New Chapter 11 Bankruptcy Filing - RGN-Group Holdings LLC (d/b/a Regus)

RGN-Group Holdings LLC

We have yet to really see it run through the system but there’s no doubt in our minds that there is a commercial real estate and commercial mortgage-backed security massacre on the horizon. The hospitality sector, in particular, ought to be on the receiving end of a pretty harsh shellacking. More on this in a future edition of PETITION.

For now, the most high profile CRE activity we’ve seen thus far is the trickle of Regus locations that have filed for bankruptcy. Regus is an on-demand and co-working company with 1000 locations across the United States and Canada. Set up as special purpose entities with individual leases, the structure is such that IWG Plc f/k/a Regus Corporation (OTCMKTS: $IWGFF) serves as both ultimate parent and lender but isn’t a guarantor or obligor under any of the downstream leases.* This non-recourse structure allows for individual Regus locations to plop into bankruptcy — all with an eye towards working out lease concessions or turning over — without taking down the entirety of the enterprise.**

The first outpost, RGN-Columbus IV LLC, filed for bankruptcy in Delaware back on July 30. Since then, sixteen additional Regus affiliates have filed with the most recent ones descending upon Delaware last week: RGN-Philadelphia IX LLC, RGN-Chevy Chase I LLC, RGN-Los Angeles XXV LLC, RGN-San Jose IX LLC, RGN-New York XXXIX and RGN-Denver XVI LLC. All of the cases filed under Subchapter V of chapter 11 of the bankruptcy code (though, thanks to the addition of more locations, the case has been re-designated under Chapter 11).***

The description of the overall business model is precious:

IWG’s business model begins with entry into long-term non-residential real property leases (each, a “Lease”) with property owners (each, a “Landlord”) that provide the Company unoccupied office space (the “Centers”). Based on significant market research on potential client needs in local markets and the unique requirements of their existing clients, IWG engineers each of the Centers to meet the architectural style, service, space, and amenity needs of those individuals, companies, and organizations who will contract for use of subportions of the Centers. IWG markets its Centers under an umbrella of different brand names, each tailored to appeal to different types of clients and those clients’ specialized needs. These clients (the “Occupants”) enter into short-term licenses (each, an “Occupancy Agreement”) to use portions of the Centers, which are customizable as to duration, configuration, services, and amenities. When operating successfully, a Center’s Occupants’ license payments (“Occupancy Fees”) will exceed the combined cost of the underlying long-term lease, management cost, and operating expenses of the Center. (emphasis added)

It’s the “when operating successfully” part that always bewildered watchers of the co-working business model generally. After all, it was easy to see the mass expansion of co-working spaces amidst the longest bull run in market history. Indeed, Regus apparently had “Good first half performance overall given COVID-19 impact in Q2.” The question was: what happens in a downturn? The answer? You start to see the model when it operates unsuccessfully. In this scenario, occupancy rates dip lower than expected. Prior geographic expansion begins to look irresponsible. Pricing declines to attract new sales and renewals. And current occupants begin to stretch their payables.**** In total, it ain’t pretty. By way of example, take a look at some of the numbers:*****

Source: PETITION, Chapter 11 Petitions

But while the operating performance of those select locations may be ugly AF, the structure bakes in this possibility and isolates the cancer. Aside from the landlords, the locations have virtually no creditors.

• Each debtor location is an obligor pursuant to a senior secured loan agreement with Regus making for an intercompany obligation. There’s no other funded debt.

• The debtors are otherwise subject to a management agreement with non-debtor Regus Management Group LLC (“RMG”) pursuant to which each debtor is obligated to reimburse RMG for gross expenses incurred directly by RMG in performing management services plug a 5.5% vig on gross revenues.

• The debtors are also subject to an equipment lease agreement with debtor RGN-Group Holdings LLC. Under this agreement the debtors are obligated for the original cost of fixtures, furniture and equipment plus a margin fee.

• As if those agreements didn’t siphon off enough revenue, the debtors are also subject to franchise agreements pursuant to which the debtors have the right to operate an IWG business format in their respective locations and use certain business support services, advice and IT in exchange for a monthly 12% vig on gross revenue.

Given most of the debtors’ obligations are intercompany in nature, what did Regus do? It tried to stick it to its landlords. Duh.

Like so many other companies navigating these troubled times, the Company instituted a variety of comprehensive actions to reduce costs and improve cash flow and liquidity, including the deferral of rent payments and engagement with Landlords to negotiate forbearances, temporary accommodations, and, where possible, permanent modifications to the various Leases to bring them in line with the COVID-19-adjusted market realities so as to permit the Company to continue operating Centers at those respective locations despite the uncertainty when the pandemic will subside and when (and indeed, whether) the U.S. will return to something resembling the pre-pandemic “business as usual.”

Certain landlords, of course, played ball. That helped lessen Regus’ funding burden in the US. But, of course, others didn’t. Indeed, various landlords sent default/eviction notices. Hence the aforementioned bankruptcy filings:

…the Debtors commenced their Chapter 11 Cases to prevent the forfeiture of the Lease Holder Debtors’ Leases, and to preserve all Debtors’ ability to operate their respective businesses—thereby, importantly, protecting the Occupants of the Lease Holder Debtors’ Centers from any disruption to their businesses. I expect that the “breathing spell” from Landlords’ collection efforts that will be afforded by the chapter 11 process will allow the Debtors, and the Company more broadly, to more fully explore the possibility of restructuring their various contractual obligations in order to put the Company’s North American portfolio on a surer footing going forward, so as to allow the Debtors to emerge from this process stronger and more viable than when they went in. If these restructuring efforts prove unsuccessful, the Lease Holder Debtors intend to utilize the procedures available to them under the Bankruptcy Code to (i) orderly wind down the operation of the applicable Centers (including, to the extent necessary, the removal of the FF&E from the leased premises, and to the extent possible, transition of the Occupants to other locations), (ii) liquidate the amounts due to the Landlords under their respective Leases and guarantees, as well as amounts due to the Debtors’ affiliates under their respective agreements, and (iii) to make distributions to creditors in accordance with their respective priorities under the Bankruptcy Code and applicable law.

Said another way: this is gonna be a landlord/tenant battle. Regus has offered to provide $17.5mm of DIP financing to give the debtors time to negotiate with their landlords. To the extent those negotiations (continue to) fail, the debtors will no doubt begin to reject leases left and right.

*****

They likely won’t be alone. Per The Wall Street Journal:

The world’s biggest coworking companies are starting to close money-losing locations across the globe, signaling an end to years of expansion in what had been one of real estate’s hottest sectors.

The retreat reflects an effort to slash costs at a time when the coronavirus is reducing demand for office space, and perhaps for years to come. It also shows how bigger coworking firms, in a race to sign as many leases as possible and grab market share, overexpanded and became saddled with debt and expensive leases.

The share of coworking spaces that have closed is still small. In the first half of the year, closures accounted for just 1.5% of the space occupied by flexible-office companies in the 20 biggest U.S. markets, according to CBRE Group Inc.

Knotel, for instance, seems to be making a habit of getting sued for unpaid rent. Query whether we’re at the tip of the iceberg for co-working distress.

---

*Other debtor entities, however, like RGN-Group Holdings LLC, RGN-National Business Centers LLC and H Work LLC do sometimes act as guarantors. Hence their bankruptcy filings. RGN-Group Holdings LLC isn’t a lease holder; rather, it owns all of the furniture, fixtures, equipment and other personal property and leases it all fo the respective SPE centers across the US pursuant to Equipment Lease Agreements.

**The nuance of this structure was constantly lost in the furor over WeWork back when WeWork was a thing that people actually cared about. Since we’re on the topic of WeWork, we suppose we ought to explain the video above. WeWork’s eccentric founder, Adam Neumann, was on record saying that he thought WeWork would thrive during a downturn due to its flexible structure — a point that has obviously been disproven by what’s transpired over the past few months. That said, and to be fair, he clearly didn’t have “social distancing” in mind when he hypothesized that result.

***We wrote about Subchapter V last month in the context of Desigual’s bankruptcy filing. We said:

Luckily for a lot of businesses, the Small Business Reorganization Act (SBRA and a/k/a Subchapter V) went into effect in February. Coupled with amended provisions in the CARES Act, the SBRA will make it easier for a lot of smaller businesses to restructure because:

It established a higher threshold ($7.5mm vs. $2.7mm) to qualify which means more businesses will be able to leverage the streamlined SBRA process to restructure. Previously, businesses over that cap couldn’t utilize Subchapter V which made any shot at reorganization via bankruptcy far too expensive for smaller businesses. The only alternative was dissolution and liquidation.

Debtors under SBRA can spread a payment plan for creditors over 3-5 years. Debtors get the benefit of the payments spread out over time and creditors can potentially recover more. Aiding this is the fact that admin expenses also get paid over time and debts are not discharged until all plan payments are fulfilled.

A plan must be filed within 90 days. The shorter time frame also contains cost.

A trustee must be appointed and effectively takes the place of a UCC which may only be formed on showing of cause.

Companies are taking advantage of this.

****It probably stands to reason that various client programs the debtors typically depend upon are less likely to generate results under this scenario. The debtors nevertheless filed a motion seeking to continue these programs. They include (a) rebate programs for occupants who spend over a certain annual amount, (b) occupancy agreement promotions such as discounts, reduced rent costs, one or more months of free rent, etc., and (c) occupant referral fees. Suffice it to say, occupants likely aren’t referring in many other occupants during COVID. Consequently, the debtors ultimately withdrew this motion. All of this brings up another criticism of WeWork: what, exactly, is a co-working space’s moat? As justification for these programs, the debtors say:

The Lease Holders operate in a very competitive and dynamic market and with many competitors for the same customers. The loss of one or more Occupants could significantly impact the Debtors’ profitability, and therefore, the Client Programs require timely coordination on the part of the Lease Holders to ensure the maximum generation of customer agreement profits and brand awareness during this restructuring.

Case and point.

*****These numbers are YTD for the period ended June 30, 2020.

---

For more commentary and analysis about distressed investing, restructuring and/or bankruptcy, please visit us here.

---

Dates:

RGN-Columbus IV LLC (July 30, 2020)

RGN-Chapel Hill II LLC (August 2, 2020)

RGN-Chicago XVI LLC (August 3, 2020)

RGN-Fort Lauderdale III LLC (August 8, 2020)

RGN-Group Holdings LLC (August 17, 2020)

H Work, LLC (August 17, 2020)

RGN-National Business Centers LLC (August 17, 2020)

RGN-Lehi LLC (August 27, 2020)

RGN-Lehi II LLC (August 27, 2020)

RGN Atlanta XXXV LLC (August 29, 2020)

RGN-Arlington VI LLC (August 30, 2020)

RGN-Chevy Chase I LLC (September 2, 2020)

RGN-Philadelphia IX LLC (September 2, 2020)

RGN-Denver XVI LLC (September 3, 2020)

RGN-New York XXXIX (September 3, 2020)

RGN-Los Angeles XXV LLC (September 3, 2020)

RGN-San Jose IX LLC (September 4, 2020)

Jurisdiction: D. of Delaware (Judge Shannon)

Capital Structure: N/A

Company Professionals:

• Legal: Faegre Drinker Biddle & Reath LLP (James Conlan, Mike Gustafson, Patrick Jackson, Ian Bambrick, Jay Jaffe)

• Financial Advisor: AlixPartners LLP (Stephen Spitzer)

• Restructuring Advisor/Chief Restructuring Officer: Duff & Phelps LLC (James Feltman)

• Claims Agent: Epiq Corporate Restructuring LLC (Click here for free docket access)

• Subschapter V Trustee: Gibbons PC (Natasha Songonuga)

Other Parties in Interest:

• Regus Corporation, Regus Management Group, LLC and Franchise International GmbH

  • Legal: Young Conaway Stargatt & Taylor LLP (Robert Brady, James Hughes Jr., Joseph Barry, Justin Duda, Ryan Hart)

• Starwood Capital Group

  • White & Case LLP (Harrison Denman, John Ramirez) & Potter Anderson & Corroon LLP (Christopher Samis, Aaron Stulman)

💊 New Chapter 11 Bankruptcy Filing - Proteus Digital Health Inc.💊

Proteus Digital Health Inc.

June 15, 2020

In a week chock full of chapter 11 bankruptcy filings, in our opinion, the filing of California-based medtech company Proteus Digital Health Inc. is the most interesting and unique. Sure Extraction Oil & Gas ($XOG) is a publicly-traded oil and gas exploration and production company but, aside from the fact that it operates primarily in Colorado rather than Texas or Oklahoma, there’s nothing particularly fresh or interesting about it. We get it already: oil and gas is f*cked.

In contrast (and with apologies for the long block quote), when’s the last time you read about a chapter 11 debtor that does this:

The Debtor is a pioneer and leader of the “Digital Medicines” industry. “Digital Medicines” are oral pharmaceuticals formulated with an ingestible sensor aimed at tracking a patient’s adherence to prescribed medication treatments. When patients use Digital Medicines, their mobile devices collect information about medication taken and safely transmit the data via the cloud to the healthcare provider. Care teams are able to see if their patients are properly taking their medication and observe and analyze real-time data regarding the patient’s overall health such as heart rate, activity and rest. Digital Medicines enable care teams to manage larger patient populations and make medical decisions without the need for a patient to physically travel to the doctor’s office. Digital Medicines can help accelerate the trend toward conducting medical consultations over the internet. This opportunity is especially pronounced in rural areas and developing economies both domestically and internationally, particularly in light of challenges posed by the COVID-19 pandemic and resulting social distancing measures.

That’s like some Minority Report sh*t right there. Founded in 2002, the debtor has spent the better part of two decades developing its tech, testing its tech, commencing clinical trials, obtaining FDA approval of its drug-device combination product, entering into a marketing and distribution relationship with Otsuka Pharmaceutical Co. Ltd. ($OTSKY)(which it later expanded the scope of), and agreeing to a multi-year outcomes-based initiative with the State of Tennessee’s Medicaid program with a focus on hepatitis C treatment of underserved populations. The company currently “…has a panel of more than 20 Digital Medicines that treat cardiovascular and metabolic diseases including hypertension and diabetes being prescribed to patients in the United States.” Its patent portfolio is 400 strong.

On the flip side, the company is currently “pre-revenue.” And as you can imagine, accomplishing all of the above required a significant amount of upfront capital. There’s a reason why this company raised venture capital all the way through a Series H round: $461.5mm, actually, according to Angelist, with the last round of $50mm taking place in April 2016. The company’s cap table includes, among many others, The Carlyle Group ($CG)(Series B & C rounds), Medtronic PLC ($MDT)(Series D round), Novartis Pharma AG ($NVS)(Series E & F rounds), and PepsiCo Inc. ($PEP)(Series G round). The company also has a $9.5mm pre-petition credit facility.

In late 2019, the company experienced a severe liquidity crisis due, in part, to complications arising out of the expanded collaboration agreement with Otsuka. The debtor nearly wiggled its way out of trouble; it negotiated a synchronized deal with Otsuka and its prepetition lender that would coordinate (a) payments in from Otsuka and (b) payments out to the lender and (c) let the company get back to business as usual and buy it some time to source additional financing. But then COVID-19 struck and the company again found itself in a position where it wouldn’t be possible to live up to its obligations — in this case, a $7.75mm repayment to its pre-petition lender on or before April 30. This thing is like whack-a-mole.

The company spent April and May trying to negotiate itself out of its quagmire and hired Raymond James & Associates Inc. ($RJF) as investment banker to pursue a marketing and sale process. The company entered into a series of agreements with Otsuka and its lender to stem the tide but, ultimately, the shot clock ran out:

In light of all of these circumstances, and after having explored multiple options and carefully considering the alternatives, the Board, in consultation with managements and the Debtor’s advisors, made the difficult decision to file for chapter 11 protection in order to preserve the Debtor’s assets and conduct a sale process or other transaction, all in an effort to maintain continuity of business operations (including the Debtor's TennCare initiative) and maximize going concern value for the benefit of the Debtor’s creditors and equity stakeholders. The Debtor anticipates that it will seek approval of appropriate bidding and sale procedures in the early weeks of the Chapter 11 Case.

The pre-petition lender has consented to the use of its cash collateral to fund the case. Now we’ll see if there are any buyers out there who are as impressed with the premise of Digital Medicines as we are.*

*Full disclosure, we’re going purely off of what the debtor describes and have no medical knowledge whatsoever to opine on the efficacy of such initiatives. Sure sounds cool AF though.

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: $9.5mm secured debt (OrbiMed Royalty Opportunities II LP)

• Professionals:

  • Legal: Goodwin Procter LL (Nathan Schultz, Barry Bazian, Aretm Skorostensky) & Potter Anderson & Corroon LLP (L. Katherine Good, Aaron Stulman)

  • Financial Advisor/CRO: SierraConstellation Partners LLC (Lawrence Perkins)

  • Board of Directors: Shumeet Banerji, Regina Benjamin, Robert Epstein, Frank Fischer, Alan Levy, Ryan Schwarz, Joseph Swedish, Jonathan Symonds, Immanuel Thangaraj, Andrew Thompson

  • Investment Banker: Raymond James & Associates

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

• Other Parties in Interest:

  • Prepetition Lender: OrbiMed Royalty Opportunities II LP

  • Large Series A Preferred Equityholder: Spring Ridge Ventures I LP

  • Large Series B Preferred Equityholders: Carlyle Venture Partners II LP, Adams Street V LP, BVCF IV LP

⚫️New Chapter 11 Bankruptcy Filing - Longview Power LLC⚫️

Longview Power LLC

April 14, 2020

First it was True Religion and now it’s West Virginia-based Longview Power LLC: looks like we’re back to Chapter 22-ville after a long time away. This prepackaged chapter 11 also brings us back to (“clean”) coal country.* #MAGA!! Longview is the owner and operator of coal-filed power generation facility in West Virginia that services the PJM region (P - Pennsylvania, J - Jersey, M - Maryland, among other states). The company generated $28.1mm of EBITDA in 2019 versus $355mm of funded debt. You can do the math on what that means in terms of leverage ratios. 😬

The company attributes the drag on EBITDA to a combination of “…the rapid expansion of natural gas production, the use of natural gas in electric power generation in recent years, and lower energy prices due to a series of unseasonably warm winters has decreased energy price.” Colder winters = higher demand. Damn global warming! The average price per megawatt for electricity sold in the region is less than that of 2018 ($17.65/mwh). Other factors hitting the demand side include proliferation of use of LED light bulbs and solar roofs. Disruption! Given these market challenges, the company turned its attention to its balance sheet with the hope of eliminating interest expense and freeing up liquidity.

Alas, this is a balance sheet restructuring. The capital structure — while arguably not de-levered meaningfully enough after the initial chapter 11 cut $675mm — is at least straight-forward and simple. Longview has a $25mm revolver, $286.5mm term loan B facility and $44.3mm in subordinated notes. The company’s lenders from the 2013 bankruptcy own the equity.

Well, it looks like this will be Groundhog Day for Longview. Certain of the pre-petition term lenders will backstop a $40mm exit term loan and will get 10% of the new common equity with warrants exercisable for 90% of the new common equity provided the lender participates in the exit facility. Another debt for equity swap. Second time’s the charm?

*The company has already built one clean coal facility with an eye towards a second facility. The company also has plans for natural-gas-fired combined cycle plants and solar panel complexes.

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: $25mm RCF, $286.5mm TL (Deutsche Bank Trust Company), $44.3mm subordinated notes

• Professionals:

  • Legal: Kirkland & Ellis LLP (David Seligman, Joseph Graham, Laura Krucks, Brenton Rogers, Stephen Hackney) & Richards Layton & Finger PA (Daniel DeFranceschi, Zachary Shapiro)

  • Financial Advisor: 3Cubed Advisory Services LLC

  • Investment Banker: Houlihan Lokey Inc.

  • Claims Agent: Donlin Recano & Co. (*click on the link above for free docket access)

• Other Parties in Interest:

  • Ad Hoc Group of Prepetition Term Lenders

    • Faegre Drinker Biddle & Reath LLP (Kaitlin MacKenzie, James Millar, Laura Appleby, Kyle Kistinger)

🍺New Chapter 11 Bankruptcy Filing - Craftworks Parent LLC🍺

Craftworks Parent LLC

3/3/20

In November 2018, four core casual dining restaurant brands were merged together when Centerbridge Partners LP — the owners of Old Chicago Pizza & Taproom, Gordon Biersch Brewery Restaurant and Rock Bottom Restaurant and Brewery (“Craftworks”) — purchased Logan’s Roadhouse.* At the time of the transaction, Craftworks had 189 corporate and franchise restaurants and Logan’s had 204. Craftworks had ‘17 revenue of $434.5mm and Logan’s had ‘17 revenue of $462.4mm. Fast forward 16 months and the combined entity is now in bankruptcy court.

The TN-based debtors currently operate or franchise 330 locations (⬇️63) and generated revenue of $720mm of revenue in 2019 (⬇️$176.9mm). It’s safe to say that this performance is not what Centerbridge had in mind when it did the transaction. Ahhhhh…synergies.

The debt coming out of the transaction shoulders much of the blame:

…the Debtors have been negatively impacted by an overleveraged capital structure and low levels of liquidity that dates back to their acquisition of Logan’s Roadhouse in November 2018.

This is what that debt looks like:

Source: First Day Declaration

Of course, the debt is only part of the story. The debtors also blame their poor performance on rising wages, increased competition, third-party delivery platforms, and high rent. You know, the usual suspects in the casual dining space. Adding to the debtors’ misery was the fact that the integration of the two companies didn’t exactly go as planned. Per the debtors:

Since the closing of the Logan’s Acquisition, the Debtors’ business has been hampered by an overleveraged balance and lack of sufficient liquidity to fund their operations, including necessary capital expenditures and investment in their restaurants. These issues were compounded by other internal and external factors, such as underperforming stores, unfavorable leases, redundant selling, general and administrative expenses and a general decline in same-store traffic and sales. The primary reasons for the underperformance were lower topline sales and deterioration in gross margin.

“Redundant selling” isn’t exactly the kind of synergies purchasers hope for. That said, there were synergistic benefits. The post-transaction debtors enjoyed approximately $12mm of labor cost reductions, $5mm of operating expense reductions and $4mm of corporate general and administrative expense reductions. The private equity operational model illustrated, ladies and gentlemen.

Except this didn’t offset optimistic modeling. Per the debtors:

The Logan’s Acquisition transaction model forecasted fiscal year 2019 revenue based on a same-store sales growth rate of 1.5% with a 72.5% gross margin; however, actual same-store sales for fiscal year 2019 declined by approximately 1.0%, resulting in a total volume-driven gross margin loss of approximately $27.0 million. In addition, occupancy expense was under-forecasted by approximately $2.0 million.

Last we checked, $29mm > $21mm. 🤓

Because of all of this, the debtors were unable to make interest payments under the pre-petition first lien credit agreement. This put Fortress in the driver’s seat. And Fortress is seizing the opportunity. The private equity shop is the debtors’ prepetition lender and they are influencing the trajectory of this case; they will provide a $143.1mm DIP (of which only $23mm is new money) and they are acting as the stalking horse purchaser of the debtors with a $138mm purchase price offer (a credit bid, no doubt). The debtors intend to pursue a dual-sale and plan process with the hope of maximizing value for the benefit of all stakeholders.**

*Yes, this is the Logan’s Roadhouse that was in bankruptcy back in 2016. In the prior bankruptcy, Logan’s closed approximately 34 locations.

**So, at least there’s something new here. It’s not everyday that you see a top SEVENTY-FIVE creditors list, most of which is chock full of landlords and unsecured noteholders (Wells Fargo Bank NA, Marblegate Special Opportunities Master Fund LP, FS KKR Capital Corp., FS Investment Corporation II, Carl Marks Strategic Opportunities Fund II LP, Carl Marks Strategic Investments LP, Kelso & Company). It doesn’t look like Marblegate will recover anything on these notes which is a shame because there are likely to be more taxi medallions for sale sometime soon.

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: see above.

• Professionals:

  • Legal: Katten Muchin Rosenman LLP (Steven Reisman, Bryan Kotliar, Peter Siddiqui, Lindsay Lersner) & Klehr Harrison Harvey Branzberg LLP (Domenic Pacitti, Michael Yurkewicz, Morton Branzburg)

  • Financial Advisor: M-III Advisory Partners LP (Colin Adams)

  • Investment Banker: Configure Partners LLC (Vin Batra, James Hadfield)

  • Real Estate Advisor: Hilco Real Estate LLC

  • Strategic Communications Advisor: Kekst CNC

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

• Other Parties in Interest:

  • First Lien & DIP Agent: Fortress Credit Co.

    • Legal: King & Spalding LLP (Austin Jowers, Michael Handler) & Hunton Andrews Kurth LLP (John Schneider) & Chipman Brown Cicero & Cole LLP (William Chipman Jr.)

  • Stalking Horse Purchaser: DBFLF CFTWE Holdings L.P. (an affiliate of Fortress Credit Co.)

  • Second Lien Agent: Wells Fargo Bank NA

    • Legal: Morgan Lewis & Bockius LLP (Jennifer Feldshur, Sula Fiszman)

  • Sponsor: Centerbridge Capital Partners

    • Legal: Weil Gotshal & Manges LLP (Matthew Barr, Andriana Georgallas, Bryan Podzius) & Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Jaime Luton Chapman, Jordan Sazant)

New Chapter 11 Bankruptcy Filing - High Ridge Brands Co.

High Ridge Brands Co.

December 18, 2019

Connecticut-based, private-equity-owned (Clayton Dubilier & Rice LLC) High Ridge Brands Co. (“HRB”) filed for bankruptcy in the District of Delaware. High Ridge what? Right, we wouldn’t expect you to know what HRB is but you may very well know several of the brands in its portfolio. Ever visit Nana’s house for the weekend, hop into the shower, and see a boatload of VO5 or White Rain shampoo on the shelf? Zest soap? Or have you ever seen some shadeball do this on the street?

Oh yeah. Nothing says class like Binaca! Anyway, all four of the aforementioned products are in HRB’s brand portfolio. That portfolio also includes the Coast, Firefly, LA Looks, Rave, Reach, Salon Grafix, SGX NYC, Thicker Fuller Hair, and the Zero Frizz brands; the most recent portfolio addition was, in late 2016, Dr. Fresh, which sounds like a Marvel superhero but is an oral-care brand focused on value toothbrushes and the like. This acquisition marked an expansion away from HRB’s historical focus on primarily skin cleaning and hair care products in the “value” segment. HRB describes their business model as follows:

“Given their focus on value price points, the goal of the Debtors’ early strategy was to minimize costs, which they did by concentrating supply and optimizing logistics to leverage unit volumes to create a low cost structure with fully outsourced manufacturing and logistics primarily in the United States. Said differently, the Debtors’ original business plan revolved around low-cost, low-margin, and high-volume product distribution.”

Interestingly, the gangbusters economy has not been so gangbusters for HRB and, by extension here, CD&R’s equity. HRB, therefore, has recently pivoted:

Given that the Company’s hair care and skin cleansing brand portfolio was concentrated in product segments (e.g., bar soap and hair spray) and price points (e.g., opening price points and value) that were shrinking due to shifting consumer preferences and a strong economy that led to a reduction in shelf space allotted to value priced products, the Debtors have focused recently on transformative innovation to drive topline growth in growing segments (e.g., natural products, texturizers, and body wash) at slightly higher price points. The company has also invested in capability and capacity across the organization to elevate the speed it can bring products to market, its customer service, and its performance management. These tactics, in conjunction with their recent acquisitions, have positioned the Debtors well for sustainable, profitable growth.

Now, if that last bit about razzle dazzle change and high prospects seems like a sales pitch to you, well, give yourself a pat on the back because that is precisely the point of this chapter 11 filing. And the first day filing papers reflect this: the First Day Declaration is replete with chest-pounding talk about how great HRB’s asset-light model is, how large the total addressable market is for their products, how diversified and recognizable their brands are, and how deep their customer relationships are. With respect to the latter, HRB touts its key customers: “Walmart, Dollar Tree, Dollar General, Walgreens, Kroger, Family Dollar, 99 Cents Only Stores, CVS, HEB, Wakefern and other blue chip retailers.” UM, WOULD THESE BE THE VERY SAME CUSTOMERS WHO ARE TAKING AWAY HRB’S SHELF SPACE? 🤔😜

Someone will have to buy into all of ⬆️ and disregard HRB’s actual recent performance — performance that has sucked sh*t to the tune of $301.1mm in net sales and a $62.5mm net loss (and $35.5mm of adjusted EBITDA…adjusted for what we wonder?). We would love to see the data room: given increased emphasis on higher quality product at affordable prices, among other factors, we bet the numbers are showing disturbing quarterly declines but that’s just a guess.

HRB highlights the following as events that led to its chapter cases:

• Increased competition in the personal care industry and a shift away from its value brands;

• An inability to account for increasing commodity costs when marketing to value customers;

• A late shift to higher-margin products;

• An education challenge in that HRB will now need to educate the consumer about its newer, higher-margin brands — something that has and will elevate marketing costs; and

• A soap supplier (a) jamming HRB with higher costs and HRB not having replacements at the ready and (b) failing to deliver the supply HRB needed.

Of course, there’s also the capital structure. HRB has over $500mm of debt split between a $50mm revolving credit facility, a $213.4mm term loan, and $261mm of '25 8.875% senior unsecured notes (as well as $28.7mm of trade debt).

Tellingly, HRB wasn’t able to get its lenders on board with a restructuring transaction. Per HRB:

…the Debtors explored (1) a consensual restructuring among the Debtors, the Prepetition First Lien Lenders, and the Noteholders; (2) a plan of reorganization sponsored by the Prepetition First Lien Lenders; (3) a toggle plan with a focus on a sale of the Debtors’ assets with a reorganization backstop; (4) a chapter 11 sale process with the Prepetition First Lien Lenders acting as a stalking horse bidder; and (5) a chapter 11 sale process funded by a debtor-in-possession facility provided by the Prepetition First Lien Lenders or some subset thereof.

The Debtors’ initial goal was to effectuate a consensual restructuring out of court, and the Debtors engaged with both the Prepetition First Lien Lenders and the Ad Hoc Group to explore this possibility prior to commencing the Sale Process … in September of this year. As part of this, the Debtors provided the Ad Hoc Group with a significant amount of due diligence and held a number of meetings with the Ad Hoc Group’s professionals. Although the initial discussions did result in the Ad Hoc Group providing the Debtors with an initial set of potential terms for a restructuring, negotiations ultimately dwindled such that the Debtors decided they needed to pivot to other restructuring alternatives.

Now, it’s hard to say, from the outside looking in, what this all means. Getting this kind of deal done out-of-court was — depending on how concentrated the debt holdings are — probably unrealistic. It sounds like the lenders lacked not only the numbers to get something done but the conviction. There’s no restructuring support agreement here. There’s not even a stalking horse bidder. So, none of that is great.

On the plus side … maybe?… an earlier DIP commitment for $70mm has been decreased to $40mm ($20mm of which is a roll-up of prepetition amounts). HRB claims that this a reflection of the “liquidity position and forecasted liquidity needs over the course of the…cases” which would suggest that liquidity has improved since first discussing DIP financing back in August. Alternatively, it could mean that the DIP lenders are skittish given what appears to be a significant gap in the perception of value. The DIP matures in four months — presumably enough time to allow a sale process to play out through the beginning of February. Now the pressure is on PJT Partners Inc. ($PJT) to deliver a potential buyer.

*****

One final thing to note here: the petition lists HRB’s top 50 creditors and, of that 50, only a handful are trade creditors. Typically you’d see the indenture trustee listed as the top creditor, subsuming the entirety of the outstanding debt issuance outstanding. Here, HRB individually listed each of the noteholders. This could mean that the company has, for the most part, kept its trade current, relegating a very small subset to unpaid status. Indeed, those few creditors listed are owed more than 50% of the outstanding trade debt.

Furthermore, the company filed a critical vendor motion seeking to pay $26.5mm in critical vendor, shipper, 503b9 and foreign vendor claims. That conveniently wouldn’t leave much of an unsecured creditor body outside of the notes.

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: $50mm RCF & $213.4mm TL (BMO Harris Bank NA), $261mm '25 8.875% senior unsecured notes (Wilmington Trust)

• Professionals:

  • Legal: Young Conaway Stargatt & Taylor LLP (Robert Brady, Edmon Morton, Ian Bambrick, Allison Mielke, Jared Kochenash) & Debevoise & Plimpton LLLP (M. Natasha Labovitz, Nick Kaluk III)

  • Financial Advisor/CRO: Ankura Consulting Group LLC (Benjamin Jones)

  • Investment Banker: PJT Partners LP (John Singh)

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

• Other Parties in Interest:

  • Equity Sponsor: Clayton Dubilier & Rice LLC

  • DIP Administrative Agent & Agent under the Prepetition First Lien Credit Agreement: BMO Harris Bank NA

    • Legal: Winston & Strawn LLP (Daniel McGuire, Gregory Gartland, Dov Goodman) & Womble Bond Dickinson US LLP (Matthew Ward, Morgan Patterson)

  • Indenture Trustee for the 8.875% ‘25 Senior Notes: Wilmington Trust NA

    • Legal: Kilpatrick Townsend & Stockton LLP (Todd Meyers, Gianfranco Finizio) & Morris James LLP (Eric Monzo, Brya Keilson)

  • Ad Hoc Group of 8.875% ‘25 Senior Noteholders

⛽️New Chapter 11 Filing - Arsenal Resources Development LLC⛽️

Arsenal Resources Development LLC

November 8, 2019

An “array of resources available for a certain purpose” connotes something positive — an advantage to the party in possession of the resources. Of the arsenal. Bankruptcy sure loves to flip things on their head. We’re looking at you Arsenal Resources Development LLC.

Arsenal Resources Development LLC and 16 affiliated companies filed for bankruptcy in the District of Delaware on Friday. This marked the second prepackaged chapter 11 filing for entities affiliated with the Arsenal enterprise in less than 12 months. In February, Arsenal Energy Holdings LLC, a holding company, filed a 9-day prepackaged bankruptcy to effectuate a debt-for-equity swap of $861mm of subordinated notes. We wrote at the time:

Pursuant to its prepackaged plan of reorganization, the company will convert its subordinated notes to Class A equity. Holders of 95.93% of the notes approved of the plan. The one holdout — the other 4+% — precipitated the need for a chapter 11 filing. Restructuring democracy is a beautiful (and sometimes wasteful) thing.

And:

The company, itself, is about as boring a bankruptcy filer as they come: it is just a holding company with no ops, no employees and, other than a single bank account and its direct and indirect equity interests in certain non-debtor subs, no assets. The equity is privately-held.

More of the action occurred out-of-court upon the recapitalization of the non-debtor operating company. Because of the holdout(s), the company, its noteholders, the opco lenders (Mercuria) and the consenting equityholders agreed to consummate a global transaction in steps: first, the out-of-court recap of the non-debtor opco and then the in-court restructuring of the holdco to squeeze the holdouts. For the uninitiated, a lower voting threshold passes muster in-court than it does out-of-court. Out-of-court, the debtor needed 100% consent. Not so much in BK. (emphasis added).

Critically, the February restructuring did not successfully amend any of the company’s gathering agreements. Trade creditors were unimpaired and unaffected (economically).

With this bankruptcy filing, the operating companies are now in chapter 11. Which makes statements like these…

Is two prepacks in a calendar year a new #Chapter22 milestone? https://t.co/kjo4ft8KKU

— Jared Ellias (@jared_ellias) November 8, 2019

…technically incorrect. This isn’t a Chapter 22 per se. This isn’t even what we’d dub going forward, a Crapter 22-12 (two bankruptcy filings in 12 months a la Hercules Offshore Inc., another misleadingly-strong-named-failure-of-an-enterprise) or the “Two-Year Rule” violating Crapter 22-24 (two bankruptcy filings in 24 months a la Gymboree).* This is actually David’s Bridal in reverse: an out-of-court restructuring quickly followed in short order by an in-court restructuring. This is, technically, a “reverse Chapter 11.5.” We know…this is getting to be a bit much, but work with us here, folks: when the restructuring process becomes this much of a joke, jokester labels apply.

Founded in 2011, Arsenal is an independent exploration and production company that acquires and develops “unconventional” nat gas resources in the Appalachian Basin; it has 177k acres in the Marcellus Shale. The company is headquartered in Pennsylvania but its primary acreage and horizontal wells exist in West Virginia. The company had $120.1mm of revenue in ‘18 and appears on track to more or less match that in ‘19 ($59.3mm through June’s end, so, okay, maybe “less”).

In its latest Disclosure Statement, the company has the cajones to spitball the following:

“The Company creates value by leveraging its technical expertise and local knowledge to assemble a portfolio of concentrated, high-quality drilling locations, develop its acreage position safely and efficiently and install midstream infrastructure to support its upstream activities.”

Except, all we see here — across two recapitalization transactions in less than 12 months — is value destruction across the enterprise.** To be fair, the natural gas price environment has been far from accommodating over the last year. It is primarily for that reason — and a still too-levered balance sheet — that the company is in bankruptcy. This is telling:

…following the Prior Plan Effective Date, the E&P industry’s declining trend continued through fiscal year 2019, as exhibited by the following chart, depicting a natural gas futures-strip priced on the Prior Plan Effective Date compared against the same strip priced on October 22, 2019. As shown in the chart, since the Prior Plan Effective Date, realized gas prices have been on average 8.1% below futures strip (and the forward looking October 22, 2019 strip is on average 8.6% lower today than February 14, 2019 strip). Indeed, since the Prior Plan Effective Date, through September 30, 2019, 31 E&P companies have filed for chapter 11 protection. This represents a significant increase compared to the 22 E&P companies that filed for chapter 11 during the first 9 months of 2018.

Compounding matters is the balance sheet:

The new plan, which has been agreed upon by all three of the major constituencies party to the capital structure, will:

• provide the Debtors with access to $90mm in DIP credit from Citibank NA, the debtors’ prepetition RBL Lenders and, upon confirmation and emergence from bankruptcy, a $130mm exit facility;

• convert the term loan and seller notes into 100% of the equity in the reorganized debtors (subject to dilution) from a $100mm equity infusion from lenders Chambers and Mercuria.

This filing also requires — as a condition to the equity infusion — the implementation of amendments to two of five of the debtors’ gathering agreements and the rejection, assumption or consensual amendment of the remaining three agreements. Why? The debtors note:

“…certain of the Gathering Agreements impose significant minimum volume commitments (“MVCs”) at uneconomic fixed prices, thereby requiring ARE, the debtor party to the agreements, to pay for pipeline access, whether or not it is fully utilizing that capacity.”

Significantly, the debtors have reached agreement with the two gathering agreement counterparties on more realistic obligations in the current nat gas environment. Accordingly, the debtors hope to have this case completed by the end of February.

---

*Credit for “Crapter 11” belongs to loyal reader, David Guess, a Partner, who, congratulations are in order, recently moved over to Greenberg Traurig in Irvine CA. Cheers David!

**That is, unless we factor in the professionals. Simpson Thacher & Bartlett LLP, Alvarez & Marsal LLC, PJT Partners Inc., and Prime Clerk LLC all get a second bite at the apple. Who says that debtor-work doesn’t have recurring revenue??

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: See Above.

• Professionals:

  • Legal: Simpson Thacher & Bartlett LLP (Michael Torkin, Kathrine McLendon, Nicholas Baker, William Russell Jr., Edward Linden, Jamie Fell) & Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Kara Coyle, Ashley Jacobs)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: PJT Partners Inc. (Avi Robbins)

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

• Other Parties in Interest:

  • Prepetition RBL Agent and DIP Agent: Citibank NA

    • Legal: Paul Hastings LLP (Andrew Tenzer) & Richards Layton & Finger PA (Mark Collins, David Queroli)

    • Financial Advisor: RPA Advisors

  • Gathering Agreement Counterparty: Equitrans Midstream Corporation ($ETRN)

    • Legal: Buchanan Ingersoll & Rooney PC (Mary Caloway, Mark Pfeiffer, TImothy Palmer)

⛽️New Chapter 11 Bankruptcy Filing - Edgemarc Energy Holdings LLC⛽️

Edgemarc Energy Holdings LLC

May 15, 2019

Pennsylvania-based Edgemarc Energy Holdings LLC and its eight affiliated debtor affiliates are the latest in a string of oil and gas related bankruptcy filings. Don’t let $73/barrel brent crude and $63/barrel West Texas Intermediate prices full you: this is one of many oil and gas filings on the near term horizon.

Edgemarc is a natural gas E&P company focused on the Appalachian Basin in Ohio and Pennsylvania; it and its affiliates control approximately 45k net acres and have drilled and developed 60 producing wells. Now, everyone knows that, right now, the Permian Basin in West Texas is the shizz and, therefore, hearing about the Appalachian Basin may put some of you on edge. But, here, there was an extraordinary externality that really helped push the company into bankruptcy, other more macro factors notwithstanding.

In September 2018, a pipeline and gathering system under construction by a third-party (ETC Northeast Pipeline LLC) exploded. This pipeline was meant to be the gathering and processing avenue for the debtors’ natural gas. Imagine spending a ton of time milking a farm full of cows only to have the production facility designed for processing and transporting the milk explode right as you were about to bring your product to market. Kinda hard to make money in that scenario, right? The same applies to drilling for natural gas: its hard to generate revenue when you can’t process, transport and sell it. And, unfortunately, repair hasn’t been easy: what was supposed to be a “within weeks” project now looks poised to push well into 2020.

According to the debtors, a subsequent dispute with ETC prevented the debtors from flowing their gas through alternative pipelines. Consequently, the debtors “had no other means of selling gas from the affected wells” and opted to “shut in” their Pennsylvania wells and pause all remaining Pennsylvania operations — a hit to 33% of the company’s production activity. Compounding matters, the debtors and ETC are now embroiled in litigation. 😬

Suffice it to say that any company that suddenly loses the ability to sell 33% of its product will struggle. Per the company:

The Debtors’ inability to sell gas from their Pennsylvania properties had a substantial negative impact on their liquidity and ability to satisfy their funded debt, contractual and other payment obligations.

Ya think?!?!? The debtors have approximately $77mm of funded debt; they also has fixed transportation services agreements pursuant to which they agreed to fixed amounts of transportation capacity with various counterparties that exposes the debtors to financial liability regardless of whether they actually transport nat gas. This is so critical, in fact, that the debtors have already filed motions seeking to reject transportation services agreements with Rover Pipeline LLC, Rockies Express Pipeline LLC, and Texas Gas Transmission LLC. Combined, those three entities constitute 3 of the top 4 creditors of the estate, to the tune of over $6mm. These obligations — along with a downward redetermination of the borrowing base under the debtors’ revolving credit facility — severely constrained the debtors’ ability to operate. The debtors have, therefore, filed for chapter 11 with the hope of finding a buyer; they do not have a stalking horse purchaser lined up (though they do have a commitment for a $107.79mm DIP from their prepetition lenders, of which $30mm is new money). The company generated consolidated net revenue of $116.9mm in fiscal 2018.

Significantly, the company is seeking to reject a “marketing service agreement” and “operational agency agreement” with BP Energy Company ($BP), pursuant to which BP agreed to purchase and receive 100% of the debtors’ nat gas capacity. We gather (see what we did there?) that it’s hard to perform under those agreements when you can’t transport your product: accordingly, BP is listed as the debtors’ largest unsecured creditor at ~$41mm. BP’s rights to setoff and/or recoupment (PETITION Note: Weil Gotshal & Manges LLP just happened to write about these two remedies this week here) will be a major facet of this case: if BP is able to exercise remedies, the debtors ability to operate post-restructuring will be threatened. Per the company:

Docket #17, Rejection Motion.

The privately-held company is owned primarily by affiliates of Goldman Sachs and the Ontario Teachers’ Pension. Absent “holdup value,” we can’t imagine they’ll get any return on their investment given the circumstances.

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure:

• Professionals:

  • Legal: Davis Polk & Wardwell LLP (Darren Klein, Lara Samet Buchwald, Aryeh Falk, Jonah Peppiatt) & (local) Landis Rath & Cobb (Adam Landis, Kerri Mumford, Kimberly Brown, Holly Smith)

  • Directors: Patrick J. Bartels Jr., Scott Lebovitz, Sebastien Gagnon, Baird Whitehead, Zvi Orvitz, Romeo Leemrijse, Verlyn Holt, Jack Golden, George Dotson, Callum Streeter, Alan Shepard

  • Financial Advisor: Opportune LLC and Dacarba LLC

  • Investment Banker: Evercore Partners

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

• Other Parties in Interest:

  • Prepetition & DIP Agent: Keybank NA

    • Legal: Hunton Andrews Kurth LLP (Timothy Davidson, Joseph Rovira) & (local) Connolly Gallagher LLP (Jeffrey Wisler)

  • Equityholders: Goldman Sachs & Ontario Teachers’ Pension Plan Board

    • Legal: Wachtell Lipton Rosen & Katz (Richard Mason, Emil Kleinhaus, Michael Cassel) & (local) Drinker Biddle & Reath LLP (Steven Kortanek, Patrick Jackson, Joseph Argentina Jr.)

  • ETC

    • Legal: Akerman LLP (John MItchell, David Parham, Yelena Archiyan) & (local) Pachulski Stang Ziehl & Jones LLP (Laura Davis Jones, TImothy Cairns)

New Chapter 11 Bankruptcy Filing - Hospital Acquisition LLC

Hospital Acquisition LLC

May 6 & 7, 2019

Texas-based Hospital Acquisition LLC and dozens of other affiliated companies operating in the acute care hospital, behavioral health and out-patient would care space have filed for bankruptcy in the District of Delaware.* The debtors operate 17 facilities in 9 states for a total of 865 beds; their revenue “derives from the provision of patient services and is received through Medicare and Medicaid reimbursements and payments from private payors.”

Technically, this is a chapter 22. In 2012, the debtors’ predecessor reeled from the effects of Hurricane Katrina and reduced reimbursement rates and filed for bankruptcy. The case ended in a sale of substantially all assets to the debtors.

So, why is the company in bankruptcy again? Well, to begin with, re-read the final sentence of the first paragraph. That’s why. Per the company:

…internal and external factors have lead the Debtors to an unmanageable level of debt service obligations and an untenable liquidity position. In 2015, Medicare’s establishment of patient criteria to qualify as an LTAC-compliant patient facility led to significant reimbursement rate declines over the course of 2015 and 2016 as changes were implemented. Average reimbursement rates for site neutral patients, representing approximately 57% of 2016 cases, is estimated to drop from $23,000 to $9,000 across the portfolio. When rates declined sharply, the Debtors were unable to adjust. Further, the number of patients that now qualify by Medicare to have services provided in an LTAC setting has declined substantially, resulting in a significant oversupply of LTAC beds in the market.

To offset these uncontrollable trends, the company undertook efforts to convert a new business plan focused around, among other things, closing marginally performing hospitals and diversifying the business into post-acute care “to compete in the evolving value-based health care environment.” To help effectuate this plan, the debtors re-financed its then-existing revolver, entered into its $15mm “priming” term loan, and amended and extended its then-existing term loan facility. After this transaction, the company had total consolidated long-term debt obligations totaling approximately $185mm.

So, more debt + revised business plan + evolving macro healthcare environment = ?? A revenue shortfall, it turns out. Which put the debtors in a precarious position vis-a-vis the covenants baked into the debtors’ debt docs. Whoops. Gotta hate when that happens.

The debtors then engaged Houlihan Lokey to explore strategic alternatives and engaged their lenders. At the time of filing, however, the debtors do not have a stalking horse agreement in place; they do hope, however, to have one in place by mid-July.

*There are also certain non-debtor home health owners and operators in the corporate family that are not, at this time, chapter 11 debtors.

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: $23.9mm RCF, $9.4mm LOCs, $15mm “Priming Term Loan” ($7.7mm funded), $136.8mm TL

• Professionals:

  • Legal: Akin Gump Strauss Hauer & Feld LLP (Scott Alberino, Kevin Eide, Sarah Link Schultz) & (local) Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Jaime Luton Chapman, Joseph Mulvihill, Betsy Feldman)

  • Financial Advisor: Houlihan Lokey Inc. (Geoffrey Coutts)

  • Investment Banker: BRG Capital Advisors LLC

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

• Other Parties in Interest:

  • Equityholders: Monarch Master Funding Ltd., Twin Haven Special Opportunities Fund IV LP, Blue Mountain Credit Alternatives Master Fund LP, Merrill Lynch Pierce Fenner & Smith Inc., Oakstone Ventures Inc.

  • White Oak Healthcare Finance LLC

    • Legal: King & Spalding LLP (Arthur Steinberg, Scott Davidson) & (local) The Rosner Law Group LLC (Frederick Rosner, Jason Gibson)

  • Marathon Asset Management

    • Legal: Ropes & Gray LLP (Matthew Roose)

  • Prepetition Term Loan Agents: Seaport Loan Products LLC & Wilmington Trust NA

    • Legal: Shearman & Sterling LLP (Ned Schodek, Jordan Wishnew) & (local) Potter Anderson & Corroon LLP (Jeremy Ryan, R. Stephen McNeill, D. Ryan Slaugh)

  • Official Committee of Unsecured Creditors

    • Legal: Greenberg Traurig LLP (David Cleary, Nancy Peterman, Dennis Meloro) & (local) Bayard PA (Justin Alberto, Erin Fay, Daniel Brogan)
      

Updated 5/18

New Chapter 11 Bankruptcy Filing - Achaogen Inc.

Achaogen Inc.

April 15, 2019

Biopharma is where it’s at!!

San Francisco-based Achaogen Inc. ($AKAO) is the latest in a slate of biopharma debtors who have found their way into bankruptcy court — here, the District of Delaware. Achaogen is focused on “the development and commercialization of innovative antibiotic treatments against multi-drug resistant gram-negative infections.” To date, its operations have been centered around the discovery, development and commercialization of products, making it as far as clinical trials in certain instances. As if inspired by the fact that its filing came on the heels of the much-anticipated Game of Thrones (final) Season 8 premiere, the company colorfully notes its primary purpose:

Achaogen designed its lead product, ZEMDRI® (plazomicin), to fight what the Center for Disease Control (“CDC”) calls a “nightmare bacteria” and has listed as the highest category threat of “urgent.” ZEMDRI can be used to treat patients who have limited or no alternative treatment options from infections with these nightmare bacteria. Even with its current financial situation, Achaogen continues to commercialize ZEMDRI, in part because Achaogen believes that ZEMDRI can save lives for patients who may literally have no alternative.

Nightmare bacteria!! Sheesh that’s chilling.

Even more chilling is the company’s discussion of gram-negative bacteria — found “everywhere, in virtually all environments on Earth that support life.” These bacteria are becoming increasingly resistant to common antibiotics. Achaogen calls this “a global crisis…we take for granted.” The company’s core (patented) product, ZEMDRI, is designed to “retain its effectiveness in killing these more resistant bacteria.” While ZEMDRI received FDA approval for IV-treatment of patients with complicated urinary tract infections in July 2018, the FDA rejected ZEMDRI for treatment of patients with bloodstream infections, citing a lack of substantial evidence of effectiveness.

What does the company have going for it? Again, as of July 2018, it has a commercially viable product in the United States. It also has global commercialization rights. And patent protect in the US through approximately 2031 or 2032. It sells to either specialty distributors or physician-owned infusion centers. It has agreements with Hovione Limited and Pfizer for the manufacturing of its product. Finally, it has another product in development, C-Scape, which is an oral antibiotic for treatment of patients suffering from urinary tract infections caused by a particular bacteria.

So, what’s the issue? As PETITION readers have come to learn, the development and manufacture of biopharma products is a time and capital intensive process. Indeed, the company has an accumulated deficit of $559.4mm as of December 31, 2018. This bit is especially puzzling given the company’s position that the world confronts a “global crisis”:

In the past year, there has been a dramatic downturn in the availability of financing from both the debt and equity markets for companies in the anti-infective field, based in part on the withdrawal from the space by certain large pharmaceutical companies. For example, Novartis recently announced that it is shutting down its antibacterial and antiviral research, which was followed by similar moves from Eli Lilly, Bristol-Myers Squibb and AstraZeneca.3 Allergan has also recently announced its intention to divest its anti-infective business, consisting of three commercialized products. This “big pharma flight” from antiinfective research, development and commercialization has created significant challenges for early-stage biotech companies seeking to develop and commercialize novel and much needed drugs in this sector, as opportunities for partnerships, joint R&D relationships, and merger/acquisition transactions have diminished. This sector-wide trend has negatively affected not just Achaogen but many of its competitors. Achaogen, however, has been especially impacted because it has reached the point in its life cycle where it needs substantial capital infusion to drive commercialization of its recently FDA approved drug, ZEMDRI.

Look: we don’t take everything debtors say as gospel. After all, first day pleadings are an opportunity to frame the story and set the tone of a case. But if the company is right about what it’s saying and nobody appears to give two sh*ts, well, color us a wee bit concerned. Why isn’t anybody talking about this?

Anyway, in February 2018, the company entered into a loan and security agreement with Silicon Valley Bank for $50mm. The original agreement provided SVB with a security interest in virtually all of the company’s assets — including proceeds of intellectual property — but not a security interest in the IP itself. $15mm remains outstanding under the loan. In November 2018, the company retained Evercore Group LLP to run a strategic sale process but no viable purchaser emerged. It’s not worth saving the world unless you can make some dinero, we suppose.

After engaging in various liquidity maximization efforts (including job cuts), fundraising initiatives (including an insufficient equity raise), and licensing discussions with entities abroad, the company ultimately decided that nothing would generate enough liquidity for the company to avoid chapter 11. The company notes, “although Achaogen’s out-of-court sale process did not yield any acceptable bids, many parties had expressed interest in bidding at any potential 363 auction sale, where it could pursue the Assets free and clear of existing liabilities.” The company, therefore, filed for chapter 11 to pursue a new sale process; it has no stalking horse bidder teed up. To market its assets, the company has replaced Evercore with Cassel Salpeter & Co. LLC.

In support of the bankruptcy case, SVB committed to provide the company with a $25mm DIP credit facility of which $10mm is new money and $15mm is a roll-up of the aforementioned pre-petition debt. In exchange, SVB now gets a security interest in the company’s IP.

The company’s unsecured debt is comprised of lease obligations, minimum purchase requirements under its manufacturing contract, a success fee tied to the company’s FDA approval, and $18.7mm of trade debt. New Enterprise Associates Inc., a reputed Silicon Valley venture capital firm, is the company’s largest equity holder with approximately 10.76% of the company’s shares. Prior to its 2014 IPO, the company had raised $152.1mm starting with its Series A round in August 2004: it IPO’d at a valuation of $200.4mm, having issued 6.9mm shares at $12/share to the public. It’s equity is likely worth f*ck all. Well, not exactly: we suppose this isn’t ENTIRELY “f*ck all”:

But it’s pretty darn close. Now the issue is what price the IP will fetch in a bankruptcy sale process. It will have to be tens of millions of dollars for NEA to have any sort of recovery.

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: $15mm secured debt (Silicon Valley Bank)

• Professionals:

  • Legal: Hogan Lovells US LLP (Erin Brady, Richard Wynne, Christopher Bryant, John Beck) & (local) Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Andrew Remming, Matthew Talmo, Paige Topper)

  • Financial Advisor: Meru LLC

  • Investment Banker: Cassel Salpeter & Co., LLC

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

• Other Professionals:

  • Prepetition & DIP Lender ($25mm): Silicon Valley Bank

    • Legal: Morrison & Foerster LLP ( Alexander Rheaume, Todd Goren, Benjamin Butterfield, David Ephraim) & (local) Ashby & Geddes PA (Gregory Taylor, Stacy Newman)

  • Official Committee of Unsecured Creditors (Hovione Limited, EsteveQuimica SA, Solar Capital Ltd.,. Crystal BioScience, World Courier)
    
    

New Chapter 11 Bankruptcy Filing - Consolidated Infrastructure Group Inc.

Consolidated Infrastructure Group Inc. 

January 30, 2019

Nebraska-based Consolidated Infrastructure Group Inc. filed for bankruptcy last week in the District of Delaware; it provides underground utility and damage prevention services to players in the underground construction, digging and maintenance space. It serves or served large telecom and utility companies, such as AT&T, Cox Communications, and Comcast. it also currently has contracts with the Northern Indiana Public Service Company, the City of Davenport in Iowa and with ONE Gas Inc. 

The company has little in the way of assets and liabilities. Relating to the former, the company has the above-noted contracts, a $3mm receivable from AT&T, some intellectual property and interests in insurance policies. Liabilities include two letters of credit, and a small unsecured advance by prepetition equityholder and now-postpetition DIP lender ($3mm), Parallel149, a private equity firm. 

The company has been embroiled in drama since its inception in 2016. It was formed by former employees of USIC LLC, a much-larger competitor, and the two have been locked up in litigation relating to, among other things, breach of contract (non-compete). 

The company filed for bankruptcy to pursue a going concern 363 sale and liquidating plan. It also hopes to recover the AT&T receivable. Finally, it also contends that a sale of the contracts would avoid a public safety crisis in the communities where the company's contracts are located. 

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: $mm debt     

• Company Professionals:

  • Legal: Richards Layton & Finger PA (Daniel DeFranceshi, Russell Silberglied, Paul Heath, Zachary Shapiro)

  • Financial Advisor: Gavin/Solmonese LLC

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

• Other Parties in Interest:

  • Parallel149

    • Legal: DLA Piper LLP (Richard Chesley, Jade Williams, Jamila Justine Willis, R. Craig Martin, Maris Kandestin)

New Chapter 11 Filing - Brookstone Holdings Corp.

Wellness, Entertainment & Travel Retailer Now Bankrupt

Brookstone Holdings Corp.

8/2/16

Source: Brookstone.com

Almost exactly a month ago we asked “Is Brookstone Headed for Chapter 22?” and wrote the following:

Go to Brookstone’s website for “Gift Ideas” and “Cool Gadgets” and then tell us you have any doubt. We especially liked the pop-up asking us to sign up for promotional materials one second after landing; we didn’t even get a chance to see what the company sells before it was selling us on a flooded email inbox. Someone please hire them a designer.

On Friday, Reuters reported that the company has hired Gibson Dunn & Crutcher LLP(remember them?) to explore its restructuring options. What’s the issue? Well, retail. Need there be any further explanation?

The company has roughly 120 stores (20 are in airports), approximately $45mm of debt and a Chinese sponsor in Sanpower Group Co Ltd.

This is a big change from when it first filed for bankruptcy in April 2014. At the time of that filing, the company had 242 stores and approximately $240mm in debt. The company blamed its over-levered capital structure for its inability to address its post-recession challenges. It doesn’t appear to have the same excuse now.

Upon emergence, it reportedly still had 240 stores. Clearly the company ought to have used the initial bankruptcy for more of an operational fix in addition to its balance sheet restructuring. While this could be a costly mistake, the company’s sponsor is a bit of a wild card here: Chinese sponsors tend to be more disinclined to chapter 11 proceedings than American counterparts. Will they write an equity check then?

Well, we now have our definitive answers. Yes. The company filed for bankruptcy earlier today. And whether Sanpower was disinclined to file or not, well…it’s in bankruptcy. And, it will not, at least not as of now, be writing an equity check.

The New Hampshire-based company describes itself as “a product development company and multichannel retailer that offer a number of highly distinctive and uniquely designed products. The Brookstone brand is strongly associated with cutting-edge innovation, superior quality, and sleek and elegant design.” Which is precisely why we plastered a “videocassette” emoji in our title. Because that description comports 100% with the way we view the brand. But we digress.

The company has clearly engaged in some downsizing since emerging from bankruptcy a few years ago; it notes that it currently operates 137 retail stores across 40 states with 102 of those stores located in malls and 35 in airports; it also carries 700 SKUs, the majority of which fall in one of three product categories (wellness, entertainment and travel). It sells across four product channels: mall retail, airport retail, e-commerce (brookstone.com and Amazon.com), and wholesale (including TV shopping which, we believe, means home shopping network sort of stuff). For fiscal year 2017, the company had net sales of $264mm and negative EBITDA was $60mm. For the first half of 2018, net sales were $74mm and negative EBITDA was $29mm. Annualize that first number and you’re looking at a pretty precipitous drop in revenue!

The company highlights the juxtaposition between its mall and retail sales channels. Whereas the former generated ‘17 net sales of $137.9mm and negative EBITDA of $30mm, the latter generated net sales of $37.7mm and “adjusted” EBITDA of $1.4mm. We haven’t seen the numbers but we’re guessing the adjustment takes this statement into account:

Moreover, the net sales and adjusted EBITDA figures do not tell the whole story with respect to the productivity of the Airport retail outlets. As described further below, supply chain issues have limited the sales potential that would otherwise be captured with a healthy network of suppliers. The Debtors believe that through the bankruptcy they can correct the supply chain issues and allow the airport stores to greatly increase their profitability.

🤔🤔 Seeing a lot of adjustments on the basis of “belief” these days.

Likewise, the company claims that aberrational externalities affected its e-commerce operations as well. There, the company claims $55.2mm in net sales and negative adjusted EBITDA of $1mm. The company believes that the discontinuation of its catalog mailings had a detrimental impact on its e-commerce (and store retail) numbers. It notes:

As with the airport retail segment, the net sales and adjusted EBITDA associated with the Debtors’ ecommerce segment is not reflective of its true potential due to supply chain difficulties. In addition, and as described further below, technology issues and a turnover of senior level management at the e-commerce segment led to underperformance at a segment that should be performing at a significantly higher level. The Debtors believe that the bankruptcy filing will afford the Debtors the opportunity to right the operational defects that have artificially stymied the overall profitability that should be incumbent to the Debtors’ online presence.

Finally, the company claims its wholesale business has a lot of demand and has been under-utilized due to the same supply chain issues affecting its other channels.

In other words, when we said earlier that “[c]learly the company ought to have used the initial bankruptcy for more of an operational fix,” we hit the nail on the head. The company notes:

Following the 2014 Bankruptcy, sales continued to lag almost immediately. For the years ended 2014 and 2015, net sales were pegged at approximately $420 million and $389 million respectively, while adjusted EBITDA was booked at negative $38 million and negative $24 million respectively. While a number of factors contributed to the underperformance, sourcing of products and supply chain difficulties were the major drivers.

But of course there’s an overall macro overlay here too:

The drop in net sales in 2016 and 2017 was further exacerbated by the decline in the mall model as a means for consumers to buy products of the type sold by Brookstone. During this time, foot traffic at mall locations decreased drastically, as consumers continued to seek out products online as a replacement for traditional brick and mortar shopping.

The company’s e-commerce efforts could not pick up the slack. It blames leadership changes, a new platform (and a loss of data and indexing that resulted), and the discontinuation of the hard copy catalog for this. The company notes:

Because the catalogs were directly responsible for a significant portion of the web traffic on the Debtors’ e-commerce site, the negative impact on the Debtors’ online sales was dramatic.

Anyone who thinks that e-commerce can survive independent of paper mailings ought to re-read that sentence. It also explains the fifteen Bonobos catalogs we get every week and the 829-pound Restoration Hardware calalog we receive every quarter. Remember the buzzword of the year: “multi-channel.” Case and point.

To make this already (too) long story short, Sanpower kept sinking money into this sinking ship until it finally decided that it was just throwing good money after bad. Callback to July when we said they’re disinclined to chapter 11…well, lighting millions of dollars on fire will make you a little more inclined. 💥💥

Powered by a $30mm DIP credit facility (not all new money: some will be used to refi out the ABL) from its prepetition (read: pre-bankruptcy) lenders, the company intends to use the bankruptcy filing to execute an orderly store closing process and market and sell the business. This is clearly why it went to great lengths to pretty up its e-commerce, mall and wholesale businesses in its narrative. Still, the company has been marketing the business for a month and, thus far, there are no biters. Per the agreement with its DIP lenders, the company has until September 2018 to effectuate its sale process. You read that right: a company that bled out over a period of years has two months on life support.

Major creditors include Chinese manufacturers and, as you might expect, the usual array of landlords, General Growth Properties ($GGP), Simon Property Group Inc. ($SPG), and Macerich Co. ($MAC). Given the positioning of the respective businesses, we wouldn’t expect much of a mall business to survive here regardless of whether a buyer emerges.

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: $70mm ABL Revolver (Wells Fargo NA) & $15mm Term Loan (Gordon Brothers Finance Company), $10mm second lien notes (Wilmington Trust), $39.4mm Sanpower Secured Notes, $46.6mm Sanpower Unsecured Notes

• Company Professionals:

  • Legal: Gibson Dunn & Crutcher LLP (David Feldman, Matthew Kelsey, Matthew Williams, Keith Martorana, Jason Zachary Goldstein) & (local) Young Conaway Stargatt & Taylor LLP (Michael Nestor, Sean Beach, Andrew Magaziner)

  • Financial Advisor: Berkeley Research Group LLC

  • Investment Banker: GLC Advisors & Co. (Soren Reynertson)

  • Liquidator Consultants: Gordon Brothers Retail Partners LLC & Hilco Merchant Resources LLC

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

• Other Parties in Interest:

  • DIP Agent: Wells Fargo NA (Morgan Lewis & Bockius LLP, Glenn Siegel, Christopher Carter & Burr & Forman LLP, J. Cory Falgowski)

  • DIP Term Agent: Gordon Brothers Finance Company (Choate Hall & Stewart, Kevin Simard, Jonathan Marshall & Richards Layton & Finger PA, John Knight)

  • Indenture Trustee: Wilmington Trust NA

New Chapter 11 Filing - EBH Topco LLC (a/k/a Element Behavioral Health Inc.)

EBH Topco LLC (a/k/a Element Behavioral Health Inc.)

5/23/18 

Behavioral health services and residential drug and alcohol addition treatment provider in 13 treatment centers across 8 states filed for bankruptcy. If that sounds boring: it's because it is. Which would explain why the Wall Street Journal felt compelled to drop in that its also the facility that treated Britney Spears and Lindsay Lohan. SEO just shot through the roof. Anyway, the company stated,

While the Company has had ongoing financial difficulties, the overall census of the facilities and revenue has declined since 2017. The decline in out-of-network admissions, lower reimbursement rates by insurance providers and the decline in the average length of stay were all contributing factors to the financial losses of the Company. While the Company attempted to increase census through ongoing marketing efforts of its in-house sales team and internet advertising, the increased cost of these efforts did not result in the increase in revenue to improve the financial results of the Company and offset the Company’s cash burn. Financial performance for the fiscal year 2017 was $103.7 million in revenue, $129.6 million in expenses, and EBITDA of $(25.9) million with a total net income/(loss) of $(51.2) million.

Given that the company started in 2008 and then pursued an acquisition-based growth strategy, it seems like they didn't underwrite to current conditions. Ouch. 

Just a few weeks ago, Project Build Behavioral Health, LLC purchased the first lien paper and after an initial buyer of the assets fell through, agreed to be the company' stalking horse bidder in bankruptcy subject to an expedited sale process (the sale hearing is slated for late June); it intends to credit bid its debt. The company has a proposed $14.2 million DIP credit facility lined up to fund the cases. 

• Jurisdiction: D. of Delaware (Judge Shannon)
• Capital Structure: $76mm '19 first lien term loan and revolver debt (Madison Capital Funding LLC), $29mm '20 second lien term loan (Cortland Capital Market Services LLC)
• Company Professionals:
  • Legal: Polsinelli PC (Christopher Ward, Shani Katona, Stephen Astringer, Jeremy Johnson)
  • CRO/Financial Advisor: Alvarez & Marsal LLC (Martin McGahan)
  • Investment Banker: Houlihan Lokey Capital Inc.
  • Claims Agent: Donlin Recano & Company Inc. (*click on company name above for free docket access)
• Other Parties in Interest:
  • DIP Lender/Stalking Horse Bidder: Project Build Behavioral Health, LLC
    • Legal: McDonald Hopkins LLC (David Agay, Scott Opincar, Michael Kaczka) & (local) Morris Nichols Arsht & Tunnell LLP (Derek Abbott)
  • Ad Hoc Group of Second Lien Lenders
    • Legal: Morrison & Foerster LLP (Jonathan Levine, Daniel Harris)
  • Equity sponsors: NEA, Frazier Healthcare Ventures, Formation Capital

New Chapter 11 Filing - Videology Inc.

Videology Inc. 

5/10/18

In what could amount to a solid case study in #BustedTech and the up/down nature of entrepreneurship, Videology Inc., a Baltimore based software ad-tech company that generated $143.2 million in revenue in fiscal 2017 has filed for bankruptcy.

The company has two principal business lines: (i) legacy media sales, a demand side (advertisers) platform that Videology would leverage to procure ad inventory to sell to advertising agencies (the supply side); and (ii) its long-tail "core use case," which included "long term planning, management, and execution of a company's entire portfolio of advertising campaigns or advertising inventory with complex, overlapping targets, objections...across multiple delivery channels." We're going to pretend we understand what that means; we think it has something to do with assisting ad agencies target ads effectively. What we do understand is that revenue generation for the more lucrative "core use case" segment involved a long sales pipeline that didn't support timely enough revenues to offset the liquidity draining legacy segment. Ruh roh.

But let's take a step back. This company was founded in February 2007. It raised its $15.1 million Series A round of funding in July 2008, securing Valhalla Partners II as a lead investor. It then secured its $16.4 million Series B round in Q4 2009. Comcast Ventures LP was the lead investor. Thereafter it nailed down its $30.4 million Series C round in May 2011 with New Enterprise Associates 12. Finally, in June of 2013, the company closed its $68.2 million Series D round with Catalyst Investors QP III as lead. Lots of funding. No down rounds. Everything seems to be on the right track.

Except it wasn't. The legacy segment was bleeding cash as early as 2012. The company had to tap the venture debt market in July 2017 to refi-out its bank line of credit. It obtained a $40-45 million 8.5% asset-backed credit facility (secured against virtually everything, including IP) with Fast Pay Partners LLC as agent and Tennenbaum Capital Partners LLC ("TCP"), as documentation agent and investment manager. It also obtained a second $20 million 10% asset-backed "UK" credit facility with FPP Sandbox LLC and TCP, which was secured by the same collateral. Both loans came with exit fees, charge 3% default interest and the larger facility has a 3% end-of-term premium attached to it.

At the same time the company took out the venture debt, it issued $17.1 million of convertible notes from board members and existing major investors (elevating them in the cap table) AND raised an additional $4.7 million in a subsequent rights offering to smaller legacy investors. What do you think will happen to that money? We'll come back to that.

In Q3 2017, the company also sought to find a strategic buyer. It didn't. It then started doing what every distressed company does: it stretched payables while it tried to formulate an out-of-court solution -- in the form of a restructuring or a refinancing. Certain vendors became skittish and withheld payments to the company. The resultant cash squeeze precipitated the prepetition lenders issuance of a notice of default. Thanks to a cash control agreement, they then seized control of the main operating accounts and paid down amounts owing with the company's cash and accounts receivable. And, yes, they applied the default interest rate. This is why they say what they say about possession. Savage. Consequently nothing is due under the larger facility; over $11.2 million remains due on the UK facility. 

The company now has a potential buyer, Amobee Inc., and has filed for bankruptcy to effectuate a sale. The company hasn't yet filed papers indicating the sale price but The Wall Street Journal reports that the purchase price may be $45 million -- or 1/3 of '17 revenues. The WSJ also reports that the company has nailed down a $25 million DIP credit facility which will be used to pay down the UK facility and fund the cases. Presumably the sale price will pay off the DIP and the $20 million that remains will be left for unsecured creditor recoveries. Back of the envelope, that will be about a 25% recovery. 

As for the equity holders? In the absence of bumping up by way of the convertible note, they'll be wiped out. That's venture capital for you. The venture debt providers, however, did well. 

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: $11.2mm UK Loan Facility (FPP Sandbox LLC and Tennenbaum Capital Partners LLC), $17.1 million convertible promissory note.

• Company Professionals:
  • Legal: Cole Schotz PC (Irving Walker, Patrick Reilley)
  • Financial Advisor: Berkeley Research Group LLC
  • Claims Agent: Omni Management Group (*click on company name above for free docket access)
• Other Parties in Interest:
  • Prospective Buyer: Amobee Inc.
    • Legal: Goodwin Proctor LLP (Gregory Fox, Alessandra Simons) & (local) Womble Bond Dickinson (US) LLP (Matthew Ward, Morgan Patterson)
  • Secured Lenders: FastPay Partners LLC & FPP Sandbox LLC
    • Legal: Buchalter (William Brody, Ariel Berrios) & (local) Richards Layton & Finger PA (John Knight, Christopher De Lillo)
  • DIP Lender: Draper Lending LLC
    • Legal: Arent Fox LLP (Robert Hirsh, Jordana Renert) & (local) Bayard PA (Justin Alberto, Daniel Brogan)

New Chapter 11 Filing - RMH Franchise Holdings, Inc.

RMH Franchise Holdings, Inc.

05/08/18

In 🍟Casual Dining is a Hot Mess🍟, we wrote:

…don’t let the lull in restaurant activity fool you. As we’ve stated before, this is a space worth watching given intense competition and the rise of food delivery and meal kit services - both direct-to-consumer and in-grocery.

Looks like we spoke to soon about a lull. Earlier this week RMH Franchise Holdings Inc. filed for bankruptcy in the District of Delaware. If you’ve never heard of RMH Franchise Holdings Inc., have no fear. You haven’t. Nor had we. But it is purportedly the second largest franchisee operator of Applebee’s Neighborhood Grill & Bar restaurants, operating 159 restaurants across 15 states. The company represents a bit less than 10% of all Applebee’s locations. RMH cobbled together this footprint after a string of acquisitions between 2012 and 2015, growing quickly and expanding its geographical scope.

Alas, Applebee’s is a casual dining establishment and, as previously covered, casual dining is struggling. The company notes,

…significant challenges encountered by the Applebee’s brand generally, and specific managerial decisions made on behalf of it by its franchisor, Applebee’s International, Inc. (the “Franchisor”), have negatively impacted the Debtors’ business operations and left them facing near-term liquidity issues.

These numbers paint a stark picture:

For the trailing twelve months ending March 31, 2018,4 the Debtors generated approximately $375.9 million in gross revenue, and $12.6 million of EBITDA, on a consolidated basis, a drop of roughly 60% in two years from the Debtors’ peak of $431.1 million and $31.4 million, respectively, in the twelve months ending March 31, 2016.

60%. Sixty…percent. Y.I.K.E.S. Much of this is attributable to a steep decline in same store sales over a period of years.

It is apparently also attributable to misguided directives from Applebee’s International Inc. (“AI”), the franchisor. Efforts to convert to wood-fired grill platforms and engage consumers with new ad campaigns flopped, despite the additional capital expenditures that those efforts required. In addition,

These difficulties were exacerbated by generally increased food costs, higher minimum wage rates and other labor costs, and increasing rents.

Consequently, the company spent the last year trying to improve operational efficiency and reduce operating expenses. It (and its agent Hilco Real Estate LLC) renegotiated leases with landlords, shed underperforming locations and negotiated with the corporate overlords to reduce corporate expenses. What it didn’t secure, however, was a long-term definitive agreement with Applebee’s International Inc. (“AI”). Instead, AI indicated that intends to issue a notice of termination of the company’s franchise rights in Arizona and Texas. That, friends, is what you call capitulation.

And the result, friends, is a crash landing into bankruptcy to trigger the automatic stay. Now the company will shed additional leases, negotiate with AI, and determine what options remain for a casual dining establishment that faces a headwinds coming multiple directions.

• Jurisdiction: D. of Delaware (Judge Shannon)
• Capital Structure: $68.4mm debt (Bank of America), $30mm (BMO Harris Bank NA)    
• Company Professionals:
  • Legal: Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Kenneth Enos, Robert F. Poppiti, Jr., Justin H. Rucki, Tara C. Pakrouh)
  • Financial Advisor: Mastodon Ventures Inc.
  • Real Estate Advisor: Hilco Real Estate LLC
  • Claims Agent: Prime Clerk LLC (*click on case name above for free docket access).
• Other Parties in Interest:

New Chapter 11 Filing - Nighthawk Royalties LLC

Nighthawk Royalties LLC

4/30/18

Colorado-based hydrocarbon exploration and production company filed for bankruptcy after "macroeconomic and industry distress and a failed waterflooding project" led it to trigger defaults under its senior secured credit facility with the Commonwealth Bank of Australia. The company has a signed letter of intent to sell its assets to a prospective purchaser under section 363 of the bankruptcy code. The company is also leveraging the Bankruptcy Code's automatic stay provision to prevent Fastighets AB Korpralen, a Swedish company affiliated with a former director of the debtor, from commencing shareholder litigation against the company. 

• Jurisdiction: D. of Delaware (Judge Shannon)
• Capital Structure: $21.25mm debt (Commonwealth Bank of Australia)
• Company Professionals:
  • Legal: Greenberg Traurig LLP (Mark Bloom, Paul Keenan Jr., John Dodd, Ari Newman, Dennis Meloro)
  • Investment Banker: SSG Advisors LLC
  • Claims Agent: JND Corporate Restructuring (*click on company name above for free docket access)
• Other Parties in Interest:
  • Major Shareholder: Fastighets AB Korpralen
    • Legal: K&L Gates LLP (Steven Caponi)

New Chapter 11 Filing - ExGen Texas Power LLC

ExGen Texas Power LLC

• 11/7/17 Recap: The last 12 months haven't been friendly to companies in the power space. The following have filed for bankruptcy: Panda Temple Power LLC, Westinghouse Electric Company LLC, GenOn Energy Inc., Illinois Power Generating Co., and La Paloma Generating Company LLC. Here, the owner of five natural-gas-fired power generation projects in the great state of Texas filed for bankruptcy in the face of significant headwinds. Literally. In its bankruptcy papers, the company primarily blames decreased demand and, in turn, decreased revenue, on an increase in wind production. And mild weather. Indeed, unlike retailers who incessantly blame weather for poor performance, this is actually believable. The company notes, "public policy initiatives and incentives continue to promote the development of additional wind capacity, placing downward pressure on wholesale power prices. Such additional capacity, coupled with low natural gas prices and mild and windy weather, have exacerbated the Debtors' financial struggles. By way of example, the cost per megawatt hour in 2008 was more than $70; in 2016, it was less than $25, and just prior to the Petition Date, it was approximately $25. These factors have persisted, as additional wind and other capacity is being added to the grid, which has driven down prices in light of relatively flat demand, thereby further constricting the Debtors' revenues and cash flow." In light of these issues, the company hired a banker to market the assets and only non-Debtor Exelon Generation Company LLC bit on one of the five debtor projects to the tune of $60mm (plus various forms of other consideration). The debt in the other four projects will be equitized and the term lenders will now be owners of power generation projects, subject to approval of a plan of reorganization. Interestingly, this all comes in the same week that a proposed tax overhaul bill by the House Republicans seeks to significantly curtail wind energy production tax credits. 
• Jurisdiction: D. of Delaware (Judge Shannon)
• Capital Structure: $660mm first lien TL (funded, ex-interest)(Bank of America NA)     
• Company Professionals:
  • Legal: Richards Layton & Finger PA (Daniel DeFranceschi, Paul Heath, Zachary Shapiro, Joseph Barsalona)
  • Financial Advisor/CRO: FTI Consulting (David Rush)
  • Investment Banker: Scotia Capital (USA) Inc.
  • Independent Board of Director: Alan Carr
  • Claims Agent: KCC (*click on company name for docket)
• Other Parties in Interest: 
  • Asset Purchaser: Exelon Generation Company LLC
    • Legal: DLA Piper (US) LLP (Richard Chesley, Daniel Simon)
  • TL Agent: Bank of America NA
    • Legal: Norton Rose Fulbright US LLP (Louis Strubeck, Greg Wilkes) & (local) Morris Nichols Arsht & Tunnell LLP (Derek Abbott)
  • Commodity Hedge Counterparty: Merrill Lynch Commodities Inc.
    • Legal: Davis Polk & Wardwell LLP (Marshall Heubner, Angela Libby) & (local) Potter Anderson & Corroon LLP (Jeremy Ryan, R. Stephen McNeill, D. Ryan Slaugh)

Updated: 11/8/17 at 1:00pm CT (No UCC)

New Chapter 11 Filing - M&G USA Corporation

M&G USA Corporation

• 10/24/17 Recap: Disruption via cliche and foreign competition. Here, the plastics maker and indirect subsidiary of petrochemical giant Mossi Ghisolfi Group filed for bankruptcy. The company had begun construction on a vertically-integrated plant in Corpus Christi Texas back in 2013 but then they ran headfirst into the single-most common construction cliche out there: delays and cost overruns. And that was before Hurricane Harvey compounded matters. The plant remains incomplete and, consequently, the company has "severe liquidity constraints" that it intends to address in bankruptcy - specifically, through a significant deleveraging. The company highlighted several other causes for its state of affairs: (i) higher raw material costs due to supply shortages, (ii) a recent wave of competing low-priced imports that flooded the US market (note: the company has outstanding petitions with the US Department of Commerce and the US International Trade Commission alleging that imports of polyethylene terephthalate resin from Brazil, Indonesia, South Korea, Pakistan and Taiwan are being "dumped" in the US market), and (iii) price-compression due to a competitors GOB sale. The company seeks approval of a $100mm DIP credit facility to fund its cases. 
• Jurisdiction: D. of Delaware (Judge Shannon)
• Capital Structure: $1.7b outstanding principal amount of debt (see below)   
• Company Professionals:
  • Legal: Jones Day (Scott Greenberg, Carl Black, Stacey Corr-Irvine, Michael Cohen, Nicholas Morin, Peter Saba, James Sottile IV, Daniel Merrett, Oliver Zeltner) & (local) Pachulski Stang Ziehl & Jones LLP (Laura Davis Jones, James O'Neill, Joseph Mulvihill)
  • Financial Advisor/CRO: Alvarez & Marsal North America LLC (Dennis Stogstill)
  • Investment Banker: Rothschild Inc. (Neil Augustine)
  • Board of Directors: Alan Carr, Frederick Brace
  • Claims Agent: Prime Clerk LLC (*click on link above for free docket access)
• Other Parties in Interest:
  • DAK Americas LLC 
    • Legal: Weil Gotshal & Manges LLP (Alfredo Perez, Christopher Lopez) & (local) Morris Nichols Arsht & Tunnell LLP (Curtis Miller)
  • Equity Holders: Magnate S.a r.l.
    • Legal: Kirkland & Ellis LLP
  • DIP Lender: Banco Inbursa S.A., Institucion De Banca Multiple, Grupo Financiero Inbursa
    • Legal: Cleary Gottlieb Steen & Hamilton LLP
  • Large Unsecured Creditor: Indorama Ventures Montreal LP
    • Legal: Lowenstein Sandler LLP (Paul Kizel, Nicole Fulfree)
  • Official Committee of Unsecured Creditors:
    • Legal: Milbank Tweed Hadley & McCloy LLP (Dennis Dunne, Abhilash Raval, Lauren Doyle) & (local) Cole Schotz P.C. (J. Kate Stickles, David Hurst)

Updated 11/19/17

Source: First Day Declaration

New Chapter 11 Bankruptcy - Exelco North America Inc.

Exelco North America Inc.

• 9/26/17 Recap: International diamond distributor has filed a chapter 11 bankruptcy to stay its bank lender KBC Bank's attempts to foreclose. A prior proceeding had been underway in Antwerp prior to being withdrawn.
• Jurisdiction: D. of Delaware (Judge Shannon)
• Company Professionals:
  • Legal: Hughes Hubbard & Reed LLP (Kathryn Coleman, Jeffrey Margolin, Dustin Smith) & Young Conaway Stargatt & Taylor LLP (Michael Nestor, Andrew Magaziner)
  • Claims Agent: Donlin Recano & Co. Inc. (*click on company name above for free docket access)
• Other Parties in Interest:

• Updated 11/8/17

New Chapter 11 Filing - Peekay Acquisition LLC

Peekay Acquisition LLC

• 8/10/17 Recap: The Auburn Washington-based specialty retailer of lingerie, sexual health and wellness products with 46 locations has filed for bankruptcy after failing to find an out-of-court buyer for its 5000 SKUs of lubes, $265 vibrators, sex toys and other fun stuff. This place sounds...liberated. And while the sex retail industry is allegedly gaining acceptance - at least according to the Company's own filing - it seems that Peekay was unable or incapable of capitalizing on it given its capital structure (PETITION Note: Agent Provocateur also filed for bankruptcy this year so query whether this really is a brick-and-mortar business or whether people would really rather discreetly order their sex toys on Amazon...our money is on the latter. Prior to the internet, options were a bit more limited, we gather.). Consequently, the company's Term Loan A Lenders have consented to the use of its cash collateral and are credit bidding $31mm of their debt to acquire the company after a long and failed attempt by the Company to explore other out-of-court options (which apparently included an IPO...WTF? What would the ticker be? "SEX"? "DIK"? "ASS"? We could do this all day.). 
• Jurisdiction: D. of Delaware (Judge Shannon)
• Capital Structure: $38.2mm first lien term loan ($27mm term loan A + $8.4mm interest/fees, $14.4mm term loan B + $1.98mm interest/fees), $19mm PIK seller notes    
• Company Professionals:
  • Legal: Landis Rath & Cobb LLP (Adam Landis)
  • Financial Advisor/CRO: Traverse LLC (Albert Altro)
  • Investment Banker: SSG Advisors LLC (J. Scott Victor)
  • Claims Agent: Rust Consulting/Omni Bankruptcy (*click on company name above for free docket access)
• Other Parties in Interest:
  • Term A Lenders/TLA Acquisition Corp. (Alpine Associates, Alpine Heritage LP, Alpine Heritage II LP, Alpine Heritage Offshore Fund Ltd., Chatham Capital Management IV LLC, The K2 Principal Fund LP, Tor Capital LLC, Twin Haven Special Opportunities Fund IV LP)
    • Legal: Curtis Mallet-Provost Colt & Mosle LLP (Steven Reisman, Shaya Rochester, Joshua Geller) & (local) Richards Layton & Finger PA (Mark Collins, Amanda Steele, Brendan Schlauch)
  • Official Committee of Unsecured Creditors
    • Legal: Cullen and Dykman LLP (S. Jason Teele, Nicole Stefanelli) & (local) Whiteford Taylor & Preston LLP (Christopher Samis, L. Katherine Good, Aaron Stulman, Kevin Shaw)
    • Financial Advisor: The DAK Group (Sheon Karol, Ari Fuchs, Claudia Levine)

Updated 9/5/17

New Chapter 11 Filing - Tidewater Inc.

Tidewater Inc.

• 5/17/17 Recap: First Gulfmark Offshore Inc., now Tidewater: the offshore shakeout is finally upon us. The New Orleans-based publicly-traded offshore operator filed for bankruptcy to effectuate an expedited 6-week prepackaged financial restructuring of the company. This story is so cliche at this point: leverage is high, oil prices are low, E&P activity is down, natural gas is up, liquidity is constrained. Cue Weil and a slew of other restructuring professionals. File bankruptcy. 
• Jurisdiction: D. of Delaware (Shannon)
• Capital Structure: $1.95b funded debt. $300mm TL (DNB Bank ASA) & $600mm RCF (BofA), $1.15b unsecured notes, tons of of guarantees and nonsense.    
• Company Professionals:
  • Legal: Weil (Ray Schrock, Jill Frizzley, Alfredo Perez, Christopher Lopez, Yvanna Custodio, Andriana Georgallas) & (local) Richards Layton & Finger PA (Daniel DeFranceschi, Zachary Shapiro, Christopher De Lillo)
  • Financial Advisor: AlixPartners LLC (David Johnston, Richard Robbins, Jim Trankina, Bruce Smathers)
  • Investment Banker: Lazard (Timothy Pohl)
  • Claims Agent: Epiq Bankruptcy Solutions LLC (*click on company name for free docket)
• Other Parties in Interest:
  • Independent Directors of the Board
    • Legal: Andrews Kurth Kenyon LLP (Robin Russell, Timothy Davidson)
  • Term Loan Agent: DNB Bank
    • Legal: Milbank Tweed Hadley & McCloy LLP (Dennis Dunne, Tyson Lomazow) & (local) Klehr Harrison Harvey Branzburg LLP (Domenic Pacitti)
  • Credit Agreement Agent: Bank of America
    • Legal: Morgan Lewis & Bockius LLP (Amy Kyle, Edwin Smith, Joshua Dorchak, Matthew Ziegler) & (local) Morris Nichols Arsht & Tunnell LLP (Derek Abbott)
  • Unofficial Noteholder Committee
    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Alan Kornberg, Brian Hermann, Sean Mitchell, Kellie Cairns) & (local) Blank Rome LLP (Stanley Tarr, Rick Antonoff, Barry Seidel)
  • Official Committee of Unsecured Creditors
    • Legal: Whiteford Taylor & Preston LLC
    • Financial Advisor: Berkeley Research Group LLC (Christopher Kearns, Mark Shankweiler, Rick Wright, Jeffrey Dunn, Carolyn Passaro)
  • Official Committee of Equity Holders
    • Legal: Brown Rudnick LLP (Howard Steel, Brandon Burkart, Jeffrey Jonas, Steven Pohl) & (local) Saul Ewing LLP (Mark Minuti, Sharon Levine)
    • Financial Advisor: Miller Buckfire & Co. LLC (Matthew Rodrigue) & Stifel Nicolaus & Co. Inc.
  • Post Reorg Board of Directors (Dick Fagerstal, Steven Newman, Larry Rigdon, Randee Day, Alan Carr, Thomas Robert Bates Jr.)

Updated 7/12/17 9:07 am CT