FYI WSJ Reporting Allegiance's U.S. Coal Mines Tap Lender Cash to Avert Shutdown, page-8

Bankrupt Australian Coal Miner Gets Ok To Use Lender Cash

By Vince Sullivan

Law360 (February 23, 2023, 9:29 PM EST) -- An Australian company that operates two American coal mines received permission Thursday in a Delaware bankruptcy court to use the cash collateral of its lenders as it deals with a dispute over royalty payments to a mine lessor that threatened its operations.

Allegiance Coal USA Ltd. and three affiliates commenced their Chapter 11 case Wednesday after the fight with the owner of an Alabama coal mining site resulted in a default by Allegiance on AU$42.8 million ($29.2 million) in secured convertible notes, leaving the company with no choice but to seek bankruptcy protection to preserve its operations, according to court filings.

The debtor is a subsidiary of Australian-based Allegiance Coal Ltd., and entered into administration proceedings in Australia over the default notice issued by noteholder Collins St Convertible Notes Pty Ltd., according to the filings.

U.S. Bankruptcy Judge Craig T. Goldblatt granted the debtor permission to use the cash collateral of Collins to help fund its case in exchange for the granting of superpriority replacement liens on the debtor's assets as adequate protection of the note collateral.

The court found the use of the cash collateral necessary to preserve Allegiance's business, including by meeting imminent payroll obligations for the company's workforce, according to an interim order signed by Judge Goldblatt.

The bankruptcy commenced after a dispute with the owner of the Black Warrior Mine in Alabama, where an Allegiance unit operates a strip mining enterprise on land it leases from Warrior Met Coal Land LLC. Pursuant to the lease, Allegiance pays a royalty to Warrior Met based on an actual-production calculation that is determined by the sale price of the coal mined from the plot, court filings say.

If sales targets aren't met, the lease calls for a minimum monthly royalty payment to Warrior Met. Last August, Allegiance asked for a change in the royalty calculation formula due to changes in the company's sales model. While negotiations with Warrior Met were ongoing, the debtor paid only the monthly minimum royalty, according to the filings, and an extension of the lease until December 2023 was agreed to by the parties.

However, last week, Allegiance said Warrior Met issued a termination notice of the lease, leading to urgent negotiations to preserve Allegiance's business operations at the mine. A deal was struck earlier this week in which Allegiance agreed to resume paying the actual-production royalties beginning Wednesday.

This deal led Collins to issue a notice of default on the convertible notes and demand payment in full of the $29.2 million in note obligations within five days.

Fearing an immediate threat to its business, Allegiance commenced the administration proceedings in Australia and the Chapter 11 case in Delaware to get the benefit of the automatic stay that stops the exercise of remedies by Collins or the termination of the lease by Warrior Met, according to the court filings.

Allegiance came to court with the $29.2 million in convertible notes held by Collins, along with $26 million in note obligations to Cline Mining Corp. and $15 million of unsecured and trade debt, the filings show.

In addition to approval of the cash collateral motion, Allegiance received permission Thursday to pay the wages and benefits of its employees and to maintain its existing cash management systems.

Allegiance operates two coal mines — the New Elk Coal Mine near Trinidad, Colorado, and the Black Warrior mine near Birmingham, Alabama. These mines produce metallurgical coal that is transported to Mobile, Alabama, to be shipped to the European market for making steel. Allegiance previously focused on thermal coal production.

Allegiance is represented by Robert J. Dehney, Matthew B. Harvey, Paige N. Topper and Taylor M. Haga of Morris Nichols Arsht & Tunnell LLP.

The case is In re: Allegiance Coal USA Limited, et al., case number 1:23-bk-10234, in the U.S. Bankruptcy Court for the District of Delaware.

--Editing by Melissa Treolo.