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Law360 (February 4, 2021, 10:32 AM EST) -- Frontera Holdings LLC filed for bankruptcy protection in Texas late Wednesday, saying a significant drop in demand for electricity from its natural gas-fired generating plant during the COVID-19 pandemic has drastically diminished its liquidity.
During a virtual first-day hearing Thursday, debtor attorney Joshua A. Sussberg of Kirkland & Ellis LLP said the effects of the pandemic have impacted the company's bottom line to the tune of a 61% drop in revenue for 2020 compared to 2019.
"COVID-19 completely upended the demand for energy with respect to Frontera and many of its brethren," Sussberg told the court, "This has put an immense strain on the capital structure and our ability to service outstanding indebtedness … to the point we're sitting on just $3 million in cash."
Frontera said it sells all of its output from its Mission, Texas, facility to wholesale customers across the border in Mexico, and demand for the power there has dropped nearly 70% since 2019.
To address those shortfalls, Frontera has entered into a restructuring support agreement that has the support of nearly 100% of its creditors that would cut $799 million of debt from its balance sheet and obtain a $70 million infusion of cash, Sussberg said.
The debtor received interim permission Thursday to access a portion of the $70 million debtor-in-possession financing being provided by a group of term loan lenders that hold about $760 million in prepetition secured debt.
Under a forthcoming reorganization plan, those lenders would roll that financing into an exit facility and swap out their prepetition debt claims for 87.5% of the new equity in a reorganized Frontera, according to debtor attorney Matthew C. Fagen of Kirkland & Ellis.
Holders of about $15 million in second-lien debt will receive the remaining new equity, while holders of $170 million in secured notes would receive $7.5 million in cash being provided by Frontera's ultimate parent company, Lone Star Generation, Fagen said.
The debtor plans on moving through the bankruptcy process swiftly, and Fagen said Frontera anticipates filing its proposed Chapter 11 plan and disclosure statement within the next two weeks to hopefully gain plan approval by the end of April.
"This is a huge amount of deleveraging," Fagen said of the plan. "It's going to position Frontera for success upon emergence in light of the realities it faces so it can be lean and meet its demands."
Frontera comes to court with $775 million of secured term and revolving loans and $170 million of secured notes.
In addition to severe demand reductions over the last year, the company has been dealing with regulatory and legislative headwinds in Mexico that aim to make that country's domestic energy producers the preferred source of electricity.
Frontera is represented by Matthew D. Cavenaugh, Genevieve M. Graham, Vienna F. Anaya and Victoria Argeroplos of Jackson Walker LLP, and Joshua A. Sussberg and Matthew C. Fagen of Kirkland & Ellis LLP.
The lead case is In re: Frontera Holdings LLC, case number 21-30354, in the U.S. Bankruptcy Court for the Southern District of Texas.
--Editing by Brian Baresch and Breda Lund.
Update: This story has been updated with information from the debtor's first-day hearing.
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