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 Bankruptcy & CCAA Filing - Bumble Bee Parent Inc.🐟

Bumble Bee Parent Inc.

November 21, 2019

Tuna fish went from playing a role in the founding of one of the world’s largest private equity firms (Blackstone) to, in the case of Bumble Bee Parent Inc. and its affiliated debtors, another private-equity-backed (Lion Capital LLP) bankruptcy. Bumble Bee is the company behind “shelf-stable seafood” brands Bumble Bee, Brunswick, Sweet Sue, Snow’s Beach Cliff and Wild Selections (as well as a Canadian brand). It has been on a wild ride since 2017.

The bankruptcy narrative is that a plea agreement with the United States Department of Justice related to criminal charges of alleged price-fixing led to burdensome financial obligations by way of (a) a $25mm criminal fine) and (b) defense costs associated with an onslaught of subsequent civil lawsuits from direct and indirect purchasers of products claiming damages arising out of the alleged price-fixing. This overhang ultimately led to the debtors arriving at, but not quite tripping, an event of default with their term lenders in Q4 ‘18. The debtors have been operating under a series of short-term limited waivers ever since as they sought to explore strategic alternatives.

They have one. The debtors have a stalking horse purchase agreement with affiliates of FCF Co. Ltd. “for the sale of substantially all of the Company’s assets at a total implied enterprise value of up to $930.6 million, comprised of $275 million of cash, assumption of the remaining $17 million of the DOJ Fine, and the roll-over of up to $638.6 million in outstanding term loan indebtedness.” This sale will preserve the business as a going concern, preserve jobs, and provide an ongoing business partner to vendors and customers who consider the debtors to be partners.

Debtor first day bankruptcy papers are typically replete with spin and these papers are no different. In fact, necessarily so, they read like an offering memorandum. The papers discuss how the debtors provide “nutricious foods” that are “well-positioned to address a number of important consumer preferences and food trends, including shifts toward protein-rich, low-fat/low-calorie, and high Omega-3 fatty acid diets and trends towards eating multiple small or ‘snack-sized’ portions per day rather than the traditional three-square meals per day, and an overall increase in ‘snacking.’” They have the #1 or #2 market share in the shelf-stable seafood category and 41% of the US share of sales of canned albacore tuna. They also hold “approximately 13% of the U.S. share of sales of canned “light meat” tuna, approximately 12% of the share of sales in tuna pouches, approximately 71% of the U.S. share of sales in ready-to-eat tuna meals, approximately 40% of the U.S. share of sales in sardines, and approximately 16% of the U.S. share of sales in salmon.” It helps that they’re sold at virtually every major bigbox retailer, wholesale club, and grocery store. In 2018, the company had net sales of approximately $933m and adjusted EBITDA of $112.3m and the debtors’ U.S.-based operations contributed $722.2m of net sales and adjusted EBITDA of $86.3m. This is big business.

Putting aside its recent brush with the law, it also faces big market challenges. Questions persist about the safety and viability of shelf-stable seafood, particularly tuna. Indeed, there are headwinds. One sign of this may be that the Company’s overall Adjusted EBITDA has declined by approximately 20% from 2015 to 2018. We assume that, here, the EBITDA is adjusted to ex-out litigation costs.

And then there is this bonkers Wall Street Journal piece noting that consumption of canned tuna has fallen steadily compared with fresh and frozen fish. “Per capita consumption of canned tuna has dropped 42% in the three decades through 2016, according to the latest data available from the U.S. Department of Agriculture. And the downturn has continued, with sales of the fish slumping 4% by volume from 2013 to October 2018, data from market-research firm IRI show.”

This bit is off the charts: “In a country focused on convenience, canned tuna isn’t cutting it with consumers. Many can’t be bothered to open and drain the cans, or fetch utensils and dishes to eat the tuna. “A lot of millennials don’t even own can openers,” said Andy Mecs, vice president of marketing and innovation for Pittsburgh-based StarKist, a subsidiary of South Korea’s Dongwon Group.” To address this trend, the debtors have made forays into the fresh fish category. Otherwise, these challenges will play out another day. With a different owner.

A few more bankruptcy-specific points:

1. The debtors prevailed over a fee objection by the United States Trustee relating to interim access to $40mm of a proposed $80mm DIP term loan facility and immediate access to a $200mm DIP ABL. It seems that Weil Gotshal & Manges LLP, as counsel to DIP term lender Brookfield Principal Credit LLC had to give the UST a lesson in reverse-Seinfeld Logic. With lending, it is about “taking the reservation” rather than holding or using the reservation: once a debtor obtains a commitment to funds, those funds are committed and technically cannot be allocated elsewhere. The lenders argue, therefore, that fees are warranted upfront.

2. Critical vendor motions can sometimes be controversial because, naturally, everyone wants to jump the line with critical vendor designation. To get it, however, pursuant to standards set many many years ago, there’s a multi-prong test that must be satisfied. In a nutshell, the critical vendor payments are needed to prevent disruption of a debtors’ business, among other things. Here, the buyer, FCF Co Ltd., seeks critical vendor status to the tune of $51mm (out of a $77mm critical vendor ask). Some other creditors were like “Mmmmmm???” and insisted that the Judge postpone any interim payments until an official committee of unsecured creditors could be appointed. Despite protests from FCF’s counsel, Weil for the DIP lender, and the debtors, Judge Silverstein declined to rule on the motion at the hearing, highlighting the unusual nature of a prospective buyer seeking status. If they want the business, will they really walk away?

Despite these first day fireworks, this should be a relatively smooth one.

One last question it poses is this: will this be just the first of a clump of tuna-related bankruptcies? 🤔

• Jurisdiction: D. of Delaware (Judge Silverstein)

• Capital Structure: see below.

• Professionals:

  • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Alan Kornberg, Kelly Cornish, Claudia Tobler, Christopher Hopkins, Rich Ramirez, Aidan Synnot) & (local) Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Ryan Bartley, Ashley Jacobs, Elizabeth Justison, Jared Kochenash)

  • Board of Directors: Scott Vogel, Steve Panagos

  • Financial Advisor: AlixPartners LLP

  • Investment Banker: Houlihan Lokey Inc.

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

• Other Parties in Interest:

  • ABL Agent & DIP Agent: Wells Fargo Capital Finance LLC

    • Legal: Paul Hastings LLP (Andrew Tenzer, Michael Comerford, Peter Burke) & Womble Bond Dickinson US LLP (Matthew Ward, Morgan Patterson)

  • Term Loan Agent & Term Loan DIP Agent: Brookfield Principal Credit LLC

    • Legal: Weil Gotshal & Manges LLP (Matthew Barr, David Griffiths, Debora Hoehne, Yehudah Buchweitz) & Richards Layton & Finger PA (Paul Heath, Zachary Shapiro, Brendan Schlauch)

⛽️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 - Sienna Pharmaceuticals Inc. ($SNNA)💊

Sienna Pharmaceuticals Inc.

September 16, 2019

If you’re tired of distressed retail and oil & gas companies, the good news is that the biopharma space has been mixing things up. Sienna Pharmaceuticals ($SNNA), a California-based clinical-stage biopharma and medical device company filed for bankruptcy in the District of Delaware. It develops multiple products aimed at chronic inflammatory skin diseases (e.g., psoriasis) and aesthetic conditions (e.g., unwanted hair and acne). The company is at the stage that those in the tech world would designate “pre-revenue.”

And that is precisely the problem. Much like distressed oil and gas companies, distressed biopharma companies are capital intensive (a $184.1mm accumulated deficit) and tend to succumb to the weight of their long-duration development cycle. In this case, the company “has relied on equity issuances, debt offerings, and term loans” to fund development and operations. It has also leveraged its equity as a currency, engaging in strategic acquisitions that enhance its product portfolio; it, for instance, entered into a share purchase agreement in late ‘16 with Creabilis plc. This added one more product that, at this juncture, the company cannot advance due to liquidity issues. Womp womp.

The company has, over the course of time, been indebted to its pre-petition secured lender, Silicon Valley Bank, in the range of $10-30mm. On September 15th, for instance, the company owed SVB over $30mm. In exchange, however, for the use consensual use of cash collateral, the company made a $21.3mm payment to SVB on September 16th, the day before the bankruptcy filing. That’s what you call leverage, folks. SVB’s loan is secured by a laundry list of debtor assets though it is technically not secured by the company’s extensive trove of intellectual property (~250 patents). That IP, however, is subject to what’s called a “negative pledge,” a provision that prevents the company from pledging the IP on account of the fact that SVB’s security interest includes “rights to payment and proceeds from the sale, licensing, or disposition of all or any part of the Intellectual Property.” It’s a wee bit hard to enforce a security interest in IP if someone else has a right to the payments streams emanating therefrom (not that this company has any revenue streams, but you get the idea).

Why bankruptcy? For starters, the company is subject to a “minimum cash covenant” under its SVB facility and liquidity dipped below the minimum. Due to the company’s declining stock price, the company lost access to the equity market. Finally, the company has lingering financial commitments from the Creabilis deal. For all of these reasons, the company simply doesn’t have the liquidity needed to fund the next stages of product development which, in turn, would get the company closer to revenue generation. Chicken. Meet egg.

As is the overwhelming norm these days, the company now seeks to use the bankruptcy process to pursue a sale. As of the filing, no stalking horse purchaser is teed up but the company is “confident” that its banker, Cowen & Co. ($COWN), will locate one that will enable the company to emerge from bankruptcy as a going concern. No pressure, Cowen.

• Jurisdiction: D. of Delaware (Judge TBD)

• Capital Structure: $10mm secured debt (SVB)

• Professionals:

  • Legal: Latham & Watkins LLP (Peter Gilhuly, Ted Dillman, Shawn Hansen) & Young Conaway Stargatt & Taylor LLP (Michael Nestor, Kara Hammond Coyle)

  • Financial Advisor: Force 10 Partners (Jeremy Rosenthal)

  • Investment Banker: Cowen and Company LLC (Lorie Beers)

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

• Other Parties in Interest:

  • Prepetition Lender: Silicon Valley Bank

    • Legal: Sheppard Mullin Richter & Hampton LLP (Ori Katz, Michael Driscoll) and Benesch Friedlander Coplan & Aronoff LLP (Jennifer Hoover, Kevin Capuzzi)

  • Major shareholders: ARCH Venture Partners VIII LLC, Partner Fund Management LP, FMR LLC (aka Fidelity)

  • Official Committee of Unsecured Creditors (Therapeutics Inc., Johnson Matthey Inc., MedPharm Ltd.)

    • Legal: Foley & Lardner LLP (Richard Bernard, Alissa Nann) & Potter Anderson & Corroon LLP (Christopher Samis, L. Katherine Good, D. Ryan Slaugh)

    • Financial Advisor: Emerald Capital Advisors (John Madden)

Update: 10/25/19 #140

New Chapter 11 Filing - GCX Limited

GCX Limited

September 15, 2019

GCX Limited and 15 affiliated debtors filed a prepackaged bankruptcy this week in pursuit of a dual-track restructuring that will, either through a debt-for-equity swap or a sale, extinguish over $150mm of debt. In the swap scenario, the company will hand the keys over to senior secured noteholders; in the sale scenario, the noteholders will gladly take their cash payout and get the f*ck out of dodge. Either way, the company will be under new ownership with a significantly deleveraged capital structure. Certain consenting senior secured noteholders will provide $54.5mm in DIP financing.

The debtors are a global data communications provider; they operate one of the world’s largest fiber networks (PETITION Note: we’re old enough to remember when fiber was the future!). They provide undersea and terrestrial cables and landing stations and provide managed network services all across the globe. In English, this means they help power, among other things, major telecomms companies and streaming media.

Unfortunately, the debtors have declining revenues. Among other reasons for that sad state of affairs, the debtors cite (i) newly developed and planned cable systems along the debtors’ existing and planned network routes, (ii) financial distress at the parent level, (iii) ongoing disputes with banks that have applied setoff rights against the debtors’ cash, and (iv) high fixed costs and less certain recurring revenue due to clients newfound refusal to enter into long-term arrangements. For all of these reasons, the debtors have been unable to refinance their senior secured notes and the notes matured on July 31. Obviously — considering this thing is now in bankruptcy court — the debtors’ issues prevented them from paying off the debt as it became due. Instead, the debtors have operated under a forbearance agreement since July, during which time it formulated its go-forward plan and solicited the support, via a restructuring support agreement, of a meaningful amount of senior unsecured noteholders. The forbearance expired on the filing date.

Now the bankers, Lazard & Co., will have their work cut out for them. The debtors hope to run an expedited sales process (though, in the bankers’ favor is the fact that the pool of interested parties for assets like these is likely limited) and conduct an auction within 42 days of the filing. Absent that, the debtors will proceed with the debt-for-equity swap with an eye towards confirmation within 75 days and going effective before the end of the year (subject to requisite regulatory approvals, i.e., FCC and CFIUS).

• Jurisdiction: D. of Delaware (Judge Sontchi)

• Capital Structure: $365.8mm 7% ‘19 senior secured notes (The Bank of New York Mellon)

• Professionals:

  • Legal: Paul Hastings LLP (Chris Dickerson, Brendan Gage, Robert Dixon Jr., Todd Schwartz) & Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Jaime Luton Chapman)

  • Board of Directors: Rodney Riley, Donald Mallon, Alan Carr

  • Financial Advisor/CRO: FTI Consulting Inc. (Michael Katzenstein, Don Harer)

  • Investment Banker: Lazard & Co. (Ken Ziman)

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

• Other Parties in Interest:

  • Wilmington Trust NA

    • Legal: Duane Morris LLP (Christopher Winter, Jarret Hitchings)

  • Ad Hoc Group of Senior Secured Noteholders

    • Legal: White & Case LLP (Brian Pfeiffer, William Guerrieri, Varoon Sachdev) & Farnan LLP (Brian Farnan, Michael Farnan)

💩New Chapter 11 Filing - uBiome Inc.💩

uBiome Inc.

September 4, 2019

Back in our July 4th weekend edition, we wrote the following:

#BustedTech. One year you’re on the Forbes’ 2018 Next Billion-Dollar Startups list and the next year you’re getting raided by the FBI. This is the story of uBiome, a SF-based microbiome startup. Per Forbes:

The new interim CEO of troubled microbiome startup uBiome, Curtis Solsvig, is a longtime turnaround and restructuring expert at financial advisory firm Goldin Associates and the former chief restructuring officer of failed drone startup Lily Robotics.

One man’s billion-dollar valuation is another man’s clean-up job. 

And, now, another man’s bankruptcy.

Annnd another man’s sacrifice:

The Debtor filed this Chapter 11 Case to provide an innovative business with a fresh start under new management, and to preserve approximately 100 jobs through a court-supervised sale process that is intended to maximize the value of the Debtor’s assets for the benefit of all stakeholders.

…certain business practices formulated and implemented by the Debtor’s original founders have resulted in cessation of certain aspects of the Debtor’s business, investigations by certain federal and state investigatory bodies (the “Investigations”), loss of revenue and significant potential contingent liabilities.

Godspeed founders. You just got napalmed. AGAIN.

And as they should. The debtor has been in triage for some time now.

The company empowers consumers to access analysis of their DNA/microbiomes via the use of at-home kits. Said another way, people poop in an $89.99 “explorer kit” and the company analyzes the sample through (a) a proprietary gene sequencing process and (b) a cloud-based database of microbiomes to determine what’s what in the customer’s GI system — a much less invasive discovery methodology than the gut-wrenching (pun intended) colonoscopy. The consumer receives results that provide suggestions for diet, weight control, gut inflammation, sleep disorders and non-dietary supplements. Frankly, this all sounds rather bada$$.

The company also had a clinical business. Doctors could prescribe the tests and bill the customers’ insurance. Similarly, the company launched a clinical product geared towards the analysis of vaginal swabs (i.e., STDs, HPV, gyno disorders). Together these clinical products were called “SmartX.”

Suffice it to say, this idea was big. The company’s founders leveraged the open-source results from the Human Microbiome Project (launched by the National Institutes of Health) and built something that could really make a lot of people’s lives easier. The venture capitalists saw the opportunity, and the tech media celebrated the company’s rapid capital raises and increasing valuation: $1.5mm seed in ‘14, $4.5mm in August ‘14 (led by a16z), $15.5mm Series B in October ‘16, and $83mm Series C in September ‘18. (PETITION Note: the company now says it raised $17mm in ‘16 and $59mm in ‘18, exclusive of $36.4mm of mostly-now-converted convertible notes, which means that the media appears to have been fed, or reported, wrong numbers).* Valuation? Approx $600mm.

Armed with gobs of money, the company established some valuable IP (including over 45 patents and your poop data, no joke) and commercial assets (its certified labs). On the other side of the ledger, there is $5.83mm of outstanding secured debt and $3.5mm of unsecured debt, ex-contingent liabilities including…wait for it…”[p]otential fines for civil and criminal penalties resulting from the Investigation….” Ruh roh.

The Founders implemented certain business strategies with respect to the SmartX products that were highly problematic, contained significant operational (but not scientific) flaws and, in some instances, were of questionable legality. These issues included improper insurance provider billing practices, improper use of a telemedicine physician network (known as the External Clinical Care Network), overly aggressive and potentially misleading marketing tactics, manipulation of customer upgrade testing, and improper use of customer inducements. Moreover, certain information presented to potential investors during the three rounds of capital raise my have been incorrect and/or misleading. Although uBiome believes the science and technology behind uBiome’s business model in this developing area is sound, these issues – among others – have resulted in significant legal exposure for the Debtor.

Score one for VC due diligence! The USA for the ND of California, the FBI, the DOJ and the SEC are all up in the company poop now. This investigation, much like the opioid crisis, also calls into question the ethical practices of doctors. Because we really ought not trust anybody these days.

Anyway, the company has since taken measures to right the ship. The board suspended and then sh*tcanned the founders and recruited new independents. They’ve verified that the company suffered from bad business practices rather than bad science or lab practices (Elizabeth Holmes, holla at us!!). And they’ve hired bankers to market the company’s assets (no stalking horse bidder at filing, though). The company received a commitment from early investor 8VC for a $13.83mm DIP of which $8mm in new money; it will take slightly more than 60 days to see if a buyer emerges. One selling point according to the company: it plans for its Explorer Kits to be in CVS Health Corp. ($CVS)! That’d be great if CVS planned for that too. Womp womp.

Anyway, the way bankruptcy is going these days chapter 11 probably ought to be renamed chapter 363.

*There are many reasons why d-bag startup founders hype their own raises. First, it promotes an aura of success which can help acquire new customers. Second, they love the adulation (see Elizabeth Holmes). Third, it helps with recruiting. And, fourth, the VCs must like it and use it for subsequent fundraising (given that they never correct the record).

• Jurisdiction: D. of Delaware (Judge Silverstein)

• Capital Structure: $5.83mm credit facility (Silicon Valley Bank)

• Professionals:

  • Legal: Young Conaway Stargatt & Taylor LLP (Michael Nestor, Joseph Barry, Andrew Magaziner, Joseph Mulvihill, Jordan Sazant)

  • Board of Directors: Kimberly Scotti, L. Spencer Wells, D.J. (Jan) Baker

  • Financial Advisor/CRO: Goldin Associates LLC (Curtis

  • Investment Banker: GLC Advisors & Co LLC

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

• Other Parties in Interest:

  • DIP Agent: Silicon Valley Bank

    • Legal: Morrison & Foerster LLP (Alexander Rheaume, Todd Goren, Benjamin Butterfield) & Ashby & Geddes PA (Gregory Taylor, Katharina Earle)

  • DIP Participants: 8VC Fund I LP, 8VC Entrepreneurs Fund I LP

    • Legal: Gibson Dunn & Crutcher LLP (Matthew Williams, Eric Wise, Jason Zachary Goldstein) & Cole Schotz PC (Norman Pernick, Patrick Reilley)

💰New Chapter 11 Bankruptcy Filing - RAIT Funding LLC (f/k/a Taberna Funding LLC)💰

RAIT Funding LLC

August 30, 2019

Philadelphia-based RAIT Financial Trust ($RASF) and six debtor affiliates filed for bankruptcy just before the long holiday weekend on a petition and a petition only (might as well let the professionals enjoy the weekend…the stay is in effect!). The company, an internally-managed REIT focused on managing a portfolio of $1.5b worth of CRE assets, loans and properties will be sold to Fortress Investment Group LLC in bankruptcy pursuant to section 363 of the bankruptcy code, subject to any higher or better offers. Fortress has agreed to pay $174.4mm (subject to adjustments and excluding the assumption of certain liabilities).

The debtors are in the business of providing debt financing to owners of multi-family apartment buildings, office buildings, light-industrial properties and neighborhood retail centers in the US. Except, like, they’re kinda not. In early February ‘18, the debtors ceased underwriting new loans and sold a portion of its real estate and loan portfolio. Why? To bolster liquidity. Why? Per the company:

As a result of the 2008-2009 financial crisis, ongoing market conditions, and other factors, RAIT incurred approximately $1.468 billion in losses between 2008 and 2018 through mortgage write-offs, asset write-downs, and losses on the sale of assets.

In case you can’t tell, that’s pretty effing bad. Consequently, the debtors have been in a state of perpetual restructuring AND marketing going as far back as Q3 ‘17. Regarding the former, the debtors, in addition to suspending its origination business and selling off its property portfolio, actively repurchased or repaid debt, sold loans, sold its property management business, down-sized management and laid off employees, terminated dividends (reminder: this is a REIT, so this is obviously NO BUENO), and engaged restructuring professionals. With respect to the latter, the debtors’ ‘17-’18 sale process failed, only to be reinitiated in the second half of 2018. Fortress Credit Advisors submitted a winning bid in January 2019.

Wait. You’re not crazy. It IS September. So, why did it take so long to file the bankruptcy to consummate the sale? It took a month and a half to a term sheet done and then another “six months of extensive due diligence.” We can only imagine the fun those analysts had digging into one loan after another.

In the end, this seems like a good result for stakeholders. Fortress adds to its extensive and growing portfolio and the holders of the 7.125% Senior Notes, the holders of the 7.625% Senior Notes, and all administrative, priority and general unsecured claims, will, thanks also in part to an RSA with the junior subordinated notes, receive payment in full, in cash of their allowed claims.

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: $66.5mm 7.125% senior unsecured notes (Wells Fargo Bank NA), $56.3mm 7.625% senior unsecured notes (Wells Fargo Bank NA), $25.2mm junior subordinated note guaranty (The Bank of New York Mellon), $18.6mm ‘35 subordinated Taberna junior note (Wells Fargo Bank NA)

• Professionals:

  • Legal: Drinker Biddle & Reath LLP (Patrick Jackson, Michael Pompeo, Brian Morgan)

  • Financial Advisor: M-III Partners LP (Brian Griffith)

  • Investment Banker: UBS Securities LLC

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

• Other Parties in Interest:

  • Stalking Horse Purchaser: Fortress Credit Advisors LLC/Fortress Investment Group LLC (aka CF RFP Holdings LLC)

    • Legal: Stroock & Stroock & Lavan LLP (Elizabeth Taveras, Daniel Ginsberg) & Young Conaway Stargatt & Taylor LLP (Matthew Lunn, Robert Poppitti Jr.)

Updated #1, 9/1/19 1:49 CT

🙈New Chapter 11 Bankruptcy Filing - Avenue Stores LLC🙈

Avenue Stores LLC

August 16, 2019

Retail, retail, retail.

Brutal. Absolutely B.R.U.T.A.L.

Avenue Stores LLC, a speciality women’s plus-size retailer with approximately 2,000 employees across its NJ-based HQ* and 255 leased stores,** is the latest retailer to find its way into bankruptcy court. On Friday, August 16, Avenue Stores LLC filed for chapter 11 bankruptcy in the District of Delaware. Like Dressbarn, another plus-size apparel retailer that’s in the midst of going the way of the dodo, any future iteration of the Avenue “brand” will likely exist only on the interwebs: the company intends to shutter its brick-and-mortar footprint.

What is Avenue? In addition to a select assortment of national brands, Avenue is a seller of (i) mostly “Avenue” private label apparel, (ii) intimates/swimwear and other wares under the “Loralette” brand and (iii) wide-width shoes under the “Cloudwalkers” brand. The company conducts e-commerce via “Avenue.com” and “Loralette.com.” All of this “IP” is the crux of the bankruptcy. More on this below. 

But, first, a digression: when we featured Versa Capital Management LP’s Gregory Segall in a Notice of Appearance segment back in April, we paid short shrift to the challenges of retail. We hadn’t had an investor make an NOA before and so we focused more broadly on the middle market and investing rather than Versa’s foray into retail and its ownership of Avenue Stores LLC. Nevertheless, with the benefit of 20/20 hindsight, we can now see some foreshadowing baked into Mr. Siegel’s answers — in particular, his focus on Avenue’s e-commerce business and the strategic downsizing of the brick-and-mortar footprint. Like many failed retail enterprises before it, the future — both near and long-term — of Avenue Stores is marked by these categorical distinctions. Store sales are approximately 64% of sales with e-commerce at approximately 36% (notably, he cited 33% at the time of the NOA). 

A brand founded in 1987, Avenue has had an up-and-down history. It was spun off out of Limited Brands Inc. and renamed in 1989; it IPO’d in 1992; it was then taken private in 2007. Shortly thereafter, it struggled and filed for bankruptcy in early 2012 and sold as a going-concern to an acquisition entity, Avenue Stores LLC (under a prior name), for “about $32 million.” The sale closed after all of two months in bankruptcy. The holding company that owns 100% of the membership interests in Avenue Stores LLC, the operating company, is 99%-owned by Versa Capital Management. 

Performance for the business has been bad, though the net loss isn’t off the charts like we’ve seen with other recent debtors in chapter 11 cases (or IPO candidates filing S-1s, for that matter). Indeed, the company had negative EBITDA of $886k for the first five months of 2019 on $75.3mm in sales. Nevertheless, the loss was enough for purposes of the debtors’ capital structure. The debtors are party to an asset-backed loan (“ABL”) memorialized by a credit agreement with PNC Bank NA, a lender that, lately, hasn’t been known for suffering fools. The loan is for $45mm with a $6mm first-in-last-out tranche and has a first lien on most of the debtors’ collateral. 

The thing about ABLs is that availability thereunder is subject to what’s called a “borrowing base.” A borrowing base determines how much availability there is out of the overall credit facility. Said another way, the debtors may not always have access to the full facility and therefore can’t just borrow $45mm willy-nilly; they have to comply with certain periodic tests. For instance, the value of the debtors’ inventory and receivables, among other things, must be at a certain level for availability to remain. If the value doesn’t hold up, the banks can close the spigot. If you’re a business with poor sales, slim margins, diminishing asset quality (i.e., apparel inventory), and high cash burn, you’re generally not in very good shape when it comes to these tests. With specs like those, your liquidity is probably already tight. A tightened borrowing base will merely exacerbate the problem.

Lo and behold, PNC declared the debtors in default on July 22; in turn, they imposed default interest on the debtors and initiated daily cash sweeps of the debtors’ bank accounts. Like we said. Suffer. No. Fools.*** The debtors owe $15.2mm on the facility. 

The debtors also have outstanding a subordinated secured note to the tune of $37.8mm. The note pays interest at 15% but is paid in kind.**** The lender on the note is an affiliate of Versa, and per the terms of the note, Versa had continued, at least through April 2019, to fund the business (and letters of credit for the debtors’ benefit) with millions of dollars of capital. 

If this sounds like a hot mess, well, yeah, sure, kudos. You’re clearly paying attention. It’s a dog eat dog world out there. Per the company:

The Debtors operate in an extremely competitive retail environment, facing competition from other specialty-retail stores, including Lane Bryant, Ashley Stewart, and Torrid, and mass-market retailers such as Walmart and Target, many of which are located in close proximity to Avenue stores. In addition to long-standing, traditional competitors within the plussize segment, there has been a recent influx of many other iconic fashion retail brands expanding their range of size offerings into the plus-size range, as well as a proliferation of new entrants targeting this same plus-size fashion market. Due to increased competition, the Debtors have faced significant pressure to maintain market share, which has directly and negatively affected their profitability.

Not that this is anything new. We all know this by now: competition is fierce (Stitch Fix Inc. ($SFIX), Neiman Marcus, Kohl’s Corporation ($KSS), Macy’s Inc. ($M) and others are now going after it hard), B&M sucks because leases carry higher expenses, store traffic is down, blah blah f*cking blah. The company continues:

…changes in consumer spending habits have necessitated many retailers to increase promotional activities and discounting, leading to thinner profit margins. Onerous brick-and-mortar lease terms and increased operating costs, during a period of downturn in the retail sector and deep discounting, have intensified retail losses.

Interestingly, in the face of surging U.S. retail sales in July,***** the company also notes that “a review of historic customer data indicates that Avenue customers are shopping less frequently than they once were….” They blame this on a “[s]hifts in consumer preferences” and the debtors’ emphasis on “fashion basics.” DING DING DING. No wonder customers are shopping there less frequently. “Basic” is the antithesis of Instagram-based retail these days. Basics can be purchased at any big box retailer; basics are now available via Amazon’s private label. Basics don’t create an influencer and, on the flip side, no influencer will market “basic.” Maybe Avenue could get away with “fashion basics” if it had brand-equity like SUPREME and was perceived as a luxury brand. But far from it. 

Speaking of basic, that pretty much describes the go-forward game plan. We’ll lay it out for you:

• Engage an independent director to explore strategic alternatives;

• Engage professionals (Young Conaway is legal and Berkeley Research Group as restructuring advisor and CRO)******;

• Consider whether there’s going concern value, conclude, like, basically, “nope,” and then hire a consultant******* to solicit bids from liquidators for the B&M piece and an investment banker (Configure Partners) for the IP and e-commerce business; 

• Issue WARN notices, RIF employees, and start shuttering stores (with intent to file a rejection motion on day 1 of the bankruptcy); 

• Select a stalking horse bidder for the B&M assets from the pool of interested liquidators (in this case, Gordon Brothers and Hilco Merchant Resources LLC); 

• Continue to search for a stalking horse bidder for the IP and e-commerce (at filing, there wasn’t one yet); and

• Secure DIP financing (here, $12mm from PNC) to fund the cases while the B&M liquidation transpires and the banker searches under every rock under an extremely compressed timeframe (by 9/24/19) for that e-commerce/IP buyer.******** 

So we’ll know in the next 60 days what the future is for Avenue.

If there is one.

---

*Let’s pour one out for NJ. The state’s larger retailers are having a rough go of things lately, see, e.g., Toys R Us. The 2,000 figure is updated to reflect a recent round of layoffs. 

**The debtors are located primarily in shopping malls and shopping centers, doing business in 35 states. They have a distribution center for brick-and-mortar merchandise in Troy, Ohio, and a third-party warehousing facility located in Dallas, Texas, which handles logistics for e-commerce. The Troy center is the subject of a wholly unoriginal PE-backed sale/leaseback transaction. The debtors sold the center for $11.3mm and subsequently entered into a 15-year lease with the buyer, RD Dayton LLC. We mention this because sale/leaseback transactions have been getting hyper-focus these days as a tactic-of-choice by private equity overlords to extract returns out of portfolio companies’ assets with any actual value: real property. If you’re wondering why there is very little asset value left for unsecured creditors in retail cases, sale/leaseback transactions are often a culprit. Here, it’s especially egregious because Avenue doesn’t own ANY of its stores: the entire footprint is leased.

The debtors recently closed the Ohio center and transitioned its inventory to Texas and the company already filed a motion seeking to reject this lease (Docket 15).

***This is not extraordinary. Banks do this all of the time when debtors default. A liquidity starved company is almost always toast (read: bankrupt) once this happens. 

****PIK interest means that the interest accrues in the form of additional notes and is not subject to scheduled cash payments. 

*****Per Reuters:

Retail sales increased 0.7% last month after gaining 0.3% in June, the government said. Economists polled by Reuters had forecast retail sales would rise 0.3% in July. Compared to July last year, retail sales increased 3.4%.

******Something tells us that the likes of FTI, A&M and AlixPartners are happy to cede the liquidating retailer market to Berkeley Research Group. 

*******This is one of the more ingenious things to come out of the restructuring market in recent years. These liquidator agreements are so unintelligible that they might as well be written in Dothraki. Hence the need for an intermediary to break out the secret decoder ring and figure out what is actually being contracted for. We don’t know: if something is so woefully incoherent that it requires a separate consultant just to interpret it, something tells us that obfuscation is a feature not a bug.

********If none is found, the liquidator will also get these assets as part of the agency agreement. 

• Jurisdiction: D. of Delaware (Judge Silverstein)

• Capital Structure:

• Professionals:

  • Legal: Young Conaway Stargatt & Taylor LLP (Robert Brady, Andrew Magaziner, Ashley Jacobs, Allison Mielke, Betsy Feldman)

  • Financial Advisor/CRO: Berkeley Research Group (Robert Duffy)

  • Investment Banker: Configure Partners

  • Liquidators: Gordon Brothers and Hilco Merchant Resources LLC

  • Liquidation Consultant: Malfitano Advisors LLC

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

• Other Parties in Interest:

  • Pre-petition & DIP Agent: PNC Bank NA

    • Legal: Blank Rome LLP (Regina Stango Kelbon)

  • Subordinated Lender: Versa Capital Management LP

    • Legal: Landis Rath & Cobb LLP (Adam Landis, Matthew McGuire)

⛽️New Chapter 11 Filing - HDR Holding Inc. (Schramm Inc.)⛽️

HDR Holding Inc. (Schramm Inc.)

June 24, 2019

It stands to reason that businesses centered upon servicing mining and oil and gas drilling rigs may be suffering a bit in the current — and by “current,” we mean the last five-or-so years — macroeconomic environment. HDR Holding Inc., a Pennsylvania-based company started in 1900(!), along with certain debtor affiliates, produces “a variety of mobile, top-head hydraulic rotary drilling rigs that are mounted on trucks, tracks and trailers.” The company makes money by (i) manufacturing and selling their various rig models to drillers, (ii) selling consumable drill parts that naturally deteriorate over time, and (iii) servicing their equipment. For reasons that are, by now, blatantly obvious to anyone following the distressed world, oil and gas drilling hasn’t exactly been an obscenely profitable endeavor these last few years (or, in the case of certain drilling regions, EVER, really).

And so demand for the debtors’ wares is down. Per the debtors:

Given its strong connections to the oil and gas industry, the Company has faced significant challenges pervasive in the industry over the past three to five years. Numerous oil and gas producers have significantly curtailed, if not entirely ceased, drilling new wells in response to declines in commodity prices that make such projects uneconomical. The result of this trend for the Company has been a reduced demand for both new rigs and for the related consumable drill parts as existing rig assemblies are idled, which has led to the Debtors failing to meet revenue projections and maintain compliance with the covenants under their prepetition credit facilities.

Ah, yes, the debt. The debtors have approximately $20mm in debt spread out across three different term loan facilities. In an attempt to better service this debt, the debtors have pivoted their sales efforts “to a steadier mining sector” (Bitcoin, maybe? We kid, we kid), now sell aftermarket equipment, and have “managed” their workforce and expenses to preserve cash with the hope that oil and gas might cover. Spoiler alert: it hasn’t. Nevertheless, the debtors purport to have increased performance over the last few years. Just not enough to service their capital structure.

Accordingly, over the last eight months, the debtors and their advisors have pursued a sale process with the hope of selling the business as a going concern. No third-party purchaser came forward pre-petition, unfortunately, and so the debtors seek to pursue a sale to their largest pre-petition equityholder…which also happens to be their largest pre-petition lender…AND which also happens to be their proposed DIP lender (GenNx360 Capital Parters LP). The committed DIP is $6mm at 12% and the proposed purchase price is $10.3mm plus a credit bid of the $6mm DIP amount. Pursuant to the terms of the DIP, the debtors seek to have a sale hearing on or about August 19 to have some cushion in advance of the August 28 sale order milestone under the proposed DIP.

We’ll, therefore, have at least one data point by the end of summer to show us how bullish folks are vis-a-vis a recovery in the oil and gas market.

• Jurisdiction: D. of Delaware (Judge Walrath)

• Capital Structure: $5.3mm Term Loan A (Hark Capital I LP), $6.5mm Term Loan B (GenNx360), $6mm Term Loan C (Citizens Bank NA)

• Professionals:

  • Legal: Young Conaway Stargatt & Taylor LLP (Sean Greecher, Pauline Morgan,

  • Investment Banker: FocalPoint Partners LLC (Michael Fixler)

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

• Other Parties in Interest:

  • Largest EquityHolder & Stalking Horse Purchaser: GenNx360 Capital Partners L.P.

  • DIP Lender ($6mm at 12%): Schramm II Inc. (an acquisition vehicle created by GenNx360)

    • Legal: Winston & Strawn LLP (Carey Schreiber) & (local) Robinson+Cole LLP (Jamie Edmonson)

  • Term Loan A Lender: Hark Capital I LP

    • Legal: Perkins Coie LLP (Jordan Kroop) & (local) The Rosner Law Group LLC (Frederick Rosner)

Updated 7/7 #65

New Chapter 11 Bankruptcy Filing - Triangle Petroleum Corporation

Triangle Petroleum Corporation

May 8, 2019

If it walks like a chapter 22 and quacks like a chapter 22…it…may…not…actually…be a chapter 22??

Triangle Petroleum Corporation (“TPC”) filed a prepackaged plan of reorganization with the District of Delaware to consummate a balance sheet restructuring. TPC is an independent energy holding company with a focus on the Williston Basin of North Dakota; its assets include a joint venture interest in Caliber Midstream Holdings LP, a midstream services company, leases of commercial and multi-unit residential buildings in North Dakota, and net operating losses. On the debt side of the balance sheet, the company had a $120mm 5.0% convertible promissory note issued to NGP Triangle Holdings, LLC (“NGP”).

So, what’s up with that convertible note? Wholly-owned direct or indirect subsidiaries of TPC — including Triangle USA Petroleum Corporation — filed for bankruptcy back in June 2016 to address their capital structure and, in the course of confirming a plan of reorganization, wiped out their stock. That stock, naturally, was an asset of TPC and, consequently, the New York Stock Exchange delisted TPC, constituting a “Fundamental Change,” under the note and triggering a requirement that TPC repurchase the convertible note for $154mm. TPC didn’t do so. Upon failing to do so, TPC triggered an event of default. Subsequently, J.P. Morgan Securities LLC (“JPMS”) purchased the note from NGP.

Thereafter, as part of discussions about a forbearance, JPMorgan Chase Bank NA provided the company with a term loan and the company and JPMS amended and restated the convertible note, granting JPMS a second lien in the process. JPMS, however, ultimately concluded that forbearing to nowhere wasn’t exactly a great strategy and so the chapter 11 filing will leave the term loan unimpaired, swap JPMS’ second lien secured note for 100% of TPC’s equity, ride through (what is a de minimis amount of) unsecured claims and wipe out equity, which had been trading over the counter. As of the petition date, the company had $2mm outstanding under the term loan and $167mm outstanding under the newly secured note.

Given that JPMS is the only voting party, this is a pretty easy plan to effectuate. Suffice it to say, JPMS voted yes to the prepackaged plan which means, going forward, it will own the interests in Caliber, Bakken Real Estate and, significantly, the valuable net operating losses.

• Jurisdiction: D. of Delaware (Judge Walrath)

• Capital Structure: see above.

• Professionals:

  • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Kelley Cornish, Alexander Woolverton) & (local) Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Andrew Magaziner, Shane Reil)

  • Board of Directors: Gus Halas, James Shein, Randal Matkaluk

  • Financial Advisor: Development Specialists Inc. (Mark Iammartino)

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

• Other Parties in Interest:

  • Prepetition Lender: JPMorgan Chase Bank NA & J.P. Morgan Securities LLC

    • Legal: Duane Morris LLP (Lawrence Kotlar, Joel Walker)
      

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 Filing - Southcross Energy Partners LP⛽️

Southcross Energy Partners LP

April 1, 2019

We’ve been noting — in “⛽️Is Oil & Gas Distress Back?⛽️“ (March 6) and “Oil and Gas Continues to Crack (Long Houston-Based Hotels)“ (March 24) that oil and gas was about to rear its ugly head right back into bankruptcy court. Almost on cue, Vanguard Natural Resources Inc. filed for bankruptcy in Texas on the last day of Q1 and, here, Southcross Energy Partners LP kicked off Q2.

Dallas-based Southcross Energy Partners LP is a publicly-traded company ($SXEE) that provides midstream services to nat gas producers/customers, including nat gas gathering, processing, treatment and compression and access to natural gas liquid (“NGL”) fractionation and transportation services; it also purchases and sells nat gas and NGL; its primary assets and operations are located in the Eagle Ford shale region of South Texas, though it also operates in Mississippi (sourcing power plants via its pipelines) and Alabama. It and its debtor affiliates generated $154.8mm in revenues in the three months ended 09/30/18, an 11% YOY decrease.

Why are the debtors in bankruptcy? Because natural gas prices collapsed in 2015 and have yet to really meaningfully recover — though they are up from the $1.49 low of March 4, 2016. As we write this, nat gas prices at $2.70. These prices, combined with too much leverage (particularly in comparison to competitors that flushed their debt through bankruptcy) and facility shutdowns, created strong headwinds the company simply couldn’t surmount. It now seeks to use the bankruptcy process to gain access to much needed capital and sell to a buyer to maximize value. The company does not appear to have a stalking horse bidder lined up.

The debtors have a commitment for $137.5mm of new-money post-petition financing to fund its cases. Use of proceeds? With the agreement of its secured parties, the debtors seek to pay all trade creditors in the ordinary course of business. If approved by the court, this would mean that the debtors will likely avoid having to contend with an official committee of unsecured creditors and that only the secured creditors and holders of unsecured sponsor notes would have lingering pre-petition claims — a strong power move by the debtors.

• Jurisdiction: D. of Delaware (Judge Walrath)

• Capital Structure: $81.1mm funded ‘19 RCF (Wells Fargo Bank NA), $430.875mm ‘21 TL (Wilmington Trust NA), $17.4mm unsecured sponsor notes (Wells Fargo NA)

• Professionals:

  • Legal: Davis Polk & Wardwell LLP (Marshall Heubner, Darren Klein, Steven Szanzer, Benjamin Schak) & (local) Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Andrew Remming, Joseph Barsalona II, Eric Moats)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Evercore Group LLC

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

• Other Parties in Interest:

  • Prepetition RCF & Unsecured Agent: Wells Fargo Bank NA

    • Legal: Vinson & Elkins LLP (William Wallander, Brad Foxman, Matt Pyeatt) & (local) Womble Bond Dickinson US LLP (Ericka Johnson)

  • Prepetition TL & DIP Agent ($255mm): Wilmington Trust NA

    • Legal: Arnold & Porter Kaye Scholer LLP (Seth Kleinman, Alan Glantz)

  • Post-Petition Lenders and Ad Hoc Group

    • Legal: Willkie Farr & Gallagher LLP (Joseph Minias, Paul Shalhoub, Leonard Klingbaum, Debra McElligott) & (local) Young Conaway Stargatt & Taylor LLP (Edmon Morton, Matthew Lunn)

  • Southcross Holdings LP

    • Legal: Debevoise & Plimpton LLP (Natasha Labovitz)

  • Stalking Horse Bidder:
    

Updated 9:39 CT

New Chapter 11 Bankruptcy Filing - F+W Media Inc.

F+W Media Inc.

March 10, 2019

WAAAAAAY back in September 2018, we highlighted in our Members’-only piece, “Online Education & ‘Community’ (Long Helen Mirren),” that esteemed author and professor Clayton Christensen was bullish about the growth of online education and bearish about colleges and universities in the US. We also wrote that Masterclass, a SF-based online education platform that gives students “access” to lessons from the likes of Helen Mirren(acting), Malcolm Gladwell (writing) and Ken Burns (documentary film making) had just raised $80mm in Series D financing, bringing its total fundraising to $160mm. Online education is growing, we noted, comporting nicely with Christensen’s thesis.

But we didn’t stop there. We counter-punched by noting the following:

Yet, not all online educational tools are killing it. Take F+W Media Inc., for instance. F+W is a New York-based private equity owned content and e-commerce company; it publishes magazines, books, digital products like e-books and e-magazines, produces online video, offers online education, and operates a variety of e-commerce channels that support the various subject matters it specializes in, e.g., arts & crafts, antiques & collectibles, and writing. Writer’s Digest is perhaps its best known product. Aspiring writers can go there for online and other resources to learn how to write.

For the last several years F+W has endeavored to shift from its legacy print business to a more digital operation; it is also beginning to show cracks. Back in January, the company’s CEO, COO and CTO left the company. A media and publishing team from FTI Consulting Inc. ($FTI) is (or at least was) embedded with new management. The company has been selling non-core assets (most recently World Tea Media). Its $125mm 6.5% first lien term loan due June 2019 was recently bid at 63 cents on the dollar (with a yield-to-worst of 74.8% — yields are inversely proportional to price), demonstrating, to put it simply, a market view that the company may not be able to pay the loan (or refinance the loan at or below the current economics) when it comes due.

Unlike MasterClass and Udacity and others, F+W didn’t start as an all-digital enterprise. The shift from a legacy print media business to a digital business is a time-consuming and costly one. Old management got that process started; new management will need to see it through, managing the company’s debt in the process. If the capital markets become less favorable and/or the business doesn’t show that the turnaround can result in meaningful revenue, the company could be F(+W)’d. (emphasis added)

Nailed it.

On March 10, 2019, F+W Media Inc., a multi-media company owning and operating print and digital media platforms, filed for chapter 11 bankruptcy in the District of Delaware along with several affiliated entities. We previously highlighted Writer’s Digest, but the company’s most successful revenue streams are its “Crafts Community” ($32.5mm of revenue in 2018) and “Artist’s Network” ($.8.7mm of revenue in 2018); it also has a book publishing business that generated $22mm in 2018. In terms of “master classes,” the bankruptcy papers provide an intimate look into just how truly difficult it is to transform a legacy print business into a digital multi-media business.

The numbers are brutal. The company notes that:

“In the years since 2015 alone, the Company’s subscribers have decreased from approximately 33.4 million to 21.5 million and the Company’s advertising revenue has decreased from $20.7 million to $13.7 million.”

This, ladies and gentlemen, reflects in concrete numbers, what many in media these days have been highlighting about the ad-based media model. The company continues:

Over the past decade, the market for subscription print periodicals of all kinds, including those published by the Company, has been in decline as an increasing amount of content has become available electronically at little or no cost to readers. In an attempt to combat this decline, the Company began looking for new sources of revenue growth and market space for its enthusiast brands. On or around 2008, the Company decided to shift its focus to e-commerce upon the belief that its enthusiast customers would purchase items from the Company related to their passions besides periodicals, such as craft and writing supplies. With its large library of niche information for its hobbyist customers, the Company believed it was well-positioned to make this transition.

What’s interesting is that, rather than monetize their “Communities” directly, the company sought to pursue an expensive merchandising strategy that required a significant amount of upfront investment. The company writes:

In connection with this new approach, the Company took on various additional obligations across its distribution channel, including purchasing the merchandise it would sell online, storing merchandise in leased warehouses, marketing merchandise on websites, fulfilling orders, and responding to customer service inquiries. Unfortunately, these additional obligations came at a tremendous cost to the Company, both in terms of monetary loss and the deterioration of customer relationships.

In other words, rather than compete as a media company that would serve (and monetize) its various niche audiences, the company apparently sought to use its media as a marketing arm for physical products — in essence, competing with the likes of Amazon Inc. ($AMZN), Walmart Inc. ($WMT) and other specialty hobbyist retailers. As if that wasn’t challenging enough, the company’s execution apparently sucked sh*t:

As a consequence of this shift in strategic approach, the Company was required to enter into various technology contracts which increased capital expenditures by 385% in 2017 alone. And, because the Company had ventured into fields in which it lacked expertise, it soon realized that the technology used on the Company’s websites was unnecessary or flawed, resulting in customer service issues that significantly damaged the Company’s reputation and relationship with its customers. By example, in 2018 in the crafts business alone, the Company spent approximately $6 million on its efforts to sell craft ecommerce and generated only $3 million in revenue.

Last we checked, spending $2 to make $1 isn’t good business. Well, unless you’re Uber or Lyft, we suppose. But those are transformative visionary companies (or so the narrative goes). Here? We’re talking about arts and crafts. 🙈

As if that cash burn wasn’t bad enough, in 2013 the company entered into a $135mm secured credit facility ($125mm TL; $10mm RCF) to fund its operations. By 2017, the company owed $99mm in debt and was in default of certain covenants (remember those?) under the facility. Luckily, it had some forgiving lenders. And by “forgiving,” we mean lenders who were willing to equitize the loan, reduce the company’s indebtedness by $100mm and issue a new amended and restated credit facility of $35mm (as well as provide a new $15mm tranche) — all in exchange for a mere 97% of the company’s equity (and some nice fees, we imagine). Savage!

As if the spend $2 to make $1 thing wasn’t enough to exhibit that management wasn’t, uh, “managing” so well, there’s this:

The Company utilized its improved liquidity position as a result of the Restructuring to continue its efforts to evolve from a legacy print business to an e-commerce business. However, largely as a result of mismanagement, the Company exhausted the entire $15 million of the new funding it received in the six (6) months following the Restructuring. In those six (6) months, the Company’s management dramatically increased spending on technology contracts, merchandise to store in warehouses, and staffing while the Company was faltering and revenue was declining. The Company’s decision to focus on e-commerce and deemphasize print and digital publishing accelerated the decline of the Company’s publishing business, and the resources spent on technology hurt the Company’s viability because the technology was flawed and customers often had issues with the websites.

What happened next? Well, management paid themselves millions upon millions of dollars in bonuses! Ok, no, just kidding but ask yourself: would you have really been surprised if that were so?? Instead, apparently the board of directors awoke from a long slumber and decided to FINALLY sh*tcan the management team. The board brought in a new CEO and hired FTI Consulting Inc. ($FTI) to help right the ship. They quickly discovered that the e-commerce channel was sinking the business (PETITION Note: this is precisely why many small startup businesses build their e-commerce platforms on top of the likes of Shopify Inc. ($SHOP) — to avoid precisely the e-commerce startup costs and issues F+W experienced here.).

Here is where you insert the standard operational restructuring playbook. Someone built out a 13-week cash flow model and it showed that the company was bleeding cash. Therefore, people got fired and certain discreet assets got sold. The lenders, of course, took some of those sale proceeds to setoff some of their debt. The company then refreshed the 13-week cash flow model and…lo and behold…it was still effed! Why? It still carried product inventory and had to pay for storage, it was paying for more lease space than it needed, and its migration of e-commerce to partnerships with third party vendors, while profitable, didn’t have meaningful enough margin (particularly after factoring in marketing expenses). So:

Realizing that periodic asset sales are not a long-term operational solution, the Company’s board requested alternative strategies for 2019, ranging from a full liquidation to selling a significant portion of the Company’s assets to help stabilize operations. Ultimately, the Company determined that the only viable alternative, which would allow it to survive while providing relief from its obligations, was to pursue a sale transaction within the context of a chapter 11 filing.

Greenhill & Co. Inc. ($GHL) is advising the company with respect to a sale of the book publishing business. FTI is handling the sale of the company’s Communities business. The company hopes both processes are consummated by the end of May and middle of June, respectively. The company secured an $8mm DIP credit facility to fund the cases.

And that DIP ended up being the source of some controversy at the First Day hearing. Yesterday morning, Judge Gross reportedly rebuked the lenders for seeking a 20% closing fee on the $8mm DIP; he suggested 10%. Per The Wall Street Journal:

Judge Gross said he didn’t want to play “chicken” with the lenders, but that he didn’t believe they should use the bankruptcy financing to recoup what they were owed before the chapter 11 filing.

Wow. Finally some activist push-back on excessive bankruptcy fees! Better late than never.

• Jurisdiction: D. of Delaware (Judge Gross)

• Capital Structure:

• Professionals:

  • Legal: Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Kenneth Enos, Elizabeth Justison, Allison Mielke, Jared Kochenash)

  • Financial Advisor: FTI Consulting Inc. (Michael Healy)

  • Investment Banker: Greenhill & Co.

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

• Other Parties in Interest:

  • Prepetition & Postpetition DIP Agent ($8mm): Fortress Credit Co. LLC)

    • Legal: Halperin Battaglia Benzija LLP (Alan Halperin, Walter Benzija, Julie Goldberg) & (local) Bielili & Klauder LLC (David Klauder)

  • DIP Lenders: Drawbridge Special Opportunities Fund LP, New F&W Media M Holdings Corp LLC, PBB Investments III LLC, CION Investment Corporation, Ellington Management Group, or affiliates thereof to be determined.

  • Official Committee of Unsecured Creditors (LSC Communications US, Inc. and Palm Coast Data LLC)

    • Legal: Arent Fox LLP (Robert Hirsh, Jordana Renert) & (local) Morris James LLP (Eric Monzo, Brya Keilson)

    • Financial Advisor: B. Riley FBR (Adam Rosen)

Updated 4/23

New Chapter 11 Bankruptcy Filing - DIESEL USA, Inc.

DIESEL USA, Inc.

March 5, 2019

Three things immediately occurred to us when we saw the news that Diesel USA Inc. filed for bankruptcy in the District of Delaware:

1. That makes perfect sense — Jersey Shore went off the air a long time ago;

2. This is “The Mattress Firm Effect” in action — a retailer using a quick trip in bankruptcy to, on an expedited basis, flush out some burdensome leases and otherwise leave parties in interest unimpaired; and

3. More surprising than the company filing for bankruptcy is the law firm filing it for bankruptcy. Arent Fox LLP, while a fine firm for sure, isn’t exactly known for its debtor-side chops. Just saying.

The numbers around this one are…well…interesting. The company’s brick-and-mortar retail operations consist of 28 retail store locations in 11 states, comprised of 17 full-price retail stores and 11 factory outlet stores. Net sales were:

• In 2014: $83mm for full-price retail and $42mm for outlet (Total: $125mm); and

• In 2018: $38mm for full-price retail and $34.5mm for outlet (Total: $72.5mm).

In terms of percentages:

• In 2014: brick and mortar represented 64% of net sales; and

• In 2018: brick and mortar represented 70% of net sales.

We see a couple of significant problems here.

Despite the superlatives that the company’s CRO generously uses to describe the company, i.e., “cutting-edge,” and “cultural icon,” the numbers reflect a BRAND — let alone the business — in significant trouble. Sure, net sales are down generally, but the distribution has gotten wildly askew. The numbers reflect a bare reality: Diesel simply isn't a brand people will pay full price for anymore. This couldn’t be more stark. And that’s a big problem when the company is (or was) party to expensive height-of-the-real-estate-market leases in prime locations like Manhattan’s Fifth Avenue. Diesel, quite simply, isn’t “Fifth Avenue,” let alone “Madison Avenue.”* We’re not convinced the company is being realistic when it says that it has “retained a loyal customer base.” The numbers plainly say otherwise. Moreover, in an age where digital sales are increasingly more important, the business has become MORE dependent on brick-and-mortar as opposed to its wholesale and e-commerce channels.**

But don’t take our word for it. Here’s the company’s CRO:

…in 2015 prior management implemented a strategic initiative that was focused on repositioning Diesel stores and products in premium locations and with premium customers so as to place them side-by-side with other premium fashion brands across the retail, online, and wholesale platforms. Unfortunately, since its implementation, the Debtor’s net sales have significantly decreased while its losses have significantly increased.

The market has spoken: Diesel is, according to the market, simply not “premium.”

And by “market” we also mean wholesalers. The company opted to stop distributing its products to wholesale partners “that were deemed not to fit the premium image.” Now, we can only imagine that included discount retailers. Basically, SOME OF THE RETAILERS WHO HAVE PERFORMED THE BEST OVER THE LAST SEVERAL YEARS. But wait: it gets even worse: the wholesale customers the company DID retain pursued voluminous “chargebacks.” Per the company:

As is common in the retail industry, the Debtor provides certain customers with allowances for markdowns, returns, damages, discounts, and cooperative marketing programs (collectively, the “Chargebacks”). If the Debtor’s customers fail to sell the Debtor’s products, they generally have the right to return the goods at cost or issue Chargebacks, which are netted against the Debtor’s accounts receivable. Due to mounting Chargebacks from wholesale customers, the Debtor was forced to significantly reduce its wholesale activities in recent years.

Basically, nobody is buying this sh*t. Not in stores. Not in wholesale.

And, yet, the company holds premium leases:

The primary means of implementing the 2015 strategy was to reposition the Debtor’s full-price retail and outlet stores to “premium”, high-profile, and high-visibility locations, which was executed by opening certain new stores and relocating others to “premium” locations while closing others deemed not to fit the new strategic positioning model. The result was, despite the losses suffered in connection with the Fifth Avenue store, management’s negotiation and entry into several expensive, long-term leases for certain of the Debtor’s retail locations, such as the Debtor’s “Flagship” store on Madison Avenue, which do not expire by their terms until 2024-2026. Of course, it was then (and remains today) an inopportune time to make long-term commitments to costly retail leases and the significantly increased lease expenses have not been offset by increased sales, which, in fact, have dropped precipitously.

…numerous of the Debtor’s stores are producing heavy losses. The Debtor’s unprofitable stores combined to produce negative EBITDA of approximately $10.7 million in 2018, nearly all of which flowed from full-price retail stores. The Debtor’s profitable stores are not enough to off-set the losses, as the 17 fullprice stores combined to produce negative EBITDA of approximately $8.7 million in 2018.

Now, the company does indicate that certain (seemingly outlet) stores remain profitable, as do the wholesale and e-commerce operations.*** So, there’s that. New management is in place and their plan includes (a) using the BK to negotiate with landlords, shutter some locations, shutter and relocate others, opening new smaller stores and refit existing locations; (b) deploying influencer marketing generally and aiming more efforts towards females (and hoping and praying that athleisure — a term we didn’t see ONCE in the entire first day declaration — doesn’t continue to hold sway and steer people away from jeans, generally);**** (c) growing e-commerce; and (d) revitalizing the wholesale business with key selective wholesale partners. This plan is meant to take hold in the next three years and “will require significant capital investments.” (PETITION Note: cue the chapter 22 preparation). The company intends to effectuate its new business plan via a plan of reorganization pursuant to which it will reject certain executory contracts. All in, the company hopes to be confirmed in roughly 5 weeks. Aggressive! But, like Mattress Firm, trade creditors are “current” and there’s no debt otherwise, so the schedule isn’t entirely out of the realm of possibility.

But this is the part that REALLY gets us. If you’ve been reading PETITION long enough — particularly our “We Have a Feasibility Problem” series — you know by now that you ought to be AWFULLY SKEPTICAL of management team’s rosy projections. Per the company:

The Debtor’s projections indicate that the Reorganization Business Plan will return the Debtor to stand-alone profitability by 2021 assuming successful store closures through this Chapter 11 Case, thereby ensuring its ability to continue operating as a going-concern, saving over 300 jobs, and creating new ones through the new store openings.

Generally, we’ll take the under. Though, we have to say: at least they’re not audaciously projecting a miraculous profit in 2019.

How will they achieve all of these lofty goals? The company’s foreign parent will invest $36mm over the three-year period of the business plan because…well…why the hell not? Everyone loves a Hail Mary.

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*The company suffered from an ill-advised and poorly-timed real estate spending spree. Between 2008 and 2015, right as brick-and-mortar really started to decline and e-commerce expand, the company expended $90mm on leases. As for Fifth Avenue, per the company, “the Debtor’s store on Fifth Avenue in Manhattan, which opened in 2008 and closed in 2014, by itself received approximately $18 million in capital expenditures during its tenure while generating substantial losses.”

**The company doesn’t appear to have put much into its e-commerce growth. While e-commerce now represents 12% of net sales, sales are only incrementally higher in absolute numbers (from $8mm in 2014 to $12mm in 2018). The wholesale channel, on the other hand, has gone in the opposite direction. Net sales went from $61mm (2014) to $19mm (2018) and now represent only 19% of net sales (down from 32%).

***It seems, though, that outlet stores, wholesale and e-commerce resulted in negative $2mm EBITDA if the math from the above quote is correct. Curious.

****Score for Facebook Inc. ($FB)!

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• Jurisdiction: D. of Delaware (Judge Walrath)

• Professionals:

  • Legal: Arent Fox LLP (George Angelich, David Mayo, Phillip Khezri) & (local) Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Kenneth Enos, Travis Buchanan)

  • Claims Agent: Bankruptcy Management Solutions d/b/a Stretto (*click on the link above for free docket access)

• Other Parties in Interest:

New Chapter 11 Bankruptcy Filing - Imerys Talc America Inc.

Imerys Talc America Inc.

February 13, 2019

Merely a week ago we wrote:

PG&E Corporation's ($PCG) recent liability-based bankruptcy filing got us thinking: what other companies are poised for a litigation-based chapter 11 bankruptcy filing? We think we have a winner. 

Imerys S.A. is a French multinational company that specializes in the production and processing of industrial minerals. Its North American operations are headquartered in Roswell, Georgia and in San Jose, California. Included among Imerys' North American operations is Imerys Talc America. The key word in all of the foregoing is "Talc." 

If only we had purchased a lottery ticket.

Within days, Imerys Talc America Inc. and two affiliated debtors indeed filed for bankruptcy in the District of Delaware. The debtors mine, process and distribute talc for use in end products used in the manufacturing of products sold by third-parties —- primarily Johnson & Johnson Inc. ($JNJ). The debtors have historically been the sole supplier of cosmetic talk to JNJ. And, in part, because of that, they’re getting sued to Kingdom Come. Approximately 14,650 individual claimants are suing the debtors alleging personal injuries caused by exposure to talc mined, processed or distributed by the debtors. The debtors note:

Although personal care/cosmetic sales make up only approximately 5% of the Debtors’ revenue, approximately 98.6% of the pending Talc Claims allege injuries based on use of cosmetic products containing talc.

Whoa. What a number!! What a disparity! Low revenues and yet high claims! What a sham! That just goes to show how absurd these claims are!!

Just kidding. That sentence means absolutely nothing: it is clearly an attempt by lawyers to ignorantly wow people with percentages that have absolutely no significance whatsoever. Who gives a sh*t whether personal care/cosmetic sales are only a small fraction of revenues? If those sales are all laced with toxic crap that are possibly causing people cancer or mesothelioma, the rest is just pixie dust. In fact, it’s possible that 100% of 1% of sales are causing cancer, is it not?

Anyway, naturally, the debtors deny those claims but defending the claims, of course, comes at a huge cost. Per the Company:

…while the Debtors have access to valuable insurance assets that they have relied on to fund their defense and appropriate settlement costs to date, the Debtors have been forced to fund certain litigation costs and settlements out of their free cash flow due to a lack of currently available coverage for certain Talc Claims, or insurers asserting defenses to coverage. The Debtors lack the financial wherewithal to litigate against the mounting Talc Claims being asserted against them in the tort system.

Well that sucks. In addition to the debtors issues obtaining insurance coverage, they’re also apparently bombarded by claimants emboldened by the recent multi-billion dollar verdict rendered against JNJ.. We previously wrote:

While certain cases are running into roadblocks, the prior verdicts call into question whether Imerys has adequate insurance coverage to address the various judgments. If not, the company is likely headed into bankruptcy court — the latest in a series of cases that will attempt to deploy bankruptcy code section 524's channeling injunction and funnel claims against a trust. 

Indeed, given issues with insurance (and JNJ refusing to indemnify the debtors as expected in certain instances), the massive verdict, AND discussions with a proposed future claims representative, the debtors concluded that a chapter 11 filing would be the best way to handle the talc-related liabilities. And indeed a channeling injunction is a core goal. Per the debtors:

The Debtors’ primary goal in filing these Chapter 11 Cases is to confirm a consensual plan of reorganization pursuant to Sections 105(a), 524(g), and 1129 of the Bankruptcy Code that channels all of the present and future Talc Claims to a trust vested with substantial assets and provides for a channeling injunction prohibiting claimants from asserting against any Debtor or non-debtor affiliate any claims arising from talc mined, produced, sold, or distributed by any of the Debtors prior to their emergence from these Chapter 11 Cases. While the Debtors dispute all liability as to the Talc Claims, the Debtors believe this approach will provide fair and equitable treatment of all stakeholders.

The comparisons to PG&E were on point.

• Jurisdiction: D. of Delaware (Judge Silverstein)

• Capital Structure: $14.4mm inter-company payable.

• Professionals:

  • Legal: Latham & Watkins LLP (George Davis, Keith Simon, Annemarie Reilly, Richard Levy, Jeffrey Bjork, Jeffrey Mispagel, Helena Tseregounis) & (local) Richards Layton & Finger PA (Mark Collins, Michael Merchant, Amanda Steele)

  • Financial Advisor: Alvarez & Marsal North America LLC

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

• Other Parties in Interst:

  • Imerys SA

    • Legal: Hughes Hubbard & Reed LLP (Christopher Kiplok, William Beausoleil, George Tsougarakis, Erin Diers) & (local) Bayard PA (Scott Cousins, Erin Fay)

  • Future Claims Representative: James L. Patton Jr.

    • Legal: Young Conaway Stargatt & Taylor LLP

    • Financial Advisor: Ankura Consulting Group LLC

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

Arsenal Energy Holdings LLC

February 4, 2019

This is the week of proposed super-short bankruptcy cases.

Pennsylvania-based natural-gas developer, Arsenal Energy Holdings LLC, filed a prepackaged bankruptcy case in the District of Delaware. 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.

100% of existing equity approved of the plan and will get Class B equity (with the exception of Arsenal Resource Holdings LLC and FR Mountaineer Keystone Holdings LLC, which will both get Class C equity).

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.

Given the simplicity of this case, the company hopes to be in and out of bankruptcy in less than two weeks. Which, considering the effort in FULLBEAUTY, begs the question: why is it taking so long?

• Jurisdiction: D. of Delaware

• Capital Structure: $861mm subordinated notes, $116.7mm Seller Notes

• Company Professionals:

  • Legal: Simpson Thacher & Bartlett LLP (Michael Torkin, Kathrine McLendon, Nicholas Baker) & (local) Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Kara Coyle, Ashley Jacobs)

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

• Other Parties in Interest:

  • Ad Hoc Group of Subordinated Noteholders

    • Legal: Cleary Gottlieb Steen & Hamilton LLP (Sean O’Neal, Humayan Khalid)

  • Mercuria Investments US, Inc.

    • Legal: Vinson & Elkins LLP (David Meyer, Garrick Smith)

New Chapter 11 Bankruptcy Filing - Maremont Corporation

Maremont Corporation

January 22, 2019

Michigan-based Maremont Corporation, a subsidiary of publicly-traded non-debtor automobile component manufacturer Meritor Inc. ($MTOR), has filed for bankruptcy along with three affiliates in the District of Delaware. The company was a manufacturer, distributor and seller of aftermarket auto products — many of which contained asbestos; currently, it has no ongoing operations and its only assets are an intercompany receivable, a rent-producing commercial property with Dollar General as a tenant, a few bank accounts, and some insurance assets. In contrast, the company has significant liabilities — notably asbestos-related liabilities including defense and other costs associated with defending 13k pending personal injury and wrongful death claims.

The company, in consultation with its parent and committees of Future Claimants and current Asbestos Claimants, arrived at a prepackaged plan under section 524(g) of the Bankruptcy Code. The plan envisions a personal injury trust to be funded, in large part, by Meritor (via the repayment of a remaining receivable, a contribution of intercompany payables and a $28mm settlement payment) and a channeling injunction that protects the company (and Meritor) from future suit and liability arising out of the company’s asbestos legacy. Instead, any and all asbestos-related personal injury claims may only be pursued against, and paid from, the personal injury trust.

Meritor, like most of the stock market, got beaten up yesterday. There’s no telling whether the multi-million dollar payout here had anything to do with that.

Source: Yahoo!

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For the uninitiated, this (horrifically boring) bankruptcy filing presents us with a good opportunity to highlight a potential structure (and its limitations) for any imminent Pacific Gas & Electric Company (“PG&E”) chapter 11 bankruptcy filing. PG&E’s issues — as have, by this point, been extensively documented — largely emanate out of (i) some oppressive California state liability laws (inverse-condemnation — definitely), (ii) man-made global warming and resultant mudslides and wildfires (probably), and (iii) at least a glint of negligence (probably). While the company has $18.4b of (mostly unsecured) debt, the catalyst to bankruptcy may be its multi-billion dollar liability from the aforementioned CA-state laws and years of environmental disaster.

Similar to Maremont, PG&E is likely to end up with some kind of plan of reorganization that features a litigation trust (for affected claimants) and a channeling injunction. Except, as John Rapisardi and Daniel Shamah of O’Melveny & Myers point out, there are limitations to that structure. They write:

There is one significant obstacle to any PG&E bankruptcy: the likely inability to discharge liabilities associated with wildfires that have not yet occurred. There have been numerous mass tort bankruptcies in the past that have been resolved through the formation of a litigation trust and channeling injunction, forcing litigants into a single forum where claims are satisfied through trust assets. See, e.g., 11 U.S.C. §524(g) (channeling injunction for asbestos debtors); In re TK Holdings, Doc. No. 2120, Case No. 17-11375 (Bankr D. Del.) (confirmation order with channeling injunction for debtor that manufactured airbags with defective components). But that structure only works for claims based on prior conduct or acts. PG&E, in contrast, faces perennial liability associated with wildfires and inverse condemnation. It may be challenging to discharge the inverse-condemnation liabilities associated with a post-petition wildfire. See 28 U.S.C. §959(a) (debtors-in-possession may be sued “with respect to any of their acts or transactions in carrying on business connected with such property.”).

Prior conduct or acts, huh? A discontinued product that happened to contain asbestos fits that bill. Likewise, a remedied airbag (the TK Holdings referenced above refers to Takata Airbags). Sadly — especially for Californians, there is nothing prior about environmental issues. Those are very much a present and future thing.

• Jurisdiction: D. of Delaware (Judge Carey)

• Company Professionals:

  • Legal: Sidley Austin LLP (James Conlan, Andrew O’Neill, Alison Ross Stromberg, Blair Warner, Alex Rovira) & (local) Cole Schotz PC (Norman Pernick, J. Kate Stickles)

  • Claims Estimation Advisor: Alvarez & Marsal Disputes and Investigations LLC

  • Claims Agent: Donlin Recano (*click on company name above for free docket access)

• Other Parties in Interest:

  • Future Claimants Representative: James L. Patton Jr.

    • Legal: Young Conaway Stargatt & Taylor LLP

    • Claims Estimation Advisor: Ankura Consulting Group LLC

New Chapter 11 Bankruptcy Filing - Catalina Marketing Corporation

Catalina Marketing Corporation

12/12/18

On September 16 in “🤖Tech Wants to Axe Lawyers🤖,” we wrote about Crossmark Holdings Inc., Acosta Inc., and Catalina Marketing (a unit of Checkout Holding Corp.) and noted that “[a]ll three are in trouble.” Catalina Marketing was the first domino to fall as it filed for bankruptcy in the District of Delaware.

In connection with our review of the three companies, we previously wrote:

Finally, Catalina Marketing finds itself paying restructuring fees these days too. The St. Petersburg Florida company is owned by Berkshire Partners and Hellman & Friedman. Crescent Capital is also a large equity holder. The company’s capital structure includes approximately:

$29mm April ‘19 L+3.5% Revolving Credit Facility

$1.05b April ‘21 L+3.5% Term Loan (~48.4 bid)

$460mm April ‘22 L+6.75% Second Lien Term Loan (~11.6 bid)

$230mm PIK Toggle unsecured notes

Carry the one, add the two, that’s over $5b of debt across all three companies. Gotta love private equity.

So, yes, yet another private equity-backed company is in bankruptcy court. Here, the company appears to have an agreement with 90% of its first lien lenders (Abry Advanced Securities Fund II and III, Alcentra Limited, Bain Capital Credit LP, Carlyle Investment Management LLC, Invesco Senior Secured Management Inc., and OppenheimerFunds Inc.), and 75% of its second lien lenders, the effect of which is purported to be a $1.6b — yes, $1.6 BILLION — debt reduction. An ad hoc group of first lien lenders has agreed to provide $275mm DIP credit facility (of which $125mm is new money) and committed to provide $40mm in exit financing.

• Jurisdiction: D. of Delaware (Judge Gross)

• Capital Structure: see above.

• Company Professionals:

  • Legal: Weil Gotshal & Manges LLP (Gary Holtzer, Ronit Berkovich, Jessica Liou, Kevin Bostel, Alexander Condon, Elizabeth Carens, Michael Godbe, Lisa Lansio, Leonard Yoo, Patrick Steel, David Zubkis, Theodore Tsekerides, Peter Isakoff) & (local) Richards Layton & Finger PA (Mark Collins, Jason Madron)

  • Financial Advisor: FTI Consulting Inc. (Robert Del Genio, Thomas Ackerman)

  • Investment Banker: Centerview Partners

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

• Other Parties in Interest:

  • DIP Lenders and the Ad Hoc First Lien Lenders

    • Legal: Jones Day (Scott Greenberg, Michael J. Cohen, David Torborg, Stacey Corr-Irvine, Jeremy Evans, C. Lee Wilson) and (local) Pachulski Stang Ziehl & Jones LLP represent the DIP Lenders and the Ad Hoc First Lien Lenders. 

  • Ad Hoc Group of Second Lien Lenders

    • Paul Weiss Rifkind Wharton & Harrison (Brian Hermann, Robert Britton, Daniel Youngblut, Miriam Levi) and (local) Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Andrew Magaziner)

  • Admin Agent of the First Lien Credit Agrement

    • Legal: Davis Polk & Wardwell LLP (Brian Resnick, David Schiff) and Landis Rath & Cobb LLP (Adam Landis, Kerri Mumford)

  • Admin agent under the Second Lien Credit Agreement

    • Legal: Wilmer Cutler Pickering Hale and Dorr (Andrew Goldman, Benjamin Loveland)

  • Ad Hoc Group of the PIK Toggle notes

    • Legal: Debevoise & Plimpton LLP

⛽️New Chapter 11 Bankruptcy Filing - Fairway Energy LP⛽️

Fairway Energy LP

November 26, 2018

Belligerent week for companies attached to the oil and gas space (see also Waypoint Leasing). Here, Houston-based Fairway Energy LP, which, interestingly (and somewhat oddly), is 28%-owned by the President and Fellows of Harvard College (🤔), is a storage provider for third-party companies engaged in the production, distribution and marketing of crude oil; it is also now in bankruptcy down in the District of Delaware.

Specifically, the company provides undersurface salt cavern storage, storage that has been utilized since the 40s because of its “extremely low risk of leakage through self-sealing under cavern operating pressures.” The company began construction on its 10-million barrel underground storage facility (the “Facility”) in 2015 (rough timing); yet, it has exclusive rights to store in the facility and has otherwise secured the necessary leases to operate in its geographic location. It is also connected to customers via owned and third-party pipeline systems, which enable to the company to take inbound capacity from the (hot) Permian Basin, the Eagle Ford Shale Basin, and Canada/Midcontinent. The pipelines also connect to hubs that connect to “downstream” infrastructure, i.e., refiners, etc.

To get off the ground, the company had a $390mm equity infusion and $80mm in term loans from Riverstone Credit Partners LP. The company has been operating off of credit agreement amendments now for months, however, given operational and market issues that impeded their use of the Facility and hampered liquidity. Per the company:

For the nine (9) months ended September 30, 2018, Fairway had an operating loss of $38,600,000 (before interest, expense, and other income). Fairway’s financial performance has been negatively affected by (i) reduced and delayed demand for its services, (ii) cost overruns on the Facility, (iii) commercial restrictions on accessing the Facility by existing pipeline connections, and (iv) general market conditions that undermine the demand for crude oil storage.

In other words, a perfect storm posing all sorts of headwinds. These winds, it seems, chilled any potential buyer interest in the Facility: pre-petition efforts to find a buyer, including a stalking horse buyer, proved futile. It seems all of the hopeful and flowery language deployed by the company’s professionals in the First Day Declaration about the usefulness of the Facility isn’t a sentiment shared by any prospective purchasers. Was this whole project a solution in search of a problem? Via the bankruptcy sale process, we’ll soon find out. So, will Riverstone (which is also providing a $20mm DIP credit facility) and the writers of the $390mm of equity checks (read: Harvard).

• Jurisdiction: D. of Delaware

• Capital Structure: $94mm debt     

• Company Professionals:

  • Legal: Haynes and Boone LLP (Patrick Hughes, Martha Wyrick, Kelsey Zottnick) & (local) Young Conaway Stargatt & Taylor LLP (Edmon Morton, Kenneth Enos, Elizabeth Justison)

  • Financial Advisor: Alvarez & Marsal North America LLC (Gary Barton, Kevin Larin)

  • Investment Banker: Piper Jaffray & Co./Simmons & Company International

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

• Other Parties in Interest:

  • Administrative Agent under Secured Term Loan Credit Agreement & DIP Lender/Agent: Riverstone Credit Partners LP

    • Legal: White & Case LLP (David Turetsky, Andrew Zatz) & (local) Fox Rothschild LLP (Jeffrey Schlerf)

New Chapter 11 Bankruptcy Filing - LBI Media Inc.

LBI Media Inc.

November 21, 2018

Happy Thanksgiving y’all!! LBI Media Inc. and several affiliates FINALLY filed for bankruptcy today in the District of Delaware after years of questions about its financial health. The company is a privately held minority-owned Spanish-language broadcaster that owns or licenses 27 Spanish-language television and radio stations in the largest US markets; it services the largest media markets in the nation, including Los Angeles, New York City, Chicago, Miami, Houston and Dallas. It is also a victim of disruption.

The company notes that it has “faced the market pressures that have broadly affected U.S. television and radio broadcasters, including the 2008 recession and the diversion of advertising spend by companies to digital media.” Insert Facebook Inc. ($FB) here. That’s not all, though, of course: the company is also hampered by “a substantial debt load and corresponding interest expense obligations” which has stunted LBI’s financial performance, ability to invest and grow, and liquidity.

To address this situation, the company obtained an investment from its now-DIP lender, HPS Investment Partners, in April 2018 for a new first lien credit facility. This provided the company with much needed liquidity and, in turn, briefly extended the company’s runway out of bankruptcy court. The “make-whole” provision attached to the facility, however, became the subject of much controversy and an ad hoc group of second lien noteholders sued in New York state court for an injunction to hinder the transaction. Ultimately, the state court denied the noteholders.

But…but…the noteholders persisted. And this, apparently, left a bitter taste in the mouth’s of company management (and its counsel). Junior Noteholders, meet bus. 🚌🚌 The company notes:

Following the closing of the transaction, LBI sought to continue its growth efforts. However, such efforts were weakened by the Junior Noteholder Group, which continued to litigate against the Company, its founder and CEO, and HPS, the Company’s sole senior lender. The Junior Noteholder Group commenced multiple lawsuits, and threatened several more, distracting management from operations. These actions and threats not only hindered the Debtors’ efforts to improve their operations, but certain actions, including seeking to enjoin the first lien financing, risked pushing LBI into a precipitous freefall bankruptcy.

When coupled with the Debtors’ tightening liquidity (which was exacerbated by the expense of the Junior Noteholder Group litigation), the Junior Noteholder Group’s actions made it substantially more difficult for LBI to achieve the growth it had hoped for, and the Company determined that a comprehensive reorganization may be necessary.

Thereafter, settlement talks with the Junior Noteholders proved unsuccessful and, now, therefore, the company marches into bankruptcy court with a Restructuring Support Agreement (“RSA”) in hand with HPS whereby, subject to a “fiduciary out,” HPS will serve as (prearranged but hardly set in stone) Plan sponsor and swap its $233mm first lien senior secured notes for a majority equity interest in the company. The Plan — which at the time of this writing isn’t on the docket yet — reportedly provides for recoveries for other “supporting” constituencies. What’s that we hear? IT’S A (DEATH) TRAP!?!

(PETITION NOTE: for the uninitiated, a “death trap plan” is an inartful term for when the Debtor proposes and the senior lenders allows a recovery to trickle down the “priority waterfall” to junior lenders but only on account of said junior lenders’ support of, or vote for, the proposed Plan. In essence, its consideration for dispensing with “holdup value.” A “fiduciary out” gives the Debtor flexibility to, despite the RSA, agree to an alternative transaction that bests the HPS transaction without penalty or the need to pay a “break-up fee.”).

The plan provides the company with 75-day period to run a marketing process. While the company will market the company to potential strategic and financial investors, it is also making overtures to the Junior Noteholders to take out HPS’ claim(s) (without needing to satisfy the make-whole) and become the Plan sponsor such that it could walk away with 100% equity in the company.

All of which is to say: don’t let the terms “RSA” and “Plan” fool you. This is far from a consensual case being presented to the Bankruptcy Court Judge wrapped up in a shiny bow. The Junior Noteholders have been fighting the company and HPS for months: there is no reason to suspect that that will stop now merely because the company is a chapter 11 debtor.

• Jurisdiction: D. of Delaware (Judge Lane)

• Capital Structure: $233mm 10% ‘23 senior secured notes, $262mm 11.5/13.5 ‘20 PIK toggle second priority secured notes, $27.95mm 11% ‘22 PIK unsecured Intermediate senior Holdco notes (TMI Trust Company), $8.46mm 11% ‘17 unsecured Holdco notes (U.S. Bank NA)    

• Company Professionals:

  • Legal: Weil Gotshal & Manges LLP (Ray Schrock, Garrett Fail, David J. Cohen) & (local) Richards Layton & Finger PA (Daniel DeFranceschi)

  • Board of Directors: Jose Liberman, Lenard Liberman, Winter Horton, Rockard Delgadillo, Peter Connoy, Neal Goldman

  • Financial Advisor: Alvarez & Marsal North America LLC

  • Investment Banker: Guggenheim Securities LLC

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

• Other Parties in Interest:

  • Prepetition First Lien & DIP Lender: HPS Investment Partners LLC ($38mm)

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Paul Basta, Jeffrey Safferstein, Sarah Harnett) & (local) Young Conaway Stargatt & Taylor LLP (Pauline Morgan, M. Blake Cleary)

  • First Lien Trustee: Wilmington Savings Fund Society FSB

    • Legal: Morrison & Foerster (Jonathan Levine) & (local) Ashby & Geddes PA (William Bowden)

  • Collateral Trustee for First Lien Notes: Credit Suisse AG

    • Legal: Locke Lorde LLP (Juliane Dziobak)

  • Ad Hoc Group of (Junior) Second Lien Noteholders

    • Legal: Willkie Farr & Gallagher LLP (Rachel Strickland)

  • Ad Hoc Group of Holdco Noteholders

    • Legal: Landis Rath & Cobb LLP (Matthew McGuire)

Updated 11/21/18 at 8:27 CT