💥New Chapter 11 Bankruptcy: Sears Holdings Corporation💥

Sears Holdings Corporation

October 15, 2018

Finally.

Early this morning, Illinois-based Sears Holdings Corporation ($SHLD) and approximately 49 affiliated entities (including KMart) finally filed for chapter 11 bankruptcy. The company lists a staggering $11.339 billion of total debts and $6.937 billion of assets.

The well-known company has 866 full-line and specialty stores as of August 4, 2018. In its chapter 11 petition, it boasts of its legacy as an “integrated retailer with significant physical and tangible assets, as well as virtual capabilities enabled through technology.” Yes, you read that correctly: they actually say “virtual capabilities enabled through technology.” That right there may help inform EVERYONE why this storied retailer has found its way into bankruptcy court. To the last, Sears stands out for its ability to appear out of touch.

The company appears to have a commitment for a $1.875 billion debtor-in-possession (“DIP”) asset-backed credit facility, including an increase of $300mm from its existing facility as well as an agreement over the use of the company’s lenders’ cash collateral. According to a company press release, the company is also negotiating an additional $300mm commitment from ESL Investments Inc. (“ESL”), the company’s largest shareholder and the investment vehicle of Eddie Lampert. The company intends to reorganize around a smaller store platform of “EBITDA-positive stores.” To this end, the company will close 142 stores near the end of the year adding to the previously announced 46 stores set to close in November 2018 — potentially further perpetuating the hurt put on U.S.-based malls over the last several years. Meanwhile, the company continues to negotiate an asset purchase agreement with ESL for “a large portion of the Company’s store base.” This would, obviously, keep the enterprise from liquidating and potentially help maintain thousands of jobs: Sears currently employs approximately 90k people.

While Eddie Lampert will remain Chairman of the Board, he has resigned as CEO of the company. Godspeed, Eddie.

The company’s top listed creditors at the time of filing include The Pension Benefit Guaranty Corporation and various trustees under five different tranches of unsecured notes totaling over $3 billion in principal amount (BNY Midwest Trust Company, Computershare Trust Company NA, The Chase Manhattan Bank NA). Trade creditors include Whirlpool Corporation ($23.4mm), Frigidaire Company ($18.6mm), and Winia Daewoo Electronics America ($15.2mm).

We will update this post on Wednesday in our next briefing; we are particularly excited to see how the company spins the “factors” that led to its appearance in bankruptcy court. Here’s one explanation:

And here’s another — seemingly more-on-point — one:

• Jurisdiction: S.D.N.Y. (Judge Drain)

• Capital Structure: $11.339b debt     

• Company Professionals:

  • Legal: Weil, Gotshal & Manges LLP (Ray Schrock, Garrett Fail, Jacqueline Marcus, Sunny Singh)

  • CRO/Financial Advisor: M-III Partners, LP (Mohsin Meghji, Colin Adams, Brian Griffith, Christopher Good, Mary Korycki, Kevin Tanaka, Enrique Acevedo, Wesley Sima, Noah Zatzkin, Joseph Frantz, Nicholas Weber, Ravi Ramnani )

  • Investment Banker: Lazard Freres & Company

  • Restructuring Committee’s Independent Directors: William Transier, Alan Carr, Paul DePodesta, Ann Reese

  • Restructuring Sub-Committee (RSC): Alan Carr and William Transier

  • Legal to RSC: Paul Weiss Rifkind Wharton & Garrison LLP (Paul Basta, Kelley Cornish, Lewis Clayton, Susanna Buergel, Robert Britton, Jonathan Hurwitz, Emma Carlson, Teresa Lii)

  • Financial Advisors to RSC: Alvarez & Marsal North America LLC (Dennis Stogsdill, Nick Grossi, Brian Corio, Jonah Galaz, Andrew Gasbarra, Jonathan Bain, Jordan Kravette)

  • Investment Banker to RSC: Evercore Group LLC (Daniel Aronson, Jeremy Matican, Guy McCumber, Siddhesh Patkar, Jonathan Kamel, Ajith Sukumar)

  • Conflicts Counsel: Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Rolin Bissell, Ryan Bartley, Travis Buchanan)

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

• Other Parties in Interest:

  • Large Shareholders: ESL Investments. Legal: Cleary Gottlieb Steen & Hamilton LLP (James Bromley, Sean O’Neal, Andrew Weaver)

  • Prepetition RCF, Term Loans, FILO & DIP ABL Agent: Bank of America NA. Legal: Skadden Arps Slate Meagher & Flom LLP (Paul Leake, Shana Elberg, George Howard)

  • Citibank NA. Legal: Davis Polk & Wardwell LLP (Marshall Huebner, Eli Vonnegut)

  • Large Shareholder: Fairholme Capital Management LLC. Legal: Sullivan & Cromwell LLP (Andrew Dietderich, Brian Glueckstein, David Zylberberg)

  • PBGC. Legal: Locke Lord LLP (David Wirt)

  • Debtors’ IP/Ground Lease Term Loan Lender: SHLD Lendco LLC. Legal: Cahill Gordon & Reindel LLP (Joel Levitin, Richard Stieglitz Jr.)

  • Official Committee of Unsecured Creditors

    • Legal: Akin Gump Strauss Hauer & Feld LLP (Ira Dizengoff, Philip Dublin, Abid Quereshi, SARA Brauner)

    • Legal (Conflicts): Herrick Feinstein LLP (Sean O’Donnell, Stephen Selbst, Steven Smith)

    • Financial Advisor: FTI Consulting Inc. (Matt Diaz, Conor Tully, Michael Berkin, Marshal Eisler, Kenny O’Trakoun, Morgan McCaskey, Samuel Star)

    • Investment Banker: Houlihan Lokey (Saul Burian, Eric Siegert, Brad Geer, Surbhi Gupta, Greg Rinsky, Tom Hedus, Ross Rosenstein, Ryan Conroy, John Hartigan, Ahmed Mumtaz, Jack Foster, James Lai, Natalie Weelborg, Andrew Felman, Matthew Stadtmauer)

  • Cyrus Capital Partners LP

    • Legal: Milbank Tweed Hadley & McCloy LLP (Eric Reimer, Thomas Kreller, Craig Price)

  • Indenture Trustee to Medium Term Notes: The Bank of New York Mellon Trust Company, N.A.

    • Legal: Carter Ledyard & Milburn LLP (James Gadsden, Leonardo Trivigno)

Updated 11/30/18

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New Chapter 11 Filing - Gibson Brands Inc.

Gibson Brands Inc.

5/1/18

After months of speculation (which we have covered here and elsewhere), the famed Nashville-based guitar manufacturer has finally filed for Chapter 11. We're old enough to remember this:

Late Tuesday, GIbson Brands CEO Henry Juszkiewicz denied all of the reports and indicated via press release that a plan was underway to salvage the brand.

What Mr. Juszkiewicz didn't say was that "a plan" actually meant a "plan of reorganization." Which is okay: nobody believed him anyway. 

And here's why: in the company's First Day Declaration, the company proudly boasts,

The Debtors' strength, rooted in their iconic Gibson, Epiphone, KRK, and other brands that have shaped the music industry for over 100 years, have been the brands of choice for countless musicians and recording artists, including some of the most legendary guitarists in history such as Muddy Waters, BB King, Elvis Presley, Pete Townsend, Keith Richards, Duane Allman, Elvis Costello, Lenny Kravitz, Slash, Dave Grohl, Joe Bonamassa, and Brad Paisley, among others. 

Anyone else see an issue with this lineup? Legends, sure, but not exactly a group of artists you see listed on Coachella posters. Even in a publicly-available document, this company doesn't know how to market itself to the masses. Case and point, after Guitar Center got its out-of-court deal done last week, we wrote the following:

Gibson may want to embrace the present. But we digress. 

Unbeknownst to many, however, Gibson is more than just its legendary guitars. No doubt, guitars are a big part of its business. According to the company's First Day Declaration (which, for the record, is one of the more jumbled incoherent narratives we've seen in a First Day Declaration in some time), 

Gibson has the top market share in premium electric guitars, selling over 170,000 guitars annually in over eighty (80) countries worldwide and selling over 40% of all electric guitars priced above $2,000.

But the company also expanded to include a "Professional Audio" segment, its musical instrument and pro-audio segment ("MI," which is positive cash flow), and a "Gibson Innovations" business ("GI"), which stems from a 2014 leveraged transaction. The latter business has been a drag on the overall enterprise ever since the transaction eventually leading to breaches of certain financial covenants under the company's senior secured bank debt financing agreements. The company was forced to pay down the debt to the tune of $60 million since the Fall of 2017, a cash drain which severely accentuated liquidity issues within that business. It came to this brutal reality: 

...the GI Business became trapped in a vicious cycle in which it lacked the liquidity to buy inventory and drive sales while at the same time it lacked the liquidity to rationalize its workforce to match its diminished operations.

That's rough. Even rougher is that on April 30, 2018, the GI business initiated formal liquidation proceedings under the laws of at least 8 different countries. Looks like Mr. Juszkiewicz' previous expansion "plan" was an utter disaster. 

⚡️Warning: Geeky stuff to follow ⚡️:

Now, the company is left with restructuring around the EBITDA- positive MI business with the hope of maximizing recovery for stakeholders. The holders of 69% of the principal amount of notes (PETITION NOTE: for the uninitiated, this satisfies the 2/3 in amount requirement of the bankruptcy code; unknown whether they satisfy the second prong of 1/2 in number) have entered into a Restructuring Support Agreement which would effectively equitize the notes and transfer ownership of MI to the noteholders. The company has also entered into a $135 DIP credit facility backstopped by an ad hoc group of noteholders to finance the company's trip through bankruptcy (the mechanic of which effectively rolls up some of the prepetition debt into the postpetition facility, giving the noteholders higher distribution priority). 

The RSA envisions a transaction whereby the company will exit bankruptcy with an untapped asset-backed lending facility and enough exit financing to pay off the DIP facility. So, the noteholders will collect some nice fees for about 9 months. The lenders under the DIP facility will have the option to cover the DIP monies into equity in the reorganized company at a 20% discount to the plan's valuation. 

⚡️Geeky Stuff Over. Now Back to Regularly Scheduled Snark ⚡️:

Naturally, current management has somehow convinced the new owners, i.e., the funds converting their notes into equity, that they're so invaluable that they should receive millions in "transition"-based compensation and warrants for upside preservation. Makes total sense. David Berryman, who runs Epiphone, will get a one year employment agreement paying $3.35 million, 5 year-warrants, and health benefits; Mr. Juszciewicz will get a one year "consulting agreement" paying $2.1 million, 5 year-warrants and health benefits (plus other profit-sharing incentives). It sure pays to run a company into bankruptcy these days. Naturally, they'll also get releases from any liability. Because, you know, bankruptcy!!

One final note: Thomas Lauria and White & Case LLP are listed as the 22nd highest creditor. Popping popcorn. 

• Jurisdiction: D. of Delaware 
• Capital Structure: $17.5 million ABL (Bank of America NA)/ $77.4 million Term Loan (GSO Capital Solutions Fund II AIV-I LP), $375 million '18 8.875% senior secured notes (Wilmington Trust NA), $60 million ITLA loan (GI Business only)
• Company Professionals:
  • Legal: Goodwin Proctor LLP (Michael H. Goldstein, Gregory W. Fox, Barry Z. Bazian) & (local) Pepper Hamilton LLP (David Stratton, David Fournier, Michael Custer, Marcy McLaughlin)
  • Financial Advisor/CRO: Alvarez & Marsal North America LLC (Brian Fox) 
  • Investment Banker: Jefferies LLC (Jeffrey Finger)
  • Independent Directors: Alan Carr & Sol Picciotto
  • Claims Agent: Prime Clerk LLC (*click on company name above for free docket access)
• Other Parties in Interest:
  • DIP Agent: Cortland Capital Market Services LLC
    • Legal: Arnold & Porter Kaye Scholer (D. Tyler Nurnberg, Steven Fruchter, Sarah Gryll) & (local) Young Conaway (same four names as below)
  • Prepetition ABL Agent: Bank of America NA
    • Legal: Winston & Strawn LLP (Jason Bennett, Christina Wheaton)
  • Indenture Trustee: Wilmington Trust NA
    • Legal: Shipman & Goodwin LLP (Marie Hofsdal, Patrick Sibley, Seth Lieberman, Eric Monzo)
  • Ad Hoc Group of Noteholders
    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Brian Hermann, Robert Britton, Adam Denhoff, Kellie Cairns) & (local) Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Sean Greecher, Andrew Magaziner, Betsy Feldman)
  • Ad Hoc Minority Noteholders Committee (Lord Abbett & Co. LLC, Wilks Brothers LLC)
    • Legal: Brown Rudnick LLP (Robert Stark, Steven Levine, Brian Rice) & (local) Ashby & Geddes PA (William Bowden)
  • Equity Holder: GSO Capital Partners LP
    • Legal: White & Case LLP (J. Christopher Shore, Andrew Zatz, Richard Kebrdle) & (local) Fox Rothschild LLP (Jeffrey Schlerf, Carl Neff, Margaret Manning)

Updated 5/2 5:12 pm CT

New Chapter 11 Filing - Ascent Resources Marcellus Holdings, LLC

Ascent Resources Marcellus Holdings, LLC

• 2/6/18 Recap: Oklahoman producer of oil and natural gas in the Marcellus Shale basis filed for bankruptcy to effectuate a prepackaged bankruptcy in agreement with its major creditors. We've seen this movie before. Business is capital intensive...yada yada yada...natural gas prices rolled over...yada yada yada...production volume dropped...yada yada yada...over-levered balance sheet....zzzzz. Basically, you know the drill. The prepackaged plan envisions the term lenders equitizing their debt so that the company can be leaner and meaner; it also leaves open the option for a sale, but no such sale was suitable prior to filing. 
• Jurisdiction: D. of Delaware
• Capital Structure: $750mm first lien credit facility (Cortland Capital Market Services LLC), $450mm second lien secured term loan facility (Cortland)  
• Company Professionals:
  • Legal: Sullivan & Cromwell LLP (Andrew G. Dietderich, Brian D. Glueckstein, Alexa J. Kranzley) & (local) Young Conaway Stargatt & Taylor LLP (Pauline K. Morgan, Joel A. Waite, Kara Hammond Coyle)
  • Financial Advisor: D.R. Payne & Associates, Inc.
  • Investment Banker: PJT Partners (Steven Zelin)
  • Claims Agent: Prime Clerk LLC (*click on company name above for free docket access)
  • Independent Co-Manager: Alan Carr
• Other Parties in Interest:
  • First Lien Credit Agent: Cortland Capital Market Services LLC
    • Legal: Davis Polk & Wardwell LLP
    • Financial Advisor: Moelis & Co. 
  • Second Lien Credit Agent: Cortland Capital Market Services LLC
• Members of the New Board: Jeffrey A. Fisher, Jeffrey A. Ball, Steven J. Pully, Eugene I. Davis, Barry McMahan

Updated: Effective 3/30/18 (no UCC)

New Chapter 11 Filing - ExGen Texas Power LLC

ExGen Texas Power LLC

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

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