Same Class, Different Recoveries — No Bar to Plan Confirmation

Peabody Energy Corp., a coal company, and certain of its affiliates filed voluntary Chapter 11 bankruptcy petitions during a time of falling demand and prices in the industry that resulted in a steep decline in the debtors' revenues. At the time of the bankruptcy filings, there was an ongoing dispute between several of the debtors' secured and senior-unsecured creditors over the extent to which the debtors' assets served as collateral for the secured creditors' debts. After filing for bankruptcy protection, the debtors commenced an adversary proceeding seeking a declaratory judgment regarding that dispute. The mediation that followed expanded beyond resolution of the security-interest fight and ultimately culminated in a global settlement that included a proposed plan of reorganization as its centerpiece.

The proposed plan sought to deleverage the debtors' balance sheet and included, among other things, a $1.5 billion equity raise through a $750 million backstopped rights offering of common stock and $750 million backstopped private placement that involved an exclusive sale of discounted preferred stock to qualifying creditors. Under the $750 million backstopped private placement, creditors could qualify to buy the preferred stock by executing certain agreements that obligated them to: buy a set amount of preferred stock; agree to backstop the rights offering and private placement (i.e., purchase the unsold shares of common and preferred stock); and support the plan in the confirmation process. The amount of preferred stock qualifying creditors could and were required to buy depended on the portion of the pre-bankruptcy debt they held and on how swiftly they took action to qualify. In addition to purchasing the preferred shares at a discount, qualifying creditors also received several payment premiums for executing the agreements. In short, the creditors received preferred stock at a discount and significant premiums in exchange for their prompt agreement to backstop the arrangement and support the bankruptcy plan. Regardless of whether a creditor participated in the private placement, it would receive the same distributions as other creditors in its class under the plan.