SemGroup Rushed to Raise $718 Million Pre-Bankruptcy
By Linda Sandler and Robert Tuttle
Aug. 13 (Bloomberg) -- SemGroup LP, the pipeline and energy-storage company that went bankrupt last month, rushed to raise $718 million to fund money-losing commodity trades before going bust.
The cash was obtained in five transactions with affiliates including the swap of an asphalt business with the company's publicly traded subsidiary, SemGroup Energy Partners LP, and loans from two hedge funds and General Electric Capital Corp., according to regulatory filings and shareholder and creditor lawsuits. The hedge-fund borrowings were secured with the company's SemGroup Energy stake, while GE Capital's loan to a pipeline project ended up with the parent company.
``Massive'' margin calls on trades in energy futures and options sank the Tulsa, Oklahoma-based company, according to its bankruptcy filings. Rising prices forced SemGroup to put up $1.96 billion in the first quarter to cover its bets, more than double the amount it needed a year earlier. While the company said the trading was essential to its business, lenders said it may have been improperly speculating, filings show.
``It sounds like they were desperate for cash,'' said Craig Pirrong, director of energy markets at the University of Houston Global Energy Management Institute. ``Any transfer of cash or assets within a period of time prior to bankruptcy is potentially a preference that creditors could challenge. This is headed for potentially nasty bankruptcy proceedings.''
Investigation Sought
The U.S. Justice Department asked for a court examiner to investigate SemGroup's bankruptcy, saying the lack of information on its trading strategy is causing ``significant unrest and concern among the debtors' customers, suppliers, lenders and investors,'' according to court papers filed on Aug. 12. The U.S. trustee cited ``insider transactions'' with affiliates that ``were used to fund margin calls in connection with the trading strategy.''
In addition to the loans and asset swap, the trustee said SemGroup on May 30 raised $45 million by selling pipeline assets to the public partnership, while taking in $90 million by transferring storage facilities to SemGroup Energy.
Tight credit markets made it impossible to borrow enough money to keep trading, SemGroup said in its filings in U.S. Bankruptcy Court in Wilmington, Delaware. It sought protection on July 22 from creditors who are owed about $3 billion after it lost more than $2.4 billion on energy trades.
Carlyle an Owner
Carlyle Group, a Washington-based private-equity firm, owned 29.3 percent of SemGroup in a joint venture with Riverstone Holdings LLC, according to SemGroup Energy's annual report with the U.S. Securities and Exchange Commission on March 6. Ritchie Capital Management LLC, a Lisle, Illinois-based hedge-fund firm, held 25.2 percent.
A Delaware bankruptcy judge gave SemGroup permission on Aug. 5 to borrow $150 million to keep operating while selling assets to pay lenders. Creditors may also recover ``significant'' amounts from lawsuits, Susheel Kirpalani, an attorney for unsecured lenders at New York law firm Quinn Emanuel Urquhart Oliver & Hedges LLP, said in court that day.
SemGroup's downfall is the biggest energy-trading collapse since hedge-fund manager Amaranth Advisors LLC of Greenwich, Connecticut folded under $6.6 billion of wrong-way natural-gas bets in 2006. Investors have proposed at least 10 class-action lawsuits against SemGroup Energy, saying it issued stock in February without disclosing its parent's risky hedging strategies.
SemGroup Energy plunged 25 percent to $8.30 in Nasdaq Stock Market trading on July 18 after disclosing that its parent was considering a bankruptcy filing. The stock had lost 52 percent on July 17.
SEC Probe
The SEC and a federal grand jury have asked SemGroup Energy for documents related to its bankrupt parent's liquidity, according to a July 24 SEC filing. The unit isn't in bankruptcy. Officials including SemGroup Energy Chief Executive Officer Kevin Foxx didn't return calls.
SemGroup is owed about $290 million by a trading company owned by Thomas Kivisto, 56, the company's former chief executive officer, who was placed on leave five days before the bankruptcy, according to court filings. Little-known WestBack Holdings is one of Kivisto's companies.
SemGroup, co-founded by Kivisto in 2000 with $90 million of backing from BOK Financial Corp.'s Bank of Oklahoma, quickly grew to the 12th-largest privately held company in the U.S., according to Forbes.com. Kivisto, a University of Kansas basketball star, became prominent in business, cultural, sports and philanthropic circles.
Hedging or Speculating?
He financed art galleries in Chicago, where he grew up, and led SemGroup to sponsor the LPGA SemGroup Championship in women's professional golf. Son of a basketball coach who had him shooting hoops at 6 a.m., he built SemGroup by buying 45 companies in five years, according to the Tulsa World Web site.
SemGroup and affiliates gather, transport, store and market energy for independent oil and gas producers and refiners through their North American pipelines, gathering systems, processing plants and storage facilities, according to court documents. Revenue in fiscal 2007 was $13.2 billion.
Hedging the commodities it bought and sold was part of business, the company said in court. As oil prices soared, its trades went awry and it posted $1.7 billion to satisfy margin requirements in 2007, 159 percent more than the prior year, the filings show.
After defaulting on a secured loan on July 16, SemGroup couldn't borrow anymore and turned over its New York Mercantile Exchange trading account to London-based Barclays Plc, taking losses of more than $2.4 billion, including the $290 million owed by Kivisto. Its loss on an over-the-counter market trading account was $850 million.
Tip From Blackstone
SemGroup was ``speculating,'' not hedging, RZB Finance LLC, a unit of Austria's Raiffeisen Zentralbank Oesterreich AG that is owed more than $40 million, said in a July 30 bankruptcy court filing. The company was ``employing unauthorized option trading strategies'' that violated the bank's credit agreement and the company's own risk management policies, the lender said. SemGroup blames Kivisto and his traders, it said.
RZB said it learned about the speculative option trades from Blackstone Group LP, SemGroup's financial adviser. John Ford, a spokesman for the New York-based company, declined to comment.
Financial Data Questioned
``It is common for people engaging in improper activities to take steps to cover their tracks such as making false entries in books and records,' RZB said in court documents. ``This calls into question the reliability of any financial data the debtors use.''
John Tucker, Kivisto's attorney; Brenda Adrian, a SemGroup spokeswoman; and Michael Kessler, a lawyer for SemGroup at Weil Gotshal & Manges LLP, declined to comment.
Margin calls require deposits of money to ensure commitments are met. SemGroup's cash bind coincided with a 59 percent surge in oil prices over the past year. Crude rose to a record $147.27 a barrel on July 11 on the New York Mercantile Exchange before slipping.
On Feb. 14, SemGroup Energy sold new shares, handing about $138 million in proceeds, plus $241 million it borrowed, to its parent for an asphalt-storage business, according to the prospectus. SemGroup needed the cash to meet margin calls and cover losses on short positions in oil, shareholder Craig Carson said in a complaint filed in federal court in Oklahoma on July 22.
SemGroup ``used the offering as a vehicle to provide much needed cash to the parent,'' the investor said in the complaint. The company this year ``began to suffer margin calls which it had trouble meeting, and had to cover transactions that had declined, and which began to severely impact its business and cause liquidity problems.''
Last-Minute Loans
The plaintiff wants compensation for himself and other investors for the drop in the stock of SemGroup Energy, which transports and stores oil and cement, mostly for its parent.
On July 18, hedge funds Manchester Securities Corp. and Alerian Finance Partners LP took over SemGroup Energy's board after a loan made in June to the company's parent defaulted, according to a July 21 filing. They gained SemGroup's 12.57 million partnership units, currently valued at around $128 million, and its general partner stake. They'd lent SemGroup $150 million, the Wall Street Journal reported.
Challenges Loom
This deal, struck so close to the bankruptcy, may draw a challenge from creditors, said California broker Sandra Laskowski, who sells bankrupt-company claims to investors.
Spokesman Scott Tagliarino of Elliott Management Corp., whose partnership owns Manchester, declined to comment. Alerian money manager Gabriel Hammond didn't return calls.
A SemGroup pipeline unit borrowed $54 million on July 11 that it was supposed to use for construction and gave the money to its parent, said GE Capital in a lawsuit filed July 23. In all GE said it loaned $120 million to the pipeline project.
Ken Koprowski, a spokesman for GE Energy Financial Services, a unit of Fairfield, Connecticut-based General Electric Co., declined to comment.
The bankruptcy case is In re SemCrude LP, 08-11525, U.S. Bankruptcy Court, District of Delaware (Wilmington).
To contact the reporters on this story: Robert Tuttle in New York at rtuttle@bloomberg.net; Linda Sandler in New York at lsandler@bloomberg.net.
Last Updated: August 13, 2008 16:48 EDT |
