🔫New Chapter 11 Filing - Sportco Holdings Inc. (United Sporting Companies Inc.)🔫

SportCo Holdings Inc. (United Sporting Companies Inc.)

June 10, 2019

Callback to four previous PETITION pieces:

• Is that a Gun in Your Pocket or….? (Short #MAGA!!);

• New Chapter 11 - Remington Outdoor Company;

• Who is Financing Guns? (Remington Outdoor); and

• New Chapter 11 - AcuSport Corporation.

The first one — which was a tongue-in-cheek mock First Day Declaration we wrote in advance of Remington Outdoor Company’s chapter 11 bankruptcy — is, if we do say so ourselves, AN ABSOLUTE MUST READ. The same basic narrative could apply to the recent chapter 11 bankruptcy filing of Sportco Holdings Inc., a marketer and distributor of products and accessories for hunting, which filed for bankruptcy on Monday, June 10, 2019. Sportco’s customer base consists of 20k independent retailers covering all 50 states. But back to the “MUST READ.” There are some choice bits there:

Murica!! F*#& Yeah!! 

Remington (f/k/a Freedom Group) is "Freedom Built, American Made." Because nothing says freedom like blowing sh*t up. Cue Lynyrd Skynyrd's "Free Bird." Hell, we may even sing it in court now that Toys R Ushas made that a thing. 

Our company traces its current travails to 2007 when Cerberus Capital Management LP bought Remington for $370mm (cash + assumption of debt) and immediately "loaded" the North Carolina-based company with even more debt. As of today, the company has $950mm of said debt on its balance sheet, including a $150mm asset-backed loan due June '19, a $550mm term loan B due April '19, and 7.875% $250mm 3rd lien notes due '20. Suffice it to say, the capital structure is pretty "jammed." Nothing says America like guns...and leverage. 

Indeed, this is true of Sportco too. Sportco “sports” $23mm in prepetition ABL obligations and $249.8mm in the form of a term loan. Not too shabby on the debt side, you gun nuts!

More from our mock-up on Remington:

Shortly after Cerberus purchased the company, Barack Obama became president - a fact, on its own, that many perceived as a real "blowback" to gun ownership. Little did they know. But, then, compounding matters, the Sandy Hook incident occurred and it featured Remington's Bushmaster AR-15-style rifle. Subsequently, speeches were made. Tears were shed. Big pension fund investors like CSTRS got skittish AF. And Cerberus pseudo-committed to selling the company. Many thought that this situation was going to spark "change [you] can believe in," lead to more regulation, and curtail gun sales/ownership. But everyone thought wrong. Tears are no match for lobby dollars. Suckers. 

Instead, firearm background checks have risen for at least a decade - a bullish indication for gun sales. In a sick twist of only-in-America fate, Obama's caustic tone towards gunmakers actually helped sell guns. And that is precisely what Remington needed in order to justify its burdensome capital structure and corresponding interest expense. With Hillary Clinton set to win the the election in 2016, Cerberus' convenient inability to sell was set to pay off. 

But then that "dum dum" "ramrod" Donald Trump was elected and he enthusiastically and publicly declared that he would "never, ever infringe on the right of the people to keep and bear arms."  While that's a great policy as far as we, here, at Remington are concerned, we'd rather him say that to us in private and declare in public that he's going to go door-to-door to confiscate your guns. Boom! Sales through the roof! And money money money money for the PE overlords! Who cares if you can't go see a concert in Las Vegas without fearing for your lives. Yield baby. Daddy needs a new house in Emerald Isle. 

Wait? "How would President Trump say he's going to confiscate guns and nevertheless maintain his base?" you ask. Given that he can basically say ANYTHING and maintain his base, we're not too worried about it. #MAGA!! Plus, wink wink nod nod, North Carolina. We'd all have a "barrel" of laughs over that.  

So now what? Well, "shoot." We could "burst mode" this thing, and liquidate it but what's the fun in that. After all, we still made net revenue of $603.4mm and have gross profit margins of 20.9%. Yeah, sure, those numbers are both down from $865.1mm and 27.4%, respectively, but, heck, all it'll take is a midterm election to reverse those trends baby. 

That was a pretty stellar $260mm revenue decline for Remington. Thanks Trump!! So, how did Sportco fare?

Want to quantify how scared people were that @BarackObama would take away their guns?

Per Sportco's bankruptcy filing:

Average net sales '12-'16: $885.3mm.
Net sales '17: $531.1mm.
Net sales '18: $557mm.

President Trump cost this company $300+mm in annual sales. #MAGA! pic.twitter.com/yBQOTLRFPW

— 💥PETITION💥 (@petition) June 10, 2019

Trump seems to be failing to make America great again for those who sell guns.

But don’t take our word for it. Per Sportco:

In the lead up to the 2016 presidential election, the Debtors anticipated an uptick in firearms sales historically attributable to the election of a Democratic presidential nominee. The Debtors increased their inventory to account for anticipated sales increases. In the aftermath of the unexpected Republican victory, the Debtors realized lower than expected sales figures for the 2017 and 2018 fiscal years, with higher than expected carrying costs due to the Debtors’ increased inventory. These factors contributed to the Debtors tightening liquidity and an industry-wide glut of inventory.

Whoops. Shows them for betting against the stable genius. What are these carrying costs they refer to? No gun sales = too much inventory = storage. Long warehousemen.

Compounding matters, the company’s excess inventory butted with industry-wide excess inventory sparked by “the financial distress of certain market participants.” This pressured margins further as Sportco had to discount product to push sales. This “further eroded…slim margins and contributed to…tightening liquidity.” Per the company:

Many of the Debtors’ vendors and manufacturers suffered heavy losses as a result of the Cabela’s-Bass Pro Shop merger, Dick’s Sporting Good’s pull back from the market, and the recent Gander Mountain and AcuSport bankruptcies. Those losses adversely impacted the terms and conditions on which such vendors and manufacturers were willing to extend credit to the Debtors. With respect to the Gander Mountain and AcuSport bankruptcies, the dumping of excess product into the marketplace pushed prices—and margins— even lower. The resulting tightening of credit terms eroded the Debtors’ sales and further contributed to the Debtors’ tightening liquidity.

The company also blames some usual suspects for its chapter 11 filing. First, weather. Weather ALWAYS gets a bad rap. And, of course, the debt.

Riiiiiight. About that debt. When we previously asked “Who is Financing Guns?,” the answer, in the case of Remington, was Bank of America Inc. ($BAC), Wells Fargo Inc. ($WFC) and Regions Bank Inc. ($RF). Likewise here. Those same three institutions make up the company’s ABL lender roster. We’re old enough to remember when banks paid lip service to wanting to do something about guns.

One other issue was the company’s inability to…wait for it…REALIZE CERTAIN SUPPLY CHAIN SYNERGIES after acquiring certain assets from once-bankrupt competitor AcuSport Corporation. Per the company:

The lower than anticipated increase in customer base following the AcuSport Transaction magnified the adverse effects of the market factors discussed above and resulted in a faster than expected tightening of the Debtors’ liquidity and overall deterioration of the Debtors’ financial condition.

The company then ran into issues with its pre-petition lenders and its vendors and the squeeze was on. Recognizing that time was wearing thin, the company hired Houlihan Lokey Inc. ($HLI) to market the assets. No compelling offers came, however, and the company determined that a chapter 11 filing “to pursue an orderly liquidation…was in the best interest of all stakeholders.”

R.I.P. Sportco.

*****

But not before you get in one last fight.

The glorious thing about first day papers is that they provide debtors with the opportunity to set the tone in the case. The First Day Declaration, in particular, is a narrative. A narrative told to the judge and other parties-in-interest about what was, what is, and what may be. That narrative often explains why certain other requests for relief are necessary: that is, that without them, there will be immediate and irreparable harm to the estate. The biggest one of these is typically a request for authority to tap a committed DIP credit facility and/or cash collateral to fund operations. On the flip side of that request, however, are the company’s lenders. And they often have something to say about that — objections over, say, the use of cash collateral are common.

But you don’t often see an objector re-write the entire frikken narrative and file it prior to the first hearing in the case.

Shortly after the bankruptcy filing, Prospect Capital Corporation (“PCC”), as the second lien term loan agent, unleashed an objection all over the debtors. Per PCC:

Just a few years ago, the Debtors were the largest distributor of firearms in the United States, with reported annual revenue of in excess of $770 million. Contrary to the First Day Declaration filed in these cases, the Debtors’ demise was not due to outside forces such as the “2016 presidential election,” “disruptions in the industry” and “natural disasters. Rather, as a result of dividend recapitalization transactions in 2012 and 2013, the Debtors’ equity owner, Wellspring Capital, “cashed out” in excess of $183 million. After lining their pockets with over $183 million, fiduciaries appointed by Wellspring Capital to be directors and officers of the Debtors grossly mismanaged the business and depleted all reserves necessary to weather the storms and the headwinds the business would face. In a short time, the business went from being the largest firearms distributor in the United States to being liquidated. As a result of years of mismanagement and the failure of the estates’ fiduciaries to preserve value, the Second Lien Lenders will, in all likelihood, recover only a small fraction of their $249.7 million secured loan claim. Years of mismanagement ultimately placed the Debtors in the position where they are in now….

This sh*t just got much more interesting: y’all know we love dividend recapitalizations. Anyway, PCC went on to object to the fact that this is an in-court liquidation when an out-of-court process would be, in their view, cheaper and just as effective; they also object to the debtors’ proposed budget and use of cash collateral. The upshot is that they see very little chance of recovery of their second lien loan and want to maximize value.

Of course, the debtors be like:

The numbers speak for themselves, they replied. They were $X of revenue between 2012 and 2016 and then, after Trump was elected, they’ve been $X-Y%. Plain and simple.

So where does this leave us? After some concessions from the DIP lenders and the debtors, the court approved the debtors requested DIP credit facility on an interim basis. The order preserves PCC’s rights to come back to the court with an argument related to cash collateral after the first lien lenders (read: the banks) are paid off in full (and any intercreditor agreement-imposed limitations on PCC’s ability to fight fall away).

Ultimately, THIS may sum up this situation best:

It’s genuinely difficult to pick the most villainous company in this story. Is it the company selling guns who made a big bet on people’s deepest fears and insecurities and then shit the bed? The private equity company bleeding the gun distributor dry and then running it straight into the ground? Or the other private equity company that is now mad it likely won’t get anything near what it paid out in the original loan to the distributor? Folks...let them fight.

• Jurisdiction: D. of Delaware (Judge Silverstein)

• Capital Structure: $23.1mm ABL, $249mm term loan (Prospect Capital, Summit Partners)

• Professionals:

  • Legal: McDermott Will & Emery LLP (Timothy Walsh, Darren Azman, Riley Orloff) & (local) Polsinelli PC (Christopher Ward, Brenna Dolphin, Lindsey Suprum)

  • Board of Directors: Bradley Johnson, Alexander Carles, Justin Vorwerk

  • Financial Advisor/CRO: Winter Harbor LLC (Dalton Edgecomb)

  • Investment Banker: Houlihan Lokey Inc.

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

• Other Parties in Interest:

  • DIP Agent: Bank of America NA

    • Legal: Winston & Strawn LLP (Daniel McGuire, Gregory Gartland, Carrie Hardman) & (local) Richards Layton & Finger PA (John Knight, Amanda Steele)

  • Agent for Second Lien Lenders: Prospect Capital Corporation

    • Legal: Olshan Frome Wolosky LLP (Adam Friedman, Jonathan Koevary) & (local) Blank Rome LLP (Regina Stango Kelbon, Victoria Guilfoyle, John Lucian)

  • Prepetition ABL Lenders: Bank of America NA, Wells Fargo Bank NA, Regions Bank NA

  • Large equityholders: Wellspring Capital Partners, Summit Partners, Prospect Capital Corporation

  • Official Committee of Unsecured Creditors (Vista Outdoor Sales LLC, Magpul Industries Corporation, American Outdoor Brands Corporation, Garmin USA Inc., Fiocchi of America Inc., FN America LLC, Remington Arms Company LLC)

    • Legal: Lowenstein Sandler LLP (Jeffrey Cohen, Eric Chafetz, Gabriel Olivera) & (local) Morris James LLP (Eric Monzo)

    • Financial Advisor: Emerald Capital Advisors (John Madden)

Update 7/7/19 #115

🏥New Chapter 11 Bankruptcy Filing - Insys Therapeutics Inc.🏥

Insys Therapeutics Inc.

June 10, 2019

Within a week of a massive settlement entered into with the United States Department of Justice, Insys Therapeutics Inc. ($INSY) and six affiliates have filed for bankruptcy in the District of Delaware.* The company is a specialty pharmaceutical company that commercializes drugs and drug delivery systems for targeted therapies (read: it manufactures opioids); it has two marked products. These products, if prescribed and used in the right way, aren’t in and of themselves evil (though former management is another story). Subsys is used for cancer patients and is delivered in the (non-invasive) form of an under-the-tongue spray. Syndros is used to treat loss of appetite and anorexia associated with weight loss in people with AIDS as well as nausea and vomiting caused by anti-cancer medicine. Not one to miss out on all the latest fads, the company also apparently has cannabinoid-based formulations in its pipeline. Because, like, to the extent the company wants to pursue a sale, nothing will get investor juices flowing like cannabinoid! Will its marketing get done via Snapchat and its sales conducted via the blockchain? Maybe it ought to package its formulations with fake meat. Lit!!

All in, the company owns 94 worldwide patents and 62 patent applications with expiration dates ranging between 2022 and 2039. In other words, it does have some potentially valuable intellectual property.

The company’s synopsis of why it is now in bankruptcy court reflects the world of opioid producers today:

…the Debtors are facing extensive litigation relating to their SUBSYS® product (“Subsys”), which is a prescription opioid. As of the Petition Date, one or more of the Debtors have been named in approximately one thousand lawsuits, and the Debtors anticipate that additional lawsuits may be commenced in the future. Some of the litigation they are facing is common to all opioid manufacturers, while other claims are based on particular alleged activities of the Debtors’ former executives, many of whom either pleaded guilty to or were convicted after trial of federal criminal activity relating to such activities. The expenses and settlement costs resulting from such litigation have been substantial, consuming large portions of the Debtors’ revenue and liquidity.

At the same time, over the last few years, the Debtors’ revenues from Subsys have been declining rapidly as a result of the increased national scrutiny of prescription of opioids by healthcare professionals, the resulting high-profile political and legal actions taken against manufacturers and distributors of opioids, and the specific news relating to the former executives’ criminal activity. Moreover, although the Debtors have promising products in the pipeline, those products are not yet approved for production, require significant additional investment to bring to market, and are not expected to generate revenue in the near term. As a smaller company than some other opioid manufacturers, with over 90% of its current revenue coming from the sale of opioids, Insys could not withstand the concurrent negative impact of massive litigation costs and significant opioid revenue deterioration. These factors have caused a substantial cash drain on the company to the point where, despite the Debtors’ best efforts, they risk running out of cash in 2019. (emphasis added)

We quoted that bit at length because it captures the risk that all opioid manufacturers face today given what appears to be pervasive sales and prescription practices across the country, subsuming countless companies all seeking sales and profits often in the name of shareholder value. Which is not to say that all companies and company management teams are equal: while the jury is still out in a variety of cases, here, we know that former company management engaged in some shady-a$$ methods to enrich themselves. Per Bloomberg:

In May, Insys founder and former Chief Executive Officer John Kapoor, 75, and four former executives were convicted of engaging in a racketeering conspiracy to bribe doctors to boost off-label prescriptions of Subsys, a fentanyl spray originally intended to treat cancer pain. The executives baited doctors with sham speaker fees, lavish dinners and nightclub outings, and then duped insurers into covering the prescriptions, prosecutors said. Kapoor and the others each face a maximum of 20 years in prison and will be sentenced in September.

A pandemic of addiction in Wyoming, Oklahoma and elsewhere, powered by some corrupt-AF executives and their bottles-and-models loving doctor homies.

The debtors filed their bankruptcy cases to (i) trigger the automatic stay, a statutorily imposed injunction that will, for the time being, halt ongoing litigation, (ii) pursue a sale of substantially all of their assets, and (iii) implement procedures designed to estimate categories of claims and impose distribution procedures via a plan of reorganization. Moreover, the debtors hope that a court-supervised proceeding in chapter 11 will provide the structure required to enter into additional settlements with other large groups of claimants.

As for current claims, there are lot (including a variety of professional services claims on account of indemnities and otherwise — a lot of lawyers are likely to have write-offs here). But the company has no funded debt and so the proceeds of any sale will, after professionals are paid, go to general unsecured creditors. First and foremost, the DOJ — on account of its allowed general unsecured claim ($243mm, but capped at a $195mm recovery inclusive of a $5mm prepetition payment). The DOJ will have to contend with, on an equal basis, other federal actions/settlements, state actions, municipal actions, and insurance, personal injury, securities and indemnity claimants. It’s a liability lovefest!

To address these liabilities, the debtors need asset value. To that end, the debtors are looking to establish a global sale process for their IP; they’re also looking at clawing back certain indemnification amounts they’ve paid over the years on behalf of their seemingly corrupt-AF former management; finally, they may pursue claims against their insurers for wrongful denial of coverage. All in, the debtors are seeking to maximize their estates for the purposes of broadening the potential pool for distribution to claimants. We’re all for that objective provided it can be done in a cost effective way — a rare accomplishment, these days, in bankruptcy.

*The stock, which had been trading at $1.31/share at market close on Friday, plummeted 51.45% on Monday upon the news of the bankruptcy filing. This prompted The Wall Street Journal’s Charley Grant to quip, “So much for efficient markets.” He continued:

Why the news took anyone by surprise, however, is more of a mystery. After all, Insys had given investors fair warning, just days after a federal jury convicted five former employees of engaging in a racketeering conspiracy to boost opioid sales. The company said in a report filed with the Securities and Exchange Commission that “it may be necessary... to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring.”

In case that hint was too subtle, investors got another one last week, when Insys agreed to settle criminal and civil claims with the Justice Department for $225 million.

He forgot to mention another sign. In March we wrote:

Opioids (Long Professional Retentions). Insys Therapeutics Inc. ($INSY) has JMP Securities pursuing a divestiture of its fentanyl sublinqual spray, Subsys. The company revealed this week that Lazard has now also been hired. Per Reuters, a company spokesperson stated:

“We engaged Lazard thereafter to advise us on our capital planning and strategic alternatives across the business. These are two independent efforts.”

What kind of independent effort? Color us suspicious.

“Color us suspicious” was not-so-subtle code for “this f*cker is going to file for bankruptcy, people.” So, to Mr. Grant’s point, it should have been abundantly clear what was going to happen to any market follower actually paying attention.

• Jurisdiction: D. of Delaware (Judge Gross)

• Capital Structure: No funded debt.

• Professionals:

  • Legal: Weil Gotshal & Manges LLP (Gary Holtzer, Ronit Berkovich, Candace Arthur, Olga Peshko, Brenda Funk, Ramsey Scofield, Peter Isakoff ) & (local) Richards Layton & Finger PA (John Knight, Paul Heath, Amanda Steele, Zachary Schapiro)

  • Board of Directors: John McKenna, Trudy Vanhove, Rohit Vishnoi, Vaseem Mahboob, Andrew Long, Elizabeth Bohlen

  • Financial Advisor: FTI Consulting Inc.

  • Investment Banker: Lazard Freres & Co. LLC (Andrew Yearley)

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

• Other Parties in Interest:

  • Official Committee of Unsecured Creditors (McKesson Corporation, Infirmary Health Hospitals Inc., Louisiana Health Service & Indemnity Co. d/b/a Blue Cross and Blue Shield of Louisiana, LifePoint Health Inc., Deborah Fuller, Julie Kay, James Starling Jr., Angela Mistrulli-Cantone, Lisa Mencucci)

    • Legal: Akin Gump Strauss Hauer & Feld LLP (Daniel Golden, Mitchell Hurley, Arik Preis) & (local) Bayard PA (Justin Alberto, Erin Fay, Daniel Brogan)

  • MDL Plaintiffs

    • Legal: Brown Rudnick LLP (David Molton, Gerard Cicero, Kenneth Aulet, Chelsea Mullarney, Steven Pohl) & Blank Rome LLP (Stanley Tarr, Victoria Guilfoyle) & Gilbert LLP (Scott Gilbert, Craig Litherland, Kami Quinn, Jenna Hudson)
      

Update 7/7/19 #244

🍤Casual Dining is a Hot Mess. Part VIII. New Chapter 11 Bankruptcy Filing - RUI Holding Corp.🍤

Back in October 2016, in the context of Sun Capital Partners’-owned Garden Fresh Restaurant Intermediate Holdings bankruptcy filing, we asked, “Are Progressives Bankrupting Restaurants?”* We wrote:

Morberg's explanation for the bankruptcy went a step farther. He noted that cash flow pressures also came from increased workers' compensation costs, annual rent increases, minimum wage increases in the markets they serve, and higher health benefit costs -- a damning assessment of popular progressive initiatives making the rounds this campaign season. And certainly not a minor statement to make in a sworn declaration.  

It's unlikely that this is the last restaurant bankruptcy in the near term. Will the next one also delineate progressive policies as a root cause? It seems likely.

There have been a plethora of restaurant-related bankruptcy filings between then and now and many of them have raised rising costs as an issue. Perhaps none as blatantly, however, than Sun Capital Partners’ portfolio companies: enter RUI Holding Corp and its affiliated debtors, Restaurants Unlimited Inc. and Restaurants Unlimited Texas Inc. (the “Debtors”).**

On July 7, 2019, the Sun Capital-owned Debtors filed for bankruptcy in the District of Delaware. The Debtors opened their first restaurant in 1969 and now own and operate 35 restaurants in 6 states under, among 14 others, the trade names “Clinkerdagger,” “Cutters Crabhouse,” “Maggie Bluffs,” and ”Horatio’s.” The Debtors note that each of their restaurants offer “fine dining” and “polished casual dining” “situated in iconic, scenic, high-traffic locations.” Who knew that if you want something to scream “iconic” you ought to name it Clinkerdagger?

As we’ve said time and time again, casual dining is a hot mess. Per the Debtors:

…the Company's revenue for the twelve months ended May 31, 2019, was $176 million, down 1% from the prior year. As of the Petition Date, the Company has approximately $150,000 of cash on hand and lacks access to needed liquidity other than cash flow from operations.

The Debtors have over $37.7mm of secured debt; they also owe trade $7.6mm. There are over 2000 employees, of which 168 are full-time and 50 are salaried at corporate HQ in Seattle Washington.

But enough about that stuff. Back to those damn progressives. Per the Debtors:

Over the past several years, certain changes to wage laws in the Debtors’ primary geographic locations coupled with two expansion decisions that utilized cash flow from operations resulted in increased use of cash flow from operations and borrowings and restricted liquidity. These challenges coupled with additional state-mandates that will result in an additional extraordinary wage hike in FYE 2020 in certain locations before all further wage increases are subject to increases in the CPI and the general national trend away from casual dining, led to the need to commence these chapter 11 cases.

They continue:

Over the past three years, the Company’s profitability has been significantly impacted by progressive wage laws along the Pacific coast that have increased the minimum wage as follows: Seattle $9.47 to $16.00 (69%), San Francisco $11.05 to $15.59 (41%), Portland $9.25 to $12.50 (35%). As a large employer in the Seattle metro market, for instance, the Company was one of the first in the market to be forced to institute wage hikes. Currently in Seattle, smaller employers enjoy a statutory advantage of a lesser minimum wage of $1 or more through 2021, which is not available to the Company. The result of these cumulative increases was to increase the Company’s annual wage expenses by an aggregate of $10.6 million through fiscal year end 2019.

For a second we had to do a double-take just to make sure Andy Puzder wasn’t the first day declarant!

Interestingly, despite these seemingly OBVIOUS wage headwinds and the EVEN-MORE-OBVIOUS-CASUAL-DINING-CHALLENGES, these genius operators nevertheless concluded that it was prudent to open two new restaurants in Washington state “in the second half of 2017” — at a cost of $10mm. Sadly, “[s]ince opening, the anticipated foot traffic and projected sales at these locations did not materialize….” Well, hot damn! Who could’ve seen that coming?? Coupled with the wage increases, this was the death knell. PETITION Note: this really sounds like two parents on the verge of divorce deciding a baby would make everything better. Sure, macro headwinds abound but let’s siphon off cash and open up two new restaurants!! GREAT IDEA HEFE!!

The Debtors have therefore been in a perpetual state of marketing since 2016. The Debtors’ investment banker contacted 170 parties but not one entity expressed interested past basic due diligence. Clearly, they didn’t quite like what they saw. PETITION Note: we wonder whether they saw that Sun Capital extracted millions of dollars by way of dividends, leaving a carcass behind?? There’s no mention of this in the bankruptcy papers but….well…inquiring minds want to know.

The purpose of the filing is to provide a breathing spell, gain the Debtors access to liquidity (by way of a $10mm new money DIP financing commitment from their prepetition lender), and pursue a sale of the business. To prevent additional unnecessary cash burn in the meantime, the Debtors closed six unprofitable restaurants: Palomino in Indianapolis, Indiana, and Bellevue, Washington; Prime Rib & Chocolate Cake in Portland, OR; Henry’s Tavern in Plano, Texas; Stanford’s in Walnut Creek, California; and Portland Seafood Co. in Tigard, Oregon. PETITION Note: curiously, only one of these closures was in an “iconic” location that also has the progressive rate increases the Debtors took pains to highlight.

It’s worth revisiting the press release at the time of the 2007 acquisition:

Steve Stoddard, President and CEO, Restaurants Unlimited, Inc., said, “This transaction represents an exciting partnership with a skilled and experienced restauranteur that has the requisite financial resources and deep operating experience to be instrumental in strengthening our brands and building out our footprint in suitable locations.”

Riiiiight. Stoddard’s tenure with Sun Capital lasted all of two years. His successor, Norman Abdallah, lasted a year before being replaced by Scott Smith. Smith lasted a year before being replaced by Chris Harter. Harter lasted four years and was replaced by now-CEO, Jim Eschweiler.

A growing track record of bankruptcy and a revolving door in the C-suite. One might think this may be a cautionary tale to those operators in the market for PE partners.

******

Speaking of geniuses, it’s almost as if Sun Capital Partners thinks that things disappear on the internets. Google “sun capital restaurant unlimited” and you’ll see this:

Click through the first link and this is what you get:

HAHAHAHAHA. WHOOPS INDEED!

THEY DELETED THAT SH*T FASTER THAN WE COULD SAY “DIVIDEND RECAP.”

*Turns out that Congressional Budget Office is of the view that $15/hour federal minimum wage may, in fact, have widespread repercussions that include significant job losses.

**Sun Capital is having a tough go of things in the restaurant space of late. This week, Restaurant Business reportedthat Boston Market, a Sun portfolio company, closed 45 locations over the past week as part of an operational restructuring. The company blames shifting consumer preferences and rising costs for its issues.

New Chapter 11 Bankruptcy Filing -- Fusion Connect Inc.

Fusion Connect Inc.

June 3, 2019

We previously wrote about Fusion Connect Inc. ($FSNN), providers of “Unified Communications-as-a-Service” and “Infrastructure-as-a-Service” in “⛈A Dark "Cloud" on the Horizon⛈.” Therein we marveled at how special Fusion must be…to fail SO SPECTACULARLY in today’s cloud here, cloud there, cloud everywhere, everyone’s gaga for cloud environment. Cloud is SO captivating that it wasn’t until the company filed a piss poor 8-K back in April that a B. Riley FBR ($RILY) analyst FINALLY had an epiphany and declared that the company’s stock ought to be downgraded from “buy” to “neutral” (huh?!?) with a price target of $0.75 — down from $9.75/share. This is despite the fact that the stock hadn’t traded anywhere in the vicinity of $9.75/share in ages — nowhere even close, actually — but whatevs. Clearly, his head was in the cloud(s). This, ladies and gentlemen, demonstrates, in a nutshell, the utter worthlessness of equity analyst reports.🖕

But this isn’t a story about shoddy analyst research. That would be wholly unoriginal. This is a story about synergies and burdensome debt. Because, like, that’s so super original that you won’t read of it again until…well…you scroll below to the next bit of content about FTD!! 🙄

Boiled down to its simplest form, this company is the product of an acquisition strategy (and reverse merger) gone wrong. Like, in a major, major way. Per the company:

The Company pursued the Birch Merger with a vision of leveraging its existing processes and structures to create synergies between Fusion’s and Birch’s joined customer bases, combine network infrastructure assets to improve operational efficiencies, and ultimately drive material growth in Fusion’s and Birch’s combined annual revenue. In connection with the Birch Merger and MegaPath Merger, the Company incurred $680 million in secured debt. (emphasis added)

That reverse merger closed at the end of Q2, 2018. Yet…

Unfortunately, due to underperformance compared to business projections, the Company found itself with limited liquidity and at risk of default under its debt documents by early 2019.

Wait, what? Limited liquidity and risk of default by “early 2019”?!? Who the f*ck diligenced and underwrote this transaction?!? This sitch is so bad, that the company literally didn’t have enough liquidity to make a recent $6.7mm amort payment under the first lien credit agreement and a $300k interest payment on its unsecured debt. This is the company’s pre-petition capital structure:

• $20mm super senior L+10% June 2019 debt

• $43.3mm Tranche A Term Loans L+6.0% May 2022 debt

• $490.9mm Tranche B Term Loans L+8.5% May 2023 debt

• $39mm Revolving Loans L+6.0% May 2022 debt

• $85mm Second Lien L+10.5% November 2023 debt

• $13.3mm Unsecured Debt

Back in April we summed up the situation as follows:

The company’s recent SEC reports constitute a perfect storm of bad news. On April 2, the company filed a Form 8-K indicating that (i) a recently-acquired company had material accounting deficiencies that will affect its financials and, therefore, certain of the company’s prior filings “can no longer be relied upon,” (ii) it won’t be able to file its 10-K, (iii) it failed to make a $7mm interest payment on its Tranche A and Tranche B term loan borrowings due on April 1, 2019, and (iv) due to the accounting errors, the company has tripped various covenants under the first lien credit agreement — including its fixed charge coverage ratio and its total net leverage ratio.

Again, who diligenced the reverse merger?!? 😡

So here we are. In bankruptcy. To what end?

The company is seeking a dual-path restructuring that is all the rage these days: everyone loves to promote optionality that will potentially result in greater value to the estate. In the first instance, the company proposes, as a form of “stalking horse,” a “reorganization transaction” backed by a restructuring support agreement with certain of its lenders. This transaction would slash $300mm of the company’s $665mm of debt and result in the company’s first lien lenders owning the company. That is, unless a buyer emerges out of the woodwork with a compelling purchase price. To promote this possibility, the company is filing a bid procedures motion with the bankruptcy court with the hope of an eventual auction taking place. If a buyer surfaces with mucho dinero, the company will toggle over to a sale pursuant to a plan of reorganization. This would obviously be the optimal scenario. Absent that (and maybe even with that), we’ve got a jaw-dropping example of value destruction. “Fail fast,” many in tech say. These cloud bros listened!! Nothing like deep-sixing yourself with a misguided poorly-diligenced acquisition. Bravo!!

The company has secured a commitment for a fully-backstopped $59.5mm DIP that subsumes the $20mm in super senior pre-petition bridge financing recently provided by the first lien lenders. Is this DIP commitment good for general unsecured creditors? Is any of this generally good for unsecured creditors? Probably not.

Major creditors include a who’s who of telecommunications companies, including AT&T Inc. ($T) (first Donald Trump and now THIS…rough week for AT&T), Verizon Communications Inc. ($VZ), XO Communications (owned by VZ), Frontier Communications Corp. ($FTR)(which has its own issues to contend with as it sells assets to sure up its own balance sheet), CenturyLink Inc. ($CTL), Level 3 Communications ($LVLT), Time Warner Inc. ($TWX), and….wait for it…bankrupt Windstream Communications ($WINMQ). Because the hits just keep on coming for Windstream….

Jurisdiction: S.D. of New York (Judge Bernstein)

• Capital Structure: see above.

• Professionals:

  • Legal: Weil Gotshal & Manges LLP (Gary Holtzer, Sunny Singh, Natasha Hwangpo)

  • Board of Directors: Matthew Rosen, Holcombe Green Jr., Marvin Rosen, Holcombe Green III, Michael Del Guidice, Lewis Dickey Jr., Rafe de la Gueronniere, Neil Goldman)

  • Financial Advisor: FTI Consulting Inc. (Mark Katzenstein)

  • Investment Banker: PJT Partners (Brent Herlihy, John Singh)

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

• Other Parties in Interest:

  • Ad Hoc First Lien Lender Group

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Adam Shpeen)

    • Financial Advisor: Greenhill & Co. Inc.

  • DIP Lender: Credit Suisse Loan Funding LLC

  • DIP Agent, Prepetition Super Senior Agent & Prepetition First Lien Agent: Wilmington Trust NA

    • Legal: Arnold & Porter Kaye Scholer (Michael Messersmith, Sarah Grylll, Alan Glantz)

  • Prepetition Second Lien Successor Agent: GLAS America LLC & GLAS USA LLC

  • Ad Hoc Group of Tranche A Term Loan/Revolving Lenders

    • Legal: Simpson Thacher & Bartlett LLP (Sandeep Qusba, Soogy Lee, Edward Linden)

  • Second Lien Lenders

    • Legal: Proskauer Rose LLP (Charles Dale, Jon English)

  • Large Unsecured Creditor: AT&T

    • Legal: Norton Rose Fulbright US LLP (David Rosenzweig, Francisco Vazquez)

Updated 6/4/19 at 5:42am

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 Filing - White Star Petroleum Holdings LLC⛽️

White Star Petroleum Holdings LLC

May 28, 2019

Hey look. It’s Tuesday. It must be time for another oil and gas bankruptcy filing! White Star Petroleum Holdings LLC is the latest oil and gas company to make an oh-so-2015-like appearance in bankruptcy court. No need to knock your skull or check your watch: yes, it is very much 2019.*

The company, formerly known as American Energy — Woodford LLC, was originally formed in 2013 by American Energy Partners LP, a shared services platform founded by Aubrey McClendon, the eccentric wildcatter who plowed his life (literally) and billions of dollars of cash into the exploration and production business. In 2014, The Energy & Minerals Group LP (“EMG”) and other investors cut an equity check and, in this case, it didn’t take Mr. McClendon as long as usual to fail: by 2016, the company and its businesses were separated from American Energy to become White Star, a standalone company independent of the American Energy platform. Of course, in typical McClendon fashion, the company sprayed and prayed for a while prior to the transition, gobbling up Mississippian Lime and Woodford Shale assets along the way.

Which is not to say that, post separation/transition, the company just sat on its hands. In 2016 and thereafter, the company extended its shopping spree. First it acquired additional Mississippian Lime and Woodford Shale assets from Devon Production Company LP for approximately $200mm (funded in part by equity from ESG and borrowings under the company’s revolving credit facility). Then it acquired Lighthouse Oil and Gas LP (which was 49.4% minority owned by EMG, but whatevs) through a combination of equity and more borrowings under the credit facility. Finally, the company expanded its portfolio into the Sooner Trend Anadarko Canadian Kingfisher area with borrowings under its credit facility. If you’ve been paying attention, yes, E&P is a capital intensive business: there’s a reason why so many of these companies are levered up the wazoo.

What did that capital buy? “As of December 31, 2018, the Debtors had proved reserves of approximately 84.4 million barrels of oil equivalent (“boe”) across approximately 315,000 net leasehold acres….” But, to be sure, this is a company that focuses its exploration and production on “unconventional” resource plays. Said another way, it is a horizontal driller and hydraulic fracker: its assets tend to produce in high volume for two or so years and then tail off considerably requiring capital to acquire and develop a steady stream of new wells. Of course, an investment in new wells only works if the commodity environment permits it to. With oil and gas trading where it has been trading, well…suffice it to say…the environment is proving unaccommodating. Per the company:

“Despite controlling significant leasehold and mineral acreage in the MidContinent region, due to the declines in commodity prices in the fourth quarter of 2018 and the Debtors’ financial condition, the Debtors ceased drilling new wells in April 2019 and have not resumed such activities as of the Petition Date.”

Consequently, the company suffered a net loss of $114mm in 2018 after losing $14mm in 2017; it has negative working capital of $61mm as of 12/31/18 and $70mm as of the petition date. This sucker is burning cash.

The company’s capital structure looks as follows:

Source: First Day Declaration

The current capital structure is the result of clear triage undertaken by the company in the midst of a severe commodity downturn. WE CANNOT EMPHASIZE THIS ENOUGH: nearly every oil and gas exploration and production company under the sun was forced into some sort of balance sheet transaction around the 2015 time period — many in-court, others out-of-court in an attempt to stave off bankruptcy. Here, notably, the $10.3mm of unsecured notes represent the remnants of a distressed exchange that took place in 2015 whereby approximately $340mm of unsecured notes (with a 9% cash-pay interest coupon) were exchanged for approximately $348mm 12% second lien notes. Thereafter, in late 2015 and extending through August 2016, the company entered into a series of cash and equity transactions that took out the second lien notes in a cash-draining attempt to strengthen the balance sheet and extend liquidity (by way of reduced interest expense)**. The company was effectively playing whack-a-mole.

Alas, the company is in bankruptcy. That happens when your primary sources of capital are large equity checks, borrowings under a credit facility, and proceeds from producing oil and gas properties in a rough price environment. Of course, not all oil and gas properties are created equal either. This company happens to frack in challenging territory. Per the company:

Independent oil and gas companies, such as the Debtors, with Mississippian Lime-weighted assets in the Mid-Continent region have been particularly hard-hit by volatile market conditions in recent years and the majority of the Debtors’ peers in the region have filed for chapter 11 since 2015. This is in large part due to operational challenges unique to the region, including complex geological characteristics. One of these challenges is the Mississippian Lime’s relatively high ratio of “saltwater” to produced oil and gas. During the normal production of oil and gas, saltwater mixed with hydrocarbon byproducts comes to the surface, and its separation and disposal increases production costs. Low production volumes and higher than expected production costs, together with allegations that increased saltwater injection by the operators in the area caused increased seismic activity, resulted in many operators reducing activity and many capital providers discounting asset values in the region.

Recognizing the dire nature of the situation, the company’s RBL lenders effectuated a debilitating borrowing base redetermination that created a deficiency payment that the company simply couldn’t manage. This triggered a “potential” Event of Default under the facility. Thereafter, the company entered into an amendment with the RBL lenders with the hope of securing some capital to refinance the RBL. Spoiler alert: the company couldn’t get it done. The amendment also dictated that the company attempt to secure a buyer so as to repay the debt. To chapter 11 filing is meant to aid that marketing and sale process.*** To aid this process, the company has a commitment from MUFG Union Bank NA, its prepetition RBL Agent, for a DIP credit facility of $28.5mm as well as the use of cash collateral.

*We’d be remiss if we didn’t highlight that in the “AlixPartners 14th Annual Turnaround & Restructuring Experts Survey” released in February 2019, oil and gas was listed as the second most likely sector to face distress, with 36% of respondents predicting it would be a hot and heavy sector (up from 31% the in 2018).

**The company also refinanced its RBL, sold midstream and non-strategic properties and adjusted midstream pipeline commitments.

***Some trigger happy creditors beat the company to the punch here. On May 24, five “purported” creditors filed an involuntary bankruptcy petition against the company in the Western District of Oklahoma. Considering Baker Hughes Oilfield Operations Inc. ($GE) is among the top 5 largest creditors, we can’t say we’re that surprised.

• Jurisdiction: D. of Delaware (Judge )

• Capital Structure: see above.

• Professionals:

  • Legal: Sullivan & Cromwell LLP (Andrew Dietderich, Brian Glueckstein, Alexa Kranzley) & (local) Morris Nichols Arsht & Tunnel LLP (Derek Abbott, Gregory Werkheiser, Tamara Mann, Joseph Barsalona)

  • Independent Director: Patrick Bartels Jr.

  • Financial Advisor: Alvarez & Marsal LLC (Ed Mosley)

  • Investment Banker: Guggenheim Securities LLC

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

• Other Parties in Interest:

  • RBL Agent: MUFG Union Bank NA

    • Legal: Winston & Strawn LLP (Justin Rawlins)

  • TL Agent: EnLink Oklahoma Processing LP

  • Indenture Trustee: Wilmington Trust NA
    

New Chapter 11 Filing - Elk Petroleum Inc.

Elk Petroleum Inc.

May 22, 2019

On May 22nd 2019, Elk Petroleum Aneth, LLC and Resolute Aneth, LLC voluntarily filed petitions for Chapter 11 bankruptcy with a restructuring support agreement with their noteholders. The debtors already have a plan of reorganization on file. Per the disclosure statement, the debtors claim that the cause of its financial distress and eventual bankruptcy was due to:

Debtors’ ambitious endeavors to acquire multiple oil and gas assets outpaced the Debtors’ balance sheet, and in certain respects, performance of the operated and non-operated assets failed to meet initial expectations.

The debtors tried to alleviate uncertainty of future cash flows through hedging oil prices. Oil prices went up, however, not down, and the hedging was, with the benefit of 50/50 hindsight, clearly a bad mistake. Here is what they have to say about that:

Debtors were unable to capture the financial benefits of the improving commodity price environment due to their hedge obligations under the BP ISDA.

Whoops. The Debtors are to receive $10mm in Debtor-in-Possession financing by certain supporting noteholders. All in all, the cause of distress continues to align with the reason for other bankruptcy filings in O&G land we’ve touched on. High fixed costs, lower than expected revenues and impatient lenders.

• Jurisdiction: District of Delaware (Judge Laurie Silverstein)

• Pre-Petition Capital Structure:

  • Revolving Credit Facility: $14.5mm FO Revolver (AB Elk Holdings LLC)

  • First Lien Credit Facility: $114.0mm TL (HPS Investment Partners)

  • Unsecured Debt: $54.9mm TL (LIM Asia Special Situations Master Fund Limited, AB Elk Holdings, ACR Multi-Strategy Quality Return (MQR) Fund, A Series of Investment Management Series Trust II (“ACR”), Fulcrum Energy Capital Fund II, LLC)

• Professionals:

  • Legal: Proposed Debtors & Debtors-in-Possession - Norton Rose Fulbright LLP (Gregory M. Wilkes, Kristian W. Gluck, Scott P. Drake, John N. Schwartz & Shivani Shah) Womble Bond Dickinson LLP (Matthew P. Ward & Morgan L. Patterson)

  • Financial Advisor: Ankura Consulting Group, LLC (Scott M. Pinsonnault), Opportune LLP

  • Investment Banker: Stephens Inc.

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

• Other Parties in Interest:

  • HPS Investment Partners: Provider of First Lien Term Loan

  • Certain unsecured loan holders:

    • AB Co-Invest Elk Holdings LLC

  • Certain secured debt holders:

    • AB Elk Holdings LLC

    • Riverstone Credit Partners - Direct, L.P.

    • Riverstone Credit Partners II - Direct LP

    • Riverstone Strategic Credit Partners S, L.P.

    • Riverstone Strategic Credit Partners A-2 AIV, L.P.
      

😷New Chapter 11 Bankruptcy Filing - Aegerion Pharmaceuticals Inc.😷

Aegerion Pharmaceuticals Inc.

May 20, 2019

We were right and we were wrong. Back in November 2018, in “😬Biopharma is in Pain😬 ,” we snidely wrote, “Do Pills Count as ‘Healthcare’? Short Biopharma” riffing on the common trope that healthcare was a hot spot for restructuring activity.* No, we argued: the activity is really in publicly-traded biopharma companies with little to no sales, too much debt (and usually busted convertible notes) and attractive intellectual property. We went on to predict that Synergy Pharmaceuticals Inc. ($SGYP) and Aegerion Pharmaceuticals Inc. (a subsidiary of Novelion Therapeutics Inc. ($NVLN)) would both file for bankruptcy. Ding ding!!! We were right.** The former filed back in December and, now, the latter is also in bankruptcy court. Of course, with respect to the latter, we also wrote, “[c]ome February — if not sooner — it may be in bankruptcy court.” But let’s not split hairs.***

The company manufactures two approved therapies, JUXTAPID and MYALEPT, that treat rare diseases. On Sunday, we’ll discuss the future of these therapies and what the company seeks to achieve with this restructuring.

*To be fair, the healthcare space has, indeed, picked up in activity since then.

**For what it’s worth, we also predicted that Orchids Paper Products Company ($TIS) would be in bankruptcy soon, writing “This company doesn’t produce enough toilet paper to wipe away this sh*tfest. See you in bankruptcy court.” Three for three: this is precisely why — wait for the shameless plug — you should become a PETITION Member today.

***Maturity of the bridge loan was initially February 15, 2019 but the debtors had a right to extend, which they did.

• Jurisdiction: Southern District of New York (Judge )

• Capital Structure: $36.1mm 8% PIK ‘19 secured Novelion Intercompany Loan, $73.8mm Bridge Loan (Highbridge Capital Management LLC and Athyrium Capital Management LP), $304mm 2% unsecured convertible notes (The Bank of New York Mellon Trust Company NA)

• Professionals:

  • Legal: Willkie Farr & Gallagher LLP (Paul Shalhoub, Andrew Mordkoff)

  • Financial Advisor/CRO: AlixPartners LLP (John Castellano)

  • Investment Banker: Moelis & Co. (Barak Klein)

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

• Other Parties in Interest:

  • DIP Agent: Cantor Fitzgerald Securities

  • Ad Hoc Group of Convertible Noteholders

    • Legal: Latham & Watkins LLP & King & Spalding LLP

    • Financial Advisor: Ducera Partners LLC

  • Novelion

    • Legal: Goodwin Proctor LLP & Norton Rose Fulbright Canada LLP

    • Financial Advisor: Evercore

🛌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 22 Filing - Hilltop Energy LLC⛽️

Hilltop Energy LLC

May 16, 2019

Hilltop Energy LLC, a Dallas-based E&P company with assets in Texas, has filed for bankruptcy in the District of Delaware, its second bankruptcy in four years. The company also filed its wholly-owned subsidiary, Hilltop Asset LLC (together, the “Debtors”).

The company’s predecessor, Cubic Energy Inc., filed for bankruptcy in late 2015, confirmed a prepackaged plan of reorganization in February 2016 and never emerged from bankruptcy (due to an ongoing adversary proceeding involving the chapter 11 debtors’ CEO and prior operator). Nevertheless, pursuant to the confirmed plan, secured noteholders swapped their notes for membership interests in the reorganized Cubic Energy and 14% first priority senior secured takeback paper due 2021. This is how these chapter 22 Debtors came to be owned by Anchorage Capital Group LLC and Corbin Opportunity Fund LP. General unsecured creditors and equity otherwise got wiped out.

This is the company’s capital structure:

• $5mm Superpriority Notes + $30mm 14% First Priority Senior Secured Notes

• $$18.5mm Superpriority PIK Notes + First Priority PIK Notes

Why is the company in bankruptcy? Let’s break this down into its component parts:

The Company has been cash flow negative every year since its formation following the chapter 11 cases of Cubic and its affiliates, as the revenue generated by producing wells is not sufficient to cover operating expenses and "workover" expenses, which is maintenance capex to keep the wells flowing.

Ugh. Here we go again. Flashback to the finding in this Delaware order from February 2016:

“The valuation analysis contained in the Disclosure Statement (x) is reasonable, persuasive, credible, and accurate as of the date such analysis or evidence was prepared, presented, or proffered, (y) utilizes reasonable and appropriate methodologies and assumptions and (z) has not been controverted by other evidence.”

Source: Cubic Energy Disclosure Statement

Ok, sure. The court finding may have been right — “as of the date.” But the assumptions proved to be dramatically askew. Take, for instance, the workover expense line-item. The company indicates an aggregate $600k hit there. What does the company have to say about this now?

Although production declines are expected in the oil and gas industry, the Debtors have faced several unanticipated challenges since emerging from the Cubic Chapter 11 Cases. Since emergence, over 20% of the Debtors’ producing gas wells have stopped producing due to downhole operational and/or technical issues. During this same time period, the Debtors also invested in production uplift projects—including an estimated $4 million on workover and/or recompletion projects for three wells—but the efforts to increase production from those wells were unsuccessful. The effects of these production problems on the Debtors’ revenue have been compounded by the weak natural gas market over the past few years.

That’s quite a miss. But it’s not the only one. Significantly, the company also notes:

The Debtors’ gross production has declined from approximately 10.5 million cubic feet per day ("mmcfd"), in March 2016 to roughly 5.0 mmcfd as of the date hereof. (emphasis added)

That is what it is but it begs the question: out of whose a$$ did the company pull the assumptions behind the company’s chapter 11 projections? Per the Disclosure Statement:

Daily Production of natural gas is forecast based upon anticipated January 2016 daily production of 15,500 mcf per day and calculated on a 1% month-over-month decline curve on existing drilled and producing wells.

So, uh, we’re not math experts, but a 1% decline month-over-month doesn’t get you to 10.5 mcf per day A MERE TWO MONTHS LATER. Which begs the question: were the projections actually accurate and credible “as of the date”? This certainly seems to indicate otherwise.

Consequently, the Debtors saw an impending maturity and were like, “oh sh*t”:

Although the Debtors have been able to service their debt obligations (primarily by paying interest in the form of additional notes), over time, the yield of the Debtors' producing oil and gas wells has been and may continue to be in constant decline.

This is top notch spin. Yeah, sure, we suppose issuing PIK debt is a form of debt “service” but c’mon. Really??

Consequently, the Debtors anticipate that they will generate less revenue and cash flow and, ultimately, be unable to satisfy their debt obligations before or at maturity.

Which is in 2021. So, here we are again: cue up the CHAPTER 22!!

The prepackaged plan will give 100% of the membership interests in the reorganized debtors and $1.47mm of cash to its senior secured noteholder, eliminating the $53mm of debt. The Debtors’ prepetition operator, Rivershore, will get 55% of the equity in the Hilltop Asset.

And we’re all left to wonder whether this is just a chapter 33 waiting in the wings. According to the new projections, that’s entirely up to Rivershore’s willingness to make an equity contribution in 2021:

Source: Chapter 22 Disclosure Statement

• Jurisdiction: D of Delaware (Judge Sontchi)

• Capital Structure: $5mm superpriority senior secured notes, $30mm first priority senior secured notes, PIK notes (Wilmington Trust Company NA).

• Professionals:

  • Legal: Cole Schotz PC (Norman Pernick, J. Kate Stickles, Katherine Monica Devanney)

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

• Other Parties in Interest:

  • Senior Secured Noteholder: J.P. Morgan Securities LLC and Lender: Chase Lincoln First Commercial Corporation

    • Legal: Landis Rath & Cobb LLP (Adam Landis, Richard Cobb, Holly Smith)

  • Company Operator: Rivershore Operating LLC

    • Legal: Gray Reed & McGraw LLP (Jason Brookner, Ryan Sears)
      
      
      

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

Edgemarc Energy Holdings LLC

May 15, 2019

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

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

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

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

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

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

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

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

Docket #17, Rejection Motion.

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

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure:

• Professionals:

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

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

  • Financial Advisor: Opportune LLC and Dacarba LLC

  • Investment Banker: Evercore Partners

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

• Other Parties in Interest:

  • Prepetition & DIP Agent: Keybank NA

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

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

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

  • ETC

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

🚁New Chapter 11 Bankruptcy Filing - Bristow Group Inc.🚁

Bristow Group Inc.

May 11, 2019

Nothing like being late to the party. Following in the footsteps of fellow helicopter transportation companies Erickson Inc., CHC Group, Waypoint Leasing* and PHI Inc., Bristow Group Inc. ($BRS) and its eight affiliated debtors are the latest in the space to find their way into bankruptcy court. The company enters bankruptcy with a restructuring support agreement and a $75mm DIP financing commitment with and from its senior secured noteholders.

While each of the aforementioned companies is in the helicopter transportation space, they don’t all do exactly the same business. PHI, for instance, has a fairly large — and some might say, attractive — medical services business. Bristow, on the other hand, provides industrial aviation and charter services primarily to offshore energy companies in Europe, Africa, the Americas and the Asian Pacific; it also provides search and rescue services for governmental agencies, in addition to the oil and gas industry. Like the other companies, though: it is not immune to (a) the oil and gas downturn and (b) an over-levered balance sheet.

At the time of this writing, the debtors’ chapter 11 filing wasn’t complete and so details are scant. What we do know, however, is that the company does have a restructuring support agreement executed with “the overwhelming majority” of senior secured noteholders and a $75mm DIP commitment.

*Waypoint Leasing is listed as the 14th largest creditor, owed nearly $104k. Sheesh. These businesses can’t catch a break.

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

• Capital Structure:

• Professionals:

  • Legal: Baker Botts LLP (James Prince, Omar Alaniz, Ian Roberts, Kevin Chiu, Emanuel Grillo, Chris Newcomb)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Houlihan Lokey Capital Inc.

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

• Other Parties in Interest:

  • ABL Facility Agent: Barclays Bank PLC

  • 2019 Term Loan Agent: Ankura Trust Company LLC

  • Indenture Trustee for the 8.75% ‘23 Senior Secured Notes: U.S. Bank NA

  • Indenture Trustee for the 6.25% ‘22 Senior Notes and 4.5% ‘23 Convertible Senior Notes: Wilmington Trust NA

  • Ad Hoc Group of Secured Notes and Term Lenders (Blackrock Financial Management Inc., DW Partners LP, Highbridge Capital Management LLC, Oak Hill Advisors LP, Whitebox Advisors LLC)

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Natasha Tsiouris) & (local) Haynes and Boone LLP (Charles Beckham, Kelli Norfleet, Martha Wyrick)

  • Ad Hoc Group fo Unsecured Noteholders

    • Legal: Kramer Levin Naftalis & Frankel LLP

🌑New Chapter 11 Filing - Cloud Peak Energy Inc.🌑

Cloud Peak Energy Inc.

May 10, 2019

In what ought to come as a surprise to absolutely no one, Cloud Peak Energy Inc. ($CLD) and a slate of affiliates FINALLY filed for bankruptcy.

Not the first Trump era coal bankruptcy, but it's the largest. https://t.co/2UXZkYKVjB

— ⚡Taylor Kuykendall (@taykuy) May 10, 2019

Let’s take a moment of silence for coal country, shall we? If this is what MAGA looks like, we’d hate to see what happens when a global downturn eventually hits. There’s gonna be blood in the water.

Sounds like hyperbole? Note that since 2016, there have been a slate of coal-related bankruptcies, i.e., Westmoreland Coal Company, Mission Coal Company LLC, and now Cloud Peak Energy Inc. Blackhawk Mining LLC appears to be waiting in the wings. We suppose it could be worse: we could be talking about oil and gas country (and we will be, we certainly will be…and SOON.).

Cloud Peak is an impressive company. Since its formation in 2008, it has become one of the largest (subbituminous thermal coal) coal producers in the US — supplying enough coal to satisfy approximately 2% of the US’ electricity demand. Its three surface mines are located in the Powder River Basin in Wyoming and Montana; it sold approximately 50mm tons of coal in 2018 to 46 domestic and foreign end users.*

In the scheme of things, Cloud Peak’s balance sheet isn’t overly complicated. We’re not talking about billions of dollars of debt here like we saw with Walter Energy, Peabody Energy, Arch Coal, Patriot Coal or Alpha Natural Resources. So, not all coal companies and coal company bankruptcies are created equal. Nevertheless, the company does have $290.4mm of ‘21 12% secured notes (Wilmington Trust NA) and $56.4mm of ‘24 6.375% unsecured notes (Wilmington Trust NA as successor trustee to Wells Fargo Bank NA) to contend with for a total of $346.8mm in funded debt liability. The company is also party to a securitization facility. And, finally, the company also has reclamation obligations related to their mines and therefore has $395mm in third-party surety bonds outstanding with various insurance companies, backed by $25.7mm in letters of credit. Coal mining is a messy business, homies.

So why bankruptcy? Why now? Per the company:

The Company’s chapter 11 filing, however, was precipitated by (i) general distress affecting the domestic U.S. thermal coal industry that produced a sustained low price environment that could not support profit margins to allow the Company to satisfy its funded debt obligations; (ii) export market price volatility that caused decreased demand from the Company’s customers in Asia; (iii) particularly challenging weather conditions in the second quarter of 2018 that caused spoil failure and significant delays in coal production through the remainder of 2018 and into 2019, which reduced cash inflows from coal sales and limited credit availability; and (iv) recent flooding in the Midwestern United States that has significantly disrupted rail service, further reducing coal sales.

To summarize, price compression caused by natural gas. Too much regulation (which, in turn, favors natural gas over coal). Too much debt. And, dare we say, global warming?!? Challenging weather and flooding must be really perplexing in coal country where global warming isn’t exactly embraced with open arms.

Now, we may be hopping to conclusions here but, these bits are telling — and are we say, mildly ironic in a tragic sort of way:

In addition to headwinds facing thermal coal producers and export market volatility, the Company’s mines suffered from unusually heavy rains affecting Wyoming and Montana in the second quarter of 2018. For perspective, the 10-year average combined rainfall for May, June, and July at the Company’s Antelope Mine is 6.79 inches. In 2018, it rained 10.2 inches during that period. While certain operational procedures put in place following heavy flooding in 2014 functioned effectively to mitigate equipment damage, the 2018 rains interrupted the Company’s mining operations considerably.

It gets worse.

The problem with rain is that the moisture therefrom causes “spoil.” Per the company:

Spoil is the term used for overburden and other waste rock removed during coal mining. The instability in the dragline pits caused wet spoil to slide into the pits that had to be removed by dragline and/or truck-shovel methods before the coal could be mined. This caused significant delays and diverted truck-shovel capacity from preliminary stripping work, which caused additional production delays at the Antelope Mine. The delays resulting from the spoil failure at the Antelope Mine caused the Company to have reduced shipments, increased costs, and delayed truck-shovel stripping in 2018. Consequently, the reduced cash inflows from coal sales limited the Company’s credit availability under the financial covenants in the Amended Credit Agreement prior to its termination, and limited access to any new forms of capital.

But, wait. There’s more:

Additionally, the severe weather affecting the Midwest region of the United States in mid-March 2019 caused, among other things, extensive flooding that damaged rail lines. One of Cloud Peak’s primary suppliers of rail transportation services – BNSF – was negatively impacted by the flooding and has been unable to provide sufficient rail transportation services to satisfy the Company’s targeted coal shipments. As of the Petition Date, BNSF’s trains have resumed operations, but are operating on a less frequent schedule because of repairs being made to rail lines damaged by the extensive flooding. As a result, the Company’s coal shipments have been materially impacted, with cash flows significantly reduced through mid-June 2019.

Riiiiiiiight. But:

Patrick Moore, co-founder of Greenpeace: “The whole climate crisis is not only Fake News, it’s Fake Science. There is no climate crisis, there’s weather and climate all around the world, and in fact carbon dioxide is the main building block of all life.” @foxandfriends Wow!

— Donald J. Trump (@realDonaldTrump) March 12, 2019

More about Moore here: the tweet, as you might expect, doesn’t tell the full story.

Anywho.

The company has been burning a bit over $7mm of liquidity a month since September 2018. Accordingly, it sought strategic alternatives but was unable to find anything viable that would clear its cap stack. We gather there isn’t a whole lot of bullishness around coal mines these days.

To buy itself some time, therefore, the company engaged in a series of exchange transactions dating back to 2016. This enabled it to extinguish certain debt maturing in 2019. And thank G-d for the public markets: were it not for a February 2017 equity offering where some idiot public investors hopped in to effectively transfer their money straight into noteholder pockets, this thing probably would have filed for bankruptcy sooner. That equity offering — coupled with a preceding exchange offer — bought the company some runway to continue to explore strategic alternatives. The company engaged J.P. Morgan Securities LLC to find a partner but nothing was actionable. Ah….coal.

Thereafter, the company hired a slate of restructuring professionals to help prepare it for the inevitable. Centerview Partners took over for J.P. Morgan Securities LLC but, to date, has had no additional luck. The company filed for bankruptcy without any prospective buyers lined up.

Alas, the company filed for bankruptcy with a “sale and plan support agreement” or “SAPSA.” While this may sound like a venereal disease, what it really means is that the company has an agreement with a significant percentage of both its secured and unsecured noteholders to dual track a sale and plan process. If they can sell the debtors’ assets via a string of 363 sales, great. If they have to do a more fulsome transaction by way of a plan, sure, that also works. These consenting noteholders also settled some other disputes and support the proposed $35mm DIP financing

*Foreign customers purchased approximately 9% of ‘18 coal production.

• Jurisdiction: D. of Delaware (Judge Gross)

• Capital Structure: $290mm 12% ‘21 secured debt (Wilmington Trust NA), $56.4mm unsecured debt (BOKF NA)

• Professionals:

  • Legal: Vinson & Elkins LLP (Paul Heath, David Meyer, Jessica Peet, Lauren Kanzer, Matthew Moran, Steven Zundell, Andrew Geppert, Matthew Pyeatt, Matthew Struble, Jeremy Reichman) & (local) Richards Layton & Finger PA (Daniel DeFranceschi, John Knight)

  • Financial Advisor: FTI Consulting Inc. (Alan Boyko)

  • Investment Banker: Centerview Partners (Marc Puntus, Ryan Kielty, Johannes Preis)

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

• Other Parties in Interest:

  • Major shareholders: Renaissance Technologies LLC, The Goldman Sachs Group Inc., Dimensional Fund Advisors LP, Kopernik Global Advisors, Blackrock Inc.

  • DIP Agent: Ankura Trust Company LLC

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Aryeh Ethan Falk, Christopher Robertson) & (local) Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Curtis Miller, Paige Topper)

    • Financial Advisor: Houlihan Lokey

  • Prepetition Secured Noteholder Group (Allianz Global Investors US LLC, Arena Capital Advisors LLC, Grace Brothers LP, Nomura Corporate Research and Asset Management Inc. Nuveen Alternatives Advisors LLC, Wexford Capital LP, Wolverine Asset Management LLC)

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Aryeh Ethan Falk, Christopher Robertson) & (local) Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Curtis Miller, Paige Topper)

  • Indenture Trustee: BOKF NA

    • Legal: Arent Fox LLP (Andrew Silfen, Jordana Renert) & (local) Womble Bond Dickinson US LLP (Matthew Ward)

  • Official Committee of Unsecured Creditors (BOKF NA, Nelson Brothers Mining Services LLC, Wyoming Machinery Company, Cummins Inc., ESCO Group LLC, Tractor & Equipment Co., Kennebec Global)

    • Legal: Morrison & Foerster LLP (Lorenzo Marinuzzi, Jennifer Marines, Todd Goren, Daniel Harris, Mark Lightner) & Morris James LLP (Carl Kunz III, Brya Keilson, Eric Monzo)

    • Investment Banker: Jefferies LLC (Leon Szlezinger)

Update: 7/7/19 #379

New Chapter 11 Bankruptcy Filing - Triangle Petroleum Corporation

Triangle Petroleum Corporation

May 8, 2019

If it walks like a chapter 22 and quacks like a chapter 22…it…may…not…actually…be a chapter 22??

Triangle Petroleum Corporation (“TPC”) filed a prepackaged plan of reorganization with the District of Delaware to consummate a balance sheet restructuring. TPC is an independent energy holding company with a focus on the Williston Basin of North Dakota; its assets include a joint venture interest in Caliber Midstream Holdings LP, a midstream services company, leases of commercial and multi-unit residential buildings in North Dakota, and net operating losses. On the debt side of the balance sheet, the company had a $120mm 5.0% convertible promissory note issued to NGP Triangle Holdings, LLC (“NGP”).

So, what’s up with that convertible note? Wholly-owned direct or indirect subsidiaries of TPC — including Triangle USA Petroleum Corporation — filed for bankruptcy back in June 2016 to address their capital structure and, in the course of confirming a plan of reorganization, wiped out their stock. That stock, naturally, was an asset of TPC and, consequently, the New York Stock Exchange delisted TPC, constituting a “Fundamental Change,” under the note and triggering a requirement that TPC repurchase the convertible note for $154mm. TPC didn’t do so. Upon failing to do so, TPC triggered an event of default. Subsequently, J.P. Morgan Securities LLC (“JPMS”) purchased the note from NGP.

Thereafter, as part of discussions about a forbearance, JPMorgan Chase Bank NA provided the company with a term loan and the company and JPMS amended and restated the convertible note, granting JPMS a second lien in the process. JPMS, however, ultimately concluded that forbearing to nowhere wasn’t exactly a great strategy and so the chapter 11 filing will leave the term loan unimpaired, swap JPMS’ second lien secured note for 100% of TPC’s equity, ride through (what is a de minimis amount of) unsecured claims and wipe out equity, which had been trading over the counter. As of the petition date, the company had $2mm outstanding under the term loan and $167mm outstanding under the newly secured note.

Given that JPMS is the only voting party, this is a pretty easy plan to effectuate. Suffice it to say, JPMS voted yes to the prepackaged plan which means, going forward, it will own the interests in Caliber, Bakken Real Estate and, significantly, the valuable net operating losses.

• Jurisdiction: D. of Delaware (Judge Walrath)

• Capital Structure: see above.

• Professionals:

  • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Kelley Cornish, Alexander Woolverton) & (local) Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Andrew Magaziner, Shane Reil)

  • Board of Directors: Gus Halas, James Shein, Randal Matkaluk

  • Financial Advisor: Development Specialists Inc. (Mark Iammartino)

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

• Other Parties in Interest:

  • Prepetition Lender: JPMorgan Chase Bank NA & J.P. Morgan Securities LLC

    • Legal: Duane Morris LLP (Lawrence Kotlar, Joel Walker)
      

New Chapter 11 Bankruptcy Filing - Hospital Acquisition LLC

Hospital Acquisition LLC

May 6 & 7, 2019

Texas-based Hospital Acquisition LLC and dozens of other affiliated companies operating in the acute care hospital, behavioral health and out-patient would care space have filed for bankruptcy in the District of Delaware.* The debtors operate 17 facilities in 9 states for a total of 865 beds; their revenue “derives from the provision of patient services and is received through Medicare and Medicaid reimbursements and payments from private payors.”

Technically, this is a chapter 22. In 2012, the debtors’ predecessor reeled from the effects of Hurricane Katrina and reduced reimbursement rates and filed for bankruptcy. The case ended in a sale of substantially all assets to the debtors.

So, why is the company in bankruptcy again? Well, to begin with, re-read the final sentence of the first paragraph. That’s why. Per the company:

…internal and external factors have lead the Debtors to an unmanageable level of debt service obligations and an untenable liquidity position. In 2015, Medicare’s establishment of patient criteria to qualify as an LTAC-compliant patient facility led to significant reimbursement rate declines over the course of 2015 and 2016 as changes were implemented. Average reimbursement rates for site neutral patients, representing approximately 57% of 2016 cases, is estimated to drop from $23,000 to $9,000 across the portfolio. When rates declined sharply, the Debtors were unable to adjust. Further, the number of patients that now qualify by Medicare to have services provided in an LTAC setting has declined substantially, resulting in a significant oversupply of LTAC beds in the market.

To offset these uncontrollable trends, the company undertook efforts to convert a new business plan focused around, among other things, closing marginally performing hospitals and diversifying the business into post-acute care “to compete in the evolving value-based health care environment.” To help effectuate this plan, the debtors re-financed its then-existing revolver, entered into its $15mm “priming” term loan, and amended and extended its then-existing term loan facility. After this transaction, the company had total consolidated long-term debt obligations totaling approximately $185mm.

So, more debt + revised business plan + evolving macro healthcare environment = ?? A revenue shortfall, it turns out. Which put the debtors in a precarious position vis-a-vis the covenants baked into the debtors’ debt docs. Whoops. Gotta hate when that happens.

The debtors then engaged Houlihan Lokey to explore strategic alternatives and engaged their lenders. At the time of filing, however, the debtors do not have a stalking horse agreement in place; they do hope, however, to have one in place by mid-July.

*There are also certain non-debtor home health owners and operators in the corporate family that are not, at this time, chapter 11 debtors.

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: $23.9mm RCF, $9.4mm LOCs, $15mm “Priming Term Loan” ($7.7mm funded), $136.8mm TL

• Professionals:

  • Legal: Akin Gump Strauss Hauer & Feld LLP (Scott Alberino, Kevin Eide, Sarah Link Schultz) & (local) Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Jaime Luton Chapman, Joseph Mulvihill, Betsy Feldman)

  • Financial Advisor: Houlihan Lokey Inc. (Geoffrey Coutts)

  • Investment Banker: BRG Capital Advisors LLC

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

• Other Parties in Interest:

  • Equityholders: Monarch Master Funding Ltd., Twin Haven Special Opportunities Fund IV LP, Blue Mountain Credit Alternatives Master Fund LP, Merrill Lynch Pierce Fenner & Smith Inc., Oakstone Ventures Inc.

  • White Oak Healthcare Finance LLC

    • Legal: King & Spalding LLP (Arthur Steinberg, Scott Davidson) & (local) The Rosner Law Group LLC (Frederick Rosner, Jason Gibson)

  • Marathon Asset Management

    • Legal: Ropes & Gray LLP (Matthew Roose)

  • Prepetition Term Loan Agents: Seaport Loan Products LLC & Wilmington Trust NA

    • Legal: Shearman & Sterling LLP (Ned Schodek, Jordan Wishnew) & (local) Potter Anderson & Corroon LLP (Jeremy Ryan, R. Stephen McNeill, D. Ryan Slaugh)

  • Official Committee of Unsecured Creditors

    • Legal: Greenberg Traurig LLP (David Cleary, Nancy Peterman, Dennis Meloro) & (local) Bayard PA (Justin Alberto, Erin Fay, Daniel Brogan)
      

Updated 5/18

😷New Chapter 11 Filing - Astria Health😷

Astria Health

May 6, 2019

Astria Health, a large non-profit healthcare system based in Eastern Washington, has filed for bankruptcy along with a dozen or so affiliates. The company blames its chapter 11 filing on regulatory approval processes that stunted expansion plans, poor collections on accounts receivable, and charitable care that, despite best efforts, hadn’t been offset by charitable contributions. All of these issues have squashed cash flow and triggered issues with the debtors’ secured debt, part of which is uber-expensive. The debtors intend to use their DIP credit facility to take out their expensive “high cost of capital” MidCap Financial Trust-provided (and other) debt; they also hope to use the “breathing spell” provided by the automatic stay to remedy their collections problems and march towards a plan of reorganization within 150 days.

• Jurisdiction: E.D. of Washington (Judge Kurtz)

• Capital Structure: $72mm secured debt

• Professionals:

  • Legal: Dentons US LLP (Samuel Maziel) & (local) Bush Kornfeld LLP (James Day)

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

• Other Parties in Interest:

  • DIP Lender: JMB Financial Advisors

    • Legal: Arent Fox LLP (Robert Hirsh, Jordana Renert) & (local) Southwell & O’Rourke (Kevin O’Rourke)

New Chapter 11 Bankruptcy Filing - The LaSalle Group Inc.

The LaSalle Group Inc.

May 2, 2019

Short Nana.

Texas-based The LaSalle Group Inc., an owner of 40 memory care assisted living communities across 9 states, and a handful of affiliated debtors filed for bankruptcy on May 2, 2019 and things ain’t looking pretty for the unsecured creditors: the company is administratively insolvent. The company owes $3.7mm at the parent level and then has ~$27.8mm of opco level debt among four debtor LLCs that are all owned 52% by a third-party investor (“Realco Silverado Investor”). Realco Silverado Investor seeks to purchase the opcos for $29mm, just enough to clear the debt at the opco level. Per the company, “[i]n the event this sale closes…[the notes]…should all be paid in full, all employees will have continual job opportunity, and all residents will remain in the residence they and their loved ones have chosen.” The bright side? This sounds like a good result for those most in need of it.

Why is the company in bankruptcy? It states:

“A surge in construction of assisted living facilities in recent years has created a supply-demand imbalance resulting in greater competition for residents and lower rates. This market dynamic has significantly impacted LaSalle and its affiliated entities (collectively, the “Autumn Leaves Group”) from a cash flow perspective. The Autumn Leaves Group has struggled with occupancy rates in certain markets which has significantly impacted revenue and cash flow.”

Moreover, LaSalle is the guarantor of substantially all of the secured debt and lease obligations. Its cash flow constraints precluded it from servicing its debt, culminating in approximately 30 lawsuits currently pending against LaSalle. As if that wasn’t bad enough, LaSalle also suffered the brunt of a United States District Court for the Northern District of Illinois, Eastern Division Memorandum Opinion and Order granting a motion for conditional certification of a collective action against it related to alleged hourly rate wage claims. And as if THAT wasn’t bad enough, LaSalle also faces various suits from vendors and other creditors for disputed unpaid claims. They’re all about to get hosed. The assets that aren’t sold to Realco Silverado Investor will be liquidated.

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

• Professionals:

  • Legal: Crowe & Dunlevy PC (Vickie Driver, Christina Stephenson, Christopher Staine)

  • Financial Advisor/CRO: Harney Partners (Karen Nicolaou)

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

• Other Parties in Interest:

New Chapter 11 Bankruptcy Filing - New Cotai Holdings LLC

New Cotai Holdings LLC

May 1, 2019

New Cotai Holdings LLC and three affiliated debtors filed for bankruptcy in the Southern District of New York on the basis of New Cotai Ventures LLC, a NY LLC, having cash held in a bank account in White Plains New York (as of when, we wonder). The debtors were formed for the purpose of investing in Studio City International Holdings Limited, have no employees, and are otherwise managed by sponsor, Silver Point Capital LP. The declarant supporting the debtors’ chapter 11 filing is an independent director who was put into place literally 2 days before the filing. Yup, 2 whole days.

Studio City International Holdings Limited is a wretched hive of scum and villany. Sorry, that’s not right. That’s us trying to make this more interesting than it is. In truth, its an “integrated resort comprising entertainment, retail, hotel and gaming facilities” located in Macau (that’s China, people). The project has made it past Phase I of construction but has stalled out there: the rest of the project will require several more years. In October 2018, the company IPO’d 28.75mm American Depository Shares at $12.50/share.

To further capitalize the project, two of the debtors, as co-issuers, issued $380mm of 10.625% PIK Notes in 2013 due May 2019. Curious to know how 10.625% PIK adds up? The current principal balance of the notes is now $856mm.

Now, not to state the obvious, but to paydown Notes on maturity, you kinda need to have some moolah. And considering that the project is only past Phase I with much more work to do…well, you see where we are going here. The company notes:

The Debtors’ ability to satisfy their obligations under the Notes is directly tied to the development and success of the Studio City project. Due to delays in the development of the Studio City project, a reduced allocation of gaming tables from the government, and some unanticipated declines in the Macau gaming market, the Investment has not yet achieved sufficient market value in light of the highly illiquid and unreliable market conditions that have developed following the IPO, making a refinancing impracticable. Therefore, through no fault of their own, the Debtors were unable to satisfy the Notes obligations by their maturity.

Listen guys: you ain’t getting Matt Damon, George Clooney and other whales at your tables if you don’t have VIP tables. Obvi. Second, it sounds like the project hired the quintessential New York City-based general contractor. “Yeah, sure, the project will cost $30mm and take 1 month” only to cost “an additional $300 million” and take literally years. Of course “[c]onstruction costs came in greater than expected.” Isn’t that par for the course in hotel development? The company now has until 2021 to finish Phase II of the project. It sounds like it will need it.

Of course, you have to admire the entrepreneurial enthusiasm:

Notwithstanding the aforementioned challenges, the Debtors believe that the Investment continues to represent a significant economic opportunity—the value of which is not accurately represented in the current market prices of the ADS. Indeed, should the Studio City project continue to develop on its currently anticipated timeframe, the Debtors expect the Investment to generate sufficient value to repay the Notes in full.

The debtors must NOT be expecting a downturn. Gaming usually doesn’t fare too well during one of those. And Chinese growth hasn’t exactly been at levels enjoyed over the last decade or so. But, fingers crossed.

The debtors are negotiating with an Ad Hoc Group of noteholders in an effort to address this state of affairs. They have latitude: Silver Point has committed to a $6.25mm DIP with, among other favorable terms to the debtors, no milestones and a 12-month maturity (with an option to extend a subsequent 12 months). This DIP was not marketed and so the early part of the case will be spent presumably searching for alternatives. Because lenders surely love the idea of providing a DIP, the main purpose of which is to pay Skadden Arps’ and the Ad Hoc Group’s fees.

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

• Capital Structure: $856mm (Wells Fargo Bank NA)

• Professionals:

  • Legal: Skadden, Arps, Slate, Meagher & Flom LLP (Jay Goffman, Mark McDermott, Evan Hill)

  • Managing Member: Drivetrain Advisors LLC (John Brecker)

  • Financial Advisor: Houlihan Lokey Capital Inc.

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

• Other Parties in Interest:

  • Wells Fargo Bank NA

    • Legal: Arent Fox LLP (Andrew Silfen, Beth Brownstein)

  • Sponsor: Silver Point Capital LP
    

New Chapter 11 Filing - Sungard Availability Services Capital Inc.

Sungard Availability Services Capital Inc.

May 1, 2019

Pennsylvania-based Sungard Availability Services Capital Inc., a provider of “critical production and recovery services to global enterprise companies,” with $977mm of net revenue and $203mm of EBITDA in fiscal 2018 filed a prepackaged chapter 11 plan in the Southern District of New York on Wednesday and, if you blinked, you may have missed its residency in bankruptcy. Indeed, some lost their minds because Kirkland & Ellis LLP was able to shepherd the case in and out of bankruptcy in less than 24 hours — breaking the previous record only recently set in FullBeauty. Yes, people care about these things.*

The upshot of this expeditious bankruptcy case is that (a) the company shed nearly $900mm of debt from its balance sheet (reducing debt down to approximately $400-450mm) and (b) transferred 89% ownership to a variety of debt-for-equity swapping funds such as GSO Capital Partners, Angelo Gordon & Co., and Carlyle Group (who will also receive $300mm in senior secured term loan paper). Major equity holders — Bain Capital Integral Investors LLC, Blackstone Capital Partners IV LP, Blackstone GT Communications Partners LP, KKR Millennium Fund LP, Providence Equity Partners V LP, Silver Lake Partners II LP, TPG Partners IV LP — had their equity wiped out. We had previously highlighted KKR’s investment here in “A Hot-Potato Plan of Reorganization. Short BDC Retail Exposure,” discussing the broader context of BDC lending. This is what the capital structure looks like and will look like:

Source: Disclosure Statement

That balance sheet is the driver behind the bankruptcy filing. Per the company:

This legacy capital structure was created based upon the Company’s historical operating model and performance and is unsustainable under current market conditions. When the capital structure was put in place, the Company benefited from a larger revenue base with substantially higher free cash flow. As business conditions evolved and the Company’s revenue declined, cash flow available to service debt and invest in products and services substantially declined. Consolidated net revenue declined by approximately 18% from approximately $1.2 billion in 2016 to approximately $977 million in 20188 while adjusted EBITDA margins remained within a range of approximately 20% to 22%. Negative net cash flow from 2016 to 2018 was approximately $80 million.

In other words, this is as clear-cut a balance sheet restructuring that you can get. Indeed, general unsecured claims are — as you might expect from a prepackaged plan of reorganization — riding through unimpaired. This consensual restructuring is clearly the right result. Getting it in and out of court so quickly is a bonus.

Yet, lest anyone get too high on their own supply, it’s important to note that, while this is a good result under the circumstances, there is a significant amount of value destruction illustrated by this filing. The term lenders are getting merely an estimated 50-73% recovery while the noteholders are getting 7-14%**. Now, it IS reasonable to expect that the “par guys” blew out of this situation long ago. And it is also reasonable to assume that the current holders of loans and notes got in at a significant discount so “value destruction” really is a matter of timing/pricing. For the avoidance of doubt, however, there’s no question that certain lenders experienced some pain on the path to this filing. Here is the chart representing the company’s notes:

So, while some are surely celebrating, others are surely licking their wounds.

*We don’t really want to be too flip about this. As critics of the bankruptcy process, we’re all for seeing more efficient uses of the bankruptcy court — even if that does mean that fees were run up pre-petition without any oversight whatsoever.

**You always have to take these recovery amounts with a grain of salt. In case the rampant Chapter 22s haven’t already taught you that.

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

• Capital Structure:

• Professionals:

  • Legal: Kirkland & Ellis LLP (Jonathan Henes, Emily Geier, Ryan Blaine Bennett, Laura Krucks

  • Board of Directors: Darren Abrahamson, Patrick J. Bartels Jr., Randy Hendricks, John Park, David Treadwell

  • Financial Advisor/CRO: AlixPartners LLP (Eric Koza)

  • Investment Banker: Centerview Partners (Samuel Greene)

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

• Other Parties in Interest:

  • DIP Agent: JPMorgan Chase Bank NA

  • Secured Lender Group

    • Jones Day (Scott Greenberg, Michael Cohen, Nicholas Morin)

    • Financial Advisor: Houlihan Lokey Capital Inc.

  • Crossover Group

    • Akin Gump Strauss Hauer & Feld LLP (Philip Dublin, Naomi Moss)

    • Financial Advisor: PJT Partners LP

  • Large Equityholders: Bain Capital Integral Investors LLC, Blackstone Capital Partners IV LP, Blackstone GT Communications Partners LP, KKR Millennium Fund LP, Providence Equity Partners V LP, Silver Lake Partners II LP, TPG Partners IV LP

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Brian Hermann, Jacob Adlerstein)