APC Automotive Technologies Intermediate Holdings LLC

June 3, 2020

North Carolina-based APC Automotive Technologies Intermediate Holdings LLC and 12 affiliates (the “debtors”) filed prepackaged chapter 11 cases in the District of Delaware. The debtors have been around, in some form, since 1927; they are family-run automotive aftermarket parts suppliers of underbody products for passenger vehicles and light to heavy-duty and commercial vehicles. The current iteration of the business results from a 2017 merger of legacy business AP Exhaust Intermediate Holdings LLC with CWD Holding Corporation (“Centric”) — a transaction designed to give the debtors “substantial market share as a supplier of automotive aftermarket brake and chassis parts.” Customers include Autozone Inc. ($AZO), O’Reilly’s Automotive Inc. ($ORLY) and many other large sale aftermarket players.

Almost immediately, the debtors ran into issues. The debtors note:

Between 2017 and 2019, the market presented significant challenges including historically high PGM costs, a difficult international trade environment, increased import tariffs, and a consolidating customer base, all of which negatively impacted the Debtors’ revenue and profit margins. These challenges, combined with an over-leveraged balance sheet, led to multiple ratings downgrades by credit ratings agencies. Nonetheless, the Debtors successfully navigated the last several years of headwinds through a combination of efforts, including optimizing operations, reducing expenses, maximizing liquidity, and de-leveraging their balance sheet.

Margins fell off a cliff. AP Exhaust’s segment EBITDA declined by $23.2mm while Centric’s dropped by $14mm. Liquidity fell by over $44mm. Because of this, the debtors engaged in a liability management exercise in late 2019 that, with the participation of their term lenders, resulted in a $14mm reduction in interest expense and $40mm of additional liquidity. It wasn’t enough. Liquidity issues persisted.

COVID-19 was a cherry on top. As sales fell off a cliff, the debtors woke up to the fact that their balance sheet wasn’t sustainable. Negotiations ensued between them and the term lenders on a consensual restructuring that has culminated in a restructuring support agreement and these prepackaged chapter 11 bankruptcy cases. The plan will shed $290mm of funded debt and general unsecured claimants (most of which are from China) will ride through with payment in full.

The aforementioned funded debt originated out of the 2017 merger. At the time, the debtors had:

• $75mm ABL (Wells Fargo Bank NA),

• $315mm in first lien term notes,

• and $125mm of second lien term notes.

The term notes were rejiggered pursuant to the 2019 out-of-court “liability management” exercise and replaced by $348mm in term loans split among:

• $25mm A-1 new money loans

• $155mm A-2 term loans,

• $25mm A-3 new money loans (with a PIK feature adding principal as reflected in the chart below), and

• $142.2mm term B loans which, pursuant to the term credit facility waterfall, are subordinate to the term A debt.

• Preferred stock issued to affiliates of Crescent Capital on account of the second lien term notes.*

All of this is reflected in this chart here:

To understand the mechanics of this, it’s important to note a few things:

1. Wells Fargo Bank NA ($WFC) got paid $10mm out of the new money financing at par, decreasing its exposure to the debtors. It is the sole ABL lender.

2. The separate A- tranches reflect participation in the 2019 transaction. The A-1 term loans are held by firms that were first lien term lenders that provided $25mm in new money. This includes a variety of CLOs like Apollo Credit Management CLO LLC and THL Credit. The A-3 term loans are held by private equity sponsors, Harvest Partners VII LP and Audax Group, which also provided $25mm of new money financing.

3. Term lenders who consented to the new money financing but did not participate did not get the benefit of the improved payment priority. Hence the term loan B. This includes a slate of funds and CLOs including Axar Capital Management, Sound Point Capital Management, Angelo Gordon, and MJX Asset Management LLC, among others.

After attempting another out-of-court refinancing that would have required — and could not get — 100% consent from term lenders, the debtors pivoted to a prepackaged bankruptcy filing. With 74% consenting (in excess of the requisite bankruptcy threshold for acceptance by a class), the debtors intend to fly through bankruptcy in approximately one month. They hope to do so armed with a DIP ABL Facility (which will convert into an exit ABL) and a $50mm DIP Term Facility (which includes a 5% commitment fee and a fee for 35% of the reorganized equity and will convert into a senior secured term loan facility upon exit). Holders of Term A loans will walk away with the equity (which basically just means that the pre-2019 equity loaned their way into a position of converting those new money loans back into equity). The B loans are getting zeroed out (the latter getting warrants if they consent to the plan of reorganization). Thanks for coming guys. Meanwhile all equity interests are also getting wiped out. Crescent Capital may want to do something about their fair value mark here:

• Jurisdiction: D. of Delaware (Judge Sontchi)

• Capital Structure: See chart.

• Professionals:

  • Legal: Kirkland & Ellis LLP (Jonathan Henes, George Klidonas, Neda Davanipour, Judson Oswald) & Klehr Harrison Harvey Branzburg LLP (Domenic Pacitti, Michael Yurkewicz, Morton Branzburg)

  • Financial Advisor: Weinsweig Advisors

  • Investment Banker: Jefferies Group LLC (Jeffrey Finger)

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

• Other Parties in Interest:

  • Pre-petition ABL Agent: Wells Fargo Bank NA

    • Legal: Greenbert Traurig LLP (David Kurzweil, Dennis Meloro)

  • ABL Lenders

    • Legal:

  • Pre-petition Term Loan Agent: Wilmington Trust NA

    • Legal:

  • Term Loan Lender Group

    • Legal: King & Spalding LLP (W. Austin Jowers, Michael Handler, Peter Montoni) & Chipman Brown Cicero & Cole LLP (William Chipman Jr., Mark Olivere)

  • Consenting Sponsor: Audax

  • Term A-1 Lenders: Apollo Credit Management CLO LLC, Redding Ridge Asset Management LLC, Murray Hill Funding II LLC, CBAM CLO Management LLC, Special Situations Investing Group Inc., THL Credit, Ellington CLO Management LLC

  • Term A-3 Lenders: AG Grey Goose Holdings LLC, Harvest Partners VII LP, VAP Holdings Inc.

  • Term B Lenders: Axar Master Fund Ltd., Star V Partners LLC, BCIC Senior Loan Partners LLC, Flatiron CLO 2015-1 Ltd., TCI Capital Managment II LLC, Sound Point Capital Management LP, AG Diversified Income Master Plus LP (Angelo Gordon) along with separate accounts for Kaiser Foundation Hospitals and James River Insurance Company), UBS AG, Nassau 2017-I Ltd., MJX Venture Management II LLC