Paradox Resources, LLC – Houston-Based Carbon Capture Specialist Suprises with Announcement of Successful Bidder, Newly Formed GNG Partners (Fronted by Peter Hornick and Jason Selch) Set to Offer Consideration Valued at $17.5mn

November 3, 2023 – Further to an August 31st modified bidding procedures order [Docket No. 274], the Debtors notified the Court that they have selected GNG Partners, LLC (“GNG Partners”) as the successful bidder for substantially all of their assets [Docket No. 382]. The Debtors value the transaction at $17.5mn; with that sum including including $5.5mn cash, a $8.9mn unsecured promissory note and assumed liabilities.  

As required by an October 31st oral ruling modifying the bidding procedures order, the Debtors have met a November 3rd deadline to file the GNG Partners APA, albeit in draft form given that it “remains subject to ongoing review by the Debtors and Buyer as the parties continue to make good faith progress in their ongoing negations with Washington Federal Bank and other parties in interest.”

On October 1st, the Debtors notified the Court [Docket No. 317], that absent the receipt of any qualified bids in advance of a bid deadline, an auction scheduled for October 2nd had been cancelled. At that point, the Debtors did note, however, that they “continue to negotiate with Potential Bidders regarding the terms of Bids that would be acceptable to the Debtors…”

The draft APA prominently features a health warning as to the negotiations with DIP lender Washington Federal Bank with whom the Debtors have had a strained relationship (see further below); with that tension probably not eased by the Debtors’ current request to have WaFd’s DIP primed by a further $1.1mn (see below on the Debtors’ request to use GNG Partners’ $1.1mn deposit as senior DIP financing). That APA language notes: “This draft agreement shall not be binding on any party until executed and in form and substance acceptable to Buyer in its sole discretion (including having resolved, among other things, ongoing discussions regarding the asserted interests of Washington Federal Bank, SRC Holdings, LLC and its affiliates, and the United States Bureau of Land Management and Office of Natural Resource Revenue).”

So who are GNG Partners?

The notice provisions of the draft APA have Peter Hornick and Jason Selch as contacts, with the pair listing an apartment at 410 Central Park West as their current address. Peter Hornick recently left Brevan Howard, having earlier done stints with Exodus Point Capital Management and Millennium Management. Jason Selch was formerly at Enchant Energy Corporation (another carbon capture specialist which he co-founded) and also did time with Millennium. Selch gained considerable notoriety for reportedly mooning his bosses at Bank of America, a move which cost him $2.0mn in compensation and in hindsight deeply regretted.

The draft APA prominently features a health warning as to the negotiations with DIP lender Washington Federal Bank with whom the Debtors have had a strained relationship (see further below). That language notes: “This draft agreement shall not be binding on any party until executed and in form and substance acceptable to Buyer in its sole discretion (including having resolved, among other things, ongoing discussions regarding the asserted interests of Washington Federal Bank, SRC Holdings, LLC and its affiliates, and the United States Bureau of Land Management and Office of Natural Resource Revenue).”

How Tenuous is The Sale…and the Debtors’ Stay in Chapter 11?

Apparently very. The Debtors have also filed a motion [Docket No. 391] seeking to use GNG’s $1.1mn deposit now, ie as DIP financing. If the Debtors can’t simultaneously pull off the sale and the DIP financing (without which they can’t reach an anticipated end of year closing of the sale), they will look to have their cases converted to Chapter 7. 

The Debtor’s DIP motion provides: “The primary relief requested in this Motion is contingent on the Court’s approval of the proposed sale of substantially all of the Debtors’ assets and entry of the Sale Order. An integral part of the Debtors’ proposed sale transaction is the ability to use the Good Faith Deposit of GNG Partners, LLC (the ‘Buyer’) in the amount of $1,100,000 to sustain the minimum level of operations needed for the Debtors to progress to a closing of the sale on or about December 29, 2023.

Approval of the sale to Buyer pursuant to the Sale Motion and the simultaneous approval of the supplemental financing detailed in this Motion represent the Debtors’ best and final opportunity to achieve a transaction that will provide a benefit to creditors outside of a chapter 7 liquidation. If either of the Sale Motion or this Motion are not granted by the Court concurrently with the Sale Hearing scheduled for November 7, 2023, the Debtors will request that the Court grant the alternative relief requested in this Motion and enter an order converting the Chapter 11 Cases to cases under chapter 7 of the bankruptcy code.”

As to priming, the motion adds: “Although the Supplemental DIP Facility primes WaFd and provides for first liens, the Debtors believe that, even though the value of the collateral does not exceed the total amount of WaFd’s debt, WaFd is still adequately protected, and the Supplemental DIP Facility is in the best interests of WaFd and the entire creditor constituency. The Supplemental DIP Facility is designed to permit the Debtors to obtain the needed liquidity to maximize the value of their assets.”

A hearing on the proposed sale and DIP financing is scheduled for November 7th.

Key Terms of Draft APA

  • Sellers: 
    1. Paradox Resources, LLC
    2. Paradox Upstream, LLC
    3. Paradox Midstream, LLC
    4. Four Corners Energy, LLC
    5. Four Corners Pipeline, LLC
  • Buyer: GNG Partners, LLC
  • Purchase Price: The purchase price for the purchase, sale, assignment and conveyance of Seller’s right, title and interest in, to and under the Purchased Assets shall consist of the following (collectively, the “Base Purchase Price”): 
    • A total of Seventeen Million Five Hundred Thousand Dollars ($17,500,000) consisting of: 
    • cash in an amount equal to Five Million Five-Hundred Thousand Dollars ($5,500,000) to be paid to Seller at Closing; and 
    • an unsecured promissory note (the “Note”) in the original principal amount of $8,990,393.16, executed by Buyer and delivered to Seller at Closing in the form and substance reasonably acceptable to Buyer and Seller and substantially upon the terms set forth in the Term Sheet set forth in Exhibit G hereto (the “Note Term Sheet”). 
    • The assumption of the Assumed Liabilities.
  • Deposit: Twenty percent (20%) of the cash portion of the Base Purchase Price (i.e., $1.1mn).
  • Bid Protections: N/A

Case Status

On May 22, 2023, privately held Paradox Resources, LLC and six affiliated debtors (together “Paradox” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $50.0mn and $100.0mn. At filing, the Houston-based Debtors, “a Texas-based independent midstream company primarily focused on helium processing and carbon capture, utilization and sequestration” noted as to their need to seek bankruptcy shelter….that their “immediate and significant liquidity concerns that can be traced back to the sudden and sustained drop in commodity prices in recent years, which is has resulted in the accumulation of untenable vendor debt, and severe strain on available cash.”

On May 26, 2023, responding to the Debtors’ emergency funding motion (of that same date), the Court issued an order authorizing the Debtors to access a $250k “protective advance loan” (effectively emergency DIP financing necessary to meet payroll) being provided by prepetition lender Washington Federal Bank, N.A.

On June 29, 2023, the Court hearing the Paradox Resources, LLC cases issued an order authorizing the Debtors to access $2.5mn in new money, debtor-in-possession (“DIP”) financing on an interim basis, being provided by Washington Federal Bank, N.A. (the “WaFd,” also the “DIP Lender”) and use cash collateral.

On July 31st, the Court issued an order: (i) approving bidding procedures in relation to the sale of the substantially all of the Debtors’ assets (the “Sale”), (ii) authorizing the Debtors to select one or more stalking horse bidders (none yet selected), (iii) authorizing the Debtors to offer bid protections to any selected stalking horse and (iv) adopting a timetable culminating in an auction on August 31st and a sale hearing on September 6th.

On August 25th, further to a July 28th final DIP financing order [Docket No. 197], the Court hearing the Paradox Resources, LLC cases issued an order directing Washington Federal Bank, N.A. (the “WaFd,” also the “DIP Lender”) to: “(i) honor the Debtors’ borrowing request and (ii) immediately fund the DIP Loan proceeds in the amount of $1.5mn pursuant to the borrowing request on or before August 26, 2023″ [Docket No. 250].

In an August 25th objection to the Debtors’ motion to enforce the final DIP order [Docket No. 247], WaFd had argued that: “An Event of Default has occurred and is continuing under…the DIP Loan Order. Debtors have failed to satisfy the Milestone for obtaining an acceptable stalking horse bidder within two days of the deadline. The Bank did not waive its rights.”

On the effectively binary question as to whether WaFd had waived its rights in respect of enforcing a (missed) milestone for naming a stalking horse bidder, Judge David R. Jones sided with the Debtors who argued that WaFd had missed its chance and waived its right to object when it stayed silent while he issued final DIP and bidding procedures orders notwithstanding the missed deadline: “the Debtors, Committee, and all other parties in interest have continued to operate under the assumption that WaFd waived the initial Milestone either expressly or impliedly by consenting to entry of the Final DIP Order and Bidding Procedures Order, and would continue to fund its DIP Commitment and permit the Debtors to draw upon the DIP Facility.”

About the Debtors

According to the Debtors: “Paradox Midstream is a Texas-based independent midstream company primarily focused on helium processing and carbon capture, utilization and sequestration. Acquired in 2017, Paradox Midstream’s core asset is the Lisbon Valley Gas Plant located in southeast Utah. The Lisbon Valley plant and its 500-mile pipeline system connect the Four Corners region of the US (New Mexico, Arizona, Utah and Colorado) and is strategically positioned to serve producers with the following capabilities:

  • Helium extraction and liquefaction
  • Natural gas gathering, processing, treating, dehydration and compression
  • Carbon capture, utilization and sequestration.”

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