🎓New Chapter 11 Bankruptcy Filing - The College of New Rochelle🎓

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The College of New Rochelle

September 20, 2019

Non-profit The College of New Rochelle filed for bankruptcy, an unfortunate step for a school founded in 1898 and meant to serve underprivileged and first-generational college students. Sadly, the school’s problems stem from a rogue Controller who (i) failed to pay payroll taxes over a two year period, (ii) misappropriated government grant money, (iii) used endowment funds in an unauthorized manner, (iv) stiffed creditors with all kinds of schemes, and (v) concealed the true nature of the school’s financial condition by, among other things, misrepresenting financial health and issuing false financial statements. Ouch.

While Mr. Incompetent Controller pled guilty to fraud and failure to pay payroll taxes, that, unfortunately, does not cure the financial situation for the school, which finds itself “with over $31 million in previously undisclosed debts.” As for the Controller, he was sentenced to three years in federal prison, a $25k fine, and ordered to pay restitution of no less than $13.2mm — which there isn’t a chance in hell he’ll be able to do.

As if this isn’t horrible enough already, the school’s endowment is too small and the school’s enrollment revenue is too inadequate to address this massive liability. Consequently, the school is now forced to wind-down to pay off its debts. As a practical matter, what does this mean? Well, first, the school had to figure out a solution for its students. It did so via a “teach-out agreement” with a neighboring school, pursuant to which the students were able to continue their education and secure credit. Second, the school owns its real estate and has hired a real estate broker to pursue sales thereof. Those sales will go a long way towards paying the past due taxes owed and secured debt. The company has a commitment for a $4mm DIP credit facility to fund the cases.

What a sad social commentary: one dude’s malfeasance tore down 100+ years of history. Tragic.

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

  • Capital Structure: $31.9mm secured loan (Citizens Bank/DASNY), $2mm secured loan (Carney Family Charitable Foundation), ~$2.4mm secured loan (Key Bank NA), ~$14mm bond debt (Industrial Bonds, UMB Bank NA, trustee)

  • Professionals:

    • Legal: Cullen and Dykman LLP (Matthew Roseman, Bonnie Pollack, Elizabeth Aboulafia, Sophia Hepheastou)

    • Financial Advisor/CRO: Getzler Henrich & Associates LLC (Herbert Weil, Mark Podgainy)

    • Real Estate Broker: A&G Realty Partners LLC/B6

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

  • Other Parties in Interest:

    • Key Bank NA

      • Legal: Nolan Heller Kauffman LLP (Francis Berman)

    • DIP Lender ($4mm): Summit Investment Management LLC

      • Legal: Kilpatrick Townsend & Stockton LLP (Todd Meyers, David Posner, Paul Rosenblatt)

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

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Edgemarc Energy Holdings LLC

May 15, 2019

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

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

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

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

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

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

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

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

Docket #17, Rejection Motion.

Docket #17, Rejection Motion.

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

  • Jurisdiction: D. of Delaware (Judge Shannon)

  • Capital Structure:

  • Professionals:

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

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

    • Financial Advisor: Opportune LLC and Dacarba LLC

    • Investment Banker: Evercore Partners

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

  • Other Parties in Interest:

    • Prepetition & DIP Agent: Keybank NA

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

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

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

    • ETC

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

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

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Kona Grill Inc.

April 30, 2019

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

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

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

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

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

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

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

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

  • Jurisdiction: D. of Delaware (Judge )

  • Capital Structure: $33.2mm

  • Professionals:

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

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

    • Investment Banker: Piper Jaffrey

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

  • Other Parties in Interest:

    • DIP Agent: KeyBank National Association

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

New Chapter 11 Filing - Neighbors Legacy Holdings Inc.

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Neighbors Legacy Holdings Inc.

7/12/18

Look! Some healthcare distress. 

Neighbors Legacy Holdings Inc., an operator of 22 freestanding emergency centers throughout the state of Texas filed for bankruptcy on July 12, 2018. The company blames its filing on "financial difficulties caused in large part by increased competition, less favorable insurance payor conditions, declining revenues, and disproportionate overhead costs as compared to their operational income." In other words, its owners did too much too fast, taking on too much debt to expand too rapidly in a space that requires significant upfront capital investment in exchange for a 12-18 month lag in cash flow generation. Initiate death spiral. 

The company's financial numbers look brutal. Per the First Day Declaration:

"...the Debtors’ consolidated EBITDA dropped from $49 million in 2015, to $45 million in 2016, to $10.3 million in 2017. This drop has been caused, in part, by the increased competition in the industry, which has led to lower patient volumes per Emergency Center. For the Emergency Centers opened prior to 2016, the average claims per day fell from approximately 13 in the first quarter of 2017 to approximately 10 currently. For Emergency Centers opened during 2016, there continues to be, on average, fewer than 10 claims per day. This marked reduction in patient volume led to a strain at previously profitable locations and underperformance at new locations."

The company, therefore, has been engaged in a game of whack-a-mole, trying to plug leakages in the enterprise in order to survive. The company had to close several unprofitable locations and abandon planned (but never opened) locations. It also took down SG&A, all the while alienating relationships with critical parties like landlords, vendors and doctors. You know, like, critical cogs in a medical service machine. 

On the bright side, the company does have a stalking horse bidder in tow. Altus Health Systems OPCO LLC and Altus Health System Realty LLC are the staking horse bidder for Houston assets. The company will utilize the "breathing spell" provided by the filing to conduct an auction and attempt to maximize the value of the assets in a competitive process. 

  • Jurisdiction: S.D. of Texas (Judge Isgur)
  • Capital Structure: $30mm RCF & $120mm term loan (KeyBank National Association)
  • Company Professionals:
    • Legal: Porter Hedges LLP (John Higgins, Eric English, Genevieve Graham)
    • CRO/Financial Advisor: CohnReznick LLP (Chad Sandler)
    • Investment Banker: Houlihan Lokey Inc. 
    • Claims Agent: KCC (*click on company name above for free docket access)
  • Other Parties in Interest:
    • Prepetition Lender: KeyBank National Association
      • Legal: Reed Smith LLP (Lloyd Kim, Matthew Tashman)