ITEM 1.01. Entry Into a Material Definitive Agreement.
As previously disclosed in the Current Report on Form 8-K of SandRidge Permian
Trust (the "Trust") filed on April 23, 2020, Avalon Energy, LLC was unable to
pay on a timely basis in May 2020 the approximately $4.65 million it owes the
Trust (the "May 2020 Quarterly Payment") relating to the three-month period
ended March 31, 2020 (which primarily relates to production attributable to the
Trust's overriding royalty interests (the "Royalty Interests") from December 1,
2019 to February 29, 2020). Consequently, The Bank of New York Mellon Trust
Company, N.A., as trustee of the Trust (the "Trustee"), was unable to make the
quarterly distribution to Trust unitholders for the three-month period ended
March 31, 2020. In accordance with the terms of the conveyances pursuant to
which the Royalty Interests were originally conveyed to the Trust, the unpaid
amount owed the Trust has been accruing interest at the rate of interest per
annum publicly announced from time to time by The Bank of New York Mellon Trust
Company, N.A. as its "prime rate" in effect at its principal office in New York
City until paid to the Trust.
On March 1, 2021, the Trust and Avalon entered into a repayment agreement
setting forth the terms by which Avalon has agreed to pay the May 2020 Quarterly
Payment to the Trust, together with accrued interest (the "Agreement").
Beginning with the quarterly distribution paid to Trust unitholders on or about
February 26, 2021 (the "February Distribution"), Avalon will apply towards the
payment of the May 2020 Quarterly Payment the full amount of each quarterly cash
distribution, if any, to which Avalon, as a unitholder of the Trust, is entitled
(each such cash distribution, a "Company Distribution Amount"), until the
May 2020 Quarterly Payment, together with accrued interest, has been paid in
full to the Trust, subject to any obligations Avalon may have to repay the
revolving line of credit Avalon had previously obtained from Washington Federal
Bank, National Association, pursuant to the terms of a loan agreement (the
"WaFed Loan") that are not waived by WaFed as provided in the Agreement. Avalon
will deposit its portion of the February Distribution into a repayment account
established by the Trustee on behalf of the Trust (the "Repayment Account"). The
Trust will receive $984,375, representing the portion of the
February Distribution that Avalon would otherwise receive, as an initial payment
toward the May 2020 Quarterly Payment. Beginning with the distribution with
respect to the quarter ending March 31, 2021, Avalon will deposit each such
Company Distribution Amount into the Repayment Account promptly, but in no event
later than the next business day, after the Company's receipt of any such
Company Distribution Amount.
The Agreement also provides that if any third party agrees to acquire Avalon,
whether pursuant to a merger, consolidation, purchase of all or substantially
all of the assets of Avalon, or other similar transaction or series of
transactions (a "Sale Transaction"), then, subject to any obligations Avalon may
have to repay the WaFed Loan in connection with any such transaction that are
not waived by WaFed as provided in the Agreement, Avalon will pay to the Trust
from cash received in a Sale Transaction an amount equal to (i) the difference
between (A) the aggregate amounts deposited in the Repayment Account pursuant to
the Agreement at the time the Sale Transaction is consummated and (B) the then
outstanding balance of the May 2020 Quarterly Payment together with all accrued
and unpaid interest thereon to the date of payment of such outstanding balance
(the "Balance Amount") or (ii) where the amount of cash received in the Sale
Transaction is less than the Balance Amount, all of the cash received in the
Sale Transaction. Avalon agrees that it will pay such amount to the Trust
promptly, but in no event later than the next business day, after the closing of
any such Sale Transaction. If Avalon is unable to pay the Balance Amount in full
upon the closing of a Sale Transaction, Avalon has agreed, subject to any
obligations Avalon may have to repay the WaFed Loan in connection with any such
transaction that are not waived by WaFed as provided in the Agreement, to pledge
to the Trust, to secure the payment of the outstanding portion of the Balance
Amount, any non-cash consideration that Avalon receives from such Sale
Transaction or similar transaction.
The foregoing description of the Agreement does not purport to be complete and
is qualified in its entirety by reference to the full text of the Agreement,
which is filed as an exhibit to this Current Report on Form 8-K.
ITEM 8.01. Other Events.
As described in the Trust's annual and quarterly reports filed with the
Securities and Exchange Commission ("SEC"), the amended and restated trust
agreement governing the Trust (the "Trust Agreement") requires the Trust to
dissolve and commence winding up of its business and affairs if cash available
for distribution for any four consecutive quarters, on a cumulative basis, is
less than $5.0 million. Cash available for distribution for the four consecutive
quarters ended December 31, 2020, on a cumulative basis, totaled approximately
$2.4 million, due in part to Avalon's inability to make the May 2020 Quarterly
Payment to the Trust. Because Avalon's inability to make the May 2020 Quarterly
Payment contributed to the insufficient cumulative cash available for
distribution over the four-quarter period, the Trustee and Avalon submitted to
an arbitration panel, in accordance with the Trust Agreement, the question of
whether the Trust nonetheless remains required to dissolve following the end of
that period. On February 25, 2021, the arbitration panel determined that the
existence of the unpaid May 2020 Quarterly Payment does not alter the
requirement of the Trust to terminate under the provisions of the Trust
Agreement. As a result, the Trust will dissolve and commence winding up
beginning as of the close of business on February 26, 2021 (the "Dissolution
Trigger Date").
Accordingly, the Trustee will be required to sell all of the Trust's assets,
either by private sale or public auction, and distribute the net proceeds of the
sale to the Trust unitholders after payment, or reasonable provision for
payment, of all Trust liabilities, which is expected to include the
establishment of cash reserves in such amounts as the Trustee in its discretion
deems appropriate for the purpose of making reasonable provision for all claims
and obligations of the Trust, including any contingent, conditional or unmatured
claims and obligations, in accordance with the Delaware Statutory Trust Act. The
sale process will involve costs that will reduce the amounts of any
distributions to Trust unitholders during the winding up period. As required by
the Trust Agreement, within 30 days after the Dissolution Trigger Date the
Trustee will engage a third-party advisor to assist with the marketing and sale
of the Royalty Interests. As provided in the Trust Agreement, Avalon has a right
of first refusal with respect to any sale of Royalty Interests to a third party.
The Trustee expects to complete the sale of the Royalty Interests and distribute
the net proceeds of the sale to the Trust unitholders by the end of the third
quarter of 2021, and the Trust units are expected to be canceled shortly
thereafter. Pending the sale or sales of the Royalty Interests, the Trust
anticipates that it will continue to receive income, if any, attributable to the
Royalty Interests and will continue to make quarterly distributions to Trust
unitholders to the extent there is available cash after payment of Trust
expenses and additions to cash reserves. The Trust will remain in existence
until the filing of a certificate of cancellation with the Secretary of State of
the State of Delaware following the completion of the winding up process.
Forward-Looking Statements
This Current Report on Form 8-K (this "Report") contains statements that are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. All statements contained in this Report, other
than statements of historical facts, are "forward-looking statements" for
purposes of this provision. These forward-looking statements include
expectations regarding the timing of the completion of the sale process and the
winding up of the Trust, including the cancellation of the Trust units;
expectations regarding the costs involved in the sale process; statements
regarding the possibility of future distributions to Trust unitholders during
the winding up period; and statements regarding the Trustee's withholding of
funds to increase cash reserves for future known, anticipated or contingent
expenses or liabilities of the Trust. The amount of cash received or expected to
be received by the Trust (and its ability to pay distributions) has been and
will be significantly and negatively impacted by fluctuating benchmark prices
for crude oil, natural gas and natural gas condensate. In addition to the
collapse of the worldwide demand for oil and the resulting collapse of oil
prices in the first half of 2020, as a result of the dispute over oil production
levels between members of the Organization of Petroleum Exporting Countries and
Russia and the economic effects of the COVID-19 pandemic, other important
factors that could cause actual results from Trust operations to differ
materially from those anticipated and adversely impact distributions to Trust
unitholders include lease operating expenses related to the operation of the
underlying properties burdened by the Royalty Interests, expenses of the Trust,
and reserves made by the Trust for anticipated future expenses. Statements made
in this Report are qualified by the cautionary statements made in this Report.
The Trustee does not intend, and does not assume any obligation, to update any
of the statements included in this Report. An investment in common units issued
by the Trust is subject to the risks described in the Trust's Annual Report on
Form 10-K for the year ended December 31, 2019, its Quarterly Report on
Form 10-Q for the period ended September 30, 2020, and all of its other filings
with the SEC. The Trust's annual, quarterly and other filed reports are or will
be available over the Internet at the SEC's website at http://www.sec.gov.
ITEM 9.01. Financial Statements and Exhibits.
(d) Exhibits.
10.1 Repayment Agreement dated as of March 1, 2021 between SandRidge
Permian Trust and Avalon Energy, LLC.
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