👕 New Chapter 11 Bankruptcy Filing - Chinos Holdings Inc. (J.Crew) 👕

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Chinos Holdings Inc. (J.Crew)

May 4, 2020

If you’re looking for a snapshot of the pre-trade war and pre-COVID US economy look no farther than J.Crew’s list of top 30 unsecured creditors attached to its chapter 11 bankruptcy petition. On the one hand there is the LONG list of sourcers, manufacturers and other middlemen who form the crux of J.Crew’s sh*tty product line: this includes, among others, 12 Hong Kong-based, three India-based, three South Korea-based, two Taiwan-based, and two Vietnam-based companies. In total, 87% of their product is sourced in Asia (45% from mainland China and 16% from Vietnam). On the other hand, there are the US-based companies. There’s Deloitte Consulting — owed a vicious $22.7mm — the poster child here for the services-dependent US economy. There’s the United Parcel Services Inc. ($UPS)…okay, whatever. You’ve gotta ship product. We get that. And then there’s Wilmington Savings Fund Society FSB, as the debtors’ pre-petition term loan agent, and Eaton Vance Management as a debtholder and litigant. Because nothing says the US-of-f*cking-A like debt and debtholder driven litigation. ‘Merica! F*ck Yeah!!

Chinos Holdings Inc. (aka J.Crew) and seventeen affiliated debtors (the “debtors”) filed for bankruptcy early Monday morning with a prearranged deal that is dramatically different from the deal the debtors (and especially the lenders) thought they had at the tail end of 2019. That’s right: while the debtors have obviously had fundamental issues for years, it was on the brink of a transaction that would have kept it out of court. Call it “The Petsmart Effect.” (PETITION Note: long story but after some savage asset-stripping the Chewy IPO basically dug out Petsmart from underneath its massive debt load; J.Crew’s ‘19 deal intended to do the same by separating out the various businesses from the Chino’s holding company and using Madewell IPO proceeds to fund payments to lenders).

Here is the debtors’ capital structure. It is key to understanding what (i) the 2019 deal was supposed to accomplish and (ii) the ownership of J.Crew will look like going forward:

Screen Shot 2020-05-04 at 3.38.16 PM.png

Late last year, the debtors and their lenders entered into a Transaction Support Agreement (“TSA”) with certain pre-petition lenders and their equity sponsors, TPG Capital LP and Leonard Green & Partners LP, that would have (a) swapped the $1.33b of term loans for $420mm of new term loans + cash and (b) left general unsecured creditors unimpaired (100% recovery of amounts owed). As noted above, the cash needed to make (a) and (b) happen would have come from a much-ballyhooed IPO of Madewell Inc.

Then COVID-19 happened.

Suffice it to say, IPO’ing a brick-and-mortar based retailer — even if there were any kind of IPO window — is a tall order when there’s, like, a pandemic shutting down all brick-and-mortar business. Indeed, the debtors indicate that they expect a $900mm revenue decline due to COVID. That’s the equivalent of taking Madewell — which earned $602m of revenue in ‘19 after $614mm in ‘18 — and blowing it to smithereens. Only then to go back and blow up the remnants a second time for good measure.* Source of funds exit stage left!

The post-COVID deal is obviously much different. The term lenders aren’t getting a paydown from Madewell proceeds any longer; rather, they are effectively getting Madewell itself by converting their term loan claims and secured note claims into approximately 82% of the reorganized equity. Some other highlights:

  • Those term loan holders who are members of the Ad Hoc Committee will backstop a $400mm DIP credit facility (50% minimum commitment) that will convert into $400mm of new term loans post-effective date. The entire plan is premised upon a $1.75b enterprise value which is…uh…interesting. Is it modest considering it represents a $1b haircut off the original take-private enterprise value nine years ago? Or is it ambitious considering the company’s obvious struggles, its limited brand equity, the recession, brick-and-mortar’s continued decline, Madewell’s deceleration, and so forth and so on? Time will tell.

  • Syndication of the DIP will be available to holders of term loans and IPCo Notes (more on these below), provided, however, that they are accredited institutional investors.

  • The extra juice for putting in for a DIP allocation is that, again, they convert to new term loans and, for their trouble, lenders of the new term loans will get 15% additional reorganized equity plus warrants. So an institution that’s in it to win it and has a full-on crush for Madewell (and the ghost of JCrew-past) will get a substantial chunk of the post-reorg equity (subject to dilution).

Query whether, if asked a mere six months ago, they were interested in owning this enterprise, the term lenders would’ve said ‘yes.’ Call us crazy but we suspect not. 😎

General unsecured creditors’ new deal ain’t so hot in comparison either. They went from being unimpaired to getting a $50mm pool with a 50% cap on claims. That is to say, maybe…maybe…they’ll get 50 cents on the dollar.

That is, unless they’re one of the debtors’ 140 landlords owed, in the aggregate, approximately $23mm in monthly lease obligations.** The debtors propose to treat them differently from other unsecured creditors and give them a “death trap” option: if they accept the TSA’s terms and get access to a $3mm pool or reject and get only $1mm with a 50% cap on claims. We can’t imagine this will sit well. We imagine that the debtors choice of venue selection has something to do with this proposed course of action. 🤔

We’re not going to get into the asset stripping transaction at the heart of the IPCo Note issuance. This has been widely-covered (and litigated) but we suspect it may get a new breath of life here (only to be squashed again, more likely than not). In anticipation thereof, the debtors have appointed special committees to investigate the validity of any claims related to the transaction. They may want to take up any dividends to their sponsors while they’re at it.

The debtors hope to have this deal wrapped up in a bow within 130 days. We cannot even imagine what the retail landscape will look like that far from now but, suffice it to say, the ratings agencies aren’t exactly painting a calming picture.

*****

*Curiously, there are some discrepancies here in the numbers. In the first day papers, the debtors indicate that 2018 revenue for Madewell was $529.2mm. With $602mm in ‘19 revenue, one certainly walks away with the picture that Madewell is a source of growth (13.8%) while the J.Crew side of the business continues to decline (-4%). This graph is included in the First Day Declaration:

Source: First Day Declaration

Source: First Day Declaration

The Madewell S-1, however, indicates that 2018 revenue was $614mm.

Screen Shot 2020-05-04 at 3.58.35 PM.png

With $268mm of the ‘18 revenue coming in the first half, this would imply that second half ‘18 revenue was $346mm. With ‘19 revenue coming in at $602mm and $333mm attributable to 1H, this would indicate that the business is declining rather than growing. In the second half, in particular, revenue for fiscal ‘19 was $269mm, a precipitous dropoff from $333mm in ‘18. Even if you take the full year fiscal year ‘18 numbers from the first day declaration (529.2 - 268) you get $261mm of second half growth in ‘18 compared to the $269mm in ‘19. While this would reflect some growth, it doesn’t exactly move the needle. This is cause for concern.

**To make matters worse for landlords, the debtors are also seeking authority to shirk post-petition rent obligations for 60 days while they evaluate whether to shed their leases. We get that the debtors were nearing a deal that COVID threw into flux, but this bit is puzzling: “Beginning in early April 2020, after several weeks of government mandated store closures and uncertainty as to the duration and resulting impact of the pandemic, the Debtors began to evaluate their lease portfolio to, among other things, quantify and realize the potential for lease savings.” Beginning in early April!?!?

  • Jurisdiction: E.D. of Virginia (Judge )

  • Capital Structure: $311mm ABL (Bank of America NA), $1.34b ‘21 term loan (Wilmington Savings Fund Society FSB), $347.6 IPCo Notes (U.S. Bank NA)

  • Professionals:

    • Legal: Weil Gotshal & Manges LLP (Ray Schrock, Ryan Preston Dahl, Candace Arthur, Daniel Gwen) & Hunton Andrews Kurth LLP (Tyler Brown, Henry P Long III, Nathan Kramer)

    • JCrew Opco Special Committee: D.J. (Jan) Baker, Chat Leat, Richard Feintuch, Seth Farbman

    • Financial Advisor: AlixPartners LLP

    • Investment Banker: Lazard Freres & Co.

    • Real Estate Advisor: Hilco Real Estate LLC

    • Claims Agent: Omni Agent Solutions (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Pre-petition ABL Agent: Bank of America NA

      • Legal: Choate Hall & Stewart LLP (Kevin Simard, G. Mark Edgarton) & McGuireWoods LLP (Douglas Foley, Sarah Boehm)

    • Pre-petition Term Loan & DIP Agent ($400mm): Wilmington Savings Fund Society FSB

      • Legal: Seward & Kissel LLP

    • Ad Hoc Committee

      • Legal: Milbank LLP (Dennis Dunne, Samuel Khalil, Andrew LeBlanc, Matthew Brod) & Tavenner & Beran PLC (Lynn Tavenner, Paula Beran, David Tabakin)

      • Financial Advisor: PJT Partners Inc.

    • Large common and Series B preferred stock holders: TPG Capital LP (55% and 66.2%) & Leonard Green & Partners LP (20.7% and 24.8%)

      • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Paul Basta, Jacob Adlerstein, Eugene Park, Irene Blumberg) & Whiteford Taylor & Preston LLP (Christopher Jones, Vernon Inge Jr., Corey Booker)

    • Large Series A preferred stock holders: Anchorage Capital Group LLC (25.6%), GSO Capital Partners LP (26.1%), Goldman Sachs & Co. LLC (15.5%)

New Chapter 11 Bankruptcy & CCAA Filing - Pier 1 Imports Inc. ($PIR)

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Pier 1 Imports Inc.

February 17, 2020

Fort Worth, Texas-based Pier 1 Imports Inc. and seven affiliates (the “debtors”) have fulfilled their obvious destiny and finally fallen into bankruptcy court in the Eastern District of Virginia. Contemporaneously, the debtors filed a CCAA proceeding in Canada to effectuate the closure of all Canadian operations. Color us pessimistic but we’re not feeling so great about the debtors’ go-forward chances in the US either.

We’ve covered the debtors ad nauseum in previous editions of PETITION. Here — supported by an ode to “Anchorman” — we described the debtors’ recent HORRIFIC financial performance and noted how a bankruptcy would be sure to confuse a peanut gallery accustomed to spouting regular (and sometimes inaccurate) hot takes about how private equity is killing retail.* We wrote:

The reaction to this surely-imminent bankruptcy (and, if we had a casino near us, liquidation) is going to be interesting. It is sure to flummox the “Private Equity is Killing Retail” camp because, well, it’s not PE-backed. Similarly it’ll confuse the “You Shouldn’t Put So Much Debt on Retail” cohort because, well, there really isn’t that much debt on the company’s balance sheet. Chuckling in the corner will be “The US is Over-Stored” team … And “The Millennials Aren’t Buying Homes and Furnishing Them With Chinese-Made Tchotchkes” gang (thanks a ton, Marie Kondo) … And the “Management Has Blown Chunks, The Assortment Sucks” bunch … And, finally, “The Amazon Effect” squad….

Over the weekend, The New York Times ran a piece from Austan Goolsbee, an economics professor at the University of Chicago’s Booth School of Business, that — no disrespect to the professor — says many of the same things PETITION has been saying for a LONG LONG time. That is, “The Amazon Effect” is overstated. He argues that “three major economic forces have had an even bigger impact on brick-and-mortar retail than the internet has”: (1) big box stores, (2) income inequality, and (3) the preference shift away from goods towards services. It’s fair to say that these three forces affected the debtors in a big big way.**

Surely, e-commerce has a lot to do with it too. As one PETITION advisor said about the debtors’ wares yesterday:

“You can just order that sh*t online. You don’t need to try it on.”

It’s a fair point.

Another fair point that Mr. Goolsbee omits from his analysis is the role of management. It’s safe to say that the US is suffering from an epidemic of retail ineptitude.

And like the coronavirus, it keeps spreading from one retailer to the next.***

But we digress.

The business has clearly suffered:

From fiscal years 2014 to 2018, the company’s net income dropped from $108 million to about $11.6 million and in fiscal year 2019 Pier 1 experienced a $198.8 million loss.

So, what’s the upshot here? The debtors announced a plan support agreement and intend to use the chapter 11 bankruptcy process to (a) continue to shutter the previously announced ~450 stores (read: get ready for a lot of lease rejections) and (b) pursue a sale pursuant to a chapter 11 plan of reorganization of what remains of the debtors’ business. Frankly, this was masterful messaging: the announcement relating to a plan support agreement and potential plan of…wait for it…”reorganization”(!) head-faked the entire market into thinking this thing might actually be salvageable. That’s where the fine print comes in.

The debtors have dubbed this an “all weather” chapter 11 plan because it provides for either a sale or the equitization of the term loan at the term lenders’ election. This begs the question: will Pathlight Capital LP want to own this thing?🤔 This bit was eye-catching:

“To be clear, the term loan lenders have made no decision at this point, but instead support the process as outlined in the plan support agreement.”

Yeah, we bet they do. Qualified bids will be due on or before March 23 and the lenders have until March 27 to make their election. Which way will the winds blow?

Note that “the process” isn’t currently supported by a stalking horse purchaser. 🤔

Note further that the debtors are required under the DIP to distribute informational packages and solicitations for sale of the debtors’ assets on a liquidation basis to liquidators by March 9.🤔 🤔

It looks like we’ll know the answer very soon.

To finance the cases, the debtors obtained a committed for a $256mm DIP credit facility. The facility includes a $200mm revolving loan commitment and a $15mm first in last out term loan, each provided 50/50 by Bank of America N.A. and Wells Fargo National Association, and a $41.2mm term loan from Pathlight. This was the pre-petition capital structure:

Screen Shot 2020-02-18 at 11.39.07 AM.png

The DIP effectively just rolls up much of the pre-petition debt. There is no new money. The messaging here, then, is also critical: the DIP facility ought to provide customers, vendors and employees comfort that there is access to liquidity if needed. Cash collateral usage, however, is the main driver here: the debtors believe that operating cash flow will suffice to handle working capital needs and bankruptcy expenses.

To summarize, we have another distressed retailer that is scratching and clawing to live. They’ve taken all of the usual steps to extend runway: cost cuts, footprint minimalization, new management. Bankruptcy is a last-ditch effort to survive: the debtors take pains to try and convince some prospective buyer that there is life left in the debtors’ brick-and-mortar business:

The remaining go-forward stores achieved superior sales and customer metrics in the last twelve months compared to the closing stores, including approximately 15% greater sales per square foot on average.

And if that doesn’t do it, there’s the argument that there’s an e-commerce play here. The debtors similarly go to great lengths to state OVER AND OVER AGAIN that e-commerce represents 27% of total sales. They’re practically screaming, “Look at me, look at me! We can be interesting to you [Insert Authentic Brands Group here]!”

Pathlight is sure as hell hoping someone bites.

*Kirkland & Ellis…uh…we mean, the “debtors” appear to agree, stating, in reference to private equity, that “[t]oo many pundits have sought to point in too many wrong directions,” citing pieces in RetailDive and The Wall Street Journal. THAT ladies and gentlemen, is client advocacy!

**It’s also fair to say that Professor Goolsbee does his readers a disservice by neglecting the overall picture which, no doubt, also includes over-expansion, too much retail per capita, private equity and over-levered balance sheets. These cowboys are closing 400+ stores for a reason.

Of course, long time PETITION readers know that we’ve been arguing for a LOOOOONG time that the “perfect storm” hitting retail is a confluence of factors that cannot just be lazily summarized as “private equity” or “The Amazon Effect.” It’s good to see that the folks at Kirkland & Ellis agree:

In the face of the longest bull run in U.S. history (close to 3,000 days and counting), a myriad of factors have collectively changed the ways in which consumers and retailers interact—creating for retailers what is tantamount to a perfect storm—and directly contributing to the struggles retailers face in a shifting marketplace.5

Then it’s as if they lifted this footnote straight out of previous PETITION briefings:

Screen Shot 2020-02-18 at 1.39.17 PM.png

***Not to cast aspersions, but the resume of the current PIR CEO is…uh…interesting: prior experience includes FullBeauty Brands, HHGregg, and Marsh Supermarkets. Any of those names sound familiar to bankruptcy professionals?

  • Jurisdiction: E.D. of Virginia (Judge Huennekens)

  • Capital Structure: $140mm RCF + $47.3mm LOC, $189mm Term Loan (Wilmington Savings Fund Society FSB), $9.9mm industrial revenue bonds

  • Professionals:

    • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Emily Geier, AnnElyse Scarlett Gains, Joshua Altman) & Kutak Rock LLP (Michael Condyles, Peter Barrett, Jeremy Williams, Brian Richardson)

    • Canadian Legal: Osler Hoskin & Harcourt LLP

    • Independent Directors: Steven Panagos & Pamela Corrie

    • Financial Advisor: AlixPartners LLP (Holly Etlin)

    • Investment Banker: Guggenheim Securities LLC (Durc Savini)

    • Real Estate Advisor: A&G Realty Partners LLC

    • Liquidation Consultant: Gordon Brothers Retail Partners LLC

      • Legal: Riemer & Braunstein LLP (Steven Fox, Anthony Stumbo)

    • Claims Agent: Epiq Corporate Restructuring LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • DIP ABL Agent: Bank of America NA

      • Legal: Morgan, Lewis & Bockius LLP, Hunton Andrews Kurth LLP, and Norton Rose Fulbright Canada LLP

    • DIP ABL Term Agent: Pathlight Capital LP

      • Legal: Choate Hall & Stewart LLP (John Ventola, Jonathan Marshall) and Troutman Sanders LLP (Andrew Buxbaum)

    • Ad Hoc Term Lender Group: Eaton Vance Management, Insight North America LLC, Marathon Asset Management LP, MJX Asset Management LLC, Whitebox Advisors LLC, ZAIS Group LLP

      • Legal: Brown Rudnick LLP (Robert Startk, Uchechi Egeonuigwe, Steven Pohl, Sharon Dwoskin) & Whiteford Taylor & Preston LLP (Christopher Jones, Vernon Inge, Corey Booker)

      • Financial Advisor: FTI Consulting Inc.

    • Large Equityholders: Charles Schwab Investment Management, Dimensional Fund Advisors LLP

    • Official Committee of Unsecured Creditors: Bhati & Company, Synergy Home Furnishings LLC, United Parcel Services Inc., Brixmor Operating Partnership LP, Brookfield Property REIT Inc.

      • Legal: Foley & Lardner LLP (Erika Morabito, Brittany Nelson, Timothy Mohan) & Cole Schotz PC (Seth Van Aalten)

      • Financial Advisor: Province Inc. (Paul Huygens, Sanjuro Kietlinski, Walter Bowser, Paul Navid, Shane Payne, Courtney Clement)

⛽️New Chapter 11 Filing - KP Engineering LP⛽️

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KP Engineering LP

August 23, 2019 (UPDATE: The company emerged from bankruptcy court on June 23, 2020.)

Texas-based KP Engineering LP and an affiliated debtor filed for bankruptcy in the Southern District of Texas. The debtors are “in the business of designing and executing customized engineering, procurement, and construction (“EPC”) projects for the refining, midstream, and chemical industries.” Said another way, the debtors contract to serve as a general contractor for their clients, functioning as project manager overseeing subcontractors during the development and completion of facilities for clients. One thing about this kind of business: particularly when you have over $68mm of debt, your contracts have to be economical and your clients have to like you. It seems that the debtors fail on both counts.

In January 2017, the debtors entered into an EPC contract with Targa Pipeline Mid-Continent WestTex LLC (a subsidiary of Targa Resources Corp. ($TRGP)) to design, procure equipment for and construct a 200mm cubic feet per day gas cryogenic processing plant. The plant is complete and now operational. Unfortunately for the debtors, however, they “sustained a significant economic loss.” Solid job, guys! At least it helped them get additional work from Targa…

…that Targa then fired them from and are now suing over.

In August 2017, the debtors entered into an EPC for a second plant with Targa but prior to full completion, Targa allegedly stopped paying which had the cascading effect of limiting the debtors’ ability to pay its subcontractors. Earlier this month, Targa terminated the EPC agreement and booted the debtors from the job site. Now subcontractors and Targa are suing the debtors for, among other things, lack of payment. The debtors indicate that the litigation forced the debtors into bankruptcy.

So, what now? It’s unclear. The debtors have a $4mm DIP commitment but the papers don’t make it clear where the debtors intend to go from here. Curiously, the debtors provide this hanging explanation for why they’re in chapter 11:

The Debtors face a number of risks to their business. The landscape surrounding the EPC contractor market is competitive, highly technical, and fast-changing. The Debtors face risks related to a changing environment in which technological advancement is altering their core business. An inability to innovate could be detrimental to the future of the Debtors. However, the Debtors’ present innovation has been the cornerstone of its success to date.

We get some of this. We suppose the first plant was uneconomical because fierce competition affected bidding. But what is the rest of this trying to say? What tech advancement are the debtors referring to? What innovation? Are there competitors founded by Jeff Bezos? We mean, WTF? It’s almost like management here forgot for a second that the debtors aren’t a public company and, therefore, there’s no need to throw out buzzwords.

Whatever. Good luck with bankruptcy, you crazy cowboys.

  • Jurisdiction: S.D. of Texas (Judge Jones)

  • Capital Structure: $68mm of total debt

  • Professionals:

    • Legal: Hunton Andrews Kurth LLP (Jennifer Wuebker, Greg Hesse, Edward Clarkson, Justin Paget) & Okin Adams LLP (Christopher Adams)

    • Financial Advisor/CRO: Claro Group LLC (Douglas Brickley)

    • Claims Agent: Omni Management Group (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Prepetition Lender: Texas Capital Bank

    • DIP Lender ($4mm): BTS Enterprises Inc.

🏠New Chapter 11 Bankruptcy Filing - Stearns Holdings LLC🏠

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Stearns Holdings LLC

July 9, 2019

Hallelujah! Something is going on out in the world aside from the #retailapocalypse and distressed oil and gas. Here, Blackstone Capital Partners-owned Stearns Holdings LLC and six affiliated debtors (the “debtors”) have filed for bankruptcy in the Southern District of New York because of…drumroll please…rising interest rates. That’s right: the FED has claimed a victim. Stephen Moore and Judy Shelton must be smirking their faces off.

The debtors are a private mortgage company in the business of originating residential mortgages; it is the 20th largest mortgage lender in the US, operating in 50 states. We’ll delve more deeply into the business model down below but, for now, suffice it to say that the debtors generate revenue by producing mortgages and then selling them to government-sponsored enterprises such as Ginnie Mae, Fannie Mae and Freddie Mac. There are a ton of steps that have to happen between origination and sale and, suffice it further to say, that requires a f*ck ton of debt to get done. That said, on a basic level, to originate loans, the debtors require favorable interest rates which, in turn, lower the cost of residential home purchases, and increases market demand and sales activity for homes.

Except, there’s been an itsy bitsy teeny weeny problem. Interest rates have been going up. Per the debtors:

The mortgage origination business is significantly impacted by interest rate trends. In mid-2016, the 10-year Treasury was 1.60%. Following the U.S. presidential election, it rose to a range of 2.30% to 2.45% and maintained that range throughout 2017. The 10-year Treasury rate increased to over 3.0% for most of 2018. The rise in rates during this time period reduced the overall size of the mortgage market, increasing competition and significantly reducing market revenues.

Said another way: mortgage rates are pegged off the 10-year treasury rate and rising rates chilled the housing market. With buyers running for the hills, originators can’t pump supply. Hence, diminished revenues. And diminished revenues are particularly problematic when you have high-interest debt with an impending maturity.

This is where the business model really comes into play. Here’s a diagram illustrating how this all works:

Source: First Day Declaration, PETITION

Source: First Day Declaration, PETITION

The warehouse lenders got nervous when, over the course of 2017/18, mortgage volumes declined while, at the same time, the debtors were obligated to pay down the senior secured notes; they, rightfully, grew concerned that the debtors wouldn’t have the liquidity available to repurchase the originated mortgages within the 30 day window. Consequently, the debtors engaged PIMCO in discussions about the pending maturity of the notes. Over a period of several months, however, those discussions proved unproductive.

The warehouse lenders grew skittish. Per the debtors:

Warehouse lenders began reducing advance rates, increasing required collateral accounts and increasing liquidity covenants, further contracting available working capital necessary to operate the business. Eventually, two of the warehouse lenders advised the Debtors that they were prepared to wind down their respective warehouse facilities unless the Debtors and PIMCO agreed in principle to a deleveraging transaction by June 7, 2019. That did not happen. As a result, one warehouse lender terminated its facility effective June 28, 2019 and a second advised that it will no longer allow new advances effective July 15, 2019. The Debtors feared that these actions would trigger other warehouse lenders to take similar actions, significantly impacting the Debtors’ ability to fund loans and restricting liquidity, thereby jeopardizing the Debtors’ ability to operate their franchise as a going concern.

On the precipice of disaster, the debtors offered the keys to PIMCO in exchange for forgiveness of the debt. PIMCO rebuffed them. Subsequently, Blackstone made PIMCO a cents-on-the-dollar cash-out offer on the basis that the offer would exceed liquidation value of the enterprise and PIMCO again declined. At this point there’s a lot of he said, she said about what was offered and reneged upon to the point that it ought to suffice merely to say that the debtors, Blackstone and PIMCO probably aren’t all sharing a Hamptons house together this summer.

So, where did they end up?

The debtors have filed a plan of reorganization with Blackstone as plan sponsor. Blackstone agreed to inject $60mm of new equity into the business — all of which, notably, is earmarked to cash out the notes in their entirety (clearly at at discount — read: below par — for PIMCO and the other noteholders). The debtors also propose to subject Blackstone’s offer to a 30-day competitive bidding process, provided that (a) bids are in cash (credit bids will not be allowed) and (b) all obligations to the GSEs and other investors are honored.

To fund the cases the debtors have obtained a commitment from Blackstone for $35mm in DIP financing. They also sourced proposals from warehouse lenders prepetition and have obtained commitments for $1.5b in warehouse financing from Barclays Bank PLC and Nomura Corporate Funding Americas LLC (guaranteed, on a limited basis, by Blackstone). In other words, Blackstone is ALL IN here: with the DIP financing, the limited guarantee and the equity check, they are placing a stake in the ground when it comes to mortgage origination.

  • Jurisdiction: S.D. of New York (Judge Chapman)

  • Capital Structure: $184mm 9.375% ‘20 senior secured notes (Wilmington Trust Association NA)

  • Professionals:

    • Legal: Skadden Arps Slate Meagher & Flom LLP (Jay Goffman, Mark McDermott, Shana Elberg, Evan Hill, Edward Mahaney-Walter)

    • Financial Advisor: Alvarez & Marsal LLC (Robert Campagna)

    • Investment Banker: PJT Partners LP (Jamie O’Connell)

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

    • Board of Directors: David Schneider, William Cary, Glenn Stearns, Nadim El Gabbani, Chinh Chu, Jason Roswig, Chris Mitchell

  • Other Parties in Interest:

    • Indenture Trustee: Wilmington Trust Association NA

      • Legal: Alston & Bird LLP (Jason Solomon)

    • Major Noteholder: Pacific Investment Management Company LLC

      • Legal: Hogan Lovells US LLP (Bennett Spiegel, Stacey Rosenberg)

    • Blackstone Capital Partners VI-NQ/NF LP

      • Legal: Simpson Thacher & Bartlett LLP (Elisha Graff, Jamie Fell)

    • Barclays Bank PC

      • Legal: Hunton Andrews Kurth LLP (Peter Partee Sr., Brian Clarke)

    • Nomura Corporate Funding Americas LLC

      • Legal: Milbank LLP (Mark Shinderman, Lauren Doyle) & Alston & Bird LLP (Karen Gelernt)

    • Fannie Mae

      • Legal: O’Melveny & Myers LLP (Stephen Warren)

    • Freddie Mac

      • Legal: McKool Smith PC (Paul Moak)

7/9/19 #30

🍤New Chapter 11 Bankruptcy Filing - RUI Holding Corp.🍤

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RUI Holding Corp.

July 7, 2019

Back in October 2016, in the context of Sun Capital Partners’-owned Garden Fresh Restaurant Intermediate Holdings bankruptcy filing, we asked, “Are Progressives Bankrupting Restaurants?” We wrote:

Morberg's explanation for the bankruptcy went a step farther. He noted that cash flow pressures also came from increased workers' compensation costs, annual rent increases, minimum wage increases in the markets they serve, and higher health benefit costs -- a damning assessment of popular progressive initiatives making the rounds this campaign season. And certainly not a minor statement to make in a sworn declaration.  

It's unlikely that this is the last restaurant bankruptcy in the near term. Will the next one also delineate progressive policies as a root cause? It seems likely.

There have been a plethora of restaurant-related bankruptcy filings between then and now and many of them have raised rising costs as an issue. Perhaps none as blatantly, however, than Sun Capital Partners’ portfolio companies: enter RUI Holding Corp and its affiliated debtors, Restaurants Unlimited Inc. and Restaurants Unlimited Texas Inc. (the “Debtors”).

On July 7, 2019, the Sun Capital-owned Debtors filed for bankruptcy in the District of Delaware. The Debtors opened their first restaurant in 1969 and now own and operate 35 restaurants in 6 states under, among 14 others, the trade names “Clinkerdagger,” “Cutters Crabhouse,” “Maggie Bluffs,” and ”Horatio’s.” The Debtors note that each of their restaurants offer “fine dining” and “polished casual dining” “situated in iconic, scenic, high-traffic locations.” Who knew that if you want something to scream “iconic” you ought to name it Clinkerdagger?

As we’ve said time and time again, casual dining is a hot mess. Per the Debtors:

…the Company's revenue for the twelve months ended May 31, 2019, was $176 million, down 1% from the prior year. As of the Petition Date, the Company has approximately $150,000 of cash on hand and lacks access to needed liquidity other than cash flow from operations.

The Debtors have over $37.7mm of secured debt; they also owe trade $7.6mm. There are over 2000 employees, of which 168 are full-time and 50 are salaried at corporate HQ in Seattle Washington.

But enough about that stuff. Back to those damn progressives. Per the Debtors:

Over the past several years, certain changes to wage laws in the Debtors’ primary geographic locations coupled with two expansion decisions that utilized cash flow from operations resulted in increased use of cash flow from operations and borrowings and restricted liquidity. These challenges coupled with additional state-mandates that will result in an additional extraordinary wage hike in FYE 2020 in certain locations before all further wage increases are subject to increases in the CPI and the general national trend away from casual dining, led to the need to commence these chapter 11 cases.

They continue:

Over the past three years, the Company’s profitability has been significantly impacted by progressive wage laws along the Pacific coast that have increased the minimum wage as follows: Seattle $9.47 to $16.00 (69%), San Francisco $11.05 to $15.59 (41%), Portland $9.25 to $12.50 (35%). As a large employer in the Seattle metro market, for instance, the Company was one of the first in the market to be forced to institute wage hikes. Currently in Seattle, smaller employers enjoy a statutory advantage of a lesser minimum wage of $1 or more through 2021, which is not available to the Company. The result of these cumulative increases was to increase the Company’s annual wage expenses by an aggregate of $10.6 million through fiscal year end 2019.

For a second we had to do a double-take just to make sure Andy Puzder wasn’t the first day declarant!

Interestingly, despite these seemingly OBVIOUS wage headwinds and the EVEN-MORE-OBVIOUS-CASUAL-DINING-CHALLENGES, these genius operators nevertheless concluded that it was prudent to open two new restaurants in Washington state “in the second half of 2017” — at a cost of $10mm. Sadly, “[s]ince opening, the anticipated foot traffic and projected sales at these locations did not materialize….” Well, hot damn! Who could’ve seen that coming?? Coupled with the wage increases, this was the death knell. PETITION Note: this really sounds like two parents on the verge of divorce deciding a baby would make everything better. Sure, macro headwinds abound but let’s siphon off cash and open up two new restaurants!! GREAT IDEA HEFE!!

The Debtors have therefore been in a perpetual state of marketing since 2016. The Debtors’ investment banker contacted 170 parties but not one entity expressed interested past basic due diligence. Clearly, they didn’t quite like what they saw. PETITION Note: we wonder whether they saw that Sun Capital extracted millions of dollars by way of dividends, leaving a carcass behind?? There’s no mention of this in the bankruptcy papers but….well…inquiring minds want to know.

The purpose of the filing is to provide a breathing spell, gain the Debtors access to liquidity (by way of a $10mm new money DIP financing commitment from their prepetition lender), and pursue a sale of the business. To prevent additional unnecessary cash burn in the meantime, the Debtors closed six unprofitable restaurants: Palomino in Indianapolis, Indiana, and Bellevue, Washington; Prime Rib & Chocolate Cake in Portland, OR; Henry’s Tavern in Plano, Texas; Stanford’s in Walnut Creek, California; and Portland Seafood Co. in Tigard, Oregon. PETITION Note: curiously, only one of these closures was in an “iconic” location that also has the progressive rate increases the Debtors took pains to highlight.

It’s worth revisiting the press release at the time of the 2007 acquisition:

Steve Stoddard, President and CEO, Restaurants Unlimited, Inc., said, “This transaction represents an exciting partnership with a skilled and experienced restauranteur that has the requisite financial resources and deep operating experience to be instrumental in strengthening our brands and building out our footprint in suitable locations.”

Riiiiight. Stoddard’s tenure with Sun Capital lasted all of two years. His successor, Norman Abdallah, lasted a year before being replaced by Scott Smith. Smith lasted a year before being replaced by Chris Harter. Harter lasted four years and was replaced by now-CEO, Jim Eschweiler.

A growing track record of bankruptcy and a revolving door in the C-suite. One might think this may be a cautionary tale to those operators in the market for PE partners.*

*Speaking of geniuses, it’s almost as if Sun Capital Partners thinks that things disappear on the internets. Google “sun capital restaurant unlimited” and you’ll see this:

Source: Google

Source: Google

Click through the first link and this is what you get:

Source: Sun Capital Partners

Source: Sun Capital Partners

HAHAHAHAHA. WHOOPS INDEED!

THEY DELETED THAT SH*T FASTER THAN WE COULD SAY “DIVIDEND RECAP.”

  • Jurisdiction: D. of Delaware (Judge Silverstein)

  • Capital Structure: $37.7mm (plus $1.7mm of accrued and unpaid interest)(Fortress Credit Co LLC)

  • Professionals:

    • Legal: Klehr Harrison Harvey Branzburg LLP (Domenic Pacitti, Michael Yurkewicz, Sally Veghte)

    • Financial Advisor: Carl Marks Advisory Group LLC (David Bagley)

    • Investment Banker: Configure Partners LLC

    • Claims Agent: Epiq Bankruptcy Solutions LLC (*click on the link above for free docket access)

    • Board of Directors: Stephen Cella, Jonathan Jackson, James Eschweiler

  • Other Parties in Interest:

    • PE Sponsor: Sun Capital Partners Inc.

    • Prepetition Agent & DIP Agent ($10mm): Fortress Credit Co LLC

      • Legal: Hunton Andrews Kurth LLP (Tyler Brown, Justin Paget) & Gellert Scali Busenkell & Brown (Michael Busenkell)

      • Financial Advisor: Grant Thornton LLP

    • DIP Lenders: Drawbridge Special Opportunities Fund LP, NXT Capital LLC

      • Legal: Goldberg Kohn Ltd. (Randall Klein, Prisca Kim)

Updated 7/7/19

⛽️New Chapter 11 Filing - Weatherford International Plc⛽️

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Weatherford International Plc

July 1, 2019

There hasn’t been a MASSIVE bankruptcy filing in a while. Windstream Holdings Inc. filed back in late February and while there’s been plenty of chapter 11 activity since, there hasn’t been anything quite as large in the last several months. There is now. Enter Weatherford International Plc.

Late on Friday, Weatherford, an Irish public limited company, filed an 8-K with the SEC with a proposed plan of reorganization and disclosure statement; it and several affiliated debtors intend to file prepackaged chapter 11 cases in the Southern District of Texas on Monday, July 1.* The timing is appropriate: nothing screams “Independence!” like a massive chapter 11 bankruptcy filing that has the effect of eliminating six billion tyrannical dollars from the balance sheet. YEE HAW. G-D BLESS AMERICA.

Here is a snapshot of Weatherford’s pre and post-bankruptcy capital structure:**

Screen Shot 2019-06-29 at 5.15.48 AM.png

And all of the action is at the pre-petition notes level of the cap stack.*** The holders of the $7.4b of pre-petition notes**** will walk away with 99% of the equity in the reorganized company (subject to various means of dilution) — a 63% recovery based on the offered valuation of the company. They will also receive up to $1.25b of new tranche b senior unsecured convertible notes and the right to participate in new tranche a senior unsecured notes. Every other class — but for existing equity (which will get wiped out) — will ride through as if this shabang ain’t even happening.

You must be wondering: how in bloody hell does a company rack up over $8b of debt? $8 BILLION!! That’s just oil and gas, darling.

Weatherford is a provider of equipment and services used in the drilling, evaluation, completion, production, and intervention of oil and natural gas wells; it operates in over 80 countries worldwide and has service and sales locations in nearly all of the oil and natural gas producing regions in the world. It operates in a highly commoditized industry and so the company dedicates millions each year to research and development in an effort to separate itself from the pack and provide value to end users that is unmatched in the market.

Which, by its own admission, it fails to do. All of that R&D notwithstanding, Weatherford nevertheless provide a commoditized product in a tough macro environment. And while all of that debt should have helped position the company to crush less-capitalized competitors, it ultimately proved to be an albatross.

To service this debt, the debtors require stability in the oil and natural gas markets at prices that catalyze E&P companies to drill, baby, drill. An oil field services company like Weatherford can only make money if there are oil operations to service. With oil and natural gas trading at low levels for years…well, you see the issue. Per the company’s 8-K:

The sustained drop in oil and gas prices has impacted companies throughout the oil and gas industry including Weatherford and the majority of its customers. As spending on exploration, development, and production of oil and natural gas has decreased so has demand for Weatherford’s services and products. The decline in spending by oil and gas companies has had a significant effect on the Debtors’ financial health. To illustrate, on a consolidated basis, the Company’s cash flows from operating activities have been negative $304 million, negative $388 million, and negative $242 million in fiscal years 2016, 2017, and 2018, respectively.

While not quite at Uber Inc. ($UBER) levels, this company is practically lighting money on fire.

Relating to the competition:

The oilfield services and equipment industry is saturated with competition from various companies that operate in the same sector and the same regions of the world as Weatherford. The primary competitive factors include safety, performance, price, quality, and breadth of products and services. Weatherford also faces competition from regional suppliers in some of the sectors in which it operates as these suppliers offer limited equipment and services that are specifically tailored to the relevant local market. Some of the Company’s competitors have better financial and technical resources, which allows them to pursue more vigorous marketing and expansion activities. This heavily competitive market has impacted the Company’s ability to maintain its market share and defend or maintain the pricing for its products and services. Heavy competition has also impacted the Company’s ability to negotiate contract terms with its customers and suppliers, which has resulted in the Company accepting suboptimal terms.

The squeeze is on, ladies and gentlemen. As E&P companies look to cut costs in the face of increased pressure from investors to lean out, they are putting companies like Weatherford through the ringer. You bet your a$$ they’re getting “suboptimal terms.”

Compounding matters, of course, is the government:

…operations are also subject to extensive federal, international, state and local laws and regulations relating to environmental production, waste management and cleanup of hazardous materials, and other matters. Compliance with the various requirements imposed by these laws and regulations has also resulted in increased capital expenditures as companies in these sectors have had to make significant investments to ensure compliance.

Well GOSH DARN. If only Weatherford had unfettered ability to pollute the hell out of the countryside and our waters all of that debt could be paid off at par plus. Those gosh darn government hacks.

All of these factors combined to strain the debtors’ liquidity “for an extended period of time.” Accordingly, the company went into cost cutting mode.***** In Q4 ‘17, it eliminated 900 jobs to the tune of $114mm in annualized savings. In 2018, the company — with the assistance of McKinsey Restructuring & Transformation Services — continued with workforce reductions, facility consolidations, and other measures.

Yet, the squeeze continued. Per the company:

Despite implementing these efficient and strategic initiatives, the Company continued to face declining revenue and cash flow, as well as market challenges. Due to the Company’s increasingly tight liquidity, its key vendors began requiring shortened payment terms, including pay on delivery or prepayment for all supplies purchased by the Company. This contributed to additional pressure on liquidity that the Company could not sustain. Additionally, as discussed above, the highly competitive market that the Company operates in posed challenges for the Company in winning new bids, resulting in decreased revenue.

Weatherford was therefore forced to divest assets. YOU KNOW YOU’RE LEVERAGED TO THE HILT WHEN YOU SELL NEARLY $1B OF ASSETS AND IT BARELY MOVES THE NEEDLE. Sale proceeds were coming in just to go back out for debt service. The company had a leverage ratio of OVER 10X EBITDA. THIS IS AN UNMITIGATED F*CKING DISASTER. What’s actually astonishing is that the company notes that it retained Lazard Freres & Co LLC ($LZ) and Latham & Watkins LLP in December ‘18 and April ‘19, respectively. Taking them at their word (and we could have sworn Latham was in there much earlier than April), WHAT THE HELL WERE THEY WAITING FOR? $600mm of annual interest payments, pending maturities, untenable leverage relative to competitors, AND squeezing vendors and the company only got its sh*t together in April? They couldn’t possibly have been THAT inept. Ah, who are we kidding? We’re talking about bankruptcy here.

Now, though, the company has a deal****** and so the upshot is that it is well-positioned for a quick trip into bankruptcy. Indeed, it seeks plan confirmation no later than September 15, 2019 — a nice not-as-speedy-as-other-recent-prepacks-but-speedy prepack. To finance the cases, the company will seek approval of up to $750mm DIP revolver and a $1b DIP term loan. And it is optimistic that it will be well-positioned for the future:

Screen Shot 2019-06-29 at 10.53.10 AM.png

We’ll see.

*The company will also push through Bermuda and Irish proceedings.

**JPMorgan Chase Bank NA ($JPM) is the agent on the prepetition term loan, the prepetition revolving credit agreement, and the A&R facility.

***Only three entities out of an organizational structure of 255 or so direct and indirect subsidiaries are on the hook for the prepetition notes, thereby limiting the number of actual debtor entities that will be subsumed by these cases.

****The pre-petition notes consist of 13 — yes, THIRTEEN — different issuances of notes with interest rates ranging from 4.5% to 9.875% and maturities ranging from 2020 through 2042.

*****Well, as it relates to certain peeps, of course. The debtors’ non-debtor affiliates still had money to make a May 2019 payout to participants in the Executive Bonus Plan.

******The ad hoc noteholder committee is represented by Akin Gump Strauss Hauer & Feld LLP and Evercore Group LLC ($EVR).

  • Jurisdiction: S.D. of Texas (Judge )

  • Capital Structure:

  • Professionals:

    • Legal: Latham & Watkins LLP (George Davis, Keith Simon, David Hammerman, Annemarie Reilly, Lisa Lansio) & (local) Hunton Andrews Kurth LLP (Timothy Davidson, Ashley Harper)

    • Financial Advisor: Alvarez & Marsal LLC

    • Investment Banker: Lazard Freres & Co LLC

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Ad Hoc Prepetition Noteholder Committee

      • Legal: Akin Gump Strauss Hauer & Feld LLP (Michael Stamer, Meredith Lahaie, Kate Doorley)

      • Financial Advisor: Evercore Group LLC

    • DIP Agent: Citibank NA

      • Legal: Shearman & Sterling LLP (Frederic Sosnick, Ned Schodek, Sara Coelho, Ian Roberts)

🏠New Chapter 11 Filing - Monitronics International Inc.🏠

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Monitronics International inc.

June 30, 2019

We wrote about Monitronics International Inc. in July 2018 in "😬Home Security Company Looks Vulnerable 😬,” noting that “home security is a tough business (short Ascent Capital Group).” And, by “tough” we meant uber-competitive and saturated. It doesn’t help when you’re levered like a boss. We recommend you read the link above to understand the challenges these businesses faced in a better way than that described in the bankruptcy papers.

That said, the debtors’ capital structure is an important element of this story; they carry:

  • $181.4mm ‘21 Revolving Credit Facility

  • $1.072b ‘22 Term Loan

  • $585mm ‘20 9.125% Senior Notes

Leverage + disruption = a recipe for disaster. This prepackaged bankruptcy filing is meant to address the former. Management will be on the clock to figure out the latter. A significantly deleveraged capital structure and a cash infusion will certainly help.

The debtors’ proposed prepackaged plan of reorganization will eliminate approximately $885mm of funded debt by way of equitizing the entirety of the senior notes, and reducing the revolving credit facility (by $50mm) and the amount of term loans (by $250mm). The term lenders will receive $150mm in cash (financed by a rights offering totaling $177mm) and equitize $100mm worth of their loans. The remainder of the term loan amount will be exchanged for take back paper issued by the reorganized debtors.

Source: First Day Declaration ($ in millions)

Source: First Day Declaration ($ in millions)

This is what the capital structure will look like pre and post-transaction:

Source: First Day Declaration ($ in millions)

Source: First Day Declaration ($ in millions)

The senior unsecured notes are fully exchanged for 18% of pre-diluted equity in the reorganized debtors.

The overall structure of the transaction is complex and depends upon some contingencies. This is the summary the debtors provided:

It might as well be gibberish at this point. Once we know whether Ascent toggle occurs we’ll have a better sense of who is contributing what. Moreover, once we the rights offering is consummated, the debtors’ new ownership will be more obvious.

  • Jurisdiction: S.D. of Texas (Judge Jones)

  • Capital Structure: See above.

  • Professionals:

    • Legal: Latham & Watkins LLP (David Hammerman, Annemarie Reilly, Jeremy Mispagel, Liza Burton, Brian Rosen, Christopher Harris, Zachary Proulx) & King & Spalding LLP (Roger Schwartz, Sarah Primrose) & (local) Hunton Andrews Kurth LLP (Timothy Davidson, Ashley Harper)

    • Board of Directors: Jeffery Gardner, William Niles, Marc Beilinson, Sherman Edmiston III

    • Financial Advisor: FTI Consulting Inc.

    • Investment Banker: Moelis & Company LLC

    • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Ad Hoc Lender Group (Term B-2 Lenders)(Anchorage Capital Group LLC, Boston Management and Research, BlueMountain Capital Management LLC, Eaton Vance Management, FS Global Advisor LLC, Invesco Advisors Inc., KKR Credit Advisors US LLC, Monarch Alternative Capital LP)

      • Legal: Jones Day (Paul Green, Scott Greenberg, Michael Schneidereit, Peter Saba)

      • Financial Advisor: Evecore LLC

    • Ad Hoc Group of Noteholders

      • Legal: Stroock & Stroock & Lavan LLP (Kristohper Hansen, Sayan Bhattacharyya, Jason Pierce) & (local) Haynes and Boone LLP (Kelli Norfleet, Stephen Pezanosky)

      • Financial Advisor: Houlihan Lokey Capital Inc.

    • KKR Credit Advisors US LLC

      • Legal: Proskauer Rose LLP (Chris Theodoridis)

    • Administrative Agent under Pre-Petition Credit Agreement: Bank of America NA

      • Legal: Morgan Lewis & Bockius LLP (Amelia Joiner) & ( Local) Winstead PC (Sean Davis)

    • Pre-Petition Agent: Cortland Capital Markets Services LLC

      • Legal: Arnold & Porter Kaye Scholer LLP (Christopher Odell, Hannah Sibiski, D. Tyler Nurnberg, Sarah Gryll)

    • Ascent Capital Group

      • Legal: Baker Botts LLP

⚡️New Chapter 11 Bankruptcy Filing - Empire Generating Co LLC⚡️

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Empire Generating Co LLC

May 19, 2019

We love when companies that have been circling around the bankruptcy bowl finally get flushed into bankruptcy court. Empire Generating Company is a name that has been kicking around distressed circles for some time now: The Wall Street Journal wrote about it a year ago, back in May 2018. Alas, it now sits within the Southern District of New York. It is the latest in a line of power producers to file for bankruptcy in recent years.

The company owns and operates a (now) dual-fuel power plant in Rensselaer New York; as a merchant power plant, it sells electricity in the wholesale market that ultimately helps power New York’s electrical grid. Very soon, it will likewise be able to generate revenue in New England. In fiscal year 2017, the company generated $91.8mm of revenue and $16.77 of EBITDA. EBITDA decreased to $11.05mm in 2018. The company also has a meaningful amount of debt. As of the petition date, its outstanding owed amounts under its credit facility total $353.4mm. Its $20mm revolver matured in March 2019.

The company cites some interesting causes for its filing. First, it gives an economics 101 lesson, saying that coal and nuclear facilities in New York haven’t been retired quickly enough to limit electricity supply and put upward pressure on prices. Second, it blames progressives (Cuomo!!): New York’s Clean Energy Standard requires that 50% of NY’s electricity come from renewables by 2030, creating yet another supply/demand imbalance that has placed “downward pressure on the price for energy generated by other sources.” Third, unlike retailers who blame bad weather for under performance all of the time, this company actually has a viable excuse: the abnormally cold winter of 2017/2018 increased natural gas prices, compressing the company’s margins. At the time, the company wasn’t yet “dual-fuel” and, therefore, relied exclusively on natural gas whereas competitors could toggle to more economical fuel oil instead. This confluence of factors ultimately led the company to default under its loan docs.

The company has since been in a state of perpetual forbearance with an ad hoc group of pre-petition lenders. It was on the verge of a prepackaged solution to its balance sheet but time ticked away and the company’s pesky lenders traded out of their respective positions. Per the company:

Once the debt trades settled, approximately 55% of the Credit Facility was held by the Consenting Lenders (Black Diamond and MJX), and approximately 34% of the Credit Facility was held by funds managed by Ares Capital (“Ares”).

For the uninitiated, debtors need 2/3 of the amount of a particular tranche of debt to approve a deal for a plan of reorganization to be confirmed by the bankruptcy court. As you can see from the percentages above, Ares Capital and the “Consenting Lenders” (Black Diamond Capital Management LLC & MJX Asset Management LLC) had “blocking positions,” eliminating the possibility of surpassing the required threshold. Months of negotiations ensued and, apparently, Ares and Black Diamond simply couldn’t get along. Uh, yeah, bros: Black Diamond is kinda known for not getting along. Just sayin.

In lieu of an agreement with those parties, the company has secured, pursuant to a restructuring support agreement, a commitment by Black Diamond Capital Management LLC & MJX Asset Management LLC to credit bid — subject to higher and better offers — their debt in exchange for a 100% interest in the reorganized company. The company has, in turn, rejected a proposal from Ares Capital that would confer $37.8mm in cash and 89.75% equity of an acquisition vehicle as consideration for the company’s assets (which it values at a total of $369mm). Why? It concluded that the offer was neither higher nor better than the credit bid; it also had concerns about valuation, approval and feasibility (feasibility!!!!!). Otherwise, the company be like, “PEACE, B*TCHES, WE DON’T WANT NO PART OF THIS INTERCREDITOR DISPUTE.”

And an intercreditor dispute there is! Ares objected right away to the company’s proposed cash collateral, among other things, saying that Black Diamond is steering the company like a meek little sheep. The objection is too lengthy to recant here but, suffice it to say, it looks like we can expect an old school private equity battle over the course of the case. Judge Drain more or less shot down Ares at the hearing, questioning, even, whether they had standing to object; he then went on to amend the proposed cash collateral order.

Absent a settlement between the funds, this will not be the last fight in the case. Pop the popcorn.

  • Jurisdiction: (Judge Drain)

  • Capital Structure: $20mm RCF, $430mm Term B loan, $30mm Term C loan

  • Professionals:

    • Legal: Steinhilber Swanson LLP (Michael Richman) & Hunton Andrews Kurth LLP (Peter Partee Sr., Robert Rich, Michael Legge)

    • Financial Advisor: RPA Advisors (Chip Cummins)

    • Investment Banker:

    • Claims Agent: Omni Management Group (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Secured Lenders: Black Diamond Capital Management LLC & MJX Asset Management LLC

      • Legal: Skadden Arps Slate Meagher & Flom LLP (Christine Okike, Albert Hogan III, Carl Tullson)

    • Secured Lender: Ares Capital LP

      • Legal: Kirkland & Ellis LLP (James Sprayragen, Brian Schartz, Anup Sathy, Stephen Hackney, Alexandra Schwarzman)

    • Secured Lender: Starwood

      • Legal: Vinson & Elkins LLP (Steven Abramowitz)

    • Ad Hoc Group

      • Legal: Stroock & Stroock & Lavan LLP

    • Agent: Ankura Trust Company

      • Legal: Davis Polk & Wardwell LLP (Darren Klein)