⚾️New Chapter 11 Bankruptcy Filing - Modell's Sporting Goods Inc.

Modell's Sporting Goods Inc.

March 11, 2020

There’s nothing particularly new or interesting about another liquidating retailer — especially when it’s just another in a long line of companies in its business segment to file for chapter 11 bankruptcy. Sorry to be callous: we get that Modell’s Sporting Goods Inc. is a family-owned establishment with 134 stores and thousands of employees. We get that people aren’t shopping at brick-and-mortar locations, that Walmart Inc. ($WMT), Target Inc. ($TGT), Amazon Inc. ($AMZN), and, in this category, Dick’s Sporting Goods Inc. ($DKS) are crushing the competition, and that there’s a “decline in sports team participation among youth and teens.” Here’s the number of tackle football participants over the age of six years old in the United States:

This trend in football, however, is not pervasive. Participation in high school baseball, for instance, is on the rise. Most other major high school sports are pretty static, soccer being an exception as that, too, is increasing in popularity. So, sure, okay. We’ll just take the company’s word for it.

But the company doesn’t just blame the youths for its demise; it blames global warming (“warm winter weather in the Northeastern states, which negatively affected the sales of cold-weather goods and items and overall store traffic…”), the crappy-a$$ New York Knicks and disappointing Philadelphia Eagles (“lower than anticipated sales of licensed goods in the fourth quarter of 2019 based on local professional team performance”), and inventory disruption from creditors who’ve gotten sick and tired of getting regularly screwed over by administratively insolvent retailers.

It doesn’t really blame its model. For instance, it doesn’t have any private label apparel. Nor does it own any of its real estate. It is completely beholden to its vendors and foot traffic at strip malls and shopping malls. It leases everything. Apparel merchandise expenses were roughly $225mm/year and rental expenses totaled approximately $95mm/year, constituting approximately 46% and 19% of gross sales ($490mm), respectively. In addition, it has unionized employees. The company is on the hook (jointly with a non-debtor entity) for a pension plan underfunded by $25.8mm.

Of course the company also has debt. It has a unitranche revolving credit facility and term loan with JPMorgan Chase Bank NA and Wells Fargo Bank NA, respectively. As of the petition date, the company owes approximately $39mm under the facility. But as operating performance deteriorated, JPM and WFC became skittish and increased discretionary reserves by $18mm — the nail in the coffin as the company no longer had sufficient liquidity to continue to operate (PETITION Note: Wells Fargo has been particularly savage when it comes to aggressively increasing reserves on its retail clients. We’ve seen this movie before with Pier 1 Imports Inc. and Destination Maternity Inc.). This, despite the company started stretching its vendors and landlords. Rent for February and March went unpaid. The company projects $100mm in general unsecured claims, ex-lease breakage claims.

While the business suffered, multiple attempts to achieve an out-of-court restructuring and/or a sale to a strategic buyer failed. The company will now undertake a coordinated wind down to maximize recoveries for stakeholders. Absent some White Knight swooping in here at the 13th hour, pour one out for Modell’s Sporting Goods Inc.

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

• Capital Structure: $29.5mm RCF (JPMorgan Chase Bank NA), $9.225mm Term Loan (Wells Fargo Bank NA)

• Professionals:

  • Legal: Cole Schotz PC (Michael Sirota, David Bass, Felice Yudkin)

  • Financial Advisor: Berkeley Research Group LLC (Robert Duffy)

  • Investment Banker: RBC Capital Markets

  • Real Estate Advisor: A&G Realty Partners LLC

  • Liquidation Consultant: Tiger Capital Group LLC

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

• Other Parties in Interest:

  • JPMorgan Chase Bank NA

    • Legal: Otterbourg PC (Daniel Fiorillo, Chad Simon) & Norris McLaughlin PA (Morris Bauer, Allison Arotsky)

  • Wells Fargo Bank NA

    • Legal: Riemer & Braunstein LLP (Steven Fox)

  • Local 1102 RWDSU UFCW, Local 1102 Retirement Trust, and Local 1102 Health and Benefit Fund

    • Legal: Rothman Rocco Laruffa LLP (Matt Rocco) & Lowenstein Sandler LLP (Kenneth Rosen)
      

🌑New Chapter 11 Bankruptcy Filing - Foresight Energy Inc.🌑

Foresight Energy Inc.

March 10, 2020

Are there any coal companies left out there that HAVEN’T filed for bankruptcy at this point?

As expected by everyone, thermal coal producer Foresight Energy LP and numerous affiliates (the “debtors”) filed a “prearranged” bankruptcy on Tuesday in the District of Missouri.

Observers have long recognized that this chapter 11 filing was a fait accompli. The debtors are inextricably linked to Murray Energy, which filed late last year. The difference here, though, is that Foresight’s capital structure is FAR less complex and, because of that among other reasons, the debtors had the luxury of a bit more time to sit back and wait and see how the Murray bankruptcy played out. The debtors also had the luxury of taking their time — which is not to say that things haven’t been a sprint over the last several months — to come to terms on a deal with their lenders to emerge from bankruptcy with a significantly de-levered balance sheet. Indeed, that is the literal plan here.

The debtors have entered into restructuring support agreements with significant and meaningful percentages of holders of first lien loans and second lien notes. Moreover, the debtors have agreements with several key contract counterparties. The end result? The debtors will eliminate over $1b of debt, shed some burdensome royalty and contractual obligations, and get a new money infusion so that it can — against the odds in this hyper-negative-to-coal environment — be better positioned to survive. The reorganized entity, assuming the deal holds, will have $225mm of senior secured debt on it (which will roll in the proposed $175mm DIP facility).*

*The proposed DIP facility includes a new money multi-draw term loan facility of $100mm and a $75mm roll-up of pre-petition first lien debt into a DIP term loan.

• Jurisdiction: D. of MO (Judge Surratt-States)

• Capital Structure: $157mm RCF, $743.3mm first lien term loan, $425mm 11.5% ‘23 second lien notes

• Professionals:

  • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Paul Basta, Alice Belisle Eaton, Alexander Woolverton) & Armstrong Teasdale LLP (Richard Engel Jr., John Willard, Kathryn Redmond)

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

  • Investment Banker: Jefferies Group LLC

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

• Other Parties in Interest:

  • Ad Hoc First Lien Group

    • Legal: Akin Gump Strauss Hauer & Feld LLP (Brad Kahn, Ira Dizengoff, Zachary Dain Lanier, James Savin) & Thompson Coburn LLP (Mark Bossi)

  • Second Lien Notes Trustee: Wilmington Trust NA

  • Davidson Kempner Capital Management LP

    • Legal: Milbank LLP (Dennis Dunne, Parker Milender)

  • DIP Agent ($175mm): Cortland Capital Market Services LLC

🍺New Chapter 11 Bankruptcy Filing - Craftworks Parent LLC🍺

Craftworks Parent LLC

3/3/20

In November 2018, four core casual dining restaurant brands were merged together when Centerbridge Partners LP — the owners of Old Chicago Pizza & Taproom, Gordon Biersch Brewery Restaurant and Rock Bottom Restaurant and Brewery (“Craftworks”) — purchased Logan’s Roadhouse.* At the time of the transaction, Craftworks had 189 corporate and franchise restaurants and Logan’s had 204. Craftworks had ‘17 revenue of $434.5mm and Logan’s had ‘17 revenue of $462.4mm. Fast forward 16 months and the combined entity is now in bankruptcy court.

The TN-based debtors currently operate or franchise 330 locations (⬇️63) and generated revenue of $720mm of revenue in 2019 (⬇️$176.9mm). It’s safe to say that this performance is not what Centerbridge had in mind when it did the transaction. Ahhhhh…synergies.

The debt coming out of the transaction shoulders much of the blame:

…the Debtors have been negatively impacted by an overleveraged capital structure and low levels of liquidity that dates back to their acquisition of Logan’s Roadhouse in November 2018.

This is what that debt looks like:

Source: First Day Declaration

Of course, the debt is only part of the story. The debtors also blame their poor performance on rising wages, increased competition, third-party delivery platforms, and high rent. You know, the usual suspects in the casual dining space. Adding to the debtors’ misery was the fact that the integration of the two companies didn’t exactly go as planned. Per the debtors:

Since the closing of the Logan’s Acquisition, the Debtors’ business has been hampered by an overleveraged balance and lack of sufficient liquidity to fund their operations, including necessary capital expenditures and investment in their restaurants. These issues were compounded by other internal and external factors, such as underperforming stores, unfavorable leases, redundant selling, general and administrative expenses and a general decline in same-store traffic and sales. The primary reasons for the underperformance were lower topline sales and deterioration in gross margin.

“Redundant selling” isn’t exactly the kind of synergies purchasers hope for. That said, there were synergistic benefits. The post-transaction debtors enjoyed approximately $12mm of labor cost reductions, $5mm of operating expense reductions and $4mm of corporate general and administrative expense reductions. The private equity operational model illustrated, ladies and gentlemen.

Except this didn’t offset optimistic modeling. Per the debtors:

The Logan’s Acquisition transaction model forecasted fiscal year 2019 revenue based on a same-store sales growth rate of 1.5% with a 72.5% gross margin; however, actual same-store sales for fiscal year 2019 declined by approximately 1.0%, resulting in a total volume-driven gross margin loss of approximately $27.0 million. In addition, occupancy expense was under-forecasted by approximately $2.0 million.

Last we checked, $29mm > $21mm. 🤓

Because of all of this, the debtors were unable to make interest payments under the pre-petition first lien credit agreement. This put Fortress in the driver’s seat. And Fortress is seizing the opportunity. The private equity shop is the debtors’ prepetition lender and they are influencing the trajectory of this case; they will provide a $143.1mm DIP (of which only $23mm is new money) and they are acting as the stalking horse purchaser of the debtors with a $138mm purchase price offer (a credit bid, no doubt). The debtors intend to pursue a dual-sale and plan process with the hope of maximizing value for the benefit of all stakeholders.**

*Yes, this is the Logan’s Roadhouse that was in bankruptcy back in 2016. In the prior bankruptcy, Logan’s closed approximately 34 locations.

**So, at least there’s something new here. It’s not everyday that you see a top SEVENTY-FIVE creditors list, most of which is chock full of landlords and unsecured noteholders (Wells Fargo Bank NA, Marblegate Special Opportunities Master Fund LP, FS KKR Capital Corp., FS Investment Corporation II, Carl Marks Strategic Opportunities Fund II LP, Carl Marks Strategic Investments LP, Kelso & Company). It doesn’t look like Marblegate will recover anything on these notes which is a shame because there are likely to be more taxi medallions for sale sometime soon.

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: see above.

• Professionals:

  • Legal: Katten Muchin Rosenman LLP (Steven Reisman, Bryan Kotliar, Peter Siddiqui, Lindsay Lersner) & Klehr Harrison Harvey Branzberg LLP (Domenic Pacitti, Michael Yurkewicz, Morton Branzburg)

  • Financial Advisor: M-III Advisory Partners LP (Colin Adams)

  • Investment Banker: Configure Partners LLC (Vin Batra, James Hadfield)

  • Real Estate Advisor: Hilco Real Estate LLC

  • Strategic Communications Advisor: Kekst CNC

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

• Other Parties in Interest:

  • First Lien & DIP Agent: Fortress Credit Co.

    • Legal: King & Spalding LLP (Austin Jowers, Michael Handler) & Hunton Andrews Kurth LLP (John Schneider) & Chipman Brown Cicero & Cole LLP (William Chipman Jr.)

  • Stalking Horse Purchaser: DBFLF CFTWE Holdings L.P. (an affiliate of Fortress Credit Co.)

  • Second Lien Agent: Wells Fargo Bank NA

    • Legal: Morgan Lewis & Bockius LLP (Jennifer Feldshur, Sula Fiszman)

  • Sponsor: Centerbridge Capital Partners

    • Legal: Weil Gotshal & Manges LLP (Matthew Barr, Andriana Georgallas, Bryan Podzius) & Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Jaime Luton Chapman, Jordan Sazant)

⛽️New Chapter 11 Filing - Pioneer Energy Services Corp. ($PESX)⛽️

Pioneer Energy Services Corp.

March 1, 2019

San Antonio-based oilfield services provider Pioneer Energy Services Corp. and several affiliates (the “debtors”) filed “straddle” prepackaged chapter 11 bankruptcy cases on Sunday in what amounts to a true balance sheet restructuring. Will this kickoff a new slate of oil and gas related bankruptcy filings? 🤔

The debtors provide well servicing, wireline and coiled tubing services to producers in Texas and the Mid-Continent and Rocky Mountain regions; they also provide contract land drilling services to operators in Texas, Appalachia, and the Rocky Mountain region. International operations in Colombia are not part of the bankruptcy cases. Due to the…shall we say…unpleasant…atmosphere for oil and gas these last few years — which, clearly undermined demand for their services and, obviously, revenue generation — the debtors determined that they couldn’t continue to service their existing capital structure. Alas, bankruptcy.

Hold on: not so fast. We previously wrote in “⛽️Storm Clouds Forming Over Oil & Gas⛽️,” the following:

And so it’s no wonder that, despite a relative dearth of oil and gas bankruptcy filings in 2020 thus far, most people think that (a) the E&P and OFS companies that avoided a bankruptcy in the 2015 downturn are unlikely to avoid it again and (b) many of the E&P and OFS companies that didn’t avoid a bankruptcy in the 2015 downturn are unlikely to avoid the dreaded Scarlet 22….

Sure, Pioneer hasn’t filed for bankruptcy before. But it has been in a constant state of restructuring ever since 2015. Per the debtors:

…in 2015 and 2016, Pioneer reduced its total headcount by over 50%, reduced wage rates for its operations personnel, reduced incentive compensation and eliminated certain employment benefits. In 2016, the Company closed ten field offices to reduce overhead and associated lease payments. At the same time, the Company lowered its capital expenditures by 77% to primarily routine expenditures that were necessary to maintain its equipment and deferred discretionary upgrades and additions (except those that it had previously committed to make during the 2014 market slowdown).

And:

Since the beginning of 2015 through the end of 2018, the Company has liquidated nonstrategic or non-core assets. Specifically, Pioneer has sold thirty-nine (39) non-AC domestic drill rigs, thirty-three (33) older wireline units, seven (7) smaller diameter coiled tubing units and various other drilling and coiled tubing equipment for aggregate net proceeds of over $75 million. As of September 30, 2019, the Company reported another $6.2 million in assets remaining held for sale, including the fair value of buildings and yards for one domestic drilling yard and two closed wireline locations, one domestic SCR drilling rig, two coiled tubing units and spare support equipment.

Annd:

In the first quarter of 2019, the Company continued its cost-reduction initiatives and operational adjustments by expanding the roles and related responsibilities of several of its executive leaders to further leverage their existing talents to the entire organization.

In other words, these guys have been gasping for air for five years.

Relatively speaking, the debtors capital structure isn’t even that intense:

1. $175mm Term Loan (Wilmington Trust NA)

2. $300mm 6.125% ‘22 senior unsecured notes (Wells Fargo Bank NA)

Yet with oil and gas getting smoked the way it has, it was still too much. So what now?

The prepackaged plan would give the term lenders cash (from a rights offering) and $78.125mm in new secured bonds (PETITION Note: we’re betting there are a bunch of CLOs here). The unsecured noteholders will get either all of the equity or 94.25% of the equity depending upon what the interest holders do; they’ll also get rights to participate in the rights offering. If the interest holders vote to accept the plan, they’ll get 5.75% of the equity and rights to participate in the rights offering; if they reject the plan, they’ll get bupkis and the noteholders will get 100% of the equity (subject to dilution). General unsecured claimants will get paid in full. Management will put in money as part of the rights offering and an ad hoc group of the unsecured noteholders (Ascribe Capital, DW Partners LP, Intermarket Corporation, New York Life Investments, Strategic Income Management LLC, and Whitebox Advisors LLC) agreed to backstop substantially all of the rights offering (and will receive an 8% premium for their commitment). The cases will be supported by a $75mm DIP. This thing is pretty buttoned up. Confirmation is expected within 45 days.

The end result? The debtors will emerge with $153mm of debt on balance sheet (the $78.125mm in new secured bonds and a $75mm exit ABL). Time will tell whether or not this remains too much.*

*The risk factors here are particularly interesting because all of them are very real. If the oil patch does suffer, as expected, the debtors’ concentration of business among their top three clients (66% of revenue) could be especially troubling — depending on who those clients are.

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

• Capital Structure: see above.

• Professionals:

  • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Brian Hermann, Elizabeth McColm, Brian Bolin, William Clareman, Eugene Park, Grace Hotz, Sarah Harnett) & Norton Rose Fulbrights US LLP (William Greendyke, Jason Boland, Robert Bruner, Julie Goodrich Harrison)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Lazard Freres & Co. LLC

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

• Other Parties in Interest:

  • DIP Lender ($75mm): PNC Bank NA

    • Legal: Blank Rome LLP (James Grogan, Broocks Wilson)

  • Prepetition Term Loan Agent: Wilmington Trust NA

    • Legal: Covington & Burling LLP

  • Ad Hoc Group of Prepetition Term Loan Lenders

    • Legal: Vinson & Elkins LLP (David Meyer, Paul Heath, Harry Perrin, Steven Zundell, Zachary Paiva)

  • Ad Hoc Group of Unsecured Noteholders: Ascribe Capital, DW Partners LP, Intermarket Corporation, New York Life Investments, Strategic Income Management LLC, Whitebox Advisors LLC)

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Natasha Tsiouris, Erik Jerrard, Xu Pang) & Haynes and Boone LLP (Charles Beckham)

    • Financial Advisor: Houlihan Lokey

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

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

March 1, 2020

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

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

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

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

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

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

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

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

• Professionals:

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

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

• Other Parties in Interest:

  • Successor Indenture Trustee: UMB Bank NA

✝️New Chapter 11 Bankruptcy Filing - The Diocese of Buffalo NY✝️

The Diocese of Buffalo NY

February 28, 2020

Another diocese, another 400 potential claimants. Nothing else new here relative to previous diocese filings.

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

• Professionals:

  • Legal: Bond Schoeneck & King PLLC (Grayson Walter, Stephen Donato)

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

🌑New Chapter 11 Bankruptcy Filing - Hartshorne Holdings LLC🌑

Hartshorne Holdings LLC

February 20, 2020

You have to hand it to creative name conventions. Especially when viewed from the lens of restructuring where all we see are BlackRock, StonePoint, Stone Hill, Owl Creek, Owl Rock, Oak Hill, etc. etc. For some reason trees, owls and rock formations are the only things that convey “steward of capital,” it seems. If we were starting a fund we’d go with something far more interesting. Giantsbane Capital, for instance. Or Hartshorne Capital. Sadly, Hartshorne is already taken. It’s the name of the latest coal company to file for bankruptcy (#MAGA!).

Kentucky-based Hartshorne Holdings LLC and three affiliates (the “debtors”) mine thermal coal — the kind used for power production — in the Illinois Coal Basin Western Kentucky. Per the debtors:

The Western Kentucky area is among the best mining jurisdictions in the United States due to its proximity to utility companies and access to low cost power, transportation and a non-union labor pool. Mining conditions at the Poplar Grove Mine are generally similar to those encountered in neighboring mines, which rank as some of the most productive room-and-pillar thermal coal operations in the United States.

In this first instance, this sounds highly positive. As does the fact that the debtors are party to (a) two fixed-priced coal sales contracts and a (b) fuel purchase order — all on terms that are “economically advantageous” for the debtors. So, what gives?

Well, for starters, we all know the macro issues. The coal industry is in secular decline, capitulating under the weight of declining commodity prices (induced in part by fracking and a US-based natural gas boom), reduced coal-based power capacity, and regulatory compliance constraints. Sh*t, are there any coal companies that haven’t gone bankrupt yet (yeah, yeah, Foresight Energy, but that’s coming and y’all know it).*

As if the macro conditions aren’t bad enough, this company ran into every operational issue under the sun. You name it, these guys experienced it:

• Unexpected geological soil issues. ✅

• Water issues. ✅

• Delays caused by encountering a geological fault. ✅

• Poor conditions for mine car movement. ✅

• Increased mine car battery changes (due to the poor conditions). ✅

• Less-than-expected processing yields. ✅

So while the debtors had economically advantageous contracts, they nevertheless couldn’t operate in such a way that was sustainable. Liquidity became extremely tight and, due to that, the debtors’ lenders refused to continue to finance the business. Any out-of-court resolution, therefore, became unrealistic and here we are. The debtors will now seek a sale of their assets in bankruptcy.

__________

*The debtors note:

Thermal coal demand in the domestic electric power sector has declined from 935 million tons in 2011 to 636 million tons in 2018 and coal has seen its share of the domestic electricity generation market reduce from 43% in 2011 to 31% in 2017.

---

• Jurisdiction: W.D. of Kentucky (Judge Fulton)

• Capital Structure: $42.6mm Term Loan, $9mm Royalty Interest (SP2 Royalty Co. LLC)

• Professionals:

  • Legal: Squire Patton Boggs US LLP (Stephen Lerner, Norman Kinel, Nava Hazan, Travis McRoberts, Kyle Arendsen, Maura McIntyre) & Frost Brown Todd LLC (Edward King, Bryan Sisto)

  • Financial Advisor/CRO: FTI Consulting Inc. (Bertrand Troiano)

  • Investment Banker: Perella Weinberg Partners LP

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

• Other Parties in Interest:

  • Pre-Petition Senior Secured & DIP Agent ($7.5mm): Tribeca Global Resources Credit Pty Ltd

    • Legal: Wyatt Tarrant & Combs LLP (John Brice)

😷New Chapter 11 Bankruptcy Filing - Hygea Holdings Corp.😷

Hygea Holdings Corp.

February 19, 2020

Florida-based Hygea Holdings Corp. and 32 affiliates (the “debtors”) filed for bankruptcy because…whoa boy…human capital businesses are tough. Hygea is a rollup of physician practices with a primary care physician focus; it also has a management services platform. This is basically WeWork for physicians or Substack for writers: Hygea handles the management activities in such a way that frees physicians up to do what they want to do. Which is be physicians.

The problem is that the debtors expanded too aggressively, acquiring physician practices with minimal net profit. But synergies, right? Not exactly. The debtors’ model didn’t pan out after failing to integrate the underperforming acquisitions. Poor integration fundamentally counteracts the entire point of a rollup, but whatevs. Growth!!

If only things were quite so positive. Per the debtors:

Consequently, the Debtors have been burdened with supporting a number of losing operations, that even with performance improvements will never be profitable. The operating losses of those practices, along with the associated acquisition costs, have caused a substantial drain on the Debtors’ liquidity.

This presents a problem when you have over $120mm of debt. Hence bankruptcy. The company hopes to use the bankruptcy process to solicit a buyer.

• Jurisdiction: D. of Delaware (Judge Owens)

• Capital Structure: $121mm secured debt (Bridging Income Fund LP)

• Professionals:

  • Legal: Cole Schotz PC (Michael Sirota, Felice Yudkin, Jacob Frumkin, Michael Trentin, J. Kate Stickles, Katherine Devanney, Stuart Komrower)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: 4Front Capital Partners Inc.

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

• Other Parties in Interest:

New Chapter 11 Bankruptcy Filing - Roman Catholic Diocese of Harrisburg

Roman Catholic Diocese of Harrisburg

February 19, 2020

Look. We’ve already written ad nauseum about the use of the bankruptcy system to deal with a deluge of mass tort claimants. For a quick primer on why defendants against heaps of mass tort claims leverage the bankruptcy courts, you can revisit our piece about the Boy Scouts of America here. Many of the same issues at play in that case are relevant to the Roman Catholic Diocese of Harrisburg too. No sense in regurgitating.

With that as a preface, we’ll merely say this: we’re currently confronting an epidemic of immorality and dirtbaggery. Thirty sizable bankruptcy cases have filed this year already and 17% of them are mass tort cases. Three are manufacturers facing asbestos claimants. Then there’s the Boy Scouts and now the Diocese. And it won’t be the last: we have about half dozen other Dioceses that look like they’re headed towards bankruptcy. Zooming out, we can add a utility that knew but did nothing about faulty equipment that sparked wild fires, the US gymnastics team and more to the list. Seriously, folks, what the hell is going on here? If Obi-Wan Kenobi were staring down at the bankruptcy system, he’d pensively say, “You will never find a more wretched hive of scum and villainy.” And he’d be right.

The numbers here tell the tale. The RCDH is confronting 5 civil actions, 200 survivors of childhood abuse, and an unquantifiable number of unknown potential claimants. We can’t wait for the morbid constructive notice that’ll be deployed here: “If you or anyone you know was ever sexually abused by the RCDH, you have a right to file a claim in the RCDH’s bankruptcy case.” That won’t be triggering, nooooooo.

We love how these mass tort debtors frame their bankruptcy filings as an act of justice. Bankruptcy is needed, they say, to ensure the equitable distribution of assets among known and future claimants. Right sure. That’s why these debtors spent decades engaging in cover-ups. Or ring-fencing assets. Because they’re concerned about justice. 👍

Ugh. We’re sick of writing about these deplorable cases. And so we certainly hope the victims get the justice they deserve and get their due compensation. They deserve it.

• Jurisdiction: M.D. of Pennsylvania (Judge Van Eck)

• Professionals:

  • Legal: Waller Lansden Dortch & Davis LLP (Blake Roth, Tyler Layne) & Kleinbard LLC (Matthew Haverstick, Joshua Voss)

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

🍿New Chapter 11 Bankruptcy Filing - VIP Cinema Holdings Inc.🍿

VIP Cinema Holdings Inc.

February 18, 2020

VIP Cinema Holdings Inc. and four affiliates (the “debtors”) filed prepackaged chapter 11 bankruptcy cases in the District of Delaware; they are manufacturers of luxury seating products for movie theaters. Here’s the problem: end user customers stopped ordering their stuff. Yup, that’s right, there’s a finite market for luxury seating in movie theaters. Who knew?

Here are some of the problems this company confronted:

• They made chairs that were too good. That’s right. Too good. The chairs had a longer lifecycle than the company likely wanted. Either that or people are engaging in too much Netflixing and chilling and not enough movie-going.

• Movie theaters slowed down their renovation activities and construction of new locations. Perhaps people are engaging in too much Netflixing and chilling and not enough movie-going.

• Movie theaters reduced capital investment — mostly because they haven’t exactly performed very well themselves and have their own debt and equityholders to contend with. Also, people are engaging in too much Netflixing and chilling and not enough movie-going.

• They conquered the total addressable market, securing 70% market share with little to no room to grow thanks to all of the foregoing bulletpoints.

Are we being too flip about $NFLX? Well, don’t take our word for it. Here’s the company explaining one of the reasons why it’s in trouble:

“Continued proliferation of online streaming services and alternative viewing experiences, which has led to declining movie attendance, a poor outlook sentiment for the overall U.S. movie theatre industry and particularly put significant pressure on the stock price of AMC, a key customer for the Company.”

Because of all of the foregoing factors, the debtors triggered an event of default under their first lien credit agreement and have been in a state of forbearance with their lenders ever since — all with the hope of negotiating an out-of-court restructuring transaction.

That hope was extinguished when Odeon reduced seating orders, napalming everyone’s financial models upon which the proposed out-of-court transaction was premised. Now we’re in prepackaged bankruptcy territory with a restructuring support agreement that will shed $178mm of debt and infuses the company with a $33mm DIP credit facility — of which $13mm is new money and $20mm is a roll-up of prepetition debt. Here is the pre-petition capital structure:

The liquidity is highly necessary. The debtors are burning cash like Rick Dalton burns interlopers bursting into his Hollywood Hills mansion. The debtors filed for bankruptcy with just $1mm in liquidity remaining.

Speaking of burning cash, that’s pretty much what you can say about the $200-or-so-million that previously went into these debtors. The restructuring support agreement will (a) convert first lien loans to preferred and common equity, (b) donut the second lien claims, and (c) donut the general unsecured claimants (unless they opt-in to a release, in which case they’ll get $5k). Critical to everything is the fact that HIG Capital LLC, the existing shareholder in the company, will write a new-money check of $7mm and enter in a management services agreement with the reorganized newco. In exchange for this investment, HIG will get preferred equity and 51% of the common equity.* Everyone is going to be holding their breath for the next 6 weeks, hoping that no other large chains cancel or downsize orders. If that happens, this deal could blow up.

*Suffering PTSD from the last-minute collapse of the out-of-court deal, HIG also negotiated the ability to walk if the debtors have less than $1.5mm of available unrestricted cash on the “Exit Date.”

---

• Jurisdiction: D. of Delaware (Judge Walrath)

• Capital Structure: see above.

• Professionals:

  • Legal: Ropes & Gray LLP (Gregg Galardi, Christine Pirro Schwarzman) & Bayard PA (Erin Fay, Daniel Brogan, Gregory Flasser)

  • Independent Director: Michael Foreman

  • Financial Advisor/CRO: AlixPartners LLP (Stephen Spitzer)

  • Investment Banker: UBS Securities LLC

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

• Other Parties in Interest:

  • First Lien Agent: Wilmington Savings Fund Society FSB

    • Legal: Wilmer Cutler Pickering Hale and Dorr LLP (Andrew Goldman, Benjamin Loveland) & Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Joseph Barsalona II, Tamara Mann, Andrew Workman)

  • Ad Hoc Group of First Lien Lenders

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Adam Shpeen) & Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Joseph Barsalona II, Tamara Mann, Andrew Workman)

    • Financial Advisor: M-III Partners LP

  • Second Lien Agent & Second Lien Lenders: Oaktree Fund Administration LLC

    • Legal: Stroock & Stroock & Lavan LLP (Jayme Goldstein, Daniel Ginsburg, Joanne Lau) and Young Conaway Stargatt & Taylor LLP (Matthew Lunn, Edmon Morton, Betsy Feldman)

  • Sponsor: HIG Capital LLC & HIG Middle Market LBO Fund II LP

    • Legal: McDermott Will & Emery LLP (Brooks Gruemmer, Jay Kapp)

New Chapter 11 Bankruptcy & CCAA Filing - Pier 1 Imports Inc. ($PIR)

Pier 1 Imports Inc.

February 17, 2020

Fort Worth, Texas-based Pier 1 Imports Inc. and seven affiliates (the “debtors”) have fulfilled their obvious destiny and finally fallen into bankruptcy court in the Eastern District of Virginia. Contemporaneously, the debtors filed a CCAA proceeding in Canada to effectuate the closure of all Canadian operations. Color us pessimistic but we’re not feeling so great about the debtors’ go-forward chances in the US either.

We’ve covered the debtors ad nauseum in previous editions of PETITION. Here — supported by an ode to “Anchorman” — we described the debtors’ recent HORRIFIC financial performance and noted how a bankruptcy would be sure to confuse a peanut gallery accustomed to spouting regular (and sometimes inaccurate) hot takes about how private equity is killing retail.* We wrote:

The reaction to this surely-imminent bankruptcy (and, if we had a casino near us, liquidation) is going to be interesting. It is sure to flummox the “Private Equity is Killing Retail” camp because, well, it’s not PE-backed. Similarly it’ll confuse the “You Shouldn’t Put So Much Debt on Retail” cohort because, well, there really isn’t that much debt on the company’s balance sheet. Chuckling in the corner will be “The US is Over-Stored” team … And “The Millennials Aren’t Buying Homes and Furnishing Them With Chinese-Made Tchotchkes” gang (thanks a ton, Marie Kondo) … And the “Management Has Blown Chunks, The Assortment Sucks” bunch … And, finally, “The Amazon Effect” squad….

Over the weekend, The New York Times ran a piece from Austan Goolsbee, an economics professor at the University of Chicago’s Booth School of Business, that — no disrespect to the professor — says many of the same things PETITION has been saying for a LONG LONG time. That is, “The Amazon Effect” is overstated. He argues that “three major economic forces have had an even bigger impact on brick-and-mortar retail than the internet has”: (1) big box stores, (2) income inequality, and (3) the preference shift away from goods towards services. It’s fair to say that these three forces affected the debtors in a big big way.**

Who’s actually surprised #Pier1 is closing when they charge like $100 for a decorative pillow? $60 for a vanilla candle that’s also at Walmart for $5? PASS. People still shopping at a Pier 1 clearly haven’t heard of Home Goods or TJ Maxx

— Nicole (@Choley2007) February 17, 2020

Surely, e-commerce has a lot to do with it too. As one PETITION advisor said about the debtors’ wares yesterday:

“You can just order that sh*t online. You don’t need to try it on.”

It’s a fair point.

Another fair point that Mr. Goolsbee omits from his analysis is the role of management. It’s safe to say that the US is suffering from an epidemic of retail ineptitude.

Also management sucks

— TheHappySoul Goddess (@Yahiness11) February 17, 2020

And like the coronavirus, it keeps spreading from one retailer to the next.***

This has to be one of the most under-covered aspects of the #retailapocalypse: just a revolving door of execs moving from one troubled retailer to the next and everyone hoping and praying that that person can suddenly conjure up an answer. $ASNA $FRANhttps://t.co/5lmoMJFEAE

— 💥PETITION💥 (@petition) February 14, 2020

But we digress.

The business has clearly suffered:

From fiscal years 2014 to 2018, the company’s net income dropped from $108 million to about $11.6 million and in fiscal year 2019 Pier 1 experienced a $198.8 million loss.

So, what’s the upshot here? The debtors announced a plan support agreement and intend to use the chapter 11 bankruptcy process to (a) continue to shutter the previously announced ~450 stores (read: get ready for a lot of lease rejections) and (b) pursue a sale pursuant to a chapter 11 plan of reorganization of what remains of the debtors’ business. Frankly, this was masterful messaging: the announcement relating to a plan support agreement and potential plan of…wait for it…”reorganization”(!) head-faked the entire market into thinking this thing might actually be salvageable. That’s where the fine print comes in.

The debtors have dubbed this an “all weather” chapter 11 plan because it provides for either a sale or the equitization of the term loan at the term lenders’ election. This begs the question: will Pathlight Capital LP want to own this thing?🤔 This bit was eye-catching:

“To be clear, the term loan lenders have made no decision at this point, but instead support the process as outlined in the plan support agreement.”

Yeah, we bet they do. Qualified bids will be due on or before March 23 and the lenders have until March 27 to make their election. Which way will the winds blow?

Note that “the process” isn’t currently supported by a stalking horse purchaser. 🤔

Note further that the debtors are required under the DIP to distribute informational packages and solicitations for sale of the debtors’ assets on a liquidation basis to liquidators by March 9.🤔 🤔

It seems reasonably clear from the Pier 1 bankruptcy papers that none of the Debtors, the professionals nor the lenders expect this turd to actually find a buyer outside of the liquidator type.

— 💥PETITION💥 (@petition) February 18, 2020

It looks like we’ll know the answer very soon.

To finance the cases, the debtors obtained a committed for a $256mm DIP credit facility. The facility includes a $200mm revolving loan commitment and a $15mm first in last out term loan, each provided 50/50 by Bank of America N.A. and Wells Fargo National Association, and a $41.2mm term loan from Pathlight. This was the pre-petition capital structure:

The DIP effectively just rolls up much of the pre-petition debt. There is no new money. The messaging here, then, is also critical: the DIP facility ought to provide customers, vendors and employees comfort that there is access to liquidity if needed. Cash collateral usage, however, is the main driver here: the debtors believe that operating cash flow will suffice to handle working capital needs and bankruptcy expenses.

To summarize, we have another distressed retailer that is scratching and clawing to live. They’ve taken all of the usual steps to extend runway: cost cuts, footprint minimalization, new management. Bankruptcy is a last-ditch effort to survive: the debtors take pains to try and convince some prospective buyer that there is life left in the debtors’ brick-and-mortar business:

The remaining go-forward stores achieved superior sales and customer metrics in the last twelve months compared to the closing stores, including approximately 15% greater sales per square foot on average.

And if that doesn’t do it, there’s the argument that there’s an e-commerce play here. The debtors similarly go to great lengths to state OVER AND OVER AGAIN that e-commerce represents 27% of total sales. They’re practically screaming, “Look at me, look at me! We can be interesting to you [Insert Authentic Brands Group here]!”

Pathlight is sure as hell hoping someone bites.

---

*Kirkland & Ellis…uh…we mean, the “debtors” appear to agree, stating, in reference to private equity, that “[t]oo many pundits have sought to point in too many wrong directions,” citing pieces in RetailDive and The Wall Street Journal. THAT ladies and gentlemen, is client advocacy!

**It’s also fair to say that Professor Goolsbee does his readers a disservice by neglecting the overall picture which, no doubt, also includes over-expansion, too much retail per capita, private equity and over-levered balance sheets. These cowboys are closing 400+ stores for a reason.

Of course, long time PETITION readers know that we’ve been arguing for a LOOOOONG time that the “perfect storm” hitting retail is a confluence of factors that cannot just be lazily summarized as “private equity” or “The Amazon Effect.” It’s good to see that the folks at Kirkland & Ellis agree:

In the face of the longest bull run in U.S. history (close to 3,000 days and counting), a myriad of factors have collectively changed the ways in which consumers and retailers interact—creating for retailers what is tantamount to a perfect storm—and directly contributing to the struggles retailers face in a shifting marketplace.5

Then it’s as if they lifted this footnote straight out of previous PETITION briefings:

***Not to cast aspersions, but the resume of the current PIR CEO is…uh…interesting: prior experience includes FullBeauty Brands, HHGregg, and Marsh Supermarkets. Any of those names sound familiar to bankruptcy professionals?

---

• Jurisdiction: E.D. of Virginia (Judge Huennekens)

• Capital Structure: $140mm RCF + $47.3mm LOC, $189mm Term Loan (Wilmington Savings Fund Society FSB), $9.9mm industrial revenue bonds

• Professionals:

  • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Emily Geier, AnnElyse Scarlett Gains, Joshua Altman) & Kutak Rock LLP (Michael Condyles, Peter Barrett, Jeremy Williams, Brian Richardson)

  • Canadian Legal: Osler Hoskin & Harcourt LLP

  • Independent Directors: Steven Panagos & Pamela Corrie

  • Financial Advisor: AlixPartners LLP (Holly Etlin)

  • Investment Banker: Guggenheim Securities LLC (Durc Savini)

  • Real Estate Advisor: A&G Realty Partners LLC

  • Liquidation Consultant: Gordon Brothers Retail Partners LLC

    • Legal: Riemer & Braunstein LLP (Steven Fox, Anthony Stumbo)

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

• Other Parties in Interest:

  • DIP ABL Agent: Bank of America NA

    • Legal: Morgan, Lewis & Bockius LLP, Hunton Andrews Kurth LLP, and Norton Rose Fulbright Canada LLP

  • DIP ABL Term Agent: Pathlight Capital LP

    • Legal: Choate Hall & Stewart LLP (John Ventola, Jonathan Marshall) and Troutman Sanders LLP (Andrew Buxbaum)

  • Ad Hoc Term Lender Group: Eaton Vance Management, Insight North America LLC, Marathon Asset Management LP, MJX Asset Management LLC, Whitebox Advisors LLC, ZAIS Group LLP

    • Legal: Brown Rudnick LLP (Robert Startk, Uchechi Egeonuigwe, Steven Pohl, Sharon Dwoskin) & Whiteford Taylor & Preston LLP (Christopher Jones, Vernon Inge, Corey Booker)

    • Financial Advisor: FTI Consulting Inc.

  • Large Equityholders: Charles Schwab Investment Management, Dimensional Fund Advisors LLP

  • Official Committee of Unsecured Creditors: Bhati & Company, Synergy Home Furnishings LLC, United Parcel Services Inc., Brixmor Operating Partnership LP, Brookfield Property REIT Inc.

    • Legal: Foley & Lardner LLP (Erika Morabito, Brittany Nelson, Timothy Mohan) & Cole Schotz PC (Seth Van Aalten)

    • Financial Advisor: Province Inc. (Paul Huygens, Sanjuro Kietlinski, Walter Bowser, Paul Navid, Shane Payne, Courtney Clement)

👦🏻New Chapter 11 Bankruptcy Filing - Boy Scouts of America👦🏻

Boy Scouts of America

February 18, 2020

It’s a sad state of affairs when mass tort cases overrun the bankruptcy system. Between a recent deluge of asbestos cases (e.g., ON Marine Services Company LLC, Paddock Enterprises LLC, and DBMP LLC), opioid cases (e.g., Purdue Pharma, Insys Therapeutics), global warming and negligence cases (PG&E) and sexual abuse cases (e.g., USA Gymnastics, one diocese after another), Wachtell Lipton Rosen & Katz is correct to declare “A New Era of Mass Tort Bankruptcies” in a recent client report. They recently wrote:

The use of the bankruptcy process to address mass tort liability reflects a growing recognition that chapter 11, while imperfect, provides tools for dispute resolution that are not generally available in federal or state courts.

And:

For companies that have insufficient assets to pay claims in full, bankruptcy ensures that the debtor’s limited assets are distributed equitably among claimants, including “future” claimants (those whose claims have not yet manifested). Chapter 11 can allow companies with tort liabilities to maintain operations, thereby continuing to generate funds to make payments over time, while providing a respite from defending lawsuits and a platform to negotiate settlements. Bankruptcy also provides a mechanism for centralizing the resolution of large numbers of tort claims, including through a court estimation of the aggregate liability, greatly reducing litigation costs and increasing the potential for a global settlement.

The purposes of these filings?

The wave of asbestos-related bankruptcies in the 1980s led Congress to enact Bankruptcy Code provisions to facilitate reorganization of debtors facing asbestos claims by establishing a plaintiffs’ trust funded by cash, proceeds of insurance policies, and equity in the reorganized debtor. In exchange for contributing to the trust, the debtor and other contributors receive a “channeling injunction,” which “channels” all existing and future claims to the trust. Upon resolution of the bankruptcy, such claims are brought against and paid by the trust, the debtor is discharged, and other contributors are released from further liability. While the relevant Bankruptcy Code provisions apply by their terms only to asbestos-related claims, similar mechanisms have been used (or are currently contemplated) in the bankruptcies of Takata (defective airbags), Pacific Gas & Electric (wildfire damages), and several Catholic dioceses (abuse claims).

Enter Sidley Austin LLP here. Sidley Austin is widely-credited for the notion that a channeling injunction could be deployed in the Takata chapter 11 case. It’s no wonder, then, that they’d land another major mass tort case and deploy the same playbook. Boy Scouts are well-accustomed to playbooks.

And deploy the playbook, they will.

The Boy Scouts of America are involved in 275 lawsuits currently pending in state and federal courts across the United States. They are also aware of an additional 1,400 claims that have not yet filed. Recently enacted legislation that extended the statute of limitations — passed in 17 states, including 12 in 2019 — led to a deluge of additional recently filed suits against the BSA. Consequently, the BSA spent more than $150mm on settlements and legal costs from 2017 through 2019 alone. Compounding matters, membership and donations are on the decline. BSA registered membership is down 500k since 2012. People are dropping the Boy Scouts HARD.

The BSA has filed a plan of reorganization and disclosure statement along with their customary first day papers. Where the rubber will meet the road is at the asset level. Per the BSA:

…attorneys for abuse victims believed that certain Local Councils with significant abuse liabilities have significant assets that could be used to compensate victims.

The Local Councils, however, are not debtors. There is, though, an ad hoc committee of Local Councils, the purpose of which is to allow the Local Councils to participate in negotiations about a global resolution of abuse claims. The Local Councils share insurance with the BSA and insurance, naturally, will be a huge source of recovery for abuse claimants. Claimants will also want to understand whether Local Councils are being used to shield assets from attack — a strategy exposed in this recent Wall Street Journal piece. This issue appears to be key to the bankruptcy and any potential resolution. The volunteer chair of the Local Council Committee? Richard Mason of Wachtell. Forgot to mention that one in the aforementioned client alert.

• Jurisdiction: D. of Delaware (Judge Silverstein)

• Capital Structure: $328mm secured debt (see below)(JPMorgan)

• Professionals:

  • Legal: Sidley Austin LLP (Jessica Boelter, Alex Rovira, Andrew Propps, James Conlan, Thomas Labuda, Michael Andolina, Matthew Linder) & Morris Nichols Arsht & Tunnell LLP (Derek Abbott)

  • Financial Advisor: Alvarez & Marsal LLC (Brian Whittman)

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

Source: Disclosure Statement

New Chapter 11 Bankruptcy Filing - RentPath Holdings Inc.

RentPath Holdings Inc.

February 12, 2020

RentPath Holdings Inc. and eleven affiliated entities (the “debtors”), a digital marketing solutions enterprise that links property managers with prospective renters to simplify the residential rental experience, filed for bankruptcy in the District of Delaware. The business did $226.7mm of revenue in fiscal 2019 and had EBITDA of $46.8mm.

Where there’s money there’s competition. Where there’s competition, revenue maintenance becomes more challenging. And because of that competition, the debtors were forced to up their marketing spend and promotional activity which dented liquidity. A lack of liquidity presents some really big problems when your annual interest expense is $54.4mm on approximately $700mm of funded debt. For the math challenged, $46.8mm against approximately $700mm of funded debt means that this sucker has a leverage ratio of approximately 15. Or as President Trump would say, “It’s UUUUUUUUUUUGE.” Clearly that is unsustainable AF.

The good news is that the debtors have found themselves a potential buyer, CSGP Holdings LLC, an affiliate of CoStar Group Inc. ($CSGP), which has come forward with a $587.5mm cash bid (plus the assumption of certain liabilities) for the debtors’ assets. The debtors hope to consummate the sale pursuant to a plan of reorganization. To get there and fund the cases in the interim, the debtors obtained a fully-backstopped commitment of $74.1mm in DIP financing from certain members of the crossholder ad hoc committee and other first lien lenders.

• Jurisdiction: (Judge Shannon)

• Capital Structure: $37.95mm First Lien Revolving Facility, $479.75mm First Lien Term Loan, $170mm Second Lien Term Loan

• Professionals:

  • Legal: Weil Gotshal & Manges LLP (Ray Schrock, David Griffiths, Andriana Georgallas, Gaby Smith, Alexander Cohen, Kyle Satterfield, Justin Pitcher, Leslie Liberman, Martha Martir, Richard Slack, Amanda Burns Shulak) & Richards Layton & Finger PA (Daniel DeFrancheschi, Zachary Shapiro)

  • Independent Director: Marc Beilinson, Dhiren Fonseca

  • Financial Advisor: Berkeley Research Group LLC

  • Investment Banker: Moelis & Company (Zul Jamal)

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

• Other Parties in Interest:

  • DIP Agent & First Lien Agent:

    • Legal: Paul Hastings LLP (Michael Baker, Shekhar Kumar)

  • Successor Second Lien Agent: Wilmington Savings Fund Society FSB

    • Legal: Pryor Cashman LLP (Seth Lieberman, Patrick Sibley, Marie Polito Hofsdal) & Ashby & Geddes PA (William Bowden, Gregory Taylor)

  • Crossholder Ad Hoc Committee

    • Legal: Milbank LLP (Evan Fleck, Nelly Almeida, Andrew Harmeyer) & Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Joseph Barsalona)

  • Second Lien Ad Hoc Committee

    • Legal: Akin Gump Strauss Hauer & Feld LLP (Philip Dublin, Rachel Biblo Block) & Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Joseph Barsalona)

  • Stalking Horse Purchaser: CSGP Holdings LLC (CoStar Group Inc.)

    • Legal: Jones Day (Daniel Moss, Nicholas Morin) & Potter Anderson & Corroon LLP (Jeremy Ryan, R. Stephen McNeill)

  • Large Equityholders: Providence Equity & TPG

    • Legal: Vinson & Elkins LLP (David Meyer)

New Chapter 11 Bankruptcy Filing - Valeritas Holdings Inc. $VLRX

Valeritas Holdings Inc.

February 9, 2020

After a particularly active year in 2019 for both biopharma and biotech, we were wondering when 2020 might usher in its first case in the category. Now we have it.

New Jersey-based Valeritas Holdings Inc. ($VLRX) and three affiliates (the “debtors”) filed for bankruptcy to effectuate a sale of its Chinese-manufactured insulin delivery device (V-Go) and associates assets to Zealand Pharma A/S ($ZEAL) for $23mm in cash plus the assumption of certain liabilities.

On the surface, there’s not much new here: most of these biotech cases follow the same pattern. The debtors get to a certain stage of development and then run out of cash and try to find a strategic partner. That’s what happened here. Except the debtors also ran into a manufacturing issue. Consequently, they had to halt product delivery and take time to identify and solve for the issue, suffering a $3.5mm inventory write-off in the process. All of this scared away any potential buyers.

This is where the coronavirus comes in. Per the company:

Notwithstanding the Company’s quick response to address the manufacturing yield issue, it could not resurrect the Out of Court Process. Moreover, the yield issue unfortunately coincided with certain external factors impacting production. The CMO and the Company’s other manufacturers and suppliers in China are closed for the Lunar New Year (Chinese New Year) celebrations, which took place this year between January 27, 2020 through February 3, 2020, which was extended through February 9, 2020 by the Chinese government due to the coronavirus epidemic in China.

There’s more:

Additionally, many Chinese businesses, including the Company’s CMO, employ rural workers and, as a result, may experience production capability issues due to the uncertainty surrounding when these rural employees will return to work. All of the foregoing unanticipated delays further strained the Company’s balance sheet and truncated its financial runway, although, due to careful planning, it generally has not impacted the Company’s ability to make V-Go® available to the majority of patients to date. Specifically, these delays have impacted new production, retesting of existing V-Go® kits, and the packaging and shipping of finished goods to the United States.

Oooof. Talk about bad timing. Query whether this depressed the purchase price. 🤔

So, there you have it folks: our first coronavirus mention in US-based bankruptcy papers. We reckon it won’t be the last.

It took time but there's now a lot more focus on what I call the cascading sudden stop dynamics of the #CoronaVirus for the global #economy.
The main catalyst: More and more companies reporting big and growing supply and demand disruptions.
As an example:https://t.co/uCAzMVdwzH pic.twitter.com/OoPiR5f203

— Mohamed A. El-Erian (@elerianm) February 8, 2020

• Jurisdiction: D. of Delaware (Judge )

• Capital Structure: $20mm Term Loan (Capital Royalty Group)

• Professionals:

  • Legal: DLA Piper LLP (Rachel Albanese, Maris Kandestin)

  • Financial Advisor: PricewaterhouseCoopers LLP

  • Investment Banker: Lincoln International Inc.

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

• Other Parties in Interest:

  • DIP Lender: HB Fund LLC

  • Senior Secured Lender: Capital Royalty Group

  • Stalking Horse Purchaser: Zealand Pharma A/S

⚓️New Chapter 11 Bankruptcy Filing - American Commercial Lines Inc.⚓️

American Commercial Lines Inc.

February 7, 2020

Indiana-based American Commercials Lines Inc. and ten affiliates (the “debtors”), large liquid and dry cargo shippers with an active fleet of approximately 3,500 barges, filed a prepackaged bankruptcy case in the Southern District of Texas to (i) effectuate a comprehensive restructuring of $1.48b of debt ($536mm RCF and $949mm term loan) and (ii) inject the debtors with much-needed new capital via a rights offering. Now, we know what you’re thinking: the debtors are just the latest victims of the oil and gas crash. While oil and gas do make up some small portion of the debtors’ revenues (10%), this is incorrect. Other factors complicated the debtors’ efforts to service their bulk of debt (see what we did there?). Hold on to your butts, people.

The company notes:

Beginning in early 2016, the inland barge industry entered a period of challenging conditions that have resulted in reduced earnings. These challenges were brought on by a variety of international trade, macroeconomic, industry capacity, and environmental factors. The industry has experienced a prolonged period of declining freight rates, grain volume volatility related to international competition and tariffs on U.S.-grown soybeans, and excessive operating costs incurred as a result of extreme flooding conditions. Freight rates during 2016 and 2017 were under continued downward pressure from reduced shipping demand for metals, grain, refined products, petrochemicals, chemicals and crude oil. These declines resulted in part from pressure on the U.S. steel industry linked to dumping of foreign steel into U.S. markets, increased international competition in grain exports, and the decline in North American crude oil production in response to an oversupply of global crude oil.

Wow. So much to unpack there. It’s as if the debtors’ diversified revenue streams all fell smack dab in the middle of each and every declining sector of the US economy. Reduced steel shipments due to Chinese dumping ✅. Distress in agriculture leading to less volume ✅. Oil and gas carnage ✅.

Compounding matters was increased barge supply (read: competition) due to an increase in coal shipments. That’s right, folks. We’re back to coal. Less coal production = redeployed ships looking for replacement cargo = more competition in the liquid and dry cargo space = decreased freight rates.

The debtors got a temporary reprieve in late 2017 when the Trump administration imposed steel tariffs. A short-lived recovery in steel prices combined with a temporary recovery in oil prices and, due to the above issues, a slowdown in barge construction, helped rates recover a tad.

It didn’t last. In mid-2018, China imposed tariffs on US-grown soybeans. Agricultural products constitute 36% of the debtors’ revenues. Combined with flooding that disrupted farming and navigable waterways, the debtors experienced approximately $86mm in increased operating costs. So, yeah, no bueno. As the debtors note with no intended irony, all of these factors amount to a “perfect storm” heightened mostly by an unsustainable and unserviceable debt load.

A few things to highlight here in terms of the process and trajectory of the cases:

• This serves as yet another example where the pre-petition lenders used the debtors’ need for additional time to fund a short-term bridge and, in exchange, lock down a full rollup of the pre-petition debt into a $640mm DIP credit facility. The term lenders will also provide a $50mm DIP to fund the administration of the cases.

• The term lenders are equitizing their $949mm term loan, getting 100% 7.5% “take back preferred equity” and “new common equity” in return. Their estimated recovery is 38%. Post-reorg, the major owners of the debtors, therefore, will be Contrarian Capital Management LLC, Finepoint Capital LP, and Invesco Ltd.

• The company will get a $150mm of new money via a backstopped rights offering supported by certain holders of term loan claims. This new money infusion (in exchange for 10% junior preferred equity to that noted above and provided subject to a 7% backstop premium) will presumably give the debtors some additional runway should the market forces noted above persist.

---

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

• Capital Structure: $536mm RCF and $949mm term loan

• Professionals:

  • Legal: Milbank LLP (Dennis Dunne, Samuel Khalil, Parker Milender) & Porter Hedges LLP (John Higgins, Eric English) & Seward & Kissel LLP

  • Post-Reorg Independent Director: Scott Vogel

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Greenhill & Co. Inc.

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

• Other Parties in Interest:

  • Prepetition ABL & DIP ABL Agent: Wells Fargo Bank NA

    • Legal: K&L Gates LLP (David Weitman, Christopher Brown)

  • Preptition Term Loan Agent: Cortland Capital Market Services LLP

  • Ad Hoc Group of Term Lenders: Contrarian Capital Management LLC, Finepoint Capital LP, and Invesco Ltd.

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Darren Klein, Erik Jerrard) & Rapp & Krock PC (Henry Flores, Kenneth Krock)

    • Financial Advisor: Evercore Group LLC

  • Large Equityholder: Platinum Equity
    

🍔New Chapter 11 Filing - SD Charlotte LLC🍔

SD Charlotte LLC

February 7, 2020

SD Charlotte LLC and four affiliates (the “debtors”) filed for bankruptcy on Friday in the Western District of North Carolina. While these are smaller cases than we typically cover here in PETITION, the filing is representative of continued distress in the restaurant space. Why? SD Charlotte LLC is the owner and operator of 73 Sonic Drive-In restaurants, an affiliate is the owner and operator of 14 MOD Pizza restaurants, and another affiliate is the owner and operator of three Fuzzy’s Taco Shop restaurants. In total, the debtors employ 1,900 people and have, as the above numbers might suggest, a large presence in the south east, predominantly in North Carolina.

It’s important to note that the debtors do not indicate that their filing is the result of the various factors we’ve seen in other restaurant filings, i.e., increasing wages, poor leases, VC-backed food delivery services, etc. We can assume, though, that given significant liquidity issues arising almost immediately after the principal franchised the restaurants, that some of these factors were in play. The main issue, however, was the debtors’ debt burden: the debtors appear to have taken on too much debt and expanded too quickly in a difficult environment for restaurants; they have $22.3mm of pre-petition secured debt — a figure that the debtors acknowledge, in their filing, exceeds the value of the debtors’ assets. Ruh roh. 😬

Liquidity has been an issue for the debtors from their inception in 2017. In late 2018, the debtors had to turn to “factors” for liquidity. What the bloody hell is a “factor”? Glad you asked…

A factoring counter-party offers upfront cash payments for future receivables. Said another way, a factor will pay a discounted cash price today and take on the risk of non-payment in exchange for greater cash payments in the near future. To protect, their interest in those future receivables, the factors should obtain a security interest in those receivables and take the proper steps to record those security interests.* The debtors entered into at least at least 10 such agreements in an attempt to stave off the inevitable.

While factoring can be a viable source of emergency liquidity for struggling companies, the terms can be highly punitive. Note:

…the Debtors sold no less than $7,988,325 of future accounts receivable to the MCA Parties in exchange for cash payments in an amount not less than $5,880,000, less fees and certain expenses. These records indicate that the MCA Parties purchased the Debtors’ future accounts receivable at significant discounts, charged high fees and had the ability to debit the Debtors’ deposit accounts directly. The depletion of the Debtors’ liquidity attributable to obligations under the MCA Agreements, coupled with the seasonal downturn in the Sonic Drive-In restaurants, left the Debtors’ cash flow position untenable.

Carry the one, add the two…yeah, that’s a pretty solid discount to par value: a bit over 25%. Think about that: the debtors’ need for liquidity was so dire that they agreed to give away approximately 25 cents on every dollar that would enter their accounts because they didn’t have the luxury of time to wait for those receivables to come in. Private equity firms and others are often dubbed “vultures” but factors have a very interesting role to play here too.

And so the debtors were so low on cash that they ultimately had to get a bridge loan from their franchisor, SRI Holding Company (Sonic). The bridge loan will rollup into a DIP credit facility agreement which, with the pre-petition secured lenders’ consent, will prime the pre-petition secured debt. The DIP credit facility will finance the debtors’ cases and give the debtors some breathing room to pursue a 363 asset sale that will clear out the pre-petition debt and eliminate any and all uncertainty relating to the factoring agreements.

One final point here: it is highly unlikely that a sale will generate enough proceeds to clear both the DIP credit facility and the pre-petition secured debt. This means that general unsecured creditors will get the royal effing. Given all of the pain in restaurant and grocery chains, this begs the question: how much supply chain pain is there out there right now? Food distributors? Packagers? We reckon quite a bit.

*Here there is some question as to whether certain of the factoring agreement counterparties filed UCC-1 financing statements which may put into dispute the validity of their said security interest in those receivables. Any official committee of unsecured creditors will take great interest in whether UCC-1s have been recorded though it likely won’t matter given the value of the assets and the likely superceding security interests held by the prepetition secured lender.

• Jurisdiction: W.D. of North Carolina (Judge Beyer)

• Capital Structure: $450k Bridge Loan (SRI Holding Company), $22.3mm (Bridge Funding Group Inc.)

• Professionals:

  • Legal: Moore Van Allen PLLC (Zachary Smith, Gabriel Mathless, Hillary Crabtree, Joanne Wu, James Langdon) & JD Thompson Law (Linda Simpson)

  • Independent Director: Finley Group (Matthew Smith)

  • Financial Advisor/CRO: Meru LLC (Brian Rosenthal, Alissia Bell)

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

• Other Parties in Interest:

  • DIP Lender: SRI Holding Company, SRI Operating Company, Sonic Franchising LLC and Sonic Industries LLC

    • Legal: DLA Piper US LLP (Daniel Simon, Davi Avraham) & Robinson Bradshaw & Hinson PA (David Schilli)

🍎New Chapter 11 Bankruptcy Filing - Earth Fare Inc.🍎

Earth Fare Inc.

February 4, 2020

North Carolina-based Earth Fare Inc. is the latest grocer to descend into the Delaware bankruptcy courts, closing a horrific stretch for the grocery space in which multiple chains — including Fairway Market and Lucky’s Market — capitulated into chapter 11. Signs were out there. On January 26th, we noted that the chain was quietly closing locations, a clear indication of trouble and precursor to bankruptcy. Subsequently, The Wall Street Journal reported that the grocer had begun closing approximately 50 stores. The thing is: it has about 50 stores (across 10 states) so that effectively signaled that the company was kaput. Twenty minutes later, the company confirmed as much, issuing a press release that it would liquidate inventory at all of its stores and pursue a sale of its assets. 3,270 people appear poised to lose their jobs. It’s brutal out there, folks.* But at least sumo mandarins are back, bringing all new meaning to “get them before they’re gone.”

Earth Fare is owned, as of 2012, by Oak Hill Capital Partners III LP (72.1%) and MCP Heirloom LLC (18.76%), an ironic name given that there isn’t expected to be much left of this sucker going forward. Which means that we all should suspect yet another onslaught of “Private Equity Kills X” pieces in the media. Because, like, those have been all the rage lately. See, e.g., The New York Times and Payless, and Slate and Fairway.

So what’s the story? Well, for starters, you know you’ve got a dumpster fire on your hands when the company’s first day declaration to be entered into evidence in support of the filing is a whopping 18 pages long. Clearly the expectations here aren’t particularly optimistic.

Similar to Lucky’s Market Parent Company LLC, it appears that the company took on too much debt and expanded too much, too soon. Ah, private equity. Consequently, it has approximately $76.8mm of funded debt including a revolving credit facility held by Fifth Third Bank and Wells Fargo Bank NA and a term loan with a mysterious “Prepetition Term Loan Lender” that the company was apparently fearful of identifying by name in its papers. Like, for some reason. Like, as if, uh, we won’t find out who that sucker is who dumped $14.8mm into this horror show a mere 6 months ago. In addition to the funded debt, the company owes $60mm in trade and other unsecured obligations.

The company blames its failure on a now-standard lineup of excuses that include (i) crazy amounts of competition,** (ii) significant capex, and (iii) too much debt.

Riiiiight. Back to that debt. The company has been in a perpetual state of amend-and-extend since 2017 when, in May of that year, it secured an amendment/extension of its revolving loan maturity to April 2019. Those private equity bros who are sure to get bashed put $10mm of equity capital into the company at that point. Then in August 2018, the company entered into another amendment pushing out its maturity. In connection therewith, those private equity bros who are sure to get bashed put another $9mm of equity capital into the company. Another extension followed in April 2019 in which those private equity bros who are sure to get bashed put another $5mm of equity capital into the company. They likely would have had more fun just putting all of that money on "black” at the roulette table.

Meanwhile, the company’s efforts to refinance its debt and/or sell stalled badly. It sold 5 underperforming stores but the rest of the company’s inventory will be the responsibility of Hilco Merchant Resources LLC and Gordon Brothers Retail Partners LLC to sell; the sale of its locations the responsibility of A&G Realty Partners LLC; and the sale of the company’s IP, the responsibility of Hilco Streambank. This mandate is raining liquidators!! Toss in legal, a financial advisor and a strategic communications advisor and the question is: is there anyone left to hire to wind down this company?

*Interestingly, The Charlotte Observer reported that “[t]he number of grocery stores in the [Charlotte] metro area has grown by 38% in five years,” a real head-turner of a stat.

** GroceryDive reported:

“They made some strategic mistakes expanding too far into some non-continuous markets,” Burt Flickinger, managing director of Strategic Resources Group in New York, told Grocery Dive. He said Earth Fare’s key markets “were some of the most over-stored on the Eastern seaboard.”

They also note that the pain is pervasive:

Given their large size and market overlap with Earth Fare and Lucky’s, Sprouts and Whole Foods appear to be the main beneficiaries of this round of specialty store closures, sources said. But these chains certainly don’t have it easy. Whole Foods has not returned to profitable growth under Amazon, according to that company’s quarterly earnings reports, while Sprouts’ stock has dropped with the news from Lucky’s and Earth Fare.

“It’s an unforgiving market out there,” Flickinger said.

Indeed!

• Jurisdiction: D. of Delaware (Judge Owens)

• Capital Structure: $43.33mm RCF (Fifth Third Bank), $21.67mm RCF (Wells Fargo Bank NA), $14.8mm Term Loan

• Professionals:

  • Legal: Young Conaway Stargatt & Taylor, LLP (Pauline Morgan, M. Blake Cleary, Sean Greecher, Shane Reil)

  • Financial Advisor/CRO: FTI Consulting Inc. (Charles Goad)

  • Asset Disposition Advisor: Malfitano Advisors LLC

  • Liquidation Consultants: Hilco Merchant Resources LLC and Gordon Brothers Retail Partners LLC

    • Legal: Pepper Hamilton LLP (Douglas Hermann, Marcy McLaughlin Smith)

  • Real Estate Consultant: A&G Realty Partners LLC

  • IP Consultant: Hilco Streambank

  • Strategic Communications Advisor: Paladin Management Group LLC (Jennifer Mercer)

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

• Other Parties in Interest:

New Chapter 11 Bankruptcy Filing - API Americas Inc. (f/k/a AP Foils Inc.)

API Americas Inc.

February 2, 2020

Kansas-based (like, real Kansas-based, as in not in Missouri) API Americas Inc. and its affiliate API (USA) Holdings Limited filed for bankruptcy in the District of Delaware.* API Americas is a manufacturer of foils, laminates, and holographic materials. Among other customers, API Americas provides (i) packaging to companies in the premium drinks, confectionery, tobacco, perfume, personal care, cosmetics, and healthcare sectors and (ii) laminated paper and board products to end users focused on fine spirits, tobacco, confectionary and beauty brands. It has facilities in both Kansas and Indiana.

The debtors appear to be victims of disruption.** They note:

The Debtors have suffered from operating losses over the last couple of years, arising out of three main factors. First, the Debtors have experienced a significant drop in demand for their products, due to unfavorable market dynamics and a shift toward more environmentally sustainable products. In large part, the drop in demand is due to tobacco customers shifting to lower cost, alternative packaging and a substantial portion of the US market moving from merchant to captive.

Given the recent push towards ESG, we suspect we’ll see more debtors note “a shift towards more environmentally sustainable”-everything as a significant headwind. Interestingly, the debtors also note that operating losses are also the result of competitive pressure stemming from overcapacity in the industry. In other words, the demand side is decreasing while the supply-side seems robust. What other companies will follow the debtors into bankruptcy as a result? 🤔

We’ve been commenting here at PETITION that the consumer has been carrying the US economy for months now as certain major manufacturing and services indices have, in contrast to increasing consumer confidence and spending numbers,*** been reflecting negative warning signs about the state of the economy.**** Interestingly, the debtors highlight:

…the manufacturing sector in general has faced economic headwinds in recent months. On January 10, 2020, the New York Times reported that the Institute of Supply Management’s manufacturing index for December 2019 reflected the fastest rate of contraction since June 2009.

We repeat: what other companies will follow the debtors into bankruptcy as a result? 🤔

The debtors have $44.4mm outstanding under its ‘17 $700mm revolving credit facility with PNC Bank NA. With the consent of PNC, they’ll use cash collateral to fund the cases.

So what now? Well, it’s a bit unclear. The papers give no indication of a trajectory for the cases but an attempted sale looks likely. That said, it doesn’t appear like a banker had been engaged at the time of filing.

*Ultimate parent API Group Limited entered administration proceedings in the UK on 1/31/20.

**The debtors cite other specific reasons for its financial distress including poor integration/consolidation of facilities and capex required after the acquisition of one of its plants. These issues cost the debtors $11mm over since 2016.

***Recent consumer confidence numbers continue to be positive.

Source: The Daily Shot

**** Of course, different surveys generally reflect mixed messaging on this front. For instance, the Fed manufacturing index showed some positive signs.

• Jurisdiction: D. of Delaware (Judge Sontchi)

• Capital Structure: $44.4mm RCF (PNC Bank NA)

• Professionals:

  • Legal: Eversheds Sutherland US LLP (Edward Christian, Mark Sherrill) & Saul Ewing Arnstein & Lehr LLP (Mark Minuti, Monique DiSabatino)

  • Financial Advisor: Ernst & Young LLP (Briana Richards, Jon Henrich)

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

• Other Parties in Interest:

  • Prepetition Lender: PNC Bank NA

    • Legal: Blank Rome LLP (Regina Stango Kelbon, Stanley Tarr, Mark Rabinowitz)

🍎New Chapter 11 Bankruptcy Filing - Lucky's Market Parent Company LLC🍎

Lucky's Market Parent Company LLC

January 27, 2020

In Sunday’s Members’-only a$$-kicking briefing entitled “🔥Like No Other Newsletter🔥,” we took a deeeeeeeeep dive into the Fairway Group Holdings Corp. chapter 11 bankruptcy filing. We relegated to a mere footnote, the following:

*Two more local grocers to watch out for: Lucky’s Market (not PE-backed) and Earthfare (PE-backed). The former announced, on the heals of losing its sponsorship from Kroger Inc., that it would close 32 of 39 stores. The latter is quietly shuttering stores (e.g., Gainesville and Indianapolis). This is telling:

“Stern said Lucky's could potentially be acquired, but he said logical choices like Sprouts Farmers Market and The Fresh Market are also retrenching and not in expansion mode right now.”

The pain in grocery is pervasive.

Lucky’s Market Parent Company LLC be like:

And so the Colorado-based company and 21 affiliated entities filed for chapter 11 bankruptcy in the District of Delaware. Because, like, f*ck it: the pain in grocery IS pervasive so it might as well become a chapter 11 debtor like everyone else.

This one swims upstream. The debtors focus on affordable organic and locally-grown produce, naturally raised meats and seafood, and fresh daily prepared foods. Which, we thought, was supposed to be all the rage. “Organic for the 99%” was their mission. They even have private label goods. AND they have a millennial-pleasing “giving” element to their business: 10% of profits from private label sales are reinvested into the local communities they service. They have no unions. And they’re not even private equity owned!! Kroger Inc. ($KR) is the debtors’ secured lender and largest equity holder and, while obviously not PE bros, it seems that maybe(?) Kroger pushed the Colorado-based founders to grow too fast too soon?? In the midst of a number of grocery bankruptcies. In April 2016, they had 17 stores. The Kroger transaction took place at that time and then — BOOM! — a private equity growth mentality appears to have mysteriously overtaken the debtors. By the end of that year, the debtors’ footprint was up to 20 stores; by the end of 2017, it was 26 stores; 33 stores by the end of 2018; and 39 stores by the end of 2019. Florida was a primary focus.

The timing was pretty bad. Per the debtors:

…the Company’s expansion in Florida coincided with, among other things, increased competition in the grocery industry, including expansions from competing chains such as Sprouts Farmers Market, Fresh Thyme Farmers Market and Earth Fare. As a result, notwithstanding the growth in sales, the portfolio of Company stores was unable to achieve sustainable four-wall profitability.

Note the mention of Earth Fare ⬆️. Get ready for Dirty Dancing 2: Havana Nights gifs, people.

There’s more:

Most recently, fiscal year-to-date through January 4, 2020, the Company had approximately $22 million of store operating losses and approximately $100 million net loss. Additionally, fiscal year-to-date through the week ended January 18, 2020, the Company had a 10.6% reduction in comparable store sales versus the prior year-to-date period.

Suffice it to say, that growth strategy diiiiiiiidn’t work out so well.

And so now it’s all being unwound. The debtors began winding down 32 of their 39 stores pre-petition and, obviously, terminated plans for 19 leased but unopened locations.

Absent closure, the debtors note, they’d be on the hook for $30mm in operating losses for fiscal year ‘20. Now they’re selling furniture, fixtures and equipment from, and transferring leases of, 26 stores to third-party purchasers. They have an asset purchase agreement with Aldi for six FL locations while they continue to operate 7 locations while the marketing process progresses.

The debtors will use Kroger’s cash collateral to fund these cases.

• Jurisdiction: (Judge Dorsey)

• Capital Structure: $301.1mm secured loan (Kroger Inc.), $5.9mm New Markets Tax Credit Loan (BBIF Subsidiary CDE 3 LLC, guaranteed by Kroger Inc.)

• Professionals:

  • Legal: Polsinelli PC (Christopher Ward, Liz Boydston, Caryn Wang)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: Peter J. Solomon

  • Liquidation Consultant: Great American Global Partners LLC

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

  • Independent Director: William Transier

• Other Parties in Interest:

  • Large Equityholder (55%): Kroger Inc.

    • Legal: Weil Gotshal & Manges LLP (Garrett Fail, Moshe Fink) and Richards Layton & Finger PA (Zachary Shapiro, Brett Haywood)

New Chapter 11 Bankruptcy Filing - American Blue Ribbon Holdings LLC

American Blue Ribbon Holdings LLC

January 27, 2020

Man. The restaurant space is active AF when it comes to BK filings these days. Sysco Corporation ($SYY) must be sweating bullets. On the same day that BL Restaurants Holding LLC (Bar Louie) filed for bankruptcy and a mere week after The Krystal Company filed and less than six months after industry segment brother Perkins and Marie Callender’s filed for bankruptcy, Tennessee-based American Blue Ribbon Holdings LLC and four affiliated entities — the operators of 75 Village Inn and 22 Bakers Square family dining restaurant brands — filed for bankruptcy in the District of Delaware — the 8th significant bankruptcy filing in Delaware in 2020 (far outpacing any other jurisdiction).

This filing may come as a surprise to some. Why? Well, this August 2019 article in the Nashville Post dripped with optimism about the company’s proposed turnaround — a turnaround which included 50 pre-petition store closures. Despite these efforts, the debtors revenues were only $318mm in ‘19, a decline of $36mm.

Unlike BL Restaurants Holding LLC (Bar Louie), the debtors aren’t drowning in funded debt. In fact, they don’t have any secured debt at all. Unsecured claims total only $14mm.

They are, however, drowning due to industry-wide issues. If the factors leading to this filing sound familiar, well…they are:

• Increased competition in the restaurant business. ✅

• Increased competition from grocery stores’ expanded prepared meai offerings which, by and large, represent a much better value proposition. ✅

• Rising labor costs ($2mm hit). ✅

• Above-market rent. ✅

• Declining foot traffic due to “an increase in convenience via takeout and delivery at the expense of dine-in customers at restaurants.” DISRUPTION!! ✅

• Over-expansion. ✅

For all of these reasons, the debtors have been bleeding cash. They lost $11mm in ‘18 and $7mm in ‘19. So, sure, the turnaround was taking hold, it seems, but the $4mm in savings weren’t enough. Indeed, the debtors’ filing was precipitated due to a lack of liquidity.

The debtors will use the “breathing spell” provided by the filing to access $20mm in emergency liquidity (from their indirect ultimate majority owner, Cannae Holdings Inc. ($CNNE)) and pursue strategic options (without a banker….uh…ok, sure).

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• Jurisdiction: D. of Delaware (Judge Silverstein)

• Capital Structure: N/A

• Professionals:

  • Legal: KTBS Law LLP (Michael Tuchin, David Fidler, Jonathan Weiss, Sasha Gurvitz) & Young Conaway Stargatt & Taylor LLP (Robert Poppiti Jr.)

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

• Other Parties in Interest: