Holders of KCS 7 1/8% notes due 2012 could gain $11.7 million if 'change of control' lawsuit succeeds

By Paul A. Harris

St. Louis, Oct. 20 - Holders of KCS Energy Inc. 7 1/8% notes due 2012 stand to gain about $11.7 million based on current market prices for the bonds, if their lawsuit succeeds in establishing that the recent merger of KCS with Petrohawk Energy Corp. resulted in a change of control.

A market source spotted the notes trading at 96.75 bid, 97.75 offered on Friday afternoon. But if bondholders prevail in a lawsuit contending KCS's recent merger with Petrohawk Energy Corp. tripped a change-of-control provision in the $275 million issue, the post-merger company would be forced to call the bonds at 101.

According to Glenn E. Siegel of Dechert LLP, the lawyer who represents the bondholders, the former trustee of the 7 1/8% notes due 2012, U.S. Bank NA, had to resign as trustee over a "statutory conflict," which, Siegel said, could have been something as simple as the bank having made a loan to Petrohawk.

With U.S. Bank out of the picture, Siegel said that 73% of the bondholders favored engaging Law Debenture Trust Co. of New York as trustee. The indenture, he added, requires that only 50% favor the change.

Law Debenture subsequently filed suit in Delaware contending that the merger effected a change of control.

The lawsuit contends that the merger constitutes a change of control according to two provisions in the bond indenture.

One provision involves the board of directors of the surviving entity, the majority of which, according to Siegel, are Petrohawk directors. The other provision is a mathematical one: if the former KCS shareholders have less than 50% of the stock of the combined company, then there has been a change of control.

Siegel contends that both of those "change of control" provisions have been met.

David Elkouri, general counsel for Petrohawk, told Prospect News that the owners of the stock of KCS have more than 50% of the stock on a going forward basis and added that it is Petrohawk's position that there has not been a change of control.

Elkouri also contends that Petrohawk has not seen evidence that a majority of KCS bondholders favored that appointment of Law Debenture as the new bond trustee, replacing U.S. Bank.

Elkouri said that in response to the lawsuit that Law Debenture has filed in Delaware, Petrohawk has filed a general motion to dismiss the case.

Petrohawk said on Thursday it intended to appoint a successor trustee in the near future.

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