🏥New Chapter 11 Bankruptcy Filing - Thomas Health System Inc.🏥1/10/20

Thomas Health System Inc.

January 10, 2020

Yeah, we poo poo’d the whole healthcare distress theme because, well, there was a lot of bluster and not many large restructurings. Which is not to say that there weren’t restructurings. There were. A ton in fact. And patients apparently got left in complete and utter disarray as a result.

Now there’s another one to watch.

Thomas Health System Inc., a West Virginia nonprofit public benefit corporation, filed for bankruptcy along with two debtor hospitals (Charleston Hospital Inc. d/b/a Saint Francis Hospital and Thomas Memorial) and another debtor ancillary services provider (THS Physicians Partners Inc.). It claims to be the 17th largest private employer in West Virginia. Collectively, the debtors form a 391-bed hospital system and employ approximately 1700 people. Meaningful.

Also meaningful is the debtors’ $137.9mm of secured bonds and $45mm of underfunded pension obligations. The debtors annual debt service in 2019 was ~$10.8mm; their revenues were ~$267mm; their operating expenses were ~$253.3mm; and their net loss was ~$6.6mm. Clearly the debt service is making a mark.

In addition to their debt, the debtors cite a laundry list of reasons that led to their bankruptcy. In a nutshell, they boil down to “Thanks Obama.” Kidding, kidding. Well, sort of. These are all of the issues the company listed:

• Implementation of the Affordable Care Act (thanks Obama);

• The decline of the coal industry (“the war on coal”) and the thousands of resultant job losses (thanks Obama, and thanks Hillary for good measure);

• Medicaid expansion (thanks Obama);

• Reduced reimbursement rates (thanks Obama); and

• Patient outmigration to competing health systems (ah, f*ck it, yeah thanks Obama).

On brand, we’re being a bit flip here but the numbers cited here are staggering:

Between fiscal year 2015 and FY 2018, the Hospitals have seen a decline of adjusted admissions, observations, and emergency room visits by approximately 12%, 26% and 45%, respectively. In addition, over the last five years, the commercial insurers’ share of payor mix has declined from approximately 28% to approximately 18%.

So, visits are ⬇️. And reimbursements are ⬇️. Compounding matters is the complexity of treatment needed:

…recent reports rated West Virginia’s overall health as a state at 46th out of the 50 states, based largely on the facts that West Virginia has the highest number of opioid-related overdose deaths in the United States in 2017 and has the highest obesity rate in the country, leading to an increasing rate of diabetes. All of these factors contribute to increased healthcare costs to be borne by the Debtors suffering from substantial reductions in Medicare reimbursement.

The debtors have been trying to pursue strategic alternatives since February 2019. To no avail. The bankruptcy, presumably, is meant to re-energize those efforts. They defaulted on their bonds and so the filing will also give the debtors a “breathing spell” to try and de-lever their balance sheet.

• Jurisdiction: S.D. of West Virginia (Judge )

• Capital Structure:

• Professionals:

  • Legal: Whiteford Taylor & Preston LLP (Brandy Rapp, Michael Roeschenthaler) & Frost Brown Todd LLC (Jared Tully, Ronald Gold, Douglas Lutz)

  • Financial Advisor: Force Ten Partners LLC

  • Investment Banker: SOLIC Capital Advisors LLC

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

• Other Parties in Interest:

  • Indenture Trustee: UMB Bank NA

    • Legal: Mintz Levin Cohn Ferris Glovsky & Popeo PC (Colleen Murphy, Ian Hammel, Timothy McKeon) & Dinsmore & Shohl LLP (Janet Smith Holbrook)

New Chapter 11 Filing - NeuroproteXeon Inc.

NeuroproteXeon Inc.

December 16, 2019

Many restructuring professionals predicted that “healthcare” would be an active area for bankruptcy in 2019. We suppose painting with such a broad brush increases the likelihood of being correct but it seems that the majority of the activity has really been in specific subsets, e.g., community retirement centers, biopharmaceuticals, and biotech/med-devices. Add another notch to the latter category.

New York-based NeuroproteXeon Inc. and its three affiliated debtors is the latest player in the space; it is “generally engaged in the development, commercialization and marketing of pharmaceutical agents, medical devices and/or other life sciences technologies.” The debtors have been “developing, testing and obtaining worldwide regulatory approval of a product consisting of pharmaceutical grade xenon gas for inhalation, which has been trademarked under the name XENEX™, and a propriety device…which delivers a combination of XENEX™ and oxygen to the respiratory system of persons who experience Post-Cardiac Arrest Syndrome….” The debtors device entered Phase III testing in 2018. But then it got suspended.

Why? Simply, the debtors ran out of money. The bankruptcy provides the debtors with access to critical funding — $5mm from JMB Capital Partners Lending LLC — that will allow them to continue to pursue testing. Meanwhile, the debtors’ investment bankers will market and try to sell the debtors’ assets.

• Jurisdiction: D. of Delaware (Judge Walrath)

• Capital Structure: $250k (JMB)

• Professionals:

  • Legal: Ashby & Geddes PA (William Bowden, Gregory Taylor, Stacy Newman)

  • Financial Advisor: Emerald Capital Advisors Corp. (John Madden)

  • Investment Banker: Lincoln Partners Advisors LLC (Brent Williams)

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

• Other Parties in Interest:

  • DIP Lender: JMB Capital Partners Lending LLC

    • Legal: Arent Fox LLP (Robert Hirsh, Beth Brownstein) & The Rosner Law Group LLC (Frederick Rosner, Scott Leonhardt, Jason Gibson)

⛽️New Chapter 11 Filing - KP Engineering LP⛽️

KP Engineering LP

August 23, 2019 (UPDATE: The company emerged from bankruptcy court on June 23, 2020.)

Texas-based KP Engineering LP and an affiliated debtor filed for bankruptcy in the Southern District of Texas. The debtors are “in the business of designing and executing customized engineering, procurement, and construction (“EPC”) projects for the refining, midstream, and chemical industries.” Said another way, the debtors contract to serve as a general contractor for their clients, functioning as project manager overseeing subcontractors during the development and completion of facilities for clients. One thing about this kind of business: particularly when you have over $68mm of debt, your contracts have to be economical and your clients have to like you. It seems that the debtors fail on both counts.

In January 2017, the debtors entered into an EPC contract with Targa Pipeline Mid-Continent WestTex LLC (a subsidiary of Targa Resources Corp. ($TRGP)) to design, procure equipment for and construct a 200mm cubic feet per day gas cryogenic processing plant. The plant is complete and now operational. Unfortunately for the debtors, however, they “sustained a significant economic loss.” Solid job, guys! At least it helped them get additional work from Targa…

…that Targa then fired them from and are now suing over.

In August 2017, the debtors entered into an EPC for a second plant with Targa but prior to full completion, Targa allegedly stopped paying which had the cascading effect of limiting the debtors’ ability to pay its subcontractors. Earlier this month, Targa terminated the EPC agreement and booted the debtors from the job site. Now subcontractors and Targa are suing the debtors for, among other things, lack of payment. The debtors indicate that the litigation forced the debtors into bankruptcy.

So, what now? It’s unclear. The debtors have a $4mm DIP commitment but the papers don’t make it clear where the debtors intend to go from here. Curiously, the debtors provide this hanging explanation for why they’re in chapter 11:

The Debtors face a number of risks to their business. The landscape surrounding the EPC contractor market is competitive, highly technical, and fast-changing. The Debtors face risks related to a changing environment in which technological advancement is altering their core business. An inability to innovate could be detrimental to the future of the Debtors. However, the Debtors’ present innovation has been the cornerstone of its success to date.

We get some of this. We suppose the first plant was uneconomical because fierce competition affected bidding. But what is the rest of this trying to say? What tech advancement are the debtors referring to? What innovation? Are there competitors founded by Jeff Bezos? We mean, WTF? It’s almost like management here forgot for a second that the debtors aren’t a public company and, therefore, there’s no need to throw out buzzwords.

Whatever. Good luck with bankruptcy, you crazy cowboys.

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

• Capital Structure: $68mm of total debt

• Professionals:

  • Legal: Hunton Andrews Kurth LLP (Jennifer Wuebker, Greg Hesse, Edward Clarkson, Justin Paget) & Okin Adams LLP (Christopher Adams)

  • Financial Advisor/CRO: Claro Group LLC (Douglas Brickley)

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

• Other Parties in Interest:

  • Prepetition Lender: Texas Capital Bank

  • DIP Lender ($4mm): BTS Enterprises Inc.

⛽️New Chapter 22 Bankruptcy Filing - PES Holdings LLC⛽️

PES Holdings LLC

July 21, 2019

Picture the private equity associate. He’s sitting at his desk, twiddling his thumbs, looking for something to do. All is good in the world: the portfolio is humming along, he hasn’t gotten roped into a lose/lose golf tournament with the senior partners in a while, and he just wants to lay low and ride out the summer if he can. Then, suddenly, on one fateful summer day in June, one of his portfolio companies just up -and-decides to randomly explode — or, as the company puts it, suffer a “historic, large-scale, catastrophic accident.” Suddenly he’s mopping the floor with his jaw.

This sudden turn of events is particularly stupefying when you consider that the portfolio company — PES Holdings LLC, aka Philadelphia Energy Solutions — happens to be a 150 year-old oil refining complex that also happens to be (i) the largest on the United States Eastern seaboard (representing approximately 28% of the crude oil refining capacity on the east coast), and (ii) an employer of 950 employees. What are the possible knee-jerk reactions here? Are they:

1. “Oh sh*t, there goes our portfolio for the year!”

2. “F******ck, did our investment literally just go up in smoke?”

3. “Am I going to have a job tomorrow?”

Then there are likely the secondary considerations:

1. “How will the Commonwealth of Pennsylvania and the City of Philadelphia fulfill their energy needs?”

2. “Oh no! Did anyone die??!?”

That’s right: we’re cynical AF. After those two waves of initial thoughts and after a deep breath, we bet these were the next questions:

1. “Do we have to file this thing for ANOTHER bankruptcy now?”

2. “How robust is our insurance coverage? What are our insurance premiums and can we keep paying them to ensure coverage?”

3. “Is this an opportunity? How do we transfer all of the risk and best position ourselves to drive equity value here?”

The latter two considerations — as heartless and lacking in empathy as they may be — are highly realistic. And highly relevant, considering the explosion and attendant fire on June 21 forced the company to shut down its plant. The timing couldn’t have been worse: the explosion took place mere days after the company finalized the implementation of a new intermediation facility. Now, though, all “momentum” is lost: the company is currently inoperable and will require an extensive rebuild: at limited capacity and with massive fixed operational costs, the company would have burned (pun most definitely intended) through $100mm in liquidity within a few weeks. Cue the chapter 22 bankruptcy filing.*

Of course, prior to the filing, the company engaged in dialogue with its insurers:

The Debtors also immediately began a process to engage with their insurers—as it relates to property and business interruption insurance claims for the losses caused by the Girard Point Incident—to advance a dialogue toward an immediate advance and a global resolution that will allow the Debtors to restore their operations. The Debtors have yet to obtain such an advance.

Show us an insurer who is ready and willing to fork over proceeds on a moments notice and we’ll show you a bridge we’re selling.

The Debtors’ goal in the near term remains continuing to preserve the safe operation of the Refining Complex while they seek to recover as quickly as possible on their property and business interruption insurance claims and pursue various transactions to preserve their operations and maximize value.

We’re not talking about peanuts here, folks:

The Debtors have $1.25 billion in property and business interruption insurance coverage to protect against these kinds of losses (in addition to other insurance policies that cover other aspects of the Girard Point Incident). The Debtors are working with the insurers under that program to make the Debtors whole for the physical loss of the refinery and the resulting interruption of the Debtors’ business. These insurance proceeds are the very heart of these chapter 11 cases: the sooner the Debtors can recover, the sooner the business can complete its recovery.

While the company waits for the insurers to cough up some cash, it, obviously, needs to focus on safety issues and fire-related cleanup. To that end, it secured a $100mm DIP commitment from certain of its term loan lenders and continues to engage in discussions with ICBC Standard Bank PLC about a dual-DIP structure that would avail the company of even more liquidity. Ultimately, the company hopes to reorganize as a going concern. The extent to which the insurers play ball will dictate whether that’s possible. Something tells us there are some risk analysts combing through those policies with a fine tooth looking for any and all exemptions that they can pull out of their a$$es.

*According to the company, the first chapter 11 filing: “(i) secured a capital infusion of approximately $260 million; (ii) extended the Debtors’ debt maturities through 2022; (iii) reduced the Debtors’ anticipated debt service obligations by approximately $35 million per year; (iv) provided the Debtors with access to a new intermediation facility; and (v) provided the Debtors with relief from certain regulatory obligations.”

• Jurisdiction: D. of Delaware (Judge Gross)

• Capital Structure: see below

• Professionals:

  • Legal: Kirkland & Ellis LLP (Edward Sassower, Steven Serajeddini, Matthew Fagen, Michael Slade, Allyson Smith Weinhouse, Patrick Venter, Nacif Taousse, Whitney Becker) & Pachulski Stang Ziehl & Jones LLP (Laura Davis Jones, James O’Neill, Peter Keane)

  • CRO: Stein Advisors LLC (Jeffrey Stein)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: PJT Partners LP

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

• Other Parties in Interest:

😷New Chapter 11 Filing - Center City Healthcare LLC (d/b/a Hahnemann University Hospital)😷

Center City Healthcare LLC

June 30, 2019

We take a break from our regularly scheduled oil and gas distress to bring you some regularly scheduled healthcare distress. That’s right: more healthcare distress. Here, Philadelphia Academic Health System LLC and 12 affiliated debtors — including two major hospitals in Philadelphia, St. Christopher’s Hospital for Children (“STC”) and Hahnemann University Hospital (“HUH”) and related physician practices — have filed for bankruptcy in Pennsyl…strike that…in the District of Delaware.* Gotta love venue!

This bankruptcy case likely marks the end of HUH, an academic medical center that (a) is the primary teaching hospital for Drexel University and (b) has been providing healthcare services since 1848.

According to the debtors, their troubles can be traced back to an August 2017 acquisition — consummated in January 2018 — of the assets (i.e., operating entities, non-debtor entities owning the real estate upon which the hospital operate, and certain receivables) from Tenet Business Services Corporation. The debtors’ primary source of funding for the acquisition was a pre-petition credit facility from Midcap Funding IV Trust.

Immediately after the sale, the debtors realized that they bought a lemon. Per the debtors:

Disputes arose between the Debtors and Tenet with regards to, among other things, the “Net Working Capital Adjustment” provided for under the parties’ Asset Sale Agreement, most notably, for overstated amounts of accounts receivable totaling approximately $21 million. The Debtors also learned that approximately $5 million of amounts received by Tenet at closing in order for it to pay certain accounts payable was never in fact paid. These issues resulted in a significant liquidity shortfall that adversely affected the Debtors’ operations almost immediately after closing of the Acquisition.

The parties are now in litigation with Tenet asserting counterclaims. Gotta hate when that happens. And that’s not the end of it:

Disputes also arose between the parties regarding the financial condition of the Debtors’ businesses, wherein the Debtors asserted that they were led to believe during due diligence process for the Acquisition that the business, as a whole, was essentially breaking even through November 2017 on an EBITDA basis. In fact, the business lost more than $6 million during its first full operational month in February 2018, and continues to experience substantial losses. The Debtors and their affiliates have asserted indemnity and fraud claims against Tenet on these grounds, which Tenet disputes.

Basically this is a hot mess. Coupled with (i) disputes with Drexel, (ii) delays in, and reduction of, payments of supplemental payments from the Commonwealth of Pennsylvania, (iii) decreased patient volumes in 2018, (iv) increased losses by certain of the physician groups, (v) material declines in outpatient procedures and surgeries; and (vi) reductions in average daily census, partly due to a reduction in average length of stay and reduced direct admissions, HUH encountered a maelstrom of negative operational issues to the tune of a pre-tax 2018 loss of approximately $69mm. STC is profitable; it, however, is dragged down by the rest of the enterprise. All in, the debtors pre-tax losses in 2018 exceeded $85mm and have not abated in 2019. Due to this piss poor financial performance, the debtors defaulted on their MidCap credit facility.

The debtors intend to use the chapter 11 process to pursue an orderly wind down of HUH while, contemporaneously, pursuing a sale of STC and the related physician practices. No stalking horse bidder is currently lined up. The debtors do, however, have a commitment from Midcap for $65mm of DIP financing, of which it appears less than $7mm will be new money.

Now is an occasion for Philly to, once again, show how tough it can be.

*SCH, HUH and their corporate parent, Philadelphia Academic Health System LLC, are all DE LLCs.

• Jurisdiction: D. of Delaware (Judge Gross)

• Capital Structure: $38.6mm RCF & $20mm TL (Midcap Funding IV Trust)

• Professionals:

  • Legal: Saul Ewing Arnstein & Lehr LLP (Monique Bair DiSabatino, Mark Minuti, Jeffrey Hampton, Adam Isenberg, Aaron Applebaum, Jeremiah Vandermark) & Klehr Harrison Harvey Branzburg LLP

  • Financial Advisor/CRO: EisnerAmper LLP (Allen Wilen)

  • Investment Banker: SSG Advisors LLC

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

• Other Parties in Interest:

  • Prepetition & DIP Lender ($65mm): MidCap Funding IV Trust

  • Tenet Business Services Corp.

    • Legal: Kirkland & Ellis LLP (Gregory Pesce) & (local) Pachulski Stang Ziehl & Jones LLP (Laura Davis Jones)

New Chapter 11 Bankruptcy Filing -- FTD Companies Inc.

FTD Companies Inc.

June 3, 2019

After the issuance of Illinois-based FTD Companies Inc’s ($FTD) most recent 10-K, everyone and their mother — well, other than maybe United Parcel Service Inc. ($UPS)* — knew that FTD was headed towards a bankruptcy court near you. It arrived.

The company is a floral and gifting company operating primarily within the United States and Canada; it (and its affiliated debtors) specializes in providing floral, specialty foods, gift and related products to consumers (direct-to-consumer), retail florists and other retail locations. The company basks in the glory of its “iconic” “Mercury Man” logo, which it alleges is “one of the most recognized logos in the world.” Seriously? Hyperbole much?🙄

Maybe…not? This, for any sort of history nerd, is actually pretty interesting:

Originally called "Florists' Telegraph Delivery Association," FTD was the world's first flowers-by-wire service and has been a leader in the floral and gifting industry for over a century. The Debtors' story began in 1910 when thirteen American retail florists agreed to exchange orders for out-of-town deliveries by telegraph, thereby eliminating prohibitively lengthy transit times that made sending flowers to friends and relatives in distant locations almost impossible. The idea revolutionized the industry, and soon independent florists all over America were telegraphing and telephoning orders to each other using the FTD network. In 1914, FTD adopted the Roman messenger god as its logo and, in 1929, copyrighted the Mercury Man® logo as the official trademark for FTD.

This company is only slightly younger than Sears (1893). And so this bankruptcy filing is a bigger deal than meets the eye. This company revolutionized flower delivery, regularly innovating and expanding its reach over its decades in business. In 1923, FTD expanded to Britain. In 1946, FTD, FTD Britain and a European clearinghouse established what is now known as Interflora to sell flowers-by-wire around the world. In 1979, the company launched an electronic system to link florists together; and in 1994, it launched its first e-commerce site. In other words, this company always tackled the “innovator’s dilemma” head on, pivoting regularly over time to seize opportunities whenever and wherever they emerged. For quite some time, this was, at least for some time, an impressive operation — seemingly always one step ahead of disruption. WE ALL LIKELY TAKE FOR GRANTED JUST HOW EASY IT IS TO DELIVER FLOWERS THESE DAYS. These guys helped make it all possible. If ever a debtor was in need of a hype man, this company is it. A read of the bankruptcy papers barely gives you a sense for the history and legacy of this company.

Interestingly, for much of its history, the company was actually a not-for-profit. That’s right: a not-for-profit. Per the company:

For the majority of its existence, FTD operated as a not-for-profit organization run by its member florists. With the florists as its core, the Debtors' legacy business provided a powerful mix of a "local," authentic, and bespoke product, broad geographic range, and a commitment to exacting standards of quality and service. Moreover, the Debtors historically were devoted to creating an optimal product for their florist network, including through investment in innovation and technology and marketing the FTD brand and the floral industry overall. As a result, florists sought out FTD membership, and the FTD brand had (and still has) significant caché in the industry.

Amazing!

So what the hell happened? Well, the blood-sucking capitalists arrived knocking. Now-defunct Perry Capital acquired FTD in 1994 (the same year that the company established its web presence) and converted the company into a for-profit corporation. In 2000, the company IPO’d and in 2008, United Online (now owned by B.Riley Financial $RILY), merged with the company in a $800mm transaction consummated just prior to the financial crisis. Then, in 2013, FTD spun off from United Online, once again becoming a publicly-traded company on the NASDAQ exchange.

Throughout the company’s evolution, it pursued a strategy of dominating the floral market via strategic acquisitions (and, in the process, drew antitrust scrutiny a handful of times). In 2006, it acquired Interflora and in 2014, it acquired Provide Commerce LLC (ProFlowers) in a $430mm cash and equity transaction. The purchase was predicated upon uniting FTD’s B2B “Florist” business (read: FTD-to-retail-florists) and B2C (read: FTD-direct-to-consumer) businesses with Provide Commerce’s B2C model in such a way that would (i) offer customers greater choice, (ii) provide the company with expanded geographic and demographic reach, and (iii) promote cross-selling possibilities. Per the company:

…FTD anticipated that the Provide Acquisition would generate significant cost synergies through efficiencies in combined operations.

Ah, synergies. Is there anything more romantic than the thought of ever-elusive synergies?

The company incurred $120-200mm of debt to finance the transaction.** You know where this is headed. If not, well, please allow the company to spell it out for you:

Though the Provide Business Units have increased the Debtors' revenue (the Provide Business Units currently contribute more than 50% of the Debtors' total revenue) … certain shifts in the market, technological changes, and improvident strategic outcomes in connection with the implementation of the Provide Acquisition combined to (a) frustrate expectations regarding the earnings of the combined entity and (b) impair the Debtors' ability to refinance near-term maturities, which has driven the Debtors' need to commence these chapter 11 cases.

That sure escalated quickly. 😬

Let’s take a moment here, however, to appreciate what the company attempted to do. In the spirit of its long-time legacy of getting out ahead of disruption, the company identified a competitor that was quickly disrupting the floral business. Per the company:

ProFlowers had entered the floral industry as a disruptor by reimagining floral delivery to consumers. Unlike the Debtors' "asset-light" B2B business model, ProFlowers took ownership of the floral inventory and fulfilled orders directly through a company-operated supply chain. By sourcing finished bouquets directly from farms, limiting product selection, pricing strategically into the consumer demand curve, and leveraging analytically-driven direct response marketing to generate large volumes at peak periods (i.e., Valentine's Day and Mother's Day), ProFlowers appealed to a broad market of consumers who wanted an efficient order process coupled with lower cost purchases.

There’s more:

In addition to these potential opportunities, FTD also viewed the Provide Acquisition as the means to strategically position itself for success within a changing industry. At the time of the Provide Acquisition, the disruptive impact of ProFlowers was perceived as a threat to traditional business models within the floral industry (and to the Florist Member Network specifically). FTD was concerned that, if it failed to adapt and embrace shifting industry paradigms, competitors would take advantage and acquire ProFlowers to FTD's detriment. Accordingly, FTD effected the Provide Acquisition.

We clown on companies all of the time for failing to heed the signs of disruption. But, that’s not actually the case here. This company was, seemingly, on its game. Where it failed, however, was with the post-acquisition integration. It’s awfully hard to realize synergies when businesses effectively run as independent entities. Per the company:

In particular, a number of key post-acquisition targets, such as (a) floral brand alignment, (b) necessary technological investments in the combined business (e.g., the consolidation of technology/ecommerce platforms), and (c) the integration of marketing and business teams, have lagged. As a result, both the Provide Commerce and the Debtors' legacy brands suffered from internal friction and suboptimal structures within the Debtors' enterprise.

And while the company failed to integrate Provide Commerce, the industry never stopped evolving. Competitors didn’t just take the acquisition as a sign that they ought to fold up their tents and relinquish the flower industry to FTD. F*ck no. To the contrary, this is where…wait for it…AMAZON INC. ($AMZN) ENTERS THE PICTURE:***

While the Debtors struggled to unify their businesses and implement the Provide Acquisition, the floral industry – and consumer expectations – continued to evolve. Following the example set by ProFlowers, other companies began to deliver farm-sourced fresh bouquets directly to customers, increasing competition in the B2C space. In addition, the expanding influence of e-commerce platforms like Amazon transformed customer expectations, particularly with respect to ease of experience and the fast, free delivery of goods. Given the perishable and delicate nature of the product, delivery and service fees were standard in the floral industry. As e-commerce companies trained consumers to expect free or nominal cost delivery, floral service fees became anathema to many customers.

Well, Amazon AND venture capital-backed floral startups (i.e., The Bouqs Company - $43mm of VC funding) that could absorb losses in the name of customer acquisition.

The company also blames a significant number of trends that we’ve covered here in PETITION for its demise. Like, for instance, increased shipping and online marketing costs (long Facebook Inc. ($FB)), low barriers to entry for other DTC businesses (long Shopify Inc. ($SHOP)), and “the growing presence of grocers and mass merchants providing low-cost floral products and chocolate-dipped strawberries during peak holidays” (long Target Inc., ($T), Walmart Inc. ($WMT), Trader Joe’s, etc.).

Collectively, market pressures contributed to declining sales and decreased order volumes, impairing the B2C businesses' ability to leverage and capitalize on scale.

In other words, (a) chocolate-dipped strawberries have no f*cking moat whatsoever and (b) as with all other things retail, this is a perfect storm story that is best explained by factors beyond just the f*cking “Amazon Effect” (the most obvious one being: a ton of debt).

Consequently, the company has been mired in a year-plus-long process of triage; it tried to cap-ex its way out of problems, but that didn’t work; it brought in new leadership but…well…you see how that turned out; it attempted to “reinvent” its user experience to combat its techie VC-backed upstart competitors with no results; and, it sought to optimize efficiencies. None of this could stem the tide of underperformance, bolster liquidity, and, ultimately, prevent debt covenant issues. The company currently has $149.4mm of secured indebtedness on its balance sheet (comprised of a $57.4mm term loan and $92mm under a revolving credit facility). The company reports approximately $72.4mm of unsecured debt owed to providers of goods and services.

In a strange fit of irony, it was the most romantic holiday of the calendar year that spelled doom for FTD. The company’s Valentine’s Day 2018 was pathetic: aggregate consumer order volume declined 5% and, even when people did use FTD, the average order size fell by 3%.

Valentine’s Day 2019 was no better. The company materially underperformed projections again. In addition to constraining liquidity further, this had the added effect of cooling any interest prospective buyers might have in the company pre-bankruptcy.

So, where are we now?

The crown jewel of the company is the company’s B2B retail business. This segment generated $150.3mm in revenue and $42.7mm in operating income in 2018. Operating margin is approximately 30%. The B2C business (including FTD.com), on the other hand, lost $4.6mm in ‘18 (on $727.9mm of revenue) and had -1% operating margin in 2018. (PETITION Note: while these numbers are in many respects abysmal, its fun to think that if they belonged, sans debt, to one of those VC-backed upstarts, they’s probably be WAY GOOD ENOUGH for the company to IPO in today’s environment…flowers-as-a-service anyone?). Clearly, there is nothing “iconic” about this brand outside of the floral network/community.

Anywho, the company is selling the company for parts. On Mary 31, the company effectuated a sale of Interflora for $59.5mm. On June 2, the company entered into an asset purchase agreement with Nexus Capital Management LP for the purchase of certain FTD assets and the ProFlowers business for $95mm. It also entered into non-binding letters of intent to sell other assets, including Shari’s Berries to Farids & Co. LLC (which is owned by the founder of Edible Arrangements LLC, the gnarliest company we’ve ever encountered when it comes to gifts.).

All of which is to say, R.I.P. FTD. We’ll be sure to send flowers. From Bouqs.

*Why are we picking on UPS? It is listed as the largest unsecured creditor to the tune of $23.2mm. Surely they’ll be clamoring for “critical vendor” status given the core function they provide to FTD’s business.

**At one point the papers say, $120mm, at another $200mm.

***We didn’t actually realize this but, yes, of course you can buy fresh flowers on Amazon.

• Jurisdiction: D. of Delaware (Judge Silverstein)

• Capital Structure:

  • Secured Indebtedness:

    • $92mm Revolver

    • $57.4mm Term Loan

  • Unsecured Indebtedness

    • $72.4mm of Various Trade Claims

• Professionals:

  • Legal: Jones Day (Heather Lennox, Brad Erens, Thomas Wilson, Caitlin Cahow) & (local) Richards Layton & Finger PA (Daniel DeFranceshi, Paul Heath, Brett Haywood, Megan Kinney)

  • Financial Advisor/CRO: AlixPartners LLP (Alan Holtz, Scott Tandberg, Jason Muscovich, Job Chan, Bassaam Fawad, J.C. Chang)

  • Investment Banker: Moelis & Company & Piper Jaffray Companies

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

• Other Parties in Interest:

🛌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 - Empire Generating Co LLC⚡️

Empire Generating Co LLC

May 19, 2019

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

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

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

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

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

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

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

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

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

• Jurisdiction: (Judge Drain)

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

• Professionals:

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

  • Financial Advisor: RPA Advisors (Chip Cummins)

  • Investment Banker:

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

• Other Parties in Interest:

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

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

  • Secured Lender: Ares Capital LP

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

  • Secured Lender: Starwood

    • Legal: Vinson & Elkins LLP (Steven Abramowitz)

  • Ad Hoc Group

    • Legal: Stroock & Stroock & Lavan LLP

  • Agent: Ankura Trust Company

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

New Chapter 11 Filing - Hexion Holdings LLC

Hexion Holdings LLC

April 1, 2019

What we appreciate that and, we hope thanks to PETITION, others will eventually come to appreciate, is that there is a lot to learn from the special corporate law, investment banking, advisory, and investing niche labeled “restructuring” and “distressed investing.” Here, Ohio-based Hexion Holdings LLC is a company that probably touches our lives in ways that most people have no knowledge of: it produces resins that “are key ingredients in a wide variety of industrial and consumer goods, where they are often employed as adhesives, as coatings and sealants, and as intermediates for other chemical applications.” These adhesives are used in wind turbines and particle board; their coatings prevent corrosion on bridges and buildings. You can imagine a scenario where, if Washington D.C. can ever get its act together and get an infrastructure bill done, Hexion will have a significant influx of revenue.

Not that revenue is an issue now. It generated $3.8b in 2018, churning out $440mm of EBITDA. And operational performance is on the upswing, having improved 21% YOY. So what’s the problem? In short, the balance sheet is a hot mess.* Per the company:

“…the Debtors face financial difficulties. Prior to the anticipated restructuring, the Debtors are over nine times levered relative to their 2018 adjusted EBITDA and face annual debt service in excess of $300 million. In addition, over $2 billion of the Debtors’ prepetition funded debt obligations mature in 2020. The resulting liquidity and refinancing pressures have created an unsustainable drag on the Debtors and, by extension, their Non-Debtor Affiliates, requiring a comprehensive solution.”

This is what that capital structure looks like:

(PETITION Note: if you’re wondering what the eff is a 1.5 lien note, well, welcome to the party pal. These notes are a construct of a frothy high-yield market and constructive readings of credit docs. They were issued in 2017 to discharge maturing notes. The holders thereof enjoy higher priority on collateral than the second lien notes and other junior creditors below, but slot in beneath the first lien notes).

Anyway, to remedy this issue, the company has entered into a support agreement “that enjoys the support of creditors holding a majority of the debt to be restructured, including majorities within every tier of the capital structure.” The agreement would reduce total funded debt by $2b by: (a) giving the first lien noteholders $1.45b in cash (less adequate protection payments reflecting interest on their loans), and 72.5% of new common stock and rights to participate in the rights offering at a significant discount to a total enterprise value of $3.1b; and (b) the 1.5 lien noteholders, the second lien noteholders and the unsecured noteholders 27.5% of the new common stock and rights to participate in the rights offering. The case will be funded by a $700mm DIP credit facility.

*Interestingly, Hexion is a derivative victim of the oil and gas downturn. In 2014, the company was selling resin coated sand to oil and gas businesses to the tune of 8% of sales and 28% of segment EBITDA. By 2016, segment EBITDA dropped by approximately $150mm, a sizable loss that couldn’t be offset by other business units.

• Jurisdiction: D. of Delaware (Judge Gross)

• Capital Structure: See above.

• Professionals:

  • Legal: Latham & Watkins LLP (George Davis, Andrew Parlan, Hugh Murtagh, Caroline Reckler, Jason Gott, Lisa Lansio, Blake Denton, Andrew Sorkin, Christopher Harris) & (local) Richards Layton & Finger PA (Mark Collins, Michael Merchant, Amanda Steele, Brendan Schlauch)

  • Managers: Samuel Feinstein, William Joyce, Robert Kaslow-Ramos, George F. Knight III, Geoffrey Manna, Craig Rogerson, Marvin Schlanger, Lee Stewart

  • Financial Advisor: AlixPartners LLP

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

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

• Other Parties in Interest:

  • Ad Hoc Group of First Lien Noteholders (Angelo Gordon & Co. LP, Aristeia Capital LLC, Barclays Bank PLC, Beach Point Capital Management LP, Capital Research and Management Company, Citadel Advisors LLC, Contrarian Capital Management LLC, Credit Suisse Securities USA LLC, Davidson Kempner Capital Management LP, DoubleLine Capital LP, Eaton Vance Management, Federated Investment Counseling, GoldenTree Asset Management LP, Graham Capital Management LP, GSO Capital Partners LP, Heyman Enterprise LLC, Hotchkis and Wiley Capital Management LLC, OSK VII LLC, Pacific Investment Management Company LLC, Silver Rock Financial LP, Sound Point Capital Management LP, Tor Asia Credit Master Fund LP, UBS Securities LLC, Whitebox Advisors LLC)

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

    • Financial Advisor: Evercore Group LLC

  • Ad Hoc Group of Crossover Noteholders (Aegon USA Investment Management LLC, Aurelius Capital Master Ltd., Avenue Capital Management II LP, Avenue Europe International Management, Benefit Street Partners LLC, Cyrus Capital Partners LP, KLS Diversified Asset Management LLC, Loomis Sayles & Company LP, Monarch Alternative Capital LP, New Generation Advisors LLC, P. Schoenfeld Asset Management LP)

    • Legal: Milbank LLP (Samuel Khalil, Matthew Brod)

    • Financial Advisor: Houlihan Lokey Capital Inc.

  • Ad Hoc Group of 1.5 Lien Noteholders

    • Legal: Jones Day (Sidney Levinson, Jeremy Evans)

  • Pre-petition RCF Agent & Post-petition DIP Agent ($350mm): JPMorgan Chase Bank NA

    • Legal: Simpson Thacher & Bartlett LLP

  • Trustee under the First Lien Notes: U.S. Bank NA

    • Legal: Kelley Drye & Warren LLP (James Carr, Kristin Elliott) & (local) Dorsey & Whitney LLP (Eric Lopez Schnabel, Alessandra Glorioso)

  • Trustee of 1.5 Lien Notes: Wilmington Savings Fund Society FSB

    • Legal: Arnold & Porter Kaye Scholer LLP

  • Trustee of Borden Indentures: The Bank of New York Mellon

  • Sponsor: Apollo

  • Official Committee of Unsecured Creditors: Pension Benefit Guaranty Corporation; Agrium US, Inc.; The Bank of New York Mellon; Mitsubishi Gas Chemical America; PVS Chloralkali, Inc.; Southern Chemical Corporation; Wilmington Trust; Wilmington Savings Fund Society; and Blue Cube Operations LLC

    • Legal: Kramer Levin Naftalis & Frankel LLP (Kenneth Eckstein, Douglas Mannal, Rachael Ringer) & (local) Bayard PA (Scott Cousins, Erin Fay, Gregory Flasser)

    • Financial Advisor: FTI Consulting Inc. (Samuel Star)

Updated:

🔋New Chapter 11 Bankruptcy Filing - 1515 GEEnergy Holding Co. LLC🔋

1515 GEEnergy Holding Co. LLC

February 14, 2019

Though it took a backseat to the overall oil and gas downturn of a few years ago, the power market has also experienced its share of distress and bankruptcy of late: Illinois Power, ExGen Texas Power, Panda Temple Power, FirstEnergy, Westinghouse, and GenOn are just a few of the power companies that found themselves in a bankruptcy court. Now we can add 1515-Geenergy Holding Co. LLC and BBPC, LLC d/b/a Great Eastern Energy, providers of (i) natural gas and electricity to customers in New York, New Jersey and Massachusetts and (ii) electricity to customers in Connecticut, to the list. (together, the “Debtors”).

What we love about bankruptcy filings is that, unbeknownst to many, they often provide a pithy overview of an industry that is highly informative without getting too into the weeds. Indeed, in the Debtors chapter 11 papers, they provide a solid history of the decades-long process of deregulated power provision. In summary (and per the debtors):

• In 1978, Congress passed the Public Utility Regulatory Policies Act (“PURPA”), which laid the groundwork for deregulation and competition by opening wholesale power markets to non-utility producers of electricity.

• Following this, in the 80s and 90s, state legislatures passed laws designed to allow competitive retail sale and supply in the nat gas markets.

• Congress passed the Energy Policy Act of 1992 which specifically promoted greater competition in the bulk power market. This began to de-monopolize the utility industry by allowing independent power producers equal access to the utilities’ transmission grid.

• By 1996, FERC implemented Orders 888 and 889, which were intended to remove impediments to competition in wholesale trade and bring more efficient lower-cost power to the nation’s electricity customers.

• President George W. Bush later signed into law the Energy Policy Act of 2005, which decreased limitations on utility companies’ ability to merge or be owned by financial holdings / non-utility companies. This led to a wave of mergers and consolidation within the utility industry.

• Today, more than 20 states have at least partially deregulated electricity markets whereby energy customers may choose between their incumbent local utility and an array of independent, competitive suppliers. This is commonly referred to as a “deregulated” or “competitive” power market.

All of this, of course, created opportunity for entrepreneurs looking to take advantage of newly opened markets. That’s where the Debtors come in. BBPC started serving nat gas to customers in 2000, leveraging its relationships with various commodity supply companies, pipelines and local utility companies for the purchase, delivery and distribution of power and natural gas to their customers. The debtors acquire customers via various marketing channels, including, among other things, an indirect sales team, a network of hundreds of independent brokers. The debtors have approximately 49k commercial customers and 5k residential customers.

So, why is the company now in bankruptcy? Per the Company:

The competitive retail electric power industry is characterized by high degrees of both fragmentation, competition, and customer attrition because power providers compete primarily on price and have little else available to differentiate their products and services. Particularly in years with high volatility in weather and energy prices, customers paying high electricity and gas bills will tend to seek out other competitive retail electric providers, resulting in higher attrition rates. Also, larger independent retail energy providers have been active in acquiring customer books of their competitors.

More than that, though, is the fact that customers are no longer f*cking idiots about how they get electric and gas service. Indeed, the company notes that they are “becoming more and more sophisticated.” It’s amazing what competition and the democratization of information that’s attendant thereto can do for consumers. With more options and pricing plans to choose from, the debtors have been feeling the effects of price compression. Moreover, this bankruptcy is Google’s damn fault. Per the company:

Small consumers are also using energy-efficient appliances and devices, adopting green building technologies, and taking other actions that help protect the environment, but also lower demand for energy products.

All of these factors converged to decrease the Debtors’ revenue and cause them to default on certain of their obligations.

We’re serious. Among the PETITION team, we own a number of Nest and other smart energy-efficient devices.

Anyway, all of this led to the debtors defaulting under their ~$60mm prepetition credit agreement with Macquarie Investments US Inc., which, after several months of forbearances meant to give the debtors an opportunity to refi out Macquarie and/or sell the company, expired under their own terms. Needless to say, the debtors weren’t successful and have filed the chapter 11 to prevent Macquarie from exercising remedies and afford themselves an opportunity to pursue a sale of substantially all of their assets.

---

• Jurisdiction: D. of Delaware (Judge Carey)

• Capital Structure: ~$60mm secured credit facility (Macquarie Investments US Inc.) + $30.6mm in collateralized LOCs.

• Professionals:

  • Legal: Klehr Harrison Harvey Branzburg LLP (Morton Branzburg, Dominic Pacitti, Michael Yurkewicz) & (local) McLaughlin & Stern LLP (Steven Newburgh)

  • Financial Advisor: GlassRatner Advisory & Capital Group LLC

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

• Other Professionals:

🏠New Chapter 11 Bankruptcy Filing - Decor Holdings Inc.🏠

Decor Holdings Inc.

February 12, 2019

Source: https://www.robertallendesign.com

Privately-owned New York-based Decor Holdings Inc. (d/b/a The RAD Group and The Robert Allen Duralee Group) and certain affiliates companies filed for bankruptcy earlier this week in the Eastern District of New York. The debtors state that they are the second largest supplier of decorative fabrics and furniture to the design industry in the U.S., designing, manufacturing and selling decorative fabrics, wall coverings, trimmings, upholstered furniture, drapery hardware and accessories for both residential and commercial applications. All of which begs the question: do people still actually decorate with this stuff?!? In addition to private label product lines, the company represents six other furnishing companies, providing tens of thousands of sku options to design professionals and commercial customers. The company maintains a presence via showrooms in large metropolitan cities in the US and Canada as well as an agent showroom network in more than 30 countries around the world. In other words, for a company you’ve likely never heard of, they have quite the reach.

The debtors’ problems derive from a 2017 merger between the Duralee business and the Robert Allen business. Why? Well, frankly, it sounds like the merger between the two is akin to a troubled married couple that decides that having a kid will cure all of their ills. Ok, that’s a terrible analogy but in this case, both companies were already struggling when they decided that a merger between the two might be more sustainable. But, “[l]ike many industries, the textile industry has been hard hit by the significant decrease in consumer spending and was severely affected by the global economic downturn. As a result, the Debtors experienced declining sales and profitability over the last several years.” YOU MEAN THE PERCEIVED SYNERGIES AND COMBINED EFFICIENCIES DIDN’T COME TO FRUITION?!? Color us shocked.

Ok, we’re being a little harsh. The debtors were actually able to cut $10-12mm of annual costs out of the business. They could not, however, consolidate their separate redundant showroom spaces outside of bankruptcy (we count approximately 32 leases). Somewhat comically, the showroom spaces are actually located in the same buildings. Compounding matters was the fact that the debtors had to staff these redundant spaces and failed to integrate differing software and hardware systems. In an of themselves, these were challenging problems even without a macro overhang. But there was that too: “…due to a fundamental reduction of market size in the home furnishings market, sales plummeted industry wide and the Debtors were not spared.” Sales declined by 14% in each of the two years post-merger. (Petition Note: we can’t help but to think that this may be the quintessential case of big firm corporate partners failing to — out of concern that management might balk at the mere introduction of the dreaded word ‘bankruptcy’ and the alleged stigma attached thereto — introduce their bankruptcy brethren into the strategy meetings. It just seems, on the surface, at least, that the 2017 merger might have been better accomplished via a double-prepackaged merger of the two companies. If Mattress Firm could shed leases in its prepackaged bankruptcy, why couldn’t these guys? But what do we know?).

To stop the bleeding, the debtors have been performing triage since the end of 2018, shuttering redundant showrooms, stretching payables, and reducing headcount by RIF’ing 315 people. Ultimately, however, the debtors concluded that chapter 11 was necessary to take advantage of the breathing spell afforded by the “automatic stay” and pursue a going concern sale. To finance the cases, the debtors obtained a commitment from Wells Fargo Bank NA, its prepetition lender, for a $30mm DIP revolving credit facility of which approximately $6mm is new money and the remainder is a “roll-up” or prepetition debt (PETITION Note: remember when “roll-ups” were rare and frowned upon?). The use of proceeds will be to pay operating expenses and the costs and expenses of being in chapter 11: interestingly, the debtors noted that they’re administratively insolvent on their petition. 🤔

Here’s to hoping for all involved that a deep-pocked buyer emerges out of the shadows.

• Jurisdiction: E.D. of New York (Judge Grossman)

• Capital Structure: $23.7mm senior secured loan (Wells Fargo Bank NA), $5.7mm secured junior loan (Corber Corp.)

• Professionals:

  • Legal: Hahn & Hesson LLP (Mark Power, Janine Figueiredo)

  • Conflicts Counsel: Halperin Battaglia Benzija LLP (Christopher Battaglia)

  • Financial Advisor: RAS Management Advisors LLC (Timothy Boates)

  • Investment Banker: SSG Capital Advisors LLC (J. Scott Victor)

  • Liquidator: Great American Group LLC

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

• Other Professionals:

  • DIP Agent: Wells Fargo Bank NA

    • Legal: Otterbourg P.C. (Daniel Fiorillo, Jonathan Helfat)

  • Subordinated Noteholder: Corber Corp.

    • Legal: Pachulski Stang Ziehl & Jones LLP (John Morris, John Lucas)

New Chapter Bankruptcy Filing - SAS Healthcare Inc.

SAS Healthcare Inc. 

January 31, 2019

Dallas/Fort Worth-based mental health facilities operator filed for bankruptcy last week in the Northern District of Texas. The more we read about these healthcare bankruptcies, the less and less assured we feel about healthcare generally. Holy sh*t a lot of them have hair on them. 

Here, the debtors operate three mental health treatment facilities — in Arlington, Dallas, and Fort Worth. Therein, the debtors provided — and we mean, "provided" — in-patient and out-patient mental health care to children, adolescents and adults struggling with substance abuse and addiction, mental health disorders and behavioral and psychological disorders. Why the past tense? Because thanks to an investigation by the Tarrant County District Attorney and subsequent indictments, the debtors ceased operations in December 2018. 

The debtors —owned in in equal 1/3 parts by three individuals — has $8.26mm in secured debt (Ciera Bank), a $503k drawn secured revolving line of credit with Ciera Bank, a $4.3mm secured term loan with Southside Bank (exclusive of another $3mm in unpaid principal and interest), a $5.6mm construction loan with Southside Bank (exclusive of another $4.3mm in unpaid principal and accrued interest); a $850k secured loan with Southside, a $400k second lien secured bridge note with REP Perimeter Holdings LLC, and $1.325mm subordinated secured note from the owners. 

Back to those closures. The grand jury investigation led to a lot of negative publicity which, in turn, led to an abrupt end in patient referrals from the two largest referral sources. The end effect? Decimated revenue. The company secured its bridge loan and performed operational triage but the second indictment proved to be a death knell. Without ongoing operations and with all of that debt, the debtors had to file for chapter 11 to trigger the automatic stay and buy itself time to conduct a marketing and sale process to sell their assets to stalking horse purchaser and prepetition lender, REP Perimeter Holdings LLC. 

• Jurisdiction: N.D. of Texas (Judge Mullin) 

• Company Professionals:

  • Legal: Haynes and Boone LLP (Stephen Pezanosky, Jarom Yates, Matt Ferris)

  • Financial Advisor: Phoenix Management Services LLC (Brian Gleason)

  • Investment Banker: Raymond James & Associates Inc. (Michael Pokrassa)

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

• Other Parties in Interest:

New Chapter 11 Bankruptcy Filing - Consolidated Infrastructure Group Inc.

Consolidated Infrastructure Group Inc. 

January 30, 2019

Nebraska-based Consolidated Infrastructure Group Inc. filed for bankruptcy last week in the District of Delaware; it provides underground utility and damage prevention services to players in the underground construction, digging and maintenance space. It serves or served large telecom and utility companies, such as AT&T, Cox Communications, and Comcast. it also currently has contracts with the Northern Indiana Public Service Company, the City of Davenport in Iowa and with ONE Gas Inc. 

The company has little in the way of assets and liabilities. Relating to the former, the company has the above-noted contracts, a $3mm receivable from AT&T, some intellectual property and interests in insurance policies. Liabilities include two letters of credit, and a small unsecured advance by prepetition equityholder and now-postpetition DIP lender ($3mm), Parallel149, a private equity firm. 

The company has been embroiled in drama since its inception in 2016. It was formed by former employees of USIC LLC, a much-larger competitor, and the two have been locked up in litigation relating to, among other things, breach of contract (non-compete). 

The company filed for bankruptcy to pursue a going concern 363 sale and liquidating plan. It also hopes to recover the AT&T receivable. Finally, it also contends that a sale of the contracts would avoid a public safety crisis in the communities where the company's contracts are located. 

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: $mm debt     

• Company Professionals:

  • Legal: Richards Layton & Finger PA (Daniel DeFranceshi, Russell Silberglied, Paul Heath, Zachary Shapiro)

  • Financial Advisor: Gavin/Solmonese LLC

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

• Other Parties in Interest:

  • Parallel149

    • Legal: DLA Piper LLP (Richard Chesley, Jade Williams, Jamila Justine Willis, R. Craig Martin, Maris Kandestin)

💄New Chapter 11 Bankruptcy Filing - Glansaol Holdings Inc.💄

Glansaol Holdings Inc.

December 19, 2018

A week after Glossier CEO Emily Weiss revealed that the direct-to-consumer beauty brand hit $100mm in sales, Glansaol, a platform company that acquires, integrates and cultivates a portfolio of prestige beauty brands — including a direct-to-consumer brand — filed for bankruptcy in the Southern District of New York. The company owns a trio of three main brands: (a) Laura Geller, a distributor of female beauty and personal care products sold primarily on QVC and wholesale, (b) Julep, a wholesale distributor of high-end nail polish, skincare and cosmetic products with a direct-to-consumer and “subscription box” model, and (c) Clark’s Botanicals, a skincare retailer, which sells primarily via e-commerce (including Amazon) and QVC.

The company indicated that “a general shift away from brick-and-mortar shopping, evolving consumer demographics, and changing trends” precipitated its bankruptcy filing. More specifically, profit drivers, historically, have been broadcast shopping networks and wholesale distribution. But both QVC and large retailers have cut back orders significantly amidst a broader industry shakeout. Compounding matters is the fact that the company’s top two customers account for over 60% of total receivables. As we always say, customer concentration is NEVER a good thing.

Moreover, the company added:

…the Debtors have been unable to replace key revenue generators due to: (a) the increasingly competitive industry landscape coinciding with the downturn in the brick and mortar retail sector; (b) the decline in broadcast shopping network sales; and (c) the downturn of the Company’s single-brand subscription business, which faces competition from new entrants that offer subscriptions covering a variety of brands.

Hmmm. Insert Birchbox here? Perhaps Glansaol ought to have entered into a partnership with Walgreens! 🤔

What happens when you can’t move product? You build up inventory. Which, for a variety of reasons, is no bueno. Per the company:

…the decline in sales has saddled the Debtors with a significant oversupply of inventory, which has forced the Debtors to sell goods at steep markdowns and destroy certain products, further tightening margins and draining liquidity. Oversupply of inventory, coupled with higher returns and chargebacks described below, has also significantly increased the Debtors’ costs for warehouses and other third-party logistics providers.

Interestingly, the company aggregated the three brands in the first place because of perceived supply chain synergies. Per the company:

The strategy was put into practice in late 2016 and early 2017 when the Debtors acquired a trio of rising prestige beauty companies ― Laura Geller, Julep, and Clark’s Botanicals. The combination was designed to realize the benefit of natural synergies without any cannibalization. The brands share relatively similar supply chains where it was thought efficiencies could be realized, but they featured different price points and consumer profiles. For example, while Laura Geller appeals to consumers over the age of 35 and is primarily sold through wholesale retailers and broadcast shopping networks, Julep caters to a younger generation through its online business and experience-driven nail salons.

We love synergies. They always seem to be good in theory and nonexistent in practice. To point:

the Debtors were never able to achieve significant cost savings related to shared services among their brands. Upon the Debtors’ acquisitions of Laura Geller, Julep and Clark’s in 2016, the plan was to ultimately consolidate shared services, including supply chain, senior management, administrative support, human resources, information technology support, accounting, finance and legal services. The brands, however, were never fully integrated. Instead, the Company is saddled with a substantial legacy investment in a new ERP system, which was put into place ahead of cross-organizational efficiency initiatives and right-sizing functionality. Accordingly, the costs savings attributed to synergies, which had been a pillar of the Debtors’ original business model, were never realized.

Which is why we generally tend to be skeptical whenever we hear about cost savings and synergies as a basis for M&A (cough, Refinitiv).

Given all of the above, the company has been engaged in a marketing process since roughly February 2018 running, in the interim, based on its credit facility and equity infusions. Now, though, the company has a stalking horse bidder in tow in the form of AS Beauty LLC, which has agreed to purchase the company’s brands and related capital assets for approximately $16.2mm. The company’s prepetition lender, SunTrust Bank, has agreed to provide a $15mm DIP credit facility which, along with cash collateral, will fund the cases.

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

• Capital Structure: $7.2mm RCF (SunTrust Bank)

• Company Professionals:

  • Legal: Willkie Farr & Gallagher LLP (Brian Lennon, Daniel Forman, Andrew Mordkoff)

  • Financial Advisor: Emerald Capital Advisors (John Madden)

  • Claims Agent: Omni Management Group Inc. (click on the case name above for free docket access)

• Other Parties in Interest:

  • Prepetition Secured & DIP Lender: SunTrust Bank (Legal: Parker Hudson Rainer & Dobbs LLP — Rufus Dorsey, Eric Anderson, James Gadsden

  • Stalking Horse Purchaser: AS Beauty LLC (Legal: Sills Cummis & Gross PC — Michael Goldsmith, George Hirsch)

  • Private Equity Sponsor: Warburg Pincus Private Equity XII Funds

New Chapter 11 Bankruptcy Filing - USA Gymnastics

USA Gymnastics

December 5, 2018

Man this year has been filled with sleaze-based bankruptcy filings: we’re old enough to remember when The Weinstein Company may have taken the prize for filth. Now, this.

Earlier this week, on December 5th, USA Gymnastics (“USAG”) filed for bankruptcy in the Southern District of Indiana. The bankruptcy filing reminds us that in a coverage universe of companies that file for bankruptcy because of (i) various operational reasons (e.g., declining revenues due to supply chain interruptions, poor inventory management, sky high SG&A, etc.) and (ii) balance sheet reasons (e.g., too much debt, interest expense, and covenant compliance obligations), there are good ol’ fashion litigation-induced bankruptcy filings.

USAG is a 501(c)(3) Indianapolis-based not-for-profit with a focus on six athletic disciplines: women’s gymnastis, men’s gymnastics, trampoline and tumbling, rhythmic gymnastics, acrobatic gymnastics, and group gymnastics. Think of it like a platform (no pun intended): the USAG brings coaches, judges and competitors together for education and competitions throughout the United States. Indeed, the USAG sanctions approximately 4k competitions and has more than 200k members.

In 1988, the USAG formed a separate (non-debtor) entity, The National Gymnastics Foundation, to further the Olympic sport of gymnastics. Thereafter, the United States Olympic Committee (“USOC”) and the Fédération Internationale de Gymnastique designated the USAG as the “national governing body for the sport of gymnastics in the United States.” That designation is now at risk. Why? Enter sleaze here…

Per the Company:

As a result of the misconduct of Larry Nassar, a former volunteer physician to USAG, USAG has been named as a defendant in approximately 100 lawsuits brought by survivors of Nassar’s abuse. USAG’s first priority is to ensure that these survivors are treated fairly and respectfully. The survivors’ claims, in the aggregate, may exceed the available resources of USAG. USAG submits that this Court is the best forum in which to implement appropriate procedures to equitably determine the rights to and allocate recoveries to survivors who have asserted claims against USAG. USAG remains committed to its mission of supporting athletes, and will continue to take specific and concrete steps to promote athlete safety and prevent future abuse.

Nassar was a volunteer medical provider who later faced accusations of sexual misconduct; Nassar ultimately pled guilty to sexual assault and other crimes and will spend his life in prison.

USAG has no secured debt and virtually no unsecured debt — other than the contingent liabilities arising out of the aforementioned lawsuits/claims. Hundreds of individuals have asserted claims in various states against USAG. USAG estimates the potential impact of these suits to be between $75-$150mm. On the asset side of the balance sheet, the company has an operating lease, $6.5mm of cash/equivalents/investments and its insurance policies. And that last piece is where the rubber meets the road. Per the Company:

USAG has insurance coverage encompassing numerous policies covering approximately 30 years, which I expect will provide substantial coverage for the amounts asserted in the various lawsuits and claims. Nevertheless, I understand that the applicable insurance proceeds may be insufficient to cover allowed claims of survivors against USAG. For this reason, USAG filed this chapter 11 case to establish an orderly procedure for the allocation of its insurance proceeds.

The company intends to use the “breathing spell” afforded by Bankruptcy Code section 362’s “automatic stay” (read: an injunction, basically) to (i) establish a process by which insurance proceeds may be doled out to claimants and (ii) assure the USOC and athletes that the USAG is positioned to be the national governing body for gymnastics going forward.

Our two cents? They should definitely consider a rebranding exercise.

• Jurisdiction: S.D. of Indiana (Judge Moberly)

• Capital Structure: $mm debt     

• Company Professionals:

  • Legal: Jenner & Block (Melissa Root, Catherine Steege, Dean Panos)

  • Claims Agent: Omni Management Group Inc. (*click on company name above for free docket access)

New Chapter 11 Bankruptcy Filing - Senior Care Centers LLC

Senior Care Centers LLC

December 4, 2018

Ok, we take it back. We’ve been saying how healthcare distress was overhyped in the beginning of the year and now a mini-wave of healthcare-related bankruptcy filings has hit dockets across the country. It’s cool: we don’t take it personally.

Here, Senior Care Centers LLC and its bazillion affiliated debtors, filed for bankruptcy in the Northern District of Texas. The debtors are one of the largest skilling nursing services providers in the US, providing care for approximately 9k patients in Texas and Louisiana. They operate 97 skilled nursing facilities, 9 assisted living facilities and 6 hospice facilities. The company notes:

Like much of the healthcare sector, the operators of skilled nursing facilities (“SNFs”) are and have been experiencing significant challenges and financial distress in recent years. The challenges faced by the Debtors are similar to those experienced by other SNF operators and widespread within the skilled nursing industry. The Debtors faced increasing financial pressure in 2017 and 2018 cause by, among other things, declining reimbursement rates, difficulties in collecting accounts receivable, declining census, and occupancy rates, increasing lease obligations, tightening terms with various trade creditors, and a significantly reduced working capital loan facility. All of these factors have combined to negatively impact the Debtors’ operations.

Getting more specific, the company adds:

Since 2017, the Company experienced significant liquidity constraints caused by, among other things: (a) increasing rent and “above-market” leases with various Landlords; (b) declining performance within the current portfolio for a variety of industry-wide developments; (c) tightening terms with various trade creditors; and (d) declining census. The Company has struggled to respond to liquidity issues for several months. In July of 2018, Administrative Agent began establishing Borrowing Base reserves, resulting in reduced availability under the Credit Facility.

The immediate cause for the filing of these Chapter 11 Cases was due to liquidity issues resulting from reduced Borrowing Base availability. This problem was compounded when certain of the Debtors’ landlords issued termination and/or default notices (the “Landlord Notices”).

Certain vendors demanded modification to payment terms, which restricted or eliminated the Company’s trade credit. Moreover, relationships with current and prospective Employees and Patients have been affected by the uncertainty. For example, several recent candidates have rescinded their offers to join the Company and expressed concern regarding the Company’s financial stability.

That story should sound wildly familiar by now.

Of significance, however, is the company’s relationship with Sabra Health Care REIT Inc. ($SBRA), which is one of the major landlords who issued termination/default notices (over which there is some dispute as to whether they were subsequently withdrawn). Sabra owns CCP which is the debtors’ second lien lender. More importantly, Sabra is the landlord on approximately 40 of the debtors’ facilities. The debtors owe Sabra $31.78mm in unpaid rent, common area maintenance charges and taxes.

Interestingly, Sabra’s own commentary about the debtors’ situation probably didn’t help matters much. On its Q3 earnings call on November 6, Sabra said a number of things about the debtors’ inability to pay rent, a potential sale of the debtors, its efforts to obtain financing, and management’s skittishness about any go-forward transaction that would endanger their jobs. On that last point, Sabra indicated that it was discussing go-forward options directly with the debtors’ board as a result. The debtors’ various constituents could obvious see/hear these comments and react accordingly.

But the Sabra commentary also demonstrates how difficult the current environment is for SNFs right now. Some big takeaways from their earnings call:

• It is reducing its exposure to Texas, its largest state, “which also happen to be the one state where there is an oversupply of skilled nursing beds in a number of markets due to new product. And Texas also has one of the weakest Medicaid systems in the country.” (PETITION Note: scour the Googles for other SNFs highly indexed to Texas for future distressed/bankruptcy candidates).

• Skilled operators (read: private equity) are in acquisition mode and, therefore, pricing is high even for product that isn’t of the highest quality. (PETITION Note: “too much money chasing too few deals.” This should, theoretically, bode well for the debtors’ proposed sale, if so). Sabra’s CEO Rick Matros said, “we're not seeing much good skill product and I really believe that that's a function of the skilled operators are buying everything all of us are selling, but they're not putting reasonable assets on the market because everybody sees the light at the end of the tunnel both in terms of the demographic in terms of decreasing supply and in terms of the positive benefits of PDPM reimbursements system that’s going go into effect next October.”

• Smaller SNFs will succumb to bankruptcy. Matros added, “My guess is over the course of the next year particularly with the mom-and-pops, we'll probably see more products come to market as a number of the smaller providers determine that they don't have the wherewithal or the desire to go through the transition that is going to be required to go through to be successful post-PDPM.”

In other words, there should be a healthy amount of M&A and distressed activity in the near future in the SNF space.

Anyway, back to the debtors: they hope to use the automatic stay provided by the filing to transition underperforming facilities to new operators in coordination with its landlords and sell their profitable facilities. They will use cash collateral to fund the cases.

• Jurisdiction: N.D. of Texas (Judge Houser)

• Funded Capital Structure: $33.06mm RCF, $9.53mm HUD RCF, $4.3mm CCP (second lien) Loan   

• Company Professionals:

  • Legal: Polsnielli PC (Jeremy Johnson, Trey Monsour, Stephen Astringer, Nicholas Griebel)

  • Conflicts Legal: Huntons Andrews Kurth LLP

  • CRO & Financial Advisor: Newbridge Management LLC (Kevin O’Halloran) & BDO USA LLP

  • Communications Consultants: Sitrick and Company

  • Claims Agent: Omni Management Group LLC (*click on company name above for free docket access)

• Other Parties in Interest:

  • Large Creditor: Sabra Health Care Reit, Inc.

  • Sponsor: Silver Star Investments LLC

  • Admin Agent & Lender: CIBC Bank USA

    • Legal: Duane Morris LLP (John Weiss, Rosanne Ciambrone) & (local) Haynes and Boone LLP (Stephen Pezanosky, Matthew Ferris)

New Chapter 11 Filing - Arecont Vision Holdings LLC

Arecont Vision Holdings LLC

5/14/18

Arecont Vision Holdings LLC, a California-based manufacturer of high-performance IP cameras and video surveillance solutions, has filed for bankruptcy to effectuate a sale to an affiliate of Turnspire Capital Partners. 

The company sells its products to a variety of industries including data centers, government, retail, financial, sports, and healthcare. End user customers include big names like Wells Fargo, Apple, Google, Facebook, Microsoft and others. In addition to holding several patents, the company counts a litigation claim against a once-secured-but-ultimately-failed-buyer, NetPosa, in the amount of $50 million among its assets. NetPosa signed a share purchase agreement in early 2017 for the purchase of Arecont for $170 million but the deal fell through while awaiting regulatory review. Apropos to the current international trade environment, NetPosa is a publicly-traded Chinese company. 

Speaking of China, the company notes, "The Debtors' performance has been negatively impacted by increased competition from Chinese manufacturers who are able to produce and sell products at lower price points." This combined with other factors, stemmed the company's previously demonstrated compound double-digit growth from 2007 through 2016; it then experienced a dramatic EBITDA decline in 2017 from $72.7 million to $41.7 million. 

To address this decline, the company engaged in a number of cost-reduction initiatives including shedding employees and outsourcing component and subassembly work to Asia from the US. Contemporaneously, Imperial Capital initiated a sale process. Enter Turnspire Capital. 

• Jurisdiction: D. of Delaware (Judge Sontchi)
• Capital Structure: $73.2mm secured debt (AIG)    
• Company Professionals:
  • Legal: Pachulski Stang Ziehl & Jones LLP (Ira Kharasch, Joshua Fried, Maxim Litvak, James O'Neill)
  • CRO/Financial Advisor: Armory Group LLC (Scott Avila, Allen Soong)
  • Investment Banker: Imperial Capital LLC 
  • Claims Agent: Omni Management LLC (*click on company name above for free docket access)
• Other Parties in Interest:
  • Stalking Horse Buyer: Turnspire Capiral LLC
  • DIP Agent: Cortland Capital Market Services LLC
  • ($4mm) DIP Lenders: American General Life Insurance Company, American Home Assurance Company, The United States Life Insurance Company in the City of New York, The Variable Annuity Life Insurance Company, American Home Assurance Company and United Guaranty Residential Insurance Company

New Chapter 11 Filing - Videology Inc.

Videology Inc. 

5/10/18

In what could amount to a solid case study in #BustedTech and the up/down nature of entrepreneurship, Videology Inc., a Baltimore based software ad-tech company that generated $143.2 million in revenue in fiscal 2017 has filed for bankruptcy.

The company has two principal business lines: (i) legacy media sales, a demand side (advertisers) platform that Videology would leverage to procure ad inventory to sell to advertising agencies (the supply side); and (ii) its long-tail "core use case," which included "long term planning, management, and execution of a company's entire portfolio of advertising campaigns or advertising inventory with complex, overlapping targets, objections...across multiple delivery channels." We're going to pretend we understand what that means; we think it has something to do with assisting ad agencies target ads effectively. What we do understand is that revenue generation for the more lucrative "core use case" segment involved a long sales pipeline that didn't support timely enough revenues to offset the liquidity draining legacy segment. Ruh roh.

But let's take a step back. This company was founded in February 2007. It raised its $15.1 million Series A round of funding in July 2008, securing Valhalla Partners II as a lead investor. It then secured its $16.4 million Series B round in Q4 2009. Comcast Ventures LP was the lead investor. Thereafter it nailed down its $30.4 million Series C round in May 2011 with New Enterprise Associates 12. Finally, in June of 2013, the company closed its $68.2 million Series D round with Catalyst Investors QP III as lead. Lots of funding. No down rounds. Everything seems to be on the right track.

Except it wasn't. The legacy segment was bleeding cash as early as 2012. The company had to tap the venture debt market in July 2017 to refi-out its bank line of credit. It obtained a $40-45 million 8.5% asset-backed credit facility (secured against virtually everything, including IP) with Fast Pay Partners LLC as agent and Tennenbaum Capital Partners LLC ("TCP"), as documentation agent and investment manager. It also obtained a second $20 million 10% asset-backed "UK" credit facility with FPP Sandbox LLC and TCP, which was secured by the same collateral. Both loans came with exit fees, charge 3% default interest and the larger facility has a 3% end-of-term premium attached to it.

At the same time the company took out the venture debt, it issued $17.1 million of convertible notes from board members and existing major investors (elevating them in the cap table) AND raised an additional $4.7 million in a subsequent rights offering to smaller legacy investors. What do you think will happen to that money? We'll come back to that.

In Q3 2017, the company also sought to find a strategic buyer. It didn't. It then started doing what every distressed company does: it stretched payables while it tried to formulate an out-of-court solution -- in the form of a restructuring or a refinancing. Certain vendors became skittish and withheld payments to the company. The resultant cash squeeze precipitated the prepetition lenders issuance of a notice of default. Thanks to a cash control agreement, they then seized control of the main operating accounts and paid down amounts owing with the company's cash and accounts receivable. And, yes, they applied the default interest rate. This is why they say what they say about possession. Savage. Consequently nothing is due under the larger facility; over $11.2 million remains due on the UK facility. 

The company now has a potential buyer, Amobee Inc., and has filed for bankruptcy to effectuate a sale. The company hasn't yet filed papers indicating the sale price but The Wall Street Journal reports that the purchase price may be $45 million -- or 1/3 of '17 revenues. The WSJ also reports that the company has nailed down a $25 million DIP credit facility which will be used to pay down the UK facility and fund the cases. Presumably the sale price will pay off the DIP and the $20 million that remains will be left for unsecured creditor recoveries. Back of the envelope, that will be about a 25% recovery. 

As for the equity holders? In the absence of bumping up by way of the convertible note, they'll be wiped out. That's venture capital for you. The venture debt providers, however, did well. 

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: $11.2mm UK Loan Facility (FPP Sandbox LLC and Tennenbaum Capital Partners LLC), $17.1 million convertible promissory note.

• Company Professionals:
  • Legal: Cole Schotz PC (Irving Walker, Patrick Reilley)
  • Financial Advisor: Berkeley Research Group LLC
  • Claims Agent: Omni Management Group (*click on company name above for free docket access)
• Other Parties in Interest:
  • Prospective Buyer: Amobee Inc.
    • Legal: Goodwin Proctor LLP (Gregory Fox, Alessandra Simons) & (local) Womble Bond Dickinson (US) LLP (Matthew Ward, Morgan Patterson)
  • Secured Lenders: FastPay Partners LLC & FPP Sandbox LLC
    • Legal: Buchalter (William Brody, Ariel Berrios) & (local) Richards Layton & Finger PA (John Knight, Christopher De Lillo)
  • DIP Lender: Draper Lending LLC
    • Legal: Arent Fox LLP (Robert Hirsh, Jordana Renert) & (local) Bayard PA (Justin Alberto, Daniel Brogan)