New Chapter 11 Bankruptcy Filing - Neiman Marcus Group LTD LLC

Neiman Marcus Group LTD LLC

May 7, 2020

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

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

This case is all about “BIG.”

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

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

Big fees. More on this below.

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

Big value destruction.

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

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

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

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

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

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

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

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

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

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

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

• Capital Structure: See above.

• Professionals:

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

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

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

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

  • Independent Manager of Mariposa Intermediate Holdings LLC: Anthony Horton

    • Legal: Katten Muchin Rosenman LLP

  • Neiman Marcus Inc.

    • Legal: Latham & Watkins LLP (Jeffrey Bjork)

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

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

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

• Other Parties in Interest:

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

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

  • FILO Agent: TPG Specialty Lending Inc.

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

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

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

  • Second Lien Note Agent: Ankura Trust Company LLC

  • Third Lien Note Agent: Wilmington Trust NA

  • Unsecured Notes Indenture Trustee: UMB Bank NA

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

  • 2028 Debentures Agent: Wilmington Savings Fund Society FSB

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

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

    • Financial Advisor: Ducera Partners LLC

  • Ad Hoc Secured Noteholder Committee

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

    • Financial Advisor: Houlihan Lokey Capital Inc.

  • Large Creditor: Chanel Inc.

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

  • Large Creditor: Louis Vuitton USA Inc.

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

  • Large Creditor: Moncler USA Inc.

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

  • Marble Ridge Capital LP & Marble Ridge Master Fund LP

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

  • Mudrick Capital Management LP

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

  • Sponsor: CPP Investment Board USRE Inc.

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

  • Sponsor: Ares Capital Management

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

  • Official Committee of Unsecured Creditors

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

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

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

⛽️New Chapter 11 Bankruptcy Filing - Diamondback Industries Inc.⛽️

Diamondback Industries Inc.

April 21, 2020

Texas-based Diamondback Industries Inc. and two affiliates (the “debtors”) filed for bankruptcy in the Northern District of Texas; they are manufacturers and sellers of disposable setting tools, power charges, and igniters used in the completion of oil and gas wells. Their wares are patent and trademark protected and appear to enjoy use by oil and gas companies engaged in drilling and well services. The debtors have managed to weather the oil and gas downturn over the last several years but the recent perfect storm brought on by the calamitous drop in oil prices + COVID-19 was too much to bear. These factors alone would have been troubling but the debtors also ran into some crippling legal troubles.

On April 3, 2020, the District Court for the Western District of Texas entered a patent judgment against the debtors that instantly dumped a $39.9mm obligation on the debtors in favor of Repeat Precision LLC. Originally, Repeat Precision LLC was the defendant in a patent license agreement dispute pursuant to which the debtors claimed breach of contract, misappropriation of trade secrets and fraudulent inducement. Repeat Precision filed counterclaims for patent infringement and tortious interference. It appears the debtors weren’t prepared for the counter-punches. The judgment was the knockout punch.

And that punch created a domino effect. The judgment triggered an event of default under the debtors’ prepetition credit agreement. This was a double-whammy: just two days before, the debtors failed to make a principal payment and breached various financial covenants under the agreement. The debtors’ lender, UMB Bank NA, did enter into a forbearance agreement with the debtors but the debtors nevertheless determined that chapter 11 cases may afford them a “breathing spell” to get their business together (and perhaps pursue a sale process). The debtors secured a $5mm DIP commitment to fund their cases.

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

• Capital Structure: $20mm funded RCF (UMB Bank NA)

• Professionals:

  • Legal: Haynes and Boone LLP (Ian Peck, David Staab, Matthew Ferris)

  • Financial Advisor/CRO: CR3 Partners LLC (Greg Baracato, Cade Kennedy)

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

• Other Parties in Interest:

  • US Bank NA

    • Legal: Bryan Cave Leighton Paisner LLP (Kyle Hirsch, Tricia Macaluso)

  • Unsecured Creditor: Repeat Precision LLC

    • Legal: Munsch Hardt Kopf & Harr PC (Davor Rukavina, Thomas Berghman)

🕍New Chapter 11 Bankruptcy Filing - Museum of American Jewish History (d/b/a National Museum of American Jewish History)🕍

Museum of American Jewish History (d/b/a National Museum of American Jewish History)

March 1, 2020

The Smithsonian-affiliated non-profit Museum of American Jewish History filed for bankruptcy in Pennsylvania earlier this month due to a shortfall from (i) sales of memberships and tickets to the Museum, (ii) event revenue, (iii) endowment income and (iv) charitable contributions relative to operating expenses. It appears to suffer from a chicken and egg problem: on one hand, it has too much debt and donors are fearful of contributing to a doomed enterprise and yet, on the other hand, it has too much debt and so the enterprise needs donors to NOT be fearful and donate to service said debt. Round and round we go.

The Philadelphia Authority for Industrial Development issued $30.75mm of Revenue Bonds in 2015 to help refinance the construction loan the Museum originally took on upon its location change in 2007 (Series A bonds are held by BNB Bank and Series B bonds are held by approximately 12 individuals). The bonds are secured by … well, basically nothing. There really couldn’t be a more meaningless security interest as the bondholders didn’t exactly get real property rights and there isn’t a whole lot of collateral or receipts, and property intended for exhibition, education or research is expressly carved-out (according to the papers).

Museum performance has been lackluster out of the gait. Per the Museum:

Since opening in 2010, the Museum’s revenues from gate receipts and events have been inconsistent. Accordingly, in 2017, the Museum reduced its operating expenses by eliminating some paid positions and by making other expense reductions. However, following such reduction in operating expenses, the Museum’s revenues have remained at a level which is insufficient to fully fund its expenses and its debt service.

Eesh. Rough. Subsequent restructuring talks with UMB Bank, BNB Bank and, presumably, representatives on behalf of the Series B noteholders proved futile. They’re undersecured and their bonds are basically worthless: it’s really quite that simple. Unfortunately, the Museum requires bankruptcy to drive that point home and attempt to figure out a restructuring of those bonds.

A quick digression admittedly grounded in opinion rather than fact: much like the United States is “over-retailed” per capita, we’re of the opinion that the United States is likewise over-Museumed. There are more than 35,000 museums in the United States. There are more than 100 museums in the city of Philadelphia. There are dozens of Jewish museums in the United States. Philadelphia is a big (and growing) city and it is entitled to a museum. But with other major Museums located nearby in New York and Washington DC, a general increasing secularization of the US population, and a diminishing number of people who, per various studies, identify as Jewish, it seems increasingly tenuous to maintain this large number of institutions. It’s a shame. But it’s a sad reality. Dont @ us.

• Jurisdiction: E.D. of PA (Judge Coleman)

• Capital Structure: $30.75mm (UMB Bank NA)

• Professionals:

  • Legal: Dilworth Paxson LLP (Lawrence McMichael, Peter Hughes, Yonit Caplow)

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

• Other Parties in Interest:

  • Successor Indenture Trustee: UMB Bank NA

🏥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 - Tarrant County Senior Living Center Inc. 😷

Tarrant County Senior Living Center Inc.

November 5, 2019

Callback to earlier this year, in February, when we reported on the chapter 11 bankruptcy filing of SQLC Senior Living Center at Corpus Christi Inc. (d/b/a Mirador). Mirador — a Texas nonprofit — owned and operated a 228-unit CCRC, comprised of 125 independent living residences, 44 assisted living residences, 18 memory care residences, and 4 skilled nursing residences. It filed for bankruptcy because, among other things, it didn’t have the occupancy level — and, by extension, revenue — to satisfy its debts (owed to UMB Bank NA and others). The company used the bankruptcy process to effectuate a sale pursuant to Bankruptcy Code section 363.

We concluded our review of the situation as follows:

One last point here: considering that we now have two CCRC bankruptcies in the last two weeks and both are operated by SQLC, we’d be remiss if we didn’t highlight that SQLC also operates four other CCRCs: (a) Northwest Senior Housing Corporation d/b/a Edgemere; (b) Buckingham Senior Living Community, Inc. d/b/a The Buckingham; (c) Barton Creek Senior Living Center, Inc. d/b/a Querencia at Barton Creek; and (d) Tarrant County Senior Living Center, Inc. d/b/a The Stayton at Museum Way. With 33% of its CCRCs currently in BK, it seems that — for the restructuring professionals among you — these other SQLC facilities may be worth a quick look/inquiry.

You’re welcome. We called that from 9 months away.

Forth Worth Texas-based Tarrant County Senior Living Center Inc. filed a prepackaged bankruptcy case in the Northern District of Texas. The not-for-profit corporation has 188 independent living apartment-style residences, 42 residential-style assisted living suites, 20 memory support assist living suites and a skilled nursing facility with 46 beds. The facility is nearly completely occupied across the board with the weakest link being the independent living segment at 6.4% vacancy.

Pursuant to the Plan, only the holders of bond claims are impaired and entitled to vote. In other words, the bonds will take a haircut — and they’ve overwhelmingly voted in favor of said haircut — while general unsecured claimants and executory contract counter-parties ride through as if nothing even happened.

Nana won’t even notice this sucker filed for bankruptcy.

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

• Capital Structure:

• Professionals:

  • Legal: DLA Piper LLP (Thomas Califano, Rachel Nanes, Andrew Zollinger)

  • Financial Advisor/CRO: Ankura Consulting (Louis Robichaux)

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

• Other Parties in Interest:

  • UMB Bank NA

    • Legal: Mintz Levin Cohn Ferris Glovsky and Popeo PC (Daniel Bleck, Charles Azano)

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

Jones Energy Inc.

April 14, 2019

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

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

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

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

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

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

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

Source: Disclosure Statement

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

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

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

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

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

• Professionals:

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

  • Independent Directors: Tara Lewis, L. Spencer Wells

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

  • Investment Banker: Evercore Group LLC (Daniel Aronson)

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

• Other Parties in Interest:

  • Ad Hoc Group of First Lien Noteholders

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

    • Financial Advisor: Lazard Freres & Co. LLC

  • Ad Hoc Group of Crossover Holders

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

    • Financial Advisor: Houlihan Lokey Capital Inc.

  • Metalmark Capital LLC

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

Updated 4/15/19 2:05 CT

😷New Chapter 11 Bankruptcy Filing - SQLC Senior Living Center at Corpus Christi Inc. (d/b/a Mirador)😷

SQLC Senior Living Center at Corpus Christi Inc. (d/b/a Mirador)

2/8/19

We started reading the papers for the bankruptcy filing of SQLC Senior Living Center at Corpus Christi Inc. (d/b/a Mirador) and started scratching our heads. “Have we read this before?” we wondered. The answer is, effectively, ‘yes.’ On January 30th, Mayflower Communities Inc. d/b/a The Barrington of Carmel filed for bankruptcy. As with Mirador, here, SQLC is the sole member of and administrator and operator of The Barrington of Carmel, too. And therein lies the familiarity: the first several pages of Mirador’s First Day Declaration filed in support of the bankruptcy have the exact same description of the continuing care retirement community business as that filed in The Barrington of Carmel case. Which makes sense: there’s the same CRO and financial advisor in both cases. And, so, we have to complement the efficiency: why reinvent the wheel?

Whereas Barrington was a 271-unit CCRC, Mirador — a Texas nonprofit — owns and operates a 228-unit CCRC, comprised of 125 independent living residences, 44 assisted living residences, 18 memory care residences, and 4 skilled nursing residences. Mirador makes all of its revenue from operation of the CCRC. Mirador is a smaller CCRC than Barrington and, similarly, its assets and liabilities are fewer. As of the petition date, the company reported approximately $53mm in assets and $118mm in liabilities, the bulk of which is comprised of $74.5mm of long-term municipal bond obligations (UMB Bank NA) and $13.9mm of subordinated notes.

So what factored into the company’s bankruptcy filing? It blames, among other things, (i) the inability to sustain pricing and the level of entrance fees needed to support its debt, (ii) the Great Recession’s effect on housing prices which had the trickle-down effect of impairing the ability of potential residents to sell their houses and pay the necessary entrance fee (which, in turn, led to below-model occupancy levels and depressed cash flow), and (iii) the competitive senior housing market in Corpus Christi.

To combat these trends, the company lowered its entrance fees to fill occupancy. While that worked, it “also produced the negative effect on the long-term financial ability of the Debtor to pay Resident Refunds as they became due.” See, this complicated things. Per the Debtors:

“The Debtor’s initial Life Care Residents often executed 90% refundable contracts, which resulted in higher Resident Refund obligation. In an effort to maintain occupancy levels, newer Life Care Residents often paid a lower cost Entrance Fee. Thus, as earlier Residents moved out of the Facility and became eligible for Resident Refunds, the Entrance Fees received from New Residents were not sufficient to cover the Debtor’s Resident Refund obligations. This pattern continued such that as of late 2017, the Debtor owed and was unable to pay Resident Refunds of approximately $2 million.”

This appears to be the nonprofit version of a Ponzi scheme, but we digress. In addition to the above, the company also stream-lined costs and curtailed company-wide expenses and administrative overhead. Ultimately, the company hired a slate of bankruptcy professionals and began a marketing process for the assets — a process that, in the end, culminated in the stalking horse offer by Aldergate Trust and Methodist Retirement Community for $20,350,000 in cash plus the assumption of certain liabilities. The agreement also includes the assumption of all Residence Agreements of former residents, preserving those residents’ rights to refunds. With this sale (and the proceeds therefrom) as its centerpiece, the company also filed a plan and disclosure statement on day one.

One last point here: considering that we now have two CCRC bankruptcies in the last two weeks and both are operated by SQLC, we’d be remiss if we didn’t highlight that SQLC also operates four other CCRCs: (a) Northwest Senior Housing Corporation d/b/a Edgemere; (b) Buckingham Senior Living Community, Inc. d/b/a The Buckingham; (c) Barton Creek Senior Living Center, Inc. d/b/a Querencia at Barton Creek; and (d) Tarrant County Senior Living Center, Inc. d/b/a The Stayton at Museum Way. With 33% of its CCRCs currently in BK, it seems that — for the restructuring professionals among you — these other SQLC facilities may be worth a quick look/inquiry.

• Jurisdiction: S.D. of Texas

• Capital Structure: see above.

• Company Professionals:

  • Legal: Thompson & Knight LLP (Demetra Liggins, Cassandra Sepanik Shoemaker)

  • Financial Advisor: Larx Advisors (Keith Allen)

  • CRO: Ankura Consulting (Louis Robichaux IV)

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

• Other Parties in Interest:

  • Indenture Trustee: UMB Bank NA

    • Legal: McDermott Will & Emery (Nathan Coco)

  • Stalking Horse Purchaser: Aldergate Trust and Methodist Retirement Community