’ll be interested to see how the sale process goes for Berry, and how the market values that business today versus how it was valued two years ago,” Bloomberg Intelligence’s Cutter said.

The case is Linn Energy LLC, 16-60040, U.S. Bankruptcy Court, Southern District of Texas (Victoria).

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