New Chapter 11 Bankruptcy Filing - Briggs & Stratton Corporation ($BGG)

Briggs & Stratton Corporation

July 20, 2020

You may not know of Briggs & Stratton Corporation ($BGG) but it’s likely that you’ve used one of its products. Its small gasoline engines are used in outdoor power equipment like lawn mowers, and it designs, manufactures and markets power generation, pressure washer, lawn and garden, turf care and job site products. Its engines even power go-karts! It offers a variety of different brands and its products are in 100 countries around the world.

The company has a rich history. In Wisconsin circa 1908, inventor Stephen Briggs and investor Harold Stratton co-founded what, two years later, would be an auto and auto parts manufacturer incorporated as Briggs & Stratton. The two men added small gasoline engines to their product suite, powering early washing machines and reel mowers. The company went public in 1928. For decades thereafter, the business ventured into agricultural and military applications (producing generators for the WWII effort), ultimately revolutionizing the first lightweight aluminum engine in 1953. The post-War suburbian boom helped fuel the company’s growth in the 50s and 60s. Lots of lawns to mow! The company has iterated a lot since then: it no longer produces auto components, for instance. The core business is currently focused around two segments: engines (primarily sold to OEMs of lawn and garden equipment) and products (i.e., outdoor power equipment, job site products, etc.).

Unfortunately, a rich history doesn’t insulate companies from distress — a lesson that many long-standing companies have learned lately as the bankruptcy bin fills to the brim with companies with 100+ year histories (see, also, BJ Services LLC, Brooks Brothers Group, RTW Retailwinds, Congoleum Corporation). Alas, the company and four affiliates (the “debtors”) also could not avoid chapter 11, filing early Monday in the Eastern District of Missouri, and citing (i) cautious ordering patterns from channel partners, (ii) weather, (iii) Sears’ demise and bankruptcy (bankruptcy dominos!!), (iv) consumer preference shifts, and (v) China, for its troubles. With approximately $200mm of notes maturing at year end (Dec) and a springing maturity of 9/15/20 if the notes are still outstanding by then, the debtors, to top things off, faced real challenges related to the balance sheet.

Because of all of the aforementioned factors, the debtors implemented a “strategic repositioning plan” that included shutting plants, laying off workers, suspending employee benefits (including underfunded and unfunded pensions), lowering capital and discretionary spending, eliminating a shareholder dividend and suspending a share repurchase program. COVID-19, as we’ve seen over and over again, got in the way of these efforts. “The preliminary estimate of the sales decline caused by the pandemic for the fiscal fourth quarter was $157 million and for the fiscal year was $197 million.” 😬

The good news is that the debtors have a buyer in the wings. Bucephalus Buyer LLC, a dramatically-named affiliate of KPS Capital Partners LP entered into a stalking horse purchase agreement with the debtors pursuant to which it would buy the debtors’ assets and equity interests in non-debtor subsidiaries for $550m in cash plus the assumption of certain liabilities. To fund this process (and take out the ABL in full), the debtors obtained (i) a commitment from prepetition ABL lender, JPMorgan Chase Bank NA, for a $412.5mm DIP ABL (L+3.5%), (ii) a commitment from KPS for a $265mm DIP Term Loan facility (L+7%) and (iii) consent to use the ABL lenders’ cash collateral. The DIP agreement mandates that a qualified sale order be entered by the bankruptcy court no later than September 24, 2020 (subject to caveats that would push the date out to December 31, 2020).

• Jurisdiction: E.D. of Missouri (Judge Schermer)

• Capital Structure: $260.4mm North American ABL, $53mm LOCs, $12.4mm Swiss ABL (JP Morgan Chase Bank NA), 202.7mm unsecured notes (Wilmington Trust NA)

• Professionals:

  • Legal: Weil Gotshal & Manges LLP (Gary Holtzer, Ronit Berkovich, Debora Hoehne, Martha Martir, Andrew Citron, Edward Soto, Janiel Jodi-Ann Myers, Lauren Alexander, Corey Berman) & Carmody MacDonald PC (Robert Eggmann, Christopher Lawhorn, Danielle Suberi, Thomas Riske, Lindsay Leible Combs, Angela Drumm)

  • Financial Advisor: EY (Jeffrey Ficks)

  • Investment Banker: Houlihan Lokey Capital Inc. (Reid Snellenbarger, Jeffrey Lewis)

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

• Other Parties in Interest:

  • Prepetition & DIP Agent ($677.5mm): JPMorgan Chase Bank NA

    • Legal: Latham & Watkins LLP (Peter Knight, Jonathan Gordon)

  • Stalking Horse Purchaser ($550mm): Bucephalus Buyer, LLC (KPS Capital Partners LP)

    • Legal: Kirkland & Ellis LLP (Chad Husnick, Gregory Pesce, Claire Stephens, Guy Macarol) & Armstrong Teasdale LLP (Richard Engel)

  • Ad Hoc Group of Noteholders

    • Legal: Gibson Dunn & Crutcher LLP

    • Financial Advisor: Imperial Capital LLC

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

Lakeland Tours LLC (d/b/a WorldStrides)

July 20, 2020

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

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

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

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

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

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

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

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

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

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

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

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

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

And they add:

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

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

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

_____

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

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

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

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

• Professionals:

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

  • DIrectors: Bob Gobel, Lisa Mayr (ID)

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

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

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

• Other Parties in Interest:

  • Prepetition & DIP Agent: Goldman Sachs Bank USA

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

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

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

  • Sponsors: Eurazeo North America & Primavera Capital Limited

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

    • Financial Advisor: PJT Partners LP

  • Ad Hoc Group of Consenting Lenders

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

    • Financial Advisor: Rothschild & Co.

New Chapter 11 Bankruptcy Filing - Jason Industries Inc. ($JASN)

Jason Industries Inc.

June 24, 2020

Wisconsin-based Jason Industries Inc. ($JASN) and seven affiliates (the “debtors”) filed a long-anticipated (prepackaged) chapter 11 bankruptcy case in the Southern District of New York on Wednesday — the latest in a line of manufacturers (e.g., Pyxus International Inc., Libbey Glass Inc., Exide Holdings Inc., Pace Industries LLC) to wind its way into bankruptcy court.

The company is an amalgam of decades of growth by acquisition: it launched its components and seating businesses with acquisitions in ‘93 and ‘95, respectively. Everything appeared to be hunky-dory heading into the Great Financial Crisis when things took a turn for the worse.

And so this isn’t the company’s first rodeo in distress. Back in ‘08-’09, the company engaged in a recapitalization transaction supported by Falcon Investment Advisors LLC and Hamilton Lane Advisors; it persevered through the downturn and ultimately sold to a special-purpose-acquisition-company (Quinpairo Acquisition Corp.) in 2014 for $538.6mm. The acquisition was financed through a combination of (i) the $172.5mm raised by the SPAC in its ‘13 IPO, (ii) rollover equity from the aforementioned sponsors (and management), and (iii) $420mm of first and second lien debt. Stick a pin in that last number: it comes back to haunt the debtors. 👻

In the years since, the company streamlined its operations — selling off assets (i.e., its fiber solutions business and a metal components business) and consolidating around two primary business segments. Through their industrial segment, the debtors manufacture a bunch of stuff used for industrial and infrastructure applications; and through their engineered components segment, the debtors manufacture (a) motorcycle seats, (b) operator seats for construction, agriculture, law and turf care and other industrial equipment markets, and (c) seating for the power sports market. Said another way, the company is heavily indexed to the automotive, heavy truck, steel and construction markets. Powered by approximately 700 employees in the US, the company did $338mm in net sales in 2019.

And that is part of the problem. $338mm in net sales represented an 8.2% ($30.1mm) dropoff from 2018. Adjusted EBITDA declined from $36.7mm in ‘18 to $24.8mm in ‘19. Both segments have been underperforming for years. The question is why?

The debtors cite a dramatic dropoff in demand in ‘19. They note:

This reduction was largely caused by reduced end market demand in key industries across the portfolio, specifically, weak economic conditions in Europe and Asia, lower industrial production in North America, and softening end market demand from OEM customers. For example, since as early as the first quarter of 2019, the Company has experienced reduced OEM build and channel inventory destocking. These problems were exacerbated by the operational disruption and demand reduction caused by the COVID-19 pandemic.

Consequently, the debtors busted out the standard playbook to try and manage liquidity (while parallel-tracking a fruitless pre-petition sale and marketing effort). They (a) intensified focus on growing market segments, (b) reduced capital investment in non-core businesses, (c) cut/furloughed labor and instituted pay reductions for execs and other employees (and eliminated a 401(k) match program), (d) closed plants and manufacturing facilities and deferred rent payments or negotiated reduced rent at leased properties, (e) accelerated the consolidation of plants acquired in a recent acquisition, and (f) invested in automation at their facilities to reduce future operating costs (read: replace expensive human beings) and expand margins. Still, the debtors struggled.

…the pandemic’s impact on orders and revenues, combined with preexisting fixed costs and debt service requirements, have constrained available working capital, reduced profitability and cash flow, and significantly impaired the Company’s ability to adequately finance operations.

Which gets us back to the capital structure:

Given where EBITDA numbers were coming in, this thing’s leverage ratio was through the roof. More to the point, the debtors deferred a March 31 second lien interest payment and had been operating under a series of forbearance agreements ever since. Luckily, the capital structure isn’t all-too-complicated and lends itself well to a prepackaged bankruptcy. And so here we are with a restructuring support agreement and proposed prepackaged plan which will effectively turn the company over to the first lien term lenders and, but for some warrants, wipe out the second lien term lenders. Here’s how the above capital structure breaks down:

Source: PETITION LLC

A couple of notable features here:

• Drop it Likes its Hot. There’s a “first lien put option” baked into the plan pursuant to which any first lien term lender who doesn’t want to own equity or the junior converts can “put” its pro rata share of that equity/converts to a first lien lender, Pelican Loan Advisors III LLC (or lenders as the case may be), which has agreed to backstop this baby. Pelican is managed by Monomoy Capital Partners.

• F*ck You Pay Me. Those first lien lenders who consented to forbearances all of those months are about to get paaaaaaayyyyyyyyydd. They’ll receive a pro rated share of and interest in $10mm worth of open market purchases by the debtors of first lien credit agreement claims held by consenting first lien lenders AND a forbearance fee equal to 4.00% of the principal amount of the first lien credit agreement loans held by the consenting lenders as of a date certain. The open market purchases were, presumably, accomplished prior to the filing with 2% of the fee already paid and the remaining 2% to be paid-in-kind on the earlier of the termination date of the RSA or the plan effective date.

• It’s a Trap! Warrants are technically going to be issued to the first lien term lenders and “gifted” to the second lien lenders. But only if they vote to accept the plan. Given the midpoint total enterprise value of $200mm and resultant deficiency claim, this is a nice absolute priority rule workaround. As reflected in the graphic above, the allowed deficiency claim of $64.9mm is obviously impaired and will get a big fat 🍩.

And so this is what the capital structure will look upon emergence:

The first lien lenders have consented to the use of their cash collateral to fund the cases.*

* ⚡️July 15, 2020 Update: The Second Lien Ad Hoc Committee, however, filed a limited objection to the cash collateral motion on the basis that a final order should (a) limit any credit bid to their collateral (noting that a material amount of assets — including 35% of the equity in foreign subs — are excluded from the first lien lenders’ collateral package, and (b) require a finding that there’s diminution of value of the first lien lenders’ collateral such that they, despite providing no new financing, ought to be granted a superpriority lien on previously unencumbered assets. The Committee also previewed objections it will have to the plan of reorganization. For a purportedly “prepackaged” chapter 11, this one looks like it could be more contentious than most. A final hearing on the cash collateral motion is set for July 22, 2020.⚡️

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

• Capital Structure: see above.

• Company Professionals:

  • Legal: Kirkland & Ellis LLP (Jonathan Henes, Emily Geier, Laura Krucks, Dan Latona, Jake Gordon, Yates French)

  • Financial Advisor: AlixPartners LLP (Rebecca Roof)

  • Investment Banker: Moelis & Company LLC (Zul Jamal)

  • Claims Agent: Epiq Bankruptcy Solutions LLC

• Other Parties in Interest:

  • Large equityholder: Wynnefield Capital Management LLC

  • Ad Hoc Group of First Lien Creditors (Credit Suisse Asset Management LLC, Voya CLO Ltd., American Money Management Corp., First Eagle Alternative Credit LLC, Angel Island Capital Services LLC, Monomoy Capital Partners LP, Z Capital Partners LLC)

    • Legal: Weil Gotshal & Manges LLP (Matthew Barr, Ryan Preston Dahl, Alexander Welch)

    • Financial Advisor: Houlihan Lokey Capital Inc.

  • First Lien Agent: The Bank of New York Mellon

  • Second Lien Agent: Wilmington Savings Fund Society FSB

    • Legal: Seward & Kissel LLP (John Ashmead, Gregg Bateman)

  • Ad Hoc Group of Second Lien Lenders: Corre Partners Management LLC, Newport Global Advisors

    • Legal: Brown Rudnick LLP (Steve Pohl, Shari Dwoskin, Kenneth Aulet)

    • Financial Advisor: DC Advisory LLC

Update July 17, 2020

New Chapter 33 Bankruptcy Filing - NorthEast Gas Generation LLC

NorthEast Gas Generation LLC

June 18, 2020

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

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

• Jurisdiction: D. of Delaware (Judge Walrath)

• Capital Structure: $585.2mm

• Professionals:

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

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Houlihan Lokey Capital Inc.

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

• Other Parties in Interest:

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

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

  • Talen Energy Supply LLC

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

🔋New Chapter 11 Bankruptcy Filing - Exide Holdings Inc.🔋

Exide Holdings Inc.

May 19, 2020

Georgia-based Exide Holdings Inc. and four affiliates (the “debtors”), among the world’s largest producers and recyclers of lead-acid batteries used in cars, boats, golf carts and more, filed for chapter 11 bankruptcy in the District of Delaware earlier this week. The filing sparked an entire industry to ask “is it a Chapter 22 or a Chapter 33?” The answer, depending upon your look-back period, is the latter. The fairer answer is probably the former and even that was 7 years ago with emergence 5 years ago (PETITION Note: the Exide Creditors’ Liquidating Trust had to make a notice of appearance in these new cases so, there’s that). Going back nearly two decades seems to be an impossible standard to hold any business to but 5-7 years seems much fairer.

Since we’re discussing labels, here’s another one: failure. Per the debtors:

Notwithstanding the Company’s efforts to implement its business plan following its emergence from the 2013 Chapter 11 Case and the support of its new owners and lenders, the Company continued to face liquidity, performance, and operational challenges that were more persistent and widespread than anticipated. Coupled with adverse industry and market factors as well as substantial environmental costs, these challenges have resulted in reduced liquidity.

Sooooo…that sucks. We admit it: we were hoping that this was a disruption story. That Elon Musk and the increasingly large cohort of lithium-ion battery using OEMs pushing out electric vehicles were putting the lead-acid battery manufacturers out to pasture. But that is not a state reason for this chapter 3…uh…chapter 2…uh, whatever the f*ck this is. Rather, the debtors state that their post-emergence liquidity issues stem from (a) mounting environmental remediation costs and litigation, (b) rising production costs (PETITION Note: because the debtors shut two recycling facilities, they are now subject to pricing pressures from outside manufacturers rather than just using their own recycled inputs), (c) operational inefficiencies caused by legacy mixed-use facilities, and (d), of course…wait for it…COVID-19. Duck for COVID-cover folks! The debtors say that the pandemic’s impact on demand for product is the cherry on top.

The debtors’ capital structure doesn’t help. Look at this beaut:

With that much funded debt, the debtors’ leverage ratio stands at 9.2x. Debt service averages approximately $26.8mm/year.

So, confronted with all of these factors, the debtors have been engaged in a marketing process since 2018. The continued deterioration of the business, however, ultimately led to a restructuring path and now the debtors intend to use the bankruptcy process to effectuate a sale of (i) the entire business or (ii) the Americas business and/or (iii) the sale of its Europe/Rest-of-World business or (iv) a liquidation (PETITION Note: the debtors fall into chapter 11 largely separated into four main business groups). The Ad Hoc Group has submitted a binding credit bid for the Europe/ROW business group which will serve as a stalking horse bid; they have also committed $15mm in DIP financing to service certain non-debtor affiliates in Europe with an additional $25mm DIP commitment for the administration of the cases coming from Blue Torch Capital LP. The debtors hope to go “effective” by the end of August: this means that everyone has a lot of work to do to try and and locate a buyer for the rest of the debtors’ businesses in the interim.

• Jurisdiction: D. of Delaware (Judge Sontchi)

• Capital Structure:

• Professionals:

  • Legal: Weil Gotshal & Manges LLP (Ray Schrock, Jacqueline Marcus, Sunny Singh, Samuel Mendez, Alyssa Kutner, Jason Hufendick) & Richards Layton & Finger PA (Daniel DeFranceschi, Zachary Shapiro, Brendan Schlauch)

  • Independent Directors: Alan Carr, William Transier, Harvey Tepner, Mark Barberio

  • Financial Advisor/CRO: Ankura Consulting (Roy Messing)

  • Investment Banker: Houlihan Lokey Capital Inc.

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

• Other Parties in Interest:

  • Prepetition ABL Agent: Bank of America NA

    • Legal: Otterbourg PC (Daniel Fiorillo, David Morse, Jonathan Helfat)

  • Indenture Trustee

    • Legal: Arent Fox LLP (Andrew Silfen, Jordana Renert)

  • DIP Agent ($40mm): Blue Torch Capital LP

    • Legal: Gibson Dunn & Crutcher LLP (Robert Klyman, Matthew Bouslog, Michael Farag) & Cole Schotz PC (Norman Pernick, Patrick Reilley)

  • Ad Hoc Group

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Alice Belisle Eaton, Robert Britton, Eugene Park, Claudia Tobler, Jacqueline Rubin, Douglas Keeton, David Weiss, David Giller) & Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Sean Greecher, Andrew Magaziner, Ian Bambrick)

  • Large equityholders: Mackay Shields LLC, AllianceBernstein LLP, D.E. Shaw Galvanic Portfolios LLC, Neuberger Berman Group LLC

  • Exide Creditors’ Liquidating Trust

    • Legal: Kelley Drye & Warren LLP (Dane Kane, Konstantinos Katsionis)

New Chapter 11 Bankruptcy Filing - J.C. Penney Company Inc. ($JCP)

J.C. Penney Company Inc.

May 15, 2020

Let’s be clear about something right off the bat. Encino Man, Captain America and Austin Powers could all suddenly surface from being entombed in ice for decades and even THEY wouldn’t be surprised that Texas-based J.C. Penney Company Inc. (and 17 affiliates, the “debtors”) filed for chapter 11 bankruptcy.

There are a couple of ways to look at this one.

First, there’s the debtors’ way. Not one to squander a solid opportunity, the debtors dive under “COVID Cover”:

“Before the pandemic, the Company had a substantial liquidity cushion, was improving its operations, and was proactively engaging with creditors to deleverage its capital structure and extend its debt maturities to build a healthier balance sheet. Unfortunately, that progress was wiped out with the onset of COVID-19. And now, the Company is unable to maintain its upward trajectory through its “Plan for Renewal.” Moreover, following the temporary shutdown of its 846 brick-and-mortar stores, the Company is unable to responsibly pay the upcoming debt service on its over-burdened capital structure.”

The debtors note that since Jill Soltau became CEO on October 2, 2018, the debtors have been off to the races with their “Plan for Renewal” strategy. This strategy was focused on getting back to JCP’s fundamentals. It emphasized (a) offering compelling merchandise, (b) delivering an engaging experience, (c) driving traffic online and to stores (including providing buy online, pickup in store or curbside pickup — the latest in retail technology that literally everyone is doing), (d) fueling growth, and (e) developing a results-minded culture. The debtors are quick to point out that all of this smoky verbiage is leading to “meaningful progress” — something they define as “…having just achieved comparable store sales improvement in six of eight merchandise divisions in the second half of 2019 over the first half, and successfully meeting or exceeding guidance on all key financial objectives for the 2019 fiscal year.” The debtors further highlight:

The five financial objectives were: (a) Comparable stores sales were expected to be down between 7-8% (stores sales were down 7.7%); (b) adjusted comparable store sales, which excludes the impact of the Company’s exit from major appliances and in-store furniture categories were expected to be down in a range of 5-6% (adjusted comparable store sales down 5.6%); (c) cost of goods sold, as a rate of net sales was expected to decrease 150-200 basis points (decreased approximately 210 basis points over prior year, which resulted in improved gross margin); (d) adjusted EBITDA was $583 million (a 2.6% improvement over prior year); and (e) free cash flow for fiscal year 2019 was $145 million, beating the target of positive.

Not exactly the highest bar in certain respects but, sure, progress nonetheless we suppose. The debtors point out, on multiple occasions, that prior to COVID-19, its “…projections showed sufficient liquidity to maintain operations without any restructuring transaction.” Maintain being the operative word. Everyone knows the company is in the midst of a slow death.

To prolong life, the focus has been on and remains on high-margin goods (which explains the company getting out of low-margin furniture and appliances and a renewed focus on private label), reducing inventory, and developing a new look for JCP’s stores which, interestingly, appears to focus on the “experiential” element that everyone has ballyhooed over the last several years which is now, in a COVID world, somewhat tenuous.

Which gets us to the way the market has looked at this. The numbers paint an ugly picture. Total revenues went from $12.87b in fiscal year ‘18 to $12b in ‘19. Gross margin also declined from 36% to 34%. In the LTM as of 2/1/20 (pre-COVID), revenue was looking like $11.1b. Curious. But, yeah, sure COGs decreased as has SG&A. People still aren’t walking through the doors and buying sh*t though. A fact reflected by the stock price which has done nothing aside from slowly slide downward since new management onboarded:

All of this performance has also obviously called into question the debtors’ ability to grow into its capital structure:

Here’s a more detailed look at the breakdown of unsecured funded debt:

And yet, prior to COVID, the debt stack has more or less held up. Here is the chart for JCP’s ‘23 5.875% $500mm senior secured first lien notes from the date of new management’s start to today:

Here is the chart for JCP’s ‘25 8.624% $400mm second lien notes from the date of new management’s start to today:

And here is our absolute favorite: JCP’s ‘97 7.625% $500mm senior unsecured notes:

The fact that these notes were in the 20s mere months ago is mind-boggling.

We talk a lot about how bankruptcy filings are a way to tell a story. And, here, the debtors, while not trying to hide their stretched balance sheet nor the pains of brick-and-mortar department stores with a 846-store footprint, are certainly trying to spin a positive story about management and the new strategic direction — all while highlighting that there are pockets of value here. For instance, of those 846 stores, 387 of them are owned, including 110 operating on ground leases. The private brand portfolio — acquired over decades — represents 46% of total merchandise sales. The debtors also own six of their 11 distribution centers and warehouses.

With that in mind, prior to COVID, management and their advisors were trying to be proactive about the balance sheet — primarily the term loans and first lien secured notes maturing in 2023. In Q3 ‘19, the debtors engaged with their first lien noteholders, term lenders and second lien noteholders on proposals that would, among other things, address those maturities, promote liquidity, and reduce interest expense. According to the debtors, they came close. A distressed investor was poised to purchase more than $750mm of the term loans and, in connection with a new $360mm FILO facility, launch the first step of a broader process that would have kicked maturities out a few years. In exchange, the debtors would lien up unencumbered collateral (real estate). Enter COVID. The deal went up in smoke.

There’s a new “deal” in its stead. A restructuring support agreement filed along with the bankruptcy papers contemplates a new post-reorg operating company (“New JCP”) and a new REIT which will issue new common stock and new interests, respectively. Beyond that, not much is clear from the filing: the term sheet has a ton of blanks in it:

There’s clearly a lot of work to do here. There’s also the “Market Test” element which entails, among other things, running new financing processes, pursuing potential sale/leaseback transactions, and pursuing a sale of the all or part of the debtors’ assets. If the debtors don’t have a business plan by July 14 and binding commitments for third-party financing by August 15, the debtors are required to immediately cease pursuing a plan and must instead pursue a 363 of all of their assets. Said another way, if the economy continues to decline, consumer spending doesn’t recover, and credit markets tighten up, there’s a very good chance that JCP could liquidate. Remember: retail sales sunk to a record low in April. Is that peak pain? Or will things get worse as the unemployment rate takes root? Will people shop at JC Penney if they even shop at all? There are numerous challenges here.

The debtors will use cash collateral for now and later seek approval of a $900mm DIP credit facility of which $450mm will be new money (L+11.75% continues the trend of expensive retail DIPs). It matures in 180 days, giving the debtors 6 months to get this all done.

*****

A few more notes as there are definitely clear winners and losers here.

Let’s start with the losers:

1. The Malls. It’s one thing when one department store files for bankruptcy and sheds stores. It’s an entirely different story when several of them go bankrupt at the same time and shed stores. This is going to be a bloodbath. Already, the debtors have a motion on file seeking to reject 20 leases.

2. Nike Inc. ($NKE) & Adidas ($ADDYY). Perhaps they’re covered by 503(b)(9) status or maybe they can slickster their way into critical vendor status (all for which the debtors seek $15.1mm on an interim basis and $49.6mm on a final basis). Regardless, showing up among the top creditors in both the Stage Stores Inc. bankruptcy and now the J.C. Penney bankruptcy makes for a horrible week.

3. The Geniuses Who Invested in JCP Debt that Matures in 2097. As CNBC’s Michael Santoli noted, “This JC Penney issue fell only 77 years short of maturing money-good.”

4. Bill Ackman & Ron Johnson. This.

And here are the winners:

1. The New York Times. Imperfect as it may be, their digitalization efforts allow us all to read and marvel about the life of James Cash Penney, a name that so befitting of a Quentin Tarantino movie that you can easily imagine JC chillin with Jack Dalton on some crazy Hollywood adventure. We read it with sadness as he boasts of the Golden Rule and profit-sharing. Profits alone would be nice, let alone sharing.

2. Kirkland & Ellis LLP. Seriously. These guys are smoking it and have just OWNED retail. In the past eight days alone the firm has filed Stage Stores Inc., Neiman Marcus Group LTD LLC and now JCP. It’s a department store hat trick. Zoom out from retail and add in Ultra Petroleum Corp. and Intelsat SA and these folks are lucky they’re working from home. They can’t afford to waste any billable minutes on a commute at this point.

3. Management. They’re getting what they paid for AND, consequently, they’re getting paid. No doubt Kirkland marched in there months ago and pitched/promised management that they’d secure lucrative pay packages for them if hired and … BOOM! $7.5mm to four members of management!

---

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

• Capital Structure: See above.

• Professionals:

  • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Christopher Marcus, Aparna Yenamandra, Rebecca Blake Chaikin, Allyson Smith Weinhouse, Jake William Gordon) & Jackson Walker LLP (Matthew Cavenaugh, Jennifer Wertz, Kristhy Peguero, Veronica Polnick)

  • OpCo (JC Penney Corporation Inc.) Independent Directors: Alan Carr, Steven Panagos

    • Legal: Katten Muchin Rosenman LLP (Steven Reisman)

  • PropCo (JCP Real Estate Holdings LLC & JC Penney Properties LLC) Independent Directors: William Transier, Heather Summerfield

    • Legal: Quinn Emanuel Urquhart & Sullivan LLP

  • Financial Advisor: AlixPartners LLP (James Mesterharm, Deb Reiger-Paganis)

  • Investment Banker: Lazard Freres & Co. LLC (David Kurtz, Christian Tempke, Michael Weitz)

  • Store Closing Consultant: Gordon Brothers Retail Partners LLC

  • Real Estate Consultants: B. Riley Real Estate LLC & Cushman & Wakefield US Inc.

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

• Other Parties in Interest:

  • DIP Agent: GLAS USA LLC

    • Legal: Arnold & Porter Kaye Scholer

  • RCF Agent: Wells Fargo Bank NA

    • Legal: Otterbourg PC & Bracewell LLP (William Wood)

    • Financial Advisor: M-III Partners (Mo Meghli)

  • TL Agent: JPMorgan Chase Bank NA

  • Indenture Trustee: Wilmington Trust NA

  • Ad Hoc Group of Certain Term Loan Lenders & First Lien Noteholders & DIP Lenders (H/2 Capital Partners, Ares Capital Management, Silver Point Capital, KKR, Whitebox Advisors, Sculptor Capital Management, Brigade Capital Management, Apollo, Owl Creek Asset Management LP, Sixth Street Partners)

    • Legal: Milbank LLP (Dennis Dunne, Andrew Leblanc, Thomas Kreller, Brian Kinney) & Porter Hedges LLP

    • Financial Advisor: Houlihan Lokey (Saul Burian)

  • Second Lien Noteholders (GoldenTree Asset Management, Carlson, Contrarian Capital Management LLC, Littlejohn & Co.)

    • Legal: Stroock & Stroock & Lavan LLP (Kris Hansen) & Haynes and Boone LLP (Kelli Norfleet, Charles Beckham)

    • Financial Advisor: Evercore Group LLC (Roopesh Shah)

  • Large equityholder: BlackRock Inc. (13.85%)

New Chapter 11 Bankruptcy Filing - Neiman Marcus Group LTD LLC

Neiman Marcus Group LTD LLC

May 7, 2020

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

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

This case is all about “BIG.”

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

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

Big fees. More on this below.

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

Big value destruction.

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

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

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

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

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

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

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

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

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

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

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

• Capital Structure: See above.

• Professionals:

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

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

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

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

  • Independent Manager of Mariposa Intermediate Holdings LLC: Anthony Horton

    • Legal: Katten Muchin Rosenman LLP

  • Neiman Marcus Inc.

    • Legal: Latham & Watkins LLP (Jeffrey Bjork)

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

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

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

• Other Parties in Interest:

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

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

  • FILO Agent: TPG Specialty Lending Inc.

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

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

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

  • Second Lien Note Agent: Ankura Trust Company LLC

  • Third Lien Note Agent: Wilmington Trust NA

  • Unsecured Notes Indenture Trustee: UMB Bank NA

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

  • 2028 Debentures Agent: Wilmington Savings Fund Society FSB

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

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

    • Financial Advisor: Ducera Partners LLC

  • Ad Hoc Secured Noteholder Committee

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

    • Financial Advisor: Houlihan Lokey Capital Inc.

  • Large Creditor: Chanel Inc.

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

  • Large Creditor: Louis Vuitton USA Inc.

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

  • Large Creditor: Moncler USA Inc.

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

  • Marble Ridge Capital LP & Marble Ridge Master Fund LP

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

  • Mudrick Capital Management LP

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

  • Sponsor: CPP Investment Board USRE Inc.

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

  • Sponsor: Ares Capital Management

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

  • Official Committee of Unsecured Creditors

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

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

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

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

Frontier Communications Inc.

April 14, 2020

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

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

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

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

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

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

😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬😬

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

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

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

— JV (@AyyouEm) November 5, 2019

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

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

What else is the RSA about?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

______

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

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

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

Here it was a few months later:

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

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

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

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

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

• Professionals:

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

  • Directors: Kevin Beebe, Paul Keglevic, Mohsin Meghji

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

  • Investment Banker: Evercore Group LLC (Roopesh Shah)

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

• Other Parties in Interest:

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

  • Unsecured Notes Indenture Trustee: Bank of New York Mellon

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

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

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

  • Credit Agreement Administrative Agent: JPMorgan Chase Bank NA

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

  • DIP Agent: Goldman Sachs Bank USA

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

  • Ad Hoc First Lien Committee

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

    • Financial Advisor: PJT Partners LP

  • Second lien Ad Hoc Group

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

  • Ad Hoc Senior Notes Group

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

    • Financial Advisor: Ducera Partners LLC

  • Ad Hoc Committee of Frontier Noteholders

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

    • Financial Advisor: Houlihan Lokey Inc.

  • Ad Hoc Group of Subsidiary Debtholders

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

  • Official Committee of Unsecured Creditors

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

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

    • Investment Banker: UBS Securities LLC (Elizabeth LaPuma)

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

Pioneer Energy Services Corp.

March 1, 2019

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

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

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

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

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

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

And:

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

Annd:

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

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

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

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

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

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

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

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

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

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

• Capital Structure: see above.

• Professionals:

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

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Lazard Freres & Co. LLC

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

• Other Parties in Interest:

  • DIP Lender ($75mm): PNC Bank NA

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

  • Prepetition Term Loan Agent: Wilmington Trust NA

    • Legal: Covington & Burling LLP

  • Ad Hoc Group of Prepetition Term Loan Lenders

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

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

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

    • Financial Advisor: Houlihan Lokey

🐟New Chapter 11 Bankruptcy & CCAA Filing - Bumble Bee Parent Inc.🐟

Bumble Bee Parent Inc.

November 21, 2019

Tuna fish went from playing a role in the founding of one of the world’s largest private equity firms (Blackstone) to, in the case of Bumble Bee Parent Inc. and its affiliated debtors, another private-equity-backed (Lion Capital LLP) bankruptcy. Bumble Bee is the company behind “shelf-stable seafood” brands Bumble Bee, Brunswick, Sweet Sue, Snow’s Beach Cliff and Wild Selections (as well as a Canadian brand). It has been on a wild ride since 2017.

The bankruptcy narrative is that a plea agreement with the United States Department of Justice related to criminal charges of alleged price-fixing led to burdensome financial obligations by way of (a) a $25mm criminal fine) and (b) defense costs associated with an onslaught of subsequent civil lawsuits from direct and indirect purchasers of products claiming damages arising out of the alleged price-fixing. This overhang ultimately led to the debtors arriving at, but not quite tripping, an event of default with their term lenders in Q4 ‘18. The debtors have been operating under a series of short-term limited waivers ever since as they sought to explore strategic alternatives.

They have one. The debtors have a stalking horse purchase agreement with affiliates of FCF Co. Ltd. “for the sale of substantially all of the Company’s assets at a total implied enterprise value of up to $930.6 million, comprised of $275 million of cash, assumption of the remaining $17 million of the DOJ Fine, and the roll-over of up to $638.6 million in outstanding term loan indebtedness.” This sale will preserve the business as a going concern, preserve jobs, and provide an ongoing business partner to vendors and customers who consider the debtors to be partners.

Debtor first day bankruptcy papers are typically replete with spin and these papers are no different. In fact, necessarily so, they read like an offering memorandum. The papers discuss how the debtors provide “nutricious foods” that are “well-positioned to address a number of important consumer preferences and food trends, including shifts toward protein-rich, low-fat/low-calorie, and high Omega-3 fatty acid diets and trends towards eating multiple small or ‘snack-sized’ portions per day rather than the traditional three-square meals per day, and an overall increase in ‘snacking.’” They have the #1 or #2 market share in the shelf-stable seafood category and 41% of the US share of sales of canned albacore tuna. They also hold “approximately 13% of the U.S. share of sales of canned “light meat” tuna, approximately 12% of the share of sales in tuna pouches, approximately 71% of the U.S. share of sales in ready-to-eat tuna meals, approximately 40% of the U.S. share of sales in sardines, and approximately 16% of the U.S. share of sales in salmon.” It helps that they’re sold at virtually every major bigbox retailer, wholesale club, and grocery store. In 2018, the company had net sales of approximately $933m and adjusted EBITDA of $112.3m and the debtors’ U.S.-based operations contributed $722.2m of net sales and adjusted EBITDA of $86.3m. This is big business.

Putting aside its recent brush with the law, it also faces big market challenges. Questions persist about the safety and viability of shelf-stable seafood, particularly tuna. Indeed, there are headwinds. One sign of this may be that the Company’s overall Adjusted EBITDA has declined by approximately 20% from 2015 to 2018. We assume that, here, the EBITDA is adjusted to ex-out litigation costs.

And then there is this bonkers Wall Street Journal piece noting that consumption of canned tuna has fallen steadily compared with fresh and frozen fish. “Per capita consumption of canned tuna has dropped 42% in the three decades through 2016, according to the latest data available from the U.S. Department of Agriculture. And the downturn has continued, with sales of the fish slumping 4% by volume from 2013 to October 2018, data from market-research firm IRI show.”

This bit is off the charts: “In a country focused on convenience, canned tuna isn’t cutting it with consumers. Many can’t be bothered to open and drain the cans, or fetch utensils and dishes to eat the tuna. “A lot of millennials don’t even own can openers,” said Andy Mecs, vice president of marketing and innovation for Pittsburgh-based StarKist, a subsidiary of South Korea’s Dongwon Group.” To address this trend, the debtors have made forays into the fresh fish category. Otherwise, these challenges will play out another day. With a different owner.

A few more bankruptcy-specific points:

1. The debtors prevailed over a fee objection by the United States Trustee relating to interim access to $40mm of a proposed $80mm DIP term loan facility and immediate access to a $200mm DIP ABL. It seems that Weil Gotshal & Manges LLP, as counsel to DIP term lender Brookfield Principal Credit LLC had to give the UST a lesson in reverse-Seinfeld Logic. With lending, it is about “taking the reservation” rather than holding or using the reservation: once a debtor obtains a commitment to funds, those funds are committed and technically cannot be allocated elsewhere. The lenders argue, therefore, that fees are warranted upfront.

2. Critical vendor motions can sometimes be controversial because, naturally, everyone wants to jump the line with critical vendor designation. To get it, however, pursuant to standards set many many years ago, there’s a multi-prong test that must be satisfied. In a nutshell, the critical vendor payments are needed to prevent disruption of a debtors’ business, among other things. Here, the buyer, FCF Co Ltd., seeks critical vendor status to the tune of $51mm (out of a $77mm critical vendor ask). Some other creditors were like “Mmmmmm???” and insisted that the Judge postpone any interim payments until an official committee of unsecured creditors could be appointed. Despite protests from FCF’s counsel, Weil for the DIP lender, and the debtors, Judge Silverstein declined to rule on the motion at the hearing, highlighting the unusual nature of a prospective buyer seeking status. If they want the business, will they really walk away?

Despite these first day fireworks, this should be a relatively smooth one.

One last question it poses is this: will this be just the first of a clump of tuna-related bankruptcies? 🤔

• Jurisdiction: D. of Delaware (Judge Silverstein)

• Capital Structure: see below.

• Professionals:

  • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Alan Kornberg, Kelly Cornish, Claudia Tobler, Christopher Hopkins, Rich Ramirez, Aidan Synnot) & (local) Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Ryan Bartley, Ashley Jacobs, Elizabeth Justison, Jared Kochenash)

  • Board of Directors: Scott Vogel, Steve Panagos

  • Financial Advisor: AlixPartners LLP

  • Investment Banker: Houlihan Lokey Inc.

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

• Other Parties in Interest:

  • ABL Agent & DIP Agent: Wells Fargo Capital Finance LLC

    • Legal: Paul Hastings LLP (Andrew Tenzer, Michael Comerford, Peter Burke) & Womble Bond Dickinson US LLP (Matthew Ward, Morgan Patterson)

  • Term Loan Agent & Term Loan DIP Agent: Brookfield Principal Credit LLC

    • Legal: Weil Gotshal & Manges LLP (Matthew Barr, David Griffiths, Debora Hoehne, Yehudah Buchweitz) & Richards Layton & Finger PA (Paul Heath, Zachary Shapiro, Brendan Schlauch)

⛽️New Chapter 11 Bankruptcy Filing - Sheridan Holding Company II, LLC⛽️

Sheridan Holding Company II, LLC

September 15, 2019

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

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

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

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

*****

Some additional notes about this case:

• The hope to have confirmation in 30 days.

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

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

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

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

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

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

So, there’s that teeny weeny problemo.

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

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

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

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

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

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

• Professionals:

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

  • Board of Directors: Alan Carr, Jonathan Foster

    • Legal: Quinn Emanuel Urquhart & Sullivan LLP

  • Financial Advisor: AlixPartners LLP

  • Investment Banker: Evercore Group LLC

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

• Other Parties in Interest:

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

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

    • Financial Advisor: Houlihan Lokey Capital Inc.

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

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

    • Financial Advisor: Houlihan Lokey Capital Inc.

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

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

    • Financial Advisor: PJT Partners LP

  • Limited Partner: Wilberg Pincus LLC

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

Source: First Day Declaration

🔫New Chapter 11 Filing - Sportco Holdings Inc. (United Sporting Companies Inc.)🔫

SportCo Holdings Inc. (United Sporting Companies Inc.)

June 10, 2019

Callback to four previous PETITION pieces:

• Is that a Gun in Your Pocket or….? (Short #MAGA!!);

• New Chapter 11 - Remington Outdoor Company;

• Who is Financing Guns? (Remington Outdoor); and

• New Chapter 11 - AcuSport Corporation.

The first one — which was a tongue-in-cheek mock First Day Declaration we wrote in advance of Remington Outdoor Company’s chapter 11 bankruptcy — is, if we do say so ourselves, AN ABSOLUTE MUST READ. The same basic narrative could apply to the recent chapter 11 bankruptcy filing of Sportco Holdings Inc., a marketer and distributor of products and accessories for hunting, which filed for bankruptcy on Monday, June 10, 2019. Sportco’s customer base consists of 20k independent retailers covering all 50 states. But back to the “MUST READ.” There are some choice bits there:

Murica!! F*#& Yeah!! 

Remington (f/k/a Freedom Group) is "Freedom Built, American Made." Because nothing says freedom like blowing sh*t up. Cue Lynyrd Skynyrd's "Free Bird." Hell, we may even sing it in court now that Toys R Ushas made that a thing. 

Our company traces its current travails to 2007 when Cerberus Capital Management LP bought Remington for $370mm (cash + assumption of debt) and immediately "loaded" the North Carolina-based company with even more debt. As of today, the company has $950mm of said debt on its balance sheet, including a $150mm asset-backed loan due June '19, a $550mm term loan B due April '19, and 7.875% $250mm 3rd lien notes due '20. Suffice it to say, the capital structure is pretty "jammed." Nothing says America like guns...and leverage. 

Indeed, this is true of Sportco too. Sportco “sports” $23mm in prepetition ABL obligations and $249.8mm in the form of a term loan. Not too shabby on the debt side, you gun nuts!

More from our mock-up on Remington:

Shortly after Cerberus purchased the company, Barack Obama became president - a fact, on its own, that many perceived as a real "blowback" to gun ownership. Little did they know. But, then, compounding matters, the Sandy Hook incident occurred and it featured Remington's Bushmaster AR-15-style rifle. Subsequently, speeches were made. Tears were shed. Big pension fund investors like CSTRS got skittish AF. And Cerberus pseudo-committed to selling the company. Many thought that this situation was going to spark "change [you] can believe in," lead to more regulation, and curtail gun sales/ownership. But everyone thought wrong. Tears are no match for lobby dollars. Suckers. 

Instead, firearm background checks have risen for at least a decade - a bullish indication for gun sales. In a sick twist of only-in-America fate, Obama's caustic tone towards gunmakers actually helped sell guns. And that is precisely what Remington needed in order to justify its burdensome capital structure and corresponding interest expense. With Hillary Clinton set to win the the election in 2016, Cerberus' convenient inability to sell was set to pay off. 

But then that "dum dum" "ramrod" Donald Trump was elected and he enthusiastically and publicly declared that he would "never, ever infringe on the right of the people to keep and bear arms."  While that's a great policy as far as we, here, at Remington are concerned, we'd rather him say that to us in private and declare in public that he's going to go door-to-door to confiscate your guns. Boom! Sales through the roof! And money money money money for the PE overlords! Who cares if you can't go see a concert in Las Vegas without fearing for your lives. Yield baby. Daddy needs a new house in Emerald Isle. 

Wait? "How would President Trump say he's going to confiscate guns and nevertheless maintain his base?" you ask. Given that he can basically say ANYTHING and maintain his base, we're not too worried about it. #MAGA!! Plus, wink wink nod nod, North Carolina. We'd all have a "barrel" of laughs over that.  

So now what? Well, "shoot." We could "burst mode" this thing, and liquidate it but what's the fun in that. After all, we still made net revenue of $603.4mm and have gross profit margins of 20.9%. Yeah, sure, those numbers are both down from $865.1mm and 27.4%, respectively, but, heck, all it'll take is a midterm election to reverse those trends baby. 

That was a pretty stellar $260mm revenue decline for Remington. Thanks Trump!! So, how did Sportco fare?

Want to quantify how scared people were that @BarackObama would take away their guns?

Per Sportco's bankruptcy filing:

Average net sales '12-'16: $885.3mm.
Net sales '17: $531.1mm.
Net sales '18: $557mm.

President Trump cost this company $300+mm in annual sales. #MAGA! pic.twitter.com/yBQOTLRFPW

— 💥PETITION💥 (@petition) June 10, 2019

Trump seems to be failing to make America great again for those who sell guns.

But don’t take our word for it. Per Sportco:

In the lead up to the 2016 presidential election, the Debtors anticipated an uptick in firearms sales historically attributable to the election of a Democratic presidential nominee. The Debtors increased their inventory to account for anticipated sales increases. In the aftermath of the unexpected Republican victory, the Debtors realized lower than expected sales figures for the 2017 and 2018 fiscal years, with higher than expected carrying costs due to the Debtors’ increased inventory. These factors contributed to the Debtors tightening liquidity and an industry-wide glut of inventory.

Whoops. Shows them for betting against the stable genius. What are these carrying costs they refer to? No gun sales = too much inventory = storage. Long warehousemen.

Compounding matters, the company’s excess inventory butted with industry-wide excess inventory sparked by “the financial distress of certain market participants.” This pressured margins further as Sportco had to discount product to push sales. This “further eroded…slim margins and contributed to…tightening liquidity.” Per the company:

Many of the Debtors’ vendors and manufacturers suffered heavy losses as a result of the Cabela’s-Bass Pro Shop merger, Dick’s Sporting Good’s pull back from the market, and the recent Gander Mountain and AcuSport bankruptcies. Those losses adversely impacted the terms and conditions on which such vendors and manufacturers were willing to extend credit to the Debtors. With respect to the Gander Mountain and AcuSport bankruptcies, the dumping of excess product into the marketplace pushed prices—and margins— even lower. The resulting tightening of credit terms eroded the Debtors’ sales and further contributed to the Debtors’ tightening liquidity.

The company also blames some usual suspects for its chapter 11 filing. First, weather. Weather ALWAYS gets a bad rap. And, of course, the debt.

Riiiiiight. About that debt. When we previously asked “Who is Financing Guns?,” the answer, in the case of Remington, was Bank of America Inc. ($BAC), Wells Fargo Inc. ($WFC) and Regions Bank Inc. ($RF). Likewise here. Those same three institutions make up the company’s ABL lender roster. We’re old enough to remember when banks paid lip service to wanting to do something about guns.

One other issue was the company’s inability to…wait for it…REALIZE CERTAIN SUPPLY CHAIN SYNERGIES after acquiring certain assets from once-bankrupt competitor AcuSport Corporation. Per the company:

The lower than anticipated increase in customer base following the AcuSport Transaction magnified the adverse effects of the market factors discussed above and resulted in a faster than expected tightening of the Debtors’ liquidity and overall deterioration of the Debtors’ financial condition.

The company then ran into issues with its pre-petition lenders and its vendors and the squeeze was on. Recognizing that time was wearing thin, the company hired Houlihan Lokey Inc. ($HLI) to market the assets. No compelling offers came, however, and the company determined that a chapter 11 filing “to pursue an orderly liquidation…was in the best interest of all stakeholders.”

R.I.P. Sportco.

*****

But not before you get in one last fight.

The glorious thing about first day papers is that they provide debtors with the opportunity to set the tone in the case. The First Day Declaration, in particular, is a narrative. A narrative told to the judge and other parties-in-interest about what was, what is, and what may be. That narrative often explains why certain other requests for relief are necessary: that is, that without them, there will be immediate and irreparable harm to the estate. The biggest one of these is typically a request for authority to tap a committed DIP credit facility and/or cash collateral to fund operations. On the flip side of that request, however, are the company’s lenders. And they often have something to say about that — objections over, say, the use of cash collateral are common.

But you don’t often see an objector re-write the entire frikken narrative and file it prior to the first hearing in the case.

Shortly after the bankruptcy filing, Prospect Capital Corporation (“PCC”), as the second lien term loan agent, unleashed an objection all over the debtors. Per PCC:

Just a few years ago, the Debtors were the largest distributor of firearms in the United States, with reported annual revenue of in excess of $770 million. Contrary to the First Day Declaration filed in these cases, the Debtors’ demise was not due to outside forces such as the “2016 presidential election,” “disruptions in the industry” and “natural disasters. Rather, as a result of dividend recapitalization transactions in 2012 and 2013, the Debtors’ equity owner, Wellspring Capital, “cashed out” in excess of $183 million. After lining their pockets with over $183 million, fiduciaries appointed by Wellspring Capital to be directors and officers of the Debtors grossly mismanaged the business and depleted all reserves necessary to weather the storms and the headwinds the business would face. In a short time, the business went from being the largest firearms distributor in the United States to being liquidated. As a result of years of mismanagement and the failure of the estates’ fiduciaries to preserve value, the Second Lien Lenders will, in all likelihood, recover only a small fraction of their $249.7 million secured loan claim. Years of mismanagement ultimately placed the Debtors in the position where they are in now….

This sh*t just got much more interesting: y’all know we love dividend recapitalizations. Anyway, PCC went on to object to the fact that this is an in-court liquidation when an out-of-court process would be, in their view, cheaper and just as effective; they also object to the debtors’ proposed budget and use of cash collateral. The upshot is that they see very little chance of recovery of their second lien loan and want to maximize value.

Of course, the debtors be like:

The numbers speak for themselves, they replied. They were $X of revenue between 2012 and 2016 and then, after Trump was elected, they’ve been $X-Y%. Plain and simple.

So where does this leave us? After some concessions from the DIP lenders and the debtors, the court approved the debtors requested DIP credit facility on an interim basis. The order preserves PCC’s rights to come back to the court with an argument related to cash collateral after the first lien lenders (read: the banks) are paid off in full (and any intercreditor agreement-imposed limitations on PCC’s ability to fight fall away).

Ultimately, THIS may sum up this situation best:

It’s genuinely difficult to pick the most villainous company in this story. Is it the company selling guns who made a big bet on people’s deepest fears and insecurities and then shit the bed? The private equity company bleeding the gun distributor dry and then running it straight into the ground? Or the other private equity company that is now mad it likely won’t get anything near what it paid out in the original loan to the distributor? Folks...let them fight.

• Jurisdiction: D. of Delaware (Judge Silverstein)

• Capital Structure: $23.1mm ABL, $249mm term loan (Prospect Capital, Summit Partners)

• Professionals:

  • Legal: McDermott Will & Emery LLP (Timothy Walsh, Darren Azman, Riley Orloff) & (local) Polsinelli PC (Christopher Ward, Brenna Dolphin, Lindsey Suprum)

  • Board of Directors: Bradley Johnson, Alexander Carles, Justin Vorwerk

  • Financial Advisor/CRO: Winter Harbor LLC (Dalton Edgecomb)

  • Investment Banker: Houlihan Lokey Inc.

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

• Other Parties in Interest:

  • DIP Agent: Bank of America NA

    • Legal: Winston & Strawn LLP (Daniel McGuire, Gregory Gartland, Carrie Hardman) & (local) Richards Layton & Finger PA (John Knight, Amanda Steele)

  • Agent for Second Lien Lenders: Prospect Capital Corporation

    • Legal: Olshan Frome Wolosky LLP (Adam Friedman, Jonathan Koevary) & (local) Blank Rome LLP (Regina Stango Kelbon, Victoria Guilfoyle, John Lucian)

  • Prepetition ABL Lenders: Bank of America NA, Wells Fargo Bank NA, Regions Bank NA

  • Large equityholders: Wellspring Capital Partners, Summit Partners, Prospect Capital Corporation

  • Official Committee of Unsecured Creditors (Vista Outdoor Sales LLC, Magpul Industries Corporation, American Outdoor Brands Corporation, Garmin USA Inc., Fiocchi of America Inc., FN America LLC, Remington Arms Company LLC)

    • Legal: Lowenstein Sandler LLP (Jeffrey Cohen, Eric Chafetz, Gabriel Olivera) & (local) Morris James LLP (Eric Monzo)

    • Financial Advisor: Emerald Capital Advisors (John Madden)

Update 7/7/19 #115

🛌New Chapter 11 Bankruptcy & CCAA Filing - Hollander Sleep Products LLC🛌

Hollander Sleep Products LLC

May 19, 2019

Florida-based private equity owned Hollander Sleep Products LLC and six affiliates (including one Canadian affiliate) have filed for chapter 11 bankruptcy in the Southern District of New York. The debtors are “the largest bed pillow and mattress pad manufacturer in North America.” The debtors produce pillows, comforters and mattress pads for the likes of Ralph Lauren, Simmons, Beautyrest, Nautica and Calvin Klein; their products are available at major retailers like Costco Wholesale Corporation ($COST), Kohl’s Corporation ($KSS), Walmart Inc. ($WMT) and Target Inc. ($TGT) and with the Marriott International Inc. ($MAR) chain of hotels; they have a main showroom in New York City, nine manufacturing facilities throughout the US and Canada, and a sourcing, product development and quality control office in China. Speaking of China, 60% of the debtors’ top 10 creditors are Chinese companies.

Why bankruptcy? Interestingly, the debtors colorfully ask, “How Did We Get Here?” And the answer appears to be a combination of (a) “[r]ecent substantial price increases on materials” like fiber, down and feathers, (b) acquisition integration costs, (c) too much competition in a low margin space, (d) employee wage increases “as a result of natural wage inflation and the tight job market” and (e) too much leverage. The debtors burned through $20mm in the last year on material cost increases alone (it opted NOT to pass price increases on to the consumer), straining liquidity to the point that, at the time of filing, the company had less than $1mm of cash on hand.

With the filing, the debtors seek to restructure approximately $166.5mm of term debt, effectuating a debt-for-equity swap in the new reorganized entity (plus participation in a $30mm exit facility). 100% of the debtors’ term lenders support the plan. As does lender and equity sponsor, Sentinel Capital Partners LLC. That doesn’t necessarily mean, however, that they truly want to own the post-reorg company. Indeed, the debtors have indicated that while they march towards plan confirmation (which they say will be in four months), they will also entertain the possibility of a sale of the company to a third-party. These dual-track chapter 11 cases are all the rage these days, see, e.g., Shopko.

If approved by the bankruptcy court, the bankruptcy will be funded by a $118mm DIP credit facility which will infuse the debtors with $28mm in incremental new money and roll-up the debtors’ prepetition asset-backed first priority credit facility.

The debtors note that “the sleep industry as a whole is both healthy and growing. Market trends favor healthy lifestyle sectors, and the basic bedding segment is generally recession resilient.” We have no quibble with either comment. The company believes that by, among other things, (i) delevering its balance sheet, (ii) gaining access to new capital, (iii) engaging in selective price increases, (iv) implementing material efficiencies, (v) streamlining manufacturing, and (vi) building out their e-commerce channel, it will have a more sustainable path forward. Whether that path will be taken at the direction of their lenders or a strategic buyer remains to be seen.

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

• Capital Structure: $125mm ABL ($43mm funded), $166.5mm term loan

• Professionals:

  • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Christopher Greco, Joseph Graham, Andrew McGaan, Laura Krucks)

  • Board of Directors: Eric Bommer, Michael Fabian, Steve Cumbow, Chris Baker

  • Disinterested Director: Matthew Kahn

    • Legal: Proskauer Rose LLP

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

  • Investment Banker: Houlihan Lokey Capital Inc. (Saul Burian)

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

• Other Parties in Interest:

  • Prepetition and ($90mm) DIP ABL Agent: Wells Fargo Bank NA

    • Legal: Goldberg Kohn Ltd. (Randall Klein, Prisca Kim) & (local) Orrick Herrington & Sutcliffe LLP (Laura Metzger, Peter Amend)

  • ($28mm) DIP Term Loan Agent:

5/2/19, #2

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

Bristow Group Inc.

May 11, 2019

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

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

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

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

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

• Capital Structure:

• Professionals:

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

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Houlihan Lokey Capital Inc.

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

• Other Parties in Interest:

  • ABL Facility Agent: Barclays Bank PLC

  • 2019 Term Loan Agent: Ankura Trust Company LLC

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

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

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

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

  • Ad Hoc Group fo Unsecured Noteholders

    • Legal: Kramer Levin Naftalis & Frankel LLP

🌑New Chapter 11 Filing - Cloud Peak Energy Inc.🌑

Cloud Peak Energy Inc.

May 10, 2019

In what ought to come as a surprise to absolutely no one, Cloud Peak Energy Inc. ($CLD) and a slate of affiliates FINALLY filed for bankruptcy.

Not the first Trump era coal bankruptcy, but it's the largest. https://t.co/2UXZkYKVjB

— ⚡Taylor Kuykendall (@taykuy) May 10, 2019

Let’s take a moment of silence for coal country, shall we? If this is what MAGA looks like, we’d hate to see what happens when a global downturn eventually hits. There’s gonna be blood in the water.

Sounds like hyperbole? Note that since 2016, there have been a slate of coal-related bankruptcies, i.e., Westmoreland Coal Company, Mission Coal Company LLC, and now Cloud Peak Energy Inc. Blackhawk Mining LLC appears to be waiting in the wings. We suppose it could be worse: we could be talking about oil and gas country (and we will be, we certainly will be…and SOON.).

Cloud Peak is an impressive company. Since its formation in 2008, it has become one of the largest (subbituminous thermal coal) coal producers in the US — supplying enough coal to satisfy approximately 2% of the US’ electricity demand. Its three surface mines are located in the Powder River Basin in Wyoming and Montana; it sold approximately 50mm tons of coal in 2018 to 46 domestic and foreign end users.*

In the scheme of things, Cloud Peak’s balance sheet isn’t overly complicated. We’re not talking about billions of dollars of debt here like we saw with Walter Energy, Peabody Energy, Arch Coal, Patriot Coal or Alpha Natural Resources. So, not all coal companies and coal company bankruptcies are created equal. Nevertheless, the company does have $290.4mm of ‘21 12% secured notes (Wilmington Trust NA) and $56.4mm of ‘24 6.375% unsecured notes (Wilmington Trust NA as successor trustee to Wells Fargo Bank NA) to contend with for a total of $346.8mm in funded debt liability. The company is also party to a securitization facility. And, finally, the company also has reclamation obligations related to their mines and therefore has $395mm in third-party surety bonds outstanding with various insurance companies, backed by $25.7mm in letters of credit. Coal mining is a messy business, homies.

So why bankruptcy? Why now? Per the company:

The Company’s chapter 11 filing, however, was precipitated by (i) general distress affecting the domestic U.S. thermal coal industry that produced a sustained low price environment that could not support profit margins to allow the Company to satisfy its funded debt obligations; (ii) export market price volatility that caused decreased demand from the Company’s customers in Asia; (iii) particularly challenging weather conditions in the second quarter of 2018 that caused spoil failure and significant delays in coal production through the remainder of 2018 and into 2019, which reduced cash inflows from coal sales and limited credit availability; and (iv) recent flooding in the Midwestern United States that has significantly disrupted rail service, further reducing coal sales.

To summarize, price compression caused by natural gas. Too much regulation (which, in turn, favors natural gas over coal). Too much debt. And, dare we say, global warming?!? Challenging weather and flooding must be really perplexing in coal country where global warming isn’t exactly embraced with open arms.

Now, we may be hopping to conclusions here but, these bits are telling — and are we say, mildly ironic in a tragic sort of way:

In addition to headwinds facing thermal coal producers and export market volatility, the Company’s mines suffered from unusually heavy rains affecting Wyoming and Montana in the second quarter of 2018. For perspective, the 10-year average combined rainfall for May, June, and July at the Company’s Antelope Mine is 6.79 inches. In 2018, it rained 10.2 inches during that period. While certain operational procedures put in place following heavy flooding in 2014 functioned effectively to mitigate equipment damage, the 2018 rains interrupted the Company’s mining operations considerably.

It gets worse.

The problem with rain is that the moisture therefrom causes “spoil.” Per the company:

Spoil is the term used for overburden and other waste rock removed during coal mining. The instability in the dragline pits caused wet spoil to slide into the pits that had to be removed by dragline and/or truck-shovel methods before the coal could be mined. This caused significant delays and diverted truck-shovel capacity from preliminary stripping work, which caused additional production delays at the Antelope Mine. The delays resulting from the spoil failure at the Antelope Mine caused the Company to have reduced shipments, increased costs, and delayed truck-shovel stripping in 2018. Consequently, the reduced cash inflows from coal sales limited the Company’s credit availability under the financial covenants in the Amended Credit Agreement prior to its termination, and limited access to any new forms of capital.

But, wait. There’s more:

Additionally, the severe weather affecting the Midwest region of the United States in mid-March 2019 caused, among other things, extensive flooding that damaged rail lines. One of Cloud Peak’s primary suppliers of rail transportation services – BNSF – was negatively impacted by the flooding and has been unable to provide sufficient rail transportation services to satisfy the Company’s targeted coal shipments. As of the Petition Date, BNSF’s trains have resumed operations, but are operating on a less frequent schedule because of repairs being made to rail lines damaged by the extensive flooding. As a result, the Company’s coal shipments have been materially impacted, with cash flows significantly reduced through mid-June 2019.

Riiiiiiiight. But:

Patrick Moore, co-founder of Greenpeace: “The whole climate crisis is not only Fake News, it’s Fake Science. There is no climate crisis, there’s weather and climate all around the world, and in fact carbon dioxide is the main building block of all life.” @foxandfriends Wow!

— Donald J. Trump (@realDonaldTrump) March 12, 2019

More about Moore here: the tweet, as you might expect, doesn’t tell the full story.

Anywho.

The company has been burning a bit over $7mm of liquidity a month since September 2018. Accordingly, it sought strategic alternatives but was unable to find anything viable that would clear its cap stack. We gather there isn’t a whole lot of bullishness around coal mines these days.

To buy itself some time, therefore, the company engaged in a series of exchange transactions dating back to 2016. This enabled it to extinguish certain debt maturing in 2019. And thank G-d for the public markets: were it not for a February 2017 equity offering where some idiot public investors hopped in to effectively transfer their money straight into noteholder pockets, this thing probably would have filed for bankruptcy sooner. That equity offering — coupled with a preceding exchange offer — bought the company some runway to continue to explore strategic alternatives. The company engaged J.P. Morgan Securities LLC to find a partner but nothing was actionable. Ah….coal.

Thereafter, the company hired a slate of restructuring professionals to help prepare it for the inevitable. Centerview Partners took over for J.P. Morgan Securities LLC but, to date, has had no additional luck. The company filed for bankruptcy without any prospective buyers lined up.

Alas, the company filed for bankruptcy with a “sale and plan support agreement” or “SAPSA.” While this may sound like a venereal disease, what it really means is that the company has an agreement with a significant percentage of both its secured and unsecured noteholders to dual track a sale and plan process. If they can sell the debtors’ assets via a string of 363 sales, great. If they have to do a more fulsome transaction by way of a plan, sure, that also works. These consenting noteholders also settled some other disputes and support the proposed $35mm DIP financing

*Foreign customers purchased approximately 9% of ‘18 coal production.

• Jurisdiction: D. of Delaware (Judge Gross)

• Capital Structure: $290mm 12% ‘21 secured debt (Wilmington Trust NA), $56.4mm unsecured debt (BOKF NA)

• Professionals:

  • Legal: Vinson & Elkins LLP (Paul Heath, David Meyer, Jessica Peet, Lauren Kanzer, Matthew Moran, Steven Zundell, Andrew Geppert, Matthew Pyeatt, Matthew Struble, Jeremy Reichman) & (local) Richards Layton & Finger PA (Daniel DeFranceschi, John Knight)

  • Financial Advisor: FTI Consulting Inc. (Alan Boyko)

  • Investment Banker: Centerview Partners (Marc Puntus, Ryan Kielty, Johannes Preis)

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

• Other Parties in Interest:

  • Major shareholders: Renaissance Technologies LLC, The Goldman Sachs Group Inc., Dimensional Fund Advisors LP, Kopernik Global Advisors, Blackrock Inc.

  • DIP Agent: Ankura Trust Company LLC

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Aryeh Ethan Falk, Christopher Robertson) & (local) Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Curtis Miller, Paige Topper)

    • Financial Advisor: Houlihan Lokey

  • Prepetition Secured Noteholder Group (Allianz Global Investors US LLC, Arena Capital Advisors LLC, Grace Brothers LP, Nomura Corporate Research and Asset Management Inc. Nuveen Alternatives Advisors LLC, Wexford Capital LP, Wolverine Asset Management LLC)

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Aryeh Ethan Falk, Christopher Robertson) & (local) Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Curtis Miller, Paige Topper)

  • Indenture Trustee: BOKF NA

    • Legal: Arent Fox LLP (Andrew Silfen, Jordana Renert) & (local) Womble Bond Dickinson US LLP (Matthew Ward)

  • Official Committee of Unsecured Creditors (BOKF NA, Nelson Brothers Mining Services LLC, Wyoming Machinery Company, Cummins Inc., ESCO Group LLC, Tractor & Equipment Co., Kennebec Global)

    • Legal: Morrison & Foerster LLP (Lorenzo Marinuzzi, Jennifer Marines, Todd Goren, Daniel Harris, Mark Lightner) & Morris James LLP (Carl Kunz III, Brya Keilson, Eric Monzo)

    • Investment Banker: Jefferies LLC (Leon Szlezinger)

Update: 7/7/19 #379

New Chapter 11 Bankruptcy Filing - Hospital Acquisition LLC

Hospital Acquisition LLC

May 6 & 7, 2019

Texas-based Hospital Acquisition LLC and dozens of other affiliated companies operating in the acute care hospital, behavioral health and out-patient would care space have filed for bankruptcy in the District of Delaware.* The debtors operate 17 facilities in 9 states for a total of 865 beds; their revenue “derives from the provision of patient services and is received through Medicare and Medicaid reimbursements and payments from private payors.”

Technically, this is a chapter 22. In 2012, the debtors’ predecessor reeled from the effects of Hurricane Katrina and reduced reimbursement rates and filed for bankruptcy. The case ended in a sale of substantially all assets to the debtors.

So, why is the company in bankruptcy again? Well, to begin with, re-read the final sentence of the first paragraph. That’s why. Per the company:

…internal and external factors have lead the Debtors to an unmanageable level of debt service obligations and an untenable liquidity position. In 2015, Medicare’s establishment of patient criteria to qualify as an LTAC-compliant patient facility led to significant reimbursement rate declines over the course of 2015 and 2016 as changes were implemented. Average reimbursement rates for site neutral patients, representing approximately 57% of 2016 cases, is estimated to drop from $23,000 to $9,000 across the portfolio. When rates declined sharply, the Debtors were unable to adjust. Further, the number of patients that now qualify by Medicare to have services provided in an LTAC setting has declined substantially, resulting in a significant oversupply of LTAC beds in the market.

To offset these uncontrollable trends, the company undertook efforts to convert a new business plan focused around, among other things, closing marginally performing hospitals and diversifying the business into post-acute care “to compete in the evolving value-based health care environment.” To help effectuate this plan, the debtors re-financed its then-existing revolver, entered into its $15mm “priming” term loan, and amended and extended its then-existing term loan facility. After this transaction, the company had total consolidated long-term debt obligations totaling approximately $185mm.

So, more debt + revised business plan + evolving macro healthcare environment = ?? A revenue shortfall, it turns out. Which put the debtors in a precarious position vis-a-vis the covenants baked into the debtors’ debt docs. Whoops. Gotta hate when that happens.

The debtors then engaged Houlihan Lokey to explore strategic alternatives and engaged their lenders. At the time of filing, however, the debtors do not have a stalking horse agreement in place; they do hope, however, to have one in place by mid-July.

*There are also certain non-debtor home health owners and operators in the corporate family that are not, at this time, chapter 11 debtors.

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: $23.9mm RCF, $9.4mm LOCs, $15mm “Priming Term Loan” ($7.7mm funded), $136.8mm TL

• Professionals:

  • Legal: Akin Gump Strauss Hauer & Feld LLP (Scott Alberino, Kevin Eide, Sarah Link Schultz) & (local) Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Jaime Luton Chapman, Joseph Mulvihill, Betsy Feldman)

  • Financial Advisor: Houlihan Lokey Inc. (Geoffrey Coutts)

  • Investment Banker: BRG Capital Advisors LLC

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

• Other Parties in Interest:

  • Equityholders: Monarch Master Funding Ltd., Twin Haven Special Opportunities Fund IV LP, Blue Mountain Credit Alternatives Master Fund LP, Merrill Lynch Pierce Fenner & Smith Inc., Oakstone Ventures Inc.

  • White Oak Healthcare Finance LLC

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

  • Marathon Asset Management

    • Legal: Ropes & Gray LLP (Matthew Roose)

  • Prepetition Term Loan Agents: Seaport Loan Products LLC & Wilmington Trust NA

    • Legal: Shearman & Sterling LLP (Ned Schodek, Jordan Wishnew) & (local) Potter Anderson & Corroon LLP (Jeremy Ryan, R. Stephen McNeill, D. Ryan Slaugh)

  • Official Committee of Unsecured Creditors

    • Legal: Greenberg Traurig LLP (David Cleary, Nancy Peterman, Dennis Meloro) & (local) Bayard PA (Justin Alberto, Erin Fay, Daniel Brogan)
      

Updated 5/18

New Chapter 11 Bankruptcy Filing - New Cotai Holdings LLC

New Cotai Holdings LLC

May 1, 2019

New Cotai Holdings LLC and three affiliated debtors filed for bankruptcy in the Southern District of New York on the basis of New Cotai Ventures LLC, a NY LLC, having cash held in a bank account in White Plains New York (as of when, we wonder). The debtors were formed for the purpose of investing in Studio City International Holdings Limited, have no employees, and are otherwise managed by sponsor, Silver Point Capital LP. The declarant supporting the debtors’ chapter 11 filing is an independent director who was put into place literally 2 days before the filing. Yup, 2 whole days.

Studio City International Holdings Limited is a wretched hive of scum and villany. Sorry, that’s not right. That’s us trying to make this more interesting than it is. In truth, its an “integrated resort comprising entertainment, retail, hotel and gaming facilities” located in Macau (that’s China, people). The project has made it past Phase I of construction but has stalled out there: the rest of the project will require several more years. In October 2018, the company IPO’d 28.75mm American Depository Shares at $12.50/share.

To further capitalize the project, two of the debtors, as co-issuers, issued $380mm of 10.625% PIK Notes in 2013 due May 2019. Curious to know how 10.625% PIK adds up? The current principal balance of the notes is now $856mm.

Now, not to state the obvious, but to paydown Notes on maturity, you kinda need to have some moolah. And considering that the project is only past Phase I with much more work to do…well, you see where we are going here. The company notes:

The Debtors’ ability to satisfy their obligations under the Notes is directly tied to the development and success of the Studio City project. Due to delays in the development of the Studio City project, a reduced allocation of gaming tables from the government, and some unanticipated declines in the Macau gaming market, the Investment has not yet achieved sufficient market value in light of the highly illiquid and unreliable market conditions that have developed following the IPO, making a refinancing impracticable. Therefore, through no fault of their own, the Debtors were unable to satisfy the Notes obligations by their maturity.

Listen guys: you ain’t getting Matt Damon, George Clooney and other whales at your tables if you don’t have VIP tables. Obvi. Second, it sounds like the project hired the quintessential New York City-based general contractor. “Yeah, sure, the project will cost $30mm and take 1 month” only to cost “an additional $300 million” and take literally years. Of course “[c]onstruction costs came in greater than expected.” Isn’t that par for the course in hotel development? The company now has until 2021 to finish Phase II of the project. It sounds like it will need it.

Of course, you have to admire the entrepreneurial enthusiasm:

Notwithstanding the aforementioned challenges, the Debtors believe that the Investment continues to represent a significant economic opportunity—the value of which is not accurately represented in the current market prices of the ADS. Indeed, should the Studio City project continue to develop on its currently anticipated timeframe, the Debtors expect the Investment to generate sufficient value to repay the Notes in full.

The debtors must NOT be expecting a downturn. Gaming usually doesn’t fare too well during one of those. And Chinese growth hasn’t exactly been at levels enjoyed over the last decade or so. But, fingers crossed.

The debtors are negotiating with an Ad Hoc Group of noteholders in an effort to address this state of affairs. They have latitude: Silver Point has committed to a $6.25mm DIP with, among other favorable terms to the debtors, no milestones and a 12-month maturity (with an option to extend a subsequent 12 months). This DIP was not marketed and so the early part of the case will be spent presumably searching for alternatives. Because lenders surely love the idea of providing a DIP, the main purpose of which is to pay Skadden Arps’ and the Ad Hoc Group’s fees.

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

• Capital Structure: $856mm (Wells Fargo Bank NA)

• Professionals:

  • Legal: Skadden, Arps, Slate, Meagher & Flom LLP (Jay Goffman, Mark McDermott, Evan Hill)

  • Managing Member: Drivetrain Advisors LLC (John Brecker)

  • Financial Advisor: Houlihan Lokey Capital Inc.

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

• Other Parties in Interest:

  • Wells Fargo Bank NA

    • Legal: Arent Fox LLP (Andrew Silfen, Beth Brownstein)

  • Sponsor: Silver Point Capital LP
    

New Chapter 11 Filing - Sungard Availability Services Capital Inc.

Sungard Availability Services Capital Inc.

May 1, 2019

Pennsylvania-based Sungard Availability Services Capital Inc., a provider of “critical production and recovery services to global enterprise companies,” with $977mm of net revenue and $203mm of EBITDA in fiscal 2018 filed a prepackaged chapter 11 plan in the Southern District of New York on Wednesday and, if you blinked, you may have missed its residency in bankruptcy. Indeed, some lost their minds because Kirkland & Ellis LLP was able to shepherd the case in and out of bankruptcy in less than 24 hours — breaking the previous record only recently set in FullBeauty. Yes, people care about these things.*

The upshot of this expeditious bankruptcy case is that (a) the company shed nearly $900mm of debt from its balance sheet (reducing debt down to approximately $400-450mm) and (b) transferred 89% ownership to a variety of debt-for-equity swapping funds such as GSO Capital Partners, Angelo Gordon & Co., and Carlyle Group (who will also receive $300mm in senior secured term loan paper). Major equity holders — Bain Capital Integral Investors LLC, Blackstone Capital Partners IV LP, Blackstone GT Communications Partners LP, KKR Millennium Fund LP, Providence Equity Partners V LP, Silver Lake Partners II LP, TPG Partners IV LP — had their equity wiped out. We had previously highlighted KKR’s investment here in “A Hot-Potato Plan of Reorganization. Short BDC Retail Exposure,” discussing the broader context of BDC lending. This is what the capital structure looks like and will look like:

Source: Disclosure Statement

That balance sheet is the driver behind the bankruptcy filing. Per the company:

This legacy capital structure was created based upon the Company’s historical operating model and performance and is unsustainable under current market conditions. When the capital structure was put in place, the Company benefited from a larger revenue base with substantially higher free cash flow. As business conditions evolved and the Company’s revenue declined, cash flow available to service debt and invest in products and services substantially declined. Consolidated net revenue declined by approximately 18% from approximately $1.2 billion in 2016 to approximately $977 million in 20188 while adjusted EBITDA margins remained within a range of approximately 20% to 22%. Negative net cash flow from 2016 to 2018 was approximately $80 million.

In other words, this is as clear-cut a balance sheet restructuring that you can get. Indeed, general unsecured claims are — as you might expect from a prepackaged plan of reorganization — riding through unimpaired. This consensual restructuring is clearly the right result. Getting it in and out of court so quickly is a bonus.

Yet, lest anyone get too high on their own supply, it’s important to note that, while this is a good result under the circumstances, there is a significant amount of value destruction illustrated by this filing. The term lenders are getting merely an estimated 50-73% recovery while the noteholders are getting 7-14%**. Now, it IS reasonable to expect that the “par guys” blew out of this situation long ago. And it is also reasonable to assume that the current holders of loans and notes got in at a significant discount so “value destruction” really is a matter of timing/pricing. For the avoidance of doubt, however, there’s no question that certain lenders experienced some pain on the path to this filing. Here is the chart representing the company’s notes:

So, while some are surely celebrating, others are surely licking their wounds.

*We don’t really want to be too flip about this. As critics of the bankruptcy process, we’re all for seeing more efficient uses of the bankruptcy court — even if that does mean that fees were run up pre-petition without any oversight whatsoever.

**You always have to take these recovery amounts with a grain of salt. In case the rampant Chapter 22s haven’t already taught you that.

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

• Capital Structure:

• Professionals:

  • Legal: Kirkland & Ellis LLP (Jonathan Henes, Emily Geier, Ryan Blaine Bennett, Laura Krucks

  • Board of Directors: Darren Abrahamson, Patrick J. Bartels Jr., Randy Hendricks, John Park, David Treadwell

  • Financial Advisor/CRO: AlixPartners LLP (Eric Koza)

  • Investment Banker: Centerview Partners (Samuel Greene)

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

• Other Parties in Interest:

  • DIP Agent: JPMorgan Chase Bank NA

  • Secured Lender Group

    • Jones Day (Scott Greenberg, Michael Cohen, Nicholas Morin)

    • Financial Advisor: Houlihan Lokey Capital Inc.

  • Crossover Group

    • Akin Gump Strauss Hauer & Feld LLP (Philip Dublin, Naomi Moss)

    • Financial Advisor: PJT Partners LP

  • Large Equityholders: Bain Capital Integral Investors LLC, Blackstone Capital Partners IV LP, Blackstone GT Communications Partners LP, KKR Millennium Fund LP, Providence Equity Partners V LP, Silver Lake Partners II LP, TPG Partners IV LP

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Brian Hermann, Jacob Adlerstein)

⛽️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