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 - Arsenal Energy Holdings LLC⛽️

Arsenal Energy Holdings LLC

February 4, 2019

This is the week of proposed super-short bankruptcy cases.

Pennsylvania-based natural-gas developer, Arsenal Energy Holdings LLC, filed a prepackaged bankruptcy case in the District of Delaware. Pursuant to its prepackaged plan of reorganization, the company will convert its subordinated notes to Class A equity. Holders of 95.93% of the notes approved of the plan. The one holdout — the other 4+% — precipitated the need for a chapter 11 filing. Restructuring democracy is a beautiful (and sometimes wasteful) thing.

100% of existing equity approved of the plan and will get Class B equity (with the exception of Arsenal Resource Holdings LLC and FR Mountaineer Keystone Holdings LLC, which will both get Class C equity).

The company, itself, is about as boring a bankruptcy filer as they come: it is just a holding company with no ops, no employees and, other than a single bank account and its direct and indirect equity interests in certain non-debtor subs, no assets. The equity is privately-held.

More of the action occurred out-of-court upon the recapitalization of the non-debtor operating company. Because of the holdout(s), the company, its noteholders, the opco lenders (Mercuria) and the consenting equityholders agreed to consummate a global transaction in steps: first, the out-of-court recap of the non-debtor opco and then the in-court restructuring of the holdco to squeeze the holdouts. For the uninitiated, a lower voting threshold passes muster in-court than it does out-of-court. Out-of-court, the debtor needed 100% consent. Not so much in BK.

Given the simplicity of this case, the company hopes to be in and out of bankruptcy in less than two weeks. Which, considering the effort in FULLBEAUTY, begs the question: why is it taking so long?

• Jurisdiction: D. of Delaware

• Capital Structure: $861mm subordinated notes, $116.7mm Seller Notes

• Company Professionals:

  • Legal: Simpson Thacher & Bartlett LLP (Michael Torkin, Kathrine McLendon, Nicholas Baker) & (local) Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Kara Coyle, Ashley Jacobs)

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

• Other Parties in Interest:

  • Ad Hoc Group of Subordinated Noteholders

    • Legal: Cleary Gottlieb Steen & Hamilton LLP (Sean O’Neal, Humayan Khalid)

  • Mercuria Investments US, Inc.

    • Legal: Vinson & Elkins LLP (David Meyer, Garrick Smith)

New Chapter 11 Bankruptcy Filing - FULLBEAUTY Brands Holdings Corp.

FULLBEAUTY Brands Holdings Corp.

February 3, 2019

We’re going to regurgitate our report about FULLBEAUTY Brands Holdings Corp. from January 6th after the company publicly posted its proposed plan of reorganization and disclosure statement and issued a press release about its proposed restructuring. What follows is what we wrote then:

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FULLBEAUTY Brands Inc., an Apax Partners’ disaster…uh, “investment”…will, despite earlier reports of an out-of-court resolution to the contrary, be filing for bankruptcy after all in what appears to be either a late January or an early February filing after the company completes its prepackaged solicitation of creditors. Back in May in “Plus-Size Beauty is a Plus-Size Sh*tfest (Short Apax Partners’ Fashion Sense),” we wrote:

Here’s some free advice to our friends at Apax Partners: hire some millennials. And some women. When you have 23 partners worldwide and only 1 of them is a woman (in Tel Aviv, of all places), it’s no wonder that certain women’s apparel investments are going sideways. Fresh off of the bankruptcies of Answers.com and rue21, another recent leveraged buyout by the private equity firm is looking a bit bloated: NY-based FullBeauty Brands, a plus-size direct-to-consumer e-commerce and catalogue play with a portfolio of six brands (Woman Within, Roamans, Jessica London, Brylane Home, BC Outlet, Swimsuits for All, and Eilos).

Wait. Hold up. Direct-to-consumer? Check. E-commerce? Check. Isn’t that, like, all the rage right now? Yes, unless you’re levered to the hilt and have a relatively scant social media presence. Check and check.

Per a press release on Thursday, the company has an agreement with nearly all of its first-lien-last out lenders, first lien lenders, second lien lenders and equity sponsors on a deleveraging transaction that will shed $900mm of debt from the company’s balance sheet. It also has a commitment for $30mm in new liquidity in the form of a new money term loan with existing lenders. Per Bloomberg:

About 87.5 percent of the common reorganized equity would go to first-lien lenders, 10 percent to second liens, and 2.5 percent to the sponsor, according to people with knowledge of the plan who weren’t authorized to speak publicly.

Which, in English, means that Oaktree Capital Group LLC, Goldman Sachs Group Inc., and Voya Financial Inc. will end up owning this retailer. Your plus-sized clothing, powered by hedge funds. Apax and Charlesbank Capital, the other PE sponsor, stand to maintain 2.5% of the equity which, from our vantage point, appears rather generous (PETITION Note: there must be a decent amount of cross-holdings between the first lien and second lien debt for that to be the case). Here is the difference in capital structure:

What’s the story here? Simply put, it’s just another retail with far too much leverage in this retail environment.

Of course, there’s the obligatory product strategy, inventory control, and e-commerce excuses as well. Not to mention…wait for it…Amazon Inc ($AMZN)!

“In addition to these operational hurdles, FullBeauty has also faced competition from online retail giant Amazon, Inc. and retail chains, including Walmart Inc. and Kohl’s Corporation, that have recently entered the plus-size clothing space.”

Kirkland & Ellis LLP, PJT Partners ($PJT) and AlixPartners represent the company.

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We give bankruptcy professionals grief all of the time for what often appears to be fee extraction in various cases. In our view, there have been some pretty egregious examples of inefficiency in the system and, considering a number of our readers are management teams of distressed companies, we feel it’s imperative that we cure for a blatant information dislocation and help educate the masses. This, though, appears to be an extraordinary case. In the other direction.

The company’s professionals here propose to confirm the company’s plan of reorganization at the first day hearing of the case. As Bloomberg noted on Monday, this would “set a new record for emerging from court protection in under 24 hours.” Bloomberg reports:

The previous record for the fastest Chapter 11 process is held by Blue Bird Body Co., which exited bankruptcy in 2006 in less than two days. Fullbeauty and its advisers aim to beat that mark.

“We structured this deal as if bankruptcy never happened for our trade creditors, vendors and employees to avoid further disruption to the company,” attorney Jon Henes at Kirkland & Ellis, the company’s legal counsel, said in an interview. “In this situation, every day in court is another day of costs without any corresponding benefit.”

In fact, this case would be so quick that, as you read this (on Wednesday), Judge Drain may have already given the plan his blessing. This makes Roust Corporation Inc. (6 days) and Southcross Holdings (13 days) look like child’s play. For that reason — and that reason alone — we’ll forgive the company’s professionals for their blatant victory lap: it’s curious that Bloomberg had a completed interview ready to go at 9:26am on the morning of the company’s bankruptcy filing. Clearly Kirkland & Ellis LLP, PJT Partners LP ($PJT) and Houlihan Lokey Capital ($HL) want to milk this extraordinary result for all it’s worth. We can’t really blame them, truthfully. That is, unless and/or until the company violates the “Two Year Rule” a la Charlotte Russe.

Anyway, why so quick? Well, because they can: the entire capital structure is on board with the proposed plan and trade will ride through unimpaired and paid. All contracts will be assumed. There are no brick-and-mortar stores to deal with: this is a web and catalogue-based business. Like we said, this case is extraordinary. Per the Company:

It is in the best interest of the estates that the Debtors remain in bankruptcy for as short a time-period as possible. If FullBeauty is forced to remain in chapter 11 longer than necessary, it may be required to seek debtor in possession financing, which would cost the Debtors unnecessary bank fees and professional expenses. In addition, although January has been relatively smooth in terms of vendor outreach, FullBeauty expects that trade could contract very quickly if the company remains in chapter 11 longer than necessary—particularly because many vendors are in foreign jurisdictions and they do not understand the nuances of prepackaged cases versus longer prearranged or traditional chapter 11 cases. Every day that FullBeauty remains in chapter 11 results in cash spent that could go to developing the business.

Indeed, for once, it appears that the best interests of the debtor company were, indeed, heeded.*

*Which is not to say that we believe the out-of-court bills will be light.

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

• Capital Structure: $mm debt     

• Company Professionals:

  • Legal: Kirkland & Ellis LLP (Jonathan Henes, Emily Geier, George Klidonas, Rebecca Blake Chaikin, Nicole Greenblatt)

  • Independent Director: Mohsin Meghji

  • Financial Advisor: AlixPartners LLC

  • Investment Banker: PJT Partners LP (Jamie Baird)

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

• Other Parties in Interest:

  • Financial Sponsor (69.6%): Apax Partners LLP

    • Legal: Simpson Thatcher & Bartlett LLP (Elisha Graff, Nicholas Baker)

  • Financial Sponsor (26.4%): Charlesbank Capital Partners LLC

    • Legal: Goodwin Proctor LLP (William Weintraub, Joseph Bernardi Jr.)

  • ABL Agent & FILO Agent: JPMorgan Chase Bank NA

    • Legal: Davis Polk & Wardwell LLP (Darren Klein, Aryeh Falk)

  • First Lien Agent & Second Lien Agent: Wilmington Trust NA

    • Legal: Shipman & Goodman LLP (Nathan Plotkin, Eric Goldstein, Marie Pollio)

  • Ad Hoc Group of First Lien Term Loan Lenders

    • Legal: Milbank Tweed Hadley & McCloy LLP (Dennis Dunne, Gerard Uzzi, Nelly Almeida)

    • Financial Advisor: Ducera Partners

  • Ad Hoc Group of Second Lien Term Loan Lenders

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Paul Basta, Elizabeth McColm, Christopher Hopkins)

    • Financial Advisor: Houlihan Lokey Capital Inc. (Saul Burian)

Updated 2/4/19 at 7:03 CT

New Chapter 11 Bankruptcy Filing - Novum Pharma LLC

Novum Pharma LLC

February 3, 2019

Another day, another pharma company that has filed for bankruptcy. Curious, too: we don’t recall seeing any restructuring professionals predicting that pharma would be the hot restructuring industry of choice. But we digress.

Here, Chicago-based Novum Pharma LLC, a special pharmaceutical company which owns and manufactures a portfolio of topical dermatology products, filed for bankruptcy in the District of Delaware. The company’s bankruptcy papers are interesting in that they provide a solid overview of the distribution channel for pharma products from the manufacturer to the end user. Disgruntled with all of the players taking a piece of revenues along the way, Novum Pharma attempted to disrupt the status quo by deployment of an alternative business model. Clearly it didn’t achieve the result it had hoped for.

Per the company, here’s how the “traditional” distribution channel typically works:

Source: PETITION LLC

As you can see, the PBMs have a significant amount of leverage on account of their ability to determine which pharmaceuticals will be covered by insurance and which won’t. As a result, the company attempted its alternative. This model was predicated upon the concepts of “enhanced patient access” and “hassle free” access. It doesn’t appear that the company achieved that. Here’s how it would work:

Once the healthcare professional writes a script, the patient could get their prescription through one of three ways:

1. Via a nationwide network of specialty pharmacies like Cardinal Health 105 Inc., a specialty pharmacy division of Cardinal Health Inc., that the company sells its products to and that have agreed to comply with the company’s guidelines;

2. If 105 Inc. or the other specialty pharmacies cannot fill the prescription because a PBM denied coverage or otherwise, the pharmacy could transfer the prescription to a “consignment hub,” which is a specialty pharmacy that stocks the Debtor’s products on a consignment or bailment basis and will fill a prescription for a nominal fee (paid by the Debtor); or

3. If a patient seeks to fill the prescription at a pharmacy that doesn’t participate in the company’s network and the PBM denies coverage, the patient will receive the drug for free.

As you might imagine, prescribing physicians are encouraged to provide patients with a hotline number where, no doubt, patients, are encouraged to go route #1. Why? Because the company earns revenue from the specialty pharmacies (read: from Cardinal Health). But, per the company:

In contrast, when a prescription is filled by a pharmacy, the Debtor expends funds to facilitate the transaction. In particular, when a healthcare plan covers some or all of the cost of a Dermatology Product prescription, the Debtor, through its Co-Pay Vendors, pays the amount that is not covered by the healthcare plan. Alternatively, when a healthcare plan rejects a Dermatology Product prescription, the Debtor facilitates the transfer of that prescription to one of its consignment hubs so that the prescription can be filled and mailed to the patient, at no cost to the patient.

Anyone else see the problem with all of this?!? Don’t know about you, but the added friction of calling a hotline and finding some random specialty pharmacy rather than going to the neighborhood CVS is far from “hassle free.”

All of these gymnastics created a company with $19.4mm in assets, the lion’s share of which is its intellectual property. In addition, there are some consulting and sales support contracts and A/R. On the liability side of the balance sheet, the company has $15.2mm due and owing on a secured basis to lender RGP Pharmacap LLC (at a prime plus 9.75% or 14% interest rate, payable in monthly principal installments), and $2.8mm in lease obligations that are secured, in part, by a $500k letter of credit issued by The Huntington National Bank.

Per the company, among the factors that precipitated the company’s bankruptcy were…

…among other things, (i) manufacturing hurdles leading to production delays and product “stock-outs”; (ii) a dispute with Cardinal and CVS regarding the price at which the Dermatology Products can be returned to the Debtor; (iii) managed care actions leading to increased prescription rejection rates for the Dermatology Products; and (iv) market dilution and decreased total prescriptions due to unauthorized generic alternatives being introduced into the market.

In response, the company implemented cost-cutting measures like outsourcing its “back office” function, downsizing its sales force and entering into a more cost-effective lease. But these measures didn’t address the fundamental business challenges confronting the company. The company continued:

The Debtor’s historically low prescription approval rates, compounded by (i) the Debtor’s persistent manufacturing issues which directly damaged the Debtor’s business because the Debtor’s sales force was unable to distribute sample products during a critical product growth period and HCPs were forced to prescribe alternative medications, (ii) the Debtor’s working capital shortages stemming in part from the Cardinal/CVS product return dispute and (iii) generic drug competition (which the Debtor believes is unlawful), led the Debtor to the inevitable conclusion that its business was no longer sustainable and that a restructuring and refinancing of the business would be necessary.

The chapter 11 filing is meant to preserve the company’s assets and provide it with a forum through which to conduct a bankruptcy sale process of the dermatology products to maximize value for the company’s creditors. Based on the various disputes the company has with Cardinal/CVS, there may be some litigation here for an as-of-yet-unformed Creditors’ Committee to pursue as well.

• Jurisdiction: D. of Delaware (Judge Carey)

• Capital Structure: $15.2mm of secured debt, $2.8mm in lease obligations

• Company Professionals:

  • Legal: Cole Schotz PA (David Hurst, Patrick Reilley, Jacob Frumkin)

  • Independent Director: Thomas J. Allison

  • Financial Advisor: CR3 Partners LLC (Thomas O’Donoghue, Layne Deutscher, Cynthia Chan)

  • Investment Banker: Teneo Capital (Chris Boguslaski)

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

• Other Parties in Interest:

  • Official Committee of Unsecured Creditors

    • Legal: Sills Cummis & Gross P.C. (Andrew Sherman, Boris Mankovetskiy) & (local) Klehr Harrison Harvey Branzburg LLP (Morton Branzburg, Richard Beck, Sally Veghte)

    • Financial Advisors: Goldin Associates LLC (Gary Polkowitz)

Updated 3/9/19

New Chapter 11 Bankruptcy Filing - Charlotte Russe Holding Inc.

Charlotte Russe Holding Inc.

February 3, 2019

San Diego-based specialty women’s apparel fast-fashion retailer Charlotte Russe Holding Inc. is the latest retailer to file for bankruptcy. The company has 512 stores in 48 U.S. states. The company owns a number of different brands that it sells primarily via its brick-and-mortar channel; it has some brands, most notably “Peek,” which it sells online and wholesale to the likes of Nordstrom.

The company’s capital structure consists of:

• $22.8mm 6.75% ‘22 first lien revolving credit facility (ex-accrued and unpaid interest, expenses and fees)(Bank of America NA), and

• $150mm 8.5% ‘23 second lien term loan ($89.3mm funded, exclusive of unpaid interest, expenses and fees)(Jefferies Finance LLC). The term loan lenders have first lien security interests in the company’s intellectual property.

The company’s trajectory over the last decade is an interesting snapshot of the trouble confronting the brick-and-mortar retail space. The story begins with a leveraged buyout. In 2009, Advent International acquired the debtors through a $380mm tender offer, levering up the company with $175mm in 12% subordinated debentures in the process. At the time, the debtors also issued 85k shares of Series A Preferred Stock to Advent and others. Both the debentures and the Preferred Stock PIK’d interest (which, for the uninitiated, means that the principal or base amounts increased by the respective percentages rather than cash pay interest or dividends being paid over time). The debtors later converted the Preferred Stock to common stock.

Thereafter, the debtors made overtures towards an IPO. Indeed, business was booming. From 2011 through 2014, the debtors grew considerably with net sales increased from $776.8mm to $984mm. During this period, in May of 2013, the debtors entered into the pre-petition term loan, used the proceeds to repay a portion of the subordinated debentures and converted the remaining $121.1mm of subordinated debentures to 8% Preferred Stock (held by Advent, management and other investors). In March 2014, the debtors and its lenders increased the term loan by $80mm and used the proceeds to pay a one-time dividend. That’s right folks: a dividend recapitalization!! WE LOVE THOSE. Per the company:

In May 2014, the Debtors paid $40 million in dividends to holders of Common Stock, $9.8 million in dividends to holders of Series 1 Preferred Stock, which covered all dividends thus far accrued, and paid $65.7 million towards the Series 1 Preferred Stock principal. The Debtors’ intention was to use a portion of the net proceeds of the IPO to repay a substantial amount of the then approximately $230 million of principal due on the Prepetition Term Loan.

In other words, Advent received a significant percentage of its original equity check back by virtue of its Preferred Stock and Common Stock holdings.

Guess what happened next? Well, after all of that money was sucked out of the business, performance, CURIOUSLY, began to slip badly. Per the company:

Following fifteen (15) consecutive quarters of increased sales, however, the Debtors’ performance began to materially deteriorate and plans for the IPO were put on hold. Specifically, gross sales decreased from $984 million in fiscal year 2014 with approximately $93.8 million in adjusted EBITDA, to $928 million in fiscal year 2017 with approximately $41.2 million in adjusted EBITDA. More recently, the Debtors’ performance has materially deteriorated, as gross sales decreased from $928 million in fiscal year 2017 with approximately $41.2 million in adjusted EBITDA, to an estimated $795.5 million in fiscal year 2018 with approximately $10.3 million in adjusted EBITDA.

Consequently, the company engaged in a year-long process of trying to address its balance sheet and/or find a strategic or financial buyer. Ultimately, in February 2018, the debtors consummated an out-of-court restructuring that (i) wiped out equity (including Advent’s), (ii) converted 58% of the term loan into 100% of the equity, (iii) lowered the interest rate on the remaining term loan and (iv) extended the term loan maturity out to 2023. Advent earned itself, as consideration for the cancellation of its shares, “broad releases” under the restructuring support agreement. The company, as part of the broader restructuring, also secured substantial concessions from its landlords and vendors. At the time, this looked like a rare “success”: an out-of-court deal that resulted in both balance sheet relief and operational cost containment. It wasn’t enough.

Performance continued to decline. Year-over-year, Q3 ‘18 sales declined by $35mm and EBITDA by $8mm. Per the company:

The Debtors suffered from a dramatic decrease in sales and in-store traffic, and their merchandising and marketing strategies failed to connect with their core demographic and outpace the rapidly evolving fashion trends that are fundamental to their success. The Debtors shifted too far towards fashion basics, did not effectively reposition their e-commerce business and social media engagement strategy for success and growth, and failed to rationalize expenses related to store operations to better balance brick-and-mortar operations with necessary e-commerce investments.

In the end, bankruptcy proved unavoidable. So now what? The company has a commitment from its pre-petition lender, Bank of America NA, for $50mm in DIP financing (plus $15mm for LOCs) as well as the use of cash collateral. The DIP will roll-up the pre-petition first lien revolving facility. This DIP facility is meant to pay administrative expenses to allow for store closures (94, in the first instance) and a sale of the debtors’ assets. To date, however, despite 17 potential buyers executing NDAs, no stalking horse purchaser has emerged. They have until February 17th to find one; otherwise, they’re required to pursue a “full chain liquidation.” Notably, the debtors suggested in their bankruptcy petitions that the estate may be administratively insolvent. YIKES. So, who gets screwed if that is the case?

Top creditors include Fedex, Google, a number of Chinese manufacturers and other trade vendors. Landlords were not on the top 30 creditor list, though Taubman Company, Washington Prime Group Inc., Simon Property Group L.P., and Brookfield Property REIT Inc. were quick to make notices of appearance in the cases. In total, unsecured creditors are owed approximately $50mm. Why no landlords? Timing. Despite the company going down the sh*tter, it appears that the debtors are current with the landlords (and filing before the first business day of the new month helps too). Not to be cynical, but there’s no way that Cooley LLP — typically a creditors’ committee firm — was going to let the landlords be left on the hook here.

And, so, we’ll find out within the next two weeks whether the brand has any value and can fetch a buyer. In the meantime, Gordon Brothers Retail Partners LLC and Hilco Merchant Resources LLC will commence liquidation sales at 90+ locations. We see that, mysteriously, they somehow were able to free up some bandwidth to take on an new assignment sans a joint venture with literally all of their primary competitors.

• Jurisdiction: D. of Delaware (Judge Silverstein)

• Capital Structure: $22.8mm 6.75% ‘22 first lien revolving asset-backed credit facility (ex-accrued and unpaid interest, expenses and fees)(Bank of America NA), $150mm 8.5% ‘23 second lien term loan ($89.3mm funded, exclusive of unpaid interest, expenses and fees)(Jefferies Finance LLC)

• Company Professionals:

  • Legal: Cooley LLP (Seth Van Aalten, Michael Klein, Summer McKee, Evan Lazerowitz, Joseph Brown) & (local) Bayard PA (Justin Alberto, Erin Fay)

  • Independent Director: David Mack

  • Financial Advisor/CRO: Berkeley Research Group LLC (Brian Cashman)

  • Investment Banker: Guggenheim Securities LLC (Stuart Erickson)

  • Lease Disposition Consultant & Business Broker: A&G Realty Partners LLC

  • Liquidating Agent: Gordon Brothers Retail Partners LLC and Hilco Merchant Resources LLC

  • Liquidation Consultant: Malfitano Advisors LLC

  • Claims Agent: Donlin Recano & Company (*click on company name above for free docket access)

• Other Parties in Interest:

  • DIP Lender ($50mm): Bank of America NA

    • Legal: Morgan Lewis & Bockius LLP (Julia Frost-Davies, Christopher Carter) & (local) Richards Layton & Finger PA (Mark Collins)

  • Prepetition Term Agent: Jefferies Finance LLC

    • Legal: King & Spalding LLP (Michael Rupe, W. Austin Jowers, Michael Handler)

  • Official Committee of Unsecured Creditors (Valueline Group Co Ltd., Ven Bridge Ltd., Shantex Group LLC, Global Capital Fashion Inc., Jainson’s International Inc., Simon Property Group LP, Brookfield Property REIT Inc.)

    • Legal: Whiteford Taylor & Preston LLP (Christopher Samis, L. Katherine Good, Aaron Stulman, David Gaffey, Jennifer Wuebker)

    • Financial Advisor: Province Inc. (Edward Kim)

Updated 2/14/19 at 1:41 CT

New Chapter 11 Bankruptcy Filing - Arpeni Pratama Ocean Line Investment B.V.

Arpeni Pratama Ocean Line Investment B.V.

February 1, 2019

Dutch-based non-operating single-purpose-entity, Arpeni Pratama Ocean Line Investment B.V., filed a prepackaged bankruptcy case in the Southern District of New York to effectuate a restructuring of its $141mm Floating Rate Guaranteed Secured Notes due 2021 (HSBC Bank USA NA, as agent), the issuance of which is the legal entity's sole reason to exist. The Debtor's plan sponsor, PT Arpeni Pratama Ocean Line Tbk, is the owner and operator of a fleet of Indonesian flagged dry bulk vessels and a guarantor of the debt. It operates 14 wholly-owned and 2 chartered vessles, the use of which is to provide coal transportation and jetty management services to one of Indonesia's largest power plants. 

Why is this company in bankruptcy? Per the Company:

"...the Debtor is a single purpose entity created for the purpose of issuing the Senior Secured Notes. Accordingly, the Debtor is wholly dependent on its parent company, the Plan Sponsor, to generate sufficient revenues so as to permit for the repayment of the Senior Secured Notes. The Plan Sponsor, who derives substantially all of its revenues its drybulk shipping operations, has operated in an increasingly challenging market since the financial crisis of 2008 where operational costs have continued to increase and revenues for drybulk shipping have remained at historic lows. These factors, coupled with increasing competition from smaller and less leveraged drybulk shippers, has made it more difficult for the Plan Sponsor to service its existing indebtedness, including the Senior Secured Notes."

Accordingly, the Debtor and the Plan Sponsor have agreed to equitize substantially all of the Debtor's and the Plan Sponsor's indebtedness "to permit the Plan Sponsor to position itself on a more level landscape to its competitors to better prepare itself to weather the continuing uncertainty in the shipping industry." Pursuant to the Plan, holders of the notes will receive common shares in the Plan Sponsor, warrants, and a small cash payment. 

• Jurisdiction: S.D.N.Y. (Judge Bernstein)

• Company Professionals:

  • Legal: Paul Hastings LLP (Pedro Jimenez)

  • Financial Advisor: Fulcrum Partners Asia

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

• Other Parties in Interest:

New Chapter Bankruptcy Filing - SAS Healthcare Inc.

SAS Healthcare Inc. 

January 31, 2019

Dallas/Fort Worth-based mental health facilities operator filed for bankruptcy last week in the Northern District of Texas. The more we read about these healthcare bankruptcies, the less and less assured we feel about healthcare generally. Holy sh*t a lot of them have hair on them. 

Here, the debtors operate three mental health treatment facilities — in Arlington, Dallas, and Fort Worth. Therein, the debtors provided — and we mean, "provided" — in-patient and out-patient mental health care to children, adolescents and adults struggling with substance abuse and addiction, mental health disorders and behavioral and psychological disorders. Why the past tense? Because thanks to an investigation by the Tarrant County District Attorney and subsequent indictments, the debtors ceased operations in December 2018. 

The debtors —owned in in equal 1/3 parts by three individuals — has $8.26mm in secured debt (Ciera Bank), a $503k drawn secured revolving line of credit with Ciera Bank, a $4.3mm secured term loan with Southside Bank (exclusive of another $3mm in unpaid principal and interest), a $5.6mm construction loan with Southside Bank (exclusive of another $4.3mm in unpaid principal and accrued interest); a $850k secured loan with Southside, a $400k second lien secured bridge note with REP Perimeter Holdings LLC, and $1.325mm subordinated secured note from the owners. 

Back to those closures. The grand jury investigation led to a lot of negative publicity which, in turn, led to an abrupt end in patient referrals from the two largest referral sources. The end effect? Decimated revenue. The company secured its bridge loan and performed operational triage but the second indictment proved to be a death knell. Without ongoing operations and with all of that debt, the debtors had to file for chapter 11 to trigger the automatic stay and buy itself time to conduct a marketing and sale process to sell their assets to stalking horse purchaser and prepetition lender, REP Perimeter Holdings LLC. 

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

• Company Professionals:

  • Legal: Haynes and Boone LLP (Stephen Pezanosky, Jarom Yates, Matt Ferris)

  • Financial Advisor: Phoenix Management Services LLC (Brian Gleason)

  • Investment Banker: Raymond James & Associates Inc. (Michael Pokrassa)

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

• Other Parties in Interest:

New Chapter 11 Bankruptcy Filing - Consolidated Infrastructure Group Inc.

Consolidated Infrastructure Group Inc. 

January 30, 2019

Nebraska-based Consolidated Infrastructure Group Inc. filed for bankruptcy last week in the District of Delaware; it provides underground utility and damage prevention services to players in the underground construction, digging and maintenance space. It serves or served large telecom and utility companies, such as AT&T, Cox Communications, and Comcast. it also currently has contracts with the Northern Indiana Public Service Company, the City of Davenport in Iowa and with ONE Gas Inc. 

The company has little in the way of assets and liabilities. Relating to the former, the company has the above-noted contracts, a $3mm receivable from AT&T, some intellectual property and interests in insurance policies. Liabilities include two letters of credit, and a small unsecured advance by prepetition equityholder and now-postpetition DIP lender ($3mm), Parallel149, a private equity firm. 

The company has been embroiled in drama since its inception in 2016. It was formed by former employees of USIC LLC, a much-larger competitor, and the two have been locked up in litigation relating to, among other things, breach of contract (non-compete). 

The company filed for bankruptcy to pursue a going concern 363 sale and liquidating plan. It also hopes to recover the AT&T receivable. Finally, it also contends that a sale of the contracts would avoid a public safety crisis in the communities where the company's contracts are located. 

• Jurisdiction: D. of Delaware (Judge Shannon)

• Capital Structure: $mm debt     

• Company Professionals:

  • Legal: Richards Layton & Finger PA (Daniel DeFranceshi, Russell Silberglied, Paul Heath, Zachary Shapiro)

  • Financial Advisor: Gavin/Solmonese LLC

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

• Other Parties in Interest:

  • Parallel149

    • Legal: DLA Piper LLP (Richard Chesley, Jade Williams, Jamila Justine Willis, R. Craig Martin, Maris Kandestin)

😷New Chapter 11 Bankruptcy Filing - Mayflower Communities Inc. (d/b/a The Barrington of Carmel)😷

Mayflower Communities Inc. (d/b/a The Barrington of Carmel)

January 30, 2019

Mayflower Communities, Inc. (d/b/a The Barrington of Carmel), a non-profit senior living retirement community of 271 units in the State of Indiana, filed for bankruptcy in the Northern District of Texas earlier this week. As a continuing care retirement community (“CCRC”), Barrington provides a battery of services to its residents ranging from recreational activities to assisted living, memory support, skilled nursing, and rehabilitation. Residents can get apartment homes on site.

The business model, however, is…well, interesting. Per the Company:

CCRCs, however, are often operationally and financially complex. More specifically, CCRCs can be challenging to operate because they require the maintenance of a broad range of services to seniors in varying stages of the aging process. Additionally, CCRCs require a steady flow of new residents in order to maintain day-to-day operations and to remain current on financial obligations, including, most importantly, obligations to current and former residents.

New residents = new revenue, which is also needed to meet debt obligations and comply with resident refund obligations.

Revenue comes from entrance fees ranging from approximately $316k to $650k, monthly serve fees from $2,800 to $7,600, and other per diem fees for skilled nursing, optional services fees and unit upgrade fees. In exchange, however, Barrington takes on a significant commitment. Per the company:

Unlike a pure rental retirement community, whereby a resident pays monthly fees for services (which fees may increase as the resident’s needs change), the Continuing Care Contract is a life care residency contract whereby a resident will pay an Entrance Fee and fixed monthly fees for Barrington’s commitment to provide life care services for the duration of the resident’s life, regardless of whether (i) the resident’s needs change over time which may require additional services to be provided by Barrington, or (ii) the costs of providing such services increase for Barrington. Significantly, Barrington’s commitment to provide life care services continue even if the resident’s financial condition deteriorates and is unable to continue to make its payments.

Non-profit, indeed. That sounds like a recipe for fiscal disaster.

The company reported $96.5mm in assets and $151.9mm in liabilities, including oversight fees owed to its management company, $52.4mm in resident refund obligations, $92.7mm (plus accrued interest) of long-term municipal bond obligations and $4.1mm of subordinated note obligations.

The aforementioned debt is a big problem. Compounding matters is the fact that the senior housing market in the geographic vicinity is “very competitive” which led to rental price and, by extension, margin, compression. Lower-than-projected revenues combined with the debt led to Barrington defaulting on its municipal bond obligations back in November. Consequently, the Bond Trustee commenced a receivership action. To forestall the Bond Trustee’s subsequent efforts to, among other things, displace the board and sole member, pursue a sale of the facility, and potentially reject continuing care contracts, the company filed for bankruptcy wherein it will leverage the “automatic stay” and “potentially pursue a sale of the Facility.”

• Jurisdiction: N.D. of Texas

• Company Professionals:

  • Legal: DLA Piper LLP (Thomas Califano, Rachel Nanes, Andrew Zollinger)

  • Financial Advisor/CRO: Ankura Consulting LLC (Louis Robichaux IV) & Larx Advisors Inc.

  • Investment Banker: Cushman & Wakefield U.S., Inc.

  • Claims Agent: Donlin Recano & Company (*click on company name above for free docket access)

• Other Parties in Interest:

New Chapter 11 Bankruptcy Filing - Maremont Corporation

Maremont Corporation

January 22, 2019

Michigan-based Maremont Corporation, a subsidiary of publicly-traded non-debtor automobile component manufacturer Meritor Inc. ($MTOR), has filed for bankruptcy along with three affiliates in the District of Delaware. The company was a manufacturer, distributor and seller of aftermarket auto products — many of which contained asbestos; currently, it has no ongoing operations and its only assets are an intercompany receivable, a rent-producing commercial property with Dollar General as a tenant, a few bank accounts, and some insurance assets. In contrast, the company has significant liabilities — notably asbestos-related liabilities including defense and other costs associated with defending 13k pending personal injury and wrongful death claims.

The company, in consultation with its parent and committees of Future Claimants and current Asbestos Claimants, arrived at a prepackaged plan under section 524(g) of the Bankruptcy Code. The plan envisions a personal injury trust to be funded, in large part, by Meritor (via the repayment of a remaining receivable, a contribution of intercompany payables and a $28mm settlement payment) and a channeling injunction that protects the company (and Meritor) from future suit and liability arising out of the company’s asbestos legacy. Instead, any and all asbestos-related personal injury claims may only be pursued against, and paid from, the personal injury trust.

Meritor, like most of the stock market, got beaten up yesterday. There’s no telling whether the multi-million dollar payout here had anything to do with that.

Source: Yahoo!

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For the uninitiated, this (horrifically boring) bankruptcy filing presents us with a good opportunity to highlight a potential structure (and its limitations) for any imminent Pacific Gas & Electric Company (“PG&E”) chapter 11 bankruptcy filing. PG&E’s issues — as have, by this point, been extensively documented — largely emanate out of (i) some oppressive California state liability laws (inverse-condemnation — definitely), (ii) man-made global warming and resultant mudslides and wildfires (probably), and (iii) at least a glint of negligence (probably). While the company has $18.4b of (mostly unsecured) debt, the catalyst to bankruptcy may be its multi-billion dollar liability from the aforementioned CA-state laws and years of environmental disaster.

Similar to Maremont, PG&E is likely to end up with some kind of plan of reorganization that features a litigation trust (for affected claimants) and a channeling injunction. Except, as John Rapisardi and Daniel Shamah of O’Melveny & Myers point out, there are limitations to that structure. They write:

There is one significant obstacle to any PG&E bankruptcy: the likely inability to discharge liabilities associated with wildfires that have not yet occurred. There have been numerous mass tort bankruptcies in the past that have been resolved through the formation of a litigation trust and channeling injunction, forcing litigants into a single forum where claims are satisfied through trust assets. See, e.g., 11 U.S.C. §524(g) (channeling injunction for asbestos debtors); In re TK Holdings, Doc. No. 2120, Case No. 17-11375 (Bankr D. Del.) (confirmation order with channeling injunction for debtor that manufactured airbags with defective components). But that structure only works for claims based on prior conduct or acts. PG&E, in contrast, faces perennial liability associated with wildfires and inverse condemnation. It may be challenging to discharge the inverse-condemnation liabilities associated with a post-petition wildfire. See 28 U.S.C. §959(a) (debtors-in-possession may be sued “with respect to any of their acts or transactions in carrying on business connected with such property.”).

Prior conduct or acts, huh? A discontinued product that happened to contain asbestos fits that bill. Likewise, a remedied airbag (the TK Holdings referenced above refers to Takata Airbags). Sadly — especially for Californians, there is nothing prior about environmental issues. Those are very much a present and future thing.

• Jurisdiction: D. of Delaware (Judge Carey)

• Company Professionals:

  • Legal: Sidley Austin LLP (James Conlan, Andrew O’Neill, Alison Ross Stromberg, Blair Warner, Alex Rovira) & (local) Cole Schotz PC (Norman Pernick, J. Kate Stickles)

  • Claims Estimation Advisor: Alvarez & Marsal Disputes and Investigations LLC

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

• Other Parties in Interest:

  • Future Claimants Representative: James L. Patton Jr.

    • Legal: Young Conaway Stargatt & Taylor LLP

    • Claims Estimation Advisor: Ankura Consulting Group LLC

𝟚𝟚 New Chapter 22 Bankruptcy Filing - Gymboree Group Inc. 𝟚𝟚

Gymboree Group, Inc.

January 16, 2019

So, uh, THAT didn’t age well.

Let’s be clear here: the Gymboree situation is an unmitigated disaster and, in our view, has not — in the wake of all of the news surrounding Sears Holding Corporation ($SHLDQ) and PG&E Corporation ($PCG) — gotten the attention it deserves. That’s where we come in. Let’s hop in the DeLorean.

TO READ THE REST OF THIS REPORT, YOU MUST BE A MEMBER. BECOME ONE HERE.

• Jurisdiction: E.D. of Virginia

• Capital Structure: $79.1mm senior secured ABL (Bank of America NA), $44.5mm LOCs under ABL, $89mm TL

• Company Professionals:

  • Legal: Milbank Tweed Hadley & McCloy LLP (Dennis Dunne, Evan Fleck, Michael Price) & (local) Kutak Rock LLP (Michael Condyles, Peter Barrett, Jeremy Williams, Brian Richardson)

  • Independent Directors: Eugene Davis, Scott Vogel

  • Financial Advisor/CRO: Berkeley Research Group LLC (Steven Coulombe)

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

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

• Other Parties in Interest:

  • Gymboree Canada

    • Legal: Norton Rose Fulbright Canada LLP

    • Proposal Trustee: KPMG Inc.

      • Legal: Osler Hoskin & Harcourt LLP

  • ABL Agent: Bank of America NA

    • Legal: Morgan Lewis & Bockius LLP

  • Prepetition Term Loan Agent (Goldman Sachs Specialty Lending Group Inc.) & Term DIP Agent and Term Lender (Special Situations Investing Group Inc.)

    • Legal: King & Spalding (W. Austin Jowers, Christopher Boies, Michael Handler) & (local) McGuireWoods LLP (Dion Hayes, Douglas Foley, Sarah Boehm)

New Chapter 11 Bankruptcy Filing - Specialty Retail Shops Holding Corp. (Shopko)

Specialty Retail Shops Holding Corp. (Shopko)

January 16, 2019

Sun Capital Partners’-owned, Wisconsin-based, Specialty Retail Shops Holding Corp. (“Shopko”) filed for bankruptcy on January 16, 2019 in the District of Nebraska. Yes, the District of Nebraska. Practitioners in Delaware must really be smarting over that one. That said, this is not the first retail chapter 11 bankruptcy case shepherded by Kirkland & Ellis LLP in Nebraska (see, Gordman’s Stores circa 2017). K&E must love the native Kool-Aid. Others, however, aren’t such big fans: the company’s largest unsecured creditor, McKesson Corporation ($MCK), for instance. McKesson is a supplier of the company’s pharmacies and is a large player in the healthcare business, damn it; they spit on Kool-Aid; and they have already filed a motion seeking a change of venue to the Eastern District of Wisconsin. They claim that venue is manufactured here on the basis of an absentee subsidiary. How dare they? Nobody EVER venue shops. EVER!

Anyway, we’ve gotten ahead of our skis here…

The company operates approximately 367 stores (125 bigbox, 235 hometown, and 10 express stores) in 25 states throughout the United States; it employs…

TO READ THE REST OF THIS REPORT, YOU MUST BE A MEMBER. BECOME ONE HERE.

• Jurisdiction: D. of Nebraska

• Capital Structure: see report.    

• Company Professionals:

  • Legal: Kirkland & Ellis LLP (James Sprayragen, Patrick Nash Jr., Jamie Netznik, Travis Bayer, Steven Serajeddini, Daniel Rudewicz) & (local) McGrath North Mullin & Kratz P.C. LLO (James Niemeier, Michael Eversden, Lauren Goodman)

  • Board of Directors: Russell Steinhorst (CEO), Casey Lanza, Donald Roach, Mohsin Meghji, Steve Winograd

  • Financial Advisor: Berkeley Research Group LLC

  • Investment Banker: Houlihan Lokey Capital Inc. (Stephen Spencer)

  • Liquidation Consultant: Gordon Brothers Retail Partners LLC

    • Legal: Riemer & Braunstein LLP (Steven Fox)

  • Real Estate Consultant: Hilco Real Estate LLC

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

• Special Committee of the Board of Directors

  • Legal: Willkie Farr & Gallagher LLP

  • Financial Advisor: Ducera Partners LLC

• Other Parties in Interest:

  • Wells Fargo Bank NA

    • Legal: Otterbourg PC (Chad Simon) & (local) Baird Holm LLP (Brandon Tomjack)

  • Official Committee of Unsecured Creditors (HanesBrands Inc., Readerlink Distribution Services LLC, Home Products International NA, McKesson Corp., Notations Inc., LCN SKO OMAHA (MULTI) LLC, Realty Income Corporation)

    • Legal: Pachulski Stang Ziehl & Jones LLP (Jeffrey Pomerantz, Bradford Sandler, Alan Kornfeld, Robert Feinstein) & (local) Goosmann Law Firm PLC (Joel Carney)

    • Financial Advisor: FTI Consulting Inc. (Conor Tully)

    • Expert Consultant: The Michel-Shaked Group (Israel Shaked)

Updated 3/9/19

💄New Chapter 11 Bankruptcy Filing - Beauty Brands LLC💄

Beauty Brands LLC

January 6, 2019

A second beauty bankruptcy in three weeks. We previously noted:

On December 19, 2018, a week after Glossier CEO Emily Weiss revealed that the direct-to-consumer beauty brand hit $100mm in sales, Glansaol, a platform company that acquires, integrates and cultivates a portfolio of prestige beauty brands — including a direct-to-consumer brand — filed for bankruptcy in the Southern District of New York.

Now, a Kansas City-based brick-and-mortar beauty retailer with 58 stores in 12 states, Beauty Brands LLC, filed for bankruptcy over the weekend in the District of Delaware. Though we’ve never heard of it, it is no small shop: the company generated $125mm of net sales for fiscal year ended February 3, 2018. 70% of its revenue came from retail products and 30% from salon and spa services. The company had an e-commerce platform that accounted for 6.2% of net sales. It does not own any real property, leasing each of its stores.

In December, the company’s lender, PNC Bank NA, declared a default on the company’s credit facility. Why? Per the Company:

Beauty Brands’ liquidity and financial position has been adversely affected by declining sales and rising costs associated with doing business as a predominantly “brick and mortar” retailer. These factors have adversely impacted the Debtors’ profitability and its liquidity, which in turn has made it increasingly difficult to source replenishment inventory, which in turn contributes to further declines in the Company’s sales.

Well, that certainly paints a nice picture of how trouble can spiral out of control. Compounding matters is the fact that the company decided to expand in the face of a changing brick-and-mortar retail environment…

From 2014 through 2016, Beauty Brands unsuccessfully attempted to reposition its brand identity and store model by opening 11 new format store locations, which required significant capital expenditures, deferral of other investment opportunities, and management’s focus on the new format stores to the detriment of its existing store locations. These new format store locations, which remain operational, have underperformed Beauty Brands’ expectations and contributed to operating losses incurred by the Debtors.

Despite pre-petition efforts to sell the company as a going concern, no buyers were forthcoming. Therefore, the company hired Hilco Merchant Resources LLC to commence a firm-wide liquidation. Nevertheless, the company holds out hope — given some 11th hour interest by two potential buyers — that it can auction approximately 33 of its stores (“Core Stores”). In the meantime, Hilco is pursuing “GOB” sales of the 23 remaining stores (“Closing Stores”)(PETITION Note: the company’s papers say there are 58 stores, and yet only 56 stores are accounted for in the company’s description of Core Stores and Closing Stores, though there is mention of one “Dark Store”). Hilco will also serve as the Stalking Horse Bidder for the Core Stores.

The company will pursue a short post-petition marketing and sale process with an aim towards an early February 2019 sale. The company will use a committed $9mm DIP from pre-petition agent, PNC Bank NA, to fund the process.

• Jurisdiction: D. of Delaware (Judge Sontchi)

• Capital Structure: $17.5mm ($6.9mm funded, including fees + interest)

• Company Professionals:

  • Legal: Ashby & Geddes P.A. (Gregory Taylor, Stacy Newman, Katharina Earle, David Cook)

  • Financial Advisor/CRO: RAS Management Advisors LLC (Timothy Boates, Michael Rizzo)

  • Investment Banker: Lazard Middle Markets LLC (Dermott O’Flanagan)

  • Liquidator: Hilco Merchant Resources LLC

  • Claims Agent: Donlin Recano & Company Inc.

• Other Parties in Interest:

  • DIP Agent: PNC Bank NA

    • Legal: Blank Rome LLP (Gregory Vizza, John Lucian)

  • Replacement Stalking Horse Bidder: Absolute Beauty LLC

    • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Gene Goldmintz, Joshua Greenblatt) & (local) Klehr Harrison Harvey Branzburg LLP (Dominic Pacitti)

  • Official Committee of Unsecured Creditors (TIGI Linea Corp., Deva Concepts LLC, L’Oreal USA S/D Inc.)

    • Legal: Kelley Drye & Warren LLP (Eric Wilson, Jason Adams, Lauren Schlussel) & (local) Saul Ewing Arnstein & Lehr LLP

    • Financial Advisor: Province Inc. (Carol Cabello)

💄New Chapter 11 Bankruptcy Filing - Glansaol Holdings Inc.💄

Glansaol Holdings Inc.

December 19, 2018

A week after Glossier CEO Emily Weiss revealed that the direct-to-consumer beauty brand hit $100mm in sales, Glansaol, a platform company that acquires, integrates and cultivates a portfolio of prestige beauty brands — including a direct-to-consumer brand — filed for bankruptcy in the Southern District of New York. The company owns a trio of three main brands: (a) Laura Geller, a distributor of female beauty and personal care products sold primarily on QVC and wholesale, (b) Julep, a wholesale distributor of high-end nail polish, skincare and cosmetic products with a direct-to-consumer and “subscription box” model, and (c) Clark’s Botanicals, a skincare retailer, which sells primarily via e-commerce (including Amazon) and QVC.

The company indicated that “a general shift away from brick-and-mortar shopping, evolving consumer demographics, and changing trends” precipitated its bankruptcy filing. More specifically, profit drivers, historically, have been broadcast shopping networks and wholesale distribution. But both QVC and large retailers have cut back orders significantly amidst a broader industry shakeout. Compounding matters is the fact that the company’s top two customers account for over 60% of total receivables. As we always say, customer concentration is NEVER a good thing.

Moreover, the company added:

…the Debtors have been unable to replace key revenue generators due to: (a) the increasingly competitive industry landscape coinciding with the downturn in the brick and mortar retail sector; (b) the decline in broadcast shopping network sales; and (c) the downturn of the Company’s single-brand subscription business, which faces competition from new entrants that offer subscriptions covering a variety of brands.

Hmmm. Insert Birchbox here? Perhaps Glansaol ought to have entered into a partnership with Walgreens! 🤔

What happens when you can’t move product? You build up inventory. Which, for a variety of reasons, is no bueno. Per the company:

…the decline in sales has saddled the Debtors with a significant oversupply of inventory, which has forced the Debtors to sell goods at steep markdowns and destroy certain products, further tightening margins and draining liquidity. Oversupply of inventory, coupled with higher returns and chargebacks described below, has also significantly increased the Debtors’ costs for warehouses and other third-party logistics providers.

Interestingly, the company aggregated the three brands in the first place because of perceived supply chain synergies. Per the company:

The strategy was put into practice in late 2016 and early 2017 when the Debtors acquired a trio of rising prestige beauty companies ― Laura Geller, Julep, and Clark’s Botanicals. The combination was designed to realize the benefit of natural synergies without any cannibalization. The brands share relatively similar supply chains where it was thought efficiencies could be realized, but they featured different price points and consumer profiles. For example, while Laura Geller appeals to consumers over the age of 35 and is primarily sold through wholesale retailers and broadcast shopping networks, Julep caters to a younger generation through its online business and experience-driven nail salons.

We love synergies. They always seem to be good in theory and nonexistent in practice. To point:

the Debtors were never able to achieve significant cost savings related to shared services among their brands. Upon the Debtors’ acquisitions of Laura Geller, Julep and Clark’s in 2016, the plan was to ultimately consolidate shared services, including supply chain, senior management, administrative support, human resources, information technology support, accounting, finance and legal services. The brands, however, were never fully integrated. Instead, the Company is saddled with a substantial legacy investment in a new ERP system, which was put into place ahead of cross-organizational efficiency initiatives and right-sizing functionality. Accordingly, the costs savings attributed to synergies, which had been a pillar of the Debtors’ original business model, were never realized.

Which is why we generally tend to be skeptical whenever we hear about cost savings and synergies as a basis for M&A (cough, Refinitiv).

Given all of the above, the company has been engaged in a marketing process since roughly February 2018 running, in the interim, based on its credit facility and equity infusions. Now, though, the company has a stalking horse bidder in tow in the form of AS Beauty LLC, which has agreed to purchase the company’s brands and related capital assets for approximately $16.2mm. The company’s prepetition lender, SunTrust Bank, has agreed to provide a $15mm DIP credit facility which, along with cash collateral, will fund the cases.

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

• Capital Structure: $7.2mm RCF (SunTrust Bank)

• Company Professionals:

  • Legal: Willkie Farr & Gallagher LLP (Brian Lennon, Daniel Forman, Andrew Mordkoff)

  • Financial Advisor: Emerald Capital Advisors (John Madden)

  • Claims Agent: Omni Management Group Inc. (click on the case name above for free docket access)

• Other Parties in Interest:

  • Prepetition Secured & DIP Lender: SunTrust Bank (Legal: Parker Hudson Rainer & Dobbs LLP — Rufus Dorsey, Eric Anderson, James Gadsden

  • Stalking Horse Purchaser: AS Beauty LLC (Legal: Sills Cummis & Gross PC — Michael Goldsmith, George Hirsch)

  • Private Equity Sponsor: Warburg Pincus Private Equity XII Funds

📽New Chapter 11 Bankruptcy Filing - Frank Theatres Bayonne/South Cove LLC📽

Frank Theatres Bayonne/South Cove LLC

Just in time for a sh*tty holiday movie season with subpar fare like “Vice” and “Aquaman” hitting theaters, Frank Theatres Bayonne/South Cove LLC and 23 affiliated companies filed for bankruptcy in the District of New Jersey. Under brand names Frank Theatres, CineBowl & Grille and Revolutions, the company owns and operates 9 pure play movie theaters, 3 family entertainment complexes (i.e., bowling, arcade, etc.), and 3 combination — movie theater AND family entertainment — locations. Despite a robust year for Hollywood on the heals of highly successful-cum-intellectually-retarding movies like Avengers:Infinity War and Venom, the company’s revenues and resultant losses over the past three years paint a clear picture as to why this company is in bankruptcy court. From 2016 through 2018, revenues have declined from approximately $65mm to $56mm to $40mm, respectively. Losses, in turn, come in at $10.2mm, $11.3mm and $9.7mm. These are brutal numbers.

Of course, part of the issue here is that, in certain cases, this chain knew nothing of first run screenings of the aforementioned hits. Per the company, the expansion beyond the core theater business into the broader entertainment space proved disastrous, marked by poor locations, unprofitable leases, cost overruns, delayed openings, and ineffective management. Consequently, the company started deploying theater revenue like an ATM to service the flailing entertainment business. Except, there was one giant problem with all of this:

While operating cash and third-party loans were being used to support the liquidity need caused by the over-budget, past-deadline, and unprofitable new locations, the remainder of the existing locations also steadily declined in general admissions and total revenues as preventative maintenance, standard course refreshes, and local marketing initiatives were reduced or abandoned altogether. In addition, landlords and critical vendors were not paid or were materially aged beyond their standard payment terms. These poor management decisions were made in most cases without the knowledge or consent of the Debtors’ capital providers.

Whoops.

In some instances, the Company was evicted, locked out of its theater locations, and/or box office studios refused to allow the theaters to exhibit key first run movies which further exacerbated the decline in financial performance.

Like we said: they knew nothing of first run screenings. Not that you’d want to see them at these theaters anyway:

Under Debtors’ prior management (pre-September 2017), the physical state of many locations was severely neglected. Much needed capital improvements were not made into maintenance or upgrades of many locations. As a result, over time, the locations became dirty and in disrepair, which ultimately deterred business and resulted in a decrease in revenue.

Now if that doesn’t sound like an oh-so-lovely-holiday-moviegoing experience we don’t know what does. Usually a rabies shot isn’t a prerequisite to seeing a new flick.

Given all of this (and alleged mismanagement which is now the subject of ongoing litigation), the company was ill-suited to compete (deep voice) in a world where the industry shifted to the “premium” movie-going experience. After all, why go to the movies at all if you can just sit at home and watch Sandra Bullock evade zombies on Netflix. The only reason is, thanks to 4DX and the like, to feel that punch to the face from Dwayne Johnson or the wind in your hair when Tom Cruise races down the streets of London on a motorcycle. Except, this company didn’t have any of that new razzle dazzle. They did have the prices though:

While the condition of the Company’s locations deteriorated, the movie theater industry in general trended toward an enhanced movie going experience, including luxury recliners and a more “premium” experience. At the same time, the Debtors’ ticket and concession prices continued to rise in line with, or over, the industry average (which further discouraged customers).

And so now bankruptcy. The company has a restructuring support agreement that includes participation from both its first lien and second lien lenders. The former, Elm Park Capital Management LLC, will have $20mm of their debt reinstated (which may included up to $5mm in DIP financing). The latter, Seacoast Capital Partners III LP, will reinstate $2.5mm to be paid with 25% of net cash proceeds from the sale/monetization of the reorganized assets (once Elm Park has received $20mm on account of their claims). The balance of secured debt will convert into equity. General unsecured creditors are likely to donut.

The company intends to emerge from bankruptcy with only the most profitable locations intact.

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

• Capital Structure: $31mm first lien debt (Elm Park Capital Management LLC), $8mm second lien debt (Seacoast Capital Partners III LP)

• Company Professionals:

  • Legal: Lowenstein Sandler LLP (Kenneth Rosen, Joseph DiPasquale, Michael Papandrea, Eric Chafetz)

  • Financial Advisor: Moss Adams LLP & Paragon Entertainment Holdings LLC

  • Claims Agent: Prime Clerk LLC

• Other Parties in Interest:

  • First Lien & DIP Lender: Elm Park Capital Management

    • Legal: Neligan LLP — Patrick Neligan Jr., John Gaither

  • Second Lien Lender: Seacost Capital Partners III LP

    • Legal: Dorsey & Whitney LLP — Larry Makel, Eric Lopez Schnabel

  • Benefit Street Partners LLC

    • Legal: Moore & VanAllen — Alan Pope

New Chapter 11 Bankruptcy Filing - Synergy Pharmaceuticals Inc.

December 12, 2018

On November 11 and then, in a more fulsome manner in November 18’s “😬Biopharma is in Pain😬,” we noted that Synergy Pharmaceuticals Inc. ($SGYP) “appears to be on the brink of bankruptcy.” Looks like we were right on. This morning (12/12/18) at 4:37am (PETITION Note: remember that if you think that being a biglaw attorney is glamorous), the company and an affiliate filed for bankruptcy in the Southern District of New York.

Synergy is a biopharmaceutical company that develops and commercializes gastrointestinal therapies; its primary speciality revolves around uroguanylin, “a naturally occurring and ednogenous human GI peptide, for the treatment of GI diseases and disorders” Geez…bankers and lawyers have nothing on scientists when it comes to the vernacular. The company has one commercial product (TRULANCE) and one product in development. The company owns 33 patents.

We previously noted:

The company has a $200mm 9.5% ‘25 secured term loan with CRG (~$100mm funded plus PIK interest) that has been amended a bazillion times to account for the fact that its revenues suck, its market cap sucks, and that its on the verge of tripping, or has tripped, numerous covenants including, a “minimum market capitalization” covenant and a “minimum revenue covenant.” In its most recent 10-Q, the company noted:

To date the Company has been unable to further amend the agreement with respect to the financial and revenue covenants. The Company is continuing discussions with CRG and has received a temporary waiver on the minimum market cap covenant through November 12, 2018. The Company is currently pursuing alternatives that better align with its business, but there is no assurance that Synergy can secure CRG’s consent or otherwise achieve a transaction to refinance or otherwise repay CRG on commercially reasonable terms, in which case we could default under the term loan agreement. If CRG does not grant a further waiver beyond November 12, 2018 the Company will likely be in default of the minimum market cap covenant.

In its bankruptcy filing, however, the company takes a decidedly less aggressive posture vis-a-vis CRG (which makes sense…CRG is, after all, its proposed DIP lender) when explaining the factors leading to the commencement of its chapter 11 cases. While the company does highlight lack of access to capital markets (which, at least as far as we read it, is an implicit jab at CRG), the company primarily blames TRULANCE’s slow sales growth, market access, competitive landscape and a smaller-than-anticipated total addressable market for its travails.

For its part, Centerview Partners has been engaged in a less than ideal sellside process here. According to the company’s papers, Centerview has been trying to sell the company since 2015. Now, unless there is some crazy element to this engagement, most bankers are compensated on the basis of success fees. They want to a large purchase price and a short marketing process to get the best of both worlds: a huge payday without huge utilization. That does not appear to be the case here. 3 years!

Still, they located a buyer. Bausch Health Companies (“BHC”) has agreed to be the stalking horse purchaser of the company’s assets. BHC would get substantially all of the company’s assets — including its IP, certain customer and vendor contracts, A/R, and goodwill. In exchange, they would pay approximately $185mm in cash (minus certain deductions and adjustments) and $15mm in severance obligations.

CRG is the company’s proposed DIP lender with a $155mm facility, of which $45mm represents new money.

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

• Capital Structure: $110mm 9.5% ‘25 secured term loan, $19mm 7.5% ‘19 senior convertible notes (Wells Fargo NA)

• Company Professionals:

  • Legal: Skadden Arps Slate Meagher & Flom LLP (Ron Meisler, Lisa Laukitis, Christopher Dressel, Jennifer Madden, Christine Okike) & (special counsel) Sheppard Mullin Richter & Hampton LLP

  • Legal Conflicts Counsel: Togut Segal & Segal LLP (Albert Togut, Neil Berger, Kyle Ortiz)

  • Board of Directors

    • Legal: Davis Polk & Wardwell LLP

  • Independent Director: Joseph Farnan

    • Legal: Kirkland & Ellis LLP

  • Financial Advisor: FTI Consulting Inc. (Michael Katzenstein, Sean Gumbs, Heath Gray, Om Dhavalikar, Tom Sledjeski, John Hayes, Andrew Kopfensteiner)

  • Investment Banker: Centerview Partners Holdings LP (Samuel Greene, Josh Thornton, Ercument Tokat)

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

• Other Parties in Interest:

  • Prepetition Agent & DIP Lender: CRG Servicing LLC

    • Legal: Venable LLP (Jeffrey Sabin, Lawrence Cooke)

  • Stalking Horse Bidder: Bausch Health Companies Inc.

    • Legal: Wachtell Lipton Rosen & Katz (Richard Mason, Michael Benn)

  • Ad Hoc Committee of Equity Holders

    • Legal: Cole Schotz PC (Ryan Jareck, Irving Walker, Norman Pernick, Mark Tsukerman)

  • Official Committee of Equity Security Holders

    • Legal: Gibson Dunn & Crutcher LLP (David Feldman, Matthew Kelsey, Alan Moskowitz, J. Eric Wise)

    • Financial Advisor: Houlihan Lokey Capital, Inc. (Christopher Di Mauro, Geoffrey Coutts)

  • Official Committee of Unsecured Creditors (Highbridge Capital Management, 1992 MSF International Ltd., 1992 Tactical Credit Master Fund LP)

    • Legal: Latham & Watkins LLP (Richard Levy, Jeffrey Mispagel, Matthew Warren, Blake Denton, Christopher Harris)

    • Financial Advisor: Alvarez & Marsal LLP (Mark Greenberg, Richard Newman, Jason Ivy, Martin McGahan, Allison Hoeinghaus, Seth Waschitz, Sean Skinner, Michael Sullivan)

    • Investment Bank: Jefferies LLC (Leon Szlezinger, Jeffrey Finger)

New Chapter 11 Bankruptcy Filing - Parker Drilling Inc.

Parker Drilling Inc.

12/12/18

Back in October, in “Still Work to Do in Oil Country (Short Oil Field Services Companies),” we wrote the following:

Restructuring professionals attempting to extricate themselves from oil and gas work may have to wait a little bit longer. With companies like Houston-based Parker Drilling Corporation ($PKD) continuing to tread water, there may continue to be action in the space in the very near future. 

We added:

The signs of a near-term (read: Q4 ‘18) bankruptcy filing for Parker Drilling continue to shine through. Back in July, the company implemented a reserve stock split and adopted a short-term shareholder rights plan. While neither initiative, on its own, is dispositive of a chapter 11 filing, they are indicia. The former increases the market price per share of the common stock, ensuring compliance with NYSE listing requirements. Given a delisting notice received back in the spring, some level of stock split was basically a fait accompli. The latter is intended to “protect the best interests of the Company and its stakeholders”and is meant to preserve certain tax attributes that, if lost, would be tremendous value leakage to the estate…uh, company. The company noted:

“The Company believes these Tax Benefits are valuable assets that could offset potential future income taxes for federal income tax purposes. As of December 31, 2017, the Company had approximately $456 million of federal NOLs and $47 million of foreign tax credits.”

Of course, net operating losses only emanate out of a business that is (or was during a given fiscal year) unprofitable for tax purposes. So, there’s that. Which, putting the aforementioned shenanigans aside, is seemingly the bigger problem here.

For its second quarter ended June 30, 2018, PKD reported a net loss of $23.8mm on $118.6mm of revenue, a loss of $2.56/share. Adjusted EBITDA was $18.7mm. While those numbers aren’t so good, to say the least, they actually include a Q-over-Q increase of 8.1% in revenue (thanks to an increase in gross margin). Of course G&A expenses increased by $2.1mm because…wait for it…there were “professional fees fees related to ongoing capital structure analysis during the quarter.” You bet there were, homies.

We continued:

This capital structure isn’t complex and refinancing options, while theoretical, may be difficult given the company’s continued cash burn.

This is the company’s capital structure:

And so we concluded:

The path forward here given the liquidity needed seems pretty obvious: we expect to see a restructuring support agreement on this bad boy sometime soon with an attempted quick trip through bankruptcy court that de-levers the balance sheet, eliminates interest expense, and positions the company to make the capex necessary to capture the growth projected in the business plan.

So, what’s the latest? Well, as predicted, Houston-backed Parker Drilling Company, an international provider of contract drilling and drilling-related services and rental tools, filed an earnest bankruptcy petition and accompanying papers in the Southern District of Texas. Earnest? Why “earnest”? The company stated:

Adverse macro trends, including and especially the sustained downturn in commodity prices, have reduced demand for oilfield services provided by the Debtors, resulting in idle rigs, and placing downward pressure on the prices the Debtors are able to charge. Moreover, the Debtors are facing near term 2020 maturities of their 2020 Notes and ABL (each as defined in the First Day Declaration), for which the borrowing base has been tightened and which may not be re-financeable in the current environment under the existing capital structure.

Rather than hold out hope for a market recovery, or execute an inferior transaction that would at best provide more onerous financing without addressing their capital structure in a comprehensive manner, the Debtors have negotiated a comprehensive balance sheet reorganization to both reduce leverage and increase liquidity.

“Rather than hold out hope for a market recovery.” Those are poignant words that say a lot about the company’s outlook for oil in the near-term. It also says a lot about the company’s capital structure: clearly, there was no chance this company could grow into its balance sheet and/or refinance its upcoming debt. And, so, as we also predicted, the company’s bankruptcy filing is accompanied by a deal in hand with the major players in the company’s capital structure and equity profile: Brigade Capital Management, Highbridge Capital Management, Varde Partners, Whitebox Advisors. These four institutions collectively hold approximately 77% of the unsecured notes, approximately 62% of the outstanding preferred stock, and approximately 15% of the outstanding common stock. They’ve agreed to equitize the notes in exchange for equity in the reorganized company and to participate in a rights offering that will have the effect of capitalizing the reorganized entity with $95mm of new equity. The net effect of all of this will be a $375mm deleveraging of the company’s balance sheet.

The company has a commitment for a $50 DIP credit facility to fund the cases and a $50mm exit facility (with an upsize option up to $100mm) upon its emergence from chapter 11.

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

• Capital Structure: $80mm ABL (unfunded - Bank of America NA), $225mm ‘20 notes (The Bank of New York Mellon Trust Company, N.A.), $360mm ‘22 notes (The Bank of New York Mellon Trust Company, N.A.)

• Company Professionals:

  • Legal: Kirkland & Ellis LLP (James Sprayragen, Christopher Marcus, Brian Schartz, Anna Rotman, Matthew Fagen, Jamie Netznik) & (local) Jackson Walker LLP (Patricia Tomasco, Matthew Cavenaugh)

  • Financial Advisor: Alvarez & Marsal North America LLC (Lacie Melasi, John Walsh)

  • Investment Banker: Moelis & Co. (Bassam Latif)

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

• Other Parties in Interest:

  • Consenting Noteholders: Brigade Capital Management, Highbridge Capital Management, Varde Partners, Whitebox Advisors

    • Legal: Akin Gump Strauss Hauer & Feld LLP

    • Financial Advisor: Houlihan Lokey Capital Inc.

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 & Friedman. Crescent 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 - Bakken Resources Inc.

Bakken Resources Inc.

December 7, 2018

Publicly-traded oil and gas company, Bakken Resources Inc. ($BKKN), filed for bankruptcy on Friday in the District of Nevada. The company focuses its activities in the Williston Basin in western North Dakota with a focus on acquiring mineral leases and non-operating oil mineral interests and then leasing their acreage to ten oil drilling operators.

Without getting into the weeds here, it seems pretty clear from the bankruptcy papers that the company required a little more focus on its royalty income payments: it suffers from all kinds of reconciliation issues with its partner operators as well as its “overriding royalty” holder, Holms Energy. It’s also getting sued up the wazoo. So, that’s a bit of a drain. As well as a hindrance to the company in terms of raising capital — $8-10mm of which is desperately needed to acquire new producing mineral rights. The company has no secured debt and less than a million of unsecured debt which begs a super serious question: how the hell did it hire Lowenstein Sandler LLP and AlixPartners LLP? Where’s THAT money coming from?

The company notes:

The commencement of this Chapter 11 Case is the product of a confluence of factors that continue to erode the Company’s liquidity and substantially impede the Company’s ability to raise necessary capital. The Company’s cash position deteriorated significantly in 2018 due to a precipitous drop in oil prices and continued litigation expenses. Since October 2018, oil prices have fallen by 28% which has drastically impacted the Company’s net royalty revenues, as has a decline in production from the Company’s current wells. The Company’s monthly net royalty revenues are projected to decline from $ 142,000 in April 2018 to approximately $ 70,000 in April 2019. This decline combined with legal expenses of approximately $ 2,300,000 to date in 2018 has forced the Company to consume more than $ 2 million in cash this year. The Company projects that it will exhaust an additional $ 1.3 million through June 2019 absent a bankruptcy filing.

Remember: the President of the United States WANTS low oil prices. But we digress.

AlixPartners is charged with selling the company as a going concern, raising capital, or selling discrete assets or operations. Which, we’d be remiss not to note, isn’t Alix’s typical kind of retention. We just hope they disclosed any and all potential conflicts.

• Jurisdiction: D. of Nevada (Judge Beesley)   

• Company Professionals:

  • Legal: Lowenstein Sandler LLP (Jeffrey Cohen, Gabriel Olivera) & (local) Brownstein Hyatt Farber Schreck LLP (Samuel Schwartz, Connor Shea)

  • Financial Advisor: AlixPartners LLP (Richard Robbins)

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

New Chapter 11 Bankruptcy Filing - USA Gymnastics

USA Gymnastics

December 5, 2018

Man this year has been filled with sleaze-based bankruptcy filings: we’re old enough to remember when The Weinstein Company may have taken the prize for filth. Now, this.

Earlier this week, on December 5th, USA Gymnastics (“USAG”) filed for bankruptcy in the Southern District of Indiana. The bankruptcy filing reminds us that in a coverage universe of companies that file for bankruptcy because of (i) various operational reasons (e.g., declining revenues due to supply chain interruptions, poor inventory management, sky high SG&A, etc.) and (ii) balance sheet reasons (e.g., too much debt, interest expense, and covenant compliance obligations), there are good ol’ fashion litigation-induced bankruptcy filings.

USAG is a 501(c)(3) Indianapolis-based not-for-profit with a focus on six athletic disciplines: women’s gymnastis, men’s gymnastics, trampoline and tumbling, rhythmic gymnastics, acrobatic gymnastics, and group gymnastics. Think of it like a platform (no pun intended): the USAG brings coaches, judges and competitors together for education and competitions throughout the United States. Indeed, the USAG sanctions approximately 4k competitions and has more than 200k members.

In 1988, the USAG formed a separate (non-debtor) entity, The National Gymnastics Foundation, to further the Olympic sport of gymnastics. Thereafter, the United States Olympic Committee (“USOC”) and the Fédération Internationale de Gymnastique designated the USAG as the “national governing body for the sport of gymnastics in the United States.” That designation is now at risk. Why? Enter sleaze here…

Per the Company:

As a result of the misconduct of Larry Nassar, a former volunteer physician to USAG, USAG has been named as a defendant in approximately 100 lawsuits brought by survivors of Nassar’s abuse. USAG’s first priority is to ensure that these survivors are treated fairly and respectfully. The survivors’ claims, in the aggregate, may exceed the available resources of USAG. USAG submits that this Court is the best forum in which to implement appropriate procedures to equitably determine the rights to and allocate recoveries to survivors who have asserted claims against USAG. USAG remains committed to its mission of supporting athletes, and will continue to take specific and concrete steps to promote athlete safety and prevent future abuse.

Nassar was a volunteer medical provider who later faced accusations of sexual misconduct; Nassar ultimately pled guilty to sexual assault and other crimes and will spend his life in prison.

USAG has no secured debt and virtually no unsecured debt — other than the contingent liabilities arising out of the aforementioned lawsuits/claims. Hundreds of individuals have asserted claims in various states against USAG. USAG estimates the potential impact of these suits to be between $75-$150mm. On the asset side of the balance sheet, the company has an operating lease, $6.5mm of cash/equivalents/investments and its insurance policies. And that last piece is where the rubber meets the road. Per the Company:

USAG has insurance coverage encompassing numerous policies covering approximately 30 years, which I expect will provide substantial coverage for the amounts asserted in the various lawsuits and claims. Nevertheless, I understand that the applicable insurance proceeds may be insufficient to cover allowed claims of survivors against USAG. For this reason, USAG filed this chapter 11 case to establish an orderly procedure for the allocation of its insurance proceeds.

The company intends to use the “breathing spell” afforded by Bankruptcy Code section 362’s “automatic stay” (read: an injunction, basically) to (i) establish a process by which insurance proceeds may be doled out to claimants and (ii) assure the USOC and athletes that the USAG is positioned to be the national governing body for gymnastics going forward.

Our two cents? They should definitely consider a rebranding exercise.

• Jurisdiction: S.D. of Indiana (Judge Moberly)

• Capital Structure: $mm debt     

• Company Professionals:

  • Legal: Jenner & Block (Melissa Root, Catherine Steege, Dean Panos)

  • Claims Agent: Omni Management Group Inc. (*click on company name above for free docket access)