New Chapter 11 Bankruptcy Filing - Golden Eagle Entertainment $ENT

Golden Eagle Entertainment

July 22, 2020

Suffice it to say, high correlation to the airline and cruiseline industries is a credit negative these days. A few months ago Speedcast — a provider of information technology services and (largely satellite-dependent) communications solutions (i.e., cybersecurity, content solutions, data and voice apps, IoT, network systems) to customers in the cruise, energy, government and commercial maritime businesses — discovered this the hard way and free fell into bankruptcy court. There’s still no resolution of that case. Similarly, Global Eagle Entertainment Inc. ($ENT), a business that generates revenue by (i) licensing and managing media and entertainment content and providing related services to customers in the airline, maritime and other “away-from-home” nontheatrical markets, and (ii) providing satellite-based Internet access and other connectivity solutions to airlines, cruise ships and other markets, couldn’t avoid trouble once COVID-19 shutdown its core end users. No monthly recurring revenue model can save a company when its clients are effectively closed for business AND there’s $855.6mm of funded debt to service. Not to state the obvious.

Things may get worse before they get better. The company’s largest customer is Southwest Airlines Co. ($LUV) (21% of overall revenue) and it has a pretty bearish take on …

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• Jurisdiction: D. of Delaware (Judge Dorsey)

• Capital Structure: $85mm RCF, $503.3mm TL, $188.7mm second lien notes, $82.5mm unsecured convertible notes.

• Professionals:

  • Legal: Latham & Watkins LLP (George Davis, Madeleine Parish, Ted Dillman, Helena Tseregounis, Nicholas Messana, Eric Leon) & Young Conaway Stargatt & Taylor LLP (Michael Nestor, Kara Hammond, Betsy Feldman)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Greenhill & Co. Inc.

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

• Other Parties in Interest:

  • Prepetition First Lien Admin Agent & DIP Agent: Citibank NA

    • Legal: Weil Gotshal & Manges LLP (David Griffiths, Bryan Podzius)

  • Ad Hoc DIP & First Lien Lender Group: Apollo Global Management, L.P., Eaton Vance Management, Arbour Lane Capital Management, Sound Point Capital Management, Carlyle Investment Management LLC, Mudrick Capital Management, BlackRock Financial Management, Inc.

    • Legal: Gibson Dunn & Crutcher LLP (Scott Greenberg, Michael Cohen, Jason Goldstein) & Pachulski Stang Ziehl & Jones LLP (Laura Davis Jones, TImothy Cairns)

  • Second Lien Agent: Cortland Capital Market Services LLC

  • Second Lien Noteholders: Searchlight Capital Partners LP

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Alan Kornberg, Michael Turkel, Irene Blumberg, Elizabeth Sacksteder) & Richards Layton & Finger PA (Daniel DeFranceschi, Zachary Shapiro)

  • Southwest Airlines Inc.

    • Legal: Vinson & Elkins LLP (William Wallander, Paul Heath, Robert Kimball, Matthew Struble) & Saul Ewing Arnstein & Lehr LLP (Lucian Murley)

  • AT&T Corp.

    • Legal: Arnold & Porter Kaye Scholer LLP (Brian Lohan) & Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Brett Turlington)

  • Terry Steiner International

    • Legal: Loeb & Loeb LLP (Daniel Besikof, Geneva Shi)

  • Telesat International Limited

    • Legal: Hodgson Russ LLP (Garry Graber)

  • Nantahala Capital Management LLC

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

New Chapter 33 Bankruptcy Filing - NorthEast Gas Generation LLC

NorthEast Gas Generation LLC

June 18, 2020

Texas-based NorthEast Gas Generation LLC (along with three affiliates, the “debtors”), an indirect subsidiary of non-debtors Talen Energy Corporation and NorthEast Gas Generation Holdings LLC (f/k/a MACH Gen LLC), filed for bankruptcy in the District of Delaware. This is the third chapter 11 in six years. You could be excused for thinking that, after two prior rodeos, the balance sheet would be pretty light. Alas, that is not the case. The debtors have $585.2mm of funded indebtedness split between a $554.7mm first lien credit facility and a much smaller $30.5mm second lien credit facility (PETITION Note: there are also LOCs of $23.2mm). Behind all of that is approximately $10.5mm of trade debt.

Low natural gas prices have persisted, unfortunately, and that has placed downward pressure on electric energy prices. Moreover, supply continues to outpace demand thanks to energy saving tech, alternatives, and more. Apparently global warming ain’t helping either: a warmer-than-normal winter reduced home heating levels. All of these factors affected the debtors’ ability to generate revenue and service their debt. The bankruptcy filed was tripped by the urgent need for liquidity and the ability to enter into a DIP financing agreement. This critical funding will bridge the debtors to some sort of transaction that will “allow them to effectuate an orderly restructuring process in chapter 11, pursuant to which the Debtors anticipate consummating a transaction that will transfer, sell, or otherwise convey substantially all of the Debtors’ assets to the First Lien Secured Parties or their designee.”

• Jurisdiction: D. of Delaware (Judge Walrath)

• Capital Structure: $585.2mm

• Professionals:

  • Legal: Richards Layton & Finger PA (Mark Collins, Dan DeFranceschi, Jason Madron, Brendan Schlauch)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Houlihan Lokey Capital Inc.

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

• Other Parties in Interest:

  • DIP Admin Agent & DIP Lenders: CLMG Corp. & Beal Bank USA & Beal Bank SSB

    • Legal: White & Case LLP (Scott Greissman, Philip Abelson, Elizabeth Feld, Rashida Adams) & Fox Rothschild LLP (Jeffrey Schlerf)

  • Talen Energy Supply LLC

    • Weil Gotshal & Manges LLP (Matt Barr, Bryan Podzius, Alexander Welch, Ronit Berkovich & Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Taylor Haga)

⛽️ New Chapter 11 Bankruptcy Filing - Vista Proppants and Logistics LLC ⛽️

Vista Proppants and Logistics LLC

June 9, 2020

You wouldn’t know it from the equity price action in oil and gas this week but lest there be any confusion: generally speaking, oil and gas is still very much f*cked.

In case we need to review:$XOG - rumored to be a bankruptcy filer. In grace period due to missed interest payment.$CHK - obvious.$BORR - ???$WLL - already in chapter 11 bankruptcy.$VAL - rumored to be a bankruptcy filer. In grace period due to missed interest payment. pic.twitter.com/K0XB1bUJ3R

— 💥PETITION💥 (@petition) June 8, 2020

Privately-held (The Lonestar Prospects Holdings Company LLC and First Reserve) Texas-based Vista Proppants and Logistics LLC (along with its affiliate filers, the “debtors”) is yet another victim of the oil and gas malaise. Its principal business is producing mine-to-wellhead high-quality, fine-grade “Texas Premium White” frac sand for end users in TX and OK. The business includes mining (via debtor subsidiary Lonestar Prospects Management LLC), trucking (via debtor subsidiary MAALT LP, and transloading (via debtor subsidiary MAALT Specialized Bulk LLC). The company operates three mines in Texas, twelve transloading terminals in TX and OK, three trucking facilities in TX, and a fleet of approximately 100 “last-mile” transport vehicles. Spoiler alert: when oil prices break through the floor and everyone cuts back capacity, there ain’t a whole lot of need for frac sand. Toss in a little COVID into the mix — further decimating the oil and gas space — and, well, here we are in bankruptcy court. The debtors have shut down their mining operations and aren’t engaging in any trucking and transloading activity.

As you might expect, even with all of the cost cutting initiatives under the sun, not operating can have an effect on liquidity. And indeed that’s the case here: the debtors ran out of money to service their operations and their $357+mm of debt (Ares Capital Corporation ($ARCC)). The bankruptcy filing avails the debtors of $11mm of DIP financing and provide an opportunity for the debtors to pursue a sale of their assets to Ares or a third-party buyer.

The other thing this bankruptcy filing does is provide the debtors of the same opportunity that previous frac sand provider, Emerge Energy Services, took advantage of in bankruptcy court. That is, the rejection of railcar leases. These fixed cost contracts make no sense for the debtors anymore as they simply don’t have the volumes to transport. Indeed, the debtors have already filed a slate of contract rejection motions.

Along those lines, this isn’t the first frac sand chapter 11 bankruptcy and it likely isn’t the last either.

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*For the avoidance of doubt, ARCC placed this sucker on non-accrual previously. Notably, Bloomberg reported on various comments that Ares’ CEO Michael Arougheti said this week at the Morgan Stanley Virtual U.S. Financials Conference:

“There is a little bit of a risk that people are underestimating the level of distress in the small business and consumer landscape absent the government support,” Michael Arougheti, chief executive officer at Ares Management Corp. said. “When you look at the government aid programs, they’ve generally been structured to get us through June and July, and after that is a big question mark.”

Vista seems apropos of that comment. The question is whether Vista is also the canary in the coal mine for BDC investments. Bloomberg also noted:

The firm’s portfolio companies have received capital injections from equity owners to support business, he said. Within its credit holdings, Ares has been able to negotiate stronger covenants and higher loan prices. The firm is “cautiously optimistic” of receiving debt payments in June, he said.

Set your alarms.

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• Jurisdiction: N.D. of Texas (Judge Morris)

• Capital Structure: $357.5mm Term Loan (Ares Capital Corporation), $21.9mm ABL (PlainsCapital Bank), MAALT Facility

• Professionals:

  • Legal: Haynes and Boone LLP (Stephen Pezanosky, Ian Peck, David Staab)

  • Financial Advisor: Alvarez & Marsal LLC (Gary Barton)

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

• Other Parties in Interest:

  • Ares Capital Corporation

    • Legal: Sidley Austin LLP (Dennis Twomey, Charles Persons, Juliana Hoffman)

  • Lonestar

    • Legal: Jackson Walker LLP (Kenneth Stohner Jr., Vienna Anaya)

  • PlainsCapital Bank

    • Legal: Foley & Lardner LLP (Holland O’Neil, Thomas Scannell)

⛽️ New Chapter 11 Bankruptcy Filing - Templar Energy LLC ⛽️

Templar Energy LLC

May 31, 2020

Templar Energy LLC (and six affiliates, the “debtors”), an Oklahoma City-based independent oil and gas exploration and production company that operates primarily in the Greater Anadarko Basin of Western Oklahoma and the Texas Panhandle, filed a prepackaged plan of liquidation early Monday morning — the culmination of a multi-year effort to stave off the inevitable.

A quick flashback. Four years ago oil and gas companies were collapsing into bankruptcy left and right. After oil and gas prices fell hard, the oil and gas tide rolled out and left a lot of investors stranded naked on the beach. Most funds were of the view that this was just a hiccup. One fund after another raised billions after billions of dollars thinking that energy was “where it’s at.” We now know how off-kilter that thesis was.

Some companies back then were luckier than others. Thanks in large part to its relatively simple and highly concentrated capital structure and a clear demarcation of value based on prevailing commodity prices of the time, in September 2016, Templar Energy was able to consummate an out-of-court restructuring that extinguished $1.45b of second lien debt. Repeat: $1.45 BILLION of second lien debt — a tremendous amount of value destruction a mere four years after the company’s formation. Of course, as with all things there are nuances here. “Value destruction” is a relative phrase that applies to the par holders of the debt when originally issued. Certain second lien lenders who participated in the out-of-court restructuring may very well have purchased the paper for cents on the dollar once the par guys had to pull the ripcord. Destruction there, therefore, is a function of price. There’s no way to know (from publicly available information) whether any of the original holders of second lien paper came out ahead upon receiving $133mm in cash and 45% of the equity in exchange for their second lien paper. It’s certainly possible that some did.

It’s also highly probable that some didn’t. Take Ares Management LLC, Bain Capital and Paulson & Co. Inc. for instance; they each participated in a rights offering for participating preferred equity in the company in exchange for $220mm dumped into this turd (plus $145mm placed by legacy equity holders). Given that the RBL IS NOW IMPAIRED here, clearly that equity check hasn’t borne fruit. It was also used to pay the aforementioned $133mm of cash recovery so … suffice it to say … this does not seem like one that the aforementioned funds will be referencing in future LP-oriented marketing materials.

Emanating out of that ‘16 transaction is the debtors’ current $600mm RBL. This time around, it is the fulcrum security. The debtors note, “Critically the claims under the RBL Facility are deeply impaired.” And the RBL lenders have no intention of owning the assets — predominantly leases with various oil and gas mineral owners covering non-exclusive working interests in approximately 2,165 oil and gas wells over approximately 273,400 continuous acres of property. Let’s be clear here: first lien lenders generally aren’t in the business of horizontal drilling and hydraulic fracking. Of course, right now, the debtors aren’t really in the business of horizontal drilling and hydraulic fracking. At least technically speaking. Given where oil and gas prices are — thanks Putin/MBS on the supply side, COVID-19 on the demand side — the debtors aren’t even conducting any drilling. Typically they operate anywhere up to 13 rigs at a time. All of which is to say that the lenders’ position explains why this is a sale + plan of liquidation case rather than a second debt-for-equity play.*

To aid the debtors’ attempts to continue pre-petition sale efforts post-petition, certain of the RBL Lenders have committed to a $37.5mm DIP (with a 0.5-to-1 $12.5mm rollup). Pursuant to a restructuring support agreement, the RBL lenders have agreed to receive their pro rata share of any net sale proceeds and all remaining cash held by the debtors’ estates as of the plan effective date minus (i) cash needed to repay the DIP, (ii) wind down funds, and (iii) monies placed into a professional fee escrow. Royalty owners, materialman and mechanics’ lienholders will be paid in full. General unsecured claimants and equity will get wiped.

*We should note — to hammer home the point — that one of the events that hammered the debtors’ liquidity position was the RBL lenders’ April 1, 2019 redetermination down of the RBL borrowing base to $415mm. This regularly scheduled redetermination analysis created an immediate $22mm “deficiency payment” liability for the debtors as it had $437mm borrowed at the time. The debtors stopped making those payments in November 2019. They’ve been in a state of forbearance with the RBL lenders ever since.

$37.5mm DIP with $12.5 rollup

• Jurisdiction: D. of Delaware (Judge )

• Capital Structure:

• Professionals:

  • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Paul Basta, Robert Britton, Sarah Harnett, Teresa Li) & Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Jaime Luton Chapman, Tara Pakrouh)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Guggenheim Securities LLC (Morgan Suckow)

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

• Other Parties in Interest:

  • DIP Agent ($37.5mm): Bank of America NA

  • Consenting RBL Lenders

    • Legal: Morgan Lewis & Bockius LLP (Amy Kyle, Andrew Gallo) & Richards Layton & Finger PA

    • Financial Advisor: RPA Advisors LLC

  • Large Class A equityholders: Ares Management LLC, Paulson & Co. Inc., Bain Capital, Lord Abbett, Archview Investment, Bank of America, Seix Advisors, Bardin Hill/Halcyon Loan Invest Management, Oppenheimer Funds

New Chapter 11 Bankruptcy Filing - Centric Brands Inc. ($CTRC)

Centric Brands Inc.

May 18, 2020

New York-based Centric Brands Inc. ($CTRC)(f/k/a Differential Brands Group Inc., Joe’s Jeans Inc., and Innovo Group Inc.) and 34 affiliates (the “debtors”) filed for chapter 11 bankruptcy earlier this week after COVID-19 ripped through the economy and disrupted retail operations all over the country. You’ve likely never heard of Centric Brands Inc. (unless you happened to have a soft spot for esoteric brand stocks). But there is a very good chance that you’ve purchased one of its licensed products or one of its privately-owned brands. They’re ubiquitous. And they’re ubiquitous because the company’s reach has expanded aggressively over the years.

The company started in 1987, acquired Joe’s Jeans in 2007, acquired Hudson Brand in 2013, merged with Robert Graham in 2015, acquired SWIMS in 2016 and then acquired Global Brands Group Holding Limited in 2018 for $1.2b. The majority of the company’s $1.7b of funded debt emanates out of that last transaction. More on this in a moment.

In addition to the aforementioned private brands, the company designs, produces, merchandises, manages and markets approximately 100 brands pursuant to various licenses. These brands include AllSaints, Calvin Klein, Disney, Jessica Simpson, Kenneth Cole, Tommy Hilfiger and many more. The company sells its licensed and private-brands in one of three categories: kids, accessories, and men’s and women’s apparel. The former two grew from ‘18 to ‘19. The latter…well…not so much. All of the company’s product is made in Asia or Mexico.

For distribution, the company sells wholesale to, among others, bigbox retailers like Walmart Inc. ($WMT) and Target Inc. ($TGT), to department stores like Macy’s Inc. ($M), Kohls Corporation ($KSS) and J.C. Penney Corporation ($JCPQ), to off-price retailers like TJX Companies ($TJX) and Ross Stores ($ROST), and on Amazon Inc. ($AMZN). It also has brick-and-mortar stores for its private label brands Robert Graham (33 stores) and SWIMS (one store) as well as certain licensed brands like BCBG (46 stores), Joe’s Jeans (13), and Herve Leger (one). Finally, the company operates partner shop-in-shops for BCBG with big department stores.

Bankruptcy aficionados are familiar with the BCBG brand. BCBG filed for bankruptcy itself back in March 2017. Marquee Brands LLC later acquired the entire portfolio of brands from BCBG Max Azria Global Holdings — including BCBGMAXAZRIA, BCBGeneration and Herve Leger — for $108mm later that year. Marquee’s licensing partner? Global Brands Group Holding Limited, which, as noted above, is now part of Centric Brands. Through license agreements entered into back in July 2017, Centric has the right to manufacture and distribute certain licensed BCBG product; it also has the right to use certain intellectual property for retail and e-commerce sales.

Back in April, BCBG and the company started getting after it. BCBG was pissed because the company owed it $3mm in royalty payments. After the company continued not to pay, BCBG terminated the agreement. Now the parties have a settlement. The company is rejecting the licensing agreements, agreeing to let BCBG setoff $3mm against its pre-petition claim (which is capped at $20mm and pledged in support of the plan), and agreeing to pay ongoing royalties on the goods to be supplied to wholesale partners. Marquee Brands LLC is taking the licenses back and intends to add BCBG to its e-commerce portfolio.*

Soooooo…what happens to those brick-and-mortar locations we mentioned earlier? The debtors filed a motion already seeking to reject nonresidential real property leases effective as of the petition date. The debtors seek approval to reject seven Robert Graham leases, 42 BCBG leases and one Joe’s Jeans lease. Of those rejected leases 25 are in locations managed by Simon Property Group ($SPG). But, sure, the “A” malls are juuuuuuuust fine folks. Nothing to see here.

Well, except the capital structure. It’s so large it’s kinda hard to miss. The company has:

• $163.9mm RCF,

• $20mm ‘20 term loan bridge,

• $631.9mm ‘23 first lien term loan (HPS Investment Partners, Ares Capital Corporation)

• $719.8mm second lien term loan (GSO Capital Partners LP and Blackstone Tactical Opportunities Fund),

• $200.3mm securitization facility, and

• $28.7mm unsecured convertible notes plus $10mm modified convertible notes.

Luckily the holdings are concentrated among the above-noted funds. Accordingly, HPS, Ares and Blackstone will end up lenders in an exit first lien term loan and own the reorganized equity on the backend of this restructuring. HPS and Ares will own 30% of the equity and Blackstone will own 70% (subject to dilution). Your kids’ favorite licensed casualwear powered by private equity!**

*It is unclear what Marquee Brands LLC will do with the BCBG wholesale business. This article suggests they’ll do something and then goes on to emphasize only the e-commerce approach.

**The case will be powered by a $435mm DIP credit facility of which $275mm will be provided by the revolving lenders (and will rollup the pre-petition facility) and roll into an exit facility. The remaining $160mm will be a DIP term loan provided by Blackstone which will role into the exit first lien term loan with the first lien term lenders. The debtors will also extend its existing Securitization Facility.

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

• Capital Structure: $163.9mm RCF, $20mm ‘20 term loan bridge, $631.9mm ‘23 first lien term loan, $719.8mm second lien term loan, $200.3mm securitization facility, $28.7mm unsecured convertible notes, $10mm modified convertible notes

• Professionals:

  • Legal: Ropes & Gray LLP (Gregg Galardi, Christine Pirro Schwarzman, Daniel Egan, Emily Kehoe)

  • Financial Advisor/CRO: Alvarez & Marsal LLC (Joseph Sciametta)

  • Investment Banker: PJT Partners LP (James Baird)

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

• Other Parties in Interest:

  • Prepetition First Lien Revolver & DIP Agent ($275mm): ACF Finco I LP

    • Legal: Morgan Lewis & Bockius LLP (Julia Frost-Davies, Laura McCarthy)

  • First Lien Lenders: HPS Investment Partners, Ares Capital Corporation

    • Legal: Latham & Watkins LLP (Richard Levy, James Ktsanes)

  • Preptition Second Lien TL & DIP TL Agent ($160mm): US Bank NA

    • Legal: Nixon Peabody LLP (Catherine Ng)

  • Second Lien Lenders and DIP TL Lenders: GSO Capital Partners LP and Blackstone Tactical Opportunities Fund

    • Legal: Akin Gump Strauss Hauer & Feld LLP (Ira Dizengoff, Philip Dublin, Brad Kahn)

  • Receivables Purchase Agreement Agent

    • Legal: Mayer Brown LLP (Brian Trust)

  • Major equityholders: Cede & Co., GSO Capital Opportunities Fund III LP, GSO CST III Holdco LP, TCP Denim LLC, Tengram Capital Partners Fund II LP, Ares Capital Corporation

New Chapter 11 Bankruptcy Filing - Neiman Marcus Group LTD LLC

Neiman Marcus Group LTD LLC

May 7, 2020

Dallas-based Neiman Marcus Group LTD LLC, Bergdorf Goodman Inc. and 22 other debtors filed for chapter 11 bankruptcy in the Southern District of Texas late this week. If anyone is seeking an explanation as to why that may be outside the obvious pandemic-related narrative, look no farther than this monstrosity:

A quick reality check: that $5b capital structure isn’t attached to an international enterprise with hundreds or thousands of stores. You know, like Forever21. Rather, that horror show backs a 68 store business (43 Neiman Marcus, 2 Bergdorf, 22 Last Call). Ah….gotta love the good ol’ $5b leveraged buyout.

This case is all about “BIG.”

Big capital structure stemming from a big LBO by two big PE funds, Ares Capital Management and CPP Investment Board USRE Inc.

Big brands with big price tags. PETITION Note: top unsecured creditors include Chanel Inc., Gucci America, Dolce and Gabbana USA Inc., Stuart Weitzman Inc., Theory LLC, Christian Louboutin, Yves Saint Laurent America Inc., Burberry USA, and more. There is also a big amount allocated towards critical vendors: $42.5mm. Nobody messes with Gucci, folks. Here’s a live shot of a representative walking out of court confident that they’ll get their money:

Big fees. More on this below.

Big, complicated — and controversial — multi-year re-designation and asset stripping transactions that were part of the debtors’ (and now non-debtors’) elaborate strategy to restructure out-of-court by kicking the can down the road. This is undoubtedly going to stir a big fight in the case. More on this below too.

Big value destruction.

Here is what will happen to the pre-petition capital structure under the proposed term sheet and restructuring support agreement filed along with the chapter 11 papers — a deal that has the support of 78% of the term lenders, 78% of the debentures, 99% of the second lien notes, 70% of the third lien notes, and 100% of the private equity sponsors:

The Asset-Based Revolving Credit Facility and FILO Facility will get out at par. There’ll be a $750mm exit facility. Beyond that? All that red constitutes heaps and heaps of value that’s now essentially an option. It’s a bet that there is a place in the future for brick-and-mortar luxury department stores. Pursuant to the deal, the “Extended Term Loans” will get the lion’s share of equity (87.5%, subject to dilution). The rest of the capital structure will get small slivers of reorganized equity. General unsecured creditors will get “their pro rata share of a cash pool.” The private equity sponsors will get wiped out but for their hoped-for liability releases.

Back to those big fees. The biggest issue for this week was the debtors’ proposed $675mm new money DIP credit facility (that comes in junior to the existing ABL in priority…in other words, no roll-up here). The DIP is essentially 13% paper chock full of fees (including a backstop fee payable in “NewCo equity” at 30% discount to plan value). One disgruntled party, Mudrick Capital Management, a holder of $144mm of the term loan, appears to have beef with Pimco and other DIP backstop parties — saying that the backstop agreement is inappropriate and the DIP fees are outrageous, likening the fee grab to a COVID hoarding mentality — and therefore felt compelled to cross-examine the debtors’ banker as to the reasonableness of it all. If you’ve ever imagined a kid suing other kids for not picking him for their dodgeball team, it would look something like this did.

And so Lazard’s testimony basically boiled down to this:

“Uh, yeah, dude, nobody knows when the economy will fully open up. The company only has $100mm of cash on the petition date. And IT’S NOT OPERATING. That money is enough for maybe 3 weeks of cash burn given that the debtors intend to continue paying rent (unlike most other retailers that have filed for bankruptcy lately). Damn pesky high-end landlords. Anyway, so we’ll burn approximately $300mm between now and when stores are projected to reopen in July/August. No operating cash flow + meaningful cash burn = risky AF lending environment. It’s unprecedented to lend into a situation with a cash burn that, while it pales in comparison to something like Uber, is pretty damn extreme. Look at the J.Crew DIP: it ain’t exactly cheap to lend in this market. There are no unencumbered assets; there certainly isn’t a way to get junior financing. And a priming fight makes no sense here given the impossibility of showing an equity cushion. So stop being an entitled little brat. There’s no obligation on anyone to cut you into the deal. And if you’re going to cry over spilled milk, take up your beef with Pimco and f*ck right off. Alternatively, you can subscribe to your pro rata portion of the DIP and enjoy all of the fees other than the backstop fee.”

The Judge was convinced that the above rationale constituted good business judgment and approved the DIP on an interim basis.

The hearing also foreshadowed another contentious issue in the case: the myTheresa situation. See, the Debtors’ position is the following: “The ‘17 MyTheresa designation as unrestricted subs + the ‘18 distribution of the myTheresa operating companies to non-debtor Neiman Marcus Group Inc. (a/k/a the “asset stripping” transaction) + a ‘19 wholesale amend-and-extend + cost-saving initiatives + comparable same store sales growth for 7 of 10 quarters + “significantly expanded margins” during the holiday period = rocket ship future growth but for the damn pandemic. On the flip side, Marble Ridge Capital LP takes the position that:

…the Debtors’ financial troubles were entirely foreseeable well before recent events. The Company has operated at leverage multiples more than twice its peers since at least 2018 (prior to the fraudulent transfers described herein). And last year’s debt restructuring increased the Company’s already unsustainable annual interest expense by more than $100 million while only reducing the Company’s debt load by $250 million leaving a fraction of adjusted EBITDA for any capital expenditures, principal repayment, taxes or one-time charges. Sadly, the Debtors’ financial distress will come as no surprise to anyone.

This ain’t gonna be pretty. Marble Ridge has already had one suit for fraudulent transfer dismissed with prejudice at the pleading stage. Now there are defamation and other claims AGAINST Marble Ridge outstanding. And subsequent suits in the NY Supreme Court. Have no fear, though, folks. There are independent managers in the mix now to perform an “independent” investigation into these transactions.

The debtors intend to have a plan on file by early June with confirmation in September. Until then, pop your popcorn folks. You can socially distance AND watch these fireworks.

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

• Capital Structure: See above.

• Professionals:

  • Legal: Kirkland & Ellis LLP (Anup Sathy, Chad Husnick, Matthew Fagen, Austin Klar, Gregory Hesse, Dan Latona, Gavin Campbell, Gary Kavarsky, Mark McKane, Jeffrey Goldfine, Josh Greenblatt, Maya Ben Meir) & Jackson Walker LLP (Matthew Cavenaugh, Jennifer Wertz, Kristhy Peguero, Veronica Polnick)

  • Independent Managers of NMG LTD LLC: Marc Beilinson, Scott Vogel

    • Legal: Willkie Farr & Gallagher LLP (Brian Lennon, Todd Cosenza, Jennifer Hardy, Joseph Davis, Alexander Cheney)

    • Financial Advisor: Alvarez & Marsal LLC (Dennis Stogsdill)

  • Independent Manager of Mariposa Intermediate Holdings LLC: Anthony Horton

    • Legal: Katten Muchin Rosenman LLP

  • Neiman Marcus Inc.

    • Legal: Latham & Watkins LLP (Jeffrey Bjork)

  • Financial Advisor/CRO: Berkeley Research Group LLC (Mark Weinstein, Kyle Richter, Marissa Light)

  • Investment Banker: Lazard Freres & Co. LLC (Tyler Cowan)

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

• Other Parties in Interest:

  • Pre-petition ABL Agent: Deutsche Bank AG New York Branch

    • Legal: White & Case LLP (Scott Greissman, Andrew Zatz, Rashida Adams) & Gray Reed & McGraw LLP (Jason Brookner, Paul Moak, Lydia Webb)

  • FILO Agent: TPG Specialty Lending Inc.

    • Schulte Roth & Zabel LLP (Adam Harris, Abbey Walsh, G. Scott Leonard) & Jones Walker LLP (Joseph Bain)

  • Pre-petition Term Loan Agent: Credit Suisse AG Cayman Islands Branch

    • Legal: Cravath Swaine & Moore LLP (Paul Zumbro, George Zobitz, Christopher Kelly) & Haynes and Boone LLP (Charles Beckham, Martha Wyrick)

  • Second Lien Note Agent: Ankura Trust Company LLC

  • Third Lien Note Agent: Wilmington Trust NA

  • Unsecured Notes Indenture Trustee: UMB Bank NA

    • Legal: Kramer Levin Naftalis & Frankel LLP (Douglas Mannal, Rachael Ringer)

  • 2028 Debentures Agent: Wilmington Savings Fund Society FSB

  • Ad Hoc Term Loan Lender Group (Davidson Kempner Capital Management LP, Pacific Investment Management Company LLC, Sixth Street Partners LLC)

    • Legal: Wachtell Lipton Rosen & Katz (Joshua Feltman, Emil Kleinhaus) & Vinson & Elkins LLP (Harry Perrin, Kiran Vakamudi, Paul Heath, Matthew Moran, Katherine Drell Grissel)

    • Financial Advisor: Ducera Partners LLC

  • Ad Hoc Secured Noteholder Committee

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Andrew Rosenberg, Alice Belisle Eaton, Claudia Tobler, Diane Meyers, Neal Donnelly, Patricia Walsh, Jeffrey Recher) & Porter Hedges LLP (John Higgins, Eric English, M. Shane Johnson)

    • Financial Advisor: Houlihan Lokey Capital Inc.

  • Large Creditor: Chanel Inc.

    • Legal: Sheppard Mullin Richter & Hampton LLP (Justin Bernbrock, Michael Driscoll)

  • Large Creditor: Louis Vuitton USA Inc.

    • Legal: Barack Ferrazzano Kirschbaum & Nagelberg LLP (Nathan Rugg)

  • Large Creditor: Moncler USA Inc.

    • Legal: Morrison Cohen LLP (Joseph Moldovan, David Kozlowski)

  • Marble Ridge Capital LP & Marble Ridge Master Fund LP

    • Legal: Brown Rudnick LLP (Edward Weisfelner, Sigmund Wissner-Gross, Jessica Meyers, Uchechi Egeonuigwe)

  • Mudrick Capital Management LP

    • Legal: Gibson Dunn & Crutcher LLP (Michael Rosenthal, Mitchell Karlan, David Feldman, Keith Martorana, Jonathan Fortney)

  • Sponsor: CPP Investment Board USRE Inc.

    • Legal: Debevoise & Plimpton LLP (Jasmine Ball, Erica Weisgerber) & Pillsbury Winthrop Shaw Pittman LLP (Hugh Ray, William Hotze, Jason Sharp)

  • Sponsor: Ares Capital Management

    • Legal: Milbank LLP (Dennis Dunne, Thomas Kreller)

  • Official Committee of Unsecured Creditors

    • Legal: Pachulski Stang Ziehl & Jones LLP (Richard Pachulski) & Cole Schotz PC (Daniel Rosenberg)

    • Financial Advisor: M-III Advisory Partners LP (Mohsin Meghji)

    • Valuation Expert: The Michel-Shaked Group (Israel Shaked)

⛽️New Chapter 11 Bankruptcy Filing - Diamond Offshore Drilling Inc. ($DO)⛽️

Diamond Offshore Drilling Inc.

April 26, 2020

Houston-based Diamond Offshore Drilling Inc. and 14 affiliates (the “debtors”), a contract drilling services provider to the oil and gas industry filed for bankruptcy in the Southern District of Texas. The company has 15 offshore drilling rigs: 11 semi-submersibles and four ultra-deepwater drillships deployed around the world (primarily in the Gulf of Mexico, Australia, Brazil and UK). Offshore drilling was already challenged due to excess supply of rigs — and has been since 2014. Recent events have made matters much much worse.

Thanks MBS. Thanks Putin. Thanks…uh…debilitating pandemic. The left-right combination of the Saudi/OPEC/Russia oil price war and COVID-19 has the entire oil and gas industry wobbling against the ropes. The pre-existing reality for offshore services companies “worsened precipitously” because of all of this. And so many companies will fall. The question is at what count and at what strength will they be able to get back on their feet. Given that this is a free-fall into bankruptcy with no pre-negotiated deal with lenders, it seems that nobody knows the answer. How could they? More on this below.

Unfortunately, the services segment the debtors play in is particularly at risk. “Almost all” of the debtors’ customers have requested some form of concessions on $1.4b of aggregate contract backlog. One customer, Beach Energy Ltd. ($BEPTF), “recently sought to formally terminate its agreement with the Company” (an action that is now the subject of an adversary proceeding filed in the bankruptcy cases). The debtors have been immersed in negotiations with their contract counter-parties to navigate these extraordinary times. It doesn’t help when business is so concentrated. Hess Corporation ($HES) is 30% of annual revenue; Occidental Petroleum Corporation ($OXY) is 21%; and Petrobras ($PBR) is 20%. BP PLC ($BP) and Royal Dutch Shell ($RDS.A) are other big customers.

With the writing on the wall, the debtors smartly drew down on their revolving credit facility — pulling $436mm out from under Wells Fargo Bank NA ($WFC). WFC must’ve loved that. Times like these really give phrases like “relationship banking” entirely new meaning. The debtors also elected to forgo a $14mm interest payment on its 2039 senior notes. Yep, you read that right: the company previously issued senior notes that weren’t set to mature until 2039. Not exactly Argentina but holy f*ck that expresses some real optimism (and froth) in the markets (and that issuance isn’t even the longest dated maturity but let’s not nitpick here)!

Yeah, so about that capital structure. In total, the debtors have $2.4b in funded debt. In addition to their $442mm of drawing under their revolving credit facility, the debtors have:

• $500mm of 5.7% ‘39 senior unsecured notes;

• $250mm of 3.45% ‘23 senior unsecured notes;

• $750mm of 4.875% ‘43 senior unsecured notes; and

• $500mm of 7.785% ‘25 senor unsecured notes.

As we’ve said time and time again: exploration and production is a wildly capital intensive business.

So now what? As we said above, there’s no deal here. The debtors note:

The Debtors determined to commence these Chapter 11 Cases to preserve their valuable contract backlog, and preserve their approximately $434.9 million in unrestricted cash on hand while avoiding annual interest expense of approximately $140.1 million under the Revolving Credit Facility and the Senior Notes, and to stabilize operations while proactively restructuring their balance sheet to successfully compete in the changing global energy markets. The Debtors and their Advisors believe cash on hand provides adequate funding at the outset of these cases. The Debtors are well-positioned to successfully emerge from bankruptcy with a highly marketable fleet, a solid backlog of activity, a strong balance sheet and liquidity position, and a differentiated approach and set of capabilities. Despite the volatile and current uncertain market conditions, the Debtors remain confident in the need for their industry, its importance around the world, and the critical services they provide.

We suspect the debtors will hang out in bankruptcy for a bit. After all, placing a value on how “critical” these services are in the current environment is going to be a challenge (though the relatively simple capital structure makes that calculation significantly easier…assuming the value extends beyond WFC). One thing seems certain: Loews Corporation ($L) is gonna have to write-down the entirety of its investment here.

*****

We’d be remiss if we didn’t highlight that, similar to Whiting Petroleum’s execs, the debtors’ executives here got paid nice bonuses just prior to the bankruptcy filing. PETITION Note: We don’t have data to back this up but there appeared to be a much bigger uproar in Whiting’s case about this than here. Which is not to say that people aren’t angry — totally factually incorrect — but angry:

Because equity-based comp doesn’t exactly serve as “incentive” when the equity is worth bupkis, the debtors paid $3.55mm to employees a week before the filing and intend to file a motion to seek bankruptcy court approval of their go-forward employee programs.

---

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

• Capital Structure: $442mm RCF (inclusive of LOC)(Wells Fargo Bank NA). See above.

• Professionals:

  • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Paul Basta, Robert Britton, Christopher Hopkins, Shamara James, Alice Nofzinger, Jacqueline Rubin, Andrew Gordon, Jorge Gonzalez-Corona) & Porter Hedges LLP (John Higgins, Eric English, M. Shane Johnson, Genevieve Graham)

  • Financial Advisor: Alvarez & Marsal LLC (Nicholas Grossi)

  • Investment Banker: Lazard Freres & Co. LLC

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

• Other Parties in Interest:

  • Prepetition RCF Agent: Wells Fargo Bank NA

    • Legal: Bracewell LLP

    • Financial Advisor: FTI Consulting

  • Indenture Trustee: The Bank of New York Mellon

  • Ad Hoc Group of Senior Noteholders

    • Legal: Milbank LLP

    • Financial Advisor: Evercore Group LLC

  • Major Equityholder: Loews Corporation

    • Legal: Sullivan & Cromwell LLP (James Bromley)

  • Official Committee of Unsecured Creditors: The Bank of New York Mellon Trust Company NA, National Oilwell Varco LP, Deep Sea Mooring, Crane Worldwide Logistics LLC, Kiswire Trading Inc., Parker Hannifin Corporation, SafeKick Americas LLC

    • Legal: Akin Gump Strauss Hauer & Feld LLP (Ira Dizengoff, Philip Dublin, Naomi Moss, Marty Brimmage, Kevin Eide, Patrick Chen, Matthew Breen)

    • Financial Advisor: Berkeley Research Group LLC (Christopher Kearns)

    • Investment Banker: Perella Weinberg Partners LP (Alexander Tracy)

📺 New Chapter 11 Bankruptcy Filing - Frontier Communications Inc. ($FTR) 📺

Frontier Communications Inc.

April 14, 2020

We often highlight how, particularly in the case of oil and gas companies, capital intensive companies end up with a lot of debt and a lot of debt often results in bankruptcy. In the upstream oil and gas space, exploration and production companies need a lot of upfront capital to, among other things, enter into royalty interest agreements with land owners, hire people to map wells, hire people to drill the earth, secure proper equipment, procure the relevant inputs and more. E&P companies literally have to shell out to pull out.

Similarly, telecommunications companies that want to cover a lot of ground require a lot of capital to do so. From 2010 through 2016, Connecticut-based Frontier Communications Inc. ($FTR) closed a series of transactions to expand from a provider of telephone and DSL internet services in mainly rural areas to a large telecommunications provider to both rural and urban markets across 29 states. It took billions of dollars in acquisitions to achieve this. Which, in turn, meant the company took on billions of dollars of debt to finance said acquisitions. $17.5b, to be exact. Due, in large part, to the weight of that heavy debt load, it, and its 28922932892 affiliates (collectively, the “debtors”), are now chapter 11 debtors in the Southern District of New York (White Plains).*

The debtors underwrote the transactions with the expectation that synergistic efficiencies would be borne out and flow to the bottom line. PETITION readers know how we feel about synergies: more often than not, they prove elusive. Well:

Serving the new territories proved more difficult and expensive than the Company anticipated, and integration issues made it more difficult to retain customers. Simultaneously, the Company faced industry headwinds stemming from fierce competition in the telecommunications sector, shifting consumer preferences, and accelerating bandwidth and performance demands, all redefining what infrastructure telecommunications companies need to compete in the industry. These conditions have contributed to the unsustainability of the Company’s outstanding funded debt obligations—which total approximately $17.5 billion as of the Petition Date.

Shocker. Transactions that were meant to be accretive to the overall enterprise ended up — in conjunction with disruptive trends and intense competition — resulting in an astronomical amount of value destruction.

As a result of these macro challenges and integration issues, Frontier has not been able to fully realize the economies of scale expected from the Growth Transactions, as evidenced by a loss of approximately 1.3 million customers, from a high of 5.4 million after the CTF Transaction closed in 2016 to approximately 4.1 million as of January 2020. Frontier’s share price has dropped … reflecting a $8.4 billion decrease in market capitalization.

😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬

Consequently, the debtors have been in a state of liability management ever since the end of 2018. Subsequently, they (i) issued new secured notes to refinance a near(er)-term term loan maturity, (ii) amended and extended their revolving credit facility, and (iii) agreed to sell their northwest operations and related assets for $1.352b (the “Pacific Northwest Transaction”). The Pacific Northwest Transaction has since been hurdling through the regulatory approval process and seems poised to close on April 30, 2020.**

While all of these machinations were positive steps, there were still major issues to deal with. The capital structure remained robust. And “up-tier” exchanges of junior debt into more senior debt to push out near-term maturities were, post-Windstream***, deemed too complex, too short-term, and too likely to end up the subject of fierce (and costly) litigation**** As the debtors’ issued third quarter financials that were … well … not good, they announced a full drawn down of their revolver, instantly arming them with hundreds of millions of dollars of liquidity.

$FTR with the clean sweep - Revs, margins, ebitda, FCF, churn, subs, ARPC all worse sequentially. https://t.co/vn49m5PDPP

— JV (@AyyouEm) November 5, 2019

The company needed reconstructive surgery. Band-aids alone wouldn’t be enough to dam the tide. In many respects, the company ought to be commended for opting to address the problem in a wholesale way rather than piecemeal kick, kick, and kick the can down the road — achieving nothing but short-term fixes to the enrichment of really nobody other than its bankers (and Aurelius).

And so now the company is at the restructuring support agreement stage. Seventy-five percent of the holders of unsecured notes have agreed to an equitization transaction — constituting an impaired consenting class for a plan of reorganization to be put on file within 30 days. Said another way, the debtors are taking the position that the value breaks within the unsecured debt. That is, that the value is at least $6.6b making the $10.949b of senior unsecured notes the “fulcrum security.” Unsecured noteholders reportedly include Elliott Management Corp., Apollo Global Management LLC, Franklin Resources Inc., and Capital Group Cos. They would end up the owners of the reorganized company.

What else is the RSA about?

• Secured debt will be repaid in full on the effective date;

• A proposed DIP (more on this below) would roll into an exit facility;

• The unsecured noteholders would, in addition to receiving equity, get $750mm of seniority-TBD take-back paper and $150mm of cash (and board seats);

• General unsecured creditors would ride through and be paid in full; and

• Holders of secured and unsecured subsidiary debt will be reinstated or paid in full.

The debtors also obtained a fully-committed new money DIP of $460mm from Goldman Sachs Bank USA. This has proven controversial. Though the DIP motion was not up for hearing along with other first day relief late last week, the subject proved contentious. The Ad Hoc First Lien Committee objected to the DIP. Coming in hot, they wrote:

Beneath the thin veneer in which these so-called “pre-arranged” cases are packaged, lies multiple infirmities that, if not properly addressed by the Debtors, will ultimately result in the unraveling of these cases. While the Debtors seek to shroud themselves in a restructuring support agreement (the “RSA”) that enjoys broad unsecured creditor support, the truth is that underlying that support is a fragile house of cards that will not withstand scrutiny as these cases unfold. Turning the bankruptcy code on its head, the Debtors attempt through their RSA to pay unsecured bondholders cash as a proxy for their missed prepetition interest payment, postpetition interest to yet other unsecured creditors of various subsidiaries, and complete repayment to prepetition revolver lenders that are attempting, through the proposed debtor-inpossession financing (the “DIP Loan”), to effectively “roll-up” their prepetition exposure through the DIP Loan, all while the Debtors attempt to deprive their first lien secured creditors of contractual entitlements to default interest and pro rata payments they will otherwise be entitled to if their debt is to be unimpaired, as the RSA purports to require. While those are fights for another day, their significance in these cases must not be overlooked.

Whoa. That’s a lot. What does it boil down to? “F*ck you, pay me.” The first lien lenders are pissed that everyone under the sun is getting taken care of in the RSA except them.

• You want to deny us our default interest. F+ck you, pay me.

• You want a DIP despite having hundreds of millions of cash on hand and $1.3b of sale proceeds coming in? F+ck you, pay me.

• You want a 2-for-1 roll-up where, “as a condition to raising $460 million in debtor-in-possession financing, the Debtors must turn around and repay $850 million to their prepetition revolving lenders, thus decreasing the Debtors’ overall liquidity on a net basis”? F+ck you, pay me.

• You shirking our pro rata payments we’d otherwise be entitled to if our debt is to be unimpaired? F+ck you, pay me.

• You want to pay unsecured senior noteholders “incremental payments” of excess cash to compensate them for skipped interest payments without paying us default interest and pro rata payments? F+ck you, pay me.

• You want to use sale proceeds to pay down unsecureds when that’s ours under the first lien docs? F+ck you, pay me.

• You want to pay interest on the sub debt without giving us default interest? F+ck you, pay me.

• You want to do all of this without a proper adequate protection package for us? F+ck you, pay me.

The second lien debtholders chimed in, voicing similar concerns about the propriety of the adequate protection package. For the uninitiated, adequate protection often includes replacement liens on existing collateral, super-priority claims emanating out of those liens, payment of professional fees, and interest. In this case, both the first and second liens assert that default interest — typically several bps higher — ought to be included as adequate protection. The issue, however, was not up for hearing on the first day so all of this is a preview of potential fireworks to come if an agreement isn’t hashed out in coming weeks.

The debtors hope to have a confirmation order within four months with the effective date within twelve months (the delay attributable to certain regulatory approvals). We wish them luck.

______

*Commercial real estate is getting battered all over the place but not 50 Main Street, Suite 1000 in White Plains New York. Apparently Frontier Communications has an office there too. Who knew there was a speciality business in co-working for bankrupt companies? In one place, you’ve got FULLBEAUTY Brands Inc. and Internap Inc. AND Frontier Communications. We previously wrote about this convenient phenomenon here.

**The company seeks an expedited hearing in bankruptcy court seeking approval of it. It is scheduled for this week.

***Here is a Bloomberg video from June 2019 previously posted in PETITION wherein Jason Mudrick of Mudrick Capital Management discusses the effect Windstream had on Frontier and predicted Frontier would be in bankruptcy by the end of the year. He got that wrong. But did it matter to him? He also notes a CDS-based short-position that would pay out if Frontier filed for bankruptcy within 12 months. For CDS purposes, looks like he got that right. By the way, per Moody’s, here was the spread on the CDS around the time that Mudrick acknowledged his CDS position:

Here it was a few months later:

And, for the sake of comparison, here was the spread on the CDS just prior to the bankruptcy filing last week:

Clearly the market was keenly aware (who wasn’t given the missed interest payment?) that a bankruptcy filing was imminent: insurance on FTR got meaningfully more expensive. Other companies with really expensive CDS these days? Neiman Marcus Group (which, Reuters reports, may be filing as soon as this week), J.C. Penney Corporation Inc., and Chesapeake Energy Corporation.

****Notably, Aurelius Capital Management LP pushed for an exchange of its unsecured position into secured notes higher in the capital structure — a proposal that would achieve the triple-frontier-heist-like-whammy of better positioning their debt, protecting the CDS they sold by delaying bankruptcy, and screwing over junior debtholders like Elliott (PETITION Note: we really just wanted to squeeze in a reference to the abominably-bad NFLX movie starring Ben Affleck, an unfortunate shelter-in indulge). On the flip side, funds such as Discovery Capital Management LLC and GoldenTree Asset Management LP pushed the company to file for bankruptcy rather than engage in Aurelius’ proposed exchange.

---

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

• Capital Structure: $850mm RCF, $1.7b first lien TL (JP Morgan Chase Bank NA), $1.7b first lien notes (Wilmington Trust NA), $1.6b second lien notes (Wilmington Savings Fund Society FSB), $10.95mm unsecured senior notes (The Bank of New York Mellon), $100mm sub secured notes (BOKF NA), $750mm sub unsecured notes (U.S. Bank Trust National Association)

• Professionals:

  • Legal: Kirkland & Ellis LLP (Stephen Hessler, Chad Husnick, Benjamin Rhode, Mark McKane, Patrick Venter, Jacob Johnston)

  • Directors: Kevin Beebe, Paul Keglevic, Mohsin Meghji

  • Financial Advisor: FTI Consulting Inc. (Carlin Adrianopoli)

  • Investment Banker: Evercore Group LLC (Roopesh Shah)

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

• Other Parties in Interest:

  • Major equityholders: BlackRock Inc., Vanguard Group Inc., Charles Schwab Investment Management

  • Unsecured Notes Indenture Trustee: Bank of New York Mellon

    • Legal: Reed Smith LLP (Kurt Gwynne, Katelin Morales)

  • Indenture Trustee and Collateral Agent for the 8.500% ‘26 Second Lien Secured Notes

    • Legal: Riker Danzig Scherer Hyland & Perretti LLP (Joseph Schwartz, Curtis Plaza, Tara Schellhorn)

  • Credit Agreement Administrative Agent: JPMorgan Chase Bank NA

    • Legal: Simpson Thacher & Bartlett LLP (Sandeep Qusba, Nicholas Baker, Jamie Fell)

  • DIP Agent: Goldman Sachs Bank USA

    • Legal: Davis Polk & Wardwell LLP (Eli Vonnegut, Stephen Piraino, Samuel Wagreich)

  • Ad Hoc First Lien Committee

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Brian Hermann, Gregory Laufer, Kyle Kimpler, Miriam Levi)

    • Financial Advisor: PJT Partners LP

  • Second lien Ad Hoc Group

    • Legal: Quinn Emanuel Urquhart & Sullivan LLP (Susheel Kirpalani, Benjamin Finestone, Deborah Newman, Daniel Holzman, Lindsay Weber)

  • Ad Hoc Senior Notes Group

    • Legal: Akin Gump Strauss Hauer & Feld LLP (Ira Dizengoff, Philip Dublin, Naomi Moss)

    • Financial Advisor: Ducera Partners LLC

  • Ad Hoc Committee of Frontier Noteholders

    • Legal: Milbank LLP (Dennis Dunne, Samuel Khalil, Michael Price)

    • Financial Advisor: Houlihan Lokey Inc.

  • Ad Hoc Group of Subsidiary Debtholders

    • Legal: Shearman & Sterling LLP (Joel Moss, Jordan Wishnew)

  • Official Committee of Unsecured Creditors

    • Legal: Kramer Levin Naftalis & Frankel LLP (Amy Caton, Douglas Mannal, Stephen Zide, Megan Wasson)

    • Financial Advisor: Alvarez & Marsal LLC (Richard Newman)

    • Investment Banker: UBS Securities LLC (Elizabeth LaPuma)

😷New Chapter 11 Bankruptcy Filing - Quorum Health Corporation😷

Quorum Health Corporation

April 7, 2020

Tennessee-based Quorum Health Corporation, an operator of general acute care hospitals and outpatient healthcare facilities, filed for bankruptcy in the District of Delaware (along with a long list of affiliates). COVID-19!! Not quite. This turd has been circling around the chapter 11 bankruptcy bin for years now. The fact that it is only now filing for bankruptcy under the cloud of COVID simply serves as cover for its fundamentally unsound capital structure, its lack of integration post-spinoff and the composition of its patient base (rural and dependent upon Medicare and Medicaid). Your Nana’s acute care powered by private equity/Wall Street!

About that capital structure…we’re talking: $99mm ABL + $47mm RCF + $785.3mm in first lien loans and $400mm of senior notes for a solid total of ~$1.285b in funded debt. All of this debt was placed in connection with the debtors’ origin story: a 2015 spinoff from Community Health Systems Inc. ($CYH). Troubles began from there. The company states:

The assets the Company received in the Spin-off were not initially set up as an integrated, stand-alone enterprise and presented certain day-one integration challenges, including addressing significant geographic dispersion that resulted in a lack of scale in key markets. In addition, certain of the hospitals that the Company received in the Spin-off were underperforming….

If you’re wondering whether this spin-off might lead to fraudulent conveyance claims well, to (mis)quote Elizabeth Warren, the company’s plan of reorganization has a Trust for that. That ought to be fun.

Otherwise, this is a deleveraging transaction. The ABL and holders of first lien claims will come out whole. Likewise, general unsecured claims will ride through. The holders of the senior notes will equitize their claims and come out, prior to dilution, with 100% of the post-reorg equity. Certain lenders will write a $200mm equity check. The case is on a quick one-month timeline through which it will be funded by a $100mm DIP; therefore, come May, this hospital system will, hopefully, be ready to confront a post-COVID-19 world.

• Jurisdiction: D. of Delaware (Judge Owens)

• Capital Structure: ABL (UBS AG), RCF and Term Loan (Credit Suisse AG), $421.8mm ‘23 11.625% Senior Notes (Wilmington Savings Funds Society)

• Professionals:

  • Legal: McDermott Will & Emery LLP (Felicia Perlman, Bradley Giordano, David Hurst, Megan Preusker)

  • Financial Advisor/CRO: Alvarez & Marsal (Paul Rundell, Steve Kotarba, David Blanks, Douglas Stout

  • Investment Banker: MTS Health Partners LP

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

• Other Parties in Interest:

  • DIP Agent: GLAS USA LLC

  • Consenting First Lien Lenders

    • Legal: Milbank LLP (Dennis Dunne, Tyson Lomazow)

    • Financial Advisor: Houlihan Lokey

  • Consenting Noteholders

    • Legal: Kirkland & Ellis LLP (Nicole Greenblatt, Steven Serajeddini)

    • Financial Advisor: Jefferies LLC

  • Major Shareholders: Mudrick Capital Management, LP, KKR & Co. Inc., York Capital Management Global Advisors LLC, Davidson Kempner Capital Management LP, and The Goldman Sachs Group Inc.

⛽️New Chapter 11 Bankruptcy Filing - Whiting Petroleum Corporation ($WLL)⛽️

Whiting Petroleum Corporation

April 1, 2020

Denver-based Whiting Petroleum Corporation ($WLL) and four affiliates (the “debtors”), independent oil-focused upstream exploration and production companies focused primarily on the North Dakota and Rocky Mountain regions, filed for bankruptcy in the Southern District of Texas. This is a story that requires an understanding of the debtors’ impressively-levered capital structure to understand what’s going on:

• $1.072b ‘23 RBL Facility (JPMorgan Chase Bank NA)(springing maturity to 12/20 if the ‘21 notes below are not paid in full by 12/20)

• $189.1mm ‘20 1.25% convertible senior unsecured notes due 2020 (Bank of New York Mellon Trust Company, N.A.)

• $773.6mm ‘21 5.75% senior unsecured notes

• $408.3mm ‘23 6.25% senior unsecured notes

• $1b ‘26 6.625% senior unsecured notes

You’ve heard us talk about the capital intensive nature of E&P companies so … yeah … the above $3.443b of debt shouldn’t come as much of a surprise to you. The company is also publicly-traded. The stock performance over the years has been far from stellar:

What’s interesting here is that EVERYONE knows that oil and gas has been a value-destructive sh*t show for years. There’s absolutely ZERO need to belabor the point. Yet. That doesn’t stop the debtors’ CRO from doing precisely that. Here, embedded in the First Day Declaration, is a chart juxtaposing a $100 investment in WLL versus a $100 investment in an S&P 500 index and a Dow Jones U.S. E&P Index:

We should also add that the spike reflected in the above chart in the 2017 timeframe isn’t on account of some stellar improvement of operating performance; rather, it reflects a November 2017 1-to-4 reverse stock split which inflated the reflected price of the shares. Just to be clear.

Notwithstanding the hellacious performance since 2014, the debtors take pains to paint a positive picture that was thrown into disarray by “drastic and unprecedented global events, including a ‘price war’ between OPEC and Russia and the macroeconomic effects of the COVID-19 pandemic….” In fact, the debtors come in HOT in the introduction to the First Day Declaration:

The Debtors ended 2019 standing on solid ground. While the Debtors had more than $1 billion in unsecured bond debt set to mature prior to December 2020, the Debtors had significant financial flexibility to restructure their capital structure. Most importantly, the Debtors began 2020 with a committed revolving credit facility that provided them with committed financing of up to $1.75 billion—more than enough liquidity to service the Debtors’ 2020 maturities and fund anticipated capital expenditure needs throughout the year. For these reasons, the Debtors secured a “clean” audit report as recently as February 27, 2020.

And to be fair, the debt was doing just fine until the middle of February. Indeed, the unsecured notes didn’t hit distressed levels until right after Valentine’s Day. Check out this freefall:

Who needs open amusement parks when you can just follow that price action?

Already focused on “liability management” (take a drink!) given the looming ‘21 notes maturity and the corresponding RBL springing maturity, the debtors’ retained professionals shifted over to restructuring talks with an ad hoc committee of noteholders. The debtors also drew down $650mm on their revolver to ensure adequate go-forward liquidity (and, cough, avoid the need for a relatively more expensive DIP credit facility). After what sounds like serious deliberation (and opposition from the ad hoc committee), the debtors also opted to forgo the $190mm maturity payment on the convertible notes due April 1.

The debtors filed the case with the framework of a restructuring support agreement (aka a term sheet). That framework would equitize the converts and the unsecured notes, giving them 97% of the equity (for now … debt is also still under consideration). Unsecured claims will be paid in full. Existing equity would receive 3% of post-reorg equity and warrants. Post-reorg management will get 8% of the post-reorg equity. In total, this would amount to the evisceration of over $2b worth of debt. 😬

Speaking of management, a lot of people were up in arms over this bit in the debtors’ Form 8-K filed to announce the bankruptcy filing and term sheet:

That’s right. A nice immediately-payable bonus to management.

Remember that story of Lehman Brothers CEO Dick Fuld getting punched the day after Lehman’s bankruptcy on a treadmill in the corporate gym?

Fees like something like that may be coming soon to $WLL headquarters... 👀

— EnergyCynic (@EnergyCynic) April 1, 2020

We’d love to hear how this ISN’T a subversion of code provisions regarding KEIPS/KERPS. Seriously, write us: petition@petition11.com. Ensure stability huh? Tell us: WHERE THE F*CK ARE THESE GUYS GOING TO GO IN THIS ENVIRONMENT? But at least they’re passing up their (WILDLY WORTHLESS) equity awards and bonus payments. FFS.

Ok, fine. Maybe there were contractual provisions that needed to be taken into account. And maybe the alternative — sh*tcanning management and rejecting the employment contracts — doesn’t fit the construct of leaving an umimpaired class of unsecured creditors. Equity is wildly out-of-the-money and getting a tip here anyway. This, therefore, is just a transfer of value from the noteholders to the management. We have to assume that the noteholders, then, were aware of this before it happened. If not, they should be pissed. And the Directors — who make between $180,000 and $305,000 a year — ought to be questioned by said noteholders about potential breaches of duties.

---

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

• Capital Structure:

• Professionals:

  • Legal: Kirkland & Ellis LLP (Stephen Hessler, Brian Schartz, Gregory Pesce, Anna Rotman) & Jackson Walker LLP (Matthew Cavenaugh, Jennifer Wertz, Veronica Polnick)

  • CRO: Stein Advisors LLC (Jeffrey Stein)

  • Financial Advisor: Alvarez & Marsal LLC (Julie Hertzberg)

  • Investment Banker: Moelis & Company

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

• Other Parties in Interest:

  • RBL Agent: JPMorgan Chase Bank NA

  • Ad Hoc Committee of Noteholders

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Andrew Rosenberg, Alice Beslisle Eaton, Michael Turkel, Omid Rahnama) & Porter Hedges LLP (John Higgins, Eric English, Genevieve Graham)

    • Financial Advisor: PJT Partners LP

  • Creditor: Caliber North Dakota LLC

    • Legal: Weil Gotshal & Manges LLP (Alfredo Perez, Brenda Funk)

⛽️New Chapter 11 Filing - Pioneer Energy Services Corp. ($PESX)⛽️

Pioneer Energy Services Corp.

March 1, 2019

San Antonio-based oilfield services provider Pioneer Energy Services Corp. and several affiliates (the “debtors”) filed “straddle” prepackaged chapter 11 bankruptcy cases on Sunday in what amounts to a true balance sheet restructuring. Will this kickoff a new slate of oil and gas related bankruptcy filings? 🤔

The debtors provide well servicing, wireline and coiled tubing services to producers in Texas and the Mid-Continent and Rocky Mountain regions; they also provide contract land drilling services to operators in Texas, Appalachia, and the Rocky Mountain region. International operations in Colombia are not part of the bankruptcy cases. Due to the…shall we say…unpleasant…atmosphere for oil and gas these last few years — which, clearly undermined demand for their services and, obviously, revenue generation — the debtors determined that they couldn’t continue to service their existing capital structure. Alas, bankruptcy.

Hold on: not so fast. We previously wrote in “⛽️Storm Clouds Forming Over Oil & Gas⛽️,” the following:

And so it’s no wonder that, despite a relative dearth of oil and gas bankruptcy filings in 2020 thus far, most people think that (a) the E&P and OFS companies that avoided a bankruptcy in the 2015 downturn are unlikely to avoid it again and (b) many of the E&P and OFS companies that didn’t avoid a bankruptcy in the 2015 downturn are unlikely to avoid the dreaded Scarlet 22….

Sure, Pioneer hasn’t filed for bankruptcy before. But it has been in a constant state of restructuring ever since 2015. Per the debtors:

…in 2015 and 2016, Pioneer reduced its total headcount by over 50%, reduced wage rates for its operations personnel, reduced incentive compensation and eliminated certain employment benefits. In 2016, the Company closed ten field offices to reduce overhead and associated lease payments. At the same time, the Company lowered its capital expenditures by 77% to primarily routine expenditures that were necessary to maintain its equipment and deferred discretionary upgrades and additions (except those that it had previously committed to make during the 2014 market slowdown).

And:

Since the beginning of 2015 through the end of 2018, the Company has liquidated nonstrategic or non-core assets. Specifically, Pioneer has sold thirty-nine (39) non-AC domestic drill rigs, thirty-three (33) older wireline units, seven (7) smaller diameter coiled tubing units and various other drilling and coiled tubing equipment for aggregate net proceeds of over $75 million. As of September 30, 2019, the Company reported another $6.2 million in assets remaining held for sale, including the fair value of buildings and yards for one domestic drilling yard and two closed wireline locations, one domestic SCR drilling rig, two coiled tubing units and spare support equipment.

Annd:

In the first quarter of 2019, the Company continued its cost-reduction initiatives and operational adjustments by expanding the roles and related responsibilities of several of its executive leaders to further leverage their existing talents to the entire organization.

In other words, these guys have been gasping for air for five years.

Relatively speaking, the debtors capital structure isn’t even that intense:

1. $175mm Term Loan (Wilmington Trust NA)

2. $300mm 6.125% ‘22 senior unsecured notes (Wells Fargo Bank NA)

Yet with oil and gas getting smoked the way it has, it was still too much. So what now?

The prepackaged plan would give the term lenders cash (from a rights offering) and $78.125mm in new secured bonds (PETITION Note: we’re betting there are a bunch of CLOs here). The unsecured noteholders will get either all of the equity or 94.25% of the equity depending upon what the interest holders do; they’ll also get rights to participate in the rights offering. If the interest holders vote to accept the plan, they’ll get 5.75% of the equity and rights to participate in the rights offering; if they reject the plan, they’ll get bupkis and the noteholders will get 100% of the equity (subject to dilution). General unsecured claimants will get paid in full. Management will put in money as part of the rights offering and an ad hoc group of the unsecured noteholders (Ascribe Capital, DW Partners LP, Intermarket Corporation, New York Life Investments, Strategic Income Management LLC, and Whitebox Advisors LLC) agreed to backstop substantially all of the rights offering (and will receive an 8% premium for their commitment). The cases will be supported by a $75mm DIP. This thing is pretty buttoned up. Confirmation is expected within 45 days.

The end result? The debtors will emerge with $153mm of debt on balance sheet (the $78.125mm in new secured bonds and a $75mm exit ABL). Time will tell whether or not this remains too much.*

*The risk factors here are particularly interesting because all of them are very real. If the oil patch does suffer, as expected, the debtors’ concentration of business among their top three clients (66% of revenue) could be especially troubling — depending on who those clients are.

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

• Capital Structure: see above.

• Professionals:

  • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Brian Hermann, Elizabeth McColm, Brian Bolin, William Clareman, Eugene Park, Grace Hotz, Sarah Harnett) & Norton Rose Fulbrights US LLP (William Greendyke, Jason Boland, Robert Bruner, Julie Goodrich Harrison)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Lazard Freres & Co. LLC

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

• Other Parties in Interest:

  • DIP Lender ($75mm): PNC Bank NA

    • Legal: Blank Rome LLP (James Grogan, Broocks Wilson)

  • Prepetition Term Loan Agent: Wilmington Trust NA

    • Legal: Covington & Burling LLP

  • Ad Hoc Group of Prepetition Term Loan Lenders

    • Legal: Vinson & Elkins LLP (David Meyer, Paul Heath, Harry Perrin, Steven Zundell, Zachary Paiva)

  • Ad Hoc Group of Unsecured Noteholders: Ascribe Capital, DW Partners LP, Intermarket Corporation, New York Life Investments, Strategic Income Management LLC, Whitebox Advisors LLC)

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Natasha Tsiouris, Erik Jerrard, Xu Pang) & Haynes and Boone LLP (Charles Beckham)

    • Financial Advisor: Houlihan Lokey

😷New Chapter 11 Bankruptcy Filing - Hygea Holdings Corp.😷

Hygea Holdings Corp.

February 19, 2020

Florida-based Hygea Holdings Corp. and 32 affiliates (the “debtors”) filed for bankruptcy because…whoa boy…human capital businesses are tough. Hygea is a rollup of physician practices with a primary care physician focus; it also has a management services platform. This is basically WeWork for physicians or Substack for writers: Hygea handles the management activities in such a way that frees physicians up to do what they want to do. Which is be physicians.

The problem is that the debtors expanded too aggressively, acquiring physician practices with minimal net profit. But synergies, right? Not exactly. The debtors’ model didn’t pan out after failing to integrate the underperforming acquisitions. Poor integration fundamentally counteracts the entire point of a rollup, but whatevs. Growth!!

If only things were quite so positive. Per the debtors:

Consequently, the Debtors have been burdened with supporting a number of losing operations, that even with performance improvements will never be profitable. The operating losses of those practices, along with the associated acquisition costs, have caused a substantial drain on the Debtors’ liquidity.

This presents a problem when you have over $120mm of debt. Hence bankruptcy. The company hopes to use the bankruptcy process to solicit a buyer.

• Jurisdiction: D. of Delaware (Judge Owens)

• Capital Structure: $121mm secured debt (Bridging Income Fund LP)

• Professionals:

  • Legal: Cole Schotz PC (Michael Sirota, Felice Yudkin, Jacob Frumkin, Michael Trentin, J. Kate Stickles, Katherine Devanney, Stuart Komrower)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: 4Front Capital Partners Inc.

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

• Other Parties in Interest:

👦🏻New Chapter 11 Bankruptcy Filing - Boy Scouts of America👦🏻

Boy Scouts of America

February 18, 2020

It’s a sad state of affairs when mass tort cases overrun the bankruptcy system. Between a recent deluge of asbestos cases (e.g., ON Marine Services Company LLC, Paddock Enterprises LLC, and DBMP LLC), opioid cases (e.g., Purdue Pharma, Insys Therapeutics), global warming and negligence cases (PG&E) and sexual abuse cases (e.g., USA Gymnastics, one diocese after another), Wachtell Lipton Rosen & Katz is correct to declare “A New Era of Mass Tort Bankruptcies” in a recent client report. They recently wrote:

The use of the bankruptcy process to address mass tort liability reflects a growing recognition that chapter 11, while imperfect, provides tools for dispute resolution that are not generally available in federal or state courts.

And:

For companies that have insufficient assets to pay claims in full, bankruptcy ensures that the debtor’s limited assets are distributed equitably among claimants, including “future” claimants (those whose claims have not yet manifested). Chapter 11 can allow companies with tort liabilities to maintain operations, thereby continuing to generate funds to make payments over time, while providing a respite from defending lawsuits and a platform to negotiate settlements. Bankruptcy also provides a mechanism for centralizing the resolution of large numbers of tort claims, including through a court estimation of the aggregate liability, greatly reducing litigation costs and increasing the potential for a global settlement.

The purposes of these filings?

The wave of asbestos-related bankruptcies in the 1980s led Congress to enact Bankruptcy Code provisions to facilitate reorganization of debtors facing asbestos claims by establishing a plaintiffs’ trust funded by cash, proceeds of insurance policies, and equity in the reorganized debtor. In exchange for contributing to the trust, the debtor and other contributors receive a “channeling injunction,” which “channels” all existing and future claims to the trust. Upon resolution of the bankruptcy, such claims are brought against and paid by the trust, the debtor is discharged, and other contributors are released from further liability. While the relevant Bankruptcy Code provisions apply by their terms only to asbestos-related claims, similar mechanisms have been used (or are currently contemplated) in the bankruptcies of Takata (defective airbags), Pacific Gas & Electric (wildfire damages), and several Catholic dioceses (abuse claims).

Enter Sidley Austin LLP here. Sidley Austin is widely-credited for the notion that a channeling injunction could be deployed in the Takata chapter 11 case. It’s no wonder, then, that they’d land another major mass tort case and deploy the same playbook. Boy Scouts are well-accustomed to playbooks.

And deploy the playbook, they will.

The Boy Scouts of America are involved in 275 lawsuits currently pending in state and federal courts across the United States. They are also aware of an additional 1,400 claims that have not yet filed. Recently enacted legislation that extended the statute of limitations — passed in 17 states, including 12 in 2019 — led to a deluge of additional recently filed suits against the BSA. Consequently, the BSA spent more than $150mm on settlements and legal costs from 2017 through 2019 alone. Compounding matters, membership and donations are on the decline. BSA registered membership is down 500k since 2012. People are dropping the Boy Scouts HARD.

The BSA has filed a plan of reorganization and disclosure statement along with their customary first day papers. Where the rubber will meet the road is at the asset level. Per the BSA:

…attorneys for abuse victims believed that certain Local Councils with significant abuse liabilities have significant assets that could be used to compensate victims.

The Local Councils, however, are not debtors. There is, though, an ad hoc committee of Local Councils, the purpose of which is to allow the Local Councils to participate in negotiations about a global resolution of abuse claims. The Local Councils share insurance with the BSA and insurance, naturally, will be a huge source of recovery for abuse claimants. Claimants will also want to understand whether Local Councils are being used to shield assets from attack — a strategy exposed in this recent Wall Street Journal piece. This issue appears to be key to the bankruptcy and any potential resolution. The volunteer chair of the Local Council Committee? Richard Mason of Wachtell. Forgot to mention that one in the aforementioned client alert.

• Jurisdiction: D. of Delaware (Judge Silverstein)

• Capital Structure: $328mm secured debt (see below)(JPMorgan)

• Professionals:

  • Legal: Sidley Austin LLP (Jessica Boelter, Alex Rovira, Andrew Propps, James Conlan, Thomas Labuda, Michael Andolina, Matthew Linder) & Morris Nichols Arsht & Tunnell LLP (Derek Abbott)

  • Financial Advisor: Alvarez & Marsal LLC (Brian Whittman)

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

Source: Disclosure Statement

⚓️New Chapter 11 Bankruptcy Filing - American Commercial Lines Inc.⚓️

American Commercial Lines Inc.

February 7, 2020

Indiana-based American Commercials Lines Inc. and ten affiliates (the “debtors”), large liquid and dry cargo shippers with an active fleet of approximately 3,500 barges, filed a prepackaged bankruptcy case in the Southern District of Texas to (i) effectuate a comprehensive restructuring of $1.48b of debt ($536mm RCF and $949mm term loan) and (ii) inject the debtors with much-needed new capital via a rights offering. Now, we know what you’re thinking: the debtors are just the latest victims of the oil and gas crash. While oil and gas do make up some small portion of the debtors’ revenues (10%), this is incorrect. Other factors complicated the debtors’ efforts to service their bulk of debt (see what we did there?). Hold on to your butts, people.

The company notes:

Beginning in early 2016, the inland barge industry entered a period of challenging conditions that have resulted in reduced earnings. These challenges were brought on by a variety of international trade, macroeconomic, industry capacity, and environmental factors. The industry has experienced a prolonged period of declining freight rates, grain volume volatility related to international competition and tariffs on U.S.-grown soybeans, and excessive operating costs incurred as a result of extreme flooding conditions. Freight rates during 2016 and 2017 were under continued downward pressure from reduced shipping demand for metals, grain, refined products, petrochemicals, chemicals and crude oil. These declines resulted in part from pressure on the U.S. steel industry linked to dumping of foreign steel into U.S. markets, increased international competition in grain exports, and the decline in North American crude oil production in response to an oversupply of global crude oil.

Wow. So much to unpack there. It’s as if the debtors’ diversified revenue streams all fell smack dab in the middle of each and every declining sector of the US economy. Reduced steel shipments due to Chinese dumping ✅. Distress in agriculture leading to less volume ✅. Oil and gas carnage ✅.

Compounding matters was increased barge supply (read: competition) due to an increase in coal shipments. That’s right, folks. We’re back to coal. Less coal production = redeployed ships looking for replacement cargo = more competition in the liquid and dry cargo space = decreased freight rates.

The debtors got a temporary reprieve in late 2017 when the Trump administration imposed steel tariffs. A short-lived recovery in steel prices combined with a temporary recovery in oil prices and, due to the above issues, a slowdown in barge construction, helped rates recover a tad.

It didn’t last. In mid-2018, China imposed tariffs on US-grown soybeans. Agricultural products constitute 36% of the debtors’ revenues. Combined with flooding that disrupted farming and navigable waterways, the debtors experienced approximately $86mm in increased operating costs. So, yeah, no bueno. As the debtors note with no intended irony, all of these factors amount to a “perfect storm” heightened mostly by an unsustainable and unserviceable debt load.

A few things to highlight here in terms of the process and trajectory of the cases:

• This serves as yet another example where the pre-petition lenders used the debtors’ need for additional time to fund a short-term bridge and, in exchange, lock down a full rollup of the pre-petition debt into a $640mm DIP credit facility. The term lenders will also provide a $50mm DIP to fund the administration of the cases.

• The term lenders are equitizing their $949mm term loan, getting 100% 7.5% “take back preferred equity” and “new common equity” in return. Their estimated recovery is 38%. Post-reorg, the major owners of the debtors, therefore, will be Contrarian Capital Management LLC, Finepoint Capital LP, and Invesco Ltd.

• The company will get a $150mm of new money via a backstopped rights offering supported by certain holders of term loan claims. This new money infusion (in exchange for 10% junior preferred equity to that noted above and provided subject to a 7% backstop premium) will presumably give the debtors some additional runway should the market forces noted above persist.

---

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

• Capital Structure: $536mm RCF and $949mm term loan

• Professionals:

  • Legal: Milbank LLP (Dennis Dunne, Samuel Khalil, Parker Milender) & Porter Hedges LLP (John Higgins, Eric English) & Seward & Kissel LLP

  • Post-Reorg Independent Director: Scott Vogel

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Greenhill & Co. Inc.

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

• Other Parties in Interest:

  • Prepetition ABL & DIP ABL Agent: Wells Fargo Bank NA

    • Legal: K&L Gates LLP (David Weitman, Christopher Brown)

  • Preptition Term Loan Agent: Cortland Capital Market Services LLP

  • Ad Hoc Group of Term Lenders: Contrarian Capital Management LLC, Finepoint Capital LP, and Invesco Ltd.

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Darren Klein, Erik Jerrard) & Rapp & Krock PC (Henry Flores, Kenneth Krock)

    • Financial Advisor: Evercore Group LLC

  • Large Equityholder: Platinum Equity
    

🍎New Chapter 11 Bankruptcy Filing - Lucky's Market Parent Company LLC🍎

Lucky's Market Parent Company LLC

January 27, 2020

In Sunday’s Members’-only a$$-kicking briefing entitled “🔥Like No Other Newsletter🔥,” we took a deeeeeeeeep dive into the Fairway Group Holdings Corp. chapter 11 bankruptcy filing. We relegated to a mere footnote, the following:

*Two more local grocers to watch out for: Lucky’s Market (not PE-backed) and Earthfare (PE-backed). The former announced, on the heals of losing its sponsorship from Kroger Inc., that it would close 32 of 39 stores. The latter is quietly shuttering stores (e.g., Gainesville and Indianapolis). This is telling:

“Stern said Lucky's could potentially be acquired, but he said logical choices like Sprouts Farmers Market and The Fresh Market are also retrenching and not in expansion mode right now.”

The pain in grocery is pervasive.

Lucky’s Market Parent Company LLC be like:

And so the Colorado-based company and 21 affiliated entities filed for chapter 11 bankruptcy in the District of Delaware. Because, like, f*ck it: the pain in grocery IS pervasive so it might as well become a chapter 11 debtor like everyone else.

This one swims upstream. The debtors focus on affordable organic and locally-grown produce, naturally raised meats and seafood, and fresh daily prepared foods. Which, we thought, was supposed to be all the rage. “Organic for the 99%” was their mission. They even have private label goods. AND they have a millennial-pleasing “giving” element to their business: 10% of profits from private label sales are reinvested into the local communities they service. They have no unions. And they’re not even private equity owned!! Kroger Inc. ($KR) is the debtors’ secured lender and largest equity holder and, while obviously not PE bros, it seems that maybe(?) Kroger pushed the Colorado-based founders to grow too fast too soon?? In the midst of a number of grocery bankruptcies. In April 2016, they had 17 stores. The Kroger transaction took place at that time and then — BOOM! — a private equity growth mentality appears to have mysteriously overtaken the debtors. By the end of that year, the debtors’ footprint was up to 20 stores; by the end of 2017, it was 26 stores; 33 stores by the end of 2018; and 39 stores by the end of 2019. Florida was a primary focus.

The timing was pretty bad. Per the debtors:

…the Company’s expansion in Florida coincided with, among other things, increased competition in the grocery industry, including expansions from competing chains such as Sprouts Farmers Market, Fresh Thyme Farmers Market and Earth Fare. As a result, notwithstanding the growth in sales, the portfolio of Company stores was unable to achieve sustainable four-wall profitability.

Note the mention of Earth Fare ⬆️. Get ready for Dirty Dancing 2: Havana Nights gifs, people.

There’s more:

Most recently, fiscal year-to-date through January 4, 2020, the Company had approximately $22 million of store operating losses and approximately $100 million net loss. Additionally, fiscal year-to-date through the week ended January 18, 2020, the Company had a 10.6% reduction in comparable store sales versus the prior year-to-date period.

Suffice it to say, that growth strategy diiiiiiiidn’t work out so well.

And so now it’s all being unwound. The debtors began winding down 32 of their 39 stores pre-petition and, obviously, terminated plans for 19 leased but unopened locations.

Absent closure, the debtors note, they’d be on the hook for $30mm in operating losses for fiscal year ‘20. Now they’re selling furniture, fixtures and equipment from, and transferring leases of, 26 stores to third-party purchasers. They have an asset purchase agreement with Aldi for six FL locations while they continue to operate 7 locations while the marketing process progresses.

The debtors will use Kroger’s cash collateral to fund these cases.

• Jurisdiction: (Judge Dorsey)

• Capital Structure: $301.1mm secured loan (Kroger Inc.), $5.9mm New Markets Tax Credit Loan (BBIF Subsidiary CDE 3 LLC, guaranteed by Kroger Inc.)

• Professionals:

  • Legal: Polsinelli PC (Christopher Ward, Liz Boydston, Caryn Wang)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Peter J. Solomon

  • Liquidation Consultant: Great American Global Partners LLC

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

  • Independent Director: William Transier

• Other Parties in Interest:

  • Large Equityholder (55%): Kroger Inc.

    • Legal: Weil Gotshal & Manges LLP (Garrett Fail, Moshe Fink) and Richards Layton & Finger PA (Zachary Shapiro, Brett Haywood)

🍔New Chapter 11 Bankruptcy Filing - The Krystal Company🍔

The Krystal Company

January 19, 2020

Georgia-based quick-service restaurant chain, The Krystal Company, which features cheap — some might say “iconic” (read: the company = “some”) — square burgers among other horrendous-for-your-health fare (eggnog shakes, anyone?), filed for bankruptcy in the Northern District of Georgia over the holiday weekend. We’re guessing that most of you snobby coastal elites have likely never heard of Krystal and, well, neither had we to be honest. To our surprise, Krystal is purportedly “the oldest quick-service restaurant chain in the South and the second oldest in the United States, the Krystal brand has a prominent place in the South’s cultural landscape.” You learn something new every day.

The chain operates 182 restaurant locations across nine states; it has approximately 4900 employees; it doesn’t own its real estate; it does have 116 franchisees. It also has over $65mm in debt.

Why the bankruptcy? PETITION readers are very familiar with the trends afflicting quick service restaurants. A number have stumbled into bankruptcy in recent years. To point, the company’s Chief Restructuring Officer also recently worked with Kona Grill and Ignite Restaurant Group. There are plenty of distressed restaurant chains to keep the fee meter running, it seems.

So, what are these trends?

• Shifting consumers tastes and preferences (PETITION Note: people are becoming more health-conscious and a slab of previously-frozen meat stacked between a gnarled bun, diced onions, a pickle and some stadium mustard don’t really pass muster anymore). ✅

• Fast casual and online delivery are crushing quick service chains (PETITION Note: we’re going to have to start referring to “The Chipotle Effect”). ✅

• It is increasingly hard to find and retain qualified employees in the current labor market, as turnover exceeds 200% (PETITION Note: #MAGA!!). ✅

• Commodity costs are rising (PETITION Note: but there’s virtually no inflation folks). ✅

• Unfavorable lease terms. ✅

Facing all of this, the company did what struggling companies tend to do: they hired an expensive consultant. Boston Consulting Group came in and to advise the company with respect to “competitive positioning” and this led to a capital intensive rebuilding project of nine of its locations. Yes, they completely demolished and rebuilt nine locations in ‘18 and ‘19. Ultimately, this led to increased sales at those locations but it clearly couldn’t course correct the entire enterprise.

Consequently, the company breached a financial covenant in Q4 ‘18. It obtained an equity infusion which stopped the bleeding…for like a hot second. The company then defaulted under its credit agreement because it couldn’t obtain a “going concern” qualification for the fiscal year ending December 31, 2018. It has been in forbearance since October. Meanwhile, it has been shedding costs: people have been fired and stores have been closed.

About those stores. The average occupancy cost of the company’s locations is $482k/month. Because of this, the company regularly reviews profitability and recently has turned several of its stores “dark” by ceasing all business there. On day one of its chapter 11 bankruptcy filing, the company filed a motion seeking to reject (i) these “dark” leases (38 of them) as well as (ii) several other locations that franchisees operate under subleases that are not profitable (40 total locations).

So, what now? The papers don’t really say much. Oddly enough, the first day declaration ends with some information about a payment processing data breach and says nothing about DIP financing (there isn’t any) or the direction of the case. In a press release, however, the company says that it intends to use the bankruptcy process to pursue “an orderly sale of its business and assets as a going concern.” Now, in the past, we’ve certainly made fun of debtors who have used their first day papers as de facto marketing materials. Not because it’s stupid: it’s rather smart. It was just also rather blatant and shamelessly spinful. Here, though, Krystal doesn’t even mention anything about a marketing process in its papers or, for that matter, a banker (which happens to be the newly merged Piper Sandler).

These guys are off to a rockin start.

*****

Wells Fargo Bank NA ($WFC), the agent under the company’s secured loan, agrees. It filed an objection to the company’s motion seeking authorization to use cash collateral. They wrote:

As the Debtors’ largest stakeholder, the Agent is extremely concerned with the manner in which the Debtors are positioning these cases. The Debtors have yet to file their budget for either the interim period until the second interim hearing or a longer-term budget, but based on the draft budgets that were provided to the Agent prior to filing, it appears that operating on cash collateral alone will not provide the Debtors with sufficient liquidity to make it through a sale process and affords almost no margin for error. The Bankruptcy Code does not permit the Debtors to avoid their obligation to provide adequate protection to the Prepetition Secured Parties on the basis that the Debtors elected a budget that will not permit it. Were the Debtors to run out of cash during the sale process, as they are likely to do, the attendant disruption could jeopardize the entire going concern value of the business and the sale process.

Nothing like a contested cash collateral hearing to get things off on the right foot.

• Jurisdiction: N.D. of Georgia (Judge Hagenau)

• Capital Structure: $10mm RCF, $54.1mm Term Loan (Wells Fargo Bank NA), $1.5mm promissory note (KRY LLC).

• Professionals:

  • Legal: King & Spalding LLP (Sarah Borders, Jeffrey Dutson, Leia Clement Shermohammed)

  • Financial Advisor/CRO: Alvarez & Marsal North America LLC (Jonathan Tibus)

  • Investment Banker: Piper Jaffray & Co. (aka Piper Sandler)

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

• Other Parties in Interest:

  • Wells Fargo Bank NA

    • Legal: Morgan Lewis & Bockius LLP (Jennifer Feldshur, Charlie Liu) & Parker Hudson Rainer & Dobbs LLP (C. Edward Dobbs, Rufus Dorsey, Michael Sullivan)
      

New Chapter 11 Filing - Paddock Enterprises LLC

Paddock Enterprises LLC

January 6, 2020

Ohio-based Paddock Enterprises LLC (aka Owens-Illinois Inc.) is the latest victim of asbestos-related liabilities to find itself in bankruptcy court. And by “latest” we mean the first in, like, a few days. Just last week, another Ohio-based manufacturer, ON Marine Services Company LLC, filed for bankruptcy after having had enough of dealing with decades-worth of claims within the tort system. ON filed for bankruptcy to address 6,000 claims emanating out of the 70s; Paddock filed for bankruptcy because its alternative to the tort system — “administrative claims agreements” — became increasingly untenable and it must still address 900 claims stemming from the 40s and 50s. That’s right, the 40s and 50s!! The purpose of filing for bankruptcy is to establish a 524(g) trust to deal with current and future asbestos claimants.

This case seems rather straight-forward and so we’ll spare you the long summary. In a nutshell, if a company at one time manufactured product with asbestos, it is generally f*cked. But there is an interesting commentary herein about these types of lawsuits and why bankruptcy is warranted. In the context of discussing its reserve coverage of asbestos-related tort expenditures ($722mm!), the company notes:

The Debtor believes that, although the established reserves are appropriate under ASC 450, its ultimate asbestos-related tort expenditures cannot be known with certainty because, among other reasons, the litigation environment in the tort system has deteriorated generally for mass tort defendants and Administrative Claims Agreements are becoming less reliable.

It gets better (PETITION Note: this is a long but worth-it passage):

What is certain is the incredible disparity between what the Debtor has historically paid, and is now being asked to pay, for Asbestos Claims, given the extent of its historical asbestosrelated operations. As of September 30, 2019, the Debtor had disposed of over 400,000 Asbestos Claims, and had incurred gross expense of approximately $5 billion for asbestos-related costs. In contrast, its total Kaylo sales for the 10-year period in which it sold the product were approximately $40 million. Asbestos-related cash payments for 2018, 2017, and 2016 alone were $105 million, $110 million, and $125 million, respectively. Although these cash payments show a modest decline, the overall volume and claimed value of Asbestos Claims asserted against the Debtor has not declined in proportion to the facts that (i) over 60 years have passed since the Debtor exited the Kaylo business, (ii) the average age of the vast majority of its claimants is now over 83 years old, (iii) these demographics produce increasingly limited opportunities to demonstrate legitimate occupational Kaylo exposures, and (iv) other recoveries are available from trusts established by other asbestos defendants. Rather, increasing settlement values have been demanded of the Debtor. And because the Debtor has settled or otherwise exhausted all insurance that might cover Asbestos Claims, it must satisfy all asbestos-related expenses out of Company cash flows.

Oh man. You’ve gotta love the plaintiff’s Bar. Those numbers are staggering. $40mm in 1940-1950 dollars would be equal to approximately $565mm in 2018 dollars. As compared to $5b in liability. And more to come. SHEEEESH. (PETITION Note: none of the foregoing is intended to disrespect any of the victims of the debtor’s product. Yes, we feel obligated to say that.)

There’s also a structural issue: the debtor entity subject to these extensive liabilities was incorporated in December 2019 as a direct wholly-owned subsidiary of O-I Glass Inc. ($OI), a $2b market cap glass container manufacturer. This is the classic “good company,” “bad company” structural separation. We suspect there’ll be at least some fireworks in bankruptcy court over this structure as creditors — almost exclusively the plaintiffs’ law firms — try to broaden the pool of potential proceeds from which they can recover monies for their clients.

• Jurisdiction: D. of Delaware (Judge Silverstein)

• Capital Structure:

• Professionals:

  • Legal: Latham & Watkins LLP (George Davis, Jeffrey Bjork, Christina Craige, Jeffrey Mispagel, Helena Tseregounis, Michael Faris, Lisa Lansio) & Richards Layton & Finger PA (John Knight, Michael Merchant)

  • Board of Directors: Kevin Collins, John Reynolds, Scott Gedris

  • Estimation Agent: Bates White LLC

  • Financial Advisor: Alvarez & Marsal LLC

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

• Other Parties in Interest:

  • O-I Glass Inc.

    • Legal: Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Joseph Halsey)

  • Future Claims Representative: James Patton Jr.

    • Legal: Young Conaway Stargatt & Taylor LLP

    • Claims Analyst: Ankura Consulting Group LLC

🥛New Chapter 11 Filing - Southern Foods Group LLC (d/b/a Dean Foods Company)🥛

Southern Foods Group LLC (d/b/a Dean Foods Company)

November 12, 2019

In one corner: innovation. In the other corner: disruption. Dean Foods Co. $DF, the largest US supplier of milk, is struggling as a result. From back in March: https://t.co/Rk8xRVdW86 (paywall) https://t.co/TNpq1s4rzc

— 💥PETITION💥 (@petition) May 21, 2019

We’ve published these charts before here but they’re worth revisiting:

Since we’re all about the charts right now, here’s another one — perhaps the ugliest of them all:

Yup, Southern Foods Group LLC (d/b/a Dean Foods Company) has been a slow-moving train wreck for some time now. In fact, we wrote about the disruption it confronts back in March. It’s worth revisiting (we removed the paywall).

Alas, the company and a long list of subsidiaries finally filed for bankruptcy yesterday in the Texas (where things seem to be getting VERRRRRY VERRRRRY busy these days; see below ⬇️).

Once upon a time everyone had milk. Serena and Venus Williams. Dwight Howard. Mark McGuire. Tyra Banks. The Olsen twins. David Beckham. Giselle. The “Got Milk? campaign was pervasive, featuring A-listers encouraging folks to drink milk for strong bones. Things have certainly changed.

Dean Foods’ long history begins in 1925; it manufactures, markets and distributes branded and private label dairy products including milks, ice cream, creamers, etc. It distributes product to schools, QSRs like McDonald’s Inc. ($MCD), small format retailers (i.e., dollar stores and pharmacies), big box retailers like Walmart Inc. ($WMT)(which accounted for 15.3% of net sales in ‘18), and the government. Its products include, among many others, Friendly’s, Land O Lakes and Organic Valley. This company is a monster: it has 58 manufacturing facilities in 29 states, 5000 refrigerated trucks and 15,000 employees (40% of whom are covered by collective bargaining agreements). Milk, while on the decline, remains big business.

How big? Per the company:

In 2018, Dean Foods’ reported consolidated net sales of $7.755 billion, gross profit of $1.655 billion, and operating income of $(315.2) million. Through the first 6 months of 2019, Dean Foods’ reported consolidated net sales of $3.931 billion, gross profit of $753.2 million, and operating income of $(96.2) million.

Those are some serious sales. And losses. And the company also has a serious capital structure:

Milk production is a capital intensive business requiring a variety of inputs: raw milk, resin to make plastic bottles (which likely infuse all of us with dangerous chemicals, but whatevs), diesel fuel, and juice concentrates and sweeteners. Hence, high debt. So, to summarize: high costs, low(er) demand, lots of debt? No wonder this thing is in trouble.

What are the stated reasons for the company’s chapter 11 filing?

• Milk Consumption Declines. “For the past 10 years, demand has fallen approximately 2% year-over-year in North America.” This is consistent with the chart above.

• Loss of Pricing Power. Because volumes declined, economies of scale also decreased. “Delivered cost per gallon rose approximately 20.7% between 2018 and 2013 as a result of volume deleverage.” That’s vicious. Talk about a mean spiral: as volumes went down, the company couldn’t support the input volumes it had previously and therefore lost pricing power. “Dean Foods suffered a full year 2018 year-over-year decline in fluid milk volume of 5.8% following a 2017 year-over-year decline of 4.2%. Moreover, Dean Foods’ volume declines continue to outpace the overall category; while category volumes declined by approximately 4%8 year-over-year through the end of September, 2019, Dean Foods experience declines of over 11.4%.” Apparently, this impacted Dean Foods disproportionately. Any buyer looking at this has to wonder how these issues can be remedied.

• Market Share Disruption. New forms of “milk” have taken market share. “Sales of nut and plant beverages grew by 9% in 2018 and had sales of $1.6 billion, according to the Plant Based Foods Association.”

• Retail Consolidation. It doesn’t help when, say, Dollar General merges with Family Dollar. That gives the dollar stores increased leverage on price. And that’s just one example.

• “The BigBox Effect.” The biggest retailers have become increasingly private label focused and, in turn, vertically integrated. Take Walmart, for example. In 2018, the retailer opened its first U.S. food production facility in Indiana. Want to guess what kind of food? Why would we be mentioning it? This new facility amounted to a 100mm gallon loss of volume to Dean Foods.

• “The Loss Leader Effect.” We often talk about the venture-backed subsidization of commonplace lifestyle items, e.g., Uber Inc. ($UBER). Retailers have, in recent years, aggressively priced private label milk to drive foot traffic. “As retailers continue to invest in private-label milk to drive foot traffic, private label margin over milk contracted to a historic low of $1.26 in June, before falling even further to $1.24 in September.”

• Freight Costs. They’ve been up over the last few years. This is a different version of
  ”The Amazon Effect” ($AMZN).

All of these are secular issues that a balance sheet solution won’t remedy. Buyer beware. 😬🤔

So, what CAN the bankruptcy achieve? Yes, the obvious: the balance sheet. Also, there is a contingent liability of over $722.4mm that results from the company’s participation in an underfunded multi-employer pension plan. And liquidity: the bankruptcy will avail the company of a $850mm DIP credit facility. It may also allow the company to pursue a sale transaction to its long-time commercial partner and largest single raw milk vendor, Dairy Farmers of America (which is wed $172.9mm). Surely they must be aware of the secular trends and will price any offer accordingly, right? RIGHT? Either way, those ‘23 notes look like they might be about to take a bath.*

*Likewise certain trade creditors. The debtors state that that they have $555.7mm of total outstanding accounts payable and claim $257mm needs to go to critical vendors and another $189.2mm to 503(b)(9) admin claimants. That leaves a small subset of creditors due a bit more than $100mm holding the bag. This also explains the sizable DIP.

Meanwhile, one of the largest unsecured creditors is Acosta Inc., with a contingent, disputed and unliquidated claim arising out of litigation. Acosta is unlikely to recover much on this claim which is a bit ironic considering that an Acosta bankruptcy filing is imminent. Womp womp.

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

• Capital Structure: see above

• Professionals:

  • Legal: Davis Polk & Wardwell LLP (Brian Resnick, Steven Szanzer, Daniel Meyer, Nate Sokol, Alexander Bernstein, Charlotte Savino, Cameron Adamson) & Norton Rose Fulbright LLP (William Greendyke, Jason Boland, Bob Bruner, Julie Goodrich Harrison)

  • Financial Advisor: Alvarez & Marsal LLC (Jeffrey Stegenga, Brian Fox, Tom Behnke, Taylor Atwood)

  • Investment Banker: Evercore Group LLC (Bo Yi)

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

• Other Parties in Interest:

  • Receivables Securitization Agent, RCF Agent & DIP Agent: Rabobank USA

    • Legal: White & Case LLP (Scott Greissman, Philip Abelson, Elizabeth Fuld, Rashida Adams, Andrew Zatz) & Gray Reed & McGraw LLP (Jason Brookner, Lydia Webb, Amber Carson)

  • Unsecured Bond Indenture Trustee: Bank of New York Mellon NA

    • Legal: Emmett Marvin & Martin LLP (Thomas Pitta, Edward Zujkowski, Elizabeth Taraila)

  • Ad Hoc Group of 6.5% ‘23 Unsecured Noteholders: Ascribe III Investments LLC, Broadbill Investment Partners LLC, Ensign Peak Advisors Inc., Kingsferry Capital LLC, Knighthead Capital Management LLC, MILFAM Investments LLC

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Andrew Rosenberg, Robert Britton, Douglas Keeton, Grace Hotz) & Pillsbury Winthrop LLP (Hugh Ray III, William Hotze, Jason Sharp)

  • Official Committee of Unsecured Creditors: Central States Southeast and Southwest Areas Pension Fund, The Bank of New York Mellon Trust Company NA, Pension Benefit Guaranty Corporation, Land O’ Lakes Inc., California Dairies Inc., Consolidated Container Company LP, Select Milk Producers Inc.

    • Legal: Akin Gump Strauss Hauer & Feld LLP (Ira Dizengoff, Philip Dublin, Meredith Lahaie, Martin Brimmage, Joanna Newdeck, Julie Thompson, Patrick Chen, Madison Gardiner)

    • Financial Advisor: Berkeley Research Group LLC (Christopher Kearns)

    • Investment Banker: Miller Buckfire & Co. LLC (Richard Klein)

Update 1/11/20

⛽️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.

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*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 22 Bankruptcy Filing - Maxcom USA Telecom Inc.🇲🇽

Maxcom USA Telecom Inc.

August 19, 2019

We’re all for a reprieve from retail and energy distress but, sheesh, couldn’t have been more interesting than this?

Maxcom USA Telecom Inc. is a telecommunications provider deploying “smart-build” approaches to “last mile” connectivity (read: modems, handsets and set-up boxes) for enterprises, residential customers and governmental entities in Mexico — which is really just a fancy way of saying that it provides local and long-distance voice, data, high speed, dedicated internet access and VoIP tech, among other things, to customers.* It purports to be cutting edge and entrepreneurial, claiming “a history of being the first providers in Mexico to introduce new services,” including (a) the first broadband in 2005, (b) the first “triple-play” (cable, voice and broadband) in 2005, and (c) the first paid tv services over copper network using IP…in 2007. That’s where the “history” stops, however, which likely goes a long way — reminder, it’s currently the year 2019 — towards explaining why this f*cker couldn’t generate enough revenue to service its ~$103.4mm in debt.** Innovators!!

And speaking of that debt, it’s primarily the $103.4mm in “Old Notes” due in 2020 that precipitated this prepackaged bankruptcy filing (in the Southern District of New York).***

The Old Notes derive from a prior prepackaged bankruptcy — in 2013 (PETITION Note: not a “Two-Year Rule” violation) — and were exchanged for what were then outstanding 11% senior notes due in 2014. These Old Notes have a “step-up interest rate,” which means that, over time, the interest rate…uh…steps up…as in, increases upward/up-like. The rate currently stands at 8%. Unfortunately, the company doesn’t have revenue step-ups/upwardness/upseedayzee to offset the interest expense increase; rather, the company “…incurred losses of $4.9 million for the three months ended June 30, 2019, as compared to losses of $2.9 million for the three months ended June 30, 2018, and losses of $16 million for the year ended December 31, 2018, compared to losses of $.8 million for the year ended December 31, 2017….” Compounding matters are, among other things, the negative effects of decreased interest income and foreign currency exchange rates (the dollar is too damn strong!).**** The closure of the residential segment also, naturally, affected net revenue.

To make matters worse, the company’s debt actually has limitations (remember those?). Per the company:

In order to expand its network and strengthen its market share, the Debtors require additional capital. But, the Old Notes Indenture prohibits Maxcom Parent from incurring additional indebtedness (other than permitted indebtedness) unless certain leverage coverage ratios are satisfied, and the increased interest burden under the Old Notes seriously constrains the Debtors’ ability to take the actions required under its business plan to strengthen and expand their operations.

The purpose of this bankruptcy filing, therefore, is to effectuate a consent solicitation and exchange offer whereby the Old Notes will be swapped (and extinguished) for new “Senior Notes,” new “Junior PIK Notes” and cash consideration. The cash consideration will be covered by a new equity injection of $15mm. This transaction will bolster the company’s liquidity and shed approximately $36mm of debt from the balance sheet (PETITION Note: carry the one, add the two, that’s roughly $2.88mm in annual interest savings before taking into account the PIK notes, which won’t be cash-pay, obviously).

Prior to the bankruptcy filing, the company obtained the requisite amount of support to jam non-consenting creditors (PETITION Note: in bankruptcy, a debtor needs 2/3 in amount and half in number of a particular class of debt to bind a class. Here, the company nailed down acceptances of the plan from 84.75% of the holders of Old Notes holding 66.73% of principal amount in Old Notes). And there is one large group of non-consenting holders, apparently. Cicerone Advisors LLC, a financial advisor to three holders of the Old Notes, Moneda Asset Management, Megeve Investments and UBS Financial Services, Inc., attempted to engage the company on better terms than that offered under the plan. It did not, however, ultimately provide a proposal; instead, it demanded terms, including confidentiality and an agreement to pay fees and expenses of financial and legal advisors. Here’s the thing, though: they miscalculated their leverage: with only 30% of Old Notes represented, they don’t have a “blocking position” that could thwart the company’s proposal. Absent an additional 4%, these guys are dead in the water.

This should be…should be…a very quick trip through bankruptcy.*****

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*The company is shutting down its residential segment, which “involves the gradual closure of residential clusters and mass disconnection of residential customers.” Apparently, people don’t need the company’s services anymore. At least not when they’re carrying $1,000 telecommunications systems in their pants pockets? 🤔

The disruption is real. Indeed, the company’s residential segment operates through an outdated copper network that doesn’t comport with the latest in fiber network technology.

**U.S. Bank NA is the indenture trustee under the Old Notes.

***Oh man, the venue on this one is just quaint. There are two debtors, Maxcom Telecomunicaciones, S.A.B. DE C.V., a Mexican entity and Maxcom USA Telecom Inc., which is 100% owned by the former. What does the latter do? According to Exhibit A of the First Day Declaration it does “[Assorted services in the USA].” Hahaha. This sh*t is so suspect that nobody even bothered to remove the brackets. It might as well say, “[Kinda sorta maybe some random sh*t within US borders and down the street from the SDNY for purposes of ginning up venue”]. Is it a guarantor on the notes? “[Yes].” HAHAHA. Like, is it, or not?? The listed highlight? “Recently created.” Damn straight it was. This year. The service address? “c/o United Corporate Services, Inc., Ten Bank Street, Suite 560, White Plains, NY 10606.” Conveniently happens to fall right in Judge Drain’s lap.

We mean, seriously, folks? People AREN’T EVEN TRYING to be slick about manufacturing venue anymore.

Apropos to the point, Duane Morris LLP’s Frederick Hyman highlights the trend of foreign borrowers with little to no assets in the U.S. filing for chapter 11 to take advantage of the automatic stay here, describing the slippery-slope-creating case of TMT Shipping (which established venue by funding professional retainers in the US).

****Interestingly, people have been voicing concerns about the foreign exchange rates and US-dominated debt in emerging markets. It seems those concerns may be warranted:

…from 2013 to date, the value of the Mexican Peso, as compared to the U.S., has decreased by 53%. Because of such devaluation, Maxcom Parent’s repurchase of the $74.3 million in principal amount of the Old Notes did not decrease the amount that Maxcom Parent’s books and records reflect is owed to the holders of the Old Notes given that Maxcom Enterprise’s revenues are mostly in Mexican Pesos. In other words, while the amount that Maxcom Parent owes on account of the Old Notes has decreased in U.S. Dollars, because the majority of Maxcom Enterprise’s revenues are in Mexican Pesos and the Old Notes are denominated in U.S. Dollars, Maxcom Parent’s liability on account of the Old Notes remains roughly the same on its books and records.

Ruh roh. 🙈 We expect to see many more mentions of exchange-related issues going forward. Mark our words.💥

*****Small victories. The dissenting bondholders were able to successfully push the debtors’ timeline by a week or so at the first day hearing.

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

• Capital Structure: $103.4mm old notes

• Professionals:

  • Legal: Paul Hastings LLP (Pedro Jimenez, Irena Goldstein)

  • Financial Advisor: Alvarez & Marsal Mexico

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

• Other Parties in Interest:

  • Indenture Trustee: US Bank NA

    • Legal: Thompson Hine LLP (Jonathan Hawkins, Curtis Tuggle)