New Chapter 11 Bankruptcy Filing - RGN-Group Holdings LLC (d/b/a Regus)

RGN-Group Holdings LLC

We have yet to really see it run through the system but there’s no doubt in our minds that there is a commercial real estate and commercial mortgage-backed security massacre on the horizon. The hospitality sector, in particular, ought to be on the receiving end of a pretty harsh shellacking. More on this in a future edition of PETITION.

For now, the most high profile CRE activity we’ve seen thus far is the trickle of Regus locations that have filed for bankruptcy. Regus is an on-demand and co-working company with 1000 locations across the United States and Canada. Set up as special purpose entities with individual leases, the structure is such that IWG Plc f/k/a Regus Corporation (OTCMKTS: $IWGFF) serves as both ultimate parent and lender but isn’t a guarantor or obligor under any of the downstream leases.* This non-recourse structure allows for individual Regus locations to plop into bankruptcy — all with an eye towards working out lease concessions or turning over — without taking down the entirety of the enterprise.**

The first outpost, RGN-Columbus IV LLC, filed for bankruptcy in Delaware back on July 30. Since then, sixteen additional Regus affiliates have filed with the most recent ones descending upon Delaware last week: RGN-Philadelphia IX LLC, RGN-Chevy Chase I LLC, RGN-Los Angeles XXV LLC, RGN-San Jose IX LLC, RGN-New York XXXIX and RGN-Denver XVI LLC. All of the cases filed under Subchapter V of chapter 11 of the bankruptcy code (though, thanks to the addition of more locations, the case has been re-designated under Chapter 11).***

The description of the overall business model is precious:

IWG’s business model begins with entry into long-term non-residential real property leases (each, a “Lease”) with property owners (each, a “Landlord”) that provide the Company unoccupied office space (the “Centers”). Based on significant market research on potential client needs in local markets and the unique requirements of their existing clients, IWG engineers each of the Centers to meet the architectural style, service, space, and amenity needs of those individuals, companies, and organizations who will contract for use of subportions of the Centers. IWG markets its Centers under an umbrella of different brand names, each tailored to appeal to different types of clients and those clients’ specialized needs. These clients (the “Occupants”) enter into short-term licenses (each, an “Occupancy Agreement”) to use portions of the Centers, which are customizable as to duration, configuration, services, and amenities. When operating successfully, a Center’s Occupants’ license payments (“Occupancy Fees”) will exceed the combined cost of the underlying long-term lease, management cost, and operating expenses of the Center. (emphasis added)

It’s the “when operating successfully” part that always bewildered watchers of the co-working business model generally. After all, it was easy to see the mass expansion of co-working spaces amidst the longest bull run in market history. Indeed, Regus apparently had “Good first half performance overall given COVID-19 impact in Q2.” The question was: what happens in a downturn? The answer? You start to see the model when it operates unsuccessfully. In this scenario, occupancy rates dip lower than expected. Prior geographic expansion begins to look irresponsible. Pricing declines to attract new sales and renewals. And current occupants begin to stretch their payables.**** In total, it ain’t pretty. By way of example, take a look at some of the numbers:*****

Source: PETITION, Chapter 11 Petitions

But while the operating performance of those select locations may be ugly AF, the structure bakes in this possibility and isolates the cancer. Aside from the landlords, the locations have virtually no creditors.

• Each debtor location is an obligor pursuant to a senior secured loan agreement with Regus making for an intercompany obligation. There’s no other funded debt.

• The debtors are otherwise subject to a management agreement with non-debtor Regus Management Group LLC (“RMG”) pursuant to which each debtor is obligated to reimburse RMG for gross expenses incurred directly by RMG in performing management services plug a 5.5% vig on gross revenues.

• The debtors are also subject to an equipment lease agreement with debtor RGN-Group Holdings LLC. Under this agreement the debtors are obligated for the original cost of fixtures, furniture and equipment plus a margin fee.

• As if those agreements didn’t siphon off enough revenue, the debtors are also subject to franchise agreements pursuant to which the debtors have the right to operate an IWG business format in their respective locations and use certain business support services, advice and IT in exchange for a monthly 12% vig on gross revenue.

Given most of the debtors’ obligations are intercompany in nature, what did Regus do? It tried to stick it to its landlords. Duh.

Like so many other companies navigating these troubled times, the Company instituted a variety of comprehensive actions to reduce costs and improve cash flow and liquidity, including the deferral of rent payments and engagement with Landlords to negotiate forbearances, temporary accommodations, and, where possible, permanent modifications to the various Leases to bring them in line with the COVID-19-adjusted market realities so as to permit the Company to continue operating Centers at those respective locations despite the uncertainty when the pandemic will subside and when (and indeed, whether) the U.S. will return to something resembling the pre-pandemic “business as usual.”

Certain landlords, of course, played ball. That helped lessen Regus’ funding burden in the US. But, of course, others didn’t. Indeed, various landlords sent default/eviction notices. Hence the aforementioned bankruptcy filings:

…the Debtors commenced their Chapter 11 Cases to prevent the forfeiture of the Lease Holder Debtors’ Leases, and to preserve all Debtors’ ability to operate their respective businesses—thereby, importantly, protecting the Occupants of the Lease Holder Debtors’ Centers from any disruption to their businesses. I expect that the “breathing spell” from Landlords’ collection efforts that will be afforded by the chapter 11 process will allow the Debtors, and the Company more broadly, to more fully explore the possibility of restructuring their various contractual obligations in order to put the Company’s North American portfolio on a surer footing going forward, so as to allow the Debtors to emerge from this process stronger and more viable than when they went in. If these restructuring efforts prove unsuccessful, the Lease Holder Debtors intend to utilize the procedures available to them under the Bankruptcy Code to (i) orderly wind down the operation of the applicable Centers (including, to the extent necessary, the removal of the FF&E from the leased premises, and to the extent possible, transition of the Occupants to other locations), (ii) liquidate the amounts due to the Landlords under their respective Leases and guarantees, as well as amounts due to the Debtors’ affiliates under their respective agreements, and (iii) to make distributions to creditors in accordance with their respective priorities under the Bankruptcy Code and applicable law.

Said another way: this is gonna be a landlord/tenant battle. Regus has offered to provide $17.5mm of DIP financing to give the debtors time to negotiate with their landlords. To the extent those negotiations (continue to) fail, the debtors will no doubt begin to reject leases left and right.

*****

They likely won’t be alone. Per The Wall Street Journal:

The world’s biggest coworking companies are starting to close money-losing locations across the globe, signaling an end to years of expansion in what had been one of real estate’s hottest sectors.

The retreat reflects an effort to slash costs at a time when the coronavirus is reducing demand for office space, and perhaps for years to come. It also shows how bigger coworking firms, in a race to sign as many leases as possible and grab market share, overexpanded and became saddled with debt and expensive leases.

The share of coworking spaces that have closed is still small. In the first half of the year, closures accounted for just 1.5% of the space occupied by flexible-office companies in the 20 biggest U.S. markets, according to CBRE Group Inc.

Knotel, for instance, seems to be making a habit of getting sued for unpaid rent. Query whether we’re at the tip of the iceberg for co-working distress.

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*Other debtor entities, however, like RGN-Group Holdings LLC, RGN-National Business Centers LLC and H Work LLC do sometimes act as guarantors. Hence their bankruptcy filings. RGN-Group Holdings LLC isn’t a lease holder; rather, it owns all of the furniture, fixtures, equipment and other personal property and leases it all fo the respective SPE centers across the US pursuant to Equipment Lease Agreements.

**The nuance of this structure was constantly lost in the furor over WeWork back when WeWork was a thing that people actually cared about. Since we’re on the topic of WeWork, we suppose we ought to explain the video above. WeWork’s eccentric founder, Adam Neumann, was on record saying that he thought WeWork would thrive during a downturn due to its flexible structure — a point that has obviously been disproven by what’s transpired over the past few months. That said, and to be fair, he clearly didn’t have “social distancing” in mind when he hypothesized that result.

***We wrote about Subchapter V last month in the context of Desigual’s bankruptcy filing. We said:

Luckily for a lot of businesses, the Small Business Reorganization Act (SBRA and a/k/a Subchapter V) went into effect in February. Coupled with amended provisions in the CARES Act, the SBRA will make it easier for a lot of smaller businesses to restructure because:

It established a higher threshold ($7.5mm vs. $2.7mm) to qualify which means more businesses will be able to leverage the streamlined SBRA process to restructure. Previously, businesses over that cap couldn’t utilize Subchapter V which made any shot at reorganization via bankruptcy far too expensive for smaller businesses. The only alternative was dissolution and liquidation.

Debtors under SBRA can spread a payment plan for creditors over 3-5 years. Debtors get the benefit of the payments spread out over time and creditors can potentially recover more. Aiding this is the fact that admin expenses also get paid over time and debts are not discharged until all plan payments are fulfilled.

A plan must be filed within 90 days. The shorter time frame also contains cost.

A trustee must be appointed and effectively takes the place of a UCC which may only be formed on showing of cause.

Companies are taking advantage of this.

****It probably stands to reason that various client programs the debtors typically depend upon are less likely to generate results under this scenario. The debtors nevertheless filed a motion seeking to continue these programs. They include (a) rebate programs for occupants who spend over a certain annual amount, (b) occupancy agreement promotions such as discounts, reduced rent costs, one or more months of free rent, etc., and (c) occupant referral fees. Suffice it to say, occupants likely aren’t referring in many other occupants during COVID. Consequently, the debtors ultimately withdrew this motion. All of this brings up another criticism of WeWork: what, exactly, is a co-working space’s moat? As justification for these programs, the debtors say:

The Lease Holders operate in a very competitive and dynamic market and with many competitors for the same customers. The loss of one or more Occupants could significantly impact the Debtors’ profitability, and therefore, the Client Programs require timely coordination on the part of the Lease Holders to ensure the maximum generation of customer agreement profits and brand awareness during this restructuring.

Case and point.

*****These numbers are YTD for the period ended June 30, 2020.

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Dates:

RGN-Columbus IV LLC (July 30, 2020)

RGN-Chapel Hill II LLC (August 2, 2020)

RGN-Chicago XVI LLC (August 3, 2020)

RGN-Fort Lauderdale III LLC (August 8, 2020)

RGN-Group Holdings LLC (August 17, 2020)

H Work, LLC (August 17, 2020)

RGN-National Business Centers LLC (August 17, 2020)

RGN-Lehi LLC (August 27, 2020)

RGN-Lehi II LLC (August 27, 2020)

RGN Atlanta XXXV LLC (August 29, 2020)

RGN-Arlington VI LLC (August 30, 2020)

RGN-Chevy Chase I LLC (September 2, 2020)

RGN-Philadelphia IX LLC (September 2, 2020)

RGN-Denver XVI LLC (September 3, 2020)

RGN-New York XXXIX (September 3, 2020)

RGN-Los Angeles XXV LLC (September 3, 2020)

RGN-San Jose IX LLC (September 4, 2020)

Jurisdiction: D. of Delaware (Judge Shannon)

Capital Structure: N/A

Company Professionals:

• Legal: Faegre Drinker Biddle & Reath LLP (James Conlan, Mike Gustafson, Patrick Jackson, Ian Bambrick, Jay Jaffe)

• Financial Advisor: AlixPartners LLP (Stephen Spitzer)

• Restructuring Advisor/Chief Restructuring Officer: Duff & Phelps LLC (James Feltman)

• Claims Agent: Epiq Corporate Restructuring LLC (Click here for free docket access)

• Subschapter V Trustee: Gibbons PC (Natasha Songonuga)

Other Parties in Interest:

• Regus Corporation, Regus Management Group, LLC and Franchise International GmbH

  • Legal: Young Conaway Stargatt & Taylor LLP (Robert Brady, James Hughes Jr., Joseph Barry, Justin Duda, Ryan Hart)

• Starwood Capital Group

  • White & Case LLP (Harrison Denman, John Ramirez) & Potter Anderson & Corroon LLP (Christopher Samis, Aaron Stulman)

⛽️New Chapter 11 Bankruptcy Filing - Rosehill Resources Inc. ($ROSE)⛽️

Rosehill Resources Inc. ($ROSE)

July 27, 2020

Stop us if you’ve heard this before: Rosehill Resources Inc. ($ROSE), a Texas-based independent E&P company focused, via a fellow-debtor operating company, Rosehill Operating Company LLC (“ROC”), on the Permian Basin (and, more specifically, the Delaware Basin), filed for bankruptcy because of the usual suspects that literally every oil and gas company blames. Seriously, it’s like everyone is just copying and pasting Arya Stark’s hitlist at this point: “Vladimir Putin, Mohammad Bin Salman Al Saud, COVID-19, the competition, too much debt, etc. etc.” Never mind: we’ll stop ourselves. We’ve all heard this before. Many. MANY. Times.

Speaking of the debt, here is what the capital structure looks like and this is what will happen to it pursuant to the prepackaged plan of reorganization that’s already on file:

©️PETITION LLC

That should be pretty self-explanatory but there are a few things to highlight:

• The $235mm exit RBL actually represents a decreased borrowing base. The original RCF had a maximum commitment of $500mm with a most recent borrowing base of $340mm. That borrowing base amount created a deficiency/liability the company struggled — when coupled with service obligations related to the RCF, secured notes and preferred stock — to make.

• The DIP will run at 8% PIK which is better than the 10% cash pay under the secured notes.

In terms of operations, Rosehill operates or owns working interests in 133 oil and gas wells of which 128 are producing or are capable of production. And here’s what that production looks like:

Is that interesting? Not particularly. We include only to demonstrate that we’re not the only ones who are capable of highly unfortunate and irritating typographical errors. More interesting is the fact that Rosehill earned $302.3mm in revenue in ‘19 against $239mm of operating expense. Revenue was basically flat from ‘18 whereas the company’s operating expense increased. On the plus side, the company had some favorable hedge agreements in place which, upon monetization, resulted in $87.6mm in proceeds that the company ultimately used to paydown its RCF immediately prior to the filing. Actually, who are we kidding? That’s not particularly interesting either.

Given how boring this bankruptcy is, the last thing we’ll mention — again because we and the entire world of finance seems to be obsessed with the topic — is that the company emanated out of … wait for it … wait for it … a SPAC!! While the company was originally incorporated in 2015 as a SPAC under the name KLR Energy Acquisition Corporation — sponsored by the KLR Group’s Edward Kovalik, Stephen Lee and Reid Rubinstein — the business corporation that ultimately became Rosehill Resources Inc. occurred in April 2017.

The rest, as they say, is now history. Perhaps we should start taking a running tally: new SPAC IPOs vs. old SPACs that have now filed for chapter 11 bankruptcy!

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

• Capital Structure: $226.5mm RCF, $106.1mm second lien secured notes,

• Professionals:

  • Legal: Gibson Dunn & Crutcher LLP (David Feldman, Matthew Kelsey, Dylan Cassidy, Hillary Holmes, Shalla Prichard, Michael Neumeister, Ashtyn Hemendinger) & Haynes and Boone LLP (Kelli Norfleet, Arsalan Muhammad)

  • Financial Advisor: Opportune LLP

  • Investment Banker: Jefferies Group LLC (Jeffrey Finger)

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

• Other Parties in Interest:

  • Admin Agent: JPMorgan Chase Bank NA

    • Legal: White & Case LLP (Mark Holmes) & Bracewell LLP (Jason Cohen)

  • Admin Agent to the Secured Note Purchase Agreement: US Bank NA

    • Legal: Shipman & Goodwin LLP (Kimberly Cohen, Robert Borden)

  • Second Lien Noteholders & Series B Preferred Stockholderes & Majority DIP Lenders: EIG Management Company LLC

    • Legal: Kirkland & Ellis LLP (Chad Husnick, Christopher Koenig, Mary Kogut Brawley) & Zack A. Clement PLLC (Zach Clement)

  • Tax Receivable Claimant & Preferred and Common Stockholder: Tema Oil & Gas Company

    • Legal: McDermott Will & Emery LLP (James Kapp III, Brandon White, Nathan Coco, Fred Levenson, Michael Boykins)
      
      
      

⛽️ New Chapter 11 Bankruptcy Filing - Permian Holdco 1 Inc.

Permian Holdco 1 Inc.

July 19, 2020

Permian Holdco 1 Inc. and three affiliates (the “debtors”) filed chapter 11 bankruptcy cases in the District of Delaware. We know. It’s shocking. How in hell could a manufacturer of above-ground wellsite fluid containment and processing systems for oil and gas E&P companies be in trouble?!? The debtors’ pre-pretition lender will serve as DIP lender ($5mm) and stalking horse purchaser, credit bidding the DIP and prepetition credit facility amount ($28.6mm) as appropriate/necessary. Riveting stuff.

• Jurisdiction: D. of DE (Judge Walrath)

• Capital Structure: $28.6mm RCF & TL (New Mountain), $19.435mm unsecured promissory notes

• Professionals:

  • Legal: Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Robert Poppiti Jr., Joseph Mulvihill, Jordan Sazant)

  • Financial Advisor/CRO: CM Advisory LLC (Chris Maier)

  • Investment Banker: Seaport Gordian Energy LLC

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

• Other Parties in Interest:

🚗 New Chapter 11 Bankruptcy Filing - Techniplas LLC 🚗

Techniplas LLC

May 6, 2020

Wisconsin-based Techniplas LLC and seven affiliates (the “debtors”), producers and manufacturers of plastic components used primarily in the automotive and transportation industries, filed for bankruptcy in the District of Delaware. “The Company produces, among other things, automotive products, such as fluid and air management components, decorative and personalization products, and structural components, as well as nonautomotive products, such as power utility and electrical components and water filtration products.” After cobbling together acquisitions over the course of the decade, the debtors’ business is now global in scale and its main customers are the leading OEMs in the US, Europe and Asia; it had net sales of $475mm and a net loss of $21mm in fiscal ‘19.

A bit more about the business. The debtors’ primary operating unit, “Techniplas Core,” acts “…as a manufacturer of technically complex, niche products across a wide range of applications and end markets, including the automotive and truck, industrial, and commercial markets.” This is roughly 83% of the business. In addition, the debtors have “Techniplas Prime,” which, aside from sounding like a Transformer that may or may not have it out for the human race, acts as a matchmaker between excess manufacturing capacity and customers in need of manufacturing. Per the debtors:

Serving as a nexus between customers, including OEMs, and other manufacturing companies, Techniplas Prime acts as an extension of Techniplas Core by delivering to customers the manufacturing capabilities of its Prime Partners. This makes Techniplas Prime asset-light and creates a “win-win” scenario for customers and Prime Partners.

Interestingly, this business segment was once dubbed “The Airbnb of Auto Manufacturing,” a moniker that makes almost zero sense and completely misunderstands the Airbnb model but, yeah sure, cheap “by-association” points, homies! Per Forbes:

[Founder George] Votis saw Techniplas Prime as an e-manufacturing platform from which customers could order parts electronically according to their own specifications, and have them built by local factories with unused capacity.

Except it’s not a platform. Like, at all. Airbnb is a digital two-sided platform that brings hosts and travelers together and seemlessly connects them. Techniplas Prime…well…

…well…page not found. Airbnb may be struggling in this COVID environment but we can assure you that you’re not EVER getting a 404 when going to their site. Platform…pssssfft. The Forbes article later contradicts itself saying:

…they focused on 3-D printing and advanced manufacturing technology companies that had spare capacity available for contract operations, for which Techniplas Prime is essentially the broker.

Right. Being a broker is different than being a platform y’all. But we digress.

The debtors have a simple capital structure consisting of a $17.59mm ABL, $175mm in 10% ‘20 notes, and a $6.77mm interim financing agreement for total funded debt around $200mm. The debtors, primarily due to this capital structure, began pursuing strategic alternatives in early 2017. Both an attempted sale process and debt refinancing failed. Thereafter, the debtors explored in 2018 a term loan refinancing of the preptition notes and/or a public equity listing in London. Those, too, failed. For this, the debtors blame a downturn in the automotive market and uncertainty from Brexit (PETITION Note: we’ve been foreshadowing that declining production capacity by the major OEMs was going to rattle through the supply chain so nobody should be surprised by this revelation).

In mid-’19, an attempted sale to a strategic buyer, private equity firm The Jordan Company, kicked off but that, despite some forward-moving progress involving a note purchase agreement and an unexercised call option for 100% of the membership interests in the debtors, ultimately fell through due to the inability to refi out the pre-petition notes. Subsequent attempts — now involving ad hoc group of noteholders and Jordan — also came close but ultimately failed due to deteriorating operating performance that pre-dated OOVID. COVID merely exacerbated things. Per the debtors:

Many customers suspended or drastically reduced production, resulting in a swift drop in demand for the Debtors’ products. Additionally, many of the locations where the Company had offices and manufacturing plants worldwide issued lockdown orders and permitted only essential business to remain open in an effort to control the outbreak and protect the health and safety of the public.

All of this was too much to handle: Jordan peaced out. Liquidity increasingly became an issue and so the debtors obtained a $6.7mm super senior priority bridge financing from the ad hoc group. Indeed, the ad hoc group is stepping up big here: in addition to providing the liquidity the debtors needed to get in chapter 11, they’ve agreed to provide a DIP ($20-25mm new money with a $100mm roll-up) and serve as stalking horse bidder — offering $105mm to purchase the debtors’ international operations and three remaining US-based manufacturing facilities. The debtors hope to close the sale within 44 days of the petition date.

• Jurisdiction: D. of Delaware (Judge Silverstein)

• Capital Structure: See above.

• Professionals:

  • Legal: White & Case LLP (David Turetsky, Andrew Zatz, Fan He, Robbie Boone Jr., John Ramirez, Sam Lawand, Thomas MacWright) & Fox Rothschild LLP (Jeffrey Schlerf, Carl Neff, Johnna Darby, Daniel Thompson)

  • Financial Advisor/CRO: FTI Consulting Inc. (Peter Smidt, Andrew Hinkelman)

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

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

• Other Parties in Interest:

  • Stalking Horse Purchaser: Techniplas Acquisition Co. LLC

  • Pre-Petition ABL & DIP ABL Agent: Bank of America NA

    • Legal: Sidley Austin LLP (Dennis Twomey, Elliot Bromagen) & Richards Layton & Finger PA (Mark Collins, Amanda Steele, David Queroli)

  • DIP Term Agent: Wilmington Savings Fund Society FSB

    • Legal: Cole Schotz PC (Daniel Geoghan, J. Kate Stickles, Patrick Reilley)

  • Indenture Trustee: US Bank NA

    • Legal: Dorsey & Whitney LLP (Eric Lopez Schnabel, Alessandra Glorioso)

  • Ad Hoc Noteholder Group ‘20 10% Senior Secured Notes

    • Legal: Arnold & Porter Kaye Scholer LLP (Jonathan Levine, Brian Lohan, Jeffrey Fuisz, Gerardo Mijares-Shafai)

🥾New Chapter 15 Bankruptcy Filing & CCAA - The Aldo Group Inc.🥾

The Aldo Group Inc.

May 7, 2020

Retail pain doesn’t respect borders. Canada-based The Aldo Group Inc. and eight (8) affiliated companies (collectively, the “Debtors”) filed petitions in the United States Bankruptcy Court for the District of Delaware seeking relief under chapter 15 of the United States Bankruptcy Code in support of a CCAA filing in Canada.

Aldo is a shoe retailer with stores in more than 100 countries. The Group notes roughly 3,000 points of sale with 700 directly owned stores and the remainder as franchises. There are 289 stores in Canada and 429 in the US.

In terms of funded debt, the Aldo Canada has CDN$140mm outstanding. Of that amount, Aldo US is an obligor on a CDN$100mm piece. Both entities are also co-borrowers on a CDN$300mm unsecured syndicated loan. Both the Aldo Canada and Aldo US have significant outstanding amounts to trade creditors including landlords who haven’t been paid for April or May.

Operating performance has been dogsh*t long before COVID hit the scene. Per the debtors:

Over the past few years, the Aldo Corporate Group has declined in profitability and regularly reported losses. For instance, for the twelve month period ending February 1, 2020, Aldo Canada posted a net loss from operations of approximately CDN$74,800,000 and Aldo U.S. posted a net loss of approximately USD$52,800,000. Taking into consideration yearend write-offs of amounts due from subsidiaries and affiliated and write-offs of future tax benefits that were recorded as an asset, Aldo Canada posted a net loss of approximately CDN$170,300,000 and Aldo U.S. posted a net loss of approximately USD$97,300,000.

Pre-COVID, the debtors were attempting an operational restructuring designed to de-emphasize brick-and-mortar stores and prop up e-commerce, wholesale and franchise channels. You know, like, the old playbook. They were also seeking to refinance the credit facility with an ABL. The “transformation” was allegedly on track when the pandemic struck precipitating an immediate liquidity crunch. Hence, the filing.

The debtors will use the filing to evaluate its store profitability, shed leases and contracts and restructure the unsecured loans both in Canada and the US.

It seems pretty safe to say that a good number of those US stores will join the retail garbage bin much to the chagrin of landlords.

• Jurisdiction: D. of Delaware (Judge Owens)

• Capital Structure: see above.

• Professionals:

  • Legal: Hogan Lovells US LLP (Peter Ivanick, Lynn Holbert, Alex Sher, Baraka Nasari) & Morris Nichols Arsht & Tunnell LLP (Eric Schwartz, Matthew Harvey, Paige Topper)

  • Canadian Monitor: Ernst & Young Inc.

  • Investment Banker: Greenhill & Co. Canada Ltd.

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

• Other Parties in Interest:

  • Largest Unsecured Creditor: Bank of Montreal

    • Legal: Chapman and Cutler LLP (Stephen Tetro, Aaron Krieger) & Womble Bond Dickinson US LLP (Matthew Ward, Morgan Patterson)

💈New Chapter 11 Bankruptcy Filing - Creative Hairdressers Inc.💈

Creative Hairdressers Inc.

April 23, 2020

Creative Hairdressers Inc., otherwise known to many as “Hair Cuttery,” filed for bankruptcy earlier this week in the District of Maryland; it is an independent family-owned chain of hair salons with 800 locations across approximately 15 states; it was also a $40mm revenue business in fiscal year 2019 (ended September ‘19).

While its revenues are impressive, the company faced intensified competition in the industry that took a toll on operating performance. Accordingly, months prior to this filing, it reduced its footprint by closing underperforming stores, refocused services around hot areas (i.e., hair coloring) and changed its professional commission structure. These changes were beginning to have a positive impact. Nevertheless, the company tripped a covenant default with its secured lender which triggered a year-long sale process that ultimately proved unsuccessful. The company’s original founders, the Ratners, subsequently sank money into the business for working capital to keep the business afloat.

And then COVID-19 hit. Forced closures precipitated an immediate liquidity crisis and the company had no choice but to furlough its employees. Liquidity drained to near zero and the Ratners again stepped up with a $4mm pledge to the company’s pre-petition lenders, HC Salon Holdings Inc. Employees, however, were left hanging as liquidity proved insufficient to cover the last payroll prior to closure.

Speaking of stepping up, HC Salon Holdings Inc. has agreed to purchase substantially all of the company’s assets; it will assume liabilities, credit bid its debt, and pay cash amounts necessary to wind down the remainder of the business. HC Salon also committed to a $40.675mm DIP (which is primarily a roll-up … $5mm is new money) and agreed to the use of its cash collateral. An immediate use of these DIP proceeds would be to true-up the employees who were — due to the extenuating circumstances — shafted prior to the filing.

Three more things to note:

First, the company hopes to wrap up the sale by the end of May with the closing scheduled to be held at the Maryland offices of DLA Piper US LLP, counsel to the credit bidder. The company is actually based in Virginia, though its affiliate, Ratner Companies LLC, is Maryland-based. So, there’s nothing particularly shady about venue held in Maryland. This did make us wonder though: is there any chance that venue considerations will be somewhat influenced by COVID-19 and where states lift restrictions? We’re guessing generally ‘no’ because the law will dictate venue as usual but we could see instances on the margins where parties in interest consider alternative venues with the hope of getting parties together, getting due diligence done, and maximizing value. We’ll see.

And, second, the company is intends to use the latest bankruptcy technology: the “Mothball Motion" where it asks the bankruptcy court to use its wide discretionary authority under section 105 of the Bankruptcy Code to limit post-petition rent payments to landlords, adjourn non-essential motions, and more. This is the new IT thing in bankruptcy cases, people. Let’s see how long it lasts now that certain states are starting to loosen restrictions.

Finally, the company has already filed a motion seeking to reject 49 leases. Prior to filing, it obtained rent concessions for approximately 100 leases. The world of hurt that is about to shake out in commercial real estate is going to be interesting to watch.

• Jurisdiction: D. of Maryland (Judge Catliota)

• Capital Structure: $36.4mm (+ $4.1mm LOC)(HC Salon Holdings Inc.)

• Professionals:

  • Legal: Shapiro Sher Guinot & Sandler (Joel Sher, Richard Goldberg, Daniel Zeller, Anastasia McCusker)

  • Financial Advisor: Carl Marks Advisory Group LLC (Marc Pfefferle)

  • Real Estate Advisor: A&G Realty Partners LLC

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

• Other Parties in Interest:

  • Pre-Petition Lender & Stalking Horse Purchaser: HC Salon Holdings Inc.

    • Legal: DLA Piper US LLP (Richard Chesley, Jamila Justine Willis)

🤖New Chapter 11 Bankruptcy Filing - BroadVision Inc. ($BVSN) 🤖

BroadVision Inc.

March 30, 2020

California-based BroadVision Inc. ($BVSN) and two affiliates (the “debtors”), developers of enterprise portal applications that (a) “enable companies to unify their e-business infrastructure” and (b) “conduct interactions and transactions with employees, partners, and customers through a personalized self-service model” filed a prepackaged chapter 11 bankruptcy in the District of Delaware over the weekend. Yeah, we have no idea what that means either. Given that the debtors reflect assets of $5.6mm, it seems we’re not alone. From what we can gather, these dudes sell some software that is one part internal business dashboard, one part CRM and B2B and B2C e-commerce, and one part publishing system.

The company has been a value destruction machine for years. In fact, the debtor has an accumulated deficit of approximately $1.3 billion since 2001 — mostly non-cash charges, but still.

The upshot here is that the company intends to effectuate a sale via a prepackaged plan of reorganization which would transfer the assets to a subsidiary (Aurea Software Inc.) of large equityholder ESW Capital LLC. ESW will fund the plan including payments to unsecured creditors, coming out with 100% of the equity interests in the reorganized company for its trouble. At the time of this writing, the more interesting thing is that the plan calls for a $4.375/share recovery for equity plus “their pro rata share of the Debtor’s cash on hand as of the effective date of the Plan (including proceeds from the sale of a block of IP addresse[s] owned by the Debtor).” Why is this interesting? Well, at the time of this writing, here is where the stock is trading:

There are only 5.1mm shares outstanding but if you could get your hands on some of that float, you’re talking a near-instant 10% recovery.* This reminds us of when Perfumania Inc. filed for bankruptcy in the middle of the Texas hurricanes and the market had a delayed reaction to the fact that equity would get paid out at a premium (PETITION Note: this is not investment advice and, more likely than not, by the time you read this on Wednesday, the gap will have closed). But we digress.

The proposed effective date is May 29, 2020 so, again, assuming you could even get your hands on some of the float, you’d have a little bit of risk with a two-month process.

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*There are some caveats. The company notes:

“…the Equity Interest Recovery may be less than $4.375 per share of Debtor Common Stock in the event that (A) the Debtor has more than 5,142,333 shares of Debtor Common Stock outstanding (including all Outstanding Shares, Restricted Stock Awards, Restricted Stock Units and Permitted Stock Options, whether or not vested) or (B) the Debtor lacks sufficient Cash (including Cash-on-Hand and proceeds from the liquidation of the IP Addresses after the Effective Date) to pay all Case-Related Claims and Expenses and repayment of amounts, if any, incurred by the Plan Sponsor in connection with funding such Case-Related Claims and Expenses….”

Two things. First, there’s a 10,000 share delta between the 5,142,333 and the actual number of shares that would be outstanding if the Permitted Stock Options are exercised at $4.70/share. It seems unlikely that these options would be exercised unless cash on hand surprises to the upside (i.e., the IP addresses fetch surprisingly high prices). Second, would you be willing to stake your bet on restructuring professionals keeping administrative expense claims down? If so, more power to you. You’ve got a 10% margin of error.

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• Jurisdiction: (Judge Sontchi)

• Capital Structure: No funded debt.

• Professionals:

  • Legal: DLA Piper LLP (R. Craig Martin, Joshua Morse)

  • Directors: James Dixon, Robert Lee, Francois Stieger

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

• Other Parties in Interest:

  • Purchaser: ESW Capital LLC

    • Legal: Goulston & Storrs PC (Trevor Hoffman) & Morris Nichols Arsht & Tunnell LLP (Derek Abbott)

😷New Chapter 11 Bankruptcy Filing - Quorum Health Corporation😷

Quorum Health Corporation

April 7, 2020

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

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

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

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

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

• Jurisdiction: D. of Delaware (Judge Owens)

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

• Professionals:

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

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

  • Investment Banker: MTS Health Partners LP

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

• Other Parties in Interest:

  • DIP Agent: GLAS USA LLC

  • Consenting First Lien Lenders

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

    • Financial Advisor: Houlihan Lokey

  • Consenting Noteholders

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

    • Financial Advisor: Jefferies LLC

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

⛽️New Chapter 11 Filing - CARBO Ceramics Inc. ($CRRT)⛽️

CARBO Ceramics Inc.

March 29, 2020

Houston-based CARBO Ceramics Inc. and two affiliates (the “debtors”) are the latest oil and gas servicers to file for chapter 11 bankruptcy; they are manufacturers and sellers of ceramic tech products and services and ceramic proppant for oilfield, industrial and environmental markets. Make no mistake, though: they are indexed heavily to the oil and gas market.

Here’s a paragraph that literally scores of companies ought to just copy and paste (with limited edits) over the next several months as a wave of oil and gas companies crash into the bankruptcy system:

Beginning in late 2014, a severe decline in oil prices and continued decline in natural gas prices led to a significant decline in oil and natural gas drilling activities and capital spending by E&P companies. While modest price recoveries have occurred intermittently since that time, prices have generally remained depressed and recently fell precipitously again to near record low levels. The Company’s financial performance is directly impacted by activity levels in the oil and natural gas industry. A downturn in oil and natural gas prices and sustained headwinds facing the E&P industry have resulted in both reduced demand for the Company’s products and services and reduced prices the Company is able to charge for those products and services. Because drilling activity has been reduced over a protracted period of time, demand for all of the Company’s products and services (proppant, in particular) has been significantly depressed.

They can then follow it up with some astounding business performance figures like:

From 2014 to 2019, the Company’s total revenue for base ceramic media fell from approximately $530 million to approximately $34 million.

BOOM!

Of course, this financial pain will trickle down to others. Like railcar and distribution center lessors, among others.

The debtors have a consensual deal with their pre-petition secured lenders, Wilks Brothers LLC and Equify Financial LLC, to equitize their debt — including maybe the DIP if its not rolled into an exit facility. The deal is interesting because it provides 100% recovery to unsecured creditors of two debtors and a cash payment option to unsecured debtors of the main debtor. The lenders will see a liquidating trust with a whopping $100k so that certain avoidance actions can be pursued. And, finally, there’s a “death trap.” If the unsecured creditors vote to accept the plan, the pre-petition secured creditors will waive their “very significant unsecured deficiency claim.” If not, they’ll flood them into oblivion. Of course, this statement implies that the value of the business is negligible at this point. Reminder: revenue dipped from $530mm to $34mm in 2019. Can’t imagine numbers for 2020 are looking particularly rosy either. Finally, all of the above is subject to a “fiduciary out” — you know, in case, by some miracle, someone else actually wants this business (spoiler alert: nobody will).

Also interesting is the value of the NOLs here which dwarf the funded debt. 🤔

Wilks will fund a $15mm DIP to finance the cases with $5mm needed within the first 14 days of the cases. This, however, is subject to what we’ll call “The COVID-caveat.” Per the company:

The DIP Budget is based on information known to date and is the best estimate of the Debtors’ current expectations. It should be noted that the global outbreak of the COVID-19 virus and the severe disruption and volatility in the market has caused and continues to cause major challenges across all industries and may ultimately result in the Debtors’ falling short of their forecasted receipts.

Interestingly, they note further:

The Company’s New Iberia facility is currently non-operational due to a state-wide shelter-in-place order, but the Company, pursuant to applicable state law, is continuing to pay its employees. While the shelter-in-place order could terminate by April 10, 2020, it is possible that the order will be extended.

While the Company’s other facilities in Alabama and Georgia are still operational, it is possible that these states will also enact shelter-in-place orders in the near term that will force these facilities to go non-operational.

The simultaneous supply and demand shock in the oil market is unprecedented and may cause a substantial strain on or reduction in collections from the Company’s primary customers, many of whom are dependent on oil prices.

None of this is surprising but it’s interesting to see the various x-factors that are now part of the DIP sizing process.

As you all very well know, these are extraordinary times.

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

• Capital Structure: $65mm RCF (Wilks Brothers LLC & Equify Financial LLC)

• Professionals:

  • Legal: Vinson & Elkins LLP (Matthew Moran, Matthew Struble, Garrick Smith, Paul Heath, David Meyer, Michael Garza) & Okin Adams LLP (Matthew Okin, Johnie Maraist)

  • Financial Advisor: FTI Consulting Inc.

  • Investment Banker: Perella Weinberg Partners LP (Jakub Mlecsko)

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

• Other Parties in Interest:

  • Prepetition Secured Lender & Major Equityholder: Wilks Brothers LLC & Equify Financial LLC

    • Legal: Norton Rose Fulbright LLP (Greg Wilkes, Francisco Vazquez)

    • Financial Advisor: Ankura Consulting Group LLC

💊New Chapter 11 Bankruptcy Filing - Rochester Drug Cooperative Inc.💊

Rochester Drug Cooperative Inc.

March 12, 2020

New York-based wholesale pharmaceutical cooperative that services independent pharmacies filed for bankruptcy to wind down its business. Revenues have been declining for years and it faces significant litigation risk in connection with a number of opioid-based lawsuits.

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

• Capital Structure: $170mm RCF & $5mm Term Loan (M&T Bank(

• Professionals:

  • Legal: Bond Schoeneck & King PLLC (Stephen Donato)

  • Financial Advisor: Huron Consulting Group LLC

  • Investment Banker: Houlihan Lokey Capital Inc.

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

• Other Parties in Interest:

New Chapter 11 Bankruptcy & CCAA Filing - Pier 1 Imports Inc. ($PIR)

Pier 1 Imports Inc.

February 17, 2020

Fort Worth, Texas-based Pier 1 Imports Inc. and seven affiliates (the “debtors”) have fulfilled their obvious destiny and finally fallen into bankruptcy court in the Eastern District of Virginia. Contemporaneously, the debtors filed a CCAA proceeding in Canada to effectuate the closure of all Canadian operations. Color us pessimistic but we’re not feeling so great about the debtors’ go-forward chances in the US either.

We’ve covered the debtors ad nauseum in previous editions of PETITION. Here — supported by an ode to “Anchorman” — we described the debtors’ recent HORRIFIC financial performance and noted how a bankruptcy would be sure to confuse a peanut gallery accustomed to spouting regular (and sometimes inaccurate) hot takes about how private equity is killing retail.* We wrote:

The reaction to this surely-imminent bankruptcy (and, if we had a casino near us, liquidation) is going to be interesting. It is sure to flummox the “Private Equity is Killing Retail” camp because, well, it’s not PE-backed. Similarly it’ll confuse the “You Shouldn’t Put So Much Debt on Retail” cohort because, well, there really isn’t that much debt on the company’s balance sheet. Chuckling in the corner will be “The US is Over-Stored” team … And “The Millennials Aren’t Buying Homes and Furnishing Them With Chinese-Made Tchotchkes” gang (thanks a ton, Marie Kondo) … And the “Management Has Blown Chunks, The Assortment Sucks” bunch … And, finally, “The Amazon Effect” squad….

Over the weekend, The New York Times ran a piece from Austan Goolsbee, an economics professor at the University of Chicago’s Booth School of Business, that — no disrespect to the professor — says many of the same things PETITION has been saying for a LONG LONG time. That is, “The Amazon Effect” is overstated. He argues that “three major economic forces have had an even bigger impact on brick-and-mortar retail than the internet has”: (1) big box stores, (2) income inequality, and (3) the preference shift away from goods towards services. It’s fair to say that these three forces affected the debtors in a big big way.**

Who’s actually surprised #Pier1 is closing when they charge like $100 for a decorative pillow? $60 for a vanilla candle that’s also at Walmart for $5? PASS. People still shopping at a Pier 1 clearly haven’t heard of Home Goods or TJ Maxx

— Nicole (@Choley2007) February 17, 2020

Surely, e-commerce has a lot to do with it too. As one PETITION advisor said about the debtors’ wares yesterday:

“You can just order that sh*t online. You don’t need to try it on.”

It’s a fair point.

Another fair point that Mr. Goolsbee omits from his analysis is the role of management. It’s safe to say that the US is suffering from an epidemic of retail ineptitude.

Also management sucks

— TheHappySoul Goddess (@Yahiness11) February 17, 2020

And like the coronavirus, it keeps spreading from one retailer to the next.***

This has to be one of the most under-covered aspects of the #retailapocalypse: just a revolving door of execs moving from one troubled retailer to the next and everyone hoping and praying that that person can suddenly conjure up an answer. $ASNA $FRANhttps://t.co/5lmoMJFEAE

— 💥PETITION💥 (@petition) February 14, 2020

But we digress.

The business has clearly suffered:

From fiscal years 2014 to 2018, the company’s net income dropped from $108 million to about $11.6 million and in fiscal year 2019 Pier 1 experienced a $198.8 million loss.

So, what’s the upshot here? The debtors announced a plan support agreement and intend to use the chapter 11 bankruptcy process to (a) continue to shutter the previously announced ~450 stores (read: get ready for a lot of lease rejections) and (b) pursue a sale pursuant to a chapter 11 plan of reorganization of what remains of the debtors’ business. Frankly, this was masterful messaging: the announcement relating to a plan support agreement and potential plan of…wait for it…”reorganization”(!) head-faked the entire market into thinking this thing might actually be salvageable. That’s where the fine print comes in.

The debtors have dubbed this an “all weather” chapter 11 plan because it provides for either a sale or the equitization of the term loan at the term lenders’ election. This begs the question: will Pathlight Capital LP want to own this thing?🤔 This bit was eye-catching:

“To be clear, the term loan lenders have made no decision at this point, but instead support the process as outlined in the plan support agreement.”

Yeah, we bet they do. Qualified bids will be due on or before March 23 and the lenders have until March 27 to make their election. Which way will the winds blow?

Note that “the process” isn’t currently supported by a stalking horse purchaser. 🤔

Note further that the debtors are required under the DIP to distribute informational packages and solicitations for sale of the debtors’ assets on a liquidation basis to liquidators by March 9.🤔 🤔

It seems reasonably clear from the Pier 1 bankruptcy papers that none of the Debtors, the professionals nor the lenders expect this turd to actually find a buyer outside of the liquidator type.

— 💥PETITION💥 (@petition) February 18, 2020

It looks like we’ll know the answer very soon.

To finance the cases, the debtors obtained a committed for a $256mm DIP credit facility. The facility includes a $200mm revolving loan commitment and a $15mm first in last out term loan, each provided 50/50 by Bank of America N.A. and Wells Fargo National Association, and a $41.2mm term loan from Pathlight. This was the pre-petition capital structure:

The DIP effectively just rolls up much of the pre-petition debt. There is no new money. The messaging here, then, is also critical: the DIP facility ought to provide customers, vendors and employees comfort that there is access to liquidity if needed. Cash collateral usage, however, is the main driver here: the debtors believe that operating cash flow will suffice to handle working capital needs and bankruptcy expenses.

To summarize, we have another distressed retailer that is scratching and clawing to live. They’ve taken all of the usual steps to extend runway: cost cuts, footprint minimalization, new management. Bankruptcy is a last-ditch effort to survive: the debtors take pains to try and convince some prospective buyer that there is life left in the debtors’ brick-and-mortar business:

The remaining go-forward stores achieved superior sales and customer metrics in the last twelve months compared to the closing stores, including approximately 15% greater sales per square foot on average.

And if that doesn’t do it, there’s the argument that there’s an e-commerce play here. The debtors similarly go to great lengths to state OVER AND OVER AGAIN that e-commerce represents 27% of total sales. They’re practically screaming, “Look at me, look at me! We can be interesting to you [Insert Authentic Brands Group here]!”

Pathlight is sure as hell hoping someone bites.

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*Kirkland & Ellis…uh…we mean, the “debtors” appear to agree, stating, in reference to private equity, that “[t]oo many pundits have sought to point in too many wrong directions,” citing pieces in RetailDive and The Wall Street Journal. THAT ladies and gentlemen, is client advocacy!

**It’s also fair to say that Professor Goolsbee does his readers a disservice by neglecting the overall picture which, no doubt, also includes over-expansion, too much retail per capita, private equity and over-levered balance sheets. These cowboys are closing 400+ stores for a reason.

Of course, long time PETITION readers know that we’ve been arguing for a LOOOOONG time that the “perfect storm” hitting retail is a confluence of factors that cannot just be lazily summarized as “private equity” or “The Amazon Effect.” It’s good to see that the folks at Kirkland & Ellis agree:

In the face of the longest bull run in U.S. history (close to 3,000 days and counting), a myriad of factors have collectively changed the ways in which consumers and retailers interact—creating for retailers what is tantamount to a perfect storm—and directly contributing to the struggles retailers face in a shifting marketplace.5

Then it’s as if they lifted this footnote straight out of previous PETITION briefings:

***Not to cast aspersions, but the resume of the current PIR CEO is…uh…interesting: prior experience includes FullBeauty Brands, HHGregg, and Marsh Supermarkets. Any of those names sound familiar to bankruptcy professionals?

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• Jurisdiction: E.D. of Virginia (Judge Huennekens)

• Capital Structure: $140mm RCF + $47.3mm LOC, $189mm Term Loan (Wilmington Savings Fund Society FSB), $9.9mm industrial revenue bonds

• Professionals:

  • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Emily Geier, AnnElyse Scarlett Gains, Joshua Altman) & Kutak Rock LLP (Michael Condyles, Peter Barrett, Jeremy Williams, Brian Richardson)

  • Canadian Legal: Osler Hoskin & Harcourt LLP

  • Independent Directors: Steven Panagos & Pamela Corrie

  • Financial Advisor: AlixPartners LLP (Holly Etlin)

  • Investment Banker: Guggenheim Securities LLC (Durc Savini)

  • Real Estate Advisor: A&G Realty Partners LLC

  • Liquidation Consultant: Gordon Brothers Retail Partners LLC

    • Legal: Riemer & Braunstein LLP (Steven Fox, Anthony Stumbo)

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

• Other Parties in Interest:

  • DIP ABL Agent: Bank of America NA

    • Legal: Morgan, Lewis & Bockius LLP, Hunton Andrews Kurth LLP, and Norton Rose Fulbright Canada LLP

  • DIP ABL Term Agent: Pathlight Capital LP

    • Legal: Choate Hall & Stewart LLP (John Ventola, Jonathan Marshall) and Troutman Sanders LLP (Andrew Buxbaum)

  • Ad Hoc Term Lender Group: Eaton Vance Management, Insight North America LLC, Marathon Asset Management LP, MJX Asset Management LLC, Whitebox Advisors LLC, ZAIS Group LLP

    • Legal: Brown Rudnick LLP (Robert Startk, Uchechi Egeonuigwe, Steven Pohl, Sharon Dwoskin) & Whiteford Taylor & Preston LLP (Christopher Jones, Vernon Inge, Corey Booker)

    • Financial Advisor: FTI Consulting Inc.

  • Large Equityholders: Charles Schwab Investment Management, Dimensional Fund Advisors LLP

  • Official Committee of Unsecured Creditors: Bhati & Company, Synergy Home Furnishings LLC, United Parcel Services Inc., Brixmor Operating Partnership LP, Brookfield Property REIT Inc.

    • Legal: Foley & Lardner LLP (Erika Morabito, Brittany Nelson, Timothy Mohan) & Cole Schotz PC (Seth Van Aalten)

    • Financial Advisor: Province Inc. (Paul Huygens, Sanjuro Kietlinski, Walter Bowser, Paul Navid, Shane Payne, Courtney Clement)

🏆New Chapter 11 Bankruptcy Filing - ON Marine Services Company LLC🏆

ON Marine Services Company LLC

January 2, 2020

Pittsburgh-based ON Marine Services Company LLC gets the prize: it marks the first sizable chapter 11 bankruptcy case of 2020. This probably wasn’t the “victory” that Pittsburgh residents wanted after the Steelers crapped out at the end of the regular NFL season. Its reward? A plan of liquidation.

Let’s be clear: by “sizable,” we are not referring to operations, employees, or some other definitive metric. Rather, we’re referring to approximately 6,000 asbestos-related personal injury claimants and, by extension, the massive continent liabilities that comes with them. 😬

The debtor dates back to 1929 and has a legacy in manufacturing and selling products used exclusively in steelmaking. The products — called insulated “hot tops” — were single-use products into which molten steel was poured. While that might seem fairly innocuous, “[b]y the mid-1940s, certain of the … “hot top” products contained asbestos as an intentionally included ingredient.” This ceased to be the case after 1978.

The company previously filed for bankruptcy in 2004 which, we guess(?), means this is a Chapter 22. Like, maybe? (We really need a set statute of limitations for using that term). For whatever reason, the company did not address its asbestos-related liabilities in the prior bankruptcy and has subsequently enjoyed a jolly good time of defending cases for the past 14 years. Over 182,000 claims have been asserted against the company: we suppose someone deserves some sort of endurance award because, as noted above, only 6,000 remain on the books. Clearly, though, folks have had enough of this sh*t.

Interestingly, there’s a commentary here about the US tort system. While the 182,000 claims tout horrific injuries, e.g., mesothelioma, lung cancer, esophageal or colon cancer, the debtor highlights that 95% of the claims asserted against it have been dismissed without payment. Nevertheless, a decade+ of defending claims has depleted the debtor of critical insurance/reserves to fund defense and indemnity costs. “[T]he Debtor has reached the point at which its traditional method of dealing with Asbestos Claims is no longer economically feasible.” Said another way, this zombie is finally being put out of its misery.

The debtor filed for bankruptcy with an insurance settlement in hand. The proceeds from that settlement with fund the bankruptcy case and feed a liquidating trust that will be available to claimants as cases proceed.

• Jurisdiction: W.D. of Pennsylvania (Judge Bohm)

• Professionals:

  • Legal: Reed Smith LLP (Paul Singer, Andrew Muha, Luke Sizemore)

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

💊New Chapter 11 Bankruptcy Filing - Sienna Pharmaceuticals Inc. ($SNNA)💊

Sienna Pharmaceuticals Inc.

September 16, 2019

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

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

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

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

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

• Jurisdiction: D. of Delaware (Judge TBD)

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

• Professionals:

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

  • Financial Advisor: Force 10 Partners (Jeremy Rosenthal)

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

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

• Other Parties in Interest:

  • Prepetition Lender: Silicon Valley Bank

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

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

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

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

    • Financial Advisor: Emerald Capital Advisors (John Madden)

Update: 10/25/19 #140

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

RAIT Funding LLC

August 30, 2019

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

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

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

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

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

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

• Jurisdiction: D. of Delaware (Judge Shannon)

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

• Professionals:

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

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

  • Investment Banker: UBS Securities LLC

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

• Other Parties in Interest:

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

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

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

🏥New Chapter 11 Bankruptcy Filing - Insys Therapeutics Inc.🏥

Insys Therapeutics Inc.

June 10, 2019

Within a week of a massive settlement entered into with the United States Department of Justice, Insys Therapeutics Inc. ($INSY) and six affiliates have filed for bankruptcy in the District of Delaware.* The company is a specialty pharmaceutical company that commercializes drugs and drug delivery systems for targeted therapies (read: it manufactures opioids); it has two marked products. These products, if prescribed and used in the right way, aren’t in and of themselves evil (though former management is another story). Subsys is used for cancer patients and is delivered in the (non-invasive) form of an under-the-tongue spray. Syndros is used to treat loss of appetite and anorexia associated with weight loss in people with AIDS as well as nausea and vomiting caused by anti-cancer medicine. Not one to miss out on all the latest fads, the company also apparently has cannabinoid-based formulations in its pipeline. Because, like, to the extent the company wants to pursue a sale, nothing will get investor juices flowing like cannabinoid! Will its marketing get done via Snapchat and its sales conducted via the blockchain? Maybe it ought to package its formulations with fake meat. Lit!!

All in, the company owns 94 worldwide patents and 62 patent applications with expiration dates ranging between 2022 and 2039. In other words, it does have some potentially valuable intellectual property.

The company’s synopsis of why it is now in bankruptcy court reflects the world of opioid producers today:

…the Debtors are facing extensive litigation relating to their SUBSYS® product (“Subsys”), which is a prescription opioid. As of the Petition Date, one or more of the Debtors have been named in approximately one thousand lawsuits, and the Debtors anticipate that additional lawsuits may be commenced in the future. Some of the litigation they are facing is common to all opioid manufacturers, while other claims are based on particular alleged activities of the Debtors’ former executives, many of whom either pleaded guilty to or were convicted after trial of federal criminal activity relating to such activities. The expenses and settlement costs resulting from such litigation have been substantial, consuming large portions of the Debtors’ revenue and liquidity.

At the same time, over the last few years, the Debtors’ revenues from Subsys have been declining rapidly as a result of the increased national scrutiny of prescription of opioids by healthcare professionals, the resulting high-profile political and legal actions taken against manufacturers and distributors of opioids, and the specific news relating to the former executives’ criminal activity. Moreover, although the Debtors have promising products in the pipeline, those products are not yet approved for production, require significant additional investment to bring to market, and are not expected to generate revenue in the near term. As a smaller company than some other opioid manufacturers, with over 90% of its current revenue coming from the sale of opioids, Insys could not withstand the concurrent negative impact of massive litigation costs and significant opioid revenue deterioration. These factors have caused a substantial cash drain on the company to the point where, despite the Debtors’ best efforts, they risk running out of cash in 2019. (emphasis added)

We quoted that bit at length because it captures the risk that all opioid manufacturers face today given what appears to be pervasive sales and prescription practices across the country, subsuming countless companies all seeking sales and profits often in the name of shareholder value. Which is not to say that all companies and company management teams are equal: while the jury is still out in a variety of cases, here, we know that former company management engaged in some shady-a$$ methods to enrich themselves. Per Bloomberg:

In May, Insys founder and former Chief Executive Officer John Kapoor, 75, and four former executives were convicted of engaging in a racketeering conspiracy to bribe doctors to boost off-label prescriptions of Subsys, a fentanyl spray originally intended to treat cancer pain. The executives baited doctors with sham speaker fees, lavish dinners and nightclub outings, and then duped insurers into covering the prescriptions, prosecutors said. Kapoor and the others each face a maximum of 20 years in prison and will be sentenced in September.

A pandemic of addiction in Wyoming, Oklahoma and elsewhere, powered by some corrupt-AF executives and their bottles-and-models loving doctor homies.

The debtors filed their bankruptcy cases to (i) trigger the automatic stay, a statutorily imposed injunction that will, for the time being, halt ongoing litigation, (ii) pursue a sale of substantially all of their assets, and (iii) implement procedures designed to estimate categories of claims and impose distribution procedures via a plan of reorganization. Moreover, the debtors hope that a court-supervised proceeding in chapter 11 will provide the structure required to enter into additional settlements with other large groups of claimants.

As for current claims, there are lot (including a variety of professional services claims on account of indemnities and otherwise — a lot of lawyers are likely to have write-offs here). But the company has no funded debt and so the proceeds of any sale will, after professionals are paid, go to general unsecured creditors. First and foremost, the DOJ — on account of its allowed general unsecured claim ($243mm, but capped at a $195mm recovery inclusive of a $5mm prepetition payment). The DOJ will have to contend with, on an equal basis, other federal actions/settlements, state actions, municipal actions, and insurance, personal injury, securities and indemnity claimants. It’s a liability lovefest!

To address these liabilities, the debtors need asset value. To that end, the debtors are looking to establish a global sale process for their IP; they’re also looking at clawing back certain indemnification amounts they’ve paid over the years on behalf of their seemingly corrupt-AF former management; finally, they may pursue claims against their insurers for wrongful denial of coverage. All in, the debtors are seeking to maximize their estates for the purposes of broadening the potential pool for distribution to claimants. We’re all for that objective provided it can be done in a cost effective way — a rare accomplishment, these days, in bankruptcy.

*The stock, which had been trading at $1.31/share at market close on Friday, plummeted 51.45% on Monday upon the news of the bankruptcy filing. This prompted The Wall Street Journal’s Charley Grant to quip, “So much for efficient markets.” He continued:

Why the news took anyone by surprise, however, is more of a mystery. After all, Insys had given investors fair warning, just days after a federal jury convicted five former employees of engaging in a racketeering conspiracy to boost opioid sales. The company said in a report filed with the Securities and Exchange Commission that “it may be necessary... to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring.”

In case that hint was too subtle, investors got another one last week, when Insys agreed to settle criminal and civil claims with the Justice Department for $225 million.

He forgot to mention another sign. In March we wrote:

Opioids (Long Professional Retentions). Insys Therapeutics Inc. ($INSY) has JMP Securities pursuing a divestiture of its fentanyl sublinqual spray, Subsys. The company revealed this week that Lazard has now also been hired. Per Reuters, a company spokesperson stated:

“We engaged Lazard thereafter to advise us on our capital planning and strategic alternatives across the business. These are two independent efforts.”

What kind of independent effort? Color us suspicious.

“Color us suspicious” was not-so-subtle code for “this f*cker is going to file for bankruptcy, people.” So, to Mr. Grant’s point, it should have been abundantly clear what was going to happen to any market follower actually paying attention.

• Jurisdiction: D. of Delaware (Judge Gross)

• Capital Structure: No funded debt.

• Professionals:

  • Legal: Weil Gotshal & Manges LLP (Gary Holtzer, Ronit Berkovich, Candace Arthur, Olga Peshko, Brenda Funk, Ramsey Scofield, Peter Isakoff ) & (local) Richards Layton & Finger PA (John Knight, Paul Heath, Amanda Steele, Zachary Schapiro)

  • Board of Directors: John McKenna, Trudy Vanhove, Rohit Vishnoi, Vaseem Mahboob, Andrew Long, Elizabeth Bohlen

  • Financial Advisor: FTI Consulting Inc.

  • Investment Banker: Lazard Freres & Co. LLC (Andrew Yearley)

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

• Other Parties in Interest:

  • Official Committee of Unsecured Creditors (McKesson Corporation, Infirmary Health Hospitals Inc., Louisiana Health Service & Indemnity Co. d/b/a Blue Cross and Blue Shield of Louisiana, LifePoint Health Inc., Deborah Fuller, Julie Kay, James Starling Jr., Angela Mistrulli-Cantone, Lisa Mencucci)

    • Legal: Akin Gump Strauss Hauer & Feld LLP (Daniel Golden, Mitchell Hurley, Arik Preis) & (local) Bayard PA (Justin Alberto, Erin Fay, Daniel Brogan)

  • MDL Plaintiffs

    • Legal: Brown Rudnick LLP (David Molton, Gerard Cicero, Kenneth Aulet, Chelsea Mullarney, Steven Pohl) & Blank Rome LLP (Stanley Tarr, Victoria Guilfoyle) & Gilbert LLP (Scott Gilbert, Craig Litherland, Kami Quinn, Jenna Hudson)
      

Update 7/7/19 #244

New Chapter 11 Bankruptcy Filing - Triangle Petroleum Corporation

Triangle Petroleum Corporation

May 8, 2019

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

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

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

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

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

• Jurisdiction: D. of Delaware (Judge Walrath)

• Capital Structure: see above.

• Professionals:

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

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

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

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

• Other Parties in Interest:

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

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

New Chapter 11 Bankruptcy Filing - Kona Grill Inc. ($KONA)

Kona Grill Inc.

April 30, 2019

Let’s be honest: we’ve given this sh*t stain of a company far too much coverage given its size. Yet, it’s part of a broader casual dining narrative that is important to follow and, significantly, we took it upon ourselves to highlight how this thing was SO CLEARLY headed towards bankruptcy a year ago considering the company is (somewhat inexplicably) publicly-traded ($KONA). We first mentioned it in this Members’-only piece in April 2018. We dug deeper in this Members’-only briefing on August 2018. Additional mentions came here, here, here (“…there is no way this thing DOESN’T end up in bankruptcy court soon. It just blew out its board. It is on to its umpteenth CEO in a matter of years. Revenues fell 15.7% in the most recent reported quarter. Same-store sales fell 14.1%. 14.1%!!!! It’s just a matter of ‘when’ at this point.”), and, finally, as recently as April 28, 2019, here, wherein we wrote “[s]tick a fork in it.”

Well, stick a fork in it, indeed. The company and several affiliated companies are now chapter 11 debtors in the District of Delaware.

To refresh your recollection, the company is a casual dining restaurant chain with 27 locations (down from 40+ locations when we first started discussing the company over a year ago). “The restaurants feature contemporary American favorites, award-winning sushi and an extensive selection of alcoholic beverages.” Award winning sushi, huh? We did some googling and were unable to ascertain which fine organization conferred upon Kona Grill Inc. an award for its fine sushi. But we digress.

As you might expect from such a long-time-coming sh*t show, the debtors’ first day filing papers are pure comedy chock full of hyperbolic bull sh*t. It’s amusing what the debtors say and it’s laughable what they don’t say. The first day declaration reads like marketing materials: it states that the company offers “an upscale contemporary ambience” with an “exceptional” dining experience and a “legendary” happy hour. The fact that this company is in bankruptcy belies the claim that the experience is exceptional. As for legend, Arya Stark is a legend; Tony Stark is a legend. Michael Jordan is a legend. Kona Grill has a bar that serves drinks. We can assure you with 100% certainty that there is absolutely nothing legendary about it. Indeed, revenues in fiscal ‘18 were $156.9mm, down 12.4% YOY, and, as of the petition date, the company had a meaningfully non-legendary $1.2mm of cash on hand. Legendary, our a$$es.

The company is party to a $33.2mm credit agreement split between a revolving loan and a term loan and has been in a state of perpetual amendment since Q1 2017. The company also owes unsecured trade creditors $8mm.

Why is the company in bankruptcy? Here’s where we get comedy by omission. Yes, sure, they acknowledge that they doubled their restaurants between ‘13 and ‘17, spent a ton on marketing to reverse negative same-store sale trends, and then engaged in an ill-advised stock repurchase program in 2016/2017, further draining much needed liquidity. Thereafter, the company was forced to deploy the standard playbook: cease opening new locations, shutter some underperforming stores (PETITION Note: the company filed a motion seeking to reject 18 leases already), fire people, cut back on training and staffing, etc. G-d help the people who actually ate there during this period: we can only imagine what happened to the food quality. What the company doesn’t say, though, is that there has been a revolving door of CEOs. We suppose the debtors ought to be commended for not completely throwing prior management teams under the bus. This may have something to do with active lawsuits between the company and a former CEO.

What’s crazy is that the company didn’t hire a banker until March 2019. This is a company that should have been marketed long ago. Notably, there’s no stalking horse buyer lined up. And while the company does have a commitment from KeyBank for $39.2mm of DIP financing (of which only $6mm is new money), the company also has a hard deadline of August 9, 2019 to avoid a default. Will it be able to find a buyer now?

We suppose we’ll find out how “legendary” things are after all.

• Jurisdiction: D. of Delaware (Judge )

• Capital Structure: $33.2mm

• Professionals:

  • Legal: Pachulski Stang Ziehl & Jones LLP (James O’Neill, John Lucas, Jeremy Richards)

  • Financial Advisor/CRO: Alvarez & Marsal LLC (Christopher Wells, Jonathan Tibus)

  • Investment Banker: Piper Jaffrey

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

• Other Parties in Interest:

  • DIP Agent: KeyBank National Association

    • Legal: Buchanan Ingersoll & Rooney PC (Mary Caloway)

⛽️New Chapter 11 Bankruptcy Filing - Jones Energy Inc.⛽️

Jones Energy Inc.

April 14, 2019

Austin-based independent oil and natural gas E&P company, Jones Energy Inc., filed a prepackaged chapter 11 bankruptcy to restructure its $1.009b of debt ($450mm senior secured first lien notes and $559mm unsecured notes across two tranches). In case you didn’t realize, oil and gas exploration and production is a capital intensive business.

The company operates primarily in the Anadarko Basin in Oklahoma and Texas. Its territory is the aggregation of acreage accumulated over the years, including the 2009 purchase of Crusader Energy Group Inc. out of bankruptcy for $240.5mm in cash.

We’re not going to belabor the point as to why this company is in bankruptcy: the narrative is no different than most other oil and gas companies that have found their way into bankruptcy court over the last several years. Indeed, this chart about sums things up nicely:

It’s really just a miracle that it didn’t file sooner. Why hadn’t it? Per the company:

…the Debtors consummated a series of liquidity enhancing transactions, including equity raises, debt repurchases, strategic acquisitions, non-core asset sales, and modifications of their operations to reduce their workforce and drilling activities. This included a Company-wide headcount reduction in 2016 resulting in the termination of approximately 30% of the Debtors’ total workforce, as well as halting drilling activity spanning several months during the worst of the historic commodity downturn.

But…well…the debt. As in, there’s too much of it.

And debt service costs were too damn high. In turn, the company’s securities traded too damn low:

Source: Disclosure Statement

What’s more interesting here is the process that unfolded. In February 2018, the company issued $450mm of 9.25% ‘23 senior secured first lien notes. The proceeds were used to repay the company’s senior secured reserve-based facility and eliminate the restrictive covenants contained therein. The company also hoped to use the proceeds to repurchase some of its senior unsecured notes at a meaningful discount to par. In a rare — yet increasingly common — show of unity, however, the company’s unsecured lenders thwarted these efforts by binding together pursuant to a “cooperation agreement” and telling the company to take its pathetic offer and pound sand. (PETITION Note: its amazing what lenders can achieve if they can solve for a collective action problem). This initiated a process that ultimately led to the transaction commemorated in the company’s announces restructuring support agreement.

So what now? The senior secured lenders will equitize their debt and come out with 96% of the common stock in the reorganized entity. Holders of unsecured debt will get 4% equity and warrants (exercisable for up to a 15% ownership stake in the reorganized company), both subject to dilution by equity issued to management under a “Management Incentive Plan.” The company has a commitment for $20mm of exit financing lined up (with the option for replacement financing of up to $150mm).

Hopefully the company will have better luck without the albatross of so much debt hanging over it.

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

• Capital Structure: $450mm 9.25% ‘23 senior secured first lien notes (UMB Bank NA), $559mm 6.75% ‘22 and 9.25% ‘23 unsecured notes (Wells Fargo Bank NA)

• Professionals:

  • Legal: Kirkland & Ellis LLP (James Sprayragen, Christopher Marcus, Brian Schartz, Anthony Grossi, Ana Rotman, Rebecca Blake Chaikin, Mark McKane, Brett Newman, Kevin Chang) & (local) Jackson Walker LLP (Matthew Cavenaugh, Jennifer Wertz)

  • Independent Directors: Tara Lewis, L. Spencer Wells

  • Financial Advisor: Alvarez & Marsal LLC (Ryan Omohundro)

  • Investment Banker: Evercore Group LLC (Daniel Aronson)

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

• Other Parties in Interest:

  • Ad Hoc Group of First Lien Noteholders

    • Legal: Milbank LLP (Dennis Dunne, Evan Fleck, Michael Price) & (local) Porter Hedges LLP (John Higgins, Eric English, Genevieve Graham)

    • Financial Advisor: Lazard Freres & Co. LLC

  • Ad Hoc Group of Crossover Holders

    • Legal: Davis Polk & Wardwell LLP (Brian Resnick, Benjamin Schak) & (local) Haynes and Boone LLP (Charlie Beckham, Kelli Norfleet)

    • Financial Advisor: Houlihan Lokey Capital Inc.

  • Metalmark Capital LLC

    • Legal: Vinson & Elkins LLP (Andrew Geppert, David Meyer, Jessica Peet, Michael Garza)

Updated 4/15/19 2:05 CT

🖥New Chapter 11 Bankruptcy Filing - Collective Inc. (Visto)🖥

Collective Inc. (Visto)

November 29, 2018

Adtech isn’t exactly known for its sexiness. SaaS (software-as-a-service), on the other hand, has been on fire lately. “Recurring revenue” is everyone’s jam these days (yes, even ours) and SaaS products are the key drivers of recurring revenue. This would explain some of the REDONKULOUS multiples that we’ve been seeing of late in the SaaS space. Just last week SAP purchased Qualtrics, a Utah-based provider of experience management software, for $8b, or 23x TTM revenue. That’s no typo: 23x!

Source: tomtunguz.com

Of course, none of these companies, to our knowledge, was an adtech company. So, what is the market for a SaaS adtech company? Collective Inc. a/k/a Visto is about to find out.

Collective Inc. is a SaaS company that…

“…allows brands, advertising agencies, and advertisers to purchase and place advertising and monitor and evaluate data with respect thereto. Collective also offers managed services to media and publisher clients, where Collective employees provide proposals to clients, and then implement and monitor advertising campaigns for those clients.

It was once a high-flying startup that grew to $174mm in revenues in 2013 and was on the verge of an IPO. But…

within the next twelve months and before any IPO went to market, Collective began experiencing a downturn in its traditional managed service business due to a significant decrease in buys from large advertising agency holding companies who were beginning to build their own internal advertising trading desks to buy digital ads themselves instead of using companies like Collective to buy it for them. As a result, the IPO was pulled.

Consequently, Collective pivoted to SaaS; it is now finding that transition to be costly and ineffective; its net loss in 2017 was $15.7mm; and, so, it needs a lifeline. Collective is lucky that the secured lender and agent on its $26mm credit facility ($17.285mm funded), National Electric Benefit Fund (“NEBF”) and RCP Advisors 2 LLC, respectively, are patient. They have been largely forgiving as Collective runs a sale process that has largely been a failure.

Now, though, the company has filed for chapter 11 to effectuate a 363 sale that will convey its assets to a prospective buyer “free and clear” of prior liens and encumbrances. Zeta Global Holdings Corp. emerged as a stalking horse purchaser and the proposed purchase price is an all-(Zeta)-stock transaction worth approximately $15mm. NEBF will fund the case via a $4mm DIP.

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

• Capital Structure: $26mm debt (National Electric Benefit Fund)

• Company Professionals:

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

  • Investment Banker: Oaklins DeSilva & Phillips LLC

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

• Other Parties in Interest:

  • Lender: National Electric Benefit Fund

    • Legal: Troutman Sanders LLP (Brett Goodman, W. Peter Beardsley)

  • Official Committee of Unsecured Creditors

    • Legal: Cullen and Dykman LLP (Michelle McMahon, Nicole Stefanelli)

Updated 1/11/19

New Chapter 11 Bankruptcy Filing - LBI Media Inc.

LBI Media Inc.

November 21, 2018

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

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

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

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

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

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

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

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

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

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

• Jurisdiction: D. of Delaware (Judge Lane)

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

• Company Professionals:

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

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

  • Financial Advisor: Alvarez & Marsal North America LLC

  • Investment Banker: Guggenheim Securities LLC

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

• Other Parties in Interest:

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

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

  • First Lien Trustee: Wilmington Savings Fund Society FSB

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

  • Collateral Trustee for First Lien Notes: Credit Suisse AG

    • Legal: Locke Lorde LLP (Juliane Dziobak)

  • Ad Hoc Group of (Junior) Second Lien Noteholders

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

  • Ad Hoc Group of Holdco Noteholders

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

Updated 11/21/18 at 8:27 CT