Cano Petroleum in bankruptcy, enters $47.5 million stock purchase deal

By Caroline Salls

Pittsburgh, March 8 - Cano Petroleum, Inc. filed Chapter 11 bankruptcy Wednesday in the U.S. Bankruptcy Court for the Northern District of Texas after entering a $47.5 million stock purchase agreement with NBI Services, Inc., according to a company news release.

The company is also seeking court approval of a marketing process in which NBI would be the stalking horse bidder and Cano would be permitted to solicit higher or better bids for its assets and businesses.

Under the proposed stock purchase agreement, all existing capital stock, including Cano's common stock and series D convertible preferred stock, will be canceled and NBI Services will receive all of the outstanding capital stock of reorganized Cano in exchange for $47.5 million.

The proceeds will be distributed to creditors under Cano's plan.

Bid procedures

Competing bids must be for at least $49 million and must include a $2 million deposit.

Bids in the first three rounds at the auction must be made in minimum increments of $250,000. For the fourth and subsequent rounds, the bid increment will be $100,000.

If NBI Services is not the high bidder, Cano will pay it a $1.48 million breakup fee.

Cano said it will continue to manage its properties and operate its businesses while it seeks confirmation of its joint plan of reorganization.

Creditor treatment

Treatment of creditors under Cano's plan will include:

• Holders of administrative claims, priority tax claims, royalty claims and priority non-tax claims will be paid in full in cash;

• Holders of senior secured claims will receive all of the sale proceeds and available cash, except those transferred to a liquidating trust, as well as net proceeds from the sale of other assets, funds remaining in a claims reserve, the proceeds of the sale of closing accounts receivable, any funds remaining in a liquidating trust expense reserve, all forfeited amounts in an undeliverable distribution reserve and all remaining accounts from environmental escrow funds;

• Holders of UnionBanCal Equities, Inc. (UBE) junior secured claims will receive any excess amounts if the senior secured claim distribution amounts are more than the allowed senior secured claims and the allowed senior secured claims are paid in full.

If not, holders of UBE junior secured claims will be treated as general unsecured claims.

However, if the company's creditors' committee supports and does not object to confirmation of the plan, all nine classes of general unsecured claims vote to accept the plan by the required majority and the validity, extent or priority of the junior secured lenders' liens are not challenged by the committee, a creditor or other party in interest, then these creditors' deficiency claim will be waived and not treated as a general unsecured claim;

• Holders of miscellaneous secured claims will be paid in cash or receive treatment determined by the bankruptcy court;

• Holders of general unsecured claims will receive from the liquidating trust a share of the sum of a gifted amount, plus total cash avoidance action proceeds, less the amount of an avoidance action proceeds reserve or gift reserve required to satisfy plan carve-out claims; and

• Holders of intercompany claims, preferred stock and interests will receive no distribution.

Financial woes

According to the release, the bankruptcy filing resulted from Cano's current financial condition, including a history of continued losses, defaults under its loan agreements and its series D preferred stock, no available borrowing capacity, constrained cash flow and negative working capital and limited to no access to additional capital.

In connection with the bankruptcy filing, the company is seeking court approval to use the cash collateral of its pre-bankruptcy secured lenders to fund its operations while in bankruptcy.

Debt details

According to court documents, Cano had $$63.37 million of total assets and $116.26 million of total debt as of Sept. 30.

The company did not list any unsecured creditors with claims of $1 million or more.

D.E. Shaw Laminar Portfolios, LLC, Investcorp Interlachen Multi-Strategy Master Fund Ltd., Kellogg Capital Group LLC, Fidelity Clearing Canada ULC, William Herbert Hunt Trust Estate, Radcliffe Capital Management LP and O'Connor Global Multi-Strategy Alpha Master Ltd. hold more than 5% of the company's voting securities, according to the bankruptcy petition.

The company has retained Thompson & Knight LLP as legal counsel. NBI Services, Inc. is represented by McDonald, McCann & Metcalf, LLP.

Cano is a Fort Worth-based oil and natural gas company. Its Chapter 11 case number is 12-31549.

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