💩Workers’ Compensation, Powered by Private Equity💩

One Call Corporation is a Florida-based private equity-owned (Apax Partners) provider of “cost containment services to the workers’ compensation industry.” It’s a B2B service in that its clients are payors, i.e., insurers. The company formed in 2013 after Apax Partners acquired One Call Care Management, the predecessor entity, from private equity firm Odyssey Investment Partners (terms undisclosed) and contemporaneously acquired Align Networks from growth equity firm General Atlantic and The Riverside Company and merged the two together to form Once Call Corporation.

We bet you’re wondering: how complex can a workers’ comp solutions provider really be? We mean…this has to be the least sexy business ever. That said, we’re glad you asked. This company has a stupefying amount of debt on its balance sheet! $2b, in fact. You really have to love private equity.

You also have to really love poop-frosted layer cake capital structures:

• $56.6mm ‘22 revolver;

• $842.6mm ‘22 L+5.25% Term Loan B;

• $37.9mm ‘20 L+4% Term Loan B

• $343mm ‘24 7.5%/11% PIK new first lien toggle notes;

• $349mm ‘20 L+3.75%/6% PIK 1.5 first lien term loan (KKR, GSO Capital Markets);

• $94.7mm ‘24 7.5% first lien notes;* and

• $291mm ‘24 10% second lien notes.*

You get all of that? This may be the first time a capital structure for a company single-handedly put us across our newsletter length limitations. Sheesh that’s a lot of debt. And this is after an exchange transaction earlier this year in which the two tranches above with asterisks were (clearly not wholly) exchanged for the $343mm PIK toggle notes. That transaction — and, no doubt, all the fees that came with it — bought the company…

…a rather insignificant amount of time, it seems. The company’s performance apparently cannot sustain that much debt. Per Bloomberg:

Cash has been running short at One Call, which recently drew $50 million from its $56.6 million revolver…. Leverage was around 6.95 times earnings at mid-year, bumping up against the 7-times limit in its lender agreement….

So, the company has covenant issues and a lack of liquidity. It therefore failed to make an interest payment on the $291mm second lien notes on October 1 and it’s now operating amidst a customary 30-day grace period. No cash and little covenant room = no bueno. But, you know what it does have? A blog. That’s right, a blog. And the company is a prolific poster:

For the past couple of weeks, we have been engaging with our lenders on a comprehensive solution that will ensure One Call has an appropriate capital structure to support our long-term business objectives. As these constructive discussions continue, we decided to take advantage of an available grace period for making an interest payment due October 1 under the terms of one of our debt agreements. This grace period, which is fairly standard, allows us to defer this payment for 30 days – without constituting an event of default – while we work together on a solution.

S&P promptly downgraded the company to CC from CCC and put it on CreditWatch.

Per Bloomberg, negotiations are ongoing as to how the capital structure will be dealt with. Suffice it to say, this sucker will file for bankruptcy. And they’ll likely try and make quick work of it. We can’t wait to see how the company manufactures venue in White Plains given that its legal and restructuring advisory professionals are the same dynamic duo from FullBeauty, Sungard and Deluxe Entertainment. Lately, with these characters, “quick work of it” is a matter of relative degree.

💥Sungard Napalms the United States Trustee💥

New Chapter 11 Filing - Sungard Availability Services Capital Inc Part I

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

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

This is what the capital structure looked like and will look like:

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

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

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

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WANT TO SEE THE REST? THAT EDGE IS JUST ON THE OTHER SIDE OF THIS LINK. DISCOVER MORE WITH PETITION.

Is rue21 Becoming rue22? (Short Liberal Return Policies)

On Mary 15, 2017 - nearly exactly a year ago — rue21 Inc. became the latest in what was a string of specialty fashion retailers to file for bankruptcy; it sought to pursue both an operational and a financial restructuring. The company had 1179 brick-and-mortar locations in various strip centers, regional malls and outlet centers. It also had a capital structure that looked like this:

Much of the leverage emanated out of an Apax Partners LLP-sponsored take-private transaction in 2013. We recently discussed Apax Partners in the context of FullBeauty here, in our recent Members’-only briefing.

Without any real contest, it was clear that the term loan holders constituted the “fulcrum” security and would end up swapping said loans for equity in the reorganized company. And that is precisely what happened. The ABL was covered, the term lenders funded a roll-up DIP credit facility along with new money to finance the pendency of the cases and then converted that DIP into an exit facility. The post-emergence capital structure consists of:

• $125 million ABL; and

• $50 million term loan (plus accrued interest on the DIP term loan as of the effective date).

General unsecured claimants were provided an equity “kiss” on the petition date and then, after the Official Committee of Unsecured Creditors’ (“UCC”) formed, it extricated additional value in the form of, among other things, (i) a put option to sell its post-reorg equity to one of the reorganized debtors, and (ii) a waiver by the prepetition term lenders of their $200 million deficiency claim. While the UCC did try and go after third-party releases for Apax, Apax ultimately succeeded in obtaining the release pursuant to the bankruptcy court’s September 9 confirmation order on the basis that it…

“…agreed to (i) support the Plan, including by promptly facilitating and participating in prepetition Plan discussions that culminated in the Restructuring Support Agreement and the Plan, notwithstanding that their equity position would likely be eliminated thereunder; and (ii) participate in the financing of the DIP Term Loan Credit Facility.”

In other words, Apax bought its release for $2 million in DIP allocation.

All told, this was a solid deleveraging of roughly $700 million. Moreover, the company closed roughly 400 stores. The company was seemingly well-positioned to effectuate the rest of its proposed restructuring, including (i) revamping its e-commerce strategy, (ii) improving the in-store experience, and (iii) pursuing a long-term business plan under relatively new management in a highly competitive retail atmosphere.

“Seemingly” being the operative word. In January, The Wall Street Journal reported (paywall) that the retailer experienced lackluster sales and tightening trade terms. Then, in February, Reuters reported that the company “is seeking financing after lackluster holiday sales failed to generate the cash it had hoped for….” It noted, further, that the company had engaged Piper Jaffray Companies ($PJC) to raise the funds. Notably, there has been nothing new on this front since. No news is probably not good news when it comes to this situation. Start the sewing machines: a Scarlet 22 tag may be in order and a liquidation on the horizon.

In the meantime, if the company is looking for ways to preserve liquidity, it might want to consider a far less generous return policy:

With clothes like this and a customer like that, what could go wrong?