Insights from the Courthouse: Patriot Coal Venue Change Proceedings Day 1

Today marked the start of hearings in one of the most important issues in the Patriot Coal case: venue change. The issue is so important that the hearing is being telecast in both West Virginia and St Louis, something I've seen only a few times in bankruptcy proceedings. As has been reported, many parties including the UMWA and the U.S. Trustee office have motioned (or joined in on the motion) for a venue change. Likewise, many parties have filed joinders to the Debtor's objections to the venue change motions brought by the UMWA and the U.S Trustee. The UCC and DIP agent have also filed a motion objection to the venue change motions.

Before I begin, I want to go on record saying Judge Shelley Chapman is brilliant. It really is an honor (pardon the pun) to hear her go to work dissecting issues in a case as important as this. To those only following tangentially, this will be a very important ruling for future case law. Judge Chapman wants to get this right, especially in light of all the political issues that have arose in the past year over "venue shopping." If she rules that PCX can keep the venue in SDNY, many cases in the future will reference her decision, assuming it stands up on a most certain appeal by various parties specifically the U.S. Trustee's office.

It was marginally difficult to listen to Susan Jennik, who is representing the UMWA in the case, go head to head with Judge Chapman. Jennik was getting grilled. Prior to this hearing, I thought the venue would be changed but probably to somewhere other that West Virginia (that only has one bankruptcy judge) and is definitely inconvenient to travel to relative to some place like St Louis. 20 minutes into Ms. Jennik's discussion I thought I was definitely going to be wrong here. Her slip, which I am sure will haunt her, was bringing up the concept of a 'learning curve' in coal cases as it relates to SDNY versus a venue like West Virginia. This is a judge that is handling two incredibly technical cases beautifully (Lightsquared and Ambac) - the notion that an SDNY court won't be able to rule coherently and intelligently on a coal case is hard to conceive.

Judge Chapman posed a number of difficult questions to Ms. Jennik. One I thought was quite poignant related to whether the UMWA would have brought a venue change motion if the costs to the estates were higher in a West Virginia bankruptcy vs a SDNY bankruptcy proceeding. Judge Chapman did note that no one had yet presented her facts or evidence of the numbers or costs in the case but it does bring up the interesting notion that the management team might be looking out for all parties holistically by considering costs in choosing venue.

From the U.S. Trustee offices, Andrea Schwartz fared far better than Jennik. I was impressed with her abilities in the courtroom especially her ability to bring the Court back to her "smoking gun" as it were: The two New York entities were created on the eve of the bankruptcy, have very little assets, and no operations. The statute is being "manipulated." For whose benefit, she didn't quite come up with a strong answer but in light of Judge Chapman's challenging questions, I think she did a good job. (You can read the U.S. Trustee's principal arguments here: http://patriotcaseinformation.com/pdflib/509_12900.pdf). A key here is that the U.S. Trustee's argument is "in the interest of justice" which is different than the UMWA's objections.

Yet to be heard is the Debtor's counsel as well as I'm sure many other parties that will want to lay out his/her arguments to the Court. I am not sure if we get a decision tomorrow, but it is my inkling that Judge Chapman will rule from the bench and then follow with a written opinion given the gravity of this decision.

A venue change to West Virginia is, in my opinion, disastrous for the senior bonds. The "box theory" would fall apart in a substantial consolidation of the operating companies (sub con all opcos, keep holdco distinct) and legacy creditors would benefit greatly. In my opinion, management has significant negotiating leverage with the 1113/1114 claimants in a non-sub con situation. And that might be quite lucrative if they can engineer a rights offering with bondholders and give themselves a slug of the equity via a management incentive plan.

Interestingly, just yesterday, Brown Rudnick filed a Rule 2019 statement as it is representing the ad hoc consortium of Senior Noteholders who own $102.5M or 41% of the issue. The names of the funds and their holdings are listed below:

• Beacon Asset Management: $1M in Senior Notes
• Claren Road Asset Management: $17.5 in Senior Notes
• Knighthead Capital Management: $14M in Senior Notes  
• Mason Street Advisors: $25.15M in Senior Notes
• Merrill Lynch & Co: $11.5M in Senior Notes
• PineBridge Investments: $6.92M in Senior Notes
• TPG Credit Management: $6.02M in Senior Notes
• Whitebox Advisors: $20.388M in Senior Notes

PCX bonds have held in well relative to other areas in the coal space. Below is a chart of PCX bonds, ANR equity, and ACI equity *, normalized to the start of PCX's bankruptcy case. As you can see PCX bonds have outperformed (PCX bonds are the dotted line):

The hearing on venue change continues tomorrow and we will provide an update on the proceedings.

(* Disclosure: I am long ACI leaps)