🔥New Chapter 22 Bankruptcy Filing - Remington Outdoor Company Inc.🔥

Remington Outdoor Company

July 27, 2020

To read our summary of the case, please go here.


Jurisdiction: N.D. of Alabama (Judge Jessup)

Company Professionals:

  • Legal: O’Melveny & Myers LLP (Nancy Mitchell, Stephen Warren, Karen Rinehart, Diana Perez, Jennifer Taylor) & Burr & Forman LLP (Derek Meek, Hanna Lahr)

  • Post-Reorg Board of Directors: Anthony Acitelli, Alex Zyngier, George Wurtz III, G.M. McCarroll, Ron Coburn, Ken D’Arcy, Gene Davis)

  • Legal to Restructuring Committee: Akin Gump Strauss Hauer & Feld LLP (Sarah Schultz)

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

  • Investment Banker: Ducera Partners LLC (Bradley Meyer)

  • Claims Agent: Prime Clerk (*Click on case name above for free docket access)

Other Parties in Interest:

  • Priority Term Loan Lender: Whitebox Advisors LLC

    • Legal: Brown Rudnick LLP (Andreas Andromalos) & Balch & Bingham LLP (Jeremy Retherford)

  • Priority Term Loan Agent: Cantor Fitzgerald Securities

    • Christian & Small LLP (Daniel Sparks, Bill Bensinger)

  • FILO Lender: Franklin Advisors Inc.

    • Legal: Pillsbury Winthrop Shaw Pittman LLP (Joshua Morse, Andrew Alfano) & Christian & Small LLP (Daniel Sparks, Bill Bensinger)

  • FILO Term Loan Agent: Ankura Trust Company

    • Legal: Davis Polk & Wardwell LLP (Donald Bernstein, Joanna McDonald) & Hand Arendall Harrison Sale LLC (Benjamin Goldman)

  • Largest Equityholders (in order): Cede & Co., Schultze Master Fund, Antora Peak Credit Opportunities, BMR Funding LLC, Whitebox Asymmetric Partners LP, Whitebox Multi Strategy Partners LP, JNL Series TR - JNL/PPM America, Rockwall CDO II Ltd., Greenbriar CLO Ltd., SG-Financial LLC, W.R. Stephens Jr. Trust A., Eastland CLO Ltd., JMP Credit Advisors CLO IV Ltd., Stratford CLO Ltd., Westchester CLO Ltd., JMP Credit Advisors CLO III(R) Ltd., Voya CLO 2015-1 Ltd., Voya CLO 2014-4 Ltd., Voya CLO 2014-2 Ltd., Voya CLO 2013-3 Ltd., Voya CLO 2013-1 Ltd., Eastspring Investments US Bank Loan, PPM Grayhawk CLO Ltd., Commonwealth Fixed Interest Fund 17, National Railroad Retirement, Cantor Fitzgerald & Co.

🌎 New Chapter 11 Filing - Lakeland Tours LLC (d/b/a WorldStrides) 🌎

Virginia-based Lakeland Tours LLC (d/b/a WorldStrides) and 22 affiliates (the “debtors”) filed for bankruptcy in the Southern District of New York, the latest in a relatively small group of COVID-related victims to end up in bankruptcy court. Similar to other pure-play filings (e.g., several Latin American airlines and Hertz Corporation $HTZ)), the debtors are in the travel industry; they are a provider of educational travel experiences in the US and abroad; they are the US’ largest accredited travel program serving hundreds of thousands of students and hundreds of universities annually. And they were doing well before the pandemic: in fiscal ‘19, the company generated approximately $650mm in net revenue and management projected $840mm in net revenue in ‘20. As we all know, “experiences” are all the rage these days and international student travel is far more common today than it was even five years ago (PETITION Note: seriously, folks, the company doesn’t even try to hide the social element to this … the above photo just screams “Pay us for an experience racked with non-stop selfies!). According to StudentUniverse and Skift, “[t]he student traveler represents fully one-fifth of all international arrivals in the travel industry, today. They command a market value of some $320 billion….

A worldwide travel shutdown will obviously negatively impact that trend. And, by extension, obliterate the company’s projections. Indeed, the debtors were “decimated” by the worldwide shutdown of nonessential travel. Revenue? Lost. Future bookings? Crushed. Refund requests? Voluminous. The “negative net bookings” must have been off the charts. All in, these factors created a $200mm liquidity hole for the debtors.

This need for new capital, when coupled with the debtors’ burdensome capital structure ($768mm of funded debt), precipitated the need for a restructuring. And, alas, the debtors have a restructuring support agreement (the “RSA”) agreed to by the debtors’ prepetition secured lenders, their hedge provider and their equity sponsors, Eurazeo North America and Primavera Capital Limited. The RSA commits these consenting stakeholders to, among other things, a $200mm new capital infusion (exclusive of fees) split 50/50 between the consenting lenders and the sponsors which will roll into exit debt and equity.* Here are the highlights:

  • The $100mm provided by the lenders will roll into an exit facility;

  • The $150mm roll-up will roll into a second-out term loan take-back facility; and

  • The $100mm provided by the equity sponsors will convert into 100% of the common stock of the reorganized debtors (subject to dilution from a management incentive plan).

  • Holders of $126mm in subordinated seller notes will get wiped out along with existing equity interests.

  • General unsecured creditors will ride-through paid in full.

  • The major parties to the RSA will get releases under the proposed plan: creditors who vote to reject the plan will need to affirmatively opt-out of the releases.

The debtors already commenced solicitation and hope to confirm the plan on or about August 19. The post-reorg capital structure will look like this:

Screen Shot 2020-07-21 at 11.33.25 AM.png

The above graphic is the biggest “tell” that the filing is predominantly about access to fresh capital. The deleveraging (of only $100mm) is rather secondary and inconsequential relative to the $200mm cash infusion. Which begs the question: if the debtors perform dramatically under business plan in coming years — perhaps, uh, due to a decrease in international student travel — will the company be in need of another restructuring? PETITION Note: as we write this, a talking head is pontificating on CNBC that business travel will be significantly lower in coming years than it had been — confirming the premise of this Bloomberg piece. If parents aren’t traveling for work, will they let their children travel for school?

The debtors certainly acknowledge the risks. In the “risk factors” section of their Disclosure Statement, they note that a “second wave” of COVID-19 could impact results (PETITION Note: we need to conquer the “first wave” to get to the “second wave,” but, yeah, sure.). They state:

The Debtors cannot predict when any of the various international or domestic travel restrictions will be eased or lifted. Moreover, even when travel advisories and restrictions are lifted, demand for study abroad and student travel may remain reduced for a significant length of time, and the Debtors cannot predict if and when demand will return to pre-pandemic levels. Due to the discretionary nature of educational travel spending, the Debtors’ revenues are heavily influenced by the condition of the U.S. economy and economies in other regions of the world. Unfavorable conditions in these broader economies have resulted, and may result in the future, in decreased demand for educational travel, changes in booking practices and related policies by the Debtors’ competitors, all of which in turn have had, and may have in the future, a strong negative effect on the Debtors’ business. In particular, the Debtors’ bookings may be negatively impacted by the adverse changes in the perceived or actual economic climate, including higher unemployment rates, declines in income levels and loss of personal wealth resulting from the impact of COVID-19. The Debtors’ bookings may also be impacted by continued and prolonged school closings.

And they add:

This is the first time since September 11, 2001 that the Debtors have suspended their tours, and is the first time the Debtors have completely suspended their tours for an extended period of time. As a result of these unprecedented circumstances, the Debtors are not able to predict the full impact of such a suspension. In particular, the Debtors cannot predict the impact on financial performance and cash flows required for cash refunds of fares for cancelled tours as a result of a suspension of tours if such suspensions are prolonged further than anticipated, as well as the public’s concern regarding the health and safety of travel, and related decreases in demand for travel. Depending on the length of the suspension and level of customer acceptance of future tour credits, the Debtors may be required to provide additional cash refunds for a substantial portion of the balance of deferred tours, as customers who have opted to defer tours may request a cash refund.

And so it looks like the debtors are conservatively projecting $367.9mm of revenue in fiscal year 2021, slightly more than half of what they did in ‘19. They don’t expect to revert back to projected ‘20 numbers until at least 2024. Yes, 2024.

Screen Shot 2020-07-21 at 1.28.26 PM.png

Now, generally, projections are almost always worthless. As the debtors’ risk factors suggest here, they may be even more worthless than usual depending upon how COVID shakes out. At least management appears to be realistic here that the business will not return to pre-COVID levels for some time. Let’s hope that a vaccine comes and they’re positioned to surprise to the upside.**

_____

*$150mm of pre-petition secured debt will roll-up into the DIP.

**Houlihan Lokey pegs valuation between approximately $625mm and $745mm as of September 30, 2020.


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

  • Capital Structure: $642mm RCF/TL/LOCs, $126mm subordinated seller notes

  • Professionals:

    • Legal: Kirkland & Ellis LLP (Nicole Greenblatt, Jennifer Perkins, Susan Golden, Whitney Fogelberg, Kimberly Pageau, Elizabeth Jones)

    • DIrectors: Bob Gobel, Lisa Mayr (ID)

    • Financial Advisor: KPMG LLP (James Grace, Thomas Bibby)

    • Investment Banker: Houlihan Lokey Capital Inc. (Sam Handler, Stephen Spencer)

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

  • Other Parties in Interest:

    • Prepetition & DIP Agent: Goldman Sachs Bank USA

      • Legal: Latham & Watkins LLP (Adam Goldberg, Hugh Murtagh)

    • Seller Noteholders: Metalmark Capital Holdings LLC & Silverhawk Capital Partners

      • Legal: Davis Polk & Wardwell LLP (Michael Davis)

    • Sponsors: Eurazeo North America & Primavera Capital Limited

      • Legal: Cravath Swaine & Moore LLP (Paul Zumbro, George Zobitz) & Simpson Thacher & Bartlett LLP (Michael Torkin)

      • Financial Advisor: PJT Partners LP

    • Ad Hoc Group of Consenting Lenders

      • Legal: Gibson Dunn & Crutcher LLP (Scott Greenberg, Steven Domanowski, Jeremy Evans)

      • Financial Advisor: Rothschild & Co.

🧀 New Chapter 11 Bankruptcy Filing - CEC Entertainment Inc. 🧀

CEC Entertainment Inc.

June 24, 2020

For our rundown, please go here.

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

  • Capital Structure: $1.089b funded debt ($760mm TL, $108 RCF, $6mm LOC, $215.7mm notes)

  • Professionals:

    • Legal: Weil Gotshal & Manges LLP (Matthew Barr, Alfredo Perez, Andrew Citron, Rachael Foust, Scott Bowling)

    • Board of Directors: David McKillips, Andrew Jhawar, Naveen Shahani, Allen Weiss, Peter Brown, Paul Aronzon

    • Financial Advisor: FTI Consulting Inc. (Chad Coben)

    • Investment Banker: PJT Partners LP (Jamie O’Connell)

    • Real Estate Advisor: Hilco Real Estate LLC

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

  • Other Parties in Interest:

    • PE Sponsor: Queso Holdings Inc./AP VIII CEC Holdings, L.P. (Apollo)

      • Legal: Paul Weiss Rifkind Wharton & Garrison LLP

    • First Lien Credit Agreement Agent: Credit Suisse AG, Cayman Islands Branch

      • Legal: Davis Polk & Wardwell LLP (Eli Vonnegut) & Rapp & Krock PC (Henry Flores, Kenneth Krock)

    • Ad Hoc Group of First Lien Lenders: American Money Management Corp, Arbour Lane Capital Management, Arena Capital Advisors LLC, Ares Management LLC, Bank of Montreal, BlueMountain Capital Management, Carlson Capital LP, Catalur Capital Management LP, Citibank NA, Credit Suisse AG, Deutsche Bank New York, Fidelity Management & Research Co., Fortress Investment Group LLC, GS Capital Partners LP, Hill Path Capital, Indaba Capital Fund LP, ICG Debt Advisors, Jefferies Financ LLC, J.H. Lane Partners Master Fund LP, Monarch Alternative Capital LP, MSD Capital LP, MSD Partners LP, Octagon Credit Investors LLC, Par Four Investment Management LLC, RFG-Clover LLC, Second Lien LLC, UBS AG, Wazee Street Capital Management, Western Asset Management Company LLC, WhiteStar Asset Management, ZAIS Group LLC

      • Legal: Akin Gump Strauss Hauer & Feld LLP (Ira Dizengoff, Philip Dublin, Jason Rubin, Marty Brimmage Jr., Lacy Lawrence)

    • Indenture Trustee: Wilmington Trust NA

      • Legal: Reed Smith LLP (Kurt Gwynne, Jason Angelo)

    • Ad Hoc Group of ‘22 8% Senior Noteholders (Longfellow Investment Management Co. LLC, Prudential Financial Inc., Resource Credit Income Fund, Westchester Capital Management)

      • Legal: King & Spalding LLP (Matthew Warren, Lindsey Henrikson, Michael Rupe)

      • Financial Advisor: Ducera Partners LLC

    • Official Committee of Unsecured Creditors: Wilmington Trust NA, The Coca-Cola Company, National Retail Properties, Performance Food Group, Washington Prime Group, NCR Corporation, Index Promotions

      • Legal: Kelley Drye & Warren LLP (Eric Wilson, Jason Adams, Lauren Schlussel & Womble Bond Dickinson LLP (Matthew Ward)

7/17/20 Dkt. 352.

⛽️New Chapter 11 Bankruptcy Filing - Hornbeck Offshore Services Inc. ($HOSS)⛽️

Hornbeck Offshore Services Inc.

May 19, 2020

Hornbeck Offshore Services Inc. and 13 affiliates (the “debtors”), providers of marine transportation services to petroleum exploration and production, oilfield service, offshore construction and US military customers, filed prepackaged chapter 11 bankruptcies in the Southern District of Texas. Judge Isgur and Judge Jones must be thinking “Thank G-d”: for the judges, “prepackaged” is the operative word here and a quickie case amidst some of these melting ice cubes (e.g., J.C. Penney) must be a welcome breath of fresh air.

Hornbeck is one of those companies that people have been watching ever since 2015 — mostly on account of (i) the idea that offshore drilling had become prohibitively expensive in a falling commodity price environment and (ii) thanks to years of capital-intensive vessel construction programs and vessel acquisitions, an over-levered balance sheet. The good news is that, because of those programs/acquisitions, the company is relatively well-positioned with a nimble and younger fleet (76 vessels in total) — a fact that’s surely recognized by the company’s future equity holders. The bad news is that, with this much debt, even Hornbeck couldn’t postpone the inevitable bankruptcy ad infinitum when oil is where it is. Per the company:

Despite the Company’s relative strengths in its core markets, recent industry trends have had a materially adverse impact on the offshore energy industry and on the Company in particular. While the Company is accustomed to, and built for, the cyclical nature of the oilfield services industry, the recent downturn in the industry has lasted nearly six years, much longer than any previous cycles in the deepwater era, and has put pressure on the Company’s ability to repay or refinance its significant debt obligations.

This is what the funded debt looks like:

Despite that ghastly capital structure and the unfriendly market, Hornbeck, unlike other players in the space like Tidewater Inc. and GulfMark Offshore Inc., managed to stay out of bankruptcy. To do so, it pulled every lever in the book:

  • Stacking of vessels to right-size the size of the available fleet relative to demand? ✅

  • Defer drydocking costs? ✅

  • Onshore and offshore personnel pay cuts? ✅

  • Selectively taking on assignments, avoiding long-term Ks and insurance risk? ✅

This is all great but of course there’s still that monstrosity of a balance sheet. In tandem with the operational restructuring, the company has been pursuing strategic balance sheet transactions since 2017 — some more successful than others. The most recent attempt of out-of-court exchange offers and consent solicitations was in early February and though it got a super-majority of support from holders of the ‘20 and ‘21 notes, it failed to meet the required 99% threshold to consummate the deal. On March 23, the date of the bottom of the stock market (irrelevant…just a fun fact), the company terminated the offers. After a long road over many years, bankruptcy became more of a reality.

And so here we are. With the amount of support indicated on the offers, this thing set up nicely for a prepackaged plan. Regarding the plan, there’s a whole lot going on there because of the way the exit facilities are contemplated and the fact that there are Jones Act compliance issues but suffice it to say that the plan treats the first lien lenders as the fulcrum security. The second lien lenders will get a tip and the unsecured noteholders essentially walk away with a small equity kiss and warrants. The company will require liquidity on the back end of the chapter 11 and so the plan also contemplates a $100mm rights offering in exchange for 70% of the reorganized equity.

The debtors will fund the cases via a $75mm DIP credit facility which includes $56.25 million funded by certain secured lenders and $18.75 million funded by certain unsecured noteholders.

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

  • Capital Structure: $50mm ABL (Wilmington Trust NA), $350mm first lien facility (Wilmington Trust NA), $121.2mm second lien facility (Wilmington Trust NA), $224.3mm ‘20 unsecured notes, $450mm ‘21 unsecured notes

  • Professionals:

    • Legal: Kirkland & Ellis LLP (Edward Sassower, Ryan Blaine Bennett, Ameneh Bordi, Debbie Farmer, Emily Flynn, Michael Lemm, Benjamin Rhode) & Jackson Walker LLP (Matthew Cavenaugh, Kristhy Peguero, Jennifer Wertz, Veronica Polnick)

    • Financial Advisor: Portage Point Partners LLC

    • Investment Banker: Guggenheim Securities LLC

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

  • Other Parties in Interest:

    • DIP Agent ($75mm): Wilmington Trust NA

    • Counsel to the Consenting Secured Lenders

      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Darren Klein, Stephanie Massman)

    • Counsel to Consenting Unsecured Notes

      • Legal: Milbank LLP (Gerard Uzzi, Brett Goldblatt, James Ball)

    • Large equityholders: Cyrus Capital Partners LP, Fine Capital Partners LP, William Hurt Hunt Trust Estate

🚢 New Chapter 11 Bankruptcy Filing - Speedcast International Limited 🚢

Speedcast International Limited

April 22, 2020

This is a fun one.

Speedcast International Limited, a publicly-traded Australian company headquartered in Houston and 32 affiliates (the “debtors”) filed rare freefall bankruptcy cases in the Southern District of Texas earlier this week. In a week where another 4.4mm people filed for unemployment, one thing seems abundantly clear: the Texas’ bankruptcy courts are going to need help. While Delaware has also been extremely busy, both the Northern District and Southern District of Texas are seeing rock solid bankruptcy flow these days. If the judges got volume bonuses, they’d be rolling in it.

Who’s the big loser? Well, with all of these bankruptcy hearings conducted telephonically, we reckon it’s the city of Houston. In normal times, there’d be a steady stream of suits flushing through the local economy there: staying at the hotels, eating at the restaurants, drinking at the bars. Brutal. But we digress. 🤔

One thing the restructuring industry gives us is an open window into how one domino can topple over others. For instance, the energy and cruise industries are clearly effed currently and so it stands to reason that service providers to those industries would also feel pain. This is where Speedcast comes in: it is 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. They plug a hole: they offer telecom services to users in remote parts around the world, “primarily where there is limited or no terrestrial network.” Picture some evildoer in some decked out yacht-lair somewhere plotting to take over the world Austin Powers-style. He is probably leveraging Speedcast for IT solutions (PETITION Note: we’re just painting a picture folks; we’re not suggesting that the company merely deals with shady-a$$ mofos. Don’t @ us.). The business is truly international in scope.

Putting aside yacht-loving villains, Speedcast has high profile clients. Carnival Corp. ($CCL), for instance, contracted with Speedcast in December 2018 — long before any of Carnival’s customers contracted with the coronavirus. Cruisers streaming reports about their horrific cruise-going experiences likely used Speedcast product to get the word out. 😬 This was a growing business segment. Revenue increased by $36.5mm from fiscal year 2018 to 2019.

Likewise, the debtors’ energy business had also been growing. The debtors provide “high-bandwidth remote communication services to all segments of the global energy industry, including companies involved in drilling and exploration, floating production storage, offloading, offshore service, general service, engineering, and construction.” Revenue there increased from $158.3mm in FY18 to $164.5mm. We’re pretty sure we know which direction that number is heading in FY20.

Similarly, the debtors’ other business segments — Enterprise & Emerging Markets and Government — demonstrated growth between ‘18 and ‘19. All in, this is a $722.3mm revenue business. Unfortunately, it also had net losses of $459.8mm in FY19. So, yeah. There’s that. The debtors’ rapid expansion over the years apparently didn’t lead to immediate synergistic realization and the debtors suffered from margin compression, revenue declines from specific business lines, and other ails that affected performance and liquidity.

While there have been operational issues for some time now, those were just jabs. COVID-19 and the attendant global shutdown body slammed the company. The debtors note:

Further, the lasting and distressed market conditions in the maritime and oil and gas industries, and the recent and dramatic impact of the COVID-19 pandemic, have impacted all players in the global marketplace. The Company has been particularly hard hit by these adverse market conditions. The outsized impact on the Company’s Maritime Business and Energy Business customers has manifested in a dramatic reduction in cash receipts. This macroeconomic downturn, along with the above-mentioned headwinds that contributed to the lower than expected FY19 financial results, made clear that the Company would not satisfy the Net Leverage Covenant under the Credit Agreement.

Right. The debt. $689.1mm of it, to be exact (exclusive of financing arrangements) — of which approximately $590mm is a term loan. With a capital structure this simple, one would think that this is a case that is ripe for a prearranged deal memorialized via a pre-petition restructuring support agreement. But no. There isn’t one here. Why not?

The term lenders argue that the debtors engaged them too late in the game. Therefore, there wasn’t enough time to conduct due diligence on the business, they say. Surely quarantine ain’t helping matters on that front. Nor is the fact that the company is international in nature.

And so this is a traditional freefall balance sheet and operational restructuring — something you don’t really see much of anymore. This case looks headed towards either a sale — which we’re guessing is the term lenders preferred outcome (par plus accrued baby!) — or a plan that would equitize the term lenders and put the go-forward financing needs of the debtors on the shoulders of the term lenders. A plan would preserve the debtors’ net operating losses which, as noted above, could be meaningful.

The debtors and the ad hoc lenders did nail down a commitment for a multiple-draw super-priority senior secured term loan DIP which includes a $90mm new money portion ($35mm on an interim basis) and a $90mm roll-up ($35mm on an interim basis). Judge Isgur took some exception to the interim roll-up portion of the proposed facility but the debtors and the lenders were hand-in-hand saying that — particularly under the circumstances today — the interim roll-up was necessary and appropriate because the lenders need a “big incentive” to lend and “the lenders’ capital providers are getting squeezed themselves.” 🤔 (PETITION Note: The DIP market sounds vicious — though some of that, here, is attributable to the nature of the assets. Delta Airlines can place senior secured notes right now at around 7% because, well … duh … planes!). Judge Isgur did caution however that he wants no part of professionals throwing this interim roll-up in his face as precedent in an upcoming case (Um, we’ll see how that plays out…this financing environment ain’t exactly reversing overnight). While the ad hoc lenders are clearly in pole position for the DIP commitment, they’re syndicating the loan now (which would obviously affect the roll-up too). The DIP will push the professionals towards a path forward over the next couple of weeks and the hope is for a result to be consummated within six months.

Interestingly, the largest single unsecured creditor is an entity that suffers from its own issues and has reportedly hired bankruptcy professionals for advice: Intelsat SA is owed $44mm. In late March, Intelsat terminated their contract with the debtors in a pretty savage leverage play. We talk about leverage a lot in PETITION. There’s balance sheet leverage and then there is situational leverage. Intelsat flexed its muscles and exercised the latter. In exchange it got critical vendor designation, acknowledgement of the full amount of their pre-petition claim and mutual releases. Significantly, the debtors stressed the importance of the relationship, noting that the IT services were needed more than ever as vessels sail adjusted routes due to COVID (read: boats are circling around because governments won’t let passengers disembark).

We should know within a few weeks what a deal may look like here.

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

  • Capital Structure: $87.7mm RCF, $591.4mm Term Loan, $10.6mm LOC

  • Professionals:

    • Legal: Weil Gotshal & Manges LLP (Gary Holtzer, Alfredo Perez, David Griffiths, Brenda Funk, Martha Martir, Kelly DiBlasi, Stephanie Morrison, Paul Genender, Amanda Pennington Prugh, Jake Rutherford) & Herbert Smith Freehills LLP

    • Independent Director: Stephe Wilks, Grant Scott Ferguson, Michael Martin Malone, Peter Jackson, Carol Flaton, David Mack)

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

    • Investment Banker: Moelis & Company Co. (Paul Rathborne, Adam Waldman)

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

  • Other Parties in Interest:

    • Ad Hoc Group of Secured Lenders

      • Davis Polk & Wardwell LLP (Damian Schaible, David Schiff, Jonah Peppiatt, Jarret Erickson) & Rapp & Krock PC (Henry Flores, Kenneth Krock)

      • Financial Advisor: Greenhill & Co. Inc.

    • DIP Agent: Credit Suisse AG

      • Skadden Arps Slate Meagher & Flom LLP (Steven Messina, George Howard, Albert Hogan III, David Wagener)

    • Large Creditor: Intelsat SA

      • Legal: Kirkland & Ellis LLP (Edward Sassower, Steven Serajeddini, Anthony Grossi) & Jackson Walker LLP (Matthew Cavenaugh)

    • Large Creditor: Inmarsat Global Limited

      • Legal: Steptoe & Johnson LLP (Michael Dockterman) & Norton Rose Fulbright US LLP (Jason Boland, Bob Bruner)

    • Official Committee of Unsecured Creditors

      • Legal: Hogan Lovells US LLP (S. Lee Whitesell, John Beck, David Simonds, Ron Silverman, Michael Hefter) & Husch Blackwell LLP (Randall Rios, Timothy Million)

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

Triple Frontier.gif

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).*

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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.

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:

Screen Shot 2020-04-19 at 9.33.11 AM.png

Here it was a few months later:

Screen Shot 2020-04-19 at 10.02.17 AM.png

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

Screen Shot 2020-04-19 at 9.35.24 AM.png

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 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 - VIP Cinema Holdings Inc.🍿

VIP Cinema Holdings Inc.

February 18, 2020

VIP Cinema Holdings Inc. and four affiliates (the “debtors”) filed prepackaged chapter 11 bankruptcy cases in the District of Delaware; they are manufacturers of luxury seating products for movie theaters. Here’s the problem: end user customers stopped ordering their stuff. Yup, that’s right, there’s a finite market for luxury seating in movie theaters. Who knew?

Here are some of the problems this company confronted:

  • They made chairs that were too good. That’s right. Too good. The chairs had a longer lifecycle than the company likely wanted. Either that or people are engaging in too much Netflixing and chilling and not enough movie-going.

  • Movie theaters slowed down their renovation activities and construction of new locations. Perhaps people are engaging in too much Netflixing and chilling and not enough movie-going.

  • Movie theaters reduced capital investment — mostly because they haven’t exactly performed very well themselves and have their own debt and equityholders to contend with. Also, people are engaging in too much Netflixing and chilling and not enough movie-going.

  • They conquered the total addressable market, securing 70% market share with little to no room to grow thanks to all of the foregoing bulletpoints.

Are we being too flip about $NFLX? Well, don’t take our word for it. Here’s the company explaining one of the reasons why it’s in trouble:

“Continued proliferation of online streaming services and alternative viewing experiences, which has led to declining movie attendance, a poor outlook sentiment for the overall U.S. movie theatre industry and particularly put significant pressure on the stock price of AMC, a key customer for the Company.”

Because of all of the foregoing factors, the debtors triggered an event of default under their first lien credit agreement and have been in a state of forbearance with their lenders ever since — all with the hope of negotiating an out-of-court restructuring transaction.

That hope was extinguished when Odeon reduced seating orders, napalming everyone’s financial models upon which the proposed out-of-court transaction was premised. Now we’re in prepackaged bankruptcy territory with a restructuring support agreement that will shed $178mm of debt and infuses the company with a $33mm DIP credit facility — of which $13mm is new money and $20mm is a roll-up of prepetition debt. Here is the pre-petition capital structure:

Screen Shot 2020-02-18 at 8.52.34 PM.png

The liquidity is highly necessary. The debtors are burning cash like Rick Dalton burns interlopers bursting into his Hollywood Hills mansion. The debtors filed for bankruptcy with just $1mm in liquidity remaining.

Speaking of burning cash, that’s pretty much what you can say about the $200-or-so-million that previously went into these debtors. The restructuring support agreement will (a) convert first lien loans to preferred and common equity, (b) donut the second lien claims, and (c) donut the general unsecured claimants (unless they opt-in to a release, in which case they’ll get $5k). Critical to everything is the fact that HIG Capital LLC, the existing shareholder in the company, will write a new-money check of $7mm and enter in a management services agreement with the reorganized newco. In exchange for this investment, HIG will get preferred equity and 51% of the common equity.* Everyone is going to be holding their breath for the next 6 weeks, hoping that no other large chains cancel or downsize orders. If that happens, this deal could blow up.

*Suffering PTSD from the last-minute collapse of the out-of-court deal, HIG also negotiated the ability to walk if the debtors have less than $1.5mm of available unrestricted cash on the “Exit Date.”


  • Jurisdiction: D. of Delaware (Judge Walrath)

  • Capital Structure: see above.

  • Professionals:

    • Legal: Ropes & Gray LLP (Gregg Galardi, Christine Pirro Schwarzman) & Bayard PA (Erin Fay, Daniel Brogan, Gregory Flasser)

    • Independent Director: Michael Foreman

    • Financial Advisor/CRO: AlixPartners LLP (Stephen Spitzer)

    • Investment Banker: UBS Securities LLC

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

  • Other Parties in Interest:

    • First Lien Agent: Wilmington Savings Fund Society FSB

      • Legal: Wilmer Cutler Pickering Hale and Dorr LLP (Andrew Goldman, Benjamin Loveland) & Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Joseph Barsalona II, Tamara Mann, Andrew Workman)

    • Ad Hoc Group of First Lien Lenders

      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Adam Shpeen) & Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Joseph Barsalona II, Tamara Mann, Andrew Workman)

      • Financial Advisor: M-III Partners LP

    • Second Lien Agent & Second Lien Lenders: Oaktree Fund Administration LLC

      • Legal: Stroock & Stroock & Lavan LLP (Jayme Goldstein, Daniel Ginsburg, Joanne Lau) and Young Conaway Stargatt & Taylor LLP (Matthew Lunn, Edmon Morton, Betsy Feldman)

    • Sponsor: HIG Capital LLC & HIG Middle Market LBO Fund II LP

      • Legal: McDermott Will & Emery LLP (Brooks Gruemmer, Jay Kapp)

⚓️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 Filing - Anna Holdings Inc. (a/k/a Acosta Inc.)

Anna Holdings Inc. (a/k/a Acosta Inc.)

DATE

Back in September 2018’s “Trickle-Down Disruption from Retail Malaise (Short Coupons),” we noted a troubled trio of “sales and marketing agencies.” We wrote:

With the “perfect storm” … of (i) food delivery, (ii) the rise of direct-to-consumer CPG brands, (iii) increased competition from private-brand focused German infiltrators Aldi and Lidl, and (iv) the increasingly app-powered WholeFoods, there are a breed of companies that are feeling the aftershocks. Known as “sales and marketing agencies” (“SMAs”), you’d generally have zero clue about them but for the fact that you probably know someone who is addicted to coupon clipping. Or you’re addicted to coupon clipping. No shame in that, broheim. Anyway, that’s what they’re known for: coupons (we’re over-simplifying: they each perform other marketing, retailing, and data-oriented services too). The only other way you’d be familiar is if you have a private equity buddy who is sweating buckets right now, having underwritten an investment in one of three companies that are currently in distress. Enter Crossmark Holdings Inc., Acosta Inc., and Catalina Marketing (a unit of Checkout Holding Corp.). All three are in trouble.

What’s happened since? Catalina Marketing filed for chapter 11 bankruptcy. Crossmark Holdings Inc. effectuated an out-of-court exchange transaction, narrowing averting a chapter 11 bankruptcy filing. And, as of last week, Acosta Inc. launched solicitation of a prepackaged chapter 11 bankruptcy filing. It will be in bankruptcy in the District of Delaware very very soon. We’ve basically got ourselves an SMA hat-trick.

Before we dive into what the bloody hell happened here — and it ain’t pretty — let’s first put some more meat on those SMA bones. In doing so, mea culpa: we WAY over-simplified what Acosta Inc. does in that prior piece. So, what do they do?

Acosta has two main business lines: “Sales Services” and “Marketing Services.” In the former, “Acosta assists CPG companies in selling new and existing products to retailers, providing business insights, securing optimal shelf placement, executing promotion programs, and managing back-office order-to-cash and claims deduction management solutions. Acosta also works with clients in negotiations with retailers and managing promotional events.” They also provide store-level merchandising services to make sure sh*t is properly placed on shelves, stocks are right, displays executed, etc. The is segment creates 80% of Acosta’s revenue.

The other 20% comes from the Marketing Services segment. In this segment, “Acosta provides four primary Marketing Services offerings: (i) experiential marketing; (ii) assisted selling and training; (iii) content marketing; and (iv) shopper marketing. Acosta offers clients event-based marketing services such as brand launch events, pop-up retail experiences, mobile tours, large events, and trial/demo campaigns. Acosta also provides Marketing Services such as assisted selling, staffing, associate training, in-store demonstrations, and more. Under its shopping marketing business, Acosta advises clients on consumer promotions, package designs, digital shopping, and other shopper marketing channels.

In the past, the company made money through commission-based contracts; they are now shifting “towards higher margin revenue generation models that allow the Company to focus on aligning cost-to-serve with revenue generation to better serve clients and maximize growth.” Whatever the f*ck that means.

We’re being flip because, well, let’s face it: this company hasn’t exactly gotten much right over the last four years so we ought to be forgiven for expressing a glint of skepticism that they’ve now suddenly got it all figured out. Indeed, The Carlyle Group LP acquired the company in 2014 for a staggering $4.75b — a transaction that “ranked … among the largest private-equity purchases of that year.Score for Thomas H. Lee Partners LP (which acquired the company in 2011 from AEA Investors LP for $2b)!! This was after the Washington DC-based private equity firm reportedly lost out on its bid to acquire Advantage Sales & Marketing, a competitor which just goes to show the fervor with which Carlyle pursued entry into this business. Now they must surely regret it. Likewise, the company: nearly all of the company’s $3b of debt stems from that transaction. The company’s bankruptcy papers make no reference to management fees paid or dividends extracted so it’s difficult to tell whether Carlyle got any bang whatsoever for their equity buck.*

Suffice it to say, this isn’t exactly a raging success story for private equity (calling Elizabeth Warren!). Indeed, since 2015 — almost immediately after the acquisition — the company lost $631mm of revenue and $193mm of EBITDA. It gets worse. Per the company:

“Revenue contributions from the top twenty-five clients in 2015 have declined at approximately 14.6 percent per year since fiscal year 2015. Furthermore, adjusted EBITDA margins have decreased year-over-year since fiscal year 2015 from over 19 percent to approximately 16 percent as of the end of fiscal year 2018.”

When you’re losing this money, it’s awfully hard to service $3b of debt. Not to state the obvious. But why did the company’s business deteriorate so quickly? Disruption, baby. Disruption. Per the company:

Acosta’s performance was disrupted by changes in consumer behavior and other macroeconomic trends in the retail and CPG industries that had a significant impact on the Company’s ability to generate revenue. Specifically, consumers have shifted away from traditional grocery retailers where Acosta has had a leadership position to discounters, convenience stores, online channels, and organic-focused grocers, where Acosta has not historically focused.

Just like we said a year ago. Let’s call this “The Aldi/Lidl/Amazon/Dollar Tree/Dollar Store Effect.” Other trends have also taken hold: (a) people are eating healthier, shying away from center-store (where all the Campbell’s, Kellogg’s, KraftHeinz and Nestle stuff is — by the way, those are, or in the case of KraftHeinz, were, all major clients!); and (b) the rise of private label.

Screen Shot 2019-11-18 at 1.08.25 PM.png

Moreover, according to Acosta, consumer purchasing has declined overall due to the increased cost of food (huh? uh, sure okay). The company adds:

These consumer trends have exposed CPG manufacturers to significant margin pressure, resulting in a reduction in outsourced sales and marketing spend. In the years and months leading to the Petition Date, several of Acosta’s major clients consolidated, downsized, or otherwise reduced their marketing budgets.

By way of example, here is Kraft Heinz’ marketing spend over the last several years:

Screen Shot 2019-11-18 at 1.12.46 PM.png

Compounding matters, competition in the space is apparently rather savage:

“Acosta also faced significant pressure as a result of the Company’s heavy debt load. Clients have sought to diversify their SMA providers to decrease perceived risk of Acosta vulnerability. In fact, certain of Acosta’s competitors have pointed to the Company’s significant indebtedness, contrasting their own de-levered balance sheets, to entice clients away from Acosta. Over time, these factors have tightened the Company’s liquidity position and constrained the Company from making necessary operational and capital expenditures, further impacting revenue.”

So, obviously, Acosta needed to do something about that mountain of debt. And do something it did: it’s piling it up like The Joker, pouring kerosene on it, and lighting that sh*t on fire. The company will wipe out the first lien credit facility AND the unsecured notes — nearly $2.8b of debt POOF! GONE! What an epic example of disruption and value destruction!

So now what? Well, the debtors clearly cannot reverse the trends confronting CPG companies and, by extension, their business. But they can sure as hell napalm their balance sheet! The plan would provide for the following:

  • Provide $150mm new money DIP provided by Elliott, DK, Oaktree and Nexus to satisfy the A/R facility, fund the cases, and presumably roll into an exit facility;

  • First lien lenders will get 85% of the new common stock (subject to dilution from employee incentive plan, the equity rights offering, the direct investment preferred equity raise, etc.) + first lien subscription rights OR cash subject to a cap.

  • Senior Notes will get 15% of new common stock + senior notes subscription rights OR cash subject to a cap.

  • They’ll be $325mm in new equity infusions.

So, in total, over $2b — TWO BILLION — of debt will be eliminated and swapped for equity in the reorganized company. The listed recoveries (which, we must point out, are based on projections of enterprise value) are 22-24% for the holders of first lien paper and 10-11% for the holders of senior notes.

We previously wrote about how direct lenders — FS KKR Capital Corp. ($FSK), for instance — are all up in Acosta’s loans. Here’s what KKR had to say about their piece of the first lien loan:

We placed Acosta on nonaccrual due to ongoing restructuring negotiations during the quarter and chose to exit this position after the quarter end at a gain to our third quarter mark.

HAHAHAHA. Now THAT is some top-notch spin! Small victories, we guess. 😬😜

*There have been two independent directors appointed to the board; they have their own counsel; and they’re performing an investigation into whether “any matter arising in or related to a restructuring transaction constituted a conflict matter.” There is no implication, however, that this investigation has anything to do with potential fraudulent conveyance claims. Not everything is Payless, people.

  • Jurisdiction: D. of Delaware (Judge )

  • Capital Structure:

Screen Shot 2019-12-02 at 9.01.54 PM.png
  • Professionals:

    • Legal: Kirkland & Ellis LLP (Edward Sassower, Joshua Sussberg, Christopher Greco, Spencer Winters, Derek Hunter, Ameneh Bordi, Annie Dreisbach, Josh Greenblatt, Yates French, Jeffrey Goldfine) & Klehr Harrison Harvey Branzburg LLP (Domenic Pacitti, Michael Yurkewicz, Sally Veghte)

    • Independent Directors: Gary Begeman, Marc Beilinson

      • Legal: Katten Muchin Rosenman LLP

    • Financial Advisor: Alvarez & Marsal LLC

    • Investment Banker: PJT Partners Inc. (Paul Sheaffer)

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

  • Other Parties in Interest:

    • A/R Facility Agent: Wells Fargo Bank NA

    • Admin Agent and Collateral Agent: Ankura Trust Company LLC

      • Legal: Shearman & Sterling LLP (Joel Moss, Sara Coelho) & Drinker Biddle & Reath LLP (Patrick Jackson)

    • First Lien Credit Agent: JPMorgan Chase Bank NA

      • Legal: Freshfields Bruckhaus Deringer US LLP (Scott Talmadge, Samantha Braunstein) & Richards Layton & Finger PA (Mark Collins, David Queroli)

    • First Lien Lender Group

      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Stephen Piraino, Jacob Weiner)

      • Financial Advisor: Centerview Partners

    • Minority First Lien Lenders

      • Legal: Arnold & Porter Kaye Scholer LLP (Michael Messersmith, Seith Kleinman, Sarah Gryll) & Pepper Hamilton LLP (David Stratton)

      • Financial Advisor: FTI Consulting Inc.

    • Indenture Trustee: Wilmington Trust NA

    • Backstop Parties: Elliott Management Corporation & Oaktree Capital Management LP

      • Legal: White & Case LLP (Thomas Lauria, Michael Shepherd, Joseph Pack, Jason Zakia, Kimberly Havlin) & Whiteford Taylor & Preston LLC (Marc Abrams, Richard Riley)

    • Backstop Parties: Davidson Kempner Capital Management LP & Nexus Capital Management LP

      • Legal: Sullivan & Cromwell LLP (Alison Ressler, Ari Blaut, James Bromley) & Potter Anderson & Corroon LLP (Christopher Samis, Aaron Stulman)

    • Sponsor: Carlyle Partners VI Holdings LP (78.47% equity)

      • Legal: Latham & Watkins LLP (George Davis, Andrew Parlen)

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

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:

Screen Shot 2020-01-11 at 11.28.49 AM.png

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’sLand 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:

Screen Shot 2020-01-11 at 11.31.29 AM.png

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 Bankruptcy Filing - Sheridan Holding Company II, LLC⛽️

Sheridan Holding Company II, LLC

September 15, 2019

Houston-based Sheridan Holding Company II LLC and 8 affiliated debtors filed a chapter 11 bankruptcy case in the Southern District of Texas with a nearly-fully-consensual prepackaged plan of reorganization. The plan, once effective, would eliminate approximately $900mm(!) of pre-petition debt. The case is supported by a $100mm DIP credit facility (50% new money).

Why so much debt? While this is an oil and gas story much like scores of other companies we’ve seen march through the bankruptcy court doors, the business model, here, is a bit different than usual. Sheridan II is a “fund”; it invests in a portfolio of working interests in mature onshore producing properties in Texas, New Mexico and Wyoming. Like Matt Damon in “Promised Land,” the debtors scour God’s country in search of properties, acquires working interests in those properties, and then seeks to deploy their special sauce (“application of cost-effective reinvestments, operational improvements, and enhanced recovery programs to the acquired assets”) to eke out product and, ultimately, sell that sh*t at a profit. This, as you might suspect, requires a bunch of capital (and equity from LPs like Warburg Pincus).* Hence the $1.1b of debt on balance sheet. All of this is well (pun intended) and good, provided the commodity environment cooperates. Which, we all know all too well, has not been the case in recent years. Peace out equity. Peace out sub debt.

Interestingly, some of that debt was placed not too long ago. Confronted with the oil and gas downturn, the debtors took the initiative to avoid bankruptcy; they cut off distributions to LPs, took measures to decrease debt, cut opex, capex and SG&A, and engaged in a hedging program. In 2017, the debtors raised $455mm of the subordinated term loan (with PIK interest galore), while also clawing back 50% of distributions previously made to LPs to the tune of $64mm. Everyone needed to have skin in the game. Alas, these measures were insufficient.

Per this plan, that skin is seared. The revolving lenders and term lenders will receive 95% of the common stock in the reorganized entity with the subordinated term lenders getting the remaining 5%. YIKES. The debtors estimate that the subordinated term lenders will recover 2.6% of the amount of their claims under the proposed plan. 2.6% of $514mm = EPIC VALUE DESTRUCTION. Sweeeeeeeeet. Of course, the limited partners are wistfully looking at that 2.6%. Everything is relative.

*****

Some additional notes about this case:

  • The hope to have confirmation in 30 days.

  • The plan includes the ability to “toggle” to a sale pursuant to a plan if a buyer for the assets emerges. These “toggle” plans continue to be all of the rage these days.

  • The debtors note that this was a “hard fought” negotiation. We’ve lost count of how many times professionals pat themselves on the backs by noting that they arrived at a deal, resolving the issues of various constituencies with conflicting interests and positions. First, enough already: this isn’t exactly Fallujah. You’re a bunch of mostly white males (the CEO of the company notwithstanding), sitting around a luxury conference table in a high rise in Manhattan or Houston. Let’s keep some perspective here, people. Second, THIS IS WHAT YOU GET PAID $1000+/hour to do. If you CAN’T get to a deal, then that really says something, particularly in a situation like this where the capital structure isn’t all-too-complex.

  • The bulk of the debtors’ assets were purchased from SandRidge Energy in 2013. This is like bankruptcy hot potato.

  • Independent directors are really becoming a cottage industry. We have to say, if you’re an independent director across dozens of companies, it probably makes sense to keep Quinn Emanuel on retainer. That way, you’re less likely to see them on the opposite side of the table (and when you do, you may at least temper certain bulldog tendencies). Just saying.

Finally, the debtors’ bankruptcy papers provide real insights into what’s happening in the oil and gas industry today — particularly in the Permian Basin. The debtors’ assets mostly rest in the Permian, the purported crown jewel of oil and gas exploration and production. Except, as previously discussed in PETITION, production of oil out of the Permian ain’t worth as much if, say, you can’t move it anywhere. Transportation constraints, while relaxing somewhat, continue to persist. Per the company:

“Prices realized by the Debtors for crude oil produced and sold in the Permian Basin have been further depressed since 2018 due to “price differentials”—the difference in price received for sales of oil in the Permian Basin as compared to sales at the Cushing, Oklahoma sales hub or sales of sour crude oil. The differentials are largely attributable to take-away capacity constraints caused by increases in supply exceeding available transportation infrastructure. During 2018, Permian Basin crude oil at times sold at discounts relative to sales at the Cushing, Oklahoma hub of $16 per barrel or more. Price differentials have narrowed as additional take-away capacity has come online, but crude oil still sells in the Permian Basin at a discount relative to Cushing prices.”

So, there’s that teeny weeny problemo.

If you think that’s bad, bear in mind what’s happening with natural gas:

“Similarly, the Henry Hub natural gas spot market price fell from a peak of $5.39 per million British thermal units (“MMBtu”) in January 2014 to $1.73 per MMBtu by March 2016, and remains at approximately $2.62 per MMBtu as of the Petition Date. In 2019, natural gas prices at the Waha hub in West Texas have at times been negative, meaning that the Debtors have at times either had to shut in production or pay purchasers to take the Debtors’ natural gas.”

It’s the natural gas equivalent of negative interest rates. 😜🙈

*All in, this fund raised $1.8b of equity. The Sheridan Group, the manager of the debtors, has raised $4.6b across three funds, completing nine major acquisitions for an aggregate purchase price of $5.7b. Only Sheridan II, however, is a debtor (as of now?).

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

  • Capital Structure: $66 RCF (Bank of America NA), $543.1mm Term Loan (Bank of America NA), $514mm ‘22 13.5%/17% PIK Subordinated Term Loans (Wilmington Trust NA) — see below.

  • Professionals:

    • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Steven Serajeddini, Spencer Winters, Stephen Hackney, Rachael Marie Bazinski, Jaimie Fedell, Casey James McGushin) & Jackson Walker LLP (Elizabeth Freeman, Matthew Cavenaugh)

    • Board of Directors: Alan Carr, Jonathan Foster

      • Legal: Quinn Emanuel Urquhart & Sullivan LLP

    • Financial Advisor: AlixPartners LLP

    • Investment Banker: Evercore Group LLC

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

  • Other Parties in Interest:

    • Administrative agent and collateral agent under the Sheridan II Term Loan Credit Agreements: Bank of America NA

      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Stephen Piraino, Nathaniel Sokol)

      • Financial Advisor: Houlihan Lokey Capital Inc.

    • Administrative Agent under the Sheridan II RBL: Bank of America NA

      • Legal: Vinson & Elkins LLP (William Wallander, Bradley Foxman, Andrew Geppert)

      • Financial Advisor: Houlihan Lokey Capital Inc.

    • Ad Hoc Group of Subordinated Term Loans (Pantheon Ventures US LP, HarbourVest Partners LP)

      • Legal: Weil Gotshal & Manges LLP (Matthew Barr, Gabriel Morgan, Clifford Carlson)

      • Financial Advisor: PJT Partners LP

    • Limited Partner: Wilberg Pincus LLC

      • Legal: Willkie Farr & Gallagher LLP (Brian Lennon)

Screen Shot 2019-09-18 at 9.34.47 AM.png
Source: First Day Declaration

Source: First Day Declaration

💊New Chapter 11 Bankruptcy Filing - Purdue Pharma LP 💊

Purdue Pharma LP

September 15, 2019

See here for our writeup.

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

  • Professionals:

    • Legal: Davis Polk & Wardwell (Marshall S. Huebner, Benjamin S. Kaminetzky,, Timothy Graulich, Eli J. Vonnegut)

    • Board of Directors: Robert Miller, Kenneth Buckfire, John Dubel, Michael Cola, Anthony Roncalli, Cecil Pickett, F. Peter Boer

    • Financial Advisor: AlixPartners LLP

    • Investment Banker: PJT Partners Inc.

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

  • Other Parties in Interest:

    • Ad Hoc Committee of AGs in Support of Settlement

      • Legal: Kramer Levin Naftalis & Frankel LLP (Kenneth Eckstein, Rachael Ringer), Brown Rudnick LLP (David Molton, Steven Pohl), Gilbert LLP (Scott Gilbert, Craig Litherland, Kami Quinn), Otterbourg PC (Melanie Cyganowski, Jennifer Feeney)

    • AG of New York

      • Legal: Pillsbury Winthrop LLP (Andrew Troop)

    • Official Committee of Unsecured Creditors: West Boca Medical Center, CVS Caremark D Services LLC, LTS Lohmann Therapy Systems Corporation, Blue Cross and Blue Shield Association, Pension Benefit Guaranty Corporation and 4 individuals

      • Legal: Akin Gump Strauss Hauer & Feld LLP

9/28/19 #135

🌑New Chapter 11 Bankruptcy Filing - Blackhawk Mining LLC🌑

Blackhawk Mining LLC

July 19, 2019

What are we averaging? Like, one coal bankruptcy a month at this point? MAGA!!

This week Blackhawk Mining LLC filed prepackaged Chapter 11 cases in the District of Delaware, the effect of which will be the elimination of approximately $650mm of debt from the company’s balance sheet. Unlike other recent bankruptcies, i.e., the absolute and utter train wreck that is the Blackjewel LLC bankruptcy, this case actually has financing and employees aren’t getting left out in the lurch. So, coal country can at least take a deep breath. Small victories!

Before we get into the mechanics of how this deleveraging will work, it’s important to note some of the company’s history. Blackhawk represents opportunism at its best. Founded in 2010 as a strategic vehicle to acquire coal reserves, active mining operations and logistical infrastructure located primarily in the Appalachian Basin, the privately-owned coal producer hit the ground running. Initially the company started with Kentucky thermal coal assets (PETITION Note: thermal coal’s end use is the production of electricity; in contrast, metallurgical coal’s prime use is for the production of steel). It then quickly moved to diversify its product offering with a variety of acquisitions. In 2014, it acquired three mining complexes in the bankruptcy of James River Coal Company (which served as the company’s entry into the production of met coal). Thereafter, in 2015, the company purchased six mining complexes in the bankruptcy of Patriot Coal Company (which has since filed for bankruptcy a second time). This acquisition lofted the company into the highest echelon of US-based met coal production (PETITION Note: met coal drives 76% of the company’s $1.09b in revenue today). The company now operates 19 active underground and 6 active surface mines at 10 active mining complexes in West Virginia and Kentucky. The company has 2,800 employees. 

Naturally, this rapid growth begs some obvious questions: what was the thesis behind all of these acquisitions and how the hell were they financed? 

The investments were a play on an improved met coal market. And, to some degree, this play has proven to be right. Per the company: 

“The Company’s strategic growth proved to be a double-edged sword. On one hand, it significantly increased the Company’s position in the metallurgical coal market at a time when asset prices were depressed relative to today’s prices. The Company continues to benefit from this position in the current market. The price of high volatile A metallurgical coal has risen from $75 per ton to an average of $188 per ton over the last two years, providing a significant tailwind for the Company. On the other hand, the pricing environment for metallurgical coal did not improve until late 2016, and the debt attendant to the Company’s acquisition strategy in 2015 placed a strain on the Company’s ability to maintain its then-existing production profile while continuing to reinvest in the business. During this time, to defer expenses, the Company permanently closed over 10 coal mines (with over 5 million tons of productive capacity), idled the Triad complex, and depleted inventories of spare equipment, parts, and components. Furthermore, once the coal markets began to improve, the Company was forced to make elevated capital expenditures and bear unanticipated increases in costs—for example, employment costs rose approximately 25% between 2016 and 2018—to remain competitive. The confluence of these factors eventually made the Company’s financial position untenable.”

Longs and shorts require the same thing: good timing. 

Alas, the answer to the second question also leads us to the very predicament the company finds itself in today. The company has $1.09b in debt split across, among other things, an ABL facility (’22 $85mm, MidCap Financial LLC), a first lien term loan facility (’22 $639mm, Cantor Fitzgerald Securities), a second lien term loan facility (’21 $318mm, Cortland Capital Markets Services LLC), and $16mm legacy unsecured note issued to a “Patriot Trust” as part of the Patriot Coal asset acquisition. More on this Trust below.

But this is not the first time the company moved to address its capital structure. In a bankruptcy-avoiding move in 2017, the company — on the heals of looming amortization and interest payments on its first and second lien debt — negotiated an out-of-court consensual restructuring with its lenders pursuant to which it kicked the can down the road on the amortization payments to its first lien lenders and deferred cash interest payments to its second lien lenders. If you’re asking yourself, why would the lenders agree to these terms, the answer is, as always, driven by money (and some hopes and prayers). For their part, the first lien lenders obtained covenant amendments, juiced interest rates and an increased principal balance owed while the second lien lenders obtained an interest rate increase. Certain first and second lien lenders also got equity units, board seats and additional voting rights. These terms — onerous in their own way — were a roll of the dice that the environment for met coal would continue to improve and the company could grow into its capital structure. Clearly, that hope proved to be misplaced. 

Indeed, this is the quintessential kick-the-can-down-the-road situation. By spring 2019, Blackhawk again faced a $16mm mandatory amortization payment and $20mm in interest payments due under the first lien term loan. 

Now the first lien lenders will swap their debt for 71% of the reorganized equity and a $225mm new term loan and the second lien lenders will get 29% of the new equity. The “will-met-coal-recover-to-such-a-point-where-the-value-of-the-company-extends-beyond-the-debt?” option play for those second lien lenders has expired. The company seeks to have its plan confirmed by the end of August. The cases will be financed by a $235mm DIP of which $50mm is new money and the remainder will rollup $100mm in first lien term loan claims and $85mm in ABL claims (and ultimately convert to a $90mm exit facility). 

Some other quick notes:

  • Kirkland & Ellis LLP represents the company after pushing Latham & Watkins LLP out in a move that would make Littlefinger proud. This is becoming an ongoing trend: as previously reported, K&E also gave das boot to Latham in Forever21. A war is brewing folks. 

  • The Patriot Trust will get $500k per a settlement baked into the plan. On a $16mm claim. The “Patriot Trust” refers to the liquidating trust that was established in connection with the Patriot Coal Corporation chapter 11 cases, previously filed in the Eastern District of Virginia. Marinate on that for a second: the creditors in that case fought long and hard to have some sort of recovery, won a $16mm claim and now have to settle for $500k. There’s nothing like getting screwed over multiple times in bankruptcy. 

  • But then there’s management: the CEO gets a nice cushy settlement that includes a $500k payment, a seat on the reorganized board of managers (and, presumably, whatever fee comes with that), and a one-year consulting contract. He waives his right to severance. If we had to venture a guess, Mr. Potter will soon find his way onto K&E’s list of “independent” directors for service in other distressed situations too. That list seems to be growing like a weed. 

  • Knighthead Capital Management LLC and Solus Alternative Asset Management LP are the primary holders of first lien paper and now, therefore, own the company. Your country’s steel production, powered by hedge funds! They will each have representation on the board of managers and the ability to jointly appoint an “independent” director. 


  • Jurisdiction: D. of Delaware (Judge Silverstein)

  • Capital Structure: See above.

  • Professionals:

    • Legal: Kirkland & Ellis LLP (James Sprayragen, Ross Kwasteniet, Joseph Graham, Stephen Hessler, Christopher Hayes, Derek Hunter, Barack Echols) & (local) Potter Anderson Corroon LLP (Christopher Swamis, L. Katherine Good) 

    • Financial Advisor: AlixPartners LLP

    • Investment Banker: Centerview Partners (Marc Puntus)

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

  • Other Parties in Interest:

    • Prepetition ABL & DIP ABL Agent: Midcap Funding IV Trust

      • Legal: Hogan Lovells US LLP (Deborah Staudinger)

    • Prepetition & DIP Term Agent: Cantor Fitzgerald Securities

      • Legal: Herrick Feinstein LLP (Eric Stabler, Steven Smith)

    • Second Lien Term Loan Agent: Cortland Capital Market Services LLC

      • Legal: Stroock & Stroock & Lavan LLP (Alex Cota, Gabriel Sasson)

    • Consenting Term Lenders: Knighthead Capital Management LLC, Solus Alternative Asset Management LP, Redwood Capital Management LLC

      • Davis Polk & Wardwell LLP (Brian Resnick, Dylan Consla, Daniel Meyer)

    • Ad Hoc Group of First Lien Lenders

      • Legal: Shearman & Sterling LLP (Fredric Sosnick, Ned Schodek)

⛽️New Chapter 11 Filing - Legacy Reserves Inc.⛽️

Legacy Reserves Inc.

June 18, 2019

Even at 95 years old, you can’t get one past Charlie Munger. #Legend.

The Permian Basin in West Texas is where it’s at in the world of oil and gas exploration and production. Per Wikipedia:

As of 2018, the Permian Basin has produced more than 33 billion barrels of oil, along with 118 trillion cubic feet of natural gas. This production accounts for 20% of US crude oil production and 7% of US dry natural gas production. While the production was thought to have peaked in the early 1970s, new technologies for oil extraction, such as hydraulic fracturing and horizontal drilling have increased production dramatically. Estimates from the Energy Information Administration have predicted that proven reserves in the Permian Basin still hold 5 billion barrels of oil and approximately 19 trillion cubic feet of natural gas.

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And it may be even more prolific than originally thought. Norwegian research firm Rystad Energy recently issued a report indicating that Permian projected output was already above 4.5mm barrels a day in May with volumes exceeding 5mm barrels in June. This staggering level of production is pushing total U.S. oil production to approximately 12.5mm barrels per day in May. That means the Permian now accounts for 36% of US crude oil production — a significant increase over 2018. Normalized across 365 days, that would be a 1.64 billion barrel run rate. This is despite (a) rigs coming offline in the Permian and (b) natural gas flaring and venting reaching all-time highs in Q1 ‘19 due to a lack of pipelines. Come again? That’s right. The Permian is producing in quantities larger than pipelines can accommodate. Per Reuters:

Producers burned or vented 661 million cubic feet per day (mmcfd) in the Permian Basin of West Texas and eastern New Mexico, the field that has driven the U.S. to record oil production, according to a new report from Rystad Energy.

The Permian’s first-quarter flaring and venting level more than doubles the production of the U.S. Gulf of Mexico’s most productive gas facility, Royal Dutch Shell’s Mars-Ursa complex, which produces about 260 to 270 mmcfd of gas.

The Permian isn’t alone in this, however. The Bakken shale field in North Dakota is also flaring at a high level. More from Reuters:

Together, the two oil fields on a yearly basis are burning and venting more than the gas demand in countries that include Hungary, Israel, Azerbaijan, Colombia and Romania, according to the report.

All of which brings us to Legacy Reserves Inc. ($LGCY). Despite the midstream challenges, one could be forgiven for thinking that any operators engaged in E&P in the Permian might be insulated from commodity price declines and other macro headwinds. That position, however, would be wrong.

Legacy is a publicly-traded energy company engaged in the acquisition, development, production of oil and nat gas properties; its primary operations are in the Permian Basin (its largest operating region, historically), East Texas, and in the Rocky Mountain and Mid-Continent regions. While some of these basins may produce gobs of oil and gas, acquisition and production is nevertheless a HIGHLY capital intensive endeavor. And, here, like with many other E&P companies that have recently made their way into the bankruptcy bin, “significant capital” translates to “significant debt.”

Per the Company:

Like similar companies in this industry, the Company’s oil and natural gas operations, including their exploration, drilling, and production operations, are capital-intensive activities that require access to significant amounts of capital.  An oil price environment that has not recovered from the downturn seen in mid-2014 and the Company’s limited access to new capital have adversely affected the Company’s business. The Company further had liquidity constraints through borrowing base redeterminations under the Prepetition RBL Credit Agreement, as well as an inability to refinance or extend the maturity of the Prepetition RBL Credit Agreement beyond May 31, 2019.

This is the company’s capital structure:

Legacy Cap Stack.png

The company made two acquisitions in mid-2015 costing over $540mm. These acquisitions proved to be ill-timed given the longer-than-expected downturn in oil and gas. Per the Company:

In hindsight, despite the GP Board’s and management’s favorable view of the potential future opportunities afforded by these acquisitions and the high-caliber employees hired by the Company in connection therewith, these two acquisitions consumed disproportionately large amounts of the Company’s liquidity during a difficult industry period.

WHOOPS. It’s a good thing there were no public investors in this thing who were in it for the high yield and favorable tax treatment.*

Yet, the company was able to avoid a prior bankruptcy when various other E&P companies were falling like flies. Why was that? Insert the “drillco” structure here: the company entered into a development agreement with private equity firm TPG Special Situations Partners to drill, baby, drill (as opposed to acquire). What’s a drillco structure? Quite simply, the PE firm provided capital in return for a wellbore interest in the wells that it capitalized. Once TPG clears a specified IRR in relation to any specific well, any remaining proceeds revert to the operator. This structure — along with efforts to delever through out of court exchanges of debt — provided the company with much-needed runway during a rough macro patch.

It didn’t last, however. Liquidity continued to be a pervasive problem and it became abundantly clear that the company required a holistic solution to its balance sheet. That’s what this filing will achieve: this chapter 11 case is a financial restructuring backed by a Restructuring Support Agreement agreed to by nearly the entirety of the capital structure — down through the unsecured notes. Per the Company:

The Global RSA contemplates $256.3 million in backstopped equity commitments, $500.0 million in committed exit financing from the existing RBL Lenders, the equitization of approximately $815.8 million of prepetition debt, and payment in full of the Debtors’ general unsecured creditors.

Said another way, the Permian holds far too much promise for parties in interest to walk away from it without maintaining optionality for the future.

*Investors got burned multiple times along the way here. How did management do? Here is one view (view thread: it’s precious):

😬

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

  • Capital Structure: See above.

  • Professionals:

    • Legal: Sidley Austin LLP (Duston McFaul, Charles Persons, Michael Fishel, Maegan Quejada, James Conlan, Bojan Guzina, Andrew O’Neill, Allison Ross Stromberg)

    • Financial Advisor: Alvarez & Marsal LLC (Seth Bullock, Mark Rajcevich)

    • Investment Banker: Perella Weinberg Partners (Kevin Cofsky)

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

  • Other Parties in Interest:

    • Official Committee of Unsecured Creditors (Wilmington Trust NA, Dalton Investments LLC, Paul Drueke, John Dinkel, Nicholas Mumford)

    • GSO Capital Partners LP

      • Legal: Latham & Watkins LLP (George Davis, Adam Goldberg, Christopher Harris, Zachary Proulx, Brett Neve, Julian Bulaon) & (local) Porter Hedges LLP (John Higgins, Eric English, M. Shane Johnson)

    • DIP Lender: Wells Fargo Bank NA

      • Legal: Orrick LLP (Raniero D’Aversa, Laura Metzger)

    • Prepetition Term Agent: Cortland Capital Market Services LLC

      • Legal: Arnold & Porter Kaye Scholer LLP (Gerardo Mijares-Shafai, Seth Kleinman)

    • Indenture Trustee: Wilmington Trust NA

      • Legal: Pryor Cashman (Seth Lieberman, Patrick Sibley, Andrew Richmond)

    • Ad Hoc Group of Senior Noteholders (Canyon Capital Advisors LLC, DoubleLine Income Solutions Fund, J.H. Lane Partners Master Fund LP, JCG 2016 Holdings LP, The John C. Goff 2010 Family Trust, John C. Goff SEP-IRA, Cuerno Largo Partners LP, MGA insurance Company Inc., Pingora Partners LLC)

      • Legal: Davis Polk & Wardwell LLP (Brian Resnick, Stephen Piraino, Michael Pera) & (local) Rapp & Krock PC (Henry Flores)

Updated 7/7/19 #188

🌑New Chapter 11 Bankruptcy Filing - Cambrian Holding Company Inc.🌑

Cambrian Holding Company Inc.

June 16, 2019

Pour one out for the fine folks of eastern Kentucky and western Virginia. They can’t seem to catch a break.

Earlier this week, Cambrian Holding Company Inc. (and its affiliate debtors) joined a long line of coal producers/processors (e.g., Cloud Peak Energy, Westmoreland Coal, Mission Coal) who have recently filed for bankruptcy. The company employees approximately 660 people, none of whom are members of a labor union (in contrast to bigger, more controversial, coal filings, i.e., Westmoreland) and most of whom must be fretting over their futures. They must really be getting tired of all of the post-election “winning” that’s going on in coal country.

The company’s problems appear to start in 2015, at the time the company acquired TECO Coal LLC and assumed $40mm of workers’ compensation and black lung liabilities that TECO had previously self-insured. The company sought to leverage its broader scale to increase production but it failed to raise the working capital it needed to live up to its obligations and sustain production at levels necessary to service the company’s balance sheet. Post-acquisition, the company doubled revenues, but it couldn’t sustain that progress and nevertheless recorded net losses from 2015 through 2018. In turn, the company triggered financial covenant and other defaults under its ABL Revolver and Term Loan.

In other words, the company has been in a state of emergency ever since the acquisition. Almost immediately, the company “undertook various efforts to return to a positive cashflow,” which, as you might expect, meant idling or closing certain mining operations, stretching the usable life of equipment, and laying off employees.* Its efforts proved fruitless. Per the company:

Notwithstanding these efforts, the Debtors have been unable to overcome the pressures placed on their profit margins from steadily declining coal prices (along with burdensome regulations and the accompanying decline in demand for coal), all of which have contributed to the Debtors’ substantial negative cashflow and inability to consummate a value-enhancing transaction.

So, what now? The company, with assistance from Jefferies LLC, will attempt to find a buyer willing to catch a falling knife: the plan is to “commence an expeditious sale and marketing process” of the company’s assets (call us crazy, but shouldn’t it be the other way around?). To fund this process, the company has a DIP commitment from affiliates of pre-petition lenders for $15mm.**

*Interestingly, it was in March 2016 when Hilary Clinton infamously stated, “Because we're going to put a lot of coal miners and coal companies out of business.” At the time, Cambrian was already struggling, laying off people in an attempt to generate positive cashflow. That message really must’ve struck a chord down in coal country. WHOOPS.

**The Term Lenders swiftly objected to the terms of the DIP and the use of cash collateral.

  • Jurisdiction: D. of Kentucky (Judge Schaaf)

  • Capital Structure: $48mm ABL Revolver (Deutsche Bank AG New York Branch), $78mm Term Loan (Deutsche Bank Trust Company Americas)

  • Professionals:

    • Legal: Frost Brown Todd LLC (Ronald Gold, Douglas Lutz, Patrica Burgess)

    • Financial Advisor: FTI Consulting Inc. (Bertrand Troiano)

    • Investment Banker: Jefferies LLC (Leon Szlezinger)

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

  • Other Parties in Interest:

    • Term Lenders: Deutsche Bank AG, London Branch, Tennenbaum Opportunities Partners V, LP and Tennenbaum Opportunities Fund VI, LLC

      • Legal: Davis Polk & Wardwell LLP (Brian Resnick, Christopher Robertson, Elliot Moskowitz) & (local) Bingham Greenbaum Doll LLP (Christopher Madden)

    • DIP & Bridge Lender: Richmond Hill Capital Partners, LP

New Chapter 11 Bankruptcy Filing -- Fusion Connect Inc.

June 3, 2019

We previously wrote about Fusion Connect Inc. ($FSNN), providers of “Unified Communications-as-a-Service” and “Infrastructure-as-a-Service” in “⛈A Dark "Cloud" on the Horizon⛈.” Therein we marveled at how special Fusion must be…to fail SO SPECTACULARLY in today’s cloud here, cloud there, cloud everywhere, everyone’s gaga for cloud environment. Cloud is SO captivating that it wasn’t until the company filed a piss poor 8-K back in April that a B. Riley FBR ($RILY) analyst FINALLY had an epiphany and declared that the company’s stock ought to be downgraded from “buy” to “neutral” (huh?!?) with a price target of $0.75 — down from $9.75/share. This is despite the fact that the stock hadn’t traded anywhere in the vicinity of $9.75/share in ages — nowhere even close, actually — but whatevs. Clearly, his head was in the cloud(s). This, ladies and gentlemen, demonstrates, in a nutshell, the utter worthlessness of equity analyst reports.🖕

But this isn’t a story about shoddy analyst research. That would be wholly unoriginal. This is a story about synergies and burdensome debt. Because, like, that’s so super original that you won’t read of it again until…well…you scroll below to the next bit of content about FTD!! 🙄

Boiled down to its simplest form, this company is the product of an acquisition strategy (and reverse merger) gone wrong. Like, in a majormajor way. Per the company:

The Company pursued the Birch Merger with a vision of leveraging its existing processes and structures to create synergies between Fusion’s and Birch’s joined customer bases, combine network infrastructure assets to improve operational efficiencies, and ultimately drive material growth in Fusion’s and Birch’s combined annual revenue. In connection with the Birch Merger and MegaPath Merger, the Company incurred $680 million in secured debt(emphasis added)

That reverse merger closed at the end of Q2, 2018. Yet…

Unfortunately, due to underperformance compared to business projections, the Company found itself with limited liquidity and at risk of default under its debt documents by early 2019.

Wait, what? Limited liquidity and risk of default by “early 2019”?!? Who the f*ck diligenced and underwrote this transaction?!? This sitch is so bad, that the company literally didn’t have enough liquidity to make a recent $6.7mm amort payment under the first lien credit agreement and a $300k interest payment on its unsecured debt. This is the company’s pre-petition capital structure:

  • $20mm super senior L+10% June 2019 debt

  • $43.3mm Tranche A Term Loans L+6.0% May 2022 debt

  • $490.9mm Tranche B Term Loans L+8.5% May 2023 debt

  • $39mm Revolving Loans L+6.0% May 2022 debt

  • $85mm Second Lien L+10.5% November 2023 debt

  • $13.3mm Unsecured Debt

Back in April we summed up the situation as follows:

The company’s recent SEC reports constitute a perfect storm of bad news. On April 2, the company filed a Form 8-K indicating that (i) a recently-acquired company had material accounting deficiencies that will affect its financials and, therefore, certain of the company’s prior filings “can no longer be relied upon,” (ii) it won’t be able to file its 10-K, (iii) it failed to make a $7mm interest payment on its Tranche A and Tranche B term loan borrowings due on April 1, 2019, and (iv) due to the accounting errors, the company has tripped various covenants under the first lien credit agreement — including its fixed charge coverage ratio and its total net leverage ratio.

Again, who diligenced the reverse merger?!? 😡

So here we are. In bankruptcy. To what end?

The company is seeking a dual-path restructuring that is all the rage these days: everyone loves to promote optionality that will potentially result in greater value to the estate. In the first instance, the company proposes, as a form of “stalking horse,” a “reorganization transaction” backed by a restructuring support agreement with certain of its lenders. This transaction would slash $300mm of the company’s $665mm of debt and result in the company’s first lien lenders owning the company. That is, unless a buyer emerges out of the woodwork with a compelling purchase price. To promote this possibility, the company is filing a bid procedures motion with the bankruptcy court with the hope of an eventual auction taking place. If a buyer surfaces with mucho dinero, the company will toggle over to a sale pursuant to a plan of reorganization. This would obviously be the optimal scenario. Absent that (and maybe even with that), we’ve got a jaw-dropping example of value destruction. “Fail fast,” many in tech say. These cloud bros listened!! Nothing like deep-sixing yourself with a misguided poorly-diligenced acquisition. Bravo!!

The company has secured a commitment for a fully-backstopped $59.5mm DIP that subsumes the $20mm in super senior pre-petition bridge financing recently provided by the first lien lenders. Is this DIP commitment good for general unsecured creditors? Is any of this generally good for unsecured creditors? Probably not.

Major creditors include a who’s who of telecommunications companies, including AT&T Inc. ($T) (first Donald Trump and now THIS…rough week for AT&T), Verizon Communications Inc. ($VZ)XO Communications (owned by VZ), Frontier Communications Corp. ($FTR)(which has its own issues to contend with as it sells assets to sure up its own balance sheet), CenturyLink Inc. ($CTL)Level 3 Communications ($LVLT)Time Warner Inc. ($TWX), and….wait for it…bankrupt Windstream Communications ($WINMQ). Because the hits just keep on coming for Windstream….

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

  • Capital Structure: see above.

  • Professionals:

    • Legal: Weil Gotshal & Manges LLP (Gary Holtzer, Sunny Singh, Natasha Hwangpo)

    • Board of Directors: Matthew Rosen, Holcombe Green Jr., Marvin Rosen, Holcombe Green III, Michael Del Guidice, Lewis Dickey Jr., Rafe de la Gueronniere, Neil Goldman)

    • Financial Advisor: FTI Consulting Inc. (Mark Katzenstein)

    • Investment Banker: PJT Partners (Brent Herlihy, John Singh)

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

  • Other Parties in Interest:

    • Ad Hoc First Lien Lender Group

      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Adam Shpeen)

      • Financial Advisor: Greenhill & Co. Inc.

    • DIP Lender: Credit Suisse Loan Funding LLC

    • DIP Agent, Prepetition Super Senior Agent & Prepetition First Lien Agent: Wilmington Trust NA

      • Legal: Arnold & Porter Kaye Scholer (Michael Messersmith, Sarah Grylll, Alan Glantz)

    • Prepetition Second Lien Successor Agent: GLAS America LLC & GLAS USA LLC

    • Ad Hoc Group of Tranche A Term Loan/Revolving Lenders

      • Legal: Simpson Thacher & Bartlett LLP (Sandeep Qusba, Soogy Lee, Edward Linden)

    • Second Lien Lenders

      • Legal: Proskauer Rose LLP (Charles Dale, Jon English)

    • Large Unsecured Creditor: AT&T

      • Legal: Norton Rose Fulbright US LLP (David Rosenzweig, Francisco Vazquez)

Updated 6/4/19 at 5:42am


⚡️New Chapter 11 Bankruptcy Filing - Empire Generating Co LLC⚡️

Empire Generating Co LLC

May 19, 2019

We love when companies that have been circling around the bankruptcy bowl finally get flushed into bankruptcy court. Empire Generating Company is a name that has been kicking around distressed circles for some time now: The Wall Street Journal wrote about it a year ago, back in May 2018. Alas, it now sits within the Southern District of New York. It is the latest in a line of power producers to file for bankruptcy in recent years.

The company owns and operates a (now) dual-fuel power plant in Rensselaer New York; as a merchant power plant, it sells electricity in the wholesale market that ultimately helps power New York’s electrical grid. Very soon, it will likewise be able to generate revenue in New England. In fiscal year 2017, the company generated $91.8mm of revenue and $16.77 of EBITDA. EBITDA decreased to $11.05mm in 2018. The company also has a meaningful amount of debt. As of the petition date, its outstanding owed amounts under its credit facility total $353.4mm. Its $20mm revolver matured in March 2019.

The company cites some interesting causes for its filing. First, it gives an economics 101 lesson, saying that coal and nuclear facilities in New York haven’t been retired quickly enough to limit electricity supply and put upward pressure on prices. Second, it blames progressives (Cuomo!!): New York’s Clean Energy Standard requires that 50% of NY’s electricity come from renewables by 2030, creating yet another supply/demand imbalance that has placed “downward pressure on the price for energy generated by other sources.” Third, unlike retailers who blame bad weather for under performance all of the time, this company actually has a viable excuse: the abnormally cold winter of 2017/2018 increased natural gas prices, compressing the company’s margins. At the time, the company wasn’t yet “dual-fuel” and, therefore, relied exclusively on natural gas whereas competitors could toggle to more economical fuel oil instead. This confluence of factors ultimately led the company to default under its loan docs.

The company has since been in a state of perpetual forbearance with an ad hoc group of pre-petition lenders. It was on the verge of a prepackaged solution to its balance sheet but time ticked away and the company’s pesky lenders traded out of their respective positions. Per the company:

Once the debt trades settled, approximately 55% of the Credit Facility was held by the Consenting Lenders (Black Diamond and MJX), and approximately 34% of the Credit Facility was held by funds managed by Ares Capital (“Ares”).

For the uninitiated, debtors need 2/3 of the amount of a particular tranche of debt to approve a deal for a plan of reorganization to be confirmed by the bankruptcy court. As you can see from the percentages above, Ares Capital and the “Consenting Lenders” (Black Diamond Capital Management LLC & MJX Asset Management LLC) had “blocking positions,” eliminating the possibility of surpassing the required threshold. Months of negotiations ensued and, apparently, Ares and Black Diamond simply couldn’t get along. Uh, yeah, bros: Black Diamond is kinda known for not getting along. Just sayin.

In lieu of an agreement with those parties, the company has secured, pursuant to a restructuring support agreement, a commitment by Black Diamond Capital Management LLC & MJX Asset Management LLC to credit bid — subject to higher and better offers — their debt in exchange for a 100% interest in the reorganized company. The company has, in turn, rejected a proposal from Ares Capital that would confer $37.8mm in cash and 89.75% equity of an acquisition vehicle as consideration for the company’s assets (which it values at a total of $369mm). Why? It concluded that the offer was neither higher nor better than the credit bid; it also had concerns about valuation, approval and feasibility (feasibility!!!!!). Otherwise, the company be like, “PEACE, B*TCHES, WE DON’T WANT NO PART OF THIS INTERCREDITOR DISPUTE.”

And an intercreditor dispute there is! Ares objected right away to the company’s proposed cash collateral, among other things, saying that Black Diamond is steering the company like a meek little sheep. The objection is too lengthy to recant here but, suffice it to say, it looks like we can expect an old school private equity battle over the course of the case. Judge Drain more or less shot down Ares at the hearing, questioning, even, whether they had standing to object; he then went on to amend the proposed cash collateral order.

Absent a settlement between the funds, this will not be the last fight in the case. Pop the popcorn.

  • Jurisdiction: (Judge Drain)

  • Capital Structure: $20mm RCF, $430mm Term B loan, $30mm Term C loan

  • Professionals:

    • Legal: Steinhilber Swanson LLP (Michael Richman) & Hunton Andrews Kurth LLP (Peter Partee Sr., Robert Rich, Michael Legge)

    • Financial Advisor: RPA Advisors (Chip Cummins)

    • Investment Banker:

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

  • Other Parties in Interest:

    • Secured Lenders: Black Diamond Capital Management LLC & MJX Asset Management LLC

      • Legal: Skadden Arps Slate Meagher & Flom LLP (Christine Okike, Albert Hogan III, Carl Tullson)

    • Secured Lender: Ares Capital LP

      • Legal: Kirkland & Ellis LLP (James Sprayragen, Brian Schartz, Anup Sathy, Stephen Hackney, Alexandra Schwarzman)

    • Secured Lender: Starwood

      • Legal: Vinson & Elkins LLP (Steven Abramowitz)

    • Ad Hoc Group

      • Legal: Stroock & Stroock & Lavan LLP

    • Agent: Ankura Trust Company

      • Legal: Davis Polk & Wardwell LLP (Darren Klein)

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

Edgemarc Energy Holdings LLC

May 15, 2019

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

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

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

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

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

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

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

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

Docket #17, Rejection Motion.

Docket #17, Rejection Motion.

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

  • Jurisdiction: D. of Delaware (Judge Shannon)

  • Capital Structure:

  • Professionals:

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

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

    • Financial Advisor: Opportune LLC and Dacarba LLC

    • Investment Banker: Evercore Partners

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

  • Other Parties in Interest:

    • Prepetition & DIP Agent: Keybank NA

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

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

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

    • ETC

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

🚁New Chapter 11 Bankruptcy Filing - Bristow Group Inc.🚁

Bristow Group Inc.

May 11, 2019

Nothing like being late to the party. Following in the footsteps of fellow helicopter transportation companies Erickson Inc., CHC Group, Waypoint Leasing* and PHI Inc., Bristow Group Inc. ($BRS) and its eight affiliated debtors are the latest in the space to find their way into bankruptcy court. The company enters bankruptcy with a restructuring support agreement and a $75mm DIP financing commitment with and from its senior secured noteholders.

While each of the aforementioned companies is in the helicopter transportation space, they don’t all do exactly the same business. PHI, for instance, has a fairly large — and some might say, attractive — medical services business. Bristow, on the other hand, provides industrial aviation and charter services primarily to offshore energy companies in Europe, Africa, the Americas and the Asian Pacific; it also provides search and rescue services for governmental agencies, in addition to the oil and gas industry. Like the other companies, though: it is not immune to (a) the oil and gas downturn and (b) an over-levered balance sheet.

At the time of this writing, the debtors’ chapter 11 filing wasn’t complete and so details are scant. What we do know, however, is that the company does have a restructuring support agreement executed with “the overwhelming majority” of senior secured noteholders and a $75mm DIP commitment.

*Waypoint Leasing is listed as the 14th largest creditor, owed nearly $104k. Sheesh. These businesses can’t catch a break.

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

  • Capital Structure:

  • Professionals:

    • Legal: Baker Botts LLP (James Prince, Omar Alaniz, Ian Roberts, Kevin Chiu, Emanuel Grillo, Chris Newcomb)

    • 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:

    • ABL Facility Agent: Barclays Bank PLC

    • 2019 Term Loan Agent: Ankura Trust Company LLC

    • Indenture Trustee for the 8.75% ‘23 Senior Secured Notes: U.S. Bank NA

    • Indenture Trustee for the 6.25% ‘22 Senior Notes and 4.5% ‘23 Convertible Senior Notes: Wilmington Trust NA

    • Ad Hoc Group of Secured Notes and Term Lenders (Blackrock Financial Management Inc., DW Partners LP, Highbridge Capital Management LLC, Oak Hill Advisors LP, Whitebox Advisors LLC)

      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Natasha Tsiouris) & (local) Haynes and Boone LLP (Charles Beckham, Kelli Norfleet, Martha Wyrick)

    • Ad Hoc Group fo Unsecured Noteholders

      • Legal: Kramer Levin Naftalis & Frankel LLP