🚁New Chapter 11 Bankruptcy Filing - PHI Inc.🚁

PHI Inc.

March 15, 2019

It’s pretty rare to see a company affected by macro factors in two industries. And, yet, Louisiana-based PHI Inc. ($PHI) and four affiliates filed for bankruptcy in the Northern District of Texas, marking the fourth bankruptcy fallout in the helicopter services space following Waypoint Leasing, Erickson Incorporated and CHC Group. The company is a leading provider of transportation services to both the oil and gas industry (including, for example, Shell Oil Company, BP America Production Company, ExxonMobil Production Co., ConocoPhillips Company, ENI Petroleum and the recently-bankrupt Fieldwood Energy) and the medical services industry. It operates 238 aircraft, 213 which are company-owned and 119 of which are dedicated to oil and gas operations and 111 of which are dedicated to medical services. The company generated $675mm in revenue in 2018 — with much of that revenue coming from fixed-term contracts.

The company strongly asserts that operational failures are not a cause of its bankruptcy — a clear cut message to the market which might otherwise be concerned about safety and reliability. The issue here, the company notes, is the balance sheet, especially a March 15 2019 maturity of the company’s $500mm in unsecured notes. Despite alleged efforts to address this maturity with the company’s (fresh out of the womb) secured term loan holder and an ad hoc group of unsecured noteholders, the company was unable to do so.

The broader issue, however, is that the industry may be ripe for consolidation. Back in 2017, the company acquired the offshore business of HNZ Group Inc. This transaction expanded the company’s capacity to more international geographies. But given the dearth of offshore oil and gas production activity of late and intense competition in the space, there might be a need for more industry-wide M&A. The company notes:

As a result of this prolonged cyclical downturn in the industry, oil and gas exploration projects have been reduced significantly by the Company’s customers. Indeed, many customers have significantly reduced the number of helicopters used for their operations and have utilized this time instead to drive major changes in their offshore businesses, which have in turn drastically reduced revenues to PHI’s O&G business segment in the Gulf of Mexico. And while the price of crude oil slowly began to recover in 2018, the volatility in the market continues to drive uncertainty and negatively impact the scope and volume of services requested from service providers such as PHI.

This is simple supply and demand:

The effect of the downturn in the oil and gas industry has been felt by nearly all companies in the helicopter service industry. The downturn created an oversaturation of helicopters in the market, significantly impacting service companies’ utilization and yields. Indeed, this domino effect on the industry has required helicopter operators, like their customers, to initiate their own cost-cutting measures, including reducing fleet size and requesting rental reductions on leased aircraft.

Had these issues been isolated to the oil and gas space, the company would not have been in as bad shape considering that 38% of its revenue is attributable to medical services. But that segment also experienced trouble on account of…:

…weather-related issues and delays, changes in labor costs, and an increase in patients covered by Medicare and Medicaid (as opposed to commercial insurers), which resulted in slower and reduced collections, given that reimbursement rates from public insurance are significantly lower than those from commercial insurers or self-pay.

Compounding matters are laws and regulations that prohibit the debtors from refusing service to patients who are unable to pay. This creates an inherently risky business model dynamic. And it hindered company efforts to sell the business line to pay down debt.

Taken together, these issues are challenging enough. Tack on $700mm of debt, the inability to refi out its maturity, AND the inability to corral lenders to agree on a consensual deleveraging (which included a failed tender offer) and you have yet another freefall helicopter bankruptcy. Now the company will leverage the bankruptcy “breathing spell” and lower voting thresholds provided by the Bankruptcy Code to come to an agreement with its lenders on a plan of reorganization.

*****

That is, if agreement can be had. Suffice it to say, things were far from consensual in the lead up to (and at) the first day hearing in the case. To point, the Delaware Trust Companyas trustee for the senior unsecured notes, filed an objection to the company’s CASH MANAGEMENT motion because…well…there is no DIP Motion to object to. “Why is that,” you ask? Good question…

The debtors levered up their balance sheet in the lead-up to PHI’s well-known maturity. The debtors replaced their ABL in September with the $130mm term loan provided by Al Gonsoulin, the company’s CEO, Board Chairman and controlling shareholder. Thereafter — and by “thereafter,” we mean TWO DAYS BEFORE THE BANKRUPTCY FILING — the company layered another $70mm of secured debt onto the company, encumbering previously unencumbered aircraft and granting Mr. Gonsoulin a second lien. This is some savage balance sheet wizardry that has the effect of (a) priming the unsecured creditors and likely meaningfully affecting their recoveries and (b) securing Mr. Gonsoulin’s future with the company (and economic upside). Making matters worse, the trustee argues that the company made no real effort to shop the financing nor actively engage with the ad hoc committee of noteholders on the terms of a financing or restructuring; it doesn’t dispute, however, that the company had $70mm of availability under its indenture.

So what happened next? Over the course of a two day hearing, witnesses offered testimony about the pre-petition negotiations and financing process (or lack thereof) — again, in the context of a cash management motion. We love when sh*t gets creative! The lawyers for the company and the trustee hurled accusations and threats, the CEO was called a “patriot” (how, even if true, that is applicable to this context is anyone’s guess), and, ultimately, the judge didn’t care one iota about any of the trustee’s witness testimony and blessed the debtors’ motion subject to the company providing the trustee with weekly financial reporting. In other words, while this routine first day hearing was anything but, the result was par for the course.

Expect more fireworks as the case proceeds. Prospective counsel to the eventual official committee of unsecured creditors is salivating as we speak.

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

• Capital Structure: $130mm ‘20 senior secured term loan (Thirty Two LLC), $70mm secured term loan (Blue Torch Capital LP), $500 million ‘19 unsecured 5.25% senior notes

• Professionals:

  • Legal: DLA Piper US LLP (Daniel Prieto, Thomas Califano, Daniel Simon, David Avraham, Tara Nair)

  • Legal (corporate): Jones Walker LLP

  • Financial Advisor: FTI Consulting Inc. (Robert Del Genio, Michael Healy)

  • Investment Banker: Houlihan Lokey Capital Inc.

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

• Other Parties in Interest:

  • Prepetition TL & DIP Lender: Blue Torch Capital LP

  • Ad Hoc Committee of unsecured noteholders & Delaware Trust Company as Trustee for Senior Notes

    • Legal: Milbank LLP (Andrew LeBlanc, Dennis Dunne, Samuel Khalil) & (local) Norton Rose Fulbright US LLP (Louis Strubeck Jr., Greg Wilkes)

    • Financial Advisor: PJT Partners LP (Michael Genereaux)

  • Indenture trustee under the 5.25% Senior Notes due 2019 (Delaware Trust Company)

  • Thirty Two LLC

  • Official Committee of Unsecured Creditors (Delaware Trust Company, Oaktree Capital Management LP, Q5-R5 Trading Ltd., Regions Equipment Finance Corp., Helicopter Support Inc.)

    • Legal:

  • Official Committee of Equity Security Holders

    • Legal: Levene Neale Bender Yoo & Brill LLP (David Golubnik, Eve Karasik) & (local) Gray Reed & McGraw LLP (Jason Brookner)

    • Financial Advisor: Imperial Capital LLC (David Burns)

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 Filing - CTI Foods LLC

CTI Foods LLC

March 10, 2019

CTI Foods LLC, a large independent provider of “custom food solutions” to major hamburger, sandwich and Mexican restaurant chains…wait, stop. “Custom food solutions"? Seriously? Does everything need to be made to sound technological these days? Homies produce hamburgers, cooked sausage patties, grilled chicken, shredded beef and chicken, fajita meat, ham, Philly steak, dry sausage, beans, soups, macaroni & cheese, chili, sauces, and other sheet pan and retail meals through seven production facilities; they service QSRs and fast casual restaurants, including four of the top six hamburger restaurant chains, four of the top six sandwich chains, and “the top Mexican restaurant chain.” Queremos Taco Bell?!? Anyway, that’s basically it: let’s not over-complicate matters.

In any event, lenders must love custom food solutions because they’ve offered a solution of their own…to the company’s balance sheet. The company filed a prepackaged bankruptcy in the District of Delaware with substantial numbers of holders of first lien and second lien term loans hopping on board in support of the plan of reorganization (though not enough second lien term lenders to establish a fully consensual plan by bankruptcy thresholds). The filing is predicated upon accomplishing the results set forth in this handy-dandy chart:

Source: First Day Declaration

Pursuant to the plan, the first lien term lenders will receive some take-back paper and equity in the reorganized company, the second lenders will either equitize or cancel all $140mm of second lien term loan claims and existing equity will get wiped out. Trade creditors will ride through unimpaired. The company has secured a $155mm DIP commitment, the proceeds of which will be used, in part, to take out the ABL, and provide liquidity to fund the cases. Remaining funds will roll into an exit facility for the company to use post-emergence from bankruptcy. Just one thing: the chart shows a $50mm exit ABL and yet the company’s papers note a new $110mm exit ABL. Insert confusion here. 🤔

Confusion aside, this is a real business: the debtors apparently generated $1.2b of revenue in 2018 (and $29mm of EBITDA). Unfortunately, the private equity bros realized that back in 2013 when Thomas H. Lee Partners and Goldman Sachs & Co. acquired it from Littlejohn & Co. LLC. Per the company, the “current capital structure is the result of organic growth coupled with…strategic acquisitions….” So, uh, the capital structure didn’t fund the sponsor-to-sponsor purchase? Or is that “organic growth?” We suspect the former because, well, private equity, right? Debt is their jam. Oh, and the intercreditor agreement dated June 28, 2013 — mere months after the transaction — reflects that the debt was in place then rather than subsequently added to finance “organic growth.”* This is why PE firms pay firms like Weil the big bucks: first-class subterfuge. But…busted!

A quick aside, buried in paragraph 55 of the First Day Declaration is a cursory statement about the Restructuring Committee’s investigation into the company PE overlords. The company states:

On November 20, 2018, the Restructuring Committee separately retained Katten Muchin Rosenman LLP (“Katten”) as independent counsel. Specifically, the Restructuring Committee, with the assistance of Katten, conducted a thorough investigation into whether any potentially material claims or causes of action existed against directors, officers, or existing equity holders of the Debtors, including Goldman Sachs and T.H. Lee. Katten made extensive diligence requests to the Debtors, reviewed materials provided in response, interviewed several potential witnesses, and prepared a report for the Restructuring Committee evaluating the strengths and weaknesses of any such potential claims or causes of action. Ultimately, based on that investigation and the report prepared in connection therewith, the Restructuring Committee determined it was unlikely that any such meritorious claims or causes of action exist that ought to be pursued.

It’s a good thing trade is riding through: there likely won’t be an official committee of unsecured creditors to test this conclusion.

So, aside from the company-crushing transaction-induced debt placed on the company by its private equity overlords, why is the company in bankruptcy? Here’s where you really need to read between the lines: above we noted that the company “service[s] QSRs and fast casual restaurants, including four of the top six hamburger restaurant chains, four of the top six sandwich chains, and ‘the top Mexican restaurant chain.’” “Service” is the key word. We don’t see the word “exclusively” preceding it. Here’s the company:

CTI’s recent profitability decline is attributable in part to an increase in the number of protein processors in competitive segments of the food manufacturing and foodservice industries, which led to losses in customer shares and a decrease in new business for the Company. Simultaneously … the Company’s costs have increased over time. The combination of increased competition and increased costs resulted in lower volumes and narrower profit margins. (emphasis added)

Costs increased for a number of reasons — integration of new facilities, etc. — but the most disturbing one is food quality control. Per the company:

The Company’s profitability also suffered from food quality incidents in 2017 and 2018. Although the Company quickly identified and remedied the issues, those occurrences led to a loss of customer sales and to the incurrence of significant costs in remedying the situation and ensuring the integrity of products manufactured on a go-forward basis. These costs, albeit temporary, have collectively had a material impact on the Company’s recent profitability levels.

Yikes. That’s no bueno.

Now, there is some good news here. First, the company appears to have improved EBITDA in Q4 ‘18. Second, this plan is mostly consensual. And, third, the prepackaged nature of this plan will help the company accomplish their restructuring in a speedy six weeks, as planned. Food safety depends on it.

*$25mm of the principal amount of first lien term loans outstanding is attributable to a 2016 acquisition. To be fair.

• Jurisdiction: D. of Delaware (Judge Sontchi)

• Capital Structure: see above.     

• Company Professionals:

  • Legal: Weil Gotshal & Manges LLP (Matthew Barr, Ronit Berkovich, Lauren Tauro, Clifford Carlson, David Li, Michael Godbe) & (local) Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Jaime Luton Chapman, Shane Reil)

  • Legal to Restructuring Committee: Katten Muchin Rosenman LLP

  • Financial Advisor/CRO: AlixPartners LLP (Kent Percy)

  • Investment Banker: Centerview Partners LLC (Karn Chopra)

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

• Other Parties in Interest:

  • Prepetition Credit Agreement Agent: Wells Fargo Bank NA

    • Legal: Otterbourg PC (Andrew Kramer) & (local) Richards Layton & Finger PA (Mark Collins, Jason Madron)

  • Ad Hoc Group of Term Lenders & DIP Term Agent ($155mm): Cortland Capital Market Services LLC

    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Michelle McGreal, Stephen Piraino) & (local) Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Curtis Miller, Matthew Harvey)

  • ABL DIP & Exit Agent ($235mm): Barclays Bank PC

    • Legal: Sherman & Sterling LLP (Joel Moss, Jordan Wishnew) & (local) Richards Layton & Finger PA (Mark Collins, Jason Madron)

New Chapter 11 Bankruptcy Filing - Air Force Village West Inc. (d/b/a Altavita Village)

Air Force Village West Inc. (d/b/a Altavita Village)

March 10, 2019

Another day, another continuing care retirement community in bankruptcy. Here, Air Force Village West Inc. (d/b/a Altavita Village), a California non-profit corporation with 361 residents filed for bankruptcy in the Central District of California. We’ve covered how CCRCs operate in some recent bankruptcy filings (e.g., 😷New Chapter 11 Bankruptcy Filing - Mayflower Communities Inc. (d/b/a The Barrington of Carmel)😷 and 😷New Chapter 11 Bankruptcy Filing - SQLC Senior Living Center at Corpus Christi Inc. (d/b/a Mirador)😷) and so we don’t necessarily see the point in repeating the business basics here. Suffice it to say: the CCRC business model requires some modifications. “The company has been operating at a loss and cannot pay its liabilities as they mature.” No sh*t.

Naturally, debt is part of the issue. The company owes $66mm in alleged secured indebtedness to its prepetition lenders; it has been in payment default since March 2017. The lenders subsequently sued for the appointment of a receiver and succeeded. After the receiver was in place, the receiver, the debtor and the lenders pursued a two-year sale process with two bankers (failed) and, then later, Cushman & Wakefield (“C&W”). C&W was able to locate a stalking horse bidder, Westmont Development LP, an affiliate of Westmont Living Inc., for a 363 sale of the debtor’s assets while in bankruptcy. In light of the fact that the company already pursued a robust sale process, it seeks to consummate the sale transaction by June 2019.

• Jurisdiction: C.D. of California (Judge )

• Professionals:

  • Legal: Dentons US LLP (Samuel Maziel, Tania Moyron, Gary Marsh, Bryan Bates)

  • Investment Banker: Cushman & Wakefield US Inc.

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

• Other Parties in Interest:

New Chapter 11 Bankruptcy Filing - Z Gallerie LLC

Z Gallerie LLC

March 10, 2019

In January's "What to Make of the Credit Cycle. Part 25. (Long Warning Signs)," we discussed the leveraged loan market and, among many other things, highlighted the then-recent reports that KKR was planning to cut its leveraged loan exposure.

😳 pic.twitter.com/YdpqDVS4Zo

— Guy LeBas (@lebas_janney) January 9, 2019

It seems pretty safe to say that this decision was partially informed by KKR's recent experience managing the $2b ex-Blackstone loan fund, Franklin Square Investment Corp. According to reporting by The Financial Times back in December, the Franklin Square fund (now FS-KKR Capital Corp) wrote down five loans between April and December last year. That must be lovely news for investors in the publicly-traded business development corporation ($FSK). Per the FT:

"Executives at Blackstone’s GSO credit arm approved the original loans. But KKR is now responsible for collecting the cash and assessing the loans’ value, and has taken a much gloomier view of their prospects. It has placed 28 percent of the portfolio on a list of deals that require close monitoring or are at risk of losing money, according to securities filings.  

'KKR is a formidable group, but they probably weren’t anticipating the losses that came forth in the GSO book,' said Finian O’Shea, an analyst who covers private credit funds for Wells Fargo."

Strangely, this is obviously good news for professionals with restructuring experience:

"KKR’s credit division has been hiring restructuring specialists to beef up a dedicated team charged with salvaging value from troubled investments — a move that executives there say was planned when the FS-KKR portfolio began to deteriorate. KKR declined to comment, as did the fund’s co-manager, Franklin Square Investments."

Those specialists might get increasingly busy. FSK owned, as of December 31, 2018, first lien loans in Acosta Inc. (written down by the BDC's board to "fair value" from $19.2mm to $11.8mm), Charlotte Russe (yikes), CTI Foods (which was written down by $900k), and Z Gallerie (which had been written down from $31.9mm to $11.3mm). It also owns second lien paper in Belk Inc. (written down from $119.1mm to $94.7mm), CTI Foods, and Spencer Gifts LLC (written down from $30mm to $25.6mm). And subordinated debt in Sungard (written down by 80%). The BDC's equity holdings in Charlotte Russe and Nine West are now obviously worthless. 

Lots of people are focused on BDCs given lending standards during this long bull run. If that portfolio is any indication, they should be. 

*****

Speaking of Z Gallerie, it filed for bankruptcy last weekend in the District of Delaware. It is a specialty-niche furniture retailer that has 76 stores across select states in the US. And this is its second trip into bankruptcy in 10 years. While we think that's too large a spread to really be a "chapter 22," its an ignominious feat nonetheless. 

So another retailer in bankruptcy. We're all getting bored of this. And we're also getting bored of private equity firms helping drive companies into the ground. In this instance, Brentwood Associates, a $2.4b Los Angeles-based private equity purchased a 70% stake in the company in 2014 (and took two seats on the company's board of directors). At the time, Brentwood had this to say about the transaction:*

"Z Gallerie is a differentiated retailer in the home furnishings market with a very unique merchandise assortment. We see a significant opportunity to accelerate growth of the current retail store base."

But…well...not so much. This statement by the company's CRO is a pretty damning assessment of Brentwood's claim that they "build[] category-defining businesss through sustained, accelerated growth”:

"Following a transaction in 2014 in which the Zeidens sold majority control of Z Gallerie to Brentwood Associates (“Brentwood”), Z Gallerie’s overall performance has declined significantly. The reasons for these declines are mostly self-imposed: (i) a store footprint expansion did not meet performance targets, (ii) the addition of the Atlanta distribution center disrupted operations and increased costs, and (iii) the failure to timely invest enough capital in their e-commerce platform limited its growth. These missteps were exacerbated by macroeconomic trends in the brick and mortar retail industry and lower housing starts. As a result, net revenue and EBITDA declined during fiscal year 2018. With Z Gallerie’s current cash balances of less than $2 million, and no availability under its secured credit facilities, the commencement of these chapter 11 cases became necessary to ensure access to capital going forward."

 That's brutal. Something tells us that Z Gallerie is going to make a swift disappearance from Brentwood's website.

Anyway, the company includes all kinds of optimistic language in its bankruptcy filing papers about how, after it closes 17 stores and executes on its business plan, it will be poised for success. It intends to enhance its e-commerce (currently 20% of sales), revamp its Atlanta distribution center, launch social media campaigns (long Facebook), and better train its employees (long Toys R Us PTSD). The company claims numbers have already been on the upswing since the holidays, including February same-store sales up 5% YOY. 

Current optimism notwithstanding, make no mistake: this is yet another instance of value destruction. This is the company's balance sheet (at least some of which dates back to 2014 and is related to Brentwood's purchase):

That $91mm senior secured term loan? Yeah, that's where KKR sits. 

The company has a commitment for a $28mm DIP credit facility from KeyBank which will effectively rollup the senior secured revolving loans and provide $8mm in new money. 

The company has already filed a "hot potato" plan of reorganization — in other words, the lenders will take the company if they have to, but they don't really want to, and so they're happy to pass it on — and have a banker actively trying to pass it on (Lazard Middle Market) — to some other schmuck who thinks they can give it a go. In other words, similar to the plan proposed earlier this year in the Shopko case, this plan provides for the equitization of the allowed secured revolver and term loan claims IF the company is otherwise unable to find a buyer to take it off their hands and pay down some of their loans with cash. The company filed bid procedures along with the plan; it does not have a stalking horse bidder lined up. The company estimates a 4 month timeline to complete its bankruptcy.

We can't imagine that KKR is stoked to own this company going forward. And we can only imagine what kind of projections the company will put forth to convince the court that this thing is actually feasible: the plan has a blank space for the exit facility so that exit structure is also apparently a work in progress.

In any event, given recent loan underwriting standards, KKR, and other BDCs, might want to get used to owning credits they never expected to. 

*Brentwood was represented in the transaction by Kirkland & Ellis LLP, now counsel to the company. The company drops in a footnote that any potential claims against Brentwood and its two directors will be conducted by Klehr Harrison Harvey Branzburg LLP, a firm we’re sure was hired with absolutely zero input by Kirkland and/or the two Brentwood directors. Two independent directors are currently sitting on the board.

• Jurisdiction: District of Delaware (Judge: Laurie S. Silverstein)

• Capital Structure: see above

• Professionals:

  • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Justin Bernbrock, Joshua Altman, Emily Kehoe) & (local) Klehr Harrison Harvey Branzburg LLP (Dominic Pacetti, Michael Yurkewicz)

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

  • Investment Banker: Lazard Middle Market LLC (Jason Cohen)

  • Claims Agent: Bankruptcy Management Solutions, Inc. d/b/a/ Stretto (*click on the link above for free docket access)

• Other Parties in Interest:

  • DIP Agent: Keybank NA

    • Legal: Buchanan Ingersoll & Rooney PC (Mary Caloway, Mark Pfeiffer)

  • KKR Credit Advisors US LLC

    • Legal: Proskauer Rose LLP (Vincent Indelicato, Christ Theodoridis) & (local) Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Matthew Talmo)

New Chapter 11 Bankruptcy Filing - DIESEL USA, Inc.

DIESEL USA, Inc.

March 5, 2019

Three things immediately occurred to us when we saw the news that Diesel USA Inc. filed for bankruptcy in the District of Delaware:

1. That makes perfect sense — Jersey Shore went off the air a long time ago;

2. This is “The Mattress Firm Effect” in action — a retailer using a quick trip in bankruptcy to, on an expedited basis, flush out some burdensome leases and otherwise leave parties in interest unimpaired; and

3. More surprising than the company filing for bankruptcy is the law firm filing it for bankruptcy. Arent Fox LLP, while a fine firm for sure, isn’t exactly known for its debtor-side chops. Just saying.

The numbers around this one are…well…interesting. The company’s brick-and-mortar retail operations consist of 28 retail store locations in 11 states, comprised of 17 full-price retail stores and 11 factory outlet stores. Net sales were:

• In 2014: $83mm for full-price retail and $42mm for outlet (Total: $125mm); and

• In 2018: $38mm for full-price retail and $34.5mm for outlet (Total: $72.5mm).

In terms of percentages:

• In 2014: brick and mortar represented 64% of net sales; and

• In 2018: brick and mortar represented 70% of net sales.

We see a couple of significant problems here.

Despite the superlatives that the company’s CRO generously uses to describe the company, i.e., “cutting-edge,” and “cultural icon,” the numbers reflect a BRAND — let alone the business — in significant trouble. Sure, net sales are down generally, but the distribution has gotten wildly askew. The numbers reflect a bare reality: Diesel simply isn't a brand people will pay full price for anymore. This couldn’t be more stark. And that’s a big problem when the company is (or was) party to expensive height-of-the-real-estate-market leases in prime locations like Manhattan’s Fifth Avenue. Diesel, quite simply, isn’t “Fifth Avenue,” let alone “Madison Avenue.”* We’re not convinced the company is being realistic when it says that it has “retained a loyal customer base.” The numbers plainly say otherwise. Moreover, in an age where digital sales are increasingly more important, the business has become MORE dependent on brick-and-mortar as opposed to its wholesale and e-commerce channels.**

But don’t take our word for it. Here’s the company’s CRO:

…in 2015 prior management implemented a strategic initiative that was focused on repositioning Diesel stores and products in premium locations and with premium customers so as to place them side-by-side with other premium fashion brands across the retail, online, and wholesale platforms. Unfortunately, since its implementation, the Debtor’s net sales have significantly decreased while its losses have significantly increased.

The market has spoken: Diesel is, according to the market, simply not “premium.”

And by “market” we also mean wholesalers. The company opted to stop distributing its products to wholesale partners “that were deemed not to fit the premium image.” Now, we can only imagine that included discount retailers. Basically, SOME OF THE RETAILERS WHO HAVE PERFORMED THE BEST OVER THE LAST SEVERAL YEARS. But wait: it gets even worse: the wholesale customers the company DID retain pursued voluminous “chargebacks.” Per the company:

As is common in the retail industry, the Debtor provides certain customers with allowances for markdowns, returns, damages, discounts, and cooperative marketing programs (collectively, the “Chargebacks”). If the Debtor’s customers fail to sell the Debtor’s products, they generally have the right to return the goods at cost or issue Chargebacks, which are netted against the Debtor’s accounts receivable. Due to mounting Chargebacks from wholesale customers, the Debtor was forced to significantly reduce its wholesale activities in recent years.

Basically, nobody is buying this sh*t. Not in stores. Not in wholesale.

And, yet, the company holds premium leases:

The primary means of implementing the 2015 strategy was to reposition the Debtor’s full-price retail and outlet stores to “premium”, high-profile, and high-visibility locations, which was executed by opening certain new stores and relocating others to “premium” locations while closing others deemed not to fit the new strategic positioning model. The result was, despite the losses suffered in connection with the Fifth Avenue store, management’s negotiation and entry into several expensive, long-term leases for certain of the Debtor’s retail locations, such as the Debtor’s “Flagship” store on Madison Avenue, which do not expire by their terms until 2024-2026. Of course, it was then (and remains today) an inopportune time to make long-term commitments to costly retail leases and the significantly increased lease expenses have not been offset by increased sales, which, in fact, have dropped precipitously.

…numerous of the Debtor’s stores are producing heavy losses. The Debtor’s unprofitable stores combined to produce negative EBITDA of approximately $10.7 million in 2018, nearly all of which flowed from full-price retail stores. The Debtor’s profitable stores are not enough to off-set the losses, as the 17 fullprice stores combined to produce negative EBITDA of approximately $8.7 million in 2018.

Now, the company does indicate that certain (seemingly outlet) stores remain profitable, as do the wholesale and e-commerce operations.*** So, there’s that. New management is in place and their plan includes (a) using the BK to negotiate with landlords, shutter some locations, shutter and relocate others, opening new smaller stores and refit existing locations; (b) deploying influencer marketing generally and aiming more efforts towards females (and hoping and praying that athleisure — a term we didn’t see ONCE in the entire first day declaration — doesn’t continue to hold sway and steer people away from jeans, generally);**** (c) growing e-commerce; and (d) revitalizing the wholesale business with key selective wholesale partners. This plan is meant to take hold in the next three years and “will require significant capital investments.” (PETITION Note: cue the chapter 22 preparation). The company intends to effectuate its new business plan via a plan of reorganization pursuant to which it will reject certain executory contracts. All in, the company hopes to be confirmed in roughly 5 weeks. Aggressive! But, like Mattress Firm, trade creditors are “current” and there’s no debt otherwise, so the schedule isn’t entirely out of the realm of possibility.

But this is the part that REALLY gets us. If you’ve been reading PETITION long enough — particularly our “We Have a Feasibility Problem” series — you know by now that you ought to be AWFULLY SKEPTICAL of management team’s rosy projections. Per the company:

The Debtor’s projections indicate that the Reorganization Business Plan will return the Debtor to stand-alone profitability by 2021 assuming successful store closures through this Chapter 11 Case, thereby ensuring its ability to continue operating as a going-concern, saving over 300 jobs, and creating new ones through the new store openings.

Generally, we’ll take the under. Though, we have to say: at least they’re not audaciously projecting a miraculous profit in 2019.

How will they achieve all of these lofty goals? The company’s foreign parent will invest $36mm over the three-year period of the business plan because…well…why the hell not? Everyone loves a Hail Mary.

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*The company suffered from an ill-advised and poorly-timed real estate spending spree. Between 2008 and 2015, right as brick-and-mortar really started to decline and e-commerce expand, the company expended $90mm on leases. As for Fifth Avenue, per the company, “the Debtor’s store on Fifth Avenue in Manhattan, which opened in 2008 and closed in 2014, by itself received approximately $18 million in capital expenditures during its tenure while generating substantial losses.”

**The company doesn’t appear to have put much into its e-commerce growth. While e-commerce now represents 12% of net sales, sales are only incrementally higher in absolute numbers (from $8mm in 2014 to $12mm in 2018). The wholesale channel, on the other hand, has gone in the opposite direction. Net sales went from $61mm (2014) to $19mm (2018) and now represent only 19% of net sales (down from 32%).

***It seems, though, that outlet stores, wholesale and e-commerce resulted in negative $2mm EBITDA if the math from the above quote is correct. Curious.

****Score for Facebook Inc. ($FB)!

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• Jurisdiction: D. of Delaware (Judge Walrath)

• Professionals:

  • Legal: Arent Fox LLP (George Angelich, David Mayo, Phillip Khezri) & (local) Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Kenneth Enos, Travis Buchanan)

  • Claims Agent: Bankruptcy Management Solutions d/b/a Stretto (*click on the link above for free docket access)

• Other Parties in Interest:

New Chapter 11 Bankruptcy Filing - Weatherly Oil & Gas LLC

Weatherly Oil & Gas LLC

February 28, 2019

Restructuring in the oil and gas space has been quiet of late but we here at PETITION suspect that may change very soon. While oil has been on the rise (in the mid-60s at the time of this writing) — and there are both potential political and supply-side roadblocks growing domestically that may help push prices upward — there nevertheless appear to be cracks forming. We’ve been noting that Jones Energy ($JONE), Sanchez Energy Corporation ($SN), Southcross Energy Partners LP ($SXEE), and Vanguard Natural Resources all look distressed and headed towards chapter 11 bankruptcy filings (or a chapter 22 filing, as the case may be with Vanguard). Recent price action for several other companies also reflects some doubt about the oil and gas space.

Take, for instance, Alta Mesa Holdings LP ($AMR). Per The Houston Chronicle:

Houston oil and gas company Alta Mesa Resources is struggling to stay afloat, laying off roughly one-fourth of its employees and writing down the value of its assets by $3.1 billion because of admitted failures in its financial reporting.

The company's three top executives, CEO Hal Chappelle, Chief Operating Officer Michael Ellis and Chief Financial Officer Michael McCabe, resigned abruptly a few weeks ago.

The company disclosed in an SEC filing that the write-down stems from “ineffective internal control over financial reporting due to an identified material weakness.” We’re conjecturing here, but that sure sounds like diplomatic Texan for “we effed up pretty badly…perhaps even fraudulently.” Consequently, the plaintiffs’ lawyers are circling this puppy like vultures and, well, this:

Alta Mesa Resources $AMES, its officers and directors are being investigated on potential violations of law; bonds are getting smoked, trading at 32 today: https://t.co/GgZ8E8pgB5

— Rachel Butt (@rachel_butt) February 27, 2019

Indeed, the company’s $500mm 7.875% senior unsecured bonds due 2024 got UTTERLY HOUSED, dipping down over 40% in a week and approximately 50% versus a month ago. This chart is BRUTAL:

Source: TRACE

We’ll take a deeper dive into Alta Mesa soon for our Members: if you’re not a Member well, we hope you revel in ignorance.

The price action of once-bankrupt Chaparral Energy Inc. ($CHAP) is also notable: it saw its stock collapse over 20% and its $300mm 8.75% senior unsecured notes due 2023 fall nearly 17%. More debt BRUTALITY here:

Source: TRACE

Long trips to Texas.

Here, Weatherly Oil & Gas LLC is an oil and gas acquisition and exploration company focused on Arkansas, Louisiana and Texas; it operates over 800 well bores (over half shut-in or non-producing) on 200k net acres. The company blames continued low commodity prices and fundamentally changed lending practices for its bankruptcy. Specifically, the company notes:

Lending practices moved from a reserves-based approach to a cash-flow based approach, limiting access to capital growth and forcing the Debtor to utilize free cash flow to pay down senior debt instead of making other capital expenditures.

Without capital and with an expensive production focus, the company struggled in the face of a glut of competition.

The company has a transaction support agreement pursuant to which it intends to sell its assets to multiple purchasers and then pursue a plan of liquidation. Angelo Gordon Energy Servicer LLC, the company’s prepetition lender, will provide a $1mm DIP to fund the cases. Halliburton Energy Services is the company’s largest unsecured creditor with an approximate $2.9mm claim.

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

• Capital Structure: $90.2mm term loan (Angelo Gordon Energy Servicer LLC)

• Professionals:

  • Legal: Jackson Walker LLP (Matthew Cavenaugh, Kristhy Peguero, Vienna Anaya)

  • Financial Advisor/CRO: Ankura Consulting Group LLC (Scott Pinsonnault)

  • Marketing Agent: TenOaks Energy Partners LLC

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

• Other Parties in Interest:

  • Prepetition Term Lender & DIP Lender ($1mm): Angelo Gordon Energy Servicer LLC

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

  • Buyer: BRG Lone Star, Ltd.

  • Buyer: EnSight IV Energy Partners, LLC

  • Sponsor: Weatherly East Texas LLC

    • Legal: Kirkland & Ellis LLP (Gregory Pesce, Brett Newman)

New Chapter 11 Bankruptcy Filing - Windstream Holdings Inc.

Windstream Holdings Inc.

February 25, 2019

See here for our write-up on Winstream Holdings Inc.

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

• Capital Structure: see below.

• Professionals:

  • Legal: Kirkland & Ellis LLP (James Sprayragen, Stephen Hessler, Ross Kwasteniet, Marc Kieselstein, Brad Weiland, Cristine Pirro Schwarzman, John Luze, Neda Davanipour)

  • Legal (Board of Directors): Norton Rose Fulbright US LLP (Louis Strubeck Jr., James Copeland, Kristian Gluck)

  • Financial Advisor: Alvarez & Marsal LLC

  • Investment Banker: PJT Partners LP

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

• Other Parties in Interest:

  • DIP Lender ($500mm TL, $500mm RCF): Citigroup Global Markets Inc.

  • Prepetition 10.5% and 9% Notes Indenture Trustee: Wilmington Trust NA

    • Legal: Reed Smith LLP (Jason Angelo)

  • Prepetition TL and RCF Agent: JPMorgan Chase Bank NA

    • Legal: Simpson Thacher & Bartlett LLP (Sandeep Qusba, Nicholas Baker, Jamie Fell)

  • Ad Hoc Group of Second Lien Noteholders

    • Legal: Milbank LLP

    • Financial Advisor: Houlihan Lokey Capital

  • Ad Hoc Group of First Lien Term Lenders

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Brian Hermann, Andrew Rosenberg, Samuel Lovett, Michael Rudnick)

    • Financial Advisor: Evercore

  • Midwest Noteholders

    • Legal: Shearman & Sterling LLP

  • Uniti Group Inc.

    • Legal: Davis Polk & Wardwell LLP (Marshall Huebner, Eli Vonnegut, James Millerman)

    • Financial Advisor: Rothschild & Co.

  • Large Unsecured Creditor: AT&T Corp.

    • Legal: Arnold & Porter Kaye Scholer LLP (Brian Lohan, Ginger Clements, Peta Gordon) & AT&T (James Grudus)

  • Large Unsecured Creditor: Verizon Communications Inc.

    • Legal: Stinson Leonard Street LLP (Darrell Clark, Tracey Ohm)

  • Official Committee of Unsecured Creditors (AT&T Services Inc., Pension Benefit Guaranty Corporation, Communication Workers of America, AFL-CIO CLC, VeloCloud Networks Inc., Crown Castle Fiber, LEC Services Inc., UMB Bank)

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

New Chapter 11 Bankruptcy Filing - Aceto Corporation

Aceto Corporation

February 19, 2019

In November in “🎬🎥Moviepass Falters; Market Chuckles🎬🎥,” we highlighted how Aceto Corporation ($ACET) had announced that it was pursuing strategic alternatives on the heels of obtaining a waiver of covenant non-compliance. It appears that its pursuit was (somewhat) fruitful.

Yesterday the company filed for bankruptcy in the District of New Jersey with intent to sell its chemicals business assets to New Mountain Capital for $338mm in cash, plus the assumption of certain liabilities (subject to adjustments). It also intends to sell another subsidiary, Rising Pharmaceuticals, while in bankruptcy and prior to the end of its fiscal year on June 30, 2019.

The company’s pre-petition capital structure consists of:

• an $85mm 9.5%-11.5% secured revolving loan (Wells Fargo Bank NA);

• a $120mm 11.5% secured term loan (as part of the same A/R Credit Agreement as the above); and

• $143.75mm of 2% convertible senior notes due 2020 (Citibank NA).

Carry the one, add the two: that’s a total of $348.75mm of debt. Which means that the purchase price of the chemicals business doesn’t even cover the company’s debt. Here’s to hoping the Rising Pharmaceuticals business fetches a good price. To be fair, the company did end its fiscal 2018 with $103.9mm of cash.

Pre-petition lenders led by pre-petition agent, Wells Fargo Bank NA, have committed to providing the company with a $60mm DIP credit facility.

• Jurisdiction: D. of New Jersey (Judge )

• Capital Structure: see above.

• Professionals:

  • Legal: Lowenstein Sandler LLP (Kenneth Rosen, Michael Etkin, Paul Kizel, Jeffrey Cohen, Philip Gross)

  • Financial Advisor/CFO: AlixPartners LLP (Rebecca Roof)

  • Investment Banker: PJT Partners LP

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

• Other Parties in Interest:

  • DIP Agent and Pre-petition Agent: Wells Fargo Bank NA

    • Legal: McGuireWoods LLP (Kenneth Noble)

New Chapter 11 Bankruptcy Filing - Pernix Therapeutics/Pernix Sleep Inc.

Pernix Therapeutics/Pernix Sleep Inc.

February 18, 2019

In our January 30th Members’-only briefing entitled “😢Who Will Remember Things Remembered?😢 ,” we included a segment subtitled “Pharma Continues to Show Distress (Long Opioid-Related BK)” in which we discussed how Pernix Therapeutics Holdings Inc. ($PTX) looked like an imminent bankruptcy candidate. We noted how the company had previously staved off bankruptcy thanks to a refinancing transaction with Highbridge Capital Management. That refinancing now looks like a perfectly-executed loan-to-own strategy: Phoenix Top Holdings LLC, an affiliate of Highbridge, will serve as the stalking horse bidder of the company’s assets in exchange for $75.6mm plus the assumption of certain liabilities. Highbridge will also, after a competitive process pitted against other debtholders like Deerfield Management Company LP, provide the Debtors with a $34.1mm DIP facility — of which $15mm is new money, $5mm is an accordian facility, and the rest is a roll-up of the pre-petition ABL.

• Jurisdiction: D. of Delaware (Judge [ ])

• Capital Structure: see link above.

• Professionals:

  • Legal: Davis Polk & Wardwell LLP (Marshall Huebner, Eli Vonnegut, Christopher Robertson) & (local) Landis Rath & Cobb LLP (Adam Landis, Kerri Mumford, Jennifer Cree, Nicolas Jenner)

  • Financial Advisor: Guggenheim Partners LLC (Stuart Erickson)

  • Investment Banker: Ernst & Young LLP

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

• Other Parties in Interest:

  • Stalking Horse Purchaser: Phoenix Top Holdings LLC (a Highbridge Capital Management affiliate)

  • Large debtholder: Deerfield Management Company LP

    • Legal: Sullivan & Cromwell LLP

  • DIP Agent: Cantor Fitzgerald Securities

    • Legal: Skadden Arps Slate Meagher & Flom LLP (Sarah Ward)

Updated: 2/19/19 at 8:51 CT

👢New Chapter 11 Bankruptcy & CCAA Filing - Payless👢

Payless Holdings LLC

February 18, 2019

Update coming on Wednesday.

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

• Professionals:

  • Legal: Akin Gump Strauss Hauer & Feld LLP (Ira Dizengoff, Meredith Lahaie, Kevin Zuzolo, Julie Thompson, Caitlin Griffin, Patrick Chen, Abid Qureshi) & (local) Armstrong Teasdale LLC (Richard Engel Jr., Erin Edelman, John Willard)

  • Legal (Canadian CCAA): Cassels Brock & Blackwell LLP

  • Legal (Independent Managers): Seward & Kissel LLP

  • Board of Directors: Heath Freeman, Martin Wade, R. Joseph Fuchs, Scott Vogel, Patrick Bartels

  • Financial Advisor: Ankura Consulting Group LLC (Stephen Marotta, Adrian Frankum, Swapna Deshpande)

  • Investment Banker: PJ Soloman LP (Derek Pitts)

  • Asset Disposition Advisor: Malfitano Advisors LLC (Joseph Malfitano)

  • Liquidators: Great American Group LLC and Tiger Capital Group LLC

  • Corporate Communications Consultant: Reevemark LLC

  • Real Estate Advisors: A&G Realty Partners

  • CCAA Monitor: FTI Consulting Inc.

  • CCAA Monitor

    • Legal: Bennett Jones

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

• Other Parties in Interest:

  • Pre-petition ABL Agent: Wells Fargo NA

  • Pre-petition Term Agent: Cortland Products Corp.

🔋New Chapter 11 Bankruptcy Filing - 1515 GEEnergy Holding Co. LLC🔋

1515 GEEnergy Holding Co. LLC

February 14, 2019

Though it took a backseat to the overall oil and gas downturn of a few years ago, the power market has also experienced its share of distress and bankruptcy of late: Illinois Power, ExGen Texas Power, Panda Temple Power, FirstEnergy, Westinghouse, and GenOn are just a few of the power companies that found themselves in a bankruptcy court. Now we can add 1515-Geenergy Holding Co. LLC and BBPC, LLC d/b/a Great Eastern Energy, providers of (i) natural gas and electricity to customers in New York, New Jersey and Massachusetts and (ii) electricity to customers in Connecticut, to the list. (together, the “Debtors”).

What we love about bankruptcy filings is that, unbeknownst to many, they often provide a pithy overview of an industry that is highly informative without getting too into the weeds. Indeed, in the Debtors chapter 11 papers, they provide a solid history of the decades-long process of deregulated power provision. In summary (and per the debtors):

• In 1978, Congress passed the Public Utility Regulatory Policies Act (“PURPA”), which laid the groundwork for deregulation and competition by opening wholesale power markets to non-utility producers of electricity.

• Following this, in the 80s and 90s, state legislatures passed laws designed to allow competitive retail sale and supply in the nat gas markets.

• Congress passed the Energy Policy Act of 1992 which specifically promoted greater competition in the bulk power market. This began to de-monopolize the utility industry by allowing independent power producers equal access to the utilities’ transmission grid.

• By 1996, FERC implemented Orders 888 and 889, which were intended to remove impediments to competition in wholesale trade and bring more efficient lower-cost power to the nation’s electricity customers.

• President George W. Bush later signed into law the Energy Policy Act of 2005, which decreased limitations on utility companies’ ability to merge or be owned by financial holdings / non-utility companies. This led to a wave of mergers and consolidation within the utility industry.

• Today, more than 20 states have at least partially deregulated electricity markets whereby energy customers may choose between their incumbent local utility and an array of independent, competitive suppliers. This is commonly referred to as a “deregulated” or “competitive” power market.

All of this, of course, created opportunity for entrepreneurs looking to take advantage of newly opened markets. That’s where the Debtors come in. BBPC started serving nat gas to customers in 2000, leveraging its relationships with various commodity supply companies, pipelines and local utility companies for the purchase, delivery and distribution of power and natural gas to their customers. The debtors acquire customers via various marketing channels, including, among other things, an indirect sales team, a network of hundreds of independent brokers. The debtors have approximately 49k commercial customers and 5k residential customers.

So, why is the company now in bankruptcy? Per the Company:

The competitive retail electric power industry is characterized by high degrees of both fragmentation, competition, and customer attrition because power providers compete primarily on price and have little else available to differentiate their products and services. Particularly in years with high volatility in weather and energy prices, customers paying high electricity and gas bills will tend to seek out other competitive retail electric providers, resulting in higher attrition rates. Also, larger independent retail energy providers have been active in acquiring customer books of their competitors.

More than that, though, is the fact that customers are no longer f*cking idiots about how they get electric and gas service. Indeed, the company notes that they are “becoming more and more sophisticated.” It’s amazing what competition and the democratization of information that’s attendant thereto can do for consumers. With more options and pricing plans to choose from, the debtors have been feeling the effects of price compression. Moreover, this bankruptcy is Google’s damn fault. Per the company:

Small consumers are also using energy-efficient appliances and devices, adopting green building technologies, and taking other actions that help protect the environment, but also lower demand for energy products.

All of these factors converged to decrease the Debtors’ revenue and cause them to default on certain of their obligations.

We’re serious. Among the PETITION team, we own a number of Nest and other smart energy-efficient devices.

Anyway, all of this led to the debtors defaulting under their ~$60mm prepetition credit agreement with Macquarie Investments US Inc., which, after several months of forbearances meant to give the debtors an opportunity to refi out Macquarie and/or sell the company, expired under their own terms. Needless to say, the debtors weren’t successful and have filed the chapter 11 to prevent Macquarie from exercising remedies and afford themselves an opportunity to pursue a sale of substantially all of their assets.

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• Jurisdiction: D. of Delaware (Judge Carey)

• Capital Structure: ~$60mm secured credit facility (Macquarie Investments US Inc.) + $30.6mm in collateralized LOCs.

• Professionals:

  • Legal: Klehr Harrison Harvey Branzburg LLP (Morton Branzburg, Dominic Pacitti, Michael Yurkewicz) & (local) McLaughlin & Stern LLP (Steven Newburgh)

  • Financial Advisor: GlassRatner Advisory & Capital Group LLC

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

• Other Professionals:

🚗New Chapter 11 Bankruptcy Filing - Total Finance Investment Inc.🚗

Total Finance Investment Inc.

February 13, 2019

We’ve been asking about distress in the automotive industry since our inception and most recently noted in “🚗The Auto Sector is Quietly Restructuring🚗 that activity is picking up in the space. Admittedly, this case isn’t exactly what we had in mind. Nevertheless, earlier this week, Total Finance Investment Inc. and Car Outlet Holding Inc. (and affiliated debtors) filed for bankruptcy in the Northern District of Illinois; the debtors are an integrated chain of buy-here pay-here used vehicle dealerships in Illinois and Wisconsin.

What does “buy-here pay-here” mean? The debtors sold used vehicles, provided financing, AND operated an insurance broker to assist customers with procurement of automobile insurance coverage from third-party insurance providers. They “specifically catered to the fast-growing and underserved population of “unbanked” and “underbanked” Hispanic consumers in Northern Illinois and Milwaukee, which historically made up approximately 70% of the Debtors’ customer base.” There’s just one problem with all of this? Competition is BRUTAL. Per the company:

In recent years, BHPH dealerships have been subject to increasing industry-wide pressures that have negatively impacted their operating results, driving a number of the Debtors’ BHPH competitors out of business. The used vehicle dealership market is highly fragmented and fiercely competitive—with approximately 1,800 used car dealerships in Illinois alone—and the Debtors historically competed with other large used car dealerships like CarMax and DriveTime, as well as other BHPH operations. The fragmented nature of the industry and relatively low barriers to entry have led to steep competition between dealerships, putting significant downward pressure on the margins BHPH dealerships earn on vehicle sales. Further, as a result of a protracted period of increased capital availability, indirect auto lenders such as banks, credit unions, and finance companies have in recent years moved to originate subprime auto loans and offer attractive financing terms to customers with lower than average credit scores, putting pressure on BHPH operators’ market share among their traditional customer base.

Because, like, why not? Nothing has ever gone wrong when there has been excessive competition fiercely pursuing the subprime market. 🙈Ironically, the day before this filing, The Washington Post reported that 7mm Americans have, to the surprise of economists, stopped paying their auto loans. Whooooops. Per the WP:

The data show that most of the borrowers whose auto loans have recently moved into delinquency are people younger than 30 years old and people with low credit scores. Eight percent of borrowers with credit scores below 620 — otherwise known as subprime — went from good standing to delinquent on their auto loans in the fourth quarter of 2018.

No. Bueno. Anyway, back to the debtors. Read this part and tell us you don’t suffer PTSD circa-2008:

…capital markets became increasingly accessible for indirect auto lenders, many of which began to originate subprime loans and offer attractive financing terms to borrowers that historically had been overwhelmingly BHPH customers. The Debtors’ prior management team responded to the change in market conditions by providing larger loans with longer terms, accepting smaller down payments, and accepting transactions with increasingly negative equity in order to increase sales volume. The shift to offering riskier loans to subprime customers ultimately led to the Debtors experiencing historically high delinquency rates and losses beginning in the second half of 2015.

But wait. There’s more:

In addition to increased competition in the auto lending industry, the Debtors have also incurred significant expenses to ensure compliance with new regulations enacted by the Consumer Financial Protection Bureau. Furthermore, the political climate following the 2016 presidential election has had a negative impact on the spending habits of the Debtors’ traditional customer base in a manner that negatively impacted the Debtors’ operating results.

The debtors, therefore, suffered a consolidated pre-tax loss of approximately $29.9mm. MAGA!!!

The company has been trying to improve cash flows and operating results for years. One major initiative included, as far back as 2016, tightening underwriting standards to reduce consumer finance portfolio losses. We sure hope that there are others who took similar steps given the Washington Post report. But we digress.

Back in 2017, the debtors also received an $84mm equity infusion from Marubeni Corporation. Nevertheless, the debtors continued to hemorrhage to the point of compromising compliance with certain financial covenants under their senior secured debt facility with BMO Harris Bank NA. Thereafter, the company entered into a series of forbearance agreements with BMO as it attempted to figure out either a refinancing or an asset sale. In the end, the debtors obtained a restructuring support agreement and filed for bankruptcy to liquidate the used auto business and transfer its auto loan servicing business to a third-party servicer (PETITION Note: earlier this week, The Wall Street Journal reported that the mortgage servicing business is en fuego — notwithstanding the Ditech Holding Corporation bankruptcy (see here). We wonder: what sort of demand is there for subprime auto loan servicing businesses?). BMO Harris will fund the estates with a $4mm DIP credit facility.

So we’re left with this question: is this chapter 11 filing the canary in the coal mine for subprime auto lenders?

• Jurisdiction: N.D. of Illinois (Judge Doyle)

• Capital Structure: see below.

• Professionals:

  • Legal: Sidley Austin LLP (Bojan Guzina, William Evanoff, Jackson Garvey)

  • Conflicts Legal: Togut Segal & Segal LLP

  • Financial Advisor: Portage Point Partners LLC

  • Interim Management: Development Specialists Inc.

  • Investment Banker: Keefe Bruyette & Woods and Miller Buckfire & Co. LLC

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

• Other Professionals:

  • Prepetition Lender: BMO Harris Bank NA

    • Legal: Chapman and Cutler LLP (David Audley, Mia D’Andrea)
      

Source: First Day Declaration

New Chapter 11 Bankruptcy Filing - Imerys Talc America Inc.

Imerys Talc America Inc.

February 13, 2019

Merely a week ago we wrote:

PG&E Corporation's ($PCG) recent liability-based bankruptcy filing got us thinking: what other companies are poised for a litigation-based chapter 11 bankruptcy filing? We think we have a winner. 

Imerys S.A. is a French multinational company that specializes in the production and processing of industrial minerals. Its North American operations are headquartered in Roswell, Georgia and in San Jose, California. Included among Imerys' North American operations is Imerys Talc America. The key word in all of the foregoing is "Talc." 

If only we had purchased a lottery ticket.

Within days, Imerys Talc America Inc. and two affiliated debtors indeed filed for bankruptcy in the District of Delaware. The debtors mine, process and distribute talc for use in end products used in the manufacturing of products sold by third-parties —- primarily Johnson & Johnson Inc. ($JNJ). The debtors have historically been the sole supplier of cosmetic talk to JNJ. And, in part, because of that, they’re getting sued to Kingdom Come. Approximately 14,650 individual claimants are suing the debtors alleging personal injuries caused by exposure to talc mined, processed or distributed by the debtors. The debtors note:

Although personal care/cosmetic sales make up only approximately 5% of the Debtors’ revenue, approximately 98.6% of the pending Talc Claims allege injuries based on use of cosmetic products containing talc.

Whoa. What a number!! What a disparity! Low revenues and yet high claims! What a sham! That just goes to show how absurd these claims are!!

Just kidding. That sentence means absolutely nothing: it is clearly an attempt by lawyers to ignorantly wow people with percentages that have absolutely no significance whatsoever. Who gives a sh*t whether personal care/cosmetic sales are only a small fraction of revenues? If those sales are all laced with toxic crap that are possibly causing people cancer or mesothelioma, the rest is just pixie dust. In fact, it’s possible that 100% of 1% of sales are causing cancer, is it not?

Anyway, naturally, the debtors deny those claims but defending the claims, of course, comes at a huge cost. Per the Company:

…while the Debtors have access to valuable insurance assets that they have relied on to fund their defense and appropriate settlement costs to date, the Debtors have been forced to fund certain litigation costs and settlements out of their free cash flow due to a lack of currently available coverage for certain Talc Claims, or insurers asserting defenses to coverage. The Debtors lack the financial wherewithal to litigate against the mounting Talc Claims being asserted against them in the tort system.

Well that sucks. In addition to the debtors issues obtaining insurance coverage, they’re also apparently bombarded by claimants emboldened by the recent multi-billion dollar verdict rendered against JNJ.. We previously wrote:

While certain cases are running into roadblocks, the prior verdicts call into question whether Imerys has adequate insurance coverage to address the various judgments. If not, the company is likely headed into bankruptcy court — the latest in a series of cases that will attempt to deploy bankruptcy code section 524's channeling injunction and funnel claims against a trust. 

Indeed, given issues with insurance (and JNJ refusing to indemnify the debtors as expected in certain instances), the massive verdict, AND discussions with a proposed future claims representative, the debtors concluded that a chapter 11 filing would be the best way to handle the talc-related liabilities. And indeed a channeling injunction is a core goal. Per the debtors:

The Debtors’ primary goal in filing these Chapter 11 Cases is to confirm a consensual plan of reorganization pursuant to Sections 105(a), 524(g), and 1129 of the Bankruptcy Code that channels all of the present and future Talc Claims to a trust vested with substantial assets and provides for a channeling injunction prohibiting claimants from asserting against any Debtor or non-debtor affiliate any claims arising from talc mined, produced, sold, or distributed by any of the Debtors prior to their emergence from these Chapter 11 Cases. While the Debtors dispute all liability as to the Talc Claims, the Debtors believe this approach will provide fair and equitable treatment of all stakeholders.

The comparisons to PG&E were on point.

• Jurisdiction: D. of Delaware (Judge Silverstein)

• Capital Structure: $14.4mm inter-company payable.

• Professionals:

  • Legal: Latham & Watkins LLP (George Davis, Keith Simon, Annemarie Reilly, Richard Levy, Jeffrey Bjork, Jeffrey Mispagel, Helena Tseregounis) & (local) Richards Layton & Finger PA (Mark Collins, Michael Merchant, Amanda Steele)

  • Financial Advisor: Alvarez & Marsal North America LLC

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

• Other Parties in Interst:

  • Imerys SA

    • Legal: Hughes Hubbard & Reed LLP (Christopher Kiplok, William Beausoleil, George Tsougarakis, Erin Diers) & (local) Bayard PA (Scott Cousins, Erin Fay)

  • Future Claims Representative: James L. Patton Jr.

    • Legal: Young Conaway Stargatt & Taylor LLP

    • Financial Advisor: Ankura Consulting Group LLC

😷New Chapter 11 Bankruptcy Filing - Trident Holding Company LLC😷

Trident Holding Company LLC

February 10, 2019

It looks like all of those 2018 predictions about healthcare-related distress were off by a year. We’re merely in mid-February and already there has been a full slate of healthcare bankruptcy filings. Here, Trident Holding Company LLC, a Maryland-based provider of bedside diagnostic and other services (i.e., x-ray, ultrasound, cardiac monitoring) filed for bankruptcy in the Southern District of New York. What’s interesting about the filing is that it is particularly light on detail: it includes the standard description of the capital structure and recent efforts to restructure, but there is a dearth of information about the history of the company and its financial performance. There is, however, a restructuring support agreement with the company’s priority first lien lenders.

Here’s a quick look at the company’s capital structure which is a large factor driving the company into bankruptcy:

Source: First Day Declaration

As you can see, the company has a considerable amount of debt. The above-reflected “Priority First Lien Facility” is a fairly recent development, having been put in place as recently as April 2018. That facility, provided by Silver Point, includes a $27.1mm prepayment fee triggered upon the filing of the bankruptcy case. That’s certain to be a point of interest to an Official Committee of Unsecured Creditors. It also contributed to an onerous amount of debt service. Per the company:

In the midst of market and competitive challenges, Trident has significant debt service obligations. Over the course of 2018, Trident paid approximately $26,185,667.75 in cash interest on the Secured Credit Facilities. On January 31, 2019, the Company missed an interest payment of $9,187,477.07 on the Secured Credit Facilities, resulting in an Event of Default on February 8, 2019 after the cure period expired.

But, wait. There’s more. The recent uptick in distressed healthcare activity is beginning to aggregate and create a trickle-down bankruptcies-creating-bankruptcies effect:

Moreover, a number of recent customer bankruptcies – including those of Senior Care Centers, LLC, 4 West Holdings, Inc., and Promise Healthcare Group, LLC – have exacerbated the Company’s liquidity shortfall by limiting the collectability of amounts owed from these entities. A number of other customers who have not yet filed bankruptcy cases are generally not paying the Debtors within contractual terms due to their own liquidity problems. As a result of these collection difficulties and challenges with the new billing system in the Sparks Glencoe billing center, the Debtors recorded $27.8 million of extraordinary bad debt expense in 2018 and $12.7 million in 2017.

Ouch. Not to state the obvious, but if the start of 2019 is any indication, this is only going to get worse. The company estimates a net operating cash loss of $9.1mm in the first 30 days of the case.

Given the company’s struggles and burdensome capital structure, the company has been engaging its lenders for well over a year. In the end, however, it couldn’t work out an out-of-court resolution. Instead, the company filed its bankruptcy with a “restructuring support agreement” with Silver Point which, on account of its priority first lien holdings, is positioned well to drive this bus. And by “drive this bus,” we mean jam the junior creditors. Per the RSA, Silver Point will provide a $50mm DIP and drive the company hard towards a business plan and plan of reorganization. Indeed, the business plan is due within 36 days and a disclosure statement is due within a week thereafter. Meanwhile, the RSA as currently contemplated, gives Silver Point $105mm of take-back term loan paper and 100% of the equity of the company (subject to dilution). The first lien holders have a nice blank in the RSA next to their recovery amount and that recovery is predicated upon…wait for it…

…a “death trap.” That is, if they accept the plan they’ll currently get “ [●]%” but if they reject the plan they’ll get a big fat donut. Likewise, the second lien holders. General unsecured claimants would get a pro rata interest in a whopping $100k. Or the equivalent of what Skadden will bill in roughly, call it, 3 days of work??

The business plan, meanwhile, ought to be interesting. By all appearances, the company is in the midst of a massive strategic pivot. In addition to undertaking a barrage of operational fixes “…such as optimized pricing, measures to improve revenue cycle management by increasing collection rates, rationalizing certain services, reducing labor costs, better managing vendor spend, and reducing insurance costs,” the company intends to focus on its core business and exit unprofitable markets. While it retreats in certain respects, it also intends to expand in others: for instance, the company intends to “expand home health services to respond to the shifting of patients from [skilled nursing facilities] into home care.” Per the company:

Toward this end, Trident conducted successful home health care pilot programs in 2018 in two markets to optimize its Care at Home business model with radiology technicians dedicated to servicing home health patients. Trident hopes to expand this business model to an additional seven markets in 2019.

Like we said, a pivot. Which begs the question “why?” In addition to the debt, the company noted several other factors that drove it into bankruptcy. Chief among them? The rise of home health care. More from the company:

Trident has suffered ripple effects from the distress faced by skilled nursing facilities (“SNF”), which are its primary direct customers. SNF occupancy rates have declined to a multi-year low as a result of structural and reimbursement changes not yet offset by demographic trends. These structural changes include, among other things, patient migration to home health care. The decline in SNF occupancy rates has led to reduced demand for Trident’s services. At the same time, Trident has only had limited success reducing costs in response to lower volumes, as volume declines are driven by lower utilization per facility rather than a reduction in the number of facilities served.

This is a trend worth continued watching. Who else — like Trident — will be affected by this?

Large general unsecured creditors of the business include Grosvenor Capital Management, Jones Day (to the tune of $2.3mm…yikes), Konica Minolta Healthcare Americas Inc., McKesson ($MCK)(again!!…rough couple of weeks at McKesson), Quest Diagnostics Inc. ($DGX), Cardinal Health Inc. ($CAH) and others. They must be really jacked up about that pro rata $100k!!

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

• Capital Structure: see above.

• Professionals:

  • Legal: Skadden Arps Slate Meagher & Flom LLP (Paul Leake, Jason Kestecher, James Mazza Jr., Justin Winerman)

  • Independent Director: Alexander D. Greene

  • Financial Advisor: Ankura Consulting (Russell Perry, Ben Jones)

  • Investment Banker: PJT Partners LP (Mark Buschmann, Josh Abramson, Willie Evarts, Meera Satiani, Elsa Zhang)

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

• Other Professionals:

  • Priority First Lien Admin Agent: SPCP Group LLC/Silver Point Finance LLC

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Alan Kornberg, Robert Britton, Lewis Clayton, Aidan Synnott, Christman Rice, Michael Turkel)

    • Financial Advisor: Houlihan Lokey LP

  • First Lien Agent: Cortland Capital Market Services LLC

    • Legal: White & Case LLP (Thomas Lauria, Erin Rosenberg, Jason Zakia, Harrison Denman, John Ramirez)

  • Ad Hoc Group of First Lien Lenders

    • Legal: Kirkland & Ellis LLP (Patrick Nash)

    • Financial Advisor: Greenhill & Co. Inc.

  • Second Lien Agent: Ares Capital Corporation

  • Ad Hoc Group of Second Lien Lenders

    • Legal: Latham & Watkins (Richard Levy, James Ktsanes)

  • Large Creditor: McKesson Medical-Surgical Inc.

    • Legal: Buchalter P.C. (Jeffrey Garfinkle)

  • Large Creditor: Quest Diagnostics

    • Legal: Morris James LLP (Brett Fallon)

  • Equity Sponsor: Revelstoke Capital Partners

    • Legal: Winston & Strawn LLP (Carey Schreiber, Carrie Hardman)

  • Equity Sponsor: Welltower Inc.

    • Legal: Sidley Austin LLP (Andrew Propps, Bojan Guzina)

  • Official Committee of Unsecured Creditors

    • Legal: Kilpatrick Townsend & Stockton LLP (David Posner, Gianfranco Finizio, Kelly Moynihan)

    • Financial Advisor: AlixPartners LLP (David MacGreevey)
      
      
      
      

🏠New Chapter 11 Bankruptcy Filing - Decor Holdings Inc.🏠

Decor Holdings Inc.

February 12, 2019

Source: https://www.robertallendesign.com

Privately-owned New York-based Decor Holdings Inc. (d/b/a The RAD Group and The Robert Allen Duralee Group) and certain affiliates companies filed for bankruptcy earlier this week in the Eastern District of New York. The debtors state that they are the second largest supplier of decorative fabrics and furniture to the design industry in the U.S., designing, manufacturing and selling decorative fabrics, wall coverings, trimmings, upholstered furniture, drapery hardware and accessories for both residential and commercial applications. All of which begs the question: do people still actually decorate with this stuff?!? In addition to private label product lines, the company represents six other furnishing companies, providing tens of thousands of sku options to design professionals and commercial customers. The company maintains a presence via showrooms in large metropolitan cities in the US and Canada as well as an agent showroom network in more than 30 countries around the world. In other words, for a company you’ve likely never heard of, they have quite the reach.

The debtors’ problems derive from a 2017 merger between the Duralee business and the Robert Allen business. Why? Well, frankly, it sounds like the merger between the two is akin to a troubled married couple that decides that having a kid will cure all of their ills. Ok, that’s a terrible analogy but in this case, both companies were already struggling when they decided that a merger between the two might be more sustainable. But, “[l]ike many industries, the textile industry has been hard hit by the significant decrease in consumer spending and was severely affected by the global economic downturn. As a result, the Debtors experienced declining sales and profitability over the last several years.” YOU MEAN THE PERCEIVED SYNERGIES AND COMBINED EFFICIENCIES DIDN’T COME TO FRUITION?!? Color us shocked.

Ok, we’re being a little harsh. The debtors were actually able to cut $10-12mm of annual costs out of the business. They could not, however, consolidate their separate redundant showroom spaces outside of bankruptcy (we count approximately 32 leases). Somewhat comically, the showroom spaces are actually located in the same buildings. Compounding matters was the fact that the debtors had to staff these redundant spaces and failed to integrate differing software and hardware systems. In an of themselves, these were challenging problems even without a macro overhang. But there was that too: “…due to a fundamental reduction of market size in the home furnishings market, sales plummeted industry wide and the Debtors were not spared.” Sales declined by 14% in each of the two years post-merger. (Petition Note: we can’t help but to think that this may be the quintessential case of big firm corporate partners failing to — out of concern that management might balk at the mere introduction of the dreaded word ‘bankruptcy’ and the alleged stigma attached thereto — introduce their bankruptcy brethren into the strategy meetings. It just seems, on the surface, at least, that the 2017 merger might have been better accomplished via a double-prepackaged merger of the two companies. If Mattress Firm could shed leases in its prepackaged bankruptcy, why couldn’t these guys? But what do we know?).

To stop the bleeding, the debtors have been performing triage since the end of 2018, shuttering redundant showrooms, stretching payables, and reducing headcount by RIF’ing 315 people. Ultimately, however, the debtors concluded that chapter 11 was necessary to take advantage of the breathing spell afforded by the “automatic stay” and pursue a going concern sale. To finance the cases, the debtors obtained a commitment from Wells Fargo Bank NA, its prepetition lender, for a $30mm DIP revolving credit facility of which approximately $6mm is new money and the remainder is a “roll-up” or prepetition debt (PETITION Note: remember when “roll-ups” were rare and frowned upon?). The use of proceeds will be to pay operating expenses and the costs and expenses of being in chapter 11: interestingly, the debtors noted that they’re administratively insolvent on their petition. 🤔

Here’s to hoping for all involved that a deep-pocked buyer emerges out of the shadows.

• Jurisdiction: E.D. of New York (Judge Grossman)

• Capital Structure: $23.7mm senior secured loan (Wells Fargo Bank NA), $5.7mm secured junior loan (Corber Corp.)

• Professionals:

  • Legal: Hahn & Hesson LLP (Mark Power, Janine Figueiredo)

  • Conflicts Counsel: Halperin Battaglia Benzija LLP (Christopher Battaglia)

  • Financial Advisor: RAS Management Advisors LLC (Timothy Boates)

  • Investment Banker: SSG Capital Advisors LLC (J. Scott Victor)

  • Liquidator: Great American Group LLC

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

• Other Professionals:

  • DIP Agent: Wells Fargo Bank NA

    • Legal: Otterbourg P.C. (Daniel Fiorillo, Jonathan Helfat)

  • Subordinated Noteholder: Corber Corp.

    • Legal: Pachulski Stang Ziehl & Jones LLP (John Morris, John Lucas)

New Chapter 11 Bankruptcy Filing - DiTech Holding Corporation

Ditech Holding Corporation

February 11, 2019

Source: PETITION

The benefit of building a track record of writing/reporting is that various themes emerge over time that can be built upon. Ben Thompson, the eponymous writer of Stratechery, often comments about how newsletters are a better forum for writing than books because thought processes can evolve, themes can be strung together and built-upon or amended, and the reader isn’t purchasing a finished product, per se, but a relationship with the writer. And that relationship can grow over time. We hope that our PETITION readers feel similarly.

Apropos, we wrote back in “We Have a Feasibility Problem” back in November 2016 that, in the context of the Paragon Offshore bankruptcy case, the bankruptcy profession may be suffering from what we dubbed a “feasibility problem.” We wrote:

We're thankful this week for Judge Sontchi's decision last week in the Paragon Offshore bankruptcy cases. The decision was more than just a victory for the company's term loan lenders: it was a much-needed warning signal to the restructuring industry. 

First, a quick synopsis of the opinion. In short, Judge Sontchi sustained most, but not all, of the term lenders objections on the basis that the Debtors' (i) deployed unrealistic rig utilization and day rate assumptions and (ii) failed to take into consideration macro considerations that would affect the Debtors' eventual ability to refinance debt upon maturity in 2021 (if they didn't run out of cash before then). 

We added:

Putting aside the specifics of this case, the decision is important for another reason: it highlights the importance of feasibility. Now, granted, the term lenders had to object for Sontchi to arrive at his conclusion in Paragon but there is an increasing likelihood of Judges scrutinizing feasibility. This Fox Business piece notes, "Some critics say bankruptcy judges too often focus on hammering out an agreement without paying enough attention to companies' chances of long-term survival." Will this continue?

Maybe we need Judges to be activists and save us from ourselves. Deals are being cut, sure, but are they for the right reasons? Are they cut to ensure the viability of the companies underneath capital structures or to uphold "castles in the air" theory and line the pockets of distressed investors? Hard to say: seemingly, these deals aren't doing them any favors either. Without greater transparency to the markets, it's hard to know.

Here's what we do know. In the last several years, there have been a number of repeat restructurings: American Apparel LLC. Global Geophysical Services LLC. Hercules Offshore Inc. Essar Steel Algoma Inc. Fresh and Easy. A&P. Sbarro LLC. Revel Casino. Catalyst Paper. Perhaps we all -- judges included -- ought to ask ourselves why that might be.

We’ve since continued that line of inquiry.

Three weeks ago in “⚡️Why is Gymboree an Unmitigated Disaster?⚡️” — a piece worth revisiting — we explained that, in the context of plan confirmation, debtors submit financial projections and either proffer written testimony or provide live testimony to the effect that the projections are realistic and that, therefore, the plan is feasible and compliant with Bankruptcy Code section 1129(a)(11). We also highlighted — of course with the benefit of 20/20 hindsight — that, as it turned out in the Gymboree chapter 11 case, those projections were complete and utter dogsh*t. We deconstructed, nearly line-item by line-item, how amiss the company’s actual performance was vis-a-vis the projections and concluded:

In summary, the actual operating performance has made a joke of the company’s financial projections and a mockery of the evidence presented to the bankruptcy court to satisfy feasibility.

Again, we insist that you revisit the piece. We concluded by snarking:

…perhaps we’ve arrived at the point in bankruptcy proceedings where the bankruptcy court, itself, ought to hire professionals to verify or challenge the evidence presented to it. We could see it now: Judge Nebraska hiring Banker EFF&D to serve as her banker to determine whether the feasibility proffer is a total clusterf*ck like the one here. Why has this not happened yet? Don’t even tell us it’s fee sensitivity.

And then the Sears sale hearing happened. In “Sears Sales Process “Ends” With an Anticlimactic Flourish (Long Strong PR),” we wrote the following as just one small part of our fulsome discussion of the Sears sale approval hearing:

But this part was especially interesting:

Drain made clear during the course of the hearing he was well aware of the uncertainty pertaining to Sears' future viability. That uncertainty however, did not appear strong enough to override a deal that would have saved 45,000 jobs.

"Whether it's a company that used to print educational books or used to sell plus-sized clothes, the internet has changed everything – and any projection is more in doubt than a projection you would have had 15 years ago or 10 years ago," said Drain, seemingly referring to the bankruptcies of Houghton Mifflin and Fullbeauty, respectively.

Wait, what?!? Is a bankruptcy judge calling into question the very idea of projections in retail bankruptcy cases? How does that affect a feasibility analysis? Is this Judge Drain acknowledging that “we have a feasibility problem?”

What we should have said — given that the commentary in Sears related to an adequate assurance analysis — was “how would that affect a feasibility analysis going forward?” It remains a good question.

This is where we add Ditech Holding Corporation to the discussion. Ditech Holding Corporation and its affiliated debtors (the “Debtors”) filed for bankruptcy in Southern District of New York on February 11, 2019. The case will be heard by Judge James L. Garrity Jr., who, in case you were curious, was the judge the last time this company filed for bankruptcy in November of 2017 (under the name Walter Investment Management Corporation). The Debtors, along with certain non-debtor subsidiaries, act as an independent servicer and originator of mortgage loans and servicer of reverse mortgage loans. Per the Debtors via the First Day Declaration of CFO Gerald Lombardo:

For more than 50 years, the Company has offered a wide array of loans across the credit spectrum for its own portfolio and for GSEs (as defined below), government agencies, third-party securitization trusts, and other credit owners. The Company originates and purchases residential loans through consumer, correspondent and wholesale lending channels that are predominantly sold to GSEs and government entities. The Company also operates two complimentary businesses: (i) asset receivables management and (ii) real estate owned property management and disposition.

Lombardo continues:

In recent years, the Debtors’ business has been impacted by significant operational challenges and industry trends that have severely constrained its liquidity and ability to implement much needed operational initiatives. In an effort to address the burden of its overleveraged capital structure—a remnant of its historical acquisitions—the Company consummated a fully consensual prepackaged chapter 11 plan on February 8, 2018. Given the significant liquidity and operational headwinds facing the Company in 2019, it became clear to the Company’s new senior management team that additional relief was needed.

Curiously, though, the very next sentence states:

Beginning in June 2018, the Company began its formal review of strategic alternatives, including a potential merger or sale of all or substantially all of the assets of the Company.

That’s right. Merely four months post-emergence from bankruptcy, the company was already flittering around grasping at straws. Attempts to consummate an out-of-court transaction with a third-party purchaser failed and, faced with “increased uncertainty in 2019, and an anticipated end-of-first-quarter going-concern qualification from its auditors” in December 2018, the company initiated negotiations with groups of holders of approximately $736.6mm of its debt on an in-court recapitalization. These discussions resulted in a restructuring support agreement (the “RSA”) with an ad hoc group of term lenders which will extinguish $800mm in funded debt, transfer ownership of the company to the term lenders, and leave the company with approximately $400mm of term loan debt (plus an exit facility) upon emergence from bankruptcy. Mind you that, in the first go around, the company reduced its debt by approximately $800mm. All in, the Debtors have managed to destroy a significant amount of value over a short period of time.

This last point cannot be overstated. In the prior restructuring, the company: (i) amended and restated its term loan, eliminating $200mm of principal amounts outstanding in the process, (ii) the senior noteholders received $250mm in 9% second lien PIK toggle take-back paper due 2024 (so optimistic!) and 73% of the equity in the reorganized company, extinguishing nearly $300mm of debt in the process, and (iii) the convertible noteholders received the remainder of the equity in exchange for cancelling their $242.5mm of debt. This chart sums up the proposed restructuring:*

First Day Declaration, Walter Investment Management Chapter 11 Filing.

Said another way, all of the parties agreed that, based on the valuation of the company, the fulcrum security was at the senior noteholder level, leaving the likes of Canyon Capital Advisors LLC, CQS UK LLP, Deer Park Road Management Company LP, Lion Point Capital LP, Oaktree Capital Management LP, and Omega Advisors Inc. as the post facto owners of the company.

Docket 57, Walter Investment Management Chapter 11 case.

Well…that didn’t last long. The gist of this new chapter 11 filing is that all of the recoveries secured by the senior and convertible noteholders are now officially wiped out to zero (assuming they still hold the paper and haven’t dumped it on some other unsuspecting fool…uh…”investor”). Now the term lenders** own the company — not without taking quite a haircut themselves. For the debtholders, especially the senior and convertible noteholders, that sure isn’t a great way to start off 2019. Hopefully those 2018 bonuses based on paper gains (assuming some of the holders bought in at super-distressed levels) were pretty. It seems we may also have a valuation problem. 😬

In addition to moving forward with the restructuring transaction governed by the RSA, the company will parallel-path a marketing process and will toggle to a sale transaction if there are viable bids prior to plan confirmation. This could take the form of an all-in asset sale, a sale of a portion of the Debtors’ assets, or a sale of the master servicing business because, like, let’s be honest: we can’t imagine the term lenders want to be in the mortgage servicing business. Or…maybe…gulp…they do?? Apparently the area is hot! Meanwhile, the company has secured $1.9b in DIP warehouse financing to refinance the Debtors existing warehouse and servicer advance facilities.

So, how does so much value get destroyed so quickly? What happened here? Per the Debtors:

Notwithstanding the Company’s efforts to implement its business plan, which included further cost reductions, operational enhancements and streamlining of its business, following emergence from the WIMC Chapter 11 Case, the Company continued to face liquidity and performance challenges that were more persistent and widespread than anticipated. Coupled with the industry and market factors, these performance challenges have resulted in less liquidity, making the implementation of key operational enhancements more difficult—resulting in their postponement.

In other words, the business plan was, prima facie, unrealistic to begin with. Ladies and gentlemen, we appear to be experiencing an epidemic of bad business plans in bankruptcy (PETITION Note: we’re SUPER-DUPER-SURE-WITH-A-CHERRY-ON-TOP that Sears’ Transform Holdco will be the exception.)

Still, to be fair to the Debtors, they don’t control the FED. Interest rate increases had a negative impact on the Debtors’ business. Per the Debtors:

The increase in interest rates has also negatively impacted mortgage originators and servicers generally—the Debtors are no exception. As interest rates have risen, less borrowers are refinancing loans in a higher interest rate environment, resulting in lower origination volume for the Company.

Tack on the Debtors’ still-overlevered balance sheet, its burdensome interest and amortization obligations, and tightening rates from lending counterparties and you’ve got a world of hurt. Due to diminishing liquidity and scheduled amortization payments of approximately $110mm in 2019, the company faced risk of a going-concern qualification from auditors, which would have stream-rolled into even more hurt by way of triggered defaults and terminations throughout the the Debtors’ debt and working capital facilities.

While there’s plenty of talk about a dearth of liquidity, the Debtors conveniently offer little by way of real up-to-date detail in their bankruptcy papers — a curious development to say the least. We’re left with a balance sheet snapshot through September 20, 2018. But even that is enough to see how where the Debtors missed. This is the projected balance sheet used in the first bankruptcy:

Source: Walter Investment Management Disclosure Statement

And this is the September 30, 2018 balance sheet:

Extrapolating out for the full fiscal year, you can see that, among other things, the cash, equivalents and residential loans are below projections and that payables dramatically exceed plan. Whoops!

Now, let’s be clear: the first filing was a fully consensual deal wrapped up in a bow and presented, in a mere matter of months, to the bankruptcy judge. This is not Paragon Offshore, where there was a vehement confirmation objection. There was no evidence on the record to suggest that the business plan and, by extension, the plan of reorganization, were infeasible. And yet it only took four months for that to be the case.

Which begs another question: how in the world did so many smart people get this so wrong?

*The equity recoveries were later adjusted to reflect the fact that the convertible noteholders voted to accept the plan, giving that class 50% of the new common stock. Ah, the beauty of crossholders (see Lion Point and Deer Park above).

**The consenting noteholders in the Walter transaction were, according to public filings, Carlson Capital LP, TAO Fund LLC, Credit Suisse Asset Management LLC, Marathon Asset Management LP, Nuveen, Symphony Asset Management LLC, Eaton Vance Management.

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

• Capital Structure: See above.    

• Company Professionals:

  • Legal: Weil Gotshal & Manges LLP (Ray Schrock, Sunny Singh, Ryan Preston Dahl, Alexander Welch)

  • Financial Advisor: AlixPartners LLP (David Johnston, Clayton Gring, James Nelson)

  • Investment Banker: Houlihan Lokey Capital Inc. (Jeffrey Lewis)

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

• Other Parties in Interest:

  • Prepetition Term Agent: Credit Suisse AG

    • Legal: Davis Polk & Wardwell LLP (Brian Resnick, Michelle McGreal)

  • Counsel to the Ad Hoc Group of Term Lenders

    • Legal: Kirkland & Ellis LLP (Patrick Nash, Gregory Pesce, John Luze)

    • Financial Advisor: FTI Consulting Inc.

  • 9.0% Second Lien Senior Subordinated PIK Toggle Notes due 2024 Trustee: Wilmington Savings Fund Society, FSB

  • Second Lien Ad Hoc Group

    • Legal: Milbank Tweed Hadley & McCloy LLP (Gregory Bray, Melainie Mansfield)

  • DIP Agent & Lender: Barclays Bank PLC and Barclays Capital Inc.

    • Legal: Skadden Arps Slate Meagher & Flom LLP (Sarah Ward, Mark McDermott, Melissa Tiarks)

  • Nomura Corporate Funding Americas, LLC

    • Legal: Alston & Bird LLP (Karen Gelernt and Ronald Klein) and Jones Day LLP (Ben Rosenblum)

  • Fannie Mae

    • Legal: O’Melveny & Myers LLP (Stephen Warren, Jennifer Taylor and Darren Patrick)

  • Freddie Mac

    • Legal: McKool Smith PC (Paul D. Moak)

🚚New Chapter 11 Bankruptcy Filing - New England Motor Freight Inc.🚚

New England Motor Freight Inc.

February 11, 2019

New England Motor Freight Inc. (“NEMF”) and its affiliated debtors filed for bankruptcy in the District of New Jersey. NEMF provides less-than-truckload transportation services; its debtor affiliates also provide, among other things, truckload carrier services, equipment leasing, third party logistics services, transportation brokerage services, and non-vessel operation common carrier operations between the US and Puerto Rico. Collectively, the debtors employ approximately 3,450 full-time and part-time employees, of which 1,900 are members of the International Association of Machinists and Aerospace Workers, AFL-CIO and are covered by collective bargaining agreements. While the company generated gross revenues around $370mm in each of the last two fiscal years, it filed for bankruptcy to effectuate (a) an orderly liquidation of the majority of its business and (b) the sale of its truckload and third-party logistics businesses (which, together, account for approximately 9% of the company’s revenues). The company has approximately $57.1mm of vehicle financing debt exclusive of interest and fees and another $30.4mm in outstanding letters of credit.

Interestingly, the company notes:

While the company’s operations were profitable for decades since the current ownership group acquired NEMF in 1977, the Debtors have suffered a downward trend over recent years, which was exacerbated in late 2018 by the unexpected loss of key accounts, the shortage of drivers, a new Union contract with onerous retroactive terms, and the L/C Lenders’ ultimate unwillingness to restructure the Debtors’ letters of credit obligations under terms acceptable to the Debtors.

And, here, more on the union situation:

Changes and competition within the industry have had an ongoing negative impact on the Debtors’ revenues. The Debtors’ workforce is made up of approximately 3,450 full-time and part-time employees. The Union workforce consists of approximately: 1,425 truck drivers, and 475 dock workers, for a total of approximately 1,900 Union employees. The non-union workforce consists of, approximately: 145 truck drivers at Eastern, 600 part-time workers (primarily dock workers), and 805 other employees, for a total of approximately 1,550 non-union employees. Employee costs for the Debtors are, in the aggregate, substantially above industry norms. Most of the LTL companies competing with the Debtors operate under non-unionized conditions. At the same time, there has developed an industry-wide shortage of drivers, putting the Debtors, with an aging fleet of vehicles, at a severe disadvantage. (emphasis added)

Given the company’s proximity to New York, its relationship with Amazon Inc. ($AMZN), and the role of unions in the ultimate break-up between New York City and Amazon (which happened a day later), we thought this story was particularly intriguing.

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

• Professionals:

  • Legal: Gibbons P.C. (Karen A. Giannelli, Mark B. Conlan, Brett S. Theisen) & (local) Wasserman, Jurista & Stolz, P.C. (Donald Clarke, Daniel Stolz)

  • Financial Advisor: Phoenix Management Services LLC (Vince Colistra)

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

😷New Chapter 11 Bankruptcy Filing - SQLC Senior Living Center at Corpus Christi Inc. (d/b/a Mirador)😷

SQLC Senior Living Center at Corpus Christi Inc. (d/b/a Mirador)

2/8/19

We started reading the papers for the bankruptcy filing of SQLC Senior Living Center at Corpus Christi Inc. (d/b/a Mirador) and started scratching our heads. “Have we read this before?” we wondered. The answer is, effectively, ‘yes.’ On January 30th, Mayflower Communities Inc. d/b/a The Barrington of Carmel filed for bankruptcy. As with Mirador, here, SQLC is the sole member of and administrator and operator of The Barrington of Carmel, too. And therein lies the familiarity: the first several pages of Mirador’s First Day Declaration filed in support of the bankruptcy have the exact same description of the continuing care retirement community business as that filed in The Barrington of Carmel case. Which makes sense: there’s the same CRO and financial advisor in both cases. And, so, we have to complement the efficiency: why reinvent the wheel?

Whereas Barrington was a 271-unit CCRC, Mirador — a Texas nonprofit — owns and operates a 228-unit CCRC, comprised of 125 independent living residences, 44 assisted living residences, 18 memory care residences, and 4 skilled nursing residences. Mirador makes all of its revenue from operation of the CCRC. Mirador is a smaller CCRC than Barrington and, similarly, its assets and liabilities are fewer. As of the petition date, the company reported approximately $53mm in assets and $118mm in liabilities, the bulk of which is comprised of $74.5mm of long-term municipal bond obligations (UMB Bank NA) and $13.9mm of subordinated notes.

So what factored into the company’s bankruptcy filing? It blames, among other things, (i) the inability to sustain pricing and the level of entrance fees needed to support its debt, (ii) the Great Recession’s effect on housing prices which had the trickle-down effect of impairing the ability of potential residents to sell their houses and pay the necessary entrance fee (which, in turn, led to below-model occupancy levels and depressed cash flow), and (iii) the competitive senior housing market in Corpus Christi.

To combat these trends, the company lowered its entrance fees to fill occupancy. While that worked, it “also produced the negative effect on the long-term financial ability of the Debtor to pay Resident Refunds as they became due.” See, this complicated things. Per the Debtors:

“The Debtor’s initial Life Care Residents often executed 90% refundable contracts, which resulted in higher Resident Refund obligation. In an effort to maintain occupancy levels, newer Life Care Residents often paid a lower cost Entrance Fee. Thus, as earlier Residents moved out of the Facility and became eligible for Resident Refunds, the Entrance Fees received from New Residents were not sufficient to cover the Debtor’s Resident Refund obligations. This pattern continued such that as of late 2017, the Debtor owed and was unable to pay Resident Refunds of approximately $2 million.”

This appears to be the nonprofit version of a Ponzi scheme, but we digress. In addition to the above, the company also stream-lined costs and curtailed company-wide expenses and administrative overhead. Ultimately, the company hired a slate of bankruptcy professionals and began a marketing process for the assets — a process that, in the end, culminated in the stalking horse offer by Aldergate Trust and Methodist Retirement Community for $20,350,000 in cash plus the assumption of certain liabilities. The agreement also includes the assumption of all Residence Agreements of former residents, preserving those residents’ rights to refunds. With this sale (and the proceeds therefrom) as its centerpiece, the company also filed a plan and disclosure statement on day one.

One last point here: considering that we now have two CCRC bankruptcies in the last two weeks and both are operated by SQLC, we’d be remiss if we didn’t highlight that SQLC also operates four other CCRCs: (a) Northwest Senior Housing Corporation d/b/a Edgemere; (b) Buckingham Senior Living Community, Inc. d/b/a The Buckingham; (c) Barton Creek Senior Living Center, Inc. d/b/a Querencia at Barton Creek; and (d) Tarrant County Senior Living Center, Inc. d/b/a The Stayton at Museum Way. With 33% of its CCRCs currently in BK, it seems that — for the restructuring professionals among you — these other SQLC facilities may be worth a quick look/inquiry.

• Jurisdiction: S.D. of Texas

• Capital Structure: see above.

• Company Professionals:

  • Legal: Thompson & Knight LLP (Demetra Liggins, Cassandra Sepanik Shoemaker)

  • Financial Advisor: Larx Advisors (Keith Allen)

  • CRO: Ankura Consulting (Louis Robichaux IV)

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

• Other Parties in Interest:

  • Indenture Trustee: UMB Bank NA

    • Legal: McDermott Will & Emery (Nathan Coco)

  • Stalking Horse Purchaser: Aldergate Trust and Methodist Retirement Community

New Chapter 11 Bankruptcy Filing - Avadel Specialty Pharmaceuticals LLC

Avadel Specialty Pharmaceuticals LLC

February 6, 2019

Geez. All the action these days is in busted retail and busted pharma. Here, Avadel Specialty Pharmaceuticals LLC ("ASP") is a MIssouri-based pharmaceutical company engaged in the business of the distribution, sale and marketing of pharmaceutical products focused on chronic urological disorders. It has one product, NOCTIVA. In other words, it is not a manufacturer; it has an exclusive license from Serenity Pharmaceuticals LLC to develop, market and sell NOCTIVA in the US and Canada. The company paid $70mm for the license and Serenity maintained some option value as well, including the right to receive potential milestone payments and royalties from product sales. 

Why bankruptcy? Per the company:

"ASP has experienced several market challenges in its efforts to commercialize and increase sales volume while the overall growth for its product has been slower than anticipated. As a result, ASP has experienced losses since its inception, and as of the Petition Date, has an accumulated deficit, due in part to costs relating to underachieving sales, unanticipated competition, and certain supply agreements. Making matters worse, sales projections based on the current growth trend illustrate a substantially longer period of operating losses than originally assumed."

Or said another way, among other issues, doctors seem unwilling to prescribe NOCTIVA to their worst enemies. Per the company, "health care professionals ahve been unwillint to try (or adop) NOCTIVA." Why not? Well, for starters, there are other agents that physicians use to target the conditions NOCTIVA is formulated to tackle. Moreover, there are "underlying concerns with regard to the potential risks of a serious side effect associated with the active ingredient in NOCTIVA™ (desmopressin acetate), based on prior experience with older formulations of the same active ingredient…." Uh, yeah, that sounds sketchy AF. 

And so this thing has been a money pit. The company's direct (non-debtor) parent has funded approximately $152mm since September 2017 to support the business including $80mm in additional investment that have yielded less than $3mm in net sales. How's that for ROI? As you can probably imagine, that ROI proposition was enough to finally compel ASP's direct parent to stop funding it. 

Consequently, the company sought to perform triage, first by trying (and failing) to locate a co-promoter and, second, by sublicensing its obligations. But, no dice. it filed for bankruptcy to sell its assets and wind down its operations. The bankruptcy constitutes just one part in the overall restructuring efforts of ASP's indirect parent, Avadel Pharmaceuticals plc. The case will be funded, if approved, by a $2.7mm DIP revolving credit facility and $2.7mm unsecured DIP, both provided by the company's non-debtor indirect parent. 

• Jurisdiction: D. of Delaware (Judge Sontchi) 

• Capital Structure: $mm debt     

• Company Professionals:

  • Legal: Greenberg Traurig LLP (Paul Keenan Jr., John Dodd, Reginald Sainvil, Dennis Meloro, Sara Hoffman)

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

• Other Parties in Interest:

  • Avadel US Holdings Inc.

    • Legal: Troutman Sanders LLP (Jonathan Forstot) & (local) Ashby & Geddes PA (Gregory Taylor)