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

Insys Therapeutics Inc.

June 10, 2019

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What kind of independent effort? Color us suspicious.

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

  • Jurisdiction: D. of Delaware (Judge Gross)

  • Capital Structure: No funded debt.

  • Professionals:

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

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

    • Financial Advisor: FTI Consulting Inc.

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

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

  • Other Parties in Interest:

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

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

    • MDL Plaintiffs

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

Update 7/7/19 #244

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

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

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

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

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

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

So why bankruptcy? Why now? Per the company:

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

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

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

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

It gets worse.

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

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

But, wait. There’s more:

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

Riiiiiiiight. But:

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

Anywho.

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

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

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

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

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

  • Jurisdiction: D. of Delaware (Judge Gross)

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

  • Professionals:

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

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

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

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

  • Other Parties in Interest:

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

    • DIP Agent: Ankura Trust Company LLC

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

      • Financial Advisor: Houlihan Lokey

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

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

    • Indenture Trustee: BOKF NA

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

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

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

      • Investment Banker: Jefferies LLC (Leon Szlezinger)

Update: 7/7/19 #379

New Chapter 11 Filing - Hexion Holdings LLC

Hexion Holdings LLC

April 1, 2019

What we appreciate that and, we hope thanks to PETITION, others will eventually come to appreciate, is that there is a lot to learn from the special corporate law, investment banking, advisory, and investing niche labeled “restructuring” and “distressed investing.” Here, Ohio-based Hexion Holdings LLC is a company that probably touches our lives in ways that most people have no knowledge of: it produces resins that “are key ingredients in a wide variety of industrial and consumer goods, where they are often employed as adhesives, as coatings and sealants, and as intermediates for other chemical applications.” These adhesives are used in wind turbines and particle board; their coatings prevent corrosion on bridges and buildings. You can imagine a scenario where, if Washington D.C. can ever get its act together and get an infrastructure bill done, Hexion will have a significant influx of revenue.

Not that revenue is an issue now. It generated $3.8b in 2018, churning out $440mm of EBITDA. And operational performance is on the upswing, having improved 21% YOY. So what’s the problem? In short, the balance sheet is a hot mess.* Per the company:

“…the Debtors face financial difficulties. Prior to the anticipated restructuring, the Debtors are over nine times levered relative to their 2018 adjusted EBITDA and face annual debt service in excess of $300 million. In addition, over $2 billion of the Debtors’ prepetition funded debt obligations mature in 2020. The resulting liquidity and refinancing pressures have created an unsustainable drag on the Debtors and, by extension, their Non-Debtor Affiliates, requiring a comprehensive solution.”

This is what that capital structure looks like:

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(PETITION Note: if you’re wondering what the eff is a 1.5 lien note, well, welcome to the party pal. These notes are a construct of a frothy high-yield market and constructive readings of credit docs. They were issued in 2017 to discharge maturing notes. The holders thereof enjoy higher priority on collateral than the second lien notes and other junior creditors below, but slot in beneath the first lien notes).

Anyway, to remedy this issue, the company has entered into a support agreement “that enjoys the support of creditors holding a majority of the debt to be restructured, including majorities within every tier of the capital structure.” The agreement would reduce total funded debt by $2b by: (a) giving the first lien noteholders $1.45b in cash (less adequate protection payments reflecting interest on their loans), and 72.5% of new common stock and rights to participate in the rights offering at a significant discount to a total enterprise value of $3.1b; and (b) the 1.5 lien noteholders, the second lien noteholders and the unsecured noteholders 27.5% of the new common stock and rights to participate in the rights offering. The case will be funded by a $700mm DIP credit facility.

*Interestingly, Hexion is a derivative victim of the oil and gas downturn. In 2014, the company was selling resin coated sand to oil and gas businesses to the tune of 8% of sales and 28% of segment EBITDA. By 2016, segment EBITDA dropped by approximately $150mm, a sizable loss that couldn’t be offset by other business units.

  • Jurisdiction: D. of Delaware (Judge Gross)

  • Capital Structure: See above.

  • Professionals:

    • Legal: Latham & Watkins LLP (George Davis, Andrew Parlan, Hugh Murtagh, Caroline Reckler, Jason Gott, Lisa Lansio, Blake Denton, Andrew Sorkin, Christopher Harris) & (local) Richards Layton & Finger PA (Mark Collins, Michael Merchant, Amanda Steele, Brendan Schlauch)

    • Managers: Samuel Feinstein, William Joyce, Robert Kaslow-Ramos, George F. Knight III, Geoffrey Manna, Craig Rogerson, Marvin Schlanger, Lee Stewart

    • Financial Advisor: AlixPartners LLP

    • Investment Banker: Moelis & Company LLC (Zul Jamal)

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

  • Other Parties in Interest:

    • Ad Hoc Group of First Lien Noteholders (Angelo Gordon & Co. LP, Aristeia Capital LLC, Barclays Bank PLC, Beach Point Capital Management LP, Capital Research and Management Company, Citadel Advisors LLC, Contrarian Capital Management LLC, Credit Suisse Securities USA LLC, Davidson Kempner Capital Management LP, DoubleLine Capital LP, Eaton Vance Management, Federated Investment Counseling, GoldenTree Asset Management LP, Graham Capital Management LP, GSO Capital Partners LP, Heyman Enterprise LLC, Hotchkis and Wiley Capital Management LLC, OSK VII LLC, Pacific Investment Management Company LLC, Silver Rock Financial LP, Sound Point Capital Management LP, Tor Asia Credit Master Fund LP, UBS Securities LLC, Whitebox Advisors LLC)

      • Legal: Akin Gump Strauss Hauer & Feld LLP (Ira Dizengoff, Philip Dublin, Daniel Fisher, Naomi Moss, Abid Qureshi)

      • Financial Advisor: Evercore Group LLC

    • Ad Hoc Group of Crossover Noteholders (Aegon USA Investment Management LLC, Aurelius Capital Master Ltd., Avenue Capital Management II LP, Avenue Europe International Management, Benefit Street Partners LLC, Cyrus Capital Partners LP, KLS Diversified Asset Management LLC, Loomis Sayles & Company LP, Monarch Alternative Capital LP, New Generation Advisors LLC, P. Schoenfeld Asset Management LP)

      • Legal: Milbank LLP (Samuel Khalil, Matthew Brod)

      • Financial Advisor: Houlihan Lokey Capital Inc.

    • Ad Hoc Group of 1.5 Lien Noteholders

      • Legal: Jones Day (Sidney Levinson, Jeremy Evans)

    • Pre-petition RCF Agent & Post-petition DIP Agent ($350mm): JPMorgan Chase Bank NA

      • Legal: Simpson Thacher & Bartlett LLP

    • Trustee under the First Lien Notes: U.S. Bank NA

      • Legal: Kelley Drye & Warren LLP (James Carr, Kristin Elliott) & (local) Dorsey & Whitney LLP (Eric Lopez Schnabel, Alessandra Glorioso)

    • Trustee of 1.5 Lien Notes: Wilmington Savings Fund Society FSB

      • Legal: Arnold & Porter Kaye Scholer LLP

    • Trustee of Borden Indentures: The Bank of New York Mellon

    • Sponsor: Apollo

    • Official Committee of Unsecured Creditors: Pension Benefit Guaranty Corporation; Agrium US, Inc.; The Bank of New York Mellon; Mitsubishi Gas Chemical America; PVS Chloralkali, Inc.; Southern Chemical Corporation; Wilmington Trust; Wilmington Savings Fund Society; and Blue Cube Operations LLC

      • Legal: Kramer Levin Naftalis & Frankel LLP (Kenneth Eckstein, Douglas Mannal, Rachael Ringer) & (local) Bayard PA (Scott Cousins, Erin Fay, Gregory Flasser)

      • Financial Advisor: FTI Consulting Inc. (Samuel Star)

Updated:

New Chapter 11 Bankruptcy Filing - F+W Media Inc.

F+W Media Inc.

March 10, 2019

WAAAAAAY back in September 2018, we highlighted in our Members’-only piece, “Online Education & ‘Community’ (Long Helen Mirren),” that esteemed author and professor Clayton Christensen was bullish about the growth of online education and bearish about colleges and universities in the US. We also wrote that Masterclass, a SF-based online education platform that gives students “access” to lessons from the likes of Helen Mirren(acting), Malcolm Gladwell (writing) and Ken Burns (documentary film making) had just raised $80mm in Series D financing, bringing its total fundraising to $160mm. Online education is growing, we noted, comporting nicely with Christensen’s thesis.

But we didn’t stop there. We counter-punched by noting the following:

Yet, not all online educational tools are killing it. Take F+W Media Inc., for instance. F+W is a New York-based private equity owned content and e-commerce company; it publishes magazines, books, digital products like e-books and e-magazines, produces online video, offers online education, and operates a variety of e-commerce channels that support the various subject matters it specializes in, e.g., arts & crafts, antiques & collectibles, and writing. Writer’s Digest is perhaps its best known product. Aspiring writers can go there for online and other resources to learn how to write.

For the last several years F+W has endeavored to shift from its legacy print business to a more digital operation; it is also beginning to show cracks. Back in January, the company’s CEO, COO and CTO left the company. A media and publishing team from FTI Consulting Inc. ($FTI) is (or at least was) embedded with new management. The company has been selling non-core assets (most recently World Tea Media). Its $125mm 6.5% first lien term loan due June 2019 was recently bid at 63 cents on the dollar (with a yield-to-worst of 74.8% — yields are inversely proportional to price), demonstrating, to put it simply, a market view that the company may not be able to pay the loan (or refinance the loan at or below the current economics) when it comes due.

Unlike MasterClass and Udacity and others, F+W didn’t start as an all-digital enterprise. The shift from a legacy print media business to a digital business is a time-consuming and costly one. Old management got that process started; new management will need to see it through, managing the company’s debt in the process. If the capital markets become less favorable and/or the business doesn’t show that the turnaround can result in meaningful revenue, the company could be F(+W)’d(emphasis added)

Nailed it.

On March 10, 2019, F+W Media Inc., a multi-media company owning and operating print and digital media platforms, filed for chapter 11 bankruptcy in the District of Delaware along with several affiliated entities. We previously highlighted Writer’s Digest, but the company’s most successful revenue streams are its “Crafts Community” ($32.5mm of revenue in 2018) and “Artist’s Network” ($.8.7mm of revenue in 2018); it also has a book publishing business that generated $22mm in 2018. In terms of “master classes,” the bankruptcy papers provide an intimate look into just how truly difficult it is to transform a legacy print business into a digital multi-media business.

The numbers are brutal. The company notes that:

“In the years since 2015 alone, the Company’s subscribers have decreased from approximately 33.4 million to 21.5 million and the Company’s advertising revenue has decreased from $20.7 million to $13.7 million.”

This, ladies and gentlemen, reflects in concrete numbers, what many in media these days have been highlighting about the ad-based media model. The company continues:

Over the past decade, the market for subscription print periodicals of all kinds, including those published by the Company, has been in decline as an increasing amount of content has become available electronically at little or no cost to readers. In an attempt to combat this decline, the Company began looking for new sources of revenue growth and market space for its enthusiast brands. On or around 2008, the Company decided to shift its focus to e-commerce upon the belief that its enthusiast customers would purchase items from the Company related to their passions besides periodicals, such as craft and writing supplies. With its large library of niche information for its hobbyist customers, the Company believed it was well-positioned to make this transition.

What’s interesting is that, rather than monetize their “Communities” directly, the company sought to pursue an expensive merchandising strategy that required a significant amount of upfront investment. The company writes:

In connection with this new approach, the Company took on various additional obligations across its distribution channel, including purchasing the merchandise it would sell online, storing merchandise in leased warehouses, marketing merchandise on websites, fulfilling orders, and responding to customer service inquiries. Unfortunately, these additional obligations came at a tremendous cost to the Company, both in terms of monetary loss and the deterioration of customer relationships.

In other words, rather than compete as a media company that would serve (and monetize) its various niche audiences, the company apparently sought to use its media as a marketing arm for physical products — in essence, competing with the likes of Amazon Inc. ($AMZN)Walmart Inc. ($WMT) and other specialty hobbyist retailers. As if that wasn’t challenging enough, the company’s execution apparently sucked sh*t:

As a consequence of this shift in strategic approach, the Company was required to enter into various technology contracts which increased capital expenditures by 385% in 2017 alone. And, because the Company had ventured into fields in which it lacked expertise, it soon realized that the technology used on the Company’s websites was unnecessary or flawed, resulting in customer service issues that significantly damaged the Company’s reputation and relationship with its customers. By example, in 2018 in the crafts business alone, the Company spent approximately $6 million on its efforts to sell craft ecommerce and generated only $3 million in revenue.

Last we checked, spending $2 to make $1 isn’t good business. Well, unless you’re Uber or Lyft, we suppose. But those are transformative visionary companies (or so the narrative goes). Here? We’re talking about arts and crafts. 🙈

As if that cash burn wasn’t bad enough, in 2013 the company entered into a $135mm secured credit facility ($125mm TL; $10mm RCF) to fund its operations. By 2017, the company owed $99mm in debt and was in default of certain covenants (remember those?) under the facility. Luckily, it had some forgiving lenders. And by “forgiving,” we mean lenders who were willing to equitize the loan, reduce the company’s indebtedness by $100mm and issue a new amended and restated credit facility of $35mm (as well as provide a new $15mm tranche) — all in exchange for a mere 97% of the company’s equity (and some nice fees, we imagine). Savage!

As if the spend $2 to make $1 thing wasn’t enough to exhibit that management wasn’t, uh, “managing” so well, there’s this:

The Company utilized its improved liquidity position as a result of the Restructuring to continue its efforts to evolve from a legacy print business to an e-commerce business. However, largely as a result of mismanagement, the Company exhausted the entire $15 million of the new funding it received in the six (6) months following the Restructuring. In those six (6) months, the Company’s management dramatically increased spending on technology contracts, merchandise to store in warehouses, and staffing while the Company was faltering and revenue was declining. The Company’s decision to focus on e-commerce and deemphasize print and digital publishing accelerated the decline of the Company’s publishing business, and the resources spent on technology hurt the Company’s viability because the technology was flawed and customers often had issues with the websites.

What happened next? Well, management paid themselves millions upon millions of dollars in bonuses! Ok, no, just kidding but ask yourself: would you have really been surprised if that were so?? Instead, apparently the board of directors awoke from a long slumber and decided to FINALLY sh*tcan the management team. The board brought in a new CEO and hired FTI Consulting Inc. ($FTI) to help right the ship. They quickly discovered that the e-commerce channel was sinking the business (PETITION Note: this is precisely why many small startup businesses build their e-commerce platforms on top of the likes of Shopify Inc. ($SHOP) — to avoid precisely the e-commerce startup costs and issues F+W experienced here.).

Here is where you insert the standard operational restructuring playbook. Someone built out a 13-week cash flow model and it showed that the company was bleeding cash. Therefore, people got fired and certain discreet assets got sold. The lenders, of course, took some of those sale proceeds to setoff some of their debt. The company then refreshed the 13-week cash flow model and…lo and behold…it was still effed! Why? It still carried product inventory and had to pay for storage, it was paying for more lease space than it needed, and its migration of e-commerce to partnerships with third party vendors, while profitable, didn’t have meaningful enough margin (particularly after factoring in marketing expenses). So:

Realizing that periodic asset sales are not a long-term operational solution, the Company’s board requested alternative strategies for 2019, ranging from a full liquidation to selling a significant portion of the Company’s assets to help stabilize operations. Ultimately, the Company determined that the only viable alternative, which would allow it to survive while providing relief from its obligations, was to pursue a sale transaction within the context of a chapter 11 filing.

Greenhill & Co. Inc. ($GHL) is advising the company with respect to a sale of the book publishing business. FTI is handling the sale of the company’s Communities business. The company hopes both processes are consummated by the end of May and middle of June, respectively. The company secured an $8mm DIP credit facility to fund the cases.

And that DIP ended up being the source of some controversy at the First Day hearing. Yesterday morning, Judge Gross reportedly rebuked the lenders for seeking a 20% closing fee on the $8mm DIP; he suggested 10%. Per The Wall Street Journal:

Judge Gross said he didn’t want to play “chicken” with the lenders, but that he didn’t believe they should use the bankruptcy financing to recoup what they were owed before the chapter 11 filing.

Wow. Finally some activist push-back on excessive bankruptcy fees! Better late than never.

  • Jurisdiction: D. of Delaware (Judge Gross)

  • Capital Structure:

  • Professionals:

    • Legal: Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Kenneth Enos, Elizabeth Justison, Allison Mielke, Jared Kochenash)

    • Financial Advisor: FTI Consulting Inc. (Michael Healy)

    • Investment Banker: Greenhill & Co.

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

  • Other Parties in Interest:

    • Prepetition & Postpetition DIP Agent ($8mm): Fortress Credit Co. LLC)

      • Legal: Halperin Battaglia Benzija LLP (Alan Halperin, Walter Benzija, Julie Goldberg) & (local) Bielili & Klauder LLC (David Klauder)

    • DIP Lenders: Drawbridge Special Opportunities Fund LP, New F&W Media M Holdings Corp LLC, PBB Investments III LLC, CION Investment Corporation, Ellington Management Group, or affiliates thereof to be determined.

    • Official Committee of Unsecured Creditors (LSC Communications US, Inc. and Palm Coast Data LLC)

      • Legal: Arent Fox LLP (Robert Hirsh, Jordana Renert) & (local) Morris James LLP (Eric Monzo, Brya Keilson)

      • Financial Advisor: B. Riley FBR (Adam Rosen)

Updated 4/23

New Chapter 11 Bankruptcy Filing - Things Remembered Inc.

Things Remembered Inc.

2/6/19

This has been a rough week for "out-of-court" restructurings in the retail space. On the heals of Charlotte Russe's collapse into bankruptcy after an attempted out-of-court solution, Things Remembered Inc. filed for bankruptcy in the District of Delaware on February 6, 2019. We recently wrote about Things Remembered here. Let's dig in a bit more. 

The 53-year old retailer filed with a stalking horse purchaser, Ensco Properties LLC, in line to purchase, subject to a tight 30-day timeframe, a subset of the company's store footprint and direct-sales business. The company writes in the most Trumpian-fashion imaginable:

"Although stores not acquired will need to close, the going-concern sale wills save hundreds of jobs and potentially many more and provide an improved, and significantly less risky, recovery to stakeholders." What does "potentially many more" mean? Don't they know how many people are employed at the locations being sold as well as corporate support? Seems like a Trumpian ad lib of corresponding inexactitude. But, whatever. 

What caused the need for bankruptcy?

"Like many other retailers, the Company has suffered from adverse macro-trends, as well as certain microeconomic operational challenges. Faced with these challenges, the Company initiated multiple go-forward operational initiatives to increase brick-and-mortar profitability, such as store modernization through elimination of paper forms and the addition of iPads to streamline the personalization and sale process, and by shuttering a number of underperforming locations. The Company also sought to bolster the Debtors’ online-direct sale business, including aggressive marketing to loyal customers to facilitate sales through online channels, attracting new customers via an expanded partnership with Amazon, and increasing service capabilities for the business-to-business customer segment."

Read that paragraph and then tell us that retail management teams (and their expensive advisors) have any real clue how to combat the ails confronting retail. Elimination of paper forms? Ipads? Seriously? Sure, the rest sounds sensible and comes right out of today's standard retail playbook, i.e., shutter stores, bolster online capabilities, leverage Amazon's distribution, tapping into "loyal customers," etc. We're surprised they didn't mention AR/VR, Blockchain, "experiential retail," pop-ups, advertising on scooters, loyalty programs, and all of the other trite retail-isms we've heard ad nauseum (despite no one actually proving whether any or all of those things actually drive revenue). 

The rest of the story is crazy familiar by this point. The "challenging operating environment" confronting brick-and-mortar and mall-based retail, specifically, led to missed sales targets and depressed profitability. Naturally there were operational issues that compounded matters and, attention Lenore Estrada (INSERT LINK), "…vendors have begun to place pressure on the supply chain cost structure by delaying or cancelling shipments until receiving payment." Insert cash on delivery terms here. Because that's what they should do when a customer is mid-flush. 

Anyway, shocker: negative cash flows persisted. Consequently, the company and its professionals commenced a marketing process that landed Enesco as stalking horse bidder. Enesco has committed to acquiring the direct-sales business (which constitutes 26% of all sales in 2018 and includes the e-commerce website, hq, fulfillment and distribution center in Ohio and related assets) and approximately 128 stores (subject to addition or subtraction, but a floor set at 50 store minimum). Store closings of approximately 220 stores and 30 kiosks commenced pre-petition. A joint venture between Hilco Merchant Resources LLC and Gordon Brothers Retail Partners LLC is leading that effort (which again begs the question as to how Gymboree is the only recent retailer that required the services of four "liquidators"). The purchase price is $17.5mm (subject to post-closing adjustments). $17.5mm is hardly memorable. That said, the company did have negative $4mm EBITDA so, uh, yeeeeeaaaaah. 

$18.7mm '19 revolving credit facility (Cortland Capital Markets Services LLC); $124.9mm 12% '20 TL. 

The capital structure represents the result of an August 30, 2016 out-of-court exchange that, let's be honest here, didn't do much other than incrementally lessen the debt burden, kick the can down the road and get some professionals paid. If this sounds familiar, it's because it's not all that different than Charlotte Russe in those respects. 

  • Jurisdiction: D. of Delaware (Judge Gross)

  • Capital Structure: $mm debt     

  • Company Professionals:

    • Legal: Kirkland & Ellis LLP (Christopher Greco, Derek Hunger, Angela Snell, Spencer Winters, Catherine Jun, Scott Vail, Mark McKane) & (local) Landis Rath & Cobb LLP (Adam Landis, Matthew McGuire, Kimberly Brown, Matthew Pierce)

    • Legal (Canada): Davies Ward Phillips & Vineberg LLP

    • Financial Advisor/CRO: Berkeley Research Group LLC (Robert Duffy, Brett Witherell)

    • Investment Bank: Stifel Nicolaus & Co. Inc. and Miller Buckfire & Co. LLC (James Doak)

    • Liquidators: Hilco Merchant Resources LLC and Gordon Brothers Retail Partners LLC

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

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

  • Other Parties in Interest:

    • Stalking Horse Purchaser: Enesco Properties LLC  (Balmoral Funds LLC)

      • Legal: Pachulski Stang Ziehl & Jones LLP (Jeffrey Pomerantz, Maxim Litvak, Joseph Mulvihill)

    • Lender: Cortland Capital Market Services LLC

      • Legal: Weil Gotshal & Manges LLP (David Griffiths, Lisa Lansio) & (local) Richards Layton & Finger PA (Daniel DeFranceschi, Zachary Shapiro)

    • Sponsor: KKR & Co.

    • Official Committee of Unsecured Creditors (Jewelry Concepts Inc., Gravotech Inc., Chu Kwun Kee Metal Manufactory, Brookfield Property REIT, Inc., Simon Property Group LP)

      • Legal: Kelley Drye & Warren LLP (Eric Wilson, Jason Adams, Kristin Elliott, Lauren Schlussel) & (local) Connolly Gallagher (N. Christopher Griffiths, Shaun Michael Kelly)

      • Financial Advisor: Province Inc. (Carol Cabello, Sanjuro Kietlinski, Jorge Gonzalez, Michael Martini)

New Chapter 11 Bankruptcy Filing - Catalina Marketing Corporation

Catalina Marketing Corporation

12/12/18

On September 16 in “🤖Tech Wants to Axe Lawyers🤖,” we wrote about Crossmark Holdings Inc.Acosta Inc., and Catalina Marketing (a unit of Checkout Holding Corp.) and noted that “[a]ll three are in trouble.” Catalina Marketing was the first domino to fall as it filed for bankruptcy in the District of Delaware.

In connection with our review of the three companies, we previously wrote:

Finally, Catalina Marketing finds itself paying restructuring fees these days too. The St. Petersburg Florida company is owned by Berkshire Partners and Hellman & FriedmanCrescent Capital is also a large equity holder. The company’s capital structure includes approximately:

$29mm April ‘19 L+3.5% Revolving Credit Facility

$1.05b April ‘21 L+3.5% Term Loan (~48.4 bid)

$460mm April ‘22 L+6.75% Second Lien Term Loan (~11.6 bid)

$230mm PIK Toggle unsecured notes

Carry the one, add the two, that’s over $5b of debt across all three companies. Gotta love private equity.

So, yes, yet another private equity-backed company is in bankruptcy court. Here, the company appears to have an agreement with 90% of its first lien lenders (Abry Advanced Securities Fund II and III, Alcentra Limited, Bain Capital Credit LP, Carlyle Investment Management LLC, Invesco Senior Secured Management Inc., and OppenheimerFunds Inc.), and 75% of its second lien lenders, the effect of which is purported to be a $1.6b — yes, $1.6 BILLION — debt reduction. An ad hoc group of first lien lenders has agreed to provide $275mm DIP credit facility (of which $125mm is new money) and committed to provide $40mm in exit financing.

  • Jurisdiction: D. of Delaware (Judge Gross)

  • Capital Structure: see above.

  • Company Professionals:

    • Legal: Weil Gotshal & Manges LLP (Gary Holtzer, Ronit Berkovich, Jessica Liou, Kevin Bostel, Alexander Condon, Elizabeth Carens, Michael Godbe, Lisa Lansio, Leonard Yoo, Patrick Steel, David Zubkis, Theodore Tsekerides, Peter Isakoff) & (local) Richards Layton & Finger PA (Mark Collins, Jason Madron)

    • Financial Advisor: FTI Consulting Inc. (Robert Del Genio, Thomas Ackerman)

    • Investment Banker: Centerview Partners

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

  • Other Parties in Interest:

    • DIP Lenders and the Ad Hoc First Lien Lenders

      • Legal: Jones Day (Scott Greenberg, Michael J. Cohen, David Torborg, Stacey Corr-Irvine, Jeremy Evans, C. Lee Wilson) and (local) Pachulski Stang Ziehl & Jones LLP represent the DIP Lenders and the Ad Hoc First Lien Lenders. 

    • Ad Hoc Group of Second Lien Lenders

      • Paul Weiss Rifkind Wharton & Harrison (Brian Hermann, Robert Britton, Daniel Youngblut, Miriam Levi) and (local) Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Andrew Magaziner)

    • Admin Agent of the First Lien Credit Agrement

      • Legal: Davis Polk & Wardwell LLP (Brian Resnick, David Schiff) and Landis Rath & Cobb LLP (Adam Landis, Kerri Mumford)

    • Admin agent under the Second Lien Credit Agreement

      • Legal: Wilmer Cutler Pickering Hale and Dorr (Andrew Goldman, Benjamin Loveland)

    • Ad Hoc Group of the PIK Toggle notes

      • Legal: Debevoise & Plimpton LLP

New Chapter 11 Bankruptcy Filing - Welded Construction L.P.

Welded Construction L.P.

October 22, 2018

Amidst concerns of nationwide pipeline shortages and, strangely, corresponding fears over too much pipeline capacity, it seems even more strange that a pipeline construction company would file for bankruptcy. Alas, on Monday, Welded Construction L.P., a Perrysburg Ohio-based pipeline construction contractor filed for bankruptcy in the district of Delaware despite slightly more than $1b in consolidated gross revenue in the twelve months ended 9/30/18.

We have to hand the company and its professionals some credit: they appear to be paying attention to what PETITION has been saying about the need for more efficiency in the restructuring profession as this case features one of the shortest First Day Declarations we’ve seen in recent memory. They cut right to it. No surplus. Which seems only right: surplus is definitely not something a pipeline construction contractor wants.

Sadly, that is apparently what it appears to have. Just not surplus liquidity, unfortunately. Rather they are alleged by some of their clients to have a surplus of cost overruns. And by alleged we don’t mean threatening emails or letters. We mean litigation. And then litigation has cooled the market for Welded and fed into liquidity issues.

The company is currently working on five pipeline construction projects for its various customers, a list that includes the likes of Sunoco (as affiliates of Energy Transfer Partners LP or “ETP”), Consumers Energy Company, and Williams Companies. The latter, upon completion of Welded’s construction work, is alleged to have withheld $23.5mm from a payment owed to the company and filed a lawsuit against the company alleging breach of contract. According to the company, this “created acute liquidity issues for the Debtors and concerns in the market about their viability as a going concern.” When there is a ton of pipeline construction business to be won, this timing couldn’t possibly be any worse.

Compounding matters is the fact that the company has sizable potential surety bond obligations to its insurers. The insurers, in turn, were granted security interests in the company’s assets but…uh…maybe didn’t perfect them? Whoops. Popping popcorn for this inevitable fight. There is no secured debt here other than some potential equipment financing.

Bored yet? Yeah, us too. But there is a lesson here about managing litigation risk. The lawsuit by Williams spooked other potential customers and enhanced the company’s already pressing liquidity concerns. The company states:

The Debtors vigorously dispute the allegations contained in the Williams Complaint. Since the filing of the Williams Complaint, the Debtors have engaged in dialogue with Williams and its other Customers in an attempt to consensually resolve the dispute and avert the need for the filing of these chapter 11 cases. However, the filing of the Williams Complaint was quickly made public to the market and Customers became increasingly concerned about how the payment of receivables would be utilized by the Debtors. In particular, Customers sought assurance that any new payables would be solely deployed toward expenses related to their particular Projects. As such, these discussions were unsuccessful, depriving the Debtors of the necessary liquidity to sustain their business operations outside of chapter 11 and absent negotiated arrangements with their Customers….

Subsequently, and just a few days ago, ETP sent a letter to the company purporting to terminate the company’s engagement on the ETP project. Crikey! The dominoes are falling.

That last bit of the above quote is key here. Armed with a $20mm DIP credit facility, the company intends to use the “breathing spell” afforded by the chapter 11 automatic stay to:

…negotiate arrangements to finalize the Debtors’ ongoing Projects with [customers], all with the overarching goal of maximizing the value of the Debtors’ estates for the benefit of the Debtors’ creditors and other stakeholders.

Sounds like the next few weeks are going to be riddled with intense negotiations. Sure sounds like the company’s survival depends upon it.

  • Jurisdiction: D. of Delaware (Judge Gross)

  • Capital Structure: No secured debt. $240mm of accrued liabilities.

  • Company Professionals:

    • Legal: Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Sean Beach, Justin Rucki, Tara Pakrouh, Betsy Feldman)

    • Financial Advisor: Zolfo Cooper LLC (Frank Pometti)

    • Claims Agent: KCC (*click on company name above for free docket access)

  • Other Parties in Interest:

    • North American Pipeline Equipment Company, LLC, Bechtel Oil, Gas & Chemicals, Inc., and Ohio Welded Company LLC

      • Legal: Gibson Dunn & Crutcher LLP (Michael Rosenthal, Matthew Kelsey, J. Eric Wise, Daniel Denny, Jason Friedman) & (local) Ashby & Geddes PA (William Bowden, Karen Skomorucha Owens, Katharina Earle)

    • Berkshire Hathaway Specialty Insurance Company

      • Legal: Chiesa Shahinian & Giantomasi PC (Scott Zuber, Jonathan Bondy) & (local) Burr & Forman LLP (Richard Robinson, J. Cory Falgowski)

New Chapter 11 Filing - VER Technologies Holdco LLC

VER Technologies Holdco LLC

4/4/18

VER Technologies, a Los Angeles-based provider of for-rent production equipment and engineering support for live and taped television, cinema, live events and broadcast media has filed for chapter 11 bankruptcy in the District of Delaware. We hadn't heard of these guys before and we're guessing that, unless you live in Los Feliz or Silverlake, you haven't either. Suffice it to say that they're they guys behind the guy, so to speak. Recent broadcast work included the 2018 Super Bowl broadcast (eat it Brady); they also serve over 350 live music customers per year including the Biebs and the band-formerly-known-as-Coldplay-now-called-the-Chainsmokers. 

In some respects, this is a story about attempted avoidance of disruption leading to disruption. The company initially specialized in rentals with no equipment customization but, with time, opted to expand its product and service offerings to include customization. This endeavor, however, proved capital intensive to the point where the company exceeded $270 million on its prepetition asset-backed lending facility. This triggered cash sweeps to the company's bank which proved to further constrain liquidity. This sparked a need for an operational and balance sheet restructuring to maximize cash and get the company to the point of a potential transaction.

In other respects, this is another leveraged buy-out that saddled the target company with a wee bit too much debt. Moreover, the company seems to have undertaken a number of ill-advised or ill-executed operational initiatives that, ultimately, undercut revenue. It happens. 

Now the company -- supported by a restructuring support agreement with its lenders (including funds managed by GSO Capital Partners) -- hopes to facilitate a pre-negotiated merger with an entity controlled by Production Resource Group LLCl ("PRG"). PRG is a Jordan Company-owned provider of entertainment and event technology solutions. Naturally, the term lenders will also own a portion of the reorganized company. Per the term sheet, PRG will get 72% preferred and 80% common; the term lenders will get the delta. The reorganized company will still have a meaningful amount of debt on its balance sheet with a proposed new (unquantified) first lien term loan and a $435 million new second lien term loan. 

The company has secured a proposed $364.7 million DIP credit facility ($300mm ABL, $64.7mm Term Loan, of which $50mm is new money) to support its time in bankruptcy. The company seeks to be in and out of bankruptcy court in approximately 115 days. 

  • Jurisdiction: D. of Delaware (Judge Gross)
  • Capital Structure: $296.3mm ABL Facility (Bank of America NA), $424.2mm term loan (GSO Capital Partners LP/Wilmington Trust NA), $14mm FILO loan, $18.75mm New FTF Inc. Note, $7.5mm Catterton Notes.  
  • Company Professionals:
    • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Ryan Blaine Bennett, Christine Pirro, Jamie Netznik) & (local) Klehr Harrison Harvey Branzburg LLP (Domenic Pacitti, Morton Branzburg)
    • Financial Advisor/CRO: AlixPartners LLC (Lawrence Young, Stephen Spitzer, Bradley Hunter, Christopher Blacker, James Guyton, Brad Hall)
    • Investment Banker: PJT Partners LP (Nick Leone)
    • Strategic Communications: Joele Frank
    • Independent Director: Eugene Davis
      • Legal: Kramer Levin Naftalis Frankel LLP (Philip Bentley)
    • Claims Agent: KCC (*click on company name above for free docket access)
  • Other Parties in Interest:
    • Prepetition ABL Agent and DIP ABL Agent:
      • Legal: Skadden Arps Slate Meagher & Flom LLP (Shana Elberg, Christopher Dressel, Anthony Clark, Robert Weber, Cameron Fee)
      • Financial Advisor: Perella Weinberg Partners
    • DIP Term Loan Agent: Wilmington Trust NA
      • Legal: Alston & Bird LLP (Jason Solomon)
    • Supporting Term Loan Lenders: GSO Capital Partners, ABR Reinsurance Ltd., Consumer Program Administrators Inc., Irving LLC
      • Legal: Morgan Lewis & Bockius LLP (Frederick Eisenbeigler, Andrew Gallo, Christopher Carter) & Richards Layton & Finger PA (Mark Collins, Amanda Steele, Joseph Barsalona)
    • 12% Subordinated Noteholder:
      • Legal: King & Spalding LLP (Jeffrey Pawlitz, Michael Handler)
    • Indenture Trustee FTF Note:
      • Legal: Robins Kaplan LLP (Howard Weg, Michael Delaney)
    • Production Resource Group LLC
      • Legal: Greenberg Traurig LLP (Todd Bowen) & Morrison Cohen LLP (Joseph Moldovan, Robert Dakis)
    • Wells Fargo NA
      • Legal: Otterbourg PC (Andrew Kramer)
    • Official Committee of Unsecured Creditors
      • Legal: SulmeyerKupetz PC (Alan Tippie, Mark Horoupian, Victor Sahn, David Kupetz) & (local) Whiteford Taylor & Preston LLC (Christopher Samis, L. Katherine Good, Aaron Stulman, Kevin Hroblak)
      • Financial Advisor: Province Inc. (Carol Cabello) 

Updated 5/19/18

New Chapter 11 Filing - HCR Manorcare Inc.

HCR Manorcare

3/4/18 Recap: Ohio-based Carlyle-backed long-term care provider of 450 (i) skilled nursing and impatient rehab facilities, memory care facilities and assisted living facilities (the "Long-Term Care Business"), (ii) hospice and home health care agencies, and (iii) outpatient rehab clinics filed a prepackaged bankruptcy after months of back-and-forth with its REIT-parent and Master Lease counterparty, Quality Care Properties Inc. ($QCP). The bankruptcy will effectuate a transaction pursuant to which QCP will shed its REIT status and take on 100% of the stock in the reorganized HCR. 

Interestingly, retailers aren't the only businesses capitulating under the weight of their rent. Here, the revenues generated by the Long-Term Care Business weren't generating sufficient revenues to cover ordinary course operating expenses and monthly rent obligations to QCP. By way of illustration, 

"For the twelve months ended December 31, 2017, the Company had revenues of approximately $3.741 billion, 82% of which derived from the Long-Term Care Business, and reported a consolidated pre-tax loss from continuing operations of approximately $267.9 million. As of December 31, 2017, the Company had approximately $4.264 billion in total assets and approximately $7.118 billion in total liabilities, debt and financing obligations...."

Rough. In 2016, HCR paid approximately $442mm ($37mm a month) in minimum rent to QCP. In 2017, after extensive negotiations, the amount dipped to $290mm ($24mm a month). With amounts that staggering, no wonder the company struggled. 

The relationship between QCP and HCR emanates out of a 2011 sale-leaseback transaction. After said transaction, QCP became an independent publicly traded company. Significantly,

"At the time of the 2011 Transaction, the business environment in the post-acute/skilled nursing sector was favorable due to a number of factors, including an aging population, expected increases in aggregate skilled nursing expenditures, and supply constraints in the skilled nursing sector due to substantial barriers to entry. The parties negotiated the amount of rent payable under the MLSA against this background."

But, as we consistently point out here at PETITION, projections don't always pan out as planned. Indeed, after the consummation of the 2011 transaction, 

"...the operating environment for post-acute/skilled nursing facility operators has become significantly more challenging. Unfavorable trends for operators of skilled nursing facilities include (a) a shift away from a traditional fee-for-service model toward new managed-care models, which base reimbursement on patient outcome measures; (b) increased penetration of Medicare Advantage plans, which has reduced reimbursement rates, average length of stay and average daily census; (c) increased competition from alternative healthcare services such as home health agencies, life care at home, community-based service programs, senior housing, retirement communities and convalescent centers; and (d) reductions in reimbursement rates from government payors."

Obviously this is a bit of a problem when your have a month rent nut of $37mm. 

  • Jurisdiction: D. of Delaware (Judge Gross)
  • Capital Structure: $400mm '18 9.5% TL debt (RD Credit LLC), $150mm '19 9.5% RCF, $445mm guaranty obligations under the Master Lease.
  • Company Professionals:
    • Legal: Sidley & Austin LLP (Larry Nyhan, Dennis M. Twomey, William A. Evanoff, Allison Ross Stromberg, Matthew E. Linder) & (local) Young Conaway Stargatt & Taylor LLP (Robert S. Brady, Edmon L. Morton, Justin H. Rucki, Ian J. Bambrick, Tara Pakrouh)
    • Financial Advisor/CRO: AlixPartners LLC (John Castellano)
    • Investment Banker: Moelis & Co.
    • Independent Directors: Sherman Edmiston, Kevin Collins
    • Claims Agent: Epiq Bankruptcy Solutions LLC (*click on company name above for free docket access)
  • Other Parties in Interest: TBD. 

Updated 3/5/18

New Chapter 11 Bankruptcy - Orchard Acquisition Company LLC (The J.G. Wentworth Company)

The J.G. Wentworth Company

  • 12/12/17 Recap: What's the statute of limitations for getting tagged with the "Chapter 22" label? While this may be out of bounds thanks to the passage of time, this is not the company's first foray in bankruptcy court, having previously filed during the financial crisis in 2009. It subsequently emerged under new private equity ownership and then IPO'd in 2013. This time around, the specialty-finance company in the business of providing financing solutions ((e.g., mortgage lending (as an approved issuer with Ginnie Mae, Freddie Mac, and Fannie Mae), structured settlement, annuity and lottery payment purchasing, prepaid cards, and personal loans)) filed a prepackaged bankruptcy pursuant to which its lenders will be swapping debt for at least 95.5% of the new equity and some cash. Holders of partnership interests and tax-related claims will get the remaining equity (subject to dilution by the 8% of equity set aside for management allocations). The company will eliminate its $449.5mm of debt and have a $65-70mm revolving credit facility to utilize going forward. The company blames regulatory requirements and a highly competitive market that pressured rates, service levels, products, and fees for its downfall. 
  • Jurisdiction: D. of Delaware (Judge Gross)
  • Capital Structure: $449.5mm '19 first lien TL (Jefferies Finance LLC)     
  • Company Professionals:
    • Legal: Simpson Thatcher & Bartlett LLP (Elisha Graff, Kathrine McLendon, Edward Linden, Randi Lynn Veenstra, Haley Garrett, Nicholas Baker, Bryce Friedman) & (local) Young Conaway Stargatt & Taylor LLP (Edmon Morton, Sean Beach)
    • FInancial Advisor: Ankura Consulting
    • Investment Banker: Evercore 
    • Claims Agent: Prime Clerk LLC (*click on company name above for free docket access)
  • Other Parties in Interest:
    • Jefferies Finance LLC
      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Natasha Tsiouris, Erik Jerrard) & (local) Potter Anderson & Corroon LLP (Jeremy Ryan, R. Stephen McNeill, D. Ryan Slaugh)
      • Financial Advisor: FTI Consulting Inc. (formerly CDG Group LLC)
    • New RCF Commitment Party (HPS Investment Partners LLC)
      • Legal: Weil Gotshal & Manges LLP (Matthew Barr, Kelly DiBlasi, Damian Ridealgh) & (local) Morris Nichols Arsht & Tunnell LLP (Curtis Miller, Matthew Talmo)

Updated 12/13/17