🌑New Chapter 11 Bankruptcy Filing - Murray Energy Holdings Co.🌑

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Murray Energy Holdings Co.

October 20, 2019

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Ohio-based Murray Energy Holdings Co. and its 90+ affiliated debtors are now part of a not-so-exclusive club: the Bankrupted Coal Company Club (the “BCCC”)! Unlike some more recent small(er) coal bankruptcy filings, this one is a behemoth: the debtors own and operate 13 active mines in Ohio, West Virginia, eastern and western Kentucky, Alabama, Illinois, and Utah*; their primary product is thermal coal used for electricity (though, with recent acquisitions, the debtors are also now in the steel-making business). To give you a sense of the magnitude of this company, here are some key figures:

  • Produced 53mm tons of bituminous coal in 2018;

  • Employs 5,500 people, including 2,400 active union members EXCLUSIVE of folks employed through the debtors’ partnership with soon-to-be-BCCC-member Foresight Energy LP ($FELP);

  • Generated $2.5b in coal sales and $542.3mm of EBITDA in 2018; and

  • Carries $2.7b of funded debt on balance sheet, $298mm of annual interest and amort expenses, AND $8b+ in actual or potential liability obligations under various pension and benefit plans. In 2018, the debtors’ statutory or CBA-related employee and retiree obligations totaled approximately $160mm. These are key factors that explain why, ultimately, despite every effort to hold out, this company capitulated into bankruptcy.

This is a story of unfettered expansion and spending, hubris, misplaced trust in new Washington on the part of Robert Murray, and utterly savage disruption.

The disruption side of the equation is compelling. Per the company:

“The thermal coal markets that Murray traditionally serves have been meaningfully challenged over the past three to four years, and deteriorated significantly in the last several months. This sector-wide decline has been driven largely by (a) the closure of approximately 93,000 megawatts of coal-fired electric generating capacity in the United States, (b) a record production of inexpensive natural gas, and (c) the growth of wind and solar energy, with gas and renewables, displacing coal used by U.S. power plants.”

Interestingly, this one statement ties together so much of what we’ve all been seeing in the restructuring space. Over the last several years, there have been a number of power company bankruptcies and through bankruptcy or otherwise, capacity has been cut considerably (indeed, FirstEnergy is a recipient of Murray Energy coal and undoubtedly took measures to cut back on coal supply). Fracking across the US has led to a deluge of natural gas — so much so that producers are flaring excess natural gas due to a lack of pipe infrastructure with which to transport it. Despite structural challenges, natural gas exports are on the rise. From the U.S. Energy Information Administration just yesterday:

“From January through June of 2019, U.S. net natural gas exports averaged 4.1 billion cubic feet per day (Bcf/d), more than double the average net exports in 2018 (2.0 Bcf/d), according to data in the U.S. Energy Information Administration’s (EIA) Natural Gas Monthly. The United States became a net natural gas exporter (exported more than it imported) on an annual basis in 2017 for the first time in almost 60 years.”

And as this odd illustration shows, the US is becoming increasingly dependent — in large part due to federal and state emissions standards — upon solar and wind for its electricity needs. The debtors highlight:

“…coal-fired installed capacity as a percentage of total installed capacity has fallen from 26 percent in 2013 to 20 percent in 2019, with coal-fired generation as a percentage of total generation falling from 35 percent in 2013 to 27 percent in early 2019. Natural gas and renewables installed electricity generation capacity in the United States as a percentage of total installed capacity has increased from 59 percent in 2013 to 67 percent in 2019, and natural gas and renewables generation as a percentage of total generation increased from 42 percent in 2013 to 48 percent in early 2019.”

YIKES. That is a DRAMATIC change. They continue:

“During its peak in 2007, coal was the power source for half of electricity generation in the United States and by early 2019, coal-fired electricity generation fell to approximately 27 percent. These challenges have intensified recently as (i) certain electric utility companies have filed for bankruptcy protection and others have sought, and received, subsidies for their nuclear generation capacity to avoid bankruptcy, at the expense of coal-fired facilities, (ii) domestic natural gas prices hit 20-year lows this past summer, and (iii) overall demand for electricity in the United States has declined two percent in 2019, further depleting demand for coal at domestic utilities.”

MAGA!!

The international story, though, ain’t much better, with the company noting a “perfect storm of negative forces” that includes:

“…low liquefied natural gas prices; a recent trade war driving Russia to increase exports; mild weather across the Northern Hemisphere led to a reduction in demand for heating in both Europe and Asia; higher freight costs; and a prolonged monsoon season in India which kept demand depressed while conditions cleared for a record eight months.”

As if all of that isn’t bad enough, the competitive landscape has been horrific and while we suppose its admirable to try and holdout to avoid the embarrassment and stigma of bankruptcy, that strategy clearly becomes untenable when literally every other competitor in the US has already joined the BCCC and stripped themselves of burdensome debt and pension obligations. The company acknowledges as much:

“…while Murray has historically been able to navigate the challenges of the coal marketplace, these rapidly deteriorating industry conditions have caused more than 40 coal companies to file for bankruptcy since 2008, with more than half a dozen major operators filing in the last year alone. These bankruptcies have affected thousands of workers across the United States, and they have left their mark on Murray. Competitors have used bankruptcy to reduce debt and lower their cost structures by eliminating cash interest obligations and pension and benefit obligations, leaving them better positioned to compete for volume and pricing in the current market, while Murray continued to satisfy its significant financial obligations required by the weight of its own capital structure and legacy liability expenses. As a result, Murray generated little cash after satisfying debt service obligations, paying employee health and pension benefits, and maintaining operations.”

That’s a quaint narrative but it’s also a bit misleading.

While every other company was falling apart, Mr. Murray went on a shopping spree, snapping up Consolidation Coal Company, Foresight Energy LP (coming soon to a bankruptcy court near you), Mission Coal Company LLC, Armstrong Energy Inc., and certain Colombian assets. This undoubtedly led to increased integration costs and debt. During that time, the debtors deployed every capital structure trick in the book to extend maturities and kick the can down the road. That road has come to an end at the bankruptcy court doors.

Here is that sweet clean capital structure:

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Man, that’s a beaut.

Rounding out the company’s extensive liabilities are the obligations to employees under CBAs and pension and benefit plans.

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Pursuant to these CBAs, Murray contributes to three multi-employer retirement plans. If you want a sense of how employer-employee relations have changed since the 1970s, look no farther than the debtors’ obligations under what they’ve dubbed the “1974 Pension Plan.” Per the debtors:

“Following the large wave of chapter 11 filings in 2015 and 2016, more than half a dozen large U.S. coal companies collapsed into bankruptcy over the last several years and withdrew from the 1974 Pension Plan. When an employer withdraws, its vested beneficiaries remain in the 1974 Pension Plan and are referred to as “orphan” beneficiaries. The remaining contributing employers become responsible for the benefits of these orphaned participants who were never their employees. As a result, approximately 95 percent of beneficiaries who currently receive benefits from the 1974 Pension Plan last worked for employers that no longer contribute to the Plan. As of January 2019, 11 employers contribute to the 1974 Pension Plan, compared to over 2,800 in 1984. This has placed significant stress on the 1974 Pension Plan and the small number of contributing employers—Murray most of all. If Murray withdraws from the 1974 Pension Plan, the withdrawal liability could be $6.4 billion or more, with annual estimated payments of approximately $32 to $35 million in perpetuity.”

Whoa. And that’s just one plan: the company is also on the hook for others, not to mention $1.9b in other federally-mandated post-employment benefits, asset retirement obligations and environmental obligations.

“Likely”?!?

The company has a restructuring support agreement with 60% of its “consenting superpriority lenders” and “consenting equityholders” (read: Robert Murray) that outlines the general terms of a path forward: a sale with the superpriority lenders as stalking horse bidder, DIP lender, and funder of administrative expenses. Those lenders committed to provide a $350mm DIP commitment. From here, the clock is ticking.

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The debtors hope to have an auction within 135 days and plan confirmation within 195 days. And within 106 days the debtors want to have a solution their CBA/retiree problem or file a motion seeking to reject those agreements and modify those benefits.

There is, as with most cases, a “cooler talk” aspect to this filing: there’s the Kirkland-is-dominating-with-yet-another-coal-bankruptcy-representation-post-westmoreland-and-mission-coal-and-armstrong-energy-which-means-that-A&M-is-dominating-which-means-that-Prime-Clerk-is-dominating-and-what-the-f*ck-happened-to-Jones-Day-which-used-to-crush-coal-filings-with-Peabody-and-Alpha-Natural-but-now-seems-to-be-unraveling-narrative, but putting aside that inside baseball crap and how much frikken cash this case is going to print for all of the above, it’s the miners themselves — those guys who were in the depths of the earth (as distinct from the white-collar professionals who always talk about “the trenches” and “hard fought” negotiations) — who are very likely to get completely and utterly shafted here. As if getting misled or lied to by Mr. Murray — however good his intentions may have been — and Mr. Trump wasn’t enough, they’re now facing the very real possibility of losing the benefits that they worked especially hard to get. All while the professionals are billing $1650/hour. Bankruptcy is vicious.

To point here is the UMWA’s statement about the bankruptcy:

“Today’s filing by Murray Energy for Chapter 11 bankruptcy reorganization comes as no surprise. This day has been coming for some time.

Coal production in this country continues to decline, due to the glut of natural gas on the market and continued government preference for gas and renewable energy to replace coal-fired power generation. Combined with a recent severe reduction in coal exports, these factors delivered a one-two punch that an over-extended Murray Energy could not withstand.

Now comes the part where workers and their families pay the price for corporate decision-making and governmental actions. Murray will file a motion in bankruptcy court to throw out its collective bargaining agreement with the union. It will seek to be relieved of its obligations to retirees, their dependents and widows. We have seen this sad act too many times before.”

Let’s pour one out for the little guys.

*This number is contradicted in the bankruptcy papers. In one instance, the company’s new CEO indicates that there are 13 owned and operated mines; in another he says 18. Whatevs. What are 5 mines in the scheme of things (we’re kidding…WTF, y’all?). The company also owns and operates a mine in Colombia, South America.

  • Jurisdiction: S.D. of Ohio (Judge Hoffman Jr.)

  • Capital Structure: See Above

  • Professionals:

    • Legal: Kirkland & Ellis LLP (James Sprayragen, Nicole Greenblatt, Ross Kwasteniet, Joseph Graham, Alexander Nicas, Mark McKane, Tricia Schwallier) & Dinsmore & Shohl LLP (Kim Martin Lewis, Alexandra Horwitz)

    • Financial Advisor: Alvarez & Marsal LLC (Robert Campagna)

    • Investment Banker: Evercore Group LLC

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

  • Other Parties in Interest:

    • Prepetition ABL Agent: Goldman Sachs Bank USA

    • Prepetition FILO and DIP FILO Lender: GACP Finance Co. LLC

      • Legal: Sidley Austin LLP (Jennifer Hagle, Leslie Plaskon, Anna Gumport) & Frost Brown Todd LLC (Ronald Gold, Erin Severini

    • Prepetition Superpriority Agent: GLAS Trust Company LLC; DIP Administrative Agent: GLAS USA LLC; DIP Collateral Agent: GLAS Americas LLC

      • Legal: Wilmer Cutler Pickering Hale and Dorr LLP (Andrew Goldman, Benjamin Loveland) & Frost Brown Todd LLC (Douglas Lutz, A.J. Webb, Bryan Sisto)

    • Term Loan Agent: Black Diamond Commercial Finance LLC

      • Legal: Ropes & Gray LLP (Gregg Galardi) & Keating Muething & Klekamp PLLC (Robert Sanker)

    • 1.5L Notes Indenture Trustee: U.S. Bank N.A.

    • 2L Notes Indenture Trustee (‘20 and ‘21): The Bank of New York Mellon Trust Company N.A.

    • Ad Hoc Group of Superpriority Lenders

      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Adam Shpeen, James McClammy) & Frost Brown Todd LLC (Douglas Lutz, A.J. Webb, Bryan Sisto)

      • Financial Advisor: Houlihan Lokey Capital Inc.

    • Equityholders (Robert Murray)

      • Legal: Willkie Farr & Gallagher (Brian Lennon, Matthew Feldman)

    • Official Committee of Unsecured Creditors (Bank of NY Mellon Trust Company NA, CB Mining Inc., Joy Global, RM Wilson Co., UMWA 1974 Pension Trust, United Mine Workers of America International Union, Wheeler Machinery Co.)

      • Legal: Morrison & Foerster LLP (Lorenzo Marinuzzi, Todd Goren, Jennifer Marines, Erica Richards, Benjamin Butterfield)

      • Investment Banker: Moelis & Co. (William Derrough)

💵New Chapter 11 Filing - Highland Capital Management LP 💵

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Highland Capital Management LP

October 16, 2019

Dallas-based Highland Capital Management LP filed for bankruptcy in the District of Delaware as a preemptive measure; it was expecting a legal judgment against it in an action emanating out of the closure of a related fund after the Great Recession. There’s more about that lawsuit by Bloomberg here.

  • Jurisdiction: D. of Delaware (Judge )

  • Capital Structure:

  • Professionals:

    • Legal: Pachulski Stang Ziehl & Jones LLP (James O’Neill)

    • Financial Advisor/CRO: Development Specialists Inc. (Bradley Sharp)

  • Other Parties in Interest:

💰New Chapter 11 Filing - Yueting Jia💰

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Yueting Jia

October 14, 2019

So, we’re not used to seeing individuals file for chapter 11 listing $500mm-$1b in assets and $1b-$10b in liabilities. We’ll just throw that out there. But these are interesting times and since the private markets have become the new public markets, we suppose it’s not too outlandish to see private companies — and their backers — with extraordinary balance sheets (cough, WeWork). And, by extension, bankruptcy filings.

Indeed, Yueting Jia, is an exceptional case. A serial entrepreneur, Mr. Jia, is the founder of multiple businesses over the years — most notably the LeEco streaming service and Faraday Future, a much-hyped electric vehicle company that fashions itself as a would-be competitor to Elon Musk’s Tesla Inc. ($TSLA). Faraday is owned by Smart King Ltd., an entity in which Mr. Jia holds significant equity that backs personal guarantees he’s made over the years. It’s on account of those guarantees (and several direct loans) that Mr. Jia may now add the “debtor” designation to his resume. It’ll look nice next to his other recent labels: pariah and refugee. Like we said, this is an interesting “case.”

So about those personal guarantees and loans…uh…yeah, they’re pretty extensive. There’s $279mm to Shenzhen Yingda Capital Management Co. Ltd. and $233mm to China CITIC Bank Co. Ltd., followed by at least 18 other large creditors whose security is dramatically under-secured. In other words, Mr. Jia has earned that “debtor” status.

So, what’s the plan? Well, literally, Mr. Jia has already proffered a plan that would, in exchange for broad releases of he and his wife from any claims and liability, provide certain creditors with beneficial interests in a liquidating trust. As proposed, the liquidating trust assets will include “economic rights to 40.8% of the [Smart King’s] equity consisting of 147,048,823 Class B ordinary shares currently owned by FF Top, representing 10% of the [Smart King’s] equity interest” and “a preferred distribution right in connection with 30.8% of [Smart King’s] equity interest (owned through Pacific Technology Holding LLC…and collectively owned by [Mr. Jia] and the management through the Partnership Program…,which will entitle him to a priority distribution of up to US$815.7 million (subject to certain adjustments), right after the return of capital to the management, a special distribution of 10% of the remaining amounts and thereafter, a normal distribution of 20% of the balance owned by Pacific Technology.” Wait. What? What, exactly, will creditors be getting?

Let’s take a step back. Faraday Future is one of those “yogababble” companies that Scott Galloway has recently talked about — a company chock full of mission statement bullsh*t. Per Mr. Jia:

“The Company was founded with the vision to disrupt the traditional automotive industry and create a shared intelligent mobility ecosystem that empowers everyone to move, connect, breathe and live freely.”

Founded in 2014, so far Faraday Future has disrupted nothing other than the balance sheets of Mr. Jia and several other investors. It’s “pre-revenue” which is Silicon Valley bro-code for not making any f*cking money and it hasn’t delivered any cars yet. In terms of assets, the company is really just a bucket of intellectual property and some model pre-production prototypes of its signature FF 91. Suffice it to say, then, that it hasn’t changed the way anyone moves, connects, breathes or lives. At least not yet. We suppose the good thing is that burning cash ($1.7b) doesn’t negatively affect the environment. Small victories.

Anyway, back to the plan. It’s rather circular. Mr. Jia’s interest in the company “is his primary asset.” His primary asset requires new funding to survive. The only way it can get funding is, according to Mr. Jia, if his restructuring is consummated quickly, everyone just moves on, and the company can then hunt for liquidity. Otherwise, it will follow Mr. Jia into bankruptcy. He straight up says:

“If, as a result of not being able to consummate the Restructuring in a timely manner, the Company's business is not able to once again pursue its business plan, it is likely that it will not be able to continue as a going concern, it may be forced to liquidate its remaining assets and/or initiate bankruptcy proceedings….”

And then the value of the Mr. Jia’s assets will likely be nothing. So, he’s basically saying to his creditors, “agree to this restructuring to give the company a hope and prayer of raising money because without it, the company is screwed, I’m screwed, you’re screwed AND, as a cherry on top, the company’s other investors, employees and creditors are screwed.” Such a hot mess.

Hang on. Why would the company be screwed? Per Mr. Jia:

“As of July 31, 2019, the Company's current liabilities amounted to US$734.3 million, with outstanding note payables of US$402.1 million to related-party lenders and third-party lenders, respectively. The Company has defaulted on some of the notes, and is currently in negotiation with such lenders for extensions or conversion of notes into equity. Several other notes will mature by the end of 2019. For example, the Company's secured note of US$45.0 million issued to certain purchasers pursuant to the note purchase agreement with U.S. Bank National Association will become due on October 31, 2019, to which the Company is seeking an extension from the lender.”

It’s currently in default, that’s why. It needs the Series B financing to help restructure its existing debt.* Which makes this EVEN BETTER: he’s offering his creditors interests in a Trust funded by stock which is currently behind debt that is currently in default!!

So, naturally, the company is also subject to a severe working capital deficit. It has burned through $580.9mm since 2018 with a total accumulated loss of $2.15b as of July 2019. It has approximately $6.8mm of cash on hand.

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But, don’t worry. Entrepreneurial optimism remains nonetheless. Per the plan documents, Mr. Jia remains optimistic that a deal will get done, that a subsequent $850mm Series B financing will get done by January 2020, and that that will be enough to bridge the company to an IPO in 2021. This is, of course, after, the company (i) beta tests its product, (ii) builds out its CA-based manufacturing facility, (iii) firms up its supply chain, (iv) completes all testing and validation, AND (v) delivers its first 100 units of the FF 91 to the market in early Q2 ‘21. This is all great because then we can see where Professor Gallaway puts the company on this spectrum:

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As an inducement to voting in support of this plan, Mr. Jia provides “hypothetical figures” based on his and company management’s assumptions. Naturally, he caveats that “they may prove to have been incorrect or unfounded.” You bet your a$$ they might.

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By way of comparison, Nio Inc. ($NIO) actually ships cars already (3500 in Q2 ‘19) and has a 1.68b market cap (currently trading at $1.60/share). Tesla is at 46.4b. Both companies are also hemorrhaging cash.

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It’s good to see that the Adam Neumanns of the world haven’t sapped the world of hope.


*Notably, that $45mm piece reflects secured notes held by ex-Skadden attorney, Jack Butler, through his firm Birch Lake Holdings. The notes are secured by tangible and intangible assets (which, presumably, includes all of the IP, the only thing here that, as we writ this today, probably has any value whatsoever). An earlier $15mm term loan provided by Birch Lake was paid off in September. It had an impressive 15.5% interest rate (with a default rate of 21.5%).

  • Jurisdiction: D. of Delaware (Judge )

  • Capital Structure:

  • Professionals:

    • Legal: O’Melveny & Myers LLP (Suzzanne Uhland, Diana Perez) & Pachulski Stang Ziehl Jones LLP (Jeffrey Dulberg, Malhar Pagay, Richard Pachulski, James O’Neill)

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

  • Other Parties in Interest:




🔌New Chapter 11 Bankruptcy Filing - Agera Energy LLC🔌

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Agera Energy LLC

October 4, 2019

Agera Energy LLC, a retail electricity and natural gas provider to commercial, industrial and residential customers filed for bankruptcy in the Southern District of New York. The company blames, among other things, mismanagement and poor strategy for the run-up to its financial problems: too many low margin fixed contracts in an environment that calls for variable contracts proved to be an albatross. Nevertheless, in September ‘18, sponsor Eli Global LLC agreed to pursue a turnaround plan including any and all capital infusions that might be necessary.

But then the hammer dropped. New management discovered “material balance sheet issues, which led to a restatement of the Debtors’ financials. Specifically, as of August 31, 2018, there was approximately $39 million of over stated receivables, of which $37 million related to unbilled receivables. As a result of the foregoing discovery, the Debtors suddenly found themselves in breach of the Senior Lien Supply Agreement’s $16 million Tangible Net Worth covenant.” WHOOPS.

Thereafter, the company and its lenders operated pursuant to a series of forbearance agreements while Eli Global LLC made millions of dollars of capital contributions. Until they didn’t. In May, Eli Global indicated that it was no longer in a position to inject capital into the business — and it still had $21mm in commitments from that point forward. Without the capital, the company was unable to satisfy, among other things, renewable portfolio standards it is subject to.* This dominoed into a separate liability for the company of approximately $72mm and a slate of enforcement actions from the Massachusetts Department of Energy Resources, the Rhode Island Public Utilities Commission and the New Hampshire Public Utilities Commission that threatened the debtors’ ability to sell electricity or natural gas in those states. Consequently, the debtors initiated a strategic alternatives review process which, naturally, included a marketing process for the sale of the debtors. The company now has Exelon Generation Company LLC lined up as a stalking horse purchaser (for the debtors’ contracts) for $24.75mm.

*RPS laws require a certain portion of a state’s electricity consumption to be generated from renewable sources, such as wind, solar, biomass, geothermal, or hydroelectric.

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

  • Capital Structure: $161.6mm Senior Lien Supply Agreement and Senior Lien ISDA Master Agreement (BP Energy), $35mm Second lien Revolving Credit Facility (Colorado Bankers Life Insurance Company)

  • Professionals:

    • Legal: McDermott Will & Emery (Timothy Walsh, Darren Azman, Ravi Vohra, Debra Harrison)

    • Independent Manager: Stephen Gray

    • Financial Advisor: GlassRatner Advisory & Capital Group LLC

    • Investment Banker: Miller Buckfire & Co. LLC & Stifel Nicolaus & Co. Inc.

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

  • Other Parties in Interest:

    • DIP Lender: BP Energy Company

      • Legal: Haynes and Boone LLP (Charles Beckham Jr., Kelli Norfleet, Arsalan Muhammad, Kathryn Shurin)

    • Stalking Horse Bidder: Exelon Generation Company, LLC

      • Legal: McGuireWoods LLP (Cecil Martin III)

    • Platinum Partners

      • Legal: Otterbourg PC (Melanie Cyganowski, Eric Weinick)

10/7/19 #42

🎦New Chapter 11 Bankruptcy Filing - Deluxe Entertainment Services Group Inc.🎦

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Deluxe Entertainment Services Group Inc.

October 3, 2019

Summary to come.

  • Jurisdiction: (Judge Drain)

  • Capital Structure: ⬇️

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  • Professionals:

    • Legal: Kirkland & Ellis LLP (Jonathan Henes, Jonathan Altman)

    • Board of Directors: Ronald Perelman, Matthew Cantor, Paul Savas

    • Financial Advisor: AlixPartners LLP

    • Investment Banker: PJT Partners Inc. (James Baird)

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

  • Other Parties in Interest:

    • Existing ABL Agent, Senior Priming Term Loan Agent, Priming Term Loan Agent, and Existing Term Loan Agent: Credit Suisse AG

      • Legal: Cravath Swaine & Moore LLP (Paul Zumbro, George Zobitz, Sarah Rosen) & Norton Rose Fulbright

    • Ad Hoc Committee of the Senior Priming Term Loan,2 the Priming Term Loan, the Existing Term Loan and the DIP Term Facility (see below, as of 10/7/19)

      • Legal: Stroock & Stroock & Lavan LLP (Kristopher Hansen, Jonathan Canfield, Gabriel Sasson)

      • Financial Advisor: FTI Consulting Inc.

    • MAFCO

      • Legal: Skadden Arps Slate Meagher & Flom LLP (Shana Elberg, Mark McDermott)

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New Chapter 11 Filing - Bayou Steel BD Holdings LLC

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Bayou Steel BD Holdings LLC

October 1, 2019

It’s all of the rage these days to rail on private equity. Elizabeth Warren is all over the industry these days and we, too, have been very critical of PE-backed shenanigans (mostly dividend recaps) that ultimately help destroy companies. The truth is, however, that there are two sides to that coin. Private equity can be a critical source of liquidity to businesses that might not otherwise get it.

And so this means that private equity is often in places you wouldn’t suspect. As just one example, we’ve previously noted, in our usually snarky way, how your Nana’s post-acute care may be powered by private equity. Here is another example: Bayou Steel BD Holdings LLC. Bayou Steel is a mini-mill with electric arc furnace steelmaking, continuous billet casting, and a medium section rolling mill; it also operates a bar product rolling mill. Its facilities are in Tennesee and Louisiana; it also has distribution depots in Oklahoma, Illinois and Pennsylvania. Since 2016, nearly 13 years after a previous foray in bankruptcy court, the company has been owned by Black Diamond Capital Management. Three years later, it and two affiliated companies are chapter 11 debtors: they filed for bankruptcy earlier this week in the District of Delaware.

The debtors’ bankruptcy papers are not as fulsome as we’re accustomed to. They don’t provide an extensive history of the company; they don’t offer a sweeping synopsis of the events that led to the chapter 11 filings; they don’t mention any sort of sordid mismanagement by their private equity sponsor; they don’t serve as de facto marketing materials for any prospective buyer. To that last point, there’s no mention whatsoever of any banker marketing the assets at all. There’s also no DIP credit facility: the company intends to function in bankruptcy using Bank of America NA ($BAC) and SunTrust Bank’s ($STI) cash collateral. To what end? To liquidate its inventory and assets.

They do mention, however, that the company “suffered under its debt load” which, ultimately, created “severe liquidity issues” and “eventually default” under its asset-backed loan facility (“ABL”). The company has $41.25mm outstanding under the ABL and another $36.5mm outstanding, mostly on a second lien basis, under a term loan with Black Diamond Commercial Finance LLC.* Per the company:

Left with no liquidity, and little hope of turnaround, the Company determined not to purchase any further raw materials and, as it has done in the ordinary course of business in the past when faced with excess inventory or liquidity concerns, the Company began selling off its finished goods inventory in order to pay down its secured debt.

They also sh*tcanned an overwhelming majority of their employees — all of whom were in “complete shock.”

Governor John Bel Edwards (D) — who is set to experience a tough primary in mid-October — chimed in with a statement:

“The Louisiana Workforce Commission is working with the company, the parish president and elected officials to assist those employees who are directly impacted by today’s news,” said Gov. Edwards. “While Bayou Steel has not given any specific reason for the closure, we know that this company, which uses recycled scrap metal that is largely imported, is particularly vulnerable to tariffs. Louisiana is among the most dependent states on tariffed metals, which is why we continue to be hopeful for a speedy resolution to the uncertainty of the future of tariffs. Meanwhile, we will do everything within our power to help those displaced workers.”

Curious. Indeed, the company did give a specific reason for the closure: its debt. Is it possible that tariffs played a role? Sure, that wouldn’t surprise us. But the company did not expressly state that (in its papers at least).

But since we’re on the topic of tariffs, let’s go there. In early September, in “💥PG&E. Sugarfina. uBiome. PetroSmart.💥,” we wrote the following:

Retail (Long Leverage & BSDs). Oh man. Target Inc. ($TGT) ain’t trifling. Choice bit:

“Target has communicated to its suppliers the retailer will not be raising prices for consumers nor accepting higher prices from suppliers as a result of existing and forthcoming tariffs on imported Chinese goods. 

‘Our expectation is that you will develop the appropriate contingency plans so that we don’t have to pass price increases along to our guests,’ wrote Target Executive Vice President and Chief Merchandising Officer Mark Tritton in a memo, according to multiple outlets.”

Savage. Can’t wait to see “the Target Effect” mentioned in future First Day Declarations.

We were highlighting Target, specifically, but we were also foreshadowing something we expected to see, generally, over coming months: that is, US trade policy affecting domestic companies and, at least in part, causing chapter 11 bankruptcy filings. Is it happening?

In mid-September, the Barber Steel Foundry in Rothbury Michigan announced that it would close at the end of the year. 61 people will have a rough holiday season. This followed a July announcement that NLMK Pennsylvania, would layoff 80 workers and slow production. Even big time U.S. Steel Corp. ($X) announced that it would shut down two furnaces at its flagship plant in Indiana. Professor Mark Perry, writing for the conservative American Enterprise Institute blog, noted the following:

Measured by the loss of stock market capitalization since March 2018, the steel tariffs have contributed to the following losses: the stock market value of Nucor has declined by $5.2 billion, US Steel by $5.5 billion and Steel Dynamics by $3.7 billion, for a combined loss of stock market capitalization for the three steel companies of $14.4 billion.

Regardless of whether Governor Edwards’ claims are correct in this specific case, there is zero doubt that tariffs will continue to reverberate throughout the business community and help spark bankruptcy filings.

*The second lien term lenders have a first lien on the company’s real estate. They may be a critical element to this case.

  • Jurisdiction: D. of Delaware (Judge Owens)

  • Capital Structure: $41.25mm ABL Credit Facility (Bank of America NA, SunTrust Bank), $36.5mm Term Loan (Black Diamond Commercial Finance LLC — first lien on real estate)

  • Professionals:

    • Legal: Polsinelli PC (Christopher Ward, Shanti Katona, Stephen Astringer)

    • Financial Advisor: Candlewood Partners LLC

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

  • Other Parties in Interest:

    • Prepetition Agent: Bank of America NA

      • Legal: Vinson & Elkins LLP (William Wallander, Bradley Foxman) & Richards Layton & Finger PA (Mark Collins)

    • Secured Lender: Black Diamond Commercial Finance LLC

⛽️New Chapter 11 Bankruptcy Filing - Sheridan Holding Company II, LLC⛽️

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Sheridan Holding Company II, LLC

September 15, 2019

Houston-based Sheridan Holding Company II LLC and 8 affiliated debtors filed a chapter 11 bankruptcy case in the Southern District of Texas with a nearly-fully-consensual prepackaged plan of reorganization. The plan, once effective, would eliminate approximately $900mm(!) of pre-petition debt. The case is supported by a $100mm DIP credit facility (50% new money).

Why so much debt? While this is an oil and gas story much like scores of other companies we’ve seen march through the bankruptcy court doors, the business model, here, is a bit different than usual. Sheridan II is a “fund”; it invests in a portfolio of working interests in mature onshore producing properties in Texas, New Mexico and Wyoming. Like Matt Damon in “Promised Land,” the debtors scour God’s country in search of properties, acquires working interests in those properties, and then seeks to deploy their special sauce (“application of cost-effective reinvestments, operational improvements, and enhanced recovery programs to the acquired assets”) to eke out product and, ultimately, sell that sh*t at a profit. This, as you might suspect, requires a bunch of capital (and equity from LPs like Warburg Pincus).* Hence the $1.1b of debt on balance sheet. All of this is well (pun intended) and good, provided the commodity environment cooperates. Which, we all know all too well, has not been the case in recent years. Peace out equity. Peace out sub debt.

Interestingly, some of that debt was placed not too long ago. Confronted with the oil and gas downturn, the debtors took the initiative to avoid bankruptcy; they cut off distributions to LPs, took measures to decrease debt, cut opex, capex and SG&A, and engaged in a hedging program. In 2017, the debtors raised $455mm of the subordinated term loan (with PIK interest galore), while also clawing back 50% of distributions previously made to LPs to the tune of $64mm. Everyone needed to have skin in the game. Alas, these measures were insufficient.

Per this plan, that skin is seared. The revolving lenders and term lenders will receive 95% of the common stock in the reorganized entity with the subordinated term lenders getting the remaining 5%. YIKES. The debtors estimate that the subordinated term lenders will recover 2.6% of the amount of their claims under the proposed plan. 2.6% of $514mm = EPIC VALUE DESTRUCTION. Sweeeeeeeeet. Of course, the limited partners are wistfully looking at that 2.6%. Everything is relative.

*****

Some additional notes about this case:

  • The hope to have confirmation in 30 days.

  • The plan includes the ability to “toggle” to a sale pursuant to a plan if a buyer for the assets emerges. These “toggle” plans continue to be all of the rage these days.

  • The debtors note that this was a “hard fought” negotiation. We’ve lost count of how many times professionals pat themselves on the backs by noting that they arrived at a deal, resolving the issues of various constituencies with conflicting interests and positions. First, enough already: this isn’t exactly Fallujah. You’re a bunch of mostly white males (the CEO of the company notwithstanding), sitting around a luxury conference table in a high rise in Manhattan or Houston. Let’s keep some perspective here, people. Second, THIS IS WHAT YOU GET PAID $1000+/hour to do. If you CAN’T get to a deal, then that really says something, particularly in a situation like this where the capital structure isn’t all-too-complex.

  • The bulk of the debtors’ assets were purchased from SandRidge Energy in 2013. This is like bankruptcy hot potato.

  • Independent directors are really becoming a cottage industry. We have to say, if you’re an independent director across dozens of companies, it probably makes sense to keep Quinn Emanuel on retainer. That way, you’re less likely to see them on the opposite side of the table (and when you do, you may at least temper certain bulldog tendencies). Just saying.

Finally, the debtors’ bankruptcy papers provide real insights into what’s happening in the oil and gas industry today — particularly in the Permian Basin. The debtors’ assets mostly rest in the Permian, the purported crown jewel of oil and gas exploration and production. Except, as previously discussed in PETITION, production of oil out of the Permian ain’t worth as much if, say, you can’t move it anywhere. Transportation constraints, while relaxing somewhat, continue to persist. Per the company:

“Prices realized by the Debtors for crude oil produced and sold in the Permian Basin have been further depressed since 2018 due to “price differentials”—the difference in price received for sales of oil in the Permian Basin as compared to sales at the Cushing, Oklahoma sales hub or sales of sour crude oil. The differentials are largely attributable to take-away capacity constraints caused by increases in supply exceeding available transportation infrastructure. During 2018, Permian Basin crude oil at times sold at discounts relative to sales at the Cushing, Oklahoma hub of $16 per barrel or more. Price differentials have narrowed as additional take-away capacity has come online, but crude oil still sells in the Permian Basin at a discount relative to Cushing prices.”

So, there’s that teeny weeny problemo.

If you think that’s bad, bear in mind what’s happening with natural gas:

“Similarly, the Henry Hub natural gas spot market price fell from a peak of $5.39 per million British thermal units (“MMBtu”) in January 2014 to $1.73 per MMBtu by March 2016, and remains at approximately $2.62 per MMBtu as of the Petition Date. In 2019, natural gas prices at the Waha hub in West Texas have at times been negative, meaning that the Debtors have at times either had to shut in production or pay purchasers to take the Debtors’ natural gas.”

It’s the natural gas equivalent of negative interest rates. 😜🙈

*All in, this fund raised $1.8b of equity. The Sheridan Group, the manager of the debtors, has raised $4.6b across three funds, completing nine major acquisitions for an aggregate purchase price of $5.7b. Only Sheridan II, however, is a debtor (as of now?).

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

  • Capital Structure: $66 RCF (Bank of America NA), $543.1mm Term Loan (Bank of America NA), $514mm ‘22 13.5%/17% PIK Subordinated Term Loans (Wilmington Trust NA) — see below.

  • Professionals:

    • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Steven Serajeddini, Spencer Winters, Stephen Hackney, Rachael Marie Bazinski, Jaimie Fedell, Casey James McGushin) & Jackson Walker LLP (Elizabeth Freeman, Matthew Cavenaugh)

    • Board of Directors: Alan Carr, Jonathan Foster

      • Legal: Quinn Emanuel Urquhart & Sullivan LLP

    • Financial Advisor: AlixPartners LLP

    • Investment Banker: Evercore Group LLC

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

  • Other Parties in Interest:

    • Administrative agent and collateral agent under the Sheridan II Term Loan Credit Agreements: Bank of America NA

      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Stephen Piraino, Nathaniel Sokol)

      • Financial Advisor: Houlihan Lokey Capital Inc.

    • Administrative Agent under the Sheridan II RBL: Bank of America NA

      • Legal: Vinson & Elkins LLP (William Wallander, Bradley Foxman, Andrew Geppert)

      • Financial Advisor: Houlihan Lokey Capital Inc.

    • Ad Hoc Group of Subordinated Term Loans (Pantheon Ventures US LP, HarbourVest Partners LP)

      • Legal: Weil Gotshal & Manges LLP (Matthew Barr, Gabriel Morgan, Clifford Carlson)

      • Financial Advisor: PJT Partners LP

    • Limited Partner: Wilberg Pincus LLC

      • Legal: Willkie Farr & Gallagher LLP (Brian Lennon)

Screen Shot 2019-09-18 at 9.34.47 AM.png
Source: First Day Declaration

Source: First Day Declaration

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

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The College of New Rochelle

September 20, 2019

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

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

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

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

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

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

  • Professionals:

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

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

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

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

  • Other Parties in Interest:

    • Key Bank NA

      • Legal: Nolan Heller Kauffman LLP (Francis Berman)

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

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

💊New Chapter 11 Bankruptcy Filing - Sienna Pharmaceuticals Inc. ($SNNA)💊

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Sienna Pharmaceuticals Inc.

September 16, 2019

If you’re tired of distressed retail and oil & gas companies, the good news is that the biopharma space has been mixing things up. Sienna Pharmaceuticals ($SNNA), a California-based clinical-stage biopharma and medical device company filed for bankruptcy in the District of Delaware. It develops multiple products aimed at chronic inflammatory skin diseases (e.g., psoriasis) and aesthetic conditions (e.g., unwanted hair and acne). The company is at the stage that those in the tech world would designate “pre-revenue.”

And that is precisely the problem. Much like distressed oil and gas companies, distressed biopharma companies are capital intensive (a $184.1mm accumulated deficit) and tend to succumb to the weight of their long-duration development cycle. In this case, the company “has relied on equity issuances, debt offerings, and term loans” to fund development and operations. It has also leveraged its equity as a currency, engaging in strategic acquisitions that enhance its product portfolio; it, for instance, entered into a share purchase agreement in late ‘16 with Creabilis plc. This added one more product that, at this juncture, the company cannot advance due to liquidity issues. Womp womp.

The company has, over the course of time, been indebted to its pre-petition secured lender, Silicon Valley Bank, in the range of $10-30mm. On September 15th, for instance, the company owed SVB over $30mm. In exchange, however, for the use consensual use of cash collateral, the company made a $21.3mm payment to SVB on September 16th, the day before the bankruptcy filing. That’s what you call leverage, folks. SVB’s loan is secured by a laundry list of debtor assets though it is technically not secured by the company’s extensive trove of intellectual property (~250 patents). That IP, however, is subject to what’s called a “negative pledge,” a provision that prevents the company from pledging the IP on account of the fact that SVB’s security interest includes “rights to payment and proceeds from the sale, licensing, or disposition of all or any part of the Intellectual Property.” It’s a wee bit hard to enforce a security interest in IP if someone else has a right to the payments streams emanating therefrom (not that this company has any revenue streams, but you get the idea).

Why bankruptcy? For starters, the company is subject to a “minimum cash covenant” under its SVB facility and liquidity dipped below the minimum. Due to the company’s declining stock price, the company lost access to the equity market. Finally, the company has lingering financial commitments from the Creabilis deal. For all of these reasons, the company simply doesn’t have the liquidity needed to fund the next stages of product development which, in turn, would get the company closer to revenue generation. Chicken. Meet egg.

As is the overwhelming norm these days, the company now seeks to use the bankruptcy process to pursue a sale. As of the filing, no stalking horse purchaser is teed up but the company is “confident” that its banker, Cowen & Co. ($COWN), will locate one that will enable the company to emerge from bankruptcy as a going concern. No pressure, Cowen.

  • Jurisdiction: D. of Delaware (Judge TBD)

  • Capital Structure: $10mm secured debt (SVB)

  • Professionals:

    • Legal: Latham & Watkins LLP (Peter Gilhuly, Ted Dillman, Shawn Hansen) & Young Conaway Stargatt & Taylor LLP (Michael Nestor, Kara Hammond Coyle)

    • Financial Advisor: Force 10 Partners (Jeremy Rosenthal)

    • Investment Banker: Cowen and Company LLC (Lorie Beers)

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

  • Other Parties in Interest:

    • Prepetition Lender: Silicon Valley Bank

      • Legal: Sheppard Mullin Richter & Hampton LLP (Ori Katz, Michael Driscoll) and Benesch Friedlander Coplan & Aronoff LLP (Jennifer Hoover, Kevin Capuzzi)

    • Major shareholders: ARCH Venture Partners VIII LLC, Partner Fund Management LP, FMR LLC (aka Fidelity)

    • Official Committee of Unsecured Creditors (Therapeutics Inc., Johnson Matthey Inc., MedPharm Ltd.)

      • Legal: Foley & Lardner LLP (Richard Bernard, Alissa Nann) & Potter Anderson & Corroon LLP (Christopher Samis, L. Katherine Good, D. Ryan Slaugh)

      • Financial Advisor: Emerald Capital Advisors (John Madden)

Update: 10/25/19 #140

New Chapter 11 Filing - GCX Limited

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GCX Limited

September 15, 2019

GCX Limited and 15 affiliated debtors filed a prepackaged bankruptcy this week in pursuit of a dual-track restructuring that will, either through a debt-for-equity swap or a sale, extinguish over $150mm of debt. In the swap scenario, the company will hand the keys over to senior secured noteholders; in the sale scenario, the noteholders will gladly take their cash payout and get the f*ck out of dodge. Either way, the company will be under new ownership with a significantly deleveraged capital structure. Certain consenting senior secured noteholders will provide $54.5mm in DIP financing.

The debtors are a global data communications provider; they operate one of the world’s largest fiber networks (PETITION Note: we’re old enough to remember when fiber was the future!). They provide undersea and terrestrial cables and landing stations and provide managed network services all across the globe. In English, this means they help power, among other things, major telecomms companies and streaming media.

Unfortunately, the debtors have declining revenues. Among other reasons for that sad state of affairs, the debtors cite (i) newly developed and planned cable systems along the debtors’ existing and planned network routes, (ii) financial distress at the parent level, (iii) ongoing disputes with banks that have applied setoff rights against the debtors’ cash, and (iv) high fixed costs and less certain recurring revenue due to clients newfound refusal to enter into long-term arrangements. For all of these reasons, the debtors have been unable to refinance their senior secured notes and the notes matured on July 31. Obviously — considering this thing is now in bankruptcy court — the debtors’ issues prevented them from paying off the debt as it became due. Instead, the debtors have operated under a forbearance agreement since July, during which time it formulated its go-forward plan and solicited the support, via a restructuring support agreement, of a meaningful amount of senior unsecured noteholders. The forbearance expired on the filing date.

Now the bankers, Lazard & Co., will have their work cut out for them. The debtors hope to run an expedited sales process (though, in the bankers’ favor is the fact that the pool of interested parties for assets like these is likely limited) and conduct an auction within 42 days of the filing. Absent that, the debtors will proceed with the debt-for-equity swap with an eye towards confirmation within 75 days and going effective before the end of the year (subject to requisite regulatory approvals, i.e., FCC and CFIUS).

  • Jurisdiction: D. of Delaware (Judge Sontchi)

  • Capital Structure: $365.8mm 7% ‘19 senior secured notes (The Bank of New York Mellon)

  • Professionals:

    • Legal: Paul Hastings LLP (Chris Dickerson, Brendan Gage, Robert Dixon Jr., Todd Schwartz) & Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Jaime Luton Chapman)

    • Board of Directors: Rodney Riley, Donald Mallon, Alan Carr

    • Financial Advisor/CRO: FTI Consulting Inc. (Michael Katzenstein, Don Harer)

    • Investment Banker: Lazard & Co. (Ken Ziman)

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

  • Other Parties in Interest:

    • Wilmington Trust NA

      • Legal: Duane Morris LLP (Christopher Winter, Jarret Hitchings)

    • Ad Hoc Group of Senior Secured Noteholders

      • Legal: White & Case LLP (Brian Pfeiffer, William Guerrieri, Varoon Sachdev) & Farnan LLP (Brian Farnan, Michael Farnan)

💊New Chapter 11 Bankruptcy Filing - Purdue Pharma LP 💊

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Purdue Pharma LP

September 15, 2019

See here for our writeup.

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

  • Professionals:

    • Legal: Davis Polk & Wardwell (Marshall S. Huebner, Benjamin S. Kaminetzky,, Timothy Graulich, Eli J. Vonnegut)

    • Board of Directors: Robert Miller, Kenneth Buckfire, John Dubel, Michael Cola, Anthony Roncalli, Cecil Pickett, F. Peter Boer

    • Financial Advisor: AlixPartners LLP

    • Investment Banker: PJT Partners Inc.

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

  • Other Parties in Interest:

    • Ad Hoc Committee of AGs in Support of Settlement

      • Legal: Kramer Levin Naftalis & Frankel LLP (Kenneth Eckstein, Rachael Ringer), Brown Rudnick LLP (David Molton, Steven Pohl), Gilbert LLP (Scott Gilbert, Craig Litherland, Kami Quinn), Otterbourg PC (Melanie Cyganowski, Jennifer Feeney)

    • AG of New York

      • Legal: Pillsbury Winthrop LLP (Andrew Troop)

    • Official Committee of Unsecured Creditors: West Boca Medical Center, CVS Caremark D Services LLC, LTS Lohmann Therapy Systems Corporation, Blue Cross and Blue Shield Association, Pension Benefit Guaranty Corporation and 4 individuals

      • Legal: Akin Gump Strauss Hauer & Feld LLP

9/28/19 #135

⛪️New Chapter 11 Bankruptcy Filing - The Diocese of Rochester⛪️

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The Diocese of Rochester

September 12, 2019

Source: Official Form 204, The Diocese of Rochester Chapter 11 Filing

Source: Official Form 204, The Diocese of Rochester Chapter 11 Filing

If you haven’t seen the wonderful movie “Spotlight” yet, we highly suggest you do. It’s a compelling — and disturbing — movie about silenced and shamed claimants who were abused at the hands of the Catholic Church. There’s no more appropriate visual image for these people and what they’ve gone through than a black Sharpie line covering their existence. ⬆️

The Diocese of Rochester is the latest in a long line of dioceses that have now filed for bankruptcy as a means to manage the carnage of decades of abuse, neglect, and secrecy.

Earlier this year, the New York State Legislature passed the Child Victims Act (“CVA”) and Governor Cuomo signed the legislation into law in February. The CVA (i) opened a one-year “window” through which time-barred child sex abuse claimants could lodge claims and (ii) extended “the statute of limitations for claims that were not time-barred on its date of passage, permitting such child victims to commence timely civil actions until they reach 55 years of age.” The result? 46 lawsuits involving 61 plaintiffs (plus another 12 demand letters indicating future suits). Chilling numbers.

Here’s another chilling number: “[s]ince the mid-1980’s, the Diocese has settled 44 claims related to child sexual abuse.” No wonder people today have lost faith in our institutions.

Per the Diocese:

The Diocese does not seek Chapter 11 relief to shirk or avoid responsibility for any past misconduct by clergy or for any decisions made by Diocesan authorities when addressing that misconduct. The Diocese does not seek bankruptcy relief to hide the truth or deny any person a day in court. In fact, the Diocese is committed to pursuing the truth and has never prohibited any person from telling his/her story or speaking his/her truth in public. The Diocese has publicly disclosed perpetrators. The Diocese has made and requires criminal referrals to be made for all credible allegations of sexual abuse. The Diocesan Bishop, The Most Reverend Salvatore R. Matano, has apologized for the past misconduct of the personnel of the Diocese and meets with victims at every opportunity in an attempt to bring comfort to such individuals, as did his predecessor. 1'he Diocese has established standards for the training and background assessment of all employees, clerics and volunteers who will likely interact with children and young people.

The bankruptcy is intended to streamline a claims process to promote equal treatment of the claimants. The Diocese grossed $21.8mm in the fiscal year that just ended June 2019 and has insurance policies; it recognizes that it has a “moral obligation to compensate all victims of abuse by church personnel fairly and equitably.” It hopes to use the bankruptcy process to prevent a race to the courthouse and depletion of any and all available funds to the benefit of those whose trials are first to the detriment of those whose come later.

But this isn’t just about the claimants. Per the Diocese:

Beyond the Debtor's obligation to all of its creditors, the Diocese has a fundamental and moral obligation to the Catholic faithful it serves, and to the donors who have entrusted the Diocese with the material fruits of their life's labor, to continue the ministries of the Church in fulfillment of the Debtor's canonical and secular legal purposes. In order to do this, the Diocese must survive.

…

Some faithful may believe that, going forward, their charitable gifts to any Catholic entity will be diverted from their intended purpose and used to satisfy the claims of the Debtor's creditors rather than to fund the ongoing ministries of the Church that benefit the faithful and their community.

That, frankly, is a bit painful to read. Sure, we get it: the Diocese provides many valuable services to many people in need. But statements like that reek of corporate-speak and makes it sound like the bankruptcy is meant to ensure survival rather than promote justice. It’s a shame.

So, we suspect this case will follow the usual playbook. The Diocese will seek a channeling injunction and set up a trust to address all claims, letting the trustee see what, if anything, can be extracted from insurance proceeds. The claimants will get some small reparation and life will move on. Just more easily for some than others.

  • Jurisdiction: W.D. of New York (Judge Warren)

  • Professionals:

    • Legal: Bond Schoeneck & King PLLC (Stephen Donato, Charles Sullivan, Ingrid Palermo)

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

  • Other Parties in Interest:

    • Official Committee of Unsecured Creditors

      • Legal: Pachulski Stang Ziehl & Jones LLP

Updated: 9/25/19 #65

⛽️New Chapter 11 Filing - Alta Mesa Resources Inc. ($AMR)⛽️

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Alta Mesa Resources Inc.

September 11, 2019

Man. We nailed this one. Once Alta Mesa Holdings LP’s borrowing base got redetermined down, it was f*cked.*

As we’ve previously covered, Alta Mesa Resources Inc. is an independent oil and nat gas exploration and production company focused on the Sooner Trend Anadarko Basin Canadian and Kingfisher County (otherwise known as the “STACK”) in Oklahoma. It has an upstream business and, through a non-debtor entity it is now suing in an adversary proceeding (Kingfisher Midstream LLC), a midstream business.

The fact that another oil and gas company is now in bankruptcy** is, frankly, fairly uninteresting: the debtors blame the usual factors for their demise. Depressed oil prices ✅. Over-leverage (here, a $368mm RBL and $509mm in unsecured notes)✅. Liquidity constraints✅. We’ve now seen these story — and those factors — several dozen times this year alone. Like many of its oil and gas predecessors, these debtors, too, will explore a “value-maximizing sale of all or substantially all of the [d]ebtors’ assets” while also looking at a restructuring along with non-debtor affiliates. Par for the course.

What’s most interesting to us on this one — and relatively rare in bankruptcy — is the fact that the company emanated out of a “special purpose acquisition company or “SPAC” for short (these are also known as “blank check” companies). For the uninitiated, SPACs are generally shady-as-sh*t investment vehicles with pseudo-private-equity-like characteristics (including the enrichment of the sponsors) that are offered via IPO to idiot public equity investors who are enamored with putting money behind allegedly successful founders/investors. They have a long and sordid history but, as you might imagine in frothy AF markets like the one we’re currently experiencing, they tend to rise in popularity when people have lots of money to put to work and limited avenues for yield baby yield. According to this “SPAC 101” presentation by the law firm Winston & Strawn LLP, “[i]n 2017, there were 32 SPAC IPOs raising a total of $8.7 billion, the highest total since 2007.” That number rose above $10b in 2018. Some recent prominent examples of SPACs include: (a) the proposed-but-called-off combination of SPAC Leo Holdings Corp. ($LHC) with Chuck E. Cheese, (b) Chamath Palihapitiya’s investment in Richard Branson’s Virgin Galacticspace initiative via his $600mm spac, Social Capital Hedosophia Holdings Corp ($IPOA), and (c) something closer to home for distressed players, Mudrick Capital Acquisition Corporation ($MUDS.U), founded by Jason Mudrick. The latter, despite being 18 month post-close, has yet to deploy its capital (which is notable because, typically, SPACs have a two-year life span before capital must be returned to investors).

In late 2016, Riverstone Investment Group LLC formed its SPAC and commenced an IPO in Q1 ‘17. The IPO generated proceeds of over $1b. These proceeds were placed in a trust account — standard for SPACs — and ultimately used to partially fund the “business combination” that started the sh*tshow that we all now know as Alta Mesa. That transaction closed in February 2018. Public shareholders were now in the mix.

So, how did that work out for them? Well, here we are:

So, yeah. Add this one to the list of failed SPACs. The lawyers sure have: AMR, certain of its current and former directors, Riverstone Investment Group LLC and Riverstone Holdings LLC were named defendants in securities class action lawsuits in both United States District Courts for the Southern District of New York and the Southern District of Texas that allege that the defendants “disseminated proxy materials containing materially false or misleading statements in connection with the Business Combination….” The debtors are obviously calling these claims “meritless.”

So, there you have it folks. An inauspicious start has brought us to a suspect penultimate chapter. There is no purchaser in tow, no clear direction for the bankruptcy proceeding, and an adversary proceeding that faces some recent unfavorable precedent (albeit in a different, less favorable, jurisdiction).

We can’t wait to see where this flaming hot mess goes from here.

*We wrote:

PETITION Note: Ruh roh. Just like that, the lenders have put the squeeze on AMH. AMH meet world of hurt. World of hurt, meet AMH.

“As provided under the Alta Mesa RBL, AMH will elect to repay the excess utilization in 5 equal monthly installments of $32.5 million, the first of which will be due in September 2019. As of July 31, 2019, AMH had cash on hand of approximately $79.7 million.”

PETITION Note: HAHAHAHAHA, yeah, sure it will. And we have a bridge to sell you.

Re-engage the bankruptcy countdown. Maybe…MAYBE…some crazy macroeconomic shock will occur and oil prices will shoot up to $1900/barrel. Like, maybe a meteor strikes Earth and annihilates Saudi Arabia, completely wiping it off the map. In that scenario, yeah, sure, AMH is copacetic. 

Interestingly, as we write this, Yemeni Houthi rebels are taking credit for a drone attack that has shut down half of Saudi Arabia’s oil output. Per the WSJ:

The production shutdown amounts to a loss of about five million barrels a day, the people said, roughly 5% of the world’s daily production of crude oil. The kingdom produces 9.8 million barrels a day.

Meteors. Drones. Let’s not split hairs.

**10% of the top 30 creditors features energy companies with prior BK experience including greatest hits like Chaparral Energy LLC, Weatherford US LP (another recent Latham client), and Basic Energy Services LP.


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

  • Capital Structure: $368mm RBL (Wells Fargo Bank NA), $509mm 7.785% unsecured notes (US Bank NA)

  • Professionals:

    • Legal: Latham & Watkins LLP (George Davis, Caroline Reckler, Annemarie Reilly, Brett Neve, Andrew Sorkin) & Porter Hedges LLP (John F. Higgins IV, Eric English, Aaron Power, M. Shane Johnson)

    • Board of Directors: James Hackett (Riverstone), Pierre Lapeyre Jr. (Riverstone), David Leuschen (Riverstone), Donald Dimitrievich (HPS), William McCullen, Sylvia Kerrigan, Donald Sinclair, Jeffrey Tepper, Diana Walters, Patrick Bartels, Marc Beilinson)

    • Financial Advisor/CRO: AlixPartners LLP (Robert Albergotti)

    • Investment Banker: Perella Weinberg Partners (Kevin Cofsky)

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

  • Other Parties in Interest:

    • Ad Hoc Noteholder Group (Bain Capital Credit LP, Firefly Value Partners LP, Leroy DH LP, PGIM Inc., PPM America Inc.)

      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Angela Libby, Stephanie Massman & (local) Rapp & Krock PC (Henry Flores, Kenneth Krock)

    • Issuing Lender: Wells Fargo Bank NA

      • Legal: Bracewell LLP (William A. Wood III, Jason G. Cohen)

    • Unsecured Note Indenture Trustee: US Bank NA

      • Legal: Blank Rome LLP (Ira Herman, James Grogan)

    • Creditor: Kingfisher Midstream LLC

      • Legal: Quinn Emanuel Urquhart & Sullivan LLP (Susheel Kirpalani, Patrica Tomasco, Devin va der Hahn)

    • Equity Sponsors: Riverstone Investment Group LLC/HPS Investment Partners LLC

      • Legal: Vinson & Elkins LLP (David Meyer, Michael Garza, Harry Perrin)

    • Equity Sponsor: Bayou City Energy Management LLC

      • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Gregory Pesce, Anna Rotman)

    • Equity Sponsors: Orbis Investment Management Limited, High Mesa Holdings LP,

New Chapter 11 Filing - Hollister Construction Services LLC

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Hollister Construction Services LLC

September 11, 2019

Sometimes it really pays to be a middleman. If you’re a middleman that can razzle dazzle potential claimants by saying you leverage a lot of cloud-based software, data integration apps and drones, you may even plow your way to $292mm in gross revenue. It’s all about tech these days.

NJ-based Hollister Construction Services LLC is a general construction firm that, in the course of providing construction management services, leverages the aforementioned tech. It doesn’t construct projects itself; rather, it engages in (i) design development, (ii) pre-development services, (iii) assisting with municipal approvals (iv) pre-construction services (including the subcontractor bidding process), and (iv) construction administration. Its projects are located across NJ and NY.

Here’s the thing: lots of tech and expertise are great but you still have to have a functional operating business. The economy has been charging and cranes are everywhere. The building business is booming. This is great if you’re ready to scale with the opportunity. Hollister apparently wasn’t up to the challenge. Per the company:

…recent and rapid expansion of the Debtor’s client base, combined with the Company’s underestimation of the costs of certain projects, resulted in the Company not being able to fully service all of its Project Owners’ projects. Likewise, Hollister was not able to ensure that Subcontractors were paid on the agreed-upon schedule. Certain Subcontractors subsequently stopped performing on their contracts with Hollister.

Accordingly, certain Project Owners ceased making remittance or progress payments to the Debtor on Projects that were pending or completed, but not yet paid in full. As Project Owner payments are the Debtor’s sole source of operating revenue, non-payment led to the Company experiencing significant operational cash flow and liquidity issues.

That’s brutal to read. This is what they call, “over your skis.” 45 projects are in various stages of completion.

The bankruptcy filing is predicated upon triggering the automatic stay, initiating a “breathing spell,” and giving the company an opportunity to negotiate with the Project Owners, the subcontractors, property owners and insurers on how to proceed.

  • Jurisdiction: D. of New Jersey (Judge Kaplan)

  • Capital Structure: $14mm line of credit (funded, PNC Bank NA), $1.3mm Term Loan (funded, PNC Bank NA)

  • Professionals:

    • Legal: Lowenstein Sandler LLP (Brian Buechler, Kenneth Rosen, Joseph DiPasquale, Jennifer Kimble, Arielle Adler)

    • Financial Advisor/CRO: 10X CEO Coaching LLC (Paul Belair)

    • Business Consultant: The Parkland Group Inc. (Larry Goddard)

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

  • Other Parties in Interest:

    • PNC Bank NA

      • Legal: Duane Morris LLP (James Holman, Sommer Ross)

9/13/19 #55

🙈New Chapter 11 Bankruptcy - Fred's Inc.🙈

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Fred’s Inc.

September 9, 2019

Dallas-based Fred’s Inc. and seven affiliated debtors have filed a long-awaited bankruptcy in the District of Delaware with the intent to unwind the business. The debtors are — or, we should say, were — discount retailers with full service pharmacies, focusing on fixed income families in small and medium-sized towns.

The bankruptcy papers — from a law firm largely known for litigation (a curious fact here until you consider that Alden Global Capital LLC is a large shareholder) — are remarkably sparse. No lengthy back story about the company and how “iconic” it is. Just, “it was founded in 1947, sold a lot of sh*t to people who have no other alternative and now we’re kaput.” No discussion of the interim, say, 70+ years. Not a mention in the First Day Declaration of the failed Walgreens/Rite-Aid transaction that would have given Fred’s a larger pharmacy footprint. Nothing about Alden’s stewardship. Nada. Not a word, outside of the motion to assume the liquidation consultant agreement, about the state of retail (and in that motion, only: “The Debtors faced significant headwinds given the continued decline of the brick-and-mortar retail industry.”). Given the case trajectory — an orderly liquidation — we suppose there’s really no need to spruce things up. There’s nothing really left to sell here.* All in, it’s, dare we say, actually kind of refreshing: finally we have a debtor dispensing with the hyperbole.

The debtors started 2018 with 557 locations. After four rounds of robust closures — 263 between April and June and another 178 between July and August — the debtors have approximately 125 locations remaining. Considering that those stores are now closing too and given that the average square footage per store was 14,684, the end result will be ~8mm of square footage unleashed on the commercial real estate market. We suspect that these small and medium-sized towns will have some empty storefronts for quite some time.

The debtors have a commitment from their pre-petition lenders for a $35mm DIP credit facility (which includes a rollup of pre-petition debt).

*The Debtors previously sold 179 of their pharmacy stores to a Walgreens Boots Alliance Inc. ($WBA) subsidiary for $177 million in fiscal Q4 ‘18 and 38 more to a CVS Health Corp. ($CVS) subsidiary for ~$15 million in August.

  • Jurisdiction: D. of Delaware (Judge Sontchi)

  • Capital Structure: $15.1mm RCF (+ $8.8mm LOCs), $20.9mm (Cardinal Health Inc., secured by pharmacy assets), $1.4mm in other secured debt.

  • Professionals:

    • Legal: Kasowitz Benson Torres LLP (Adam Shiff, Robert Novick, Matthew Stein, Shai Schmidt) & Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Andrew Remming, Matthew Harvey, Joseph Barsalona)

    • Board of Directors: Heath B. Freeman, Timothy A. Barton, Dana Goldsmith Needleman, Steven B. Rossi, and Thomas E. Zacharias

    • Special Legal: Akin Gump Strauss Hauer & Feld LLP

    • Financial Advisor: Berkeley Research Group LLC (Mark Renzi)

    • Investment Banker: PJ Solomon

    • Liquidator: SB360 Capital Partners LLC

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

  • Other Parties in Interest:

    • DIP Lender ($35mm): Regions Bank

      • Legal: Parker Hudson Rainer & Dobbs LLP (Eric Anderson, Bryan Bates) & Richards Layton & Finger PA (John Knight)

    • DIP Lender: Bank of America

      • Legal: Choate Hall & Stewart (John Ventola)

    • Large Shareholder: Alden Global Capital LLC

Update: 9/9/19 #19

🐻New Chapter 11 Bankruptcy - Sugarfina Inc.🐻

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Sugarfina Inc.

September 6, 2019

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First it was Lolli & Pops and now its Sugarfina Inc. Damn people! Don’t you eat sugar anymore?? What is Sugarfina?

Sugarfina is an iconic candy and confectionary brand with a uniquely fresh, fashionable, and experiential approach to gourmet confections. With the creation of a “candy store for grown ups,” Sugarfina has gained a strong and loyal customer following, through constant creation and innovation focused on distinctive product presentation and invention of fresh new candy offerings that delight and surprise. (emphasis added)

There it is again. The words “iconic” and “loyal customer following” to describe a never-profitable now-bankrupt company that bled cash like a baaaaawse over seven years. Seriously, let’s cut that hyperbolic sh*t out already: Sugarfina raised $60mm from investors — including the likes of Howard Marks, Roger McNamee, David Solomon ($GS) & Bono ($U2) — but ran out of cash by the end of ‘18. That’s enough to give us vertigo.

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Those investors will never find what they were looking for: ROI.

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Clearly this investment was not the “one” (we can keep going folks).

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to address this cash need, the company sought interest in a new debt and/or equity transaction from third-parties. But NOBODY WAS INTERESTED IN THIS ICONIC BRAND WITH THE LOYAL FOLLOWING. NO. ONE. The company was forced to take on $22.4mm in secured debt to raise short-term liquidity. Initiate death spiral.*

The company then hired a banker to raise new liquidity:

The Company’s process was open-ended, expressing a willingness to consider any type of transaction, with any terms (including complete or partial acquisitions, equity investments, or long-term debt transactions).

IN OTHER WORDS, THIS ICONIC BRAND WITH THE LOYAL FOLLOWING WAS DESPERATE AF. Over SIX MONTHS they contacted 170 — ONE HUNDRED AND SEVENTY — potential counter-parties, signed 42 NDAs, and still NO ONE wanted to move forward with an out-of-court deal. Hence, the chapter 11 filing.

You know what DOESN’T scream “iconic”? A measly $13mm purchase price (on $47mm of net sales,** $23.6mm from B&M retail). That’s right $13mm for 44 “Candy Boutiques” (inclusive of 11 shop in shops at Nordstrom’s), a wholesale business ($11.9mm sales), e-commerce ($5.6mm), international franchise ($1.8mm) and a corporate/custom channel ($4.1mm). You know what else doesn’t scream “iconic”? This:

In 2016, the Company incurred EBITDA losses of $4,828,574, which increased to EBTIDA losses of $7,340,000 in 2017, and to EBITDA losses of $17,913,000 in 2018.

SO. EFFING. ICONIC. The retail and international channels proved to be the main drag. The company already seeks approval to reject six leases so the buyer’s plan will clearly be less reliant on a physical footprint (at least in existing locations).

The company has 18.5k and 225k TWTR and Insta followers, respectively. It also has 140 design patents and trademarks in 22 international jurisdictions. Despite these “assets,” the purchase price doesn’t clear the secured debt. And the company “owe[s] material amounts, on an unsecured basis, to vendors critical to their production process, including candy and packaging suppliers.” (See “critical vendor” piece below).

The company — currently helmed by (i) a CRO who was formerly the GC (and before that, the GC of American Apparel Inc.) and (ii) two independent directors including the former CEO of both American Apparel Inc. and True Religion, Chelsea Grayson (pictured above in full-fledged Director power pose) — does have a stalking horse purchaser lined up (Candy Cube a/k/a Terramar Capital — your late night luxury sugar cravings powered by private equity!).*** It also has a $4mm (8%) DIP commitment from Serene Capital (its first lien lender) and Candy Cube.

We suppose we’ll now see how much interest this ICONIC brand draws in auction.

*At the time of filing, the company had $24.5mm of secured debt split amongst a capital structure that would make an E&P company jealous. There’s a $5mm first lien (SFF Loan Advisors LLC d/b/a Serene Capital), $10mm second lien (Goldman Sachs Specialty Lending), $8mm third lien (founder Josh Resnick), and $2.15mm fourth lien. There’s also a $2.1mm unsecured convertible promissory note. What? No appetite for a fifth lien tranche?!

**Revenue doubled each year from ‘13 thru ‘16, and 1.25x from ‘13 thru ‘18 (read: growth, as you might expect when a company matures, slowed meaningfully in the later years). Notably, the purchase price also includes membership interests in the emerging company, Candy Cube, including senior preferred membership interests with a $2.0mm preference and 20% of the common membership interests.

***The buyer has agreed to pay retention bonuses to employees who stay through the sale.

  • Jurisdiction: D. of Delaware (Judge Walrath)

  • Professionals:

    • Legal: Shulman Hodges & Bastian LLP (Alan Friedman, Ryan O’Dea) & Morris James LLP (Brya Keilson, Eric Monzo)

    • Financial Advisor: Force Ten Partners LLC (Adam Meislik)

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

  • Other Parties in Interest:

    • Stalking Horse Purchaser: Terramar Capital (a/k/a Candy Cube Holdings LLC)

      • Legal: McDonald Hopkins (Marc Carmel) & Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Andrew Magaziner)

    • First Lien Lender & DIP Lender: SFCC Loan Investors LLC

      • Legal: Loeb & Loeb LLP (Lance Jurich, Vadim Rubinstein, W. Peter Beardsley) & (local) Pachulski Stang Ziehl & Jones LLP (Jeffrey Pomerantz, James O’Neill)

    • Landlord Creditors: Federal Realty Investment Trust

      • Legal: Ballard Spahr LLP (Leslie Heilman)

    • Landlord Creditors: A/R Retail LLC, The Forbes Company LLC, The Macerich Company

      • Legal: Ballard Spahr LLP (Leslie Heilman, Brian Huben, Dustin Branch)

    • Landlord Creditor: Taubman Landlords

      • Legal: The Taubman Company (Andrew Conway) & Law Office of Susan Kaufman LLC (Susan Kaufman)

    • Landlord Creditor: Taubman Landlords: Simon Property Group

      • Legal: Simon Property Group (Ronald Tucker)

    • Landlord Creditor: Westfield LLC

      • Legal: Barclay Damon LLP (Niclas Ferland, Ilan Markus) & Law Office of Susan E. Kaufman (Susan Kaufman)

    • Landlord Creditor: Landmark Properties LLC

      • Legal: Greenberg Traurig: (Heath Kushnick, Dennis Meloro)

    • Landlord Creditor: Shopcore Properties LP and Turnberry Associates

      • Legal: Kelley Drye & Warren LLP (Robert LeHane, Jennifer Raviele, Michael Reining)

    • Landlord Creditor: CIBC Leaseco LLC

      • Legal: Mayer Brown LLP (Brian Trust, Joaquin M. C de Baca)

    • Goldman Speciality Lending Group

      • Legal: King & Spalding LLP (Austin Jowers, Michael Handler) & Chipman Brown Cicero & Cole LLP (William Chipman, Mark Olivere)

    • Official Committee of Unsecured Creditors

      • Legal: Bayard PA (Justin Alberto, Erin Fay, Daniel Brogan)

Updated 9/24/19 #130

💩New Chapter 11 Filing - uBiome Inc.💩

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uBiome Inc.

September 4, 2019

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Back in our July 4th weekend edition, we wrote the following:

#BustedTech. One year you’re on the Forbes’ 2018 Next Billion-Dollar Startups list and the next year you’re getting raided by the FBI. This is the story of uBiome, a SF-based microbiome startup. Per Forbes:

The new interim CEO of troubled microbiome startup uBiome, Curtis Solsvig, is a longtime turnaround and restructuring expert at financial advisory firm Goldin Associates and the former chief restructuring officer of failed drone startup Lily Robotics.

One man’s billion-dollar valuation is another man’s clean-up job. 

And, now, another man’s bankruptcy.

Annnd another man’s sacrifice:

The Debtor filed this Chapter 11 Case to provide an innovative business with a fresh start under new management, and to preserve approximately 100 jobs through a court-supervised sale process that is intended to maximize the value of the Debtor’s assets for the benefit of all stakeholders.

…certain business practices formulated and implemented by the Debtor’s original founders have resulted in cessation of certain aspects of the Debtor’s business, investigations by certain federal and state investigatory bodies (the “Investigations”), loss of revenue and significant potential contingent liabilities.

Godspeed founders. You just got napalmed. AGAIN.

And as they should. The debtor has been in triage for some time now.

The company empowers consumers to access analysis of their DNA/microbiomes via the use of at-home kits. Said another way, people poop in an $89.99 “explorer kit” and the company analyzes the sample through (a) a proprietary gene sequencing process and (b) a cloud-based database of microbiomes to determine what’s what in the customer’s GI system — a much less invasive discovery methodology than the gut-wrenching (pun intended) colonoscopy. The consumer receives results that provide suggestions for diet, weight control, gut inflammation, sleep disorders and non-dietary supplements. Frankly, this all sounds rather bada$$.

The company also had a clinical business. Doctors could prescribe the tests and bill the customers’ insurance. Similarly, the company launched a clinical product geared towards the analysis of vaginal swabs (i.e., STDs, HPV, gyno disorders). Together these clinical products were called “SmartX.”

Suffice it to say, this idea was big. The company’s founders leveraged the open-source results from the Human Microbiome Project (launched by the National Institutes of Health) and built something that could really make a lot of people’s lives easier. The venture capitalists saw the opportunity, and the tech media celebrated the company’s rapid capital raises and increasing valuation: $1.5mm seed in ‘14, $4.5mm in August ‘14 (led by a16z), $15.5mm Series B in October ‘16, and $83mm Series C in September ‘18. (PETITION Note: the company now says it raised $17mm in ‘16 and $59mm in ‘18, exclusive of $36.4mm of mostly-now-converted convertible notes, which means that the media appears to have been fed, or reported, wrong numbers).* Valuation? Approx $600mm.

Armed with gobs of money, the company established some valuable IP (including over 45 patents and your poop data, no joke) and commercial assets (its certified labs). On the other side of the ledger, there is $5.83mm of outstanding secured debt and $3.5mm of unsecured debt, ex-contingent liabilities including…wait for it…”[p]otential fines for civil and criminal penalties resulting from the Investigation….” Ruh roh.

The Founders implemented certain business strategies with respect to the SmartX products that were highly problematic, contained significant operational (but not scientific) flaws and, in some instances, were of questionable legality. These issues included improper insurance provider billing practices, improper use of a telemedicine physician network (known as the External Clinical Care Network), overly aggressive and potentially misleading marketing tactics, manipulation of customer upgrade testing, and improper use of customer inducements. Moreover, certain information presented to potential investors during the three rounds of capital raise my have been incorrect and/or misleading. Although uBiome believes the science and technology behind uBiome’s business model in this developing area is sound, these issues – among others – have resulted in significant legal exposure for the Debtor.

Score one for VC due diligence! The USA for the ND of California, the FBI, the DOJ and the SEC are all up in the company poop now. This investigation, much like the opioid crisis, also calls into question the ethical practices of doctors. Because we really ought not trust anybody these days.

Anyway, the company has since taken measures to right the ship. The board suspended and then sh*tcanned the founders and recruited new independents. They’ve verified that the company suffered from bad business practices rather than bad science or lab practices (Elizabeth Holmes, holla at us!!). And they’ve hired bankers to market the company’s assets (no stalking horse bidder at filing, though). The company received a commitment from early investor 8VC for a $13.83mm DIP of which $8mm in new money; it will take slightly more than 60 days to see if a buyer emerges. One selling point according to the company: it plans for its Explorer Kits to be in CVS Health Corp. ($CVS)! That’d be great if CVS planned for that too. Womp womp.

Anyway, the way bankruptcy is going these days chapter 11 probably ought to be renamed chapter 363.

*There are many reasons why d-bag startup founders hype their own raises. First, it promotes an aura of success which can help acquire new customers. Second, they love the adulation (see Elizabeth Holmes). Third, it helps with recruiting. And, fourth, the VCs must like it and use it for subsequent fundraising (given that they never correct the record).

  • Jurisdiction: D. of Delaware (Judge Silverstein)

  • Capital Structure: $5.83mm credit facility (Silicon Valley Bank)

  • Professionals:

    • Legal: Young Conaway Stargatt & Taylor LLP (Michael Nestor, Joseph Barry, Andrew Magaziner, Joseph Mulvihill, Jordan Sazant)

    • Board of Directors: Kimberly Scotti, L. Spencer Wells, D.J. (Jan) Baker

    • Financial Advisor/CRO: Goldin Associates LLC (Curtis

    • Investment Banker: GLC Advisors & Co LLC

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

  • Other Parties in Interest:

    • DIP Agent: Silicon Valley Bank

      • Legal: Morrison & Foerster LLP (Alexander Rheaume, Todd Goren, Benjamin Butterfield) & Ashby & Geddes PA (Gregory Taylor, Katharina Earle)

    • DIP Participants: 8VC Fund I LP, 8VC Entrepreneurs Fund I LP

      • Legal: Gibson Dunn & Crutcher LLP (Matthew Williams, Eric Wise, Jason Zachary Goldstein) & Cole Schotz PC (Norman Pernick, Patrick Reilley)

⛽️New Chapter 11 Filing - PetroShare Corp.⛽️

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PetroShare Corp.

September 4, 2019

When most people think of oil and gas they think of Texas. This makes sense given production volume but there are other areas of exploration and production in the United States that garner far less attention. Like Colorado.

Bankruptcy professionals have some experience already in Colorado. Bonanza Creek Energy Inc. ($BCEI), as just one example, filed for chapter 11 bankruptcy in early 2017. Given all of the oil and gas activity in bankruptcy court lately, 2019 is the new 2017.

CASE IN POINT (wink to one of our readers), PetroShare Corp. ($PRHR), a developer of crude oil and gas properties in the Rocky Mountain/mid-continent region of the US, filed for bankruptcy on September 4, 2019, in the District of Colorado. The debtor did us a favor in filing its minutes from a March 25, 2019 board meeting. It provided a bit of unintentional comedy.

Noting that, amidst a default under its secured credit agreement, the debtor’s lender representatives both resigned from the board and terminated negotiations related to a second sale of certain company assets (PETITION Note: the company had already sold $15.5mm of non-operating assets, the proceeds of which are held by the company’s lenders), the minutes reflect how recent political machinations affected the oil and gas environment in Colorado:

“…in terminating the negotiations, the Lender group and the potential equity group cited the recent dramatic changes in the Colorado political climate reflected in the proposed SB 19-181 which seeks to change the charter and direction of the Colorado Oil and Gas Conservation Commission and the potential detriment to local oil and gas development. He also noted the recently-approved 6 month moratorium on new drilling permits in Adams County, Colorado, where the bulk of the Company’s properties are located.”

Whoops. It’s hard to generate revenue when your ability to produce properties is hindered by new local regulations. That’s what you call a post-investment intervening negative externality.

Consequently, the company engaged in discussions with its lenders. Per the minutes:

“…the representatives of the Administrative Agent suggested that the Company consider other-recapitalization options including, but not limited to, filing a friendly Chapter 11 bankruptcy and then working with the Lenders to file a pre-packaged or similar reorganization plan to address trade debt, the senior loan and the unsecured noteholders.”

To which we have to say:

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Typically a pre-packaged bankruptcy, by definition, is agreed to PRIOR TO a bankruptcy filing. It’s not all willy-nilly, “we filed, now let’s be ‘friendly’ and agree to sh*t.” Everything about that entry is amusing.

Subsequently, the company discussed a variety of options. Do they attempt additional sales? Do they solicit private equity interest? Is bankruptcy the right option. Per the minutes:

“Mr. Witsell passed along information that he had received from the law firm Polsinelli on the benefits and detriments of pursuing bankruptcy.”

It all sounds so cavalier. It’s like a pitch deck from Polsinelli just fell from the sky into management’s laps. These are the pros (shed debt, free and clear sales, screw trade) and these are the cons (stigma, court supervision, expensive AF)! Ready, set, FILE! Gotta love bankruptcy!

Jokes aside, the company attempted to avoid bankruptcy (as you might expect) and thought they had a buyer lined up that would consummate an out-of-court transaction. That buyer fell through, however, at the 11th hour. This left the company with a backup bidder who required a chapter 11 filing (because, like, they’re apparently a bit more sophisticated??). The company, therefore, will use the chapter 11 process to continue to market and try and maximize value in a competitive auction — assuming competitive bidders emerge in the midst of considerable regulatory headwinds.

  • Jurisdiction: D. of Colorado (Judge Tyson)

  • Capital Structure: $14.3mm secured debt, $9.3mm convertible notes

  • Professionals:

    • Legal: Polsinelli PC (Trey Monsour, James Billingsley, William Meyer, James Bird, Caryn Wang)

    • Financial Advisor/CRO: MACCO Restructuring Group LLC (Drew McManigle, Kathy Mayle)

    • Investment Banker: Seaport Global Securities LLC

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

  • Other Parties in Interest:

    • Secured Lenders: Providence Wattenberg, 5NR Wattenberg

    • Large Equityholders: Providence Energy Operators LLC & Cede & Co.

📰New Chapter 11 Bankruptcy Filing - The News-Gazette Inc.📰

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The News-Gazette Inc.

August 30, 2019

The New York Times recently declared:

The crisis in local journalism is catastrophic — and it will get worse. More than 1,300 communities across the United States are without local news coverage, and thousands more have inadequate journalism. At the next recession, the collapse will accelerate.

Studies have now validated what we all know intuitively: The disintegration of community journalism leads to greater polarization, lower voter turnout, more pollution, less government accountability and less trust.

Insert doomsday music here, folks.

Champaign Illinois-based The News-Gazette Inc. is the leading local news source in Champaign County, Illinois. It publishes a daily newspaper that reaches approximately 22k people Monday-Friday and 24.3k people on Sunday; it has five weekly newspapers, two advertising-oriented shopper products and two magazines; through a wholly owned debtor subsidiary, DWS Inc., it also operates three radio stations and several companion websites.

Now it is another example of a struggling local news provider. The company filed for bankruptcy in the District of Delaware over the holiday weekend.

In 2008, the company “took on substantial debt to complete the first phase of a new 48,865-square-foot printing and distribution facility” and completed said phase (the distribution part) just prior to the Great Recession. The rest of the project — including the acquisition of a new printing press geared towards driving a regional commercial printing business — never got done. The company notes:

The “great recession” of 2008, however, marked the beginning of an accelerated trend of advertising revenue declines for the newspaper business in general. As revenues fell and financial performance suffered, expansion plans had to be shelved because Debtors could neither access, nor afford, the capital necessary to complete the project.

Compounding matters:

Over the last decade, circulation trends have generally been better than industry averages owing in large part to a continued commitment to maintaining a very high-quality news product. During the last two years, however, the rate of decline in circulation has increased meaningfully.

“Better than industry averages” is, by definition, a relative measurement. Which ain’t saying much. On the other hand, the metrics are “saying much.” Revenue dropped from $17.1mm in 2017 to $13mm in 2018. EBITDA went from $70k in 2016 to -$4.83mm in 2018.

Consequently, the debtors have spent the last few years rejiggering their business. That, naturally, means that people lost jobs. The debtors outsourced their production operations and liquidated its production assets; they also reduced their expenses and eliminated the facility-related debt. Nevertheless, the debtors needed an escape hatch; in late 2018, they engaged a broker to solicit interest from a strategic buyer “with financial resources and media footprint to further economize operations” to operate the debtors as a going concern.

The goal of the chapter 11 bankruptcy filing is to effectuate a sale to Community Media Group LLC by early November. Community Media Group is a privately-held multimedia company which owns and operates roughly 40 newspapers in six states. Subject to standard sale adjustments, CMG will pay $4.5mm.

It appears that the future of local news is increasingly in their hands.

*****

What happens to the employees? Well, as noted above, a number have already lost their jobs and those that remain were the glorious recipients of WARN notices (though some may be rehired). The company’s CEO said:

“It is most certainly regrettable that some employees won’t be rehired during the transition. Our economic circumstances — which are not unique to this operation — require that we operate more efficiently. Absent this sale transaction, we would be making similar decisions.”

The buyer is also leaving behind any and all liabilities (including withdrawal liabilities) with respect to defined benefit plans, pensions or similar retirement plans. As luck would have it, those liabilities make up the debtors’ three largest creditors:

Source: Chapter11 Petition

Source: Chapter11 Petition

With a purchase price of $4.5mm, well, you can get a sense of how creditors, including folks who depended upon those pensions, will fare here. Pension liabilities alone are nearly $9mm.

And so this is a bittersweet result. The paper will live on but those who helped build it will be undeniably affected.

  • Jurisdiction: D. of Delaware (Judge Owens)

  • Professionals:

    • Legal: Chipman Brown Cicero & Cole LLP (William Chipman Jr., Mark Olivere) & Neal Gerber & Eisenberg LLP (NIcholas Miller Jr., Thomas Wolford)

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

  • Other Parties in Interest:

    • Stalking Horse Bidder: Community Media Group/Champaign Multimedia Group LLC

      • Legal: Leech Tishman Fuscaldo & Lampl LLC (John Steiner, Gregory Hauswirth)

💰New Chapter 11 Bankruptcy Filing - RAIT Funding LLC (f/k/a Taberna Funding LLC)💰

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RAIT Funding LLC

August 30, 2019

Philadelphia-based RAIT Financial Trust ($RASF) and six debtor affiliates filed for bankruptcy just before the long holiday weekend on a petition and a petition only (might as well let the professionals enjoy the weekend…the stay is in effect!). The company, an internally-managed REIT focused on managing a portfolio of $1.5b worth of CRE assets, loans and properties will be sold to Fortress Investment Group LLC in bankruptcy pursuant to section 363 of the bankruptcy code, subject to any higher or better offers. Fortress has agreed to pay $174.4mm (subject to adjustments and excluding the assumption of certain liabilities).

The debtors are in the business of providing debt financing to owners of multi-family apartment buildings, office buildings, light-industrial properties and neighborhood retail centers in the US. Except, like, they’re kinda not. In early February ‘18, the debtors ceased underwriting new loans and sold a portion of its real estate and loan portfolio. Why? To bolster liquidity. Why? Per the company:

As a result of the 2008-2009 financial crisis, ongoing market conditions, and other factors, RAIT incurred approximately $1.468 billion in losses between 2008 and 2018 through mortgage write-offs, asset write-downs, and losses on the sale of assets.

In case you can’t tell, that’s pretty effing bad. Consequently, the debtors have been in a state of perpetual restructuring AND marketing going as far back as Q3 ‘17. Regarding the former, the debtors, in addition to suspending its origination business and selling off its property portfolio, actively repurchased or repaid debt, sold loans, sold its property management business, down-sized management and laid off employees, terminated dividends (reminder: this is a REIT, so this is obviously NO BUENO), and engaged restructuring professionals. With respect to the latter, the debtors’ ‘17-’18 sale process failed, only to be reinitiated in the second half of 2018. Fortress Credit Advisors submitted a winning bid in January 2019.

Wait. You’re not crazy. It IS September. So, why did it take so long to file the bankruptcy to consummate the sale? It took a month and a half to a term sheet done and then another “six months of extensive due diligence.” We can only imagine the fun those analysts had digging into one loan after another.

In the end, this seems like a good result for stakeholders. Fortress adds to its extensive and growing portfolio and the holders of the 7.125% Senior Notes, the holders of the 7.625% Senior Notes, and all administrative, priority and general unsecured claims, will, thanks also in part to an RSA with the junior subordinated notes, receive payment in full, in cash of their allowed claims.

  • Jurisdiction: D. of Delaware (Judge Shannon)

  • Capital Structure: $66.5mm 7.125% senior unsecured notes (Wells Fargo Bank NA), $56.3mm 7.625% senior unsecured notes (Wells Fargo Bank NA), $25.2mm junior subordinated note guaranty (The Bank of New York Mellon), $18.6mm ‘35 subordinated Taberna junior note (Wells Fargo Bank NA)

  • Professionals:

    • Legal: Drinker Biddle & Reath LLP (Patrick Jackson, Michael Pompeo, Brian Morgan)

    • Financial Advisor: M-III Partners LP (Brian Griffith)

    • Investment Banker: UBS Securities LLC

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

  • Other Parties in Interest:

    • Stalking Horse Purchaser: Fortress Credit Advisors LLC/Fortress Investment Group LLC (aka CF RFP Holdings LLC)

      • Legal: Stroock & Stroock & Lavan LLP (Elizabeth Taveras, Daniel Ginsberg) & Young Conaway Stargatt & Taylor LLP (Matthew Lunn, Robert Poppitti Jr.)

Updated #1, 9/1/19 1:49 CT