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December 19, 2017

Milbank Obtains Victory in Chapter 11 Proceedings of GenOn Energy, Inc.

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In the chapter 11 proceedings of GenOn Energy, Inc. (“GenOn”), one of the 10 largest wholesale power generation companies in the country, Milbank has successfully represented a group of the most significant creditors of GenOn’s wholly owned subsidiary, GenOn Mid-Atlantic, LLC (“GenMA”). Those creditors, known as the “Owner Lessors,” are parties with GenMA to a series of leveraged lease transactions, under which they lease to GenMA their undivided interests in two coal-fired power plants in Maryland known as the Morgantown and Dickerson facilities. GenMA’s future rent obligations to the Owner Lessors total approximately $800 million.

GenOn filed for chapter 11 protection on June 14, 2017, in the United States Bankruptcy Court for the Southern District of Texas, with a prearranged plan to cut nearly $1.8 billion in debt through a noteholder equity swap and settle potential fraudulent transfer claims against its parent company NRG Energy, Inc. (“NRG”) for $261 million. On December 12, 2017, GenOn won court approval of a restructuring plan that splits it from NRG and opens the way to a possible sale of the company. GenOn is expected to emerge from chapter 11 in mid-2018. GenMA is a not a debtor in the chapter 11 proceedings.

Before the bankruptcy, the Owner Lessors sued GenOn and NRG in connection with a series of transfers of cash from GenMA to GenOn, including a $125 million conveyance on May 4, 2017. The Owner Lessors alleged that these transfers violated GenMA’s leveraged lease transaction documents and constituted fraudulent conveyances. They sought to have GenOn and NRG restore the funds to GenMA so that GenMA would be better able to satisfy its future rent obligations to the Owner Lessors. After the commencement of the GenOn bankruptcy case, the Owner Lessors argued that GenOn was improperly seeking to distribute to its creditors the funds that were wrongfully extracted from GenMA, and that GenOn was attempting to eliminate the Owner Lessors’ rights to claw those funds back by forcing GenMA to grant releases to parties involved in the misconduct. Following a 10-day trial before the bankruptcy court, Judge David R. Jones handed the Owner Lessors a significant victory, ruling that the Owner Lessors had exposed serious wrongdoing at GenOn and that the bankruptcy process should not foreclose the Owner Lessors or GenMA from seeking redress. The court held that claims challenging the transfers and related misconduct would have to be “carved out” of any GenOn plan of reorganization.

In the wake of this ruling, a global settlement was reached, under which NRG and GenOn agreed to provide (i) a letter of credit in favor of the Owner Lessors for the duration of GenMA’s leveraged leases, of which NRG will fund $37.5 million and GenOn will fund $20 million; (ii) a $55 million bridge loan from GenOn to GenMA; and (iii) contribution to the payment of the Owner Lessors’ professional fees. The settlement also requires the purchase or redemption by GenMA of approximately $326 million of securities that are senior to the Owner Lessors in the GenMA capital structure, thus significantly deleveraging GenMA and enhancing the value of the Owner Lessors’ positions.

The settlement represents a tremendous success for Milbank’s clients, who now face a substantially more stable and deleveraged obligor. In approving the settlement, Judge Jones commended Milbank’s legal team for exhibiting “a great amount of flexibility [and] professionalism,” and for pursuing innovative legal theories that had “taken [the case] to something I didn’t expect.” Judge Jones expressed appreciation for what the Milbank team had accomplished in the chapter 11 proceedings and “recognize[d] what went into this to get this [case] resolved. It’s just an effort that ought to be recognized, and I do.”

The Milbank team was led by partners Tyson Lomazow (Financial Restructuring), Karen Wong (Global Project, Energy & Infrastructure Finance), and Jerry Marks (Litigation & Arbitration) with special counsel Alexander Lees (Financial Restructuring); and included special counsel Craig Price (Financial Restructuring); and Litigation associates Matthew Latterner, James Burke, Ayana Sumiyasu, Julie Wolf, and Aram Hanessian.