New Chapter 11 Bankruptcy Filing - RGN-Group Holdings LLC (d/b/a Regus)

RGN-Group Holdings LLC

We have yet to really see it run through the system but there’s no doubt in our minds that there is a commercial real estate and commercial mortgage-backed security massacre on the horizon. The hospitality sector, in particular, ought to be on the receiving end of a pretty harsh shellacking. More on this in a future edition of PETITION.

For now, the most high profile CRE activity we’ve seen thus far is the trickle of Regus locations that have filed for bankruptcy. Regus is an on-demand and co-working company with 1000 locations across the United States and Canada. Set up as special purpose entities with individual leases, the structure is such that IWG Plc f/k/a Regus Corporation (OTCMKTS: $IWGFF) serves as both ultimate parent and lender but isn’t a guarantor or obligor under any of the downstream leases.* This non-recourse structure allows for individual Regus locations to plop into bankruptcy — all with an eye towards working out lease concessions or turning over — without taking down the entirety of the enterprise.**

The first outpost, RGN-Columbus IV LLC, filed for bankruptcy in Delaware back on July 30. Since then, sixteen additional Regus affiliates have filed with the most recent ones descending upon Delaware last week: RGN-Philadelphia IX LLC, RGN-Chevy Chase I LLC, RGN-Los Angeles XXV LLC, RGN-San Jose IX LLC, RGN-New York XXXIX and RGN-Denver XVI LLC. All of the cases filed under Subchapter V of chapter 11 of the bankruptcy code (though, thanks to the addition of more locations, the case has been re-designated under Chapter 11).***

The description of the overall business model is precious:

IWG’s business model begins with entry into long-term non-residential real property leases (each, a “Lease”) with property owners (each, a “Landlord”) that provide the Company unoccupied office space (the “Centers”). Based on significant market research on potential client needs in local markets and the unique requirements of their existing clients, IWG engineers each of the Centers to meet the architectural style, service, space, and amenity needs of those individuals, companies, and organizations who will contract for use of subportions of the Centers. IWG markets its Centers under an umbrella of different brand names, each tailored to appeal to different types of clients and those clients’ specialized needs. These clients (the “Occupants”) enter into short-term licenses (each, an “Occupancy Agreement”) to use portions of the Centers, which are customizable as to duration, configuration, services, and amenities. When operating successfully, a Center’s Occupants’ license payments (“Occupancy Fees”) will exceed the combined cost of the underlying long-term lease, management cost, and operating expenses of the Center. (emphasis added)

It’s the “when operating successfully” part that always bewildered watchers of the co-working business model generally. After all, it was easy to see the mass expansion of co-working spaces amidst the longest bull run in market history. Indeed, Regus apparently had “Good first half performance overall given COVID-19 impact in Q2.” The question was: what happens in a downturn? The answer? You start to see the model when it operates unsuccessfully. In this scenario, occupancy rates dip lower than expected. Prior geographic expansion begins to look irresponsible. Pricing declines to attract new sales and renewals. And current occupants begin to stretch their payables.**** In total, it ain’t pretty. By way of example, take a look at some of the numbers:*****

Source: PETITION, Chapter 11 Petitions

But while the operating performance of those select locations may be ugly AF, the structure bakes in this possibility and isolates the cancer. Aside from the landlords, the locations have virtually no creditors.

• Each debtor location is an obligor pursuant to a senior secured loan agreement with Regus making for an intercompany obligation. There’s no other funded debt.

• The debtors are otherwise subject to a management agreement with non-debtor Regus Management Group LLC (“RMG”) pursuant to which each debtor is obligated to reimburse RMG for gross expenses incurred directly by RMG in performing management services plug a 5.5% vig on gross revenues.

• The debtors are also subject to an equipment lease agreement with debtor RGN-Group Holdings LLC. Under this agreement the debtors are obligated for the original cost of fixtures, furniture and equipment plus a margin fee.

• As if those agreements didn’t siphon off enough revenue, the debtors are also subject to franchise agreements pursuant to which the debtors have the right to operate an IWG business format in their respective locations and use certain business support services, advice and IT in exchange for a monthly 12% vig on gross revenue.

Given most of the debtors’ obligations are intercompany in nature, what did Regus do? It tried to stick it to its landlords. Duh.

Like so many other companies navigating these troubled times, the Company instituted a variety of comprehensive actions to reduce costs and improve cash flow and liquidity, including the deferral of rent payments and engagement with Landlords to negotiate forbearances, temporary accommodations, and, where possible, permanent modifications to the various Leases to bring them in line with the COVID-19-adjusted market realities so as to permit the Company to continue operating Centers at those respective locations despite the uncertainty when the pandemic will subside and when (and indeed, whether) the U.S. will return to something resembling the pre-pandemic “business as usual.”

Certain landlords, of course, played ball. That helped lessen Regus’ funding burden in the US. But, of course, others didn’t. Indeed, various landlords sent default/eviction notices. Hence the aforementioned bankruptcy filings:

…the Debtors commenced their Chapter 11 Cases to prevent the forfeiture of the Lease Holder Debtors’ Leases, and to preserve all Debtors’ ability to operate their respective businesses—thereby, importantly, protecting the Occupants of the Lease Holder Debtors’ Centers from any disruption to their businesses. I expect that the “breathing spell” from Landlords’ collection efforts that will be afforded by the chapter 11 process will allow the Debtors, and the Company more broadly, to more fully explore the possibility of restructuring their various contractual obligations in order to put the Company’s North American portfolio on a surer footing going forward, so as to allow the Debtors to emerge from this process stronger and more viable than when they went in. If these restructuring efforts prove unsuccessful, the Lease Holder Debtors intend to utilize the procedures available to them under the Bankruptcy Code to (i) orderly wind down the operation of the applicable Centers (including, to the extent necessary, the removal of the FF&E from the leased premises, and to the extent possible, transition of the Occupants to other locations), (ii) liquidate the amounts due to the Landlords under their respective Leases and guarantees, as well as amounts due to the Debtors’ affiliates under their respective agreements, and (iii) to make distributions to creditors in accordance with their respective priorities under the Bankruptcy Code and applicable law.

Said another way: this is gonna be a landlord/tenant battle. Regus has offered to provide $17.5mm of DIP financing to give the debtors time to negotiate with their landlords. To the extent those negotiations (continue to) fail, the debtors will no doubt begin to reject leases left and right.

*****

They likely won’t be alone. Per The Wall Street Journal:

The world’s biggest coworking companies are starting to close money-losing locations across the globe, signaling an end to years of expansion in what had been one of real estate’s hottest sectors.

The retreat reflects an effort to slash costs at a time when the coronavirus is reducing demand for office space, and perhaps for years to come. It also shows how bigger coworking firms, in a race to sign as many leases as possible and grab market share, overexpanded and became saddled with debt and expensive leases.

The share of coworking spaces that have closed is still small. In the first half of the year, closures accounted for just 1.5% of the space occupied by flexible-office companies in the 20 biggest U.S. markets, according to CBRE Group Inc.

Knotel, for instance, seems to be making a habit of getting sued for unpaid rent. Query whether we’re at the tip of the iceberg for co-working distress.

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*Other debtor entities, however, like RGN-Group Holdings LLC, RGN-National Business Centers LLC and H Work LLC do sometimes act as guarantors. Hence their bankruptcy filings. RGN-Group Holdings LLC isn’t a lease holder; rather, it owns all of the furniture, fixtures, equipment and other personal property and leases it all fo the respective SPE centers across the US pursuant to Equipment Lease Agreements.

**The nuance of this structure was constantly lost in the furor over WeWork back when WeWork was a thing that people actually cared about. Since we’re on the topic of WeWork, we suppose we ought to explain the video above. WeWork’s eccentric founder, Adam Neumann, was on record saying that he thought WeWork would thrive during a downturn due to its flexible structure — a point that has obviously been disproven by what’s transpired over the past few months. That said, and to be fair, he clearly didn’t have “social distancing” in mind when he hypothesized that result.

***We wrote about Subchapter V last month in the context of Desigual’s bankruptcy filing. We said:

Luckily for a lot of businesses, the Small Business Reorganization Act (SBRA and a/k/a Subchapter V) went into effect in February. Coupled with amended provisions in the CARES Act, the SBRA will make it easier for a lot of smaller businesses to restructure because:

It established a higher threshold ($7.5mm vs. $2.7mm) to qualify which means more businesses will be able to leverage the streamlined SBRA process to restructure. Previously, businesses over that cap couldn’t utilize Subchapter V which made any shot at reorganization via bankruptcy far too expensive for smaller businesses. The only alternative was dissolution and liquidation.

Debtors under SBRA can spread a payment plan for creditors over 3-5 years. Debtors get the benefit of the payments spread out over time and creditors can potentially recover more. Aiding this is the fact that admin expenses also get paid over time and debts are not discharged until all plan payments are fulfilled.

A plan must be filed within 90 days. The shorter time frame also contains cost.

A trustee must be appointed and effectively takes the place of a UCC which may only be formed on showing of cause.

Companies are taking advantage of this.

****It probably stands to reason that various client programs the debtors typically depend upon are less likely to generate results under this scenario. The debtors nevertheless filed a motion seeking to continue these programs. They include (a) rebate programs for occupants who spend over a certain annual amount, (b) occupancy agreement promotions such as discounts, reduced rent costs, one or more months of free rent, etc., and (c) occupant referral fees. Suffice it to say, occupants likely aren’t referring in many other occupants during COVID. Consequently, the debtors ultimately withdrew this motion. All of this brings up another criticism of WeWork: what, exactly, is a co-working space’s moat? As justification for these programs, the debtors say:

The Lease Holders operate in a very competitive and dynamic market and with many competitors for the same customers. The loss of one or more Occupants could significantly impact the Debtors’ profitability, and therefore, the Client Programs require timely coordination on the part of the Lease Holders to ensure the maximum generation of customer agreement profits and brand awareness during this restructuring.

Case and point.

*****These numbers are YTD for the period ended June 30, 2020.

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For more commentary and analysis about distressed investing, restructuring and/or bankruptcy, please visit us here.

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Dates:

RGN-Columbus IV LLC (July 30, 2020)

RGN-Chapel Hill II LLC (August 2, 2020)

RGN-Chicago XVI LLC (August 3, 2020)

RGN-Fort Lauderdale III LLC (August 8, 2020)

RGN-Group Holdings LLC (August 17, 2020)

H Work, LLC (August 17, 2020)

RGN-National Business Centers LLC (August 17, 2020)

RGN-Lehi LLC (August 27, 2020)

RGN-Lehi II LLC (August 27, 2020)

RGN Atlanta XXXV LLC (August 29, 2020)

RGN-Arlington VI LLC (August 30, 2020)

RGN-Chevy Chase I LLC (September 2, 2020)

RGN-Philadelphia IX LLC (September 2, 2020)

RGN-Denver XVI LLC (September 3, 2020)

RGN-New York XXXIX (September 3, 2020)

RGN-Los Angeles XXV LLC (September 3, 2020)

RGN-San Jose IX LLC (September 4, 2020)

Jurisdiction: D. of Delaware (Judge Shannon)

Capital Structure: N/A

Company Professionals:

• Legal: Faegre Drinker Biddle & Reath LLP (James Conlan, Mike Gustafson, Patrick Jackson, Ian Bambrick, Jay Jaffe)

• Financial Advisor: AlixPartners LLP (Stephen Spitzer)

• Restructuring Advisor/Chief Restructuring Officer: Duff & Phelps LLC (James Feltman)

• Claims Agent: Epiq Corporate Restructuring LLC (Click here for free docket access)

• Subschapter V Trustee: Gibbons PC (Natasha Songonuga)

Other Parties in Interest:

• Regus Corporation, Regus Management Group, LLC and Franchise International GmbH

  • Legal: Young Conaway Stargatt & Taylor LLP (Robert Brady, James Hughes Jr., Joseph Barry, Justin Duda, Ryan Hart)

• Starwood Capital Group

  • White & Case LLP (Harrison Denman, John Ramirez) & Potter Anderson & Corroon LLP (Christopher Samis, Aaron Stulman)

🚀New Chapter 11 Bankruptcy - Vector Launch Inc.🚀

Vector Launch Inc.

December 13, 2019

🚀Another Example of the Tech Hype Machine Getting a Fast and Furious Reality Check (Short “Founder Friendly?”; Long #BustedTech)🚀

We’ve been rather bored with energy and retail distress these days and so we looked on with great interest when Arizona-based Vector Launch Inc. and its subsidiary, Garvey Spacecraft Corporation, filed for bankruptcy in the District of Delaware. Sure, sure, it’s not a big name like McDermott International ($MDR) — the excitement there awaits us in ‘20 — but it’s meaningful nonetheless. Why? Because Sand Hill Road is known for its moonshots. And they often come crashing down to earth. Just not usually in bankruptcy court.

Yet this one did. Vector, a space technology company that was producing rockets and satellite computing technology, has an interesting history. Founded in 2016 by two of the original team members behind Elon Musk’s SpaceX, the company shared Mr. Musk’s vision and penchant for exaggeration. The company launched in 2016 and, in retrospect, the laudatory coverage of the ambition is laughable. Here’s Techcrunch:

With small rockets carrying single 20-40 kg payloads launching weekly or even every few days, the company can be flexible with both prices and timetables. Such small satellites are a growing business: 175 were launched in 2015 alone, and there’s plenty of room to grow. It’ll still be expensive, of course, and you won’t be able to just buy a Thursday afternoon express ticket to low earth orbit — yet.

Customers will, however, reap other benefits. There are less restrictions on space: no more having to package your satellite or craft into a launch container so it fits into a slot inside a crowded space bus. Less of a wait between build and launch means hardware can be finalized weeks, not years, in advance — and expensive satellites aren’t sitting in warehouses waiting for their turn to go live and get that sweet return on investment.

Sounds dope AF, we admit. Even more exciting, Techcrunch reported that Vector hoped to make its first real flights in 2017. At the time, it had raised government grant money (DOD and NASA) and a small amount of angel money. Straight out of the Musk playbook: fund your company and get rich off of the government teat. Brilliant.

But you don’t get government money without pedigreed founders and highfalutin promises to change the world (literally via rockets). Just imagine how that package looks to the outside investment community.

Investors are knocking down the front door looking to get in, he said, though he declined to name any. Perhaps they smell profitability: Vector’s business plan has it cash positive after just a few launches.

Oof. That bit looks REALLLLLLY REALLLLLY bad now, huh? It gets worse.

Here are some of the things that subsequently transpired:

• The company finalized an agreement to conduct 21 launches for Finland-based Iceye’s commercial Synthetic Aperture Radar satellite constellation. 👍

• Quartz published a flattering piece about the shift to smaller rockets, giving heavy prominence to Vector. 👍

• The company won $2.5mm worth of contracts from the Defense Advanced Research Projects Agency (DARPA) and NASA. 👍

• The company announced a Tucson headquarters and manufacturing plant, celebrating the potential creation of 200 jobs with the hope of reaching as many as 500; the “direct economic impact of the facility could be $290 million over five years” (citing $2.5mm in contracts and revenue in ‘16 and $160mm-worth of signed contracts for launches “once the plant starts producing rockets…”). 👍

• Vector announced “an agreement with York Space Systems, an aerospace company specializing in small and medium class spacecraft, to conduct six satellite launches from 2019 through 2022 with the option for 14 additional launches”; the contract was reportedly worth a staggering $60mm. 👍

These guys were rockin’ and rollin'.

But, wait, there’s more!

• After several more government grants and a number of angel infusions, the company finally raised a $21mm Series A round in June 2017 — which included money from vaunted Silicon Valley venture capital firm, Sequoia Capital (as well as Shasta Ventures and Lightspeed).

• By August of 2017, the hype machine was in full effect. Here is a CNBC piece championing the company’s first completed “mission.” Around the same time, Techcrunch, The Los Angeles Times and Ars Technica all wrote about the promise of small rockets. Size doesn’t matter, they said!!

• By October 2018, the company was back fundraising; it secured a $70mm Series B raise from Kodem Growth Partners, Morgan Stanley Alternative Investment Partners and participation from its existing trio of VC firms. Now nothing and nobody could get in these guys’ way!!!!!

Well, except Sequoia Capital.

Per the company’s CHAPTER 11 BANKRUPTCY PAPERS(!!!!):

“In early August 2019, a member of Vector’s board of directors…appointed by Sequoia…abruptly resigned and informed Vector that Sequoia had decided to no longer support Vector via funding for future operations. Almost immediately after the…resignation, the Debtors’ CEO resigned. The fallout from Sequoia’s decision and the CEO’s resignation spooked the investor community and doomed the Debtors’ efforts to raise additional capital.”

There’s more:

These events could not have been timed more poorly for the Debtors. In addition to preventing the Debtors from attracting new capital, they occurred when the debtors had almost expended all of the capital from their prior capital raises. Indeed, the Debtors’ cash balances barely exceeded their secured debt, which principal amount totaled $11.5 million.

HOLD ON. So, the company lit $70mm of new funding on fire in less than a year and didn’t have enough money to clear its secured debt. And SECURED DEBT? Where was the press release for that?!?!

After evaluating its options, the Board determined that if it did not immediately cease operations, the Debtors would be unable to pay their employees if their secured lenders declared a default and froze the Debtors’ cash (which is precisely what occurred). With no access to capital to fund ongoing business needs and to satisfy the Debtors’ outstanding secured debt, the Board voted to cease operations and to terminate most of the Debtors’ employees and pay all owed wages…

This ain’t exactly WeWork but still. Life comes at you fast: one moment you’re a media darling garnering all kinds of favorable coverage, raising millions upon million of dollars with investors “knocking down the door” and, the next, your pesky venture capitalists are pulling the plug and high-tailing for the exits!

Less than two weeks later, the Debtors’ secured lenders froze the approximately $12 million in cash deposited in the Debtors’ bank accounts as expected. The Debtors’ secured lenders subsequently swept the cash from Debtors’ bank accounts, leaving the Debtors with no cash, a single employee (the acting CEO), and, after assessing fees and other charges, approximately $500k in secured debt. The Debtors’ remaining assets essentially consisted of three leased facilities, transporter-erector launcher, launch vehicle parts (including rocket engines and ground support equipment), satellite computer technology, patents, and other intellectual property.

So much to unpack here.

First, what the hell is a “transporter-erector launcher” and where does Johnny get one?

Second, at what point did this thing sh*t the bed so badly that it needed to tap a credit facility? That it had to (maybe?) jettison its founder-CEO?? Tap bridge financing???

It turns out that TriplePoint Capital LLC committed to lend the company $15mm back in October 2018 alongside the company’s Series B raise (PETITION Note: this is not in and of itself crazy…many startups take on venture debt in conjunction with a fundraise generally as a safety net; usually they hope NOT to use it because they’ll just go on to their next equity raise). The loan was secured by basically all of the company’s collateral and was structured as two draws in equal $7.5mm installments. With the sweep, TriplePoint ensured that its claim would be minimized: at the time of filing, they are owed $500k.

To bridge to a filing, the company secured a $500k bridge loan from Lockheed Martin Corporation — now the proposed stalking horse purchaser. The company also issued $1.6mm in convertible notes in connection with what it thought would be a Series C raise prior to Sequoia backing out. Whoops.

The big question, then, is why did Sequoia so abruptly quit the board and split?* Why, then, did the CEO, James Cantrell, quit the next day? It sounds like there’s a lot more here to uncover:

Mr. Cantrell subsequently filed a lawsuit against Vector claiming that he was terminated. The Debtors dispute Mr. Cantrell’s claims regarding his departure. Moreover, the Debtors believe they hold claims against Mr. Cantrell that they intend to pursue for the benefit of the Debtors’ creditors.

Some shady-a$$ sh*t must’ve been discovered around August 5. Just as fervently as investors were, at one point, trying to invest in this company, parties in interest were now eager to save themselves. Silicon Valley Bank (over $4mm owed) and TriplePoint issued notices of default and swept the Debtors’ cash (PETITION Note: that’s why they say that possession is half the battle!).

Lockheed is the White Knight here salvaging what’s left of this hot mess. It provided the bridge loan; it will provide a $2.5mm DIP (yay bankruptcy pros getting paid!); and it will purchase the debtors’ GalacticSky assets for $4.25mm. The offer is cash and equity.

Interestingly, despite all of this, optimism abounds here. The debtors note that they hope to pursue the Lockheed sale followed by other sales of assets:

If consummated, the Debtors believe that the proceeds from Sales will provide for payment in full of the Debtors’ secured obligations, administrative expense claims, and priority claims. In addition, the debtors believe there will be sufficient funds for (i) a liquidation trust to pursue the Debtors’ claims against certain parties, including its former CEO and (ii) distributions to general unsecured creditors.

That claim against the former CEO ought to be interesting. Stay tuned.😬

*Axios’ Dan Primack wrote:

Per a source: Sequoia decided to stop investing due to a high burn rate and the company not meeting projections. That decision was followed by two lenders opting against giving Vector new debt lines — something Sequoia didn't instruct, but which Vector nonetheless blames on the VC firm.

Case Data:

• Jurisdiction: (Judge Dorsey)

• Capital Structure: $500k (TriplePoint Capital LLC), $500k (Lockheed Martin)

• Professionals:

  • Legal: Pillsbury Winthrop Shaw Pittman LLP (Hugh Ray III, Jason Sharp, William Hotze) & Sullivan Hazeltine Allinson LLC (Elihu Allinson Ill)

  • Financial Advisor: Winter Harbor LLC (Shaun Martin)

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

• Other Parties in Interest:

  • Prepetition Lender ($500k): TriplePoint Capital LLC

    • Legal: McDermott Will & Emery LLP (Darren Azman, Daniel Thomson) & Bayard PA (Justin Alberto)

  • Prepetition Lender ($500k) & Stalking Horse Purchaser ($2.5mm): Lockheed Martin Corporation

    • Legal: Hogan Lovells LLP (Christopher Donoho, John Beck, Jennifer Lee & Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Andrew Remming, Paige Topper)

  • Large Equityholders: Kodem Growth Partners, Sequoia Capital, Shasta Ventures V LP, Lightspeed Venture Partners XI LP, DNX Ventures

  • Official Committee of Unsecured Creditors: Valcor Engineering Corporation; (ii) Rincon Etal Investments, Inc.; (iii) Expanding TFO I, LP; (iv) M4 Engineering Inc., and (v) Gas Innovations

    • Brown Rudnick LLP (Bennett Silverberg, Kenneth Aulet) & Potter Anderson & Corroon (Christopher Samis, L. Katherine Good, D. Ryan Slaugh)

    • Financial Advisor: Dundon Advisors LLC (Matthew Dundon, Philip Preis)