💪 New Chapter 11 Bankruptcy Filing - 24 Hour Fitness Inc. 💪

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24 Hour Fitness Inc.

June 15, 2020

California-based 24 Hour Fitness Inc. (along with ten affiliates, the “debtors”) filed for chapter 11 bankruptcy in the District of Delaware after it became apparent that it’s hard to sustain a fitness business when, as a practical matter, you’re really 0 Hour Fitness Inc. When you have 3.4mm customers across 445 (leased) locations across the United States, it’s awfully hard for a business that typically does $1.5b in revenue and $191 in adjusted EBITDA to make money when a pandemic rips through the nation and shuts down business entirely. This, ladies and gentlemen, like the few airlines who have filed for bankruptcy to date, is as pure-play a COVID-19 story as they come these days.

Now, that’s to not to suggest that everything was copacetic prior to the quarantine. The business had some pimples on it. The debtors’ CRO cites the selling/operating model’s negative impact on financial performance. But the biggest and scariest pimples are the debtors’ balance sheet and lease portfolio. The former includes $1.4b of funded debt; the latter, 445 locations leased across the country, of which 135 have already been deemed unnecessary and are the subject of a first day executory contract rejection motion (PETITION Note: the debtors denote this as “a first wave.”). When revenues stop coming into the coffers, these tremendous amounts become quite an overhang and a liquidity drain.

The filing, among other things, helps solve for the liquidity issue. The debtors have obtained a commitment for a $250mm new-money senior secured DIP facility from an ad hoc group of lenders. While there is no restructuring support agreement in place here, the ad hoc group is comprised of 63.3% of the aggregate principal amount outstanding under the prepetition credit facility and approximately 73.9% of the face amount of the $500mm in senior unsecured notes. In other words, there’s a solid amount of support here but not enough yet to command the senior class of debt.

Luckily, the debtors gave themselves a form of pre-DIP. Wait. Huh? What are we referring to?

…the Debtors were obliged to close all of their fitness clubs nationwide on March 16, 2020, in response to this national emergency. As a result, the Debtors were no longer able to generate new sources of revenue (by winning new members) and, on or about April 15, 2020, the Debtors suspended billing on account of monthly membership dues.fn

In the footnote, the debtors note:

To date, litigation has been commenced in connection with the Debtors’ monthly billing on a post-March 16 basis, notwithstanding, among other things, the Debtors’ rights under their various membership agreements. The Debtors reserve all rights, claims, and defenses in this regard.

Uh, apparently, 0 Hour Fitness Inc. = 30 Days of Payment Inc. We’ll see whether this short-term liquidity grab created long term customer retention issues.*

Moreover, the fact that they apparently laid off thousands of employees via conference call probably won’t amount to a whole lot of goodwill. Just sayin’.

Now it’s wait and see. The debtors have reopened approximately 20 locations in Texas and hope to have the majority of their other non-rejected clubs open by the end of June. We’ll see if the uptick in COVID cases in certain states throws a wrench in that plan. To combat any COVID-related perception risk, the debtors are instituting some new measures:

…the Debtors have taken an innovative approach to the reopening of their clubs, instituting market-leading strategies to keep their members and employees safe, including an app-based reservation system to ensure that their clubs remain in compliance with applicable social distancing guidelines, a touchless check-in system to limit members’ and employees’ contact with surfaces, and cleaning schedules that ensure that entire clubs are sanitized every hour. (emphasis added)

Gosh. We see sh*t like this — the airlines are also making similar statements about newly implemented cleanliness standards — and it really makes us wonder: what the bloody hell were these cesspools doing pre-COVID?!?!? Clearly not enough.

And, yet, otherwise, we have some sympathy for these businesses. This is a brand new paradigm. The debtors indicate that they’re implementing a reservation-based system where people are locked into an hour-max workout after which the gym will be closed for 30 minutes for a “deep clean.” That is not exactly a seamless and frictionless user experience. Moreover, what kind of chemicals are going to be dumped all over the facility every 60 minutes? These are tough issues.

As far as social distancing:

…the Debtors are utilizing space in their clubs in creative ways in order to continue to offer members a range of amenities and services. For example, the Debtors are utilizing their basketball courts to hold group exercise classes, including by relocating stationary bike equipment to continue to offer indoor cycling classes, so that members and equipment can be properly spaced to comply with social distancing guidelines.

Source: First Day Declaration

Source: First Day Declaration

No offense but does THIS really worth going to the gym for? You can use apps for a fraction of the cost and do this at home…mask-less.

So what now?

The DIP financing will buy the debtors some time to evaluate new trends. Will those people who paid for a month when the gym was closed come back? Will the news about employee treatment effect the “brand”? Will all of those people who bought home gyms or learned to run need to go to a gym? The re-opening notwithstanding, all of these questions will directly impact valuation. Indeed, how do you value this business with so many massive question marks? Well, luckily, we have the debt to get a sense of what that answer might be. And considering that, at the time of this writing, the term loan is bid in the high 20s and the unsecured notes are bid around 3 — that’s right, 3 — it’s pretty clear who is getting (generally) wiped out in this scenario and where the market thinks the value breaks.

*Honestly, this was a dirty move but from the debtors’ perspective, it also totally makes sense.

  • Jurisdiction: D. of Delaware (Judge Owens)

  • Capital Structure: $95.2mm ‘23 RCF, $835.1mm ‘25 Term Loan, $500mm 8% ‘22 unsecured notes (Wells Fargo Bank NA)

  • Professionals:

    • Legal: Weil Gotshal & Manges LLP (Ray Schrock, Ryan Preston Dahl, Kevin Bostel, Kyle Satterfield, Ramsey Scofield, Jackson Que Alldredge, Jacob Mezei, Alexander Cohen, Sarah Schnorrenberg) & Pachulski Stang Ziehl & Jones LLP (Laura Davis Jones, Timothy Cairns, Peter Keane)

    • Directors: Marc Beilinson, Stephen Hare, Roland Smith

    • Financial Advisor/CRO: FTI Consulting Inc. (Daniel Hugo)

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

    • Real Estate Advisor: Hilco Real Estate LLC

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

  • Other Parties in Interest:

    • Ad Hoc Group

      • Legal: O’Melveny & Myers LLP (John Rapisardi, Adam Rogoff, Daniel Shamah, Diana Perez, Adam Haberkorn) & Richards Layton & Finger PA (Mark Collins, Michael Merchant, David Queroli)

    • Prepetition Agent: Morgan Stanley Senior Funding Inc.

      • Legal: Latham & Watkins LLP (Alfred Xue)

    • DIP Agent: Wilmington Trust

      • Legal: Covington & Burling (Ronald Hewitt)

    • Senior Notes Indenture Trustee: Wells Fargo Bank NA

      • Legal: Reed Smith LLP (Eric Schaffer, Luke Sizemore, Mark Eckard)

    • Large equityholders: AEA, Fitness Capital Partners LP, 2411967 Ontario Limited

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

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The Aldo Group Inc.

May 7, 2020

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

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

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

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

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

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

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

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

  • Jurisdiction: D. of Delaware (Judge Owens)

  • Capital Structure: see above.

  • Professionals:

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

    • Canadian Monitor: Ernst & Young Inc.

    • Investment Banker: Greenhill & Co. Canada Ltd.

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

  • Other Parties in Interest:

    • Largest Unsecured Creditor: Bank of Montreal

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

😷New Chapter 11 Bankruptcy Filing - Quorum Health Corporation😷

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Quorum Health Corporation

April 7, 2020

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

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

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

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

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

  • Jurisdiction: D. of Delaware (Judge Owens)

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

  • Professionals:

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

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

    • Investment Banker: MTS Health Partners LP

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

  • Other Parties in Interest:

    • DIP Agent: GLAS USA LLC

    • Consenting First Lien Lenders

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

      • Financial Advisor: Houlihan Lokey

    • Consenting Noteholders

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

      • Financial Advisor: Jefferies LLC

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

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

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Hygea Holdings Corp.

February 19, 2020

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

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

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

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

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

  • Jurisdiction: D. of Delaware (Judge Owens)

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

  • Professionals:

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

    • Financial Advisor: Alvarez & Marsal LLC

    • Investment Banker: 4Front Capital Partners Inc.

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

  • Other Parties in Interest:

🍎New Chapter 11 Bankruptcy Filing - Earth Fare Inc.🍎

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Earth Fare Inc.

February 4, 2020

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North Carolina-based Earth Fare Inc. is the latest grocer to descend into the Delaware bankruptcy courts, closing a horrific stretch for the grocery space in which multiple chains — including Fairway Market and Lucky’s Market — capitulated into chapter 11. Signs were out there. On January 26th, we noted that the chain was quietly closing locations, a clear indication of trouble and precursor to bankruptcy. Subsequently, The Wall Street Journal reported that the grocer had begun closing approximately 50 stores. The thing is: it has about 50 stores (across 10 states) so that effectively signaled that the company was kaput. Twenty minutes later, the company confirmed as much, issuing a press release that it would liquidate inventory at all of its stores and pursue a sale of its assets. 3,270 people appear poised to lose their jobs. It’s brutal out there, folks.* But at least sumo mandarins are back, bringing all new meaning to “get them before they’re gone.”

Earth Fare is owned, as of 2012, by Oak Hill Capital Partners III LP (72.1%) and MCP Heirloom LLC (18.76%), an ironic name given that there isn’t expected to be much left of this sucker going forward. Which means that we all should suspect yet another onslaught of “Private Equity Kills X” pieces in the media. Because, like, those have been all the rage lately. See, e.g., The New York Times and Payless, and Slate and Fairway.

So what’s the story? Well, for starters, you know you’ve got a dumpster fire on your hands when the company’s first day declaration to be entered into evidence in support of the filing is a whopping 18 pages long. Clearly the expectations here aren’t particularly optimistic.

Similar to Lucky’s Market Parent Company LLC, it appears that the company took on too much debt and expanded too much, too soon. Ah, private equity. Consequently, it has approximately $76.8mm of funded debt including a revolving credit facility held by Fifth Third Bank and Wells Fargo Bank NA and a term loan with a mysterious “Prepetition Term Loan Lender” that the company was apparently fearful of identifying by name in its papers. Like, for some reason. Like, as if, uh, we won’t find out who that sucker is who dumped $14.8mm into this horror show a mere 6 months ago. In addition to the funded debt, the company owes $60mm in trade and other unsecured obligations.

The company blames its failure on a now-standard lineup of excuses that include (i) crazy amounts of competition,** (ii) significant capex, and (iii) too much debt.

Riiiiight. Back to that debt. The company has been in a perpetual state of amend-and-extend since 2017 when, in May of that year, it secured an amendment/extension of its revolving loan maturity to April 2019. Those private equity bros who are sure to get bashed put $10mm of equity capital into the company at that point. Then in August 2018, the company entered into another amendment pushing out its maturity. In connection therewith, those private equity bros who are sure to get bashed put another $9mm of equity capital into the company. Another extension followed in April 2019 in which those private equity bros who are sure to get bashed put another $5mm of equity capital into the company. They likely would have had more fun just putting all of that money on "black” at the roulette table.

Meanwhile, the company’s efforts to refinance its debt and/or sell stalled badly. It sold 5 underperforming stores but the rest of the company’s inventory will be the responsibility of Hilco Merchant Resources LLC and Gordon Brothers Retail Partners LLC to sell; the sale of its locations the responsibility of A&G Realty Partners LLC; and the sale of the company’s IP, the responsibility of Hilco Streambank. This mandate is raining liquidators!! Toss in legal, a financial advisor and a strategic communications advisor and the question is: is there anyone left to hire to wind down this company?

*Interestingly, The Charlotte Observer reported that “[t]he number of grocery stores in the [Charlotte] metro area has grown by 38% in five years,” a real head-turner of a stat.

** GroceryDive reported:

“They made some strategic mistakes expanding too far into some non-continuous markets,” Burt Flickinger, managing director of Strategic Resources Group in New York, told Grocery Dive. He said Earth Fare’s key markets “were some of the most over-stored on the Eastern seaboard.”

They also note that the pain is pervasive:

Given their large size and market overlap with Earth Fare and Lucky’s, Sprouts and Whole Foods appear to be the main beneficiaries of this round of specialty store closures, sources said. But these chains certainly don’t have it easy. Whole Foods has not returned to profitable growth under Amazon, according to that company’s quarterly earnings reports, while Sprouts’ stock has dropped with the news from Lucky’s and Earth Fare.

“It’s an unforgiving market out there,” Flickinger said.

Indeed!

  • Jurisdiction: D. of Delaware (Judge Owens)

  • Capital Structure: $43.33mm RCF (Fifth Third Bank), $21.67mm RCF (Wells Fargo Bank NA), $14.8mm Term Loan

  • Professionals:

    • Legal: Young Conaway Stargatt & Taylor, LLP (Pauline Morgan, M. Blake Cleary, Sean Greecher, Shane Reil)

    • Financial Advisor/CRO: FTI Consulting Inc. (Charles Goad)

    • Asset Disposition Advisor: Malfitano Advisors LLC

    • Liquidation Consultants: Hilco Merchant Resources LLC and Gordon Brothers Retail Partners LLC

      • Legal: Pepper Hamilton LLP (Douglas Hermann, Marcy McLaughlin Smith)

    • Real Estate Consultant: A&G Realty Partners LLC

    • IP Consultant: Hilco Streambank

    • Strategic Communications Advisor: Paladin Management Group LLC (Jennifer Mercer)

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

  • Other Parties in Interest:



New Chapter 11 Filing - Bayou Steel BD Holdings LLC

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Bayou Steel BD Holdings LLC

October 1, 2019

It’s all of the rage these days to rail on private equity. Elizabeth Warren is all over the industry these days and we, too, have been very critical of PE-backed shenanigans (mostly dividend recaps) that ultimately help destroy companies. The truth is, however, that there are two sides to that coin. Private equity can be a critical source of liquidity to businesses that might not otherwise get it.

And so this means that private equity is often in places you wouldn’t suspect. As just one example, we’ve previously noted, in our usually snarky way, how your Nana’s post-acute care may be powered by private equity. Here is another example: Bayou Steel BD Holdings LLC. Bayou Steel is a mini-mill with electric arc furnace steelmaking, continuous billet casting, and a medium section rolling mill; it also operates a bar product rolling mill. Its facilities are in Tennesee and Louisiana; it also has distribution depots in Oklahoma, Illinois and Pennsylvania. Since 2016, nearly 13 years after a previous foray in bankruptcy court, the company has been owned by Black Diamond Capital Management. Three years later, it and two affiliated companies are chapter 11 debtors: they filed for bankruptcy earlier this week in the District of Delaware.

The debtors’ bankruptcy papers are not as fulsome as we’re accustomed to. They don’t provide an extensive history of the company; they don’t offer a sweeping synopsis of the events that led to the chapter 11 filings; they don’t mention any sort of sordid mismanagement by their private equity sponsor; they don’t serve as de facto marketing materials for any prospective buyer. To that last point, there’s no mention whatsoever of any banker marketing the assets at all. There’s also no DIP credit facility: the company intends to function in bankruptcy using Bank of America NA ($BAC) and SunTrust Bank’s ($STI) cash collateral. To what end? To liquidate its inventory and assets.

They do mention, however, that the company “suffered under its debt load” which, ultimately, created “severe liquidity issues” and “eventually default” under its asset-backed loan facility (“ABL”). The company has $41.25mm outstanding under the ABL and another $36.5mm outstanding, mostly on a second lien basis, under a term loan with Black Diamond Commercial Finance LLC.* Per the company:

Left with no liquidity, and little hope of turnaround, the Company determined not to purchase any further raw materials and, as it has done in the ordinary course of business in the past when faced with excess inventory or liquidity concerns, the Company began selling off its finished goods inventory in order to pay down its secured debt.

They also sh*tcanned an overwhelming majority of their employees — all of whom were in “complete shock.”

Governor John Bel Edwards (D) — who is set to experience a tough primary in mid-October — chimed in with a statement:

“The Louisiana Workforce Commission is working with the company, the parish president and elected officials to assist those employees who are directly impacted by today’s news,” said Gov. Edwards. “While Bayou Steel has not given any specific reason for the closure, we know that this company, which uses recycled scrap metal that is largely imported, is particularly vulnerable to tariffs. Louisiana is among the most dependent states on tariffed metals, which is why we continue to be hopeful for a speedy resolution to the uncertainty of the future of tariffs. Meanwhile, we will do everything within our power to help those displaced workers.”

Curious. Indeed, the company did give a specific reason for the closure: its debt. Is it possible that tariffs played a role? Sure, that wouldn’t surprise us. But the company did not expressly state that (in its papers at least).

But since we’re on the topic of tariffs, let’s go there. In early September, in “💥PG&E. Sugarfina. uBiome. PetroSmart.💥,” we wrote the following:

Retail (Long Leverage & BSDs). Oh man. Target Inc. ($TGT) ain’t trifling. Choice bit:

“Target has communicated to its suppliers the retailer will not be raising prices for consumers nor accepting higher prices from suppliers as a result of existing and forthcoming tariffs on imported Chinese goods. 

‘Our expectation is that you will develop the appropriate contingency plans so that we don’t have to pass price increases along to our guests,’ wrote Target Executive Vice President and Chief Merchandising Officer Mark Tritton in a memo, according to multiple outlets.”

Savage. Can’t wait to see “the Target Effect” mentioned in future First Day Declarations.

We were highlighting Target, specifically, but we were also foreshadowing something we expected to see, generally, over coming months: that is, US trade policy affecting domestic companies and, at least in part, causing chapter 11 bankruptcy filings. Is it happening?

In mid-September, the Barber Steel Foundry in Rothbury Michigan announced that it would close at the end of the year. 61 people will have a rough holiday season. This followed a July announcement that NLMK Pennsylvania, would layoff 80 workers and slow production. Even big time U.S. Steel Corp. ($X) announced that it would shut down two furnaces at its flagship plant in Indiana. Professor Mark Perry, writing for the conservative American Enterprise Institute blog, noted the following:

Measured by the loss of stock market capitalization since March 2018, the steel tariffs have contributed to the following losses: the stock market value of Nucor has declined by $5.2 billion, US Steel by $5.5 billion and Steel Dynamics by $3.7 billion, for a combined loss of stock market capitalization for the three steel companies of $14.4 billion.

Regardless of whether Governor Edwards’ claims are correct in this specific case, there is zero doubt that tariffs will continue to reverberate throughout the business community and help spark bankruptcy filings.

*The second lien term lenders have a first lien on the company’s real estate. They may be a critical element to this case.

  • Jurisdiction: D. of Delaware (Judge Owens)

  • Capital Structure: $41.25mm ABL Credit Facility (Bank of America NA, SunTrust Bank), $36.5mm Term Loan (Black Diamond Commercial Finance LLC — first lien on real estate)

  • Professionals:

    • Legal: Polsinelli PC (Christopher Ward, Shanti Katona, Stephen Astringer)

    • Financial Advisor: Candlewood Partners LLC

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

  • Other Parties in Interest:

    • Prepetition Agent: Bank of America NA

      • Legal: Vinson & Elkins LLP (William Wallander, Bradley Foxman) & Richards Layton & Finger PA (Mark Collins)

    • Secured Lender: Black Diamond Commercial Finance LLC

📰New Chapter 11 Bankruptcy Filing - The News-Gazette Inc.📰

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The News-Gazette Inc.

August 30, 2019

The New York Times recently declared:

The crisis in local journalism is catastrophic — and it will get worse. More than 1,300 communities across the United States are without local news coverage, and thousands more have inadequate journalism. At the next recession, the collapse will accelerate.

Studies have now validated what we all know intuitively: The disintegration of community journalism leads to greater polarization, lower voter turnout, more pollution, less government accountability and less trust.

Insert doomsday music here, folks.

Champaign Illinois-based The News-Gazette Inc. is the leading local news source in Champaign County, Illinois. It publishes a daily newspaper that reaches approximately 22k people Monday-Friday and 24.3k people on Sunday; it has five weekly newspapers, two advertising-oriented shopper products and two magazines; through a wholly owned debtor subsidiary, DWS Inc., it also operates three radio stations and several companion websites.

Now it is another example of a struggling local news provider. The company filed for bankruptcy in the District of Delaware over the holiday weekend.

In 2008, the company “took on substantial debt to complete the first phase of a new 48,865-square-foot printing and distribution facility” and completed said phase (the distribution part) just prior to the Great Recession. The rest of the project — including the acquisition of a new printing press geared towards driving a regional commercial printing business — never got done. The company notes:

The “great recession” of 2008, however, marked the beginning of an accelerated trend of advertising revenue declines for the newspaper business in general. As revenues fell and financial performance suffered, expansion plans had to be shelved because Debtors could neither access, nor afford, the capital necessary to complete the project.

Compounding matters:

Over the last decade, circulation trends have generally been better than industry averages owing in large part to a continued commitment to maintaining a very high-quality news product. During the last two years, however, the rate of decline in circulation has increased meaningfully.

“Better than industry averages” is, by definition, a relative measurement. Which ain’t saying much. On the other hand, the metrics are “saying much.” Revenue dropped from $17.1mm in 2017 to $13mm in 2018. EBITDA went from $70k in 2016 to -$4.83mm in 2018.

Consequently, the debtors have spent the last few years rejiggering their business. That, naturally, means that people lost jobs. The debtors outsourced their production operations and liquidated its production assets; they also reduced their expenses and eliminated the facility-related debt. Nevertheless, the debtors needed an escape hatch; in late 2018, they engaged a broker to solicit interest from a strategic buyer “with financial resources and media footprint to further economize operations” to operate the debtors as a going concern.

The goal of the chapter 11 bankruptcy filing is to effectuate a sale to Community Media Group LLC by early November. Community Media Group is a privately-held multimedia company which owns and operates roughly 40 newspapers in six states. Subject to standard sale adjustments, CMG will pay $4.5mm.

It appears that the future of local news is increasingly in their hands.

*****

What happens to the employees? Well, as noted above, a number have already lost their jobs and those that remain were the glorious recipients of WARN notices (though some may be rehired). The company’s CEO said:

“It is most certainly regrettable that some employees won’t be rehired during the transition. Our economic circumstances — which are not unique to this operation — require that we operate more efficiently. Absent this sale transaction, we would be making similar decisions.”

The buyer is also leaving behind any and all liabilities (including withdrawal liabilities) with respect to defined benefit plans, pensions or similar retirement plans. As luck would have it, those liabilities make up the debtors’ three largest creditors:

Source: Chapter11 Petition

Source: Chapter11 Petition

With a purchase price of $4.5mm, well, you can get a sense of how creditors, including folks who depended upon those pensions, will fare here. Pension liabilities alone are nearly $9mm.

And so this is a bittersweet result. The paper will live on but those who helped build it will be undeniably affected.

  • Jurisdiction: D. of Delaware (Judge Owens)

  • Professionals:

    • Legal: Chipman Brown Cicero & Cole LLP (William Chipman Jr., Mark Olivere) & Neal Gerber & Eisenberg LLP (NIcholas Miller Jr., Thomas Wolford)

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

  • Other Parties in Interest:

    • Stalking Horse Bidder: Community Media Group/Champaign Multimedia Group LLC

      • Legal: Leech Tishman Fuscaldo & Lampl LLC (John Steiner, Gregory Hauswirth)