⚡️New Chapter 11 Bankruptcy Filing - Empire Generating Co LLC⚡️

Empire Generating Co LLC

May 19, 2019

We love when companies that have been circling around the bankruptcy bowl finally get flushed into bankruptcy court. Empire Generating Company is a name that has been kicking around distressed circles for some time now: The Wall Street Journal wrote about it a year ago, back in May 2018. Alas, it now sits within the Southern District of New York. It is the latest in a line of power producers to file for bankruptcy in recent years.

The company owns and operates a (now) dual-fuel power plant in Rensselaer New York; as a merchant power plant, it sells electricity in the wholesale market that ultimately helps power New York’s electrical grid. Very soon, it will likewise be able to generate revenue in New England. In fiscal year 2017, the company generated $91.8mm of revenue and $16.77 of EBITDA. EBITDA decreased to $11.05mm in 2018. The company also has a meaningful amount of debt. As of the petition date, its outstanding owed amounts under its credit facility total $353.4mm. Its $20mm revolver matured in March 2019.

The company cites some interesting causes for its filing. First, it gives an economics 101 lesson, saying that coal and nuclear facilities in New York haven’t been retired quickly enough to limit electricity supply and put upward pressure on prices. Second, it blames progressives (Cuomo!!): New York’s Clean Energy Standard requires that 50% of NY’s electricity come from renewables by 2030, creating yet another supply/demand imbalance that has placed “downward pressure on the price for energy generated by other sources.” Third, unlike retailers who blame bad weather for under performance all of the time, this company actually has a viable excuse: the abnormally cold winter of 2017/2018 increased natural gas prices, compressing the company’s margins. At the time, the company wasn’t yet “dual-fuel” and, therefore, relied exclusively on natural gas whereas competitors could toggle to more economical fuel oil instead. This confluence of factors ultimately led the company to default under its loan docs.

The company has since been in a state of perpetual forbearance with an ad hoc group of pre-petition lenders. It was on the verge of a prepackaged solution to its balance sheet but time ticked away and the company’s pesky lenders traded out of their respective positions. Per the company:

Once the debt trades settled, approximately 55% of the Credit Facility was held by the Consenting Lenders (Black Diamond and MJX), and approximately 34% of the Credit Facility was held by funds managed by Ares Capital (“Ares”).

For the uninitiated, debtors need 2/3 of the amount of a particular tranche of debt to approve a deal for a plan of reorganization to be confirmed by the bankruptcy court. As you can see from the percentages above, Ares Capital and the “Consenting Lenders” (Black Diamond Capital Management LLC & MJX Asset Management LLC) had “blocking positions,” eliminating the possibility of surpassing the required threshold. Months of negotiations ensued and, apparently, Ares and Black Diamond simply couldn’t get along. Uh, yeah, bros: Black Diamond is kinda known for not getting along. Just sayin.

In lieu of an agreement with those parties, the company has secured, pursuant to a restructuring support agreement, a commitment by Black Diamond Capital Management LLC & MJX Asset Management LLC to credit bid — subject to higher and better offers — their debt in exchange for a 100% interest in the reorganized company. The company has, in turn, rejected a proposal from Ares Capital that would confer $37.8mm in cash and 89.75% equity of an acquisition vehicle as consideration for the company’s assets (which it values at a total of $369mm). Why? It concluded that the offer was neither higher nor better than the credit bid; it also had concerns about valuation, approval and feasibility (feasibility!!!!!). Otherwise, the company be like, “PEACE, B*TCHES, WE DON’T WANT NO PART OF THIS INTERCREDITOR DISPUTE.”

And an intercreditor dispute there is! Ares objected right away to the company’s proposed cash collateral, among other things, saying that Black Diamond is steering the company like a meek little sheep. The objection is too lengthy to recant here but, suffice it to say, it looks like we can expect an old school private equity battle over the course of the case. Judge Drain more or less shot down Ares at the hearing, questioning, even, whether they had standing to object; he then went on to amend the proposed cash collateral order.

Absent a settlement between the funds, this will not be the last fight in the case. Pop the popcorn.

  • Jurisdiction: (Judge Drain)

  • Capital Structure: $20mm RCF, $430mm Term B loan, $30mm Term C loan

  • Professionals:

    • Legal: Steinhilber Swanson LLP (Michael Richman) & Hunton Andrews Kurth LLP (Peter Partee Sr., Robert Rich, Michael Legge)

    • Financial Advisor: RPA Advisors (Chip Cummins)

    • Investment Banker:

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

  • Other Parties in Interest:

    • Secured Lenders: Black Diamond Capital Management LLC & MJX Asset Management LLC

      • Legal: Skadden Arps Slate Meagher & Flom LLP (Christine Okike, Albert Hogan III, Carl Tullson)

    • Secured Lender: Ares Capital LP

      • Legal: Kirkland & Ellis LLP (James Sprayragen, Brian Schartz, Anup Sathy, Stephen Hackney, Alexandra Schwarzman)

    • Secured Lender: Starwood

      • Legal: Vinson & Elkins LLP (Steven Abramowitz)

    • Ad Hoc Group

      • Legal: Stroock & Stroock & Lavan LLP

    • Agent: Ankura Trust Company

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

⛽️New Chapter 22 Filing - Hilltop Energy LLC⛽️

Hilltop Energy LLC

May 16, 2019

Hilltop Energy LLC, a Dallas-based E&P company with assets in Texas, has filed for bankruptcy in the District of Delaware, its second bankruptcy in four years. The company also filed its wholly-owned subsidiary, Hilltop Asset LLC (together, the “Debtors”).

The company’s predecessor, Cubic Energy Inc., filed for bankruptcy in late 2015, confirmed a prepackaged plan of reorganization in February 2016 and never emerged from bankruptcy (due to an ongoing adversary proceeding involving the chapter 11 debtors’ CEO and prior operator). Nevertheless, pursuant to the confirmed plan, secured noteholders swapped their notes for membership interests in the reorganized Cubic Energy and 14% first priority senior secured takeback paper due 2021. This is how these chapter 22 Debtors came to be owned by Anchorage Capital Group LLC and Corbin Opportunity Fund LP. General unsecured creditors and equity otherwise got wiped out.

This is the company’s capital structure:

  • $5mm Superpriority Notes + $30mm 14% First Priority Senior Secured Notes

  • $$18.5mm Superpriority PIK Notes + First Priority PIK Notes

Why is the company in bankruptcy? Let’s break this down into its component parts:

The Company has been cash flow negative every year since its formation following the chapter 11 cases of Cubic and its affiliates, as the revenue generated by producing wells is not sufficient to cover operating expenses and "workover" expenses, which is maintenance capex to keep the wells flowing.

Ugh. Here we go again. Flashback to the finding in this Delaware order from February 2016:

“The valuation analysis contained in the Disclosure Statement (x) is reasonable, persuasive, credible, and accurate as of the date such analysis or evidence was prepared, presented, or proffered, (y) utilizes reasonable and appropriate methodologies and assumptions and (z) has not been controverted by other evidence.”

Source: Cubic Energy Disclosure Statement

Source: Cubic Energy Disclosure Statement

Ok, sure. The court finding may have been right — “as of the date.” But the assumptions proved to be dramatically askew. Take, for instance, the workover expense line-item. The company indicates an aggregate $600k hit there. What does the company have to say about this now?

Although production declines are expected in the oil and gas industry, the Debtors have faced several unanticipated challenges since emerging from the Cubic Chapter 11 Cases. Since emergence, over 20% of the Debtors’ producing gas wells have stopped producing due to downhole operational and/or technical issues. During this same time period, the Debtors also invested in production uplift projects—including an estimated $4 million on workover and/or recompletion projects for three wells—but the efforts to increase production from those wells were unsuccessful. The effects of these production problems on the Debtors’ revenue have been compounded by the weak natural gas market over the past few years.

That’s quite a miss. But it’s not the only one. Significantly, the company also notes:

The Debtors’ gross production has declined from approximately 10.5 million cubic feet per day ("mmcfd"), in March 2016 to roughly 5.0 mmcfd as of the date hereof. (emphasis added)

That is what it is but it begs the question: out of whose a$$ did the company pull the assumptions behind the company’s chapter 11 projections? Per the Disclosure Statement:

Daily Production of natural gas is forecast based upon anticipated January 2016 daily production of 15,500 mcf per day and calculated on a 1% month-over-month decline curve on existing drilled and producing wells.

So, uh, we’re not math experts, but a 1% decline month-over-month doesn’t get you to 10.5 mcf per day A MERE TWO MONTHS LATER. Which begs the question: were the projections actually accurate and credible “as of the date”? This certainly seems to indicate otherwise.

Consequently, the Debtors saw an impending maturity and were like, “oh sh*t”:

Although the Debtors have been able to service their debt obligations (primarily by paying interest in the form of additional notes), over time, the yield of the Debtors' producing oil and gas wells has been and may continue to be in constant decline.

This is top notch spin. Yeah, sure, we suppose issuing PIK debt is a form of debt “service” but c’mon. Really??

Consequently, the Debtors anticipate that they will generate less revenue and cash flow and, ultimately, be unable to satisfy their debt obligations before or at maturity.

Which is in 2021. So, here we are again: cue up the CHAPTER 22!!

The prepackaged plan will give 100% of the membership interests in the reorganized debtors and $1.47mm of cash to its senior secured noteholder, eliminating the $53mm of debt. The Debtors’ prepetition operator, Rivershore, will get 55% of the equity in the Hilltop Asset.

And we’re all left to wonder whether this is just a chapter 33 waiting in the wings. According to the new projections, that’s entirely up to Rivershore’s willingness to make an equity contribution in 2021:

Source: Chapter 22 Disclosure Statement

Source: Chapter 22 Disclosure Statement

  • Jurisdiction: D of Delaware (Judge Sontchi)

  • Capital Structure: $5mm superpriority senior secured notes, $30mm first priority senior secured notes, PIK notes (Wilmington Trust Company NA).

  • Professionals:

    • Legal: Cole Schotz PC (Norman Pernick, J. Kate Stickles, Katherine Monica Devanney)

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

  • Other Parties in Interest:

    • Senior Secured Noteholder: J.P. Morgan Securities LLC and Lender: Chase Lincoln First Commercial Corporation

      • Legal: Landis Rath & Cobb LLP (Adam Landis, Richard Cobb, Holly Smith)

    • Company Operator: Rivershore Operating LLC

      • Legal: Gray Reed & McGraw LLP (Jason Brookner, Ryan Sears)


⛽️New Chapter 11 Bankruptcy Filing - Edgemarc Energy Holdings LLC⛽️

Edgemarc Energy Holdings LLC

May 15, 2019

Pennsylvania-based Edgemarc Energy Holdings LLC and its eight affiliated debtor affiliates are the latest in a string of oil and gas related bankruptcy filings. Don’t let $73/barrel brent crude and $63/barrel West Texas Intermediate prices full you: this is one of many oil and gas filings on the near term horizon.

Edgemarc is a natural gas E&P company focused on the Appalachian Basin in Ohio and Pennsylvania; it and its affiliates control approximately 45k net acres and have drilled and developed 60 producing wells. Now, everyone knows that, right now, the Permian Basin in West Texas is the shizz and, therefore, hearing about the Appalachian Basin may put some of you on edge. But, here, there was an extraordinary externality that really helped push the company into bankruptcy, other more macro factors notwithstanding.

In September 2018, a pipeline and gathering system under construction by a third-party (ETC Northeast Pipeline LLC) exploded. This pipeline was meant to be the gathering and processing avenue for the debtors’ natural gas. Imagine spending a ton of time milking a farm full of cows only to have the production facility designed for processing and transporting the milk explode right as you were about to bring your product to market. Kinda hard to make money in that scenario, right? The same applies to drilling for natural gas: its hard to generate revenue when you can’t process, transport and sell it. And, unfortunately, repair hasn’t been easy: what was supposed to be a “within weeks” project now looks poised to push well into 2020.

According to the debtors, a subsequent dispute with ETC prevented the debtors from flowing their gas through alternative pipelines. Consequently, the debtors “had no other means of selling gas from the affected wells” and opted to “shut in” their Pennsylvania wells and pause all remaining Pennsylvania operations — a hit to 33% of the company’s production activity. Compounding matters, the debtors and ETC are now embroiled in litigation. 😬

Suffice it to say that any company that suddenly loses the ability to sell 33% of its product will struggle. Per the company:

The Debtors’ inability to sell gas from their Pennsylvania properties had a substantial negative impact on their liquidity and ability to satisfy their funded debt, contractual and other payment obligations.

Ya think?!?!? The debtors have approximately $77mm of funded debt; they also has fixed transportation services agreements pursuant to which they agreed to fixed amounts of transportation capacity with various counterparties that exposes the debtors to financial liability regardless of whether they actually transport nat gas. This is so critical, in fact, that the debtors have already filed motions seeking to reject transportation services agreements with Rover Pipeline LLC, Rockies Express Pipeline LLC, and Texas Gas Transmission LLC. Combined, those three entities constitute 3 of the top 4 creditors of the estate, to the tune of over $6mm. These obligations — along with a downward redetermination of the borrowing base under the debtors’ revolving credit facility — severely constrained the debtors’ ability to operate. The debtors have, therefore, filed for chapter 11 with the hope of finding a buyer; they do not have a stalking horse purchaser lined up (though they do have a commitment for a $107.79mm DIP from their prepetition lenders, of which $30mm is new money). The company generated consolidated net revenue of $116.9mm in fiscal 2018.

Significantly, the company is seeking to reject a “marketing service agreement” and “operational agency agreement” with BP Energy Company ($BP), pursuant to which BP agreed to purchase and receive 100% of the debtors’ nat gas capacity. We gather (see what we did there?) that it’s hard to perform under those agreements when you can’t transport your product: accordingly, BP is listed as the debtors’ largest unsecured creditor at ~$41mm. BP’s rights to setoff and/or recoupment (PETITION Note: Weil Gotshal & Manges LLP just happened to write about these two remedies this week here) will be a major facet of this case: if BP is able to exercise remedies, the debtors ability to operate post-restructuring will be threatened. Per the company:

Docket #17, Rejection Motion.

Docket #17, Rejection Motion.

The privately-held company is owned primarily by affiliates of Goldman Sachs and the Ontario Teachers’ Pension. Absent “holdup value,” we can’t imagine they’ll get any return on their investment given the circumstances.

  • Jurisdiction: D. of Delaware (Judge Shannon)

  • Capital Structure:

  • Professionals:

    • Legal: Davis Polk & Wardwell LLP (Darren Klein, Lara Samet Buchwald, Aryeh Falk, Jonah Peppiatt) & (local) Landis Rath & Cobb (Adam Landis, Kerri Mumford, Kimberly Brown, Holly Smith)

    • Directors: Patrick J. Bartels Jr., Scott Lebovitz, Sebastien Gagnon, Baird Whitehead, Zvi Orvitz, Romeo Leemrijse, Verlyn Holt, Jack Golden, George Dotson, Callum Streeter, Alan Shepard

    • Financial Advisor: Opportune LLC and Dacarba LLC

    • Investment Banker: Evercore Partners

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

  • Other Parties in Interest:

    • Prepetition & DIP Agent: Keybank NA

      • Legal: Hunton Andrews Kurth LLP (Timothy Davidson, Joseph Rovira) & (local) Connolly Gallagher LLP (Jeffrey Wisler)

    • Equityholders: Goldman Sachs & Ontario Teachers’ Pension Plan Board

      • Legal: Wachtell Lipton Rosen & Katz (Richard Mason, Emil Kleinhaus, Michael Cassel) & (local) Drinker Biddle & Reath LLP (Steven Kortanek, Patrick Jackson, Joseph Argentina Jr.)

    • ETC

      • Legal: Akerman LLP (John MItchell, David Parham, Yelena Archiyan) & (local) Pachulski Stang Ziehl & Jones LLP (Laura Davis Jones, TImothy Cairns)

🚁New Chapter 11 Bankruptcy Filing - Bristow Group Inc.🚁

Bristow Group Inc.

May 11, 2019

Nothing like being late to the party. Following in the footsteps of fellow helicopter transportation companies Erickson Inc., CHC Group, Waypoint Leasing* and PHI Inc., Bristow Group Inc. ($BRS) and its eight affiliated debtors are the latest in the space to find their way into bankruptcy court. The company enters bankruptcy with a restructuring support agreement and a $75mm DIP financing commitment with and from its senior secured noteholders.

While each of the aforementioned companies is in the helicopter transportation space, they don’t all do exactly the same business. PHI, for instance, has a fairly large — and some might say, attractive — medical services business. Bristow, on the other hand, provides industrial aviation and charter services primarily to offshore energy companies in Europe, Africa, the Americas and the Asian Pacific; it also provides search and rescue services for governmental agencies, in addition to the oil and gas industry. Like the other companies, though: it is not immune to (a) the oil and gas downturn and (b) an over-levered balance sheet.

At the time of this writing, the debtors’ chapter 11 filing wasn’t complete and so details are scant. What we do know, however, is that the company does have a restructuring support agreement executed with “the overwhelming majority” of senior secured noteholders and a $75mm DIP commitment.

*Waypoint Leasing is listed as the 14th largest creditor, owed nearly $104k. Sheesh. These businesses can’t catch a break.

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

  • Capital Structure:

  • Professionals:

    • Legal: Baker Botts LLP (James Prince, Omar Alaniz, Ian Roberts, Kevin Chiu, Emanuel Grillo, Chris Newcomb)

    • Financial Advisor: Alvarez & Marsal LLC

    • Investment Banker: Houlihan Lokey Capital Inc.

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

  • Other Parties in Interest:

    • ABL Facility Agent: Barclays Bank PLC

    • 2019 Term Loan Agent: Ankura Trust Company LLC

    • Indenture Trustee for the 8.75% ‘23 Senior Secured Notes: U.S. Bank NA

    • Indenture Trustee for the 6.25% ‘22 Senior Notes and 4.5% ‘23 Convertible Senior Notes: Wilmington Trust NA

    • Ad Hoc Group of Secured Notes and Term Lenders (Blackrock Financial Management Inc., DW Partners LP, Highbridge Capital Management LLC, Oak Hill Advisors LP, Whitebox Advisors LLC)

      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Natasha Tsiouris) & (local) Haynes and Boone LLP (Charles Beckham, Kelli Norfleet, Martha Wyrick)

    • Ad Hoc Group fo Unsecured Noteholders

      • Legal: Kramer Levin Naftalis & Frankel LLP

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

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

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

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

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

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

So why bankruptcy? Why now? Per the company:

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

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

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

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

It gets worse.

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

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

But, wait. There’s more:

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

Riiiiiiiight. But:

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

Anywho.

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

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

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

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

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

  • Jurisdiction: D. of Delaware (Judge Gross)

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

  • Professionals:

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

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

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

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

  • Other Parties in Interest:

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

    • DIP Agent: Ankura Trust Company LLC

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

      • Financial Advisor: Houlihan Lokey

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

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

    • Indenture Trustee: BOKF NA

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

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

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

      • Investment Banker: Jefferies LLC (Leon Szlezinger)

Update: 7/7/19 #379

New Chapter 11 Bankruptcy Filing - Triangle Petroleum Corporation

Triangle Petroleum Corporation

May 8, 2019

If it walks like a chapter 22 and quacks like a chapter 22…it…may…notactually…be a chapter 22??

Triangle Petroleum Corporation (“TPC”) filed a prepackaged plan of reorganization with the District of Delaware to consummate a balance sheet restructuring. TPC is an independent energy holding company with a focus on the Williston Basin of North Dakota; its assets include a joint venture interest in Caliber Midstream Holdings LP, a midstream services company, leases of commercial and multi-unit residential buildings in North Dakota, and net operating losses. On the debt side of the balance sheet, the company had a $120mm 5.0% convertible promissory note issued to NGP Triangle Holdings, LLC (“NGP”).

So, what’s up with that convertible note? Wholly-owned direct or indirect subsidiaries of TPC — including Triangle USA Petroleum Corporation — filed for bankruptcy back in June 2016 to address their capital structure and, in the course of confirming a plan of reorganization, wiped out their stock. That stock, naturally, was an asset of TPC and, consequently, the New York Stock Exchange delisted TPC, constituting a “Fundamental Change,” under the note and triggering a requirement that TPC repurchase the convertible note for $154mm. TPC didn’t do so. Upon failing to do so, TPC triggered an event of default. Subsequently, J.P. Morgan Securities LLC (“JPMS”) purchased the note from NGP.

Thereafter, as part of discussions about a forbearance, JPMorgan Chase Bank NA provided the company with a term loan and the company and JPMS amended and restated the convertible note, granting JPMS a second lien in the process. JPMS, however, ultimately concluded that forbearing to nowhere wasn’t exactly a great strategy and so the chapter 11 filing will leave the term loan unimpaired, swap JPMS’ second lien secured note for 100% of TPC’s equity, ride through (what is a de minimis amount of) unsecured claims and wipe out equity, which had been trading over the counter. As of the petition date, the company had $2mm outstanding under the term loan and $167mm outstanding under the newly secured note.

Given that JPMS is the only voting party, this is a pretty easy plan to effectuate. Suffice it to say, JPMS voted yes to the prepackaged plan which means, going forward, it will own the interests in Caliber, Bakken Real Estate and, significantly, the valuable net operating losses.

  • Jurisdiction: D. of Delaware (Judge Walrath)

  • Capital Structure: see above.

  • Professionals:

    • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Kelley Cornish, Alexander Woolverton) & (local) Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Andrew Magaziner, Shane Reil)

    • Board of Directors: Gus Halas, James Shein, Randal Matkaluk

    • Financial Advisor: Development Specialists Inc. (Mark Iammartino)

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

  • Other Parties in Interest:

    • Prepetition Lender: JPMorgan Chase Bank NA & J.P. Morgan Securities LLC

      • Legal: Duane Morris LLP (Lawrence Kotlar, Joel Walker)

New Chapter 11 Bankruptcy Filing - Hospital Acquisition LLC

Hospital Acquisition LLC

May 6 & 7, 2019

Texas-based Hospital Acquisition LLC and dozens of other affiliated companies operating in the acute care hospital, behavioral health and out-patient would care space have filed for bankruptcy in the District of Delaware.* The debtors operate 17 facilities in 9 states for a total of 865 beds; their revenue “derives from the provision of patient services and is received through Medicare and Medicaid reimbursements and payments from private payors.

Technically, this is a chapter 22. In 2012, the debtors’ predecessor reeled from the effects of Hurricane Katrina and reduced reimbursement rates and filed for bankruptcy. The case ended in a sale of substantially all assets to the debtors.

So, why is the company in bankruptcy again? Well, to begin with, re-read the final sentence of the first paragraph. That’s why. Per the company:

…internal and external factors have lead the Debtors to an unmanageable level of debt service obligations and an untenable liquidity position. In 2015, Medicare’s establishment of patient criteria to qualify as an LTAC-compliant patient facility led to significant reimbursement rate declines over the course of 2015 and 2016 as changes were implemented. Average reimbursement rates for site neutral patients, representing approximately 57% of 2016 cases, is estimated to drop from $23,000 to $9,000 across the portfolio. When rates declined sharply, the Debtors were unable to adjust. Further, the number of patients that now qualify by Medicare to have services provided in an LTAC setting has declined substantially, resulting in a significant oversupply of LTAC beds in the market.

To offset these uncontrollable trends, the company undertook efforts to convert a new business plan focused around, among other things, closing marginally performing hospitals and diversifying the business into post-acute care “to compete in the evolving value-based health care environment.” To help effectuate this plan, the debtors re-financed its then-existing revolver, entered into its $15mm “priming” term loan, and amended and extended its then-existing term loan facility. After this transaction, the company had total consolidated long-term debt obligations totaling approximately $185mm.

So, more debt + revised business plan + evolving macro healthcare environment = ?? A revenue shortfall, it turns out. Which put the debtors in a precarious position vis-a-vis the covenants baked into the debtors’ debt docs. Whoops. Gotta hate when that happens.

The debtors then engaged Houlihan Lokey to explore strategic alternatives and engaged their lenders. At the time of filing, however, the debtors do not have a stalking horse agreement in place; they do hope, however, to have one in place by mid-July.

*There are also certain non-debtor home health owners and operators in the corporate family that are not, at this time, chapter 11 debtors.

  • Jurisdiction: D. of Delaware (Judge Shannon)

  • Capital Structure: $23.9mm RCF, $9.4mm LOCs, $15mm “Priming Term Loan” ($7.7mm funded), $136.8mm TL

  • Professionals:

    • Legal: Akin Gump Strauss Hauer & Feld LLP (Scott Alberino, Kevin Eide, Sarah Link Schultz) & (local) Young Conaway Stargatt & Taylor LLP (M. Blake Cleary, Jaime Luton Chapman, Joseph Mulvihill, Betsy Feldman)

    • Financial Advisor: Houlihan Lokey Inc. (Geoffrey Coutts)

    • Investment Banker: BRG Capital Advisors LLC

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

  • Other Parties in Interest:

    • Equityholders: Monarch Master Funding Ltd., Twin Haven Special Opportunities Fund IV LP, Blue Mountain Credit Alternatives Master Fund LP, Merrill Lynch Pierce Fenner & Smith Inc., Oakstone Ventures Inc.

    • White Oak Healthcare Finance LLC

      • Legal: King & Spalding LLP (Arthur Steinberg, Scott Davidson) & (local) The Rosner Law Group LLC (Frederick Rosner, Jason Gibson)

    • Marathon Asset Management

      • Legal: Ropes & Gray LLP (Matthew Roose)

    • Prepetition Term Loan Agents: Seaport Loan Products LLC & Wilmington Trust NA

      • Legal: Shearman & Sterling LLP (Ned Schodek, Jordan Wishnew) & (local) Potter Anderson & Corroon LLP (Jeremy Ryan, R. Stephen McNeill, D. Ryan Slaugh)

    • Official Committee of Unsecured Creditors

      • Legal: Greenberg Traurig LLP (David Cleary, Nancy Peterman, Dennis Meloro) & (local) Bayard PA (Justin Alberto, Erin Fay, Daniel Brogan)

Updated 5/18

😷New Chapter 11 Filing - Astria Health😷

Astria Health

May 6, 2019

Astria Health, a large non-profit healthcare system based in Eastern Washington, has filed for bankruptcy along with a dozen or so affiliates. The company blames its chapter 11 filing on regulatory approval processes that stunted expansion plans, poor collections on accounts receivable, and charitable care that, despite best efforts, hadn’t been offset by charitable contributions. All of these issues have squashed cash flow and triggered issues with the debtors’ secured debt, part of which is uber-expensive. The debtors intend to use their DIP credit facility to take out their expensive “high cost of capital” MidCap Financial Trust-provided (and other) debt; they also hope to use the “breathing spell” provided by the automatic stay to remedy their collections problems and march towards a plan of reorganization within 150 days.

  • Jurisdiction: E.D. of Washington (Judge Kurtz)

  • Capital Structure: $72mm secured debt

  • Professionals:

    • Legal: Dentons US LLP (Samuel Maziel) & (local) Bush Kornfeld LLP (James Day)

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

  • Other Parties in Interest:

    • DIP Lender: JMB Financial Advisors

      • Legal: Arent Fox LLP (Robert Hirsh, Jordana Renert) & (local) Southwell & O’Rourke (Kevin O’Rourke)

New Chapter 11 Bankruptcy Filing - The LaSalle Group Inc.

The LaSalle Group Inc.

May 2, 2019

Short Nana.

Texas-based The LaSalle Group Inc., an owner of 40 memory care assisted living communities across 9 states, and a handful of affiliated debtors filed for bankruptcy on May 2, 2019 and things ain’t looking pretty for the unsecured creditors: the company is administratively insolvent. The company owes $3.7mm at the parent level and then has ~$27.8mm of opco level debt among four debtor LLCs that are all owned 52% by a third-party investor (“Realco Silverado Investor”). Realco Silverado Investor seeks to purchase the opcos for $29mm, just enough to clear the debt at the opco level. Per the company, “[i]n the event this sale closes…[the notes]…should all be paid in full, all employees will have continual job opportunity, and all residents will remain in the residence they and their loved ones have chosen.” The bright side? This sounds like a good result for those most in need of it.

Why is the company in bankruptcy? It states:

“A surge in construction of assisted living facilities in recent years has created a supply-demand imbalance resulting in greater competition for residents and lower rates. This market dynamic has significantly impacted LaSalle and its affiliated entities (collectively, the “Autumn Leaves Group”) from a cash flow perspective. The Autumn Leaves Group has struggled with occupancy rates in certain markets which has significantly impacted revenue and cash flow.”

Moreover, LaSalle is the guarantor of substantially all of the secured debt and lease obligations. Its cash flow constraints precluded it from servicing its debt, culminating in approximately 30 lawsuits currently pending against LaSalle. As if that wasn’t bad enough, LaSalle also suffered the brunt of a United States District Court for the Northern District of Illinois, Eastern Division Memorandum Opinion and Order granting a motion for conditional certification of a collective action against it related to alleged hourly rate wage claims. And as if THAT wasn’t bad enough, LaSalle also faces various suits from vendors and other creditors for disputed unpaid claims. They’re all about to get hosed. The assets that aren’t sold to Realco Silverado Investor will be liquidated.

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

  • Professionals:

    • Legal: Crowe & Dunlevy PC (Vickie Driver, Christina Stephenson, Christopher Staine)

    • Financial Advisor/CRO: Harney Partners (Karen Nicolaou)

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

  • Other Parties in Interest:

New Chapter 11 Bankruptcy Filing - New Cotai Holdings LLC

New Cotai Holdings LLC

May 1, 2019

New Cotai Holdings LLC and three affiliated debtors filed for bankruptcy in the Southern District of New York on the basis of New Cotai Ventures LLC, a NY LLC, having cash held in a bank account in White Plains New York (as of when, we wonder). The debtors were formed for the purpose of investing in Studio City International Holdings Limited, have no employees, and are otherwise managed by sponsor, Silver Point Capital LP. The declarant supporting the debtors’ chapter 11 filing is an independent director who was put into place literally 2 days before the filing. Yup, 2 whole days.

Studio City International Holdings Limited is a wretched hive of scum and villany. Sorry, that’s not right. That’s us trying to make this more interesting than it is. In truth, its an “integrated resort comprising entertainment, retail, hotel and gaming facilities” located in Macau (that’s China, people). The project has made it past Phase I of construction but has stalled out there: the rest of the project will require several more years. In October 2018, the company IPO’d 28.75mm American Depository Shares at $12.50/share.

To further capitalize the project, two of the debtors, as co-issuers, issued $380mm of 10.625% PIK Notes in 2013 due May 2019. Curious to know how 10.625% PIK adds up? The current principal balance of the notes is now $856mm.

Now, not to state the obvious, but to paydown Notes on maturity, you kinda need to have some moolah. And considering that the project is only past Phase I with much more work to do…well, you see where we are going here. The company notes:

The Debtors’ ability to satisfy their obligations under the Notes is directly tied to the development and success of the Studio City project. Due to delays in the development of the Studio City project, a reduced allocation of gaming tables from the government, and some unanticipated declines in the Macau gaming market, the Investment has not yet achieved sufficient market value in light of the highly illiquid and unreliable market conditions that have developed following the IPO, making a refinancing impracticable. Therefore, through no fault of their own, the Debtors were unable to satisfy the Notes obligations by their maturity.

Listen guys: you ain’t getting Matt Damon, George Clooney and other whales at your tables if you don’t have VIP tables. Obvi. Second, it sounds like the project hired the quintessential New York City-based general contractor. “Yeah, sure, the project will cost $30mm and take 1 month” only to cost “an additional $300 million” and take literally years. Of course “[c]onstruction costs came in greater than expected.” Isn’t that par for the course in hotel development? The company now has until 2021 to finish Phase II of the project. It sounds like it will need it.

Of course, you have to admire the entrepreneurial enthusiasm:

Notwithstanding the aforementioned challenges, the Debtors believe that the Investment continues to represent a significant economic opportunity—the value of which is not accurately represented in the current market prices of the ADS. Indeed, should the Studio City project continue to develop on its currently anticipated timeframe, the Debtors expect the Investment to generate sufficient value to repay the Notes in full.

The debtors must NOT be expecting a downturn. Gaming usually doesn’t fare too well during one of those. And Chinese growth hasn’t exactly been at levels enjoyed over the last decade or so. But, fingers crossed.

The debtors are negotiating with an Ad Hoc Group of noteholders in an effort to address this state of affairs. They have latitude: Silver Point has committed to a $6.25mm DIP with, among other favorable terms to the debtors, no milestones and a 12-month maturity (with an option to extend a subsequent 12 months). This DIP was not marketed and so the early part of the case will be spent presumably searching for alternatives. Because lenders surely love the idea of providing a DIP, the main purpose of which is to pay Skadden Arps’ and the Ad Hoc Group’s fees.

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

  • Capital Structure: $856mm (Wells Fargo Bank NA)

  • Professionals:

    • Legal: Skadden, Arps, Slate, Meagher & Flom LLP (Jay Goffman, Mark McDermott, Evan Hill)

    • Managing Member: Drivetrain Advisors LLC (John Brecker)

    • Financial Advisor: Houlihan Lokey Capital Inc.

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

  • Other Parties in Interest:

    • Wells Fargo Bank NA

      • Legal: Arent Fox LLP (Andrew Silfen, Beth Brownstein)

    • Sponsor: Silver Point Capital LP

New Chapter 11 Filing - Sungard Availability Services Capital Inc.

Sungard Availability Services Capital Inc.

May 1, 2019

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

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

Source: Disclosure Statement

Source: Disclosure Statement

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

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

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

Yet, lest anyone get too high on their own supply, it’s important to note that, while this is a good result under the circumstances, there is a significant amount of value destruction illustrated by this filing. The term lenders are getting merely an estimated 50-73% recovery while the noteholders are getting 7-14%**. Now, it IS reasonable to expect that the “par guys” blew out of this situation long ago. And it is also reasonable to assume that the current holders of loans and notes got in at a significant discount so “value destruction” really is a matter of timing/pricing. For the avoidance of doubt, however, there’s no question that certain lenders experienced some pain on the path to this filing. Here is the chart representing the company’s notes:

Screen Shot 2019-05-03 at 11.12.24 AM.png

So, while some are surely celebrating, others are surely licking their wounds.

*We don’t really want to be too flip about this. As critics of the bankruptcy process, we’re all for seeing more efficient uses of the bankruptcy court — even if that does mean that fees were run up pre-petition without any oversight whatsoever.

**You always have to take these recovery amounts with a grain of salt. In case the rampant Chapter 22s haven’t already taught you that.

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

  • Capital Structure:

  • Professionals:

    • Legal: Kirkland & Ellis LLP (Jonathan Henes, Emily Geier, Ryan Blaine Bennett, Laura Krucks

    • Board of Directors: Darren Abrahamson, Patrick J. Bartels Jr., Randy Hendricks, John Park, David Treadwell

    • Financial Advisor/CRO: AlixPartners LLP (Eric Koza)

    • Investment Banker: Centerview Partners (Samuel Greene)

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

  • Other Parties in Interest:

    • DIP Agent: JPMorgan Chase Bank NA

    • Secured Lender Group

      • Jones Day (Scott Greenberg, Michael Cohen, Nicholas Morin)

      • Financial Advisor: Houlihan Lokey Capital Inc.

    • Crossover Group

      • Akin Gump Strauss Hauer & Feld LLP (Philip Dublin, Naomi Moss)

      • Financial Advisor: PJT Partners LP

    • Large Equityholders: Bain Capital Integral Investors LLC, Blackstone Capital Partners IV LP, Blackstone GT Communications Partners LP, KKR Millennium Fund LP, Providence Equity Partners V LP, Silver Lake Partners II LP, TPG Partners IV LP

      • Legal: Paul Weiss Rifkind Wharton & Garrison LLP (Brian Hermann, Jacob Adlerstein)

New Chapter 11 Bankruptcy Filing - Kona Grill Inc. ($KONA)

Kona Grill Inc.

April 30, 2019

Let’s be honest: we’ve given this sh*t stain of a company far too much coverage given its size. Yet, it’s part of a broader casual dining narrative that is important to follow and, significantly, we took it upon ourselves to highlight how this thing was SO CLEARLY headed towards bankruptcy a year ago considering the company is (somewhat inexplicably) publicly-traded ($KONA). We first mentioned it in this Members’-only piece in April 2018. We dug deeper in this Members’-only briefing on August 2018. Additional mentions came here, here, here (“…there is no way this thing DOESN’T end up in bankruptcy court soon. It just blew out its board. It is on to its umpteenth CEO in a matter of years. Revenues fell 15.7% in the most recent reported quarter. Same-store sales fell 14.1%. 14.1%!!!! It’s just a matter of ‘when’ at this point.”), and, finally, as recently as April 28, 2019, here, wherein we wrote “[s]tick a fork in it.

Well, stick a fork in it, indeed. The company and several affiliated companies are now chapter 11 debtors in the District of Delaware.

To refresh your recollection, the company is a casual dining restaurant chain with 27 locations (down from 40+ locations when we first started discussing the company over a year ago). “The restaurants feature contemporary American favorites, award-winning sushi and an extensive selection of alcoholic beverages.” Award winning sushi, huh? We did some googling and were unable to ascertain which fine organization conferred upon Kona Grill Inc. an award for its fine sushi. But we digress.

As you might expect from such a long-time-coming sh*t show, the debtors’ first day filing papers are pure comedy chock full of hyperbolic bull sh*t. It’s amusing what the debtors say and it’s laughable what they don’t say. The first day declaration reads like marketing materials: it states that the company offers “an upscale contemporary ambience” with an “exceptional” dining experience and a “legendary” happy hour. The fact that this company is in bankruptcy belies the claim that the experience is exceptional. As for legend, Arya Stark is a legend; Tony Stark is a legend. Michael Jordan is a legend. Kona Grill has a bar that serves drinks. We can assure you with 100% certainty that there is absolutely nothing legendary about it. Indeed, revenues in fiscal ‘18 were $156.9mm, down 12.4% YOY, and, as of the petition date, the company had a meaningfully non-legendary $1.2mm of cash on hand. Legendary, our a$$es.

The company is party to a $33.2mm credit agreement split between a revolving loan and a term loan and has been in a state of perpetual amendment since Q1 2017. The company also owes unsecured trade creditors $8mm.

Why is the company in bankruptcy? Here’s where we get comedy by omission. Yes, sure, they acknowledge that they doubled their restaurants between ‘13 and ‘17, spent a ton on marketing to reverse negative same-store sale trends, and then engaged in an ill-advised stock repurchase program in 2016/2017, further draining much needed liquidity. Thereafter, the company was forced to deploy the standard playbook: cease opening new locations, shutter some underperforming stores (PETITION Note: the company filed a motion seeking to reject 18 leases already), fire people, cut back on training and staffing, etc. G-d help the people who actually ate there during this period: we can only imagine what happened to the food quality. What the company doesn’t say, though, is that there has been a revolving door of CEOs. We suppose the debtors ought to be commended for not completely throwing prior management teams under the bus. This may have something to do with active lawsuits between the company and a former CEO.

What’s crazy is that the company didn’t hire a banker until March 2019. This is a company that should have been marketed long ago. Notably, there’s no stalking horse buyer lined up. And while the company does have a commitment from KeyBank for $39.2mm of DIP financing (of which only $6mm is new money), the company also has a hard deadline of August 9, 2019 to avoid a default. Will it be able to find a buyer now?

We suppose we’ll find out how “legendary” things are after all.

  • Jurisdiction: D. of Delaware (Judge )

  • Capital Structure: $33.2mm

  • Professionals:

    • Legal: Pachulski Stang Ziehl & Jones LLP (James O’Neill, John Lucas, Jeremy Richards)

    • Financial Advisor/CRO: Alvarez & Marsal LLC (Christopher Wells, Jonathan Tibus)

    • Investment Banker: Piper Jaffrey

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

  • Other Parties in Interest:

    • DIP Agent: KeyBank National Association

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

🎥New Chapter 11 Bankruptcy Filing - Fuse LLC (a/k/a Fuse Media)🎥

Fuse LLC

April 22, 2019

California-based Fuse LLC, a multicultural media company composed principally of the cable networks Fuse and FM, filed a prepackaged chapter 11 along with 8 affiliated debtors in the District of Delaware to effectuate a swap of $242mm of outstanding secured debt for $45mm in term loans (accruing at a STRONG 12% interest and maturing in five years), new membership interests in the reorganized company and interests in a litigation trust. General unsecured creditors will recover nothing despite being owed approximately $10mm to $25mm.

The company is well known to millions of US homes: approximately 61mm homes get Fuse, an independent cable network that targets young multicultural Americans and Latinos. FM’s music-centric content reached approximately 40.5mm homes “at its peak.” The company has three principal revenue streams: (a) affiliate fees; (b) advertising; and (c) sponsored events; it generated $114.7mm in net revenue for the fiscal year ended 12/31/18 and “had projected affiliate fees of approximately $495 million through 2020.

Why is it in bankruptcy? In a word, disruption. Disruption of content suppliers (here, Fuse) and content distributors (the traditional pay-tv companies). Compounding the rapid changes in the media marketplace is the company’s over-levered balance sheet, an albatross that hindered the company’s ability to innovate in an age of “peak TV” characterized by endless original and innovative content.

The company illustrates all of this nicely:

“…the overall pay-TV industry is in a period of substantial transformation as the result of the introduction into the marketplace in recent years of high quality and relatively inexpensive and consumer friendly content alternatives (e.g., Netflix, Hulu and others). The ongoing marketplace changes have resulted in, and will continue to cause, a material decline in pay-tv subscribers and related affiliate fee revenue as a result of a declining number of new subscribers, "cord-cutting" (the cancellation of an existing pay-tv subscription), and "cord-shaving" (the downgrading of a pay-tv subscription from a higher priced package to a lower priced package). Each quarter the Company receives less revenue from its traditional pay-tv distribution partners as the result of the decline in subscribers receiving the Company's networks. And new sources of revenue for the Company, although developing and in progress, have not grown sufficiently to offset revenue declines in the legacy business. As a result of these trends, the refinancing of the Company's debt was not viable.”

Said another way, on a macro level, Netflix Inc. ($NFLX), Amazon Inc’s ($AMZN) Prime service, Hulu ($DIS) and various other OTT services have taken a huge chunk out of conventional bundlers and now victims are shaking from the tree. On a more micro level, the company is subject to distribution agreements with pay-TV operators. The majority of agreements were guaranteed through 2020, representing contracted revenue estimated at approximately $495mm through 2020. But the company’s debt, however, prevented it from investing in programming, marketing and original content at the same pace as its rivals. Consequently, Comcast and Verizon Fios ($VZ)— which represent significant percentages of the debtors’ subscriber base and, in turn, revenue — stopped distributing Fuse at the end of 2018. Compounding matters, DirecTV recently notified the company that it, too, intended to terminate its distribution agreement with the debtors — which is now subject to litigation in California. Talk about a hat trick!!

The company intends to use cash collateral to finance its cases. If successful, the company will emerge from bankruptcy with a substantially reduced balance sheet, having cut its debt by approximately 80%. After de-levering, the company believes it…

“… will be better able to effectively support its core linear networks business, as well as pursue growth areas, such as virtual multichannel video programming distribution (e.g., YouTube TV and Hulu Live), advertising supported distribution (AVOD), and complementary areas such as live events and music festivals. The Company also will be well-positioned post-emergence to explore strategic transactions that can accelerate greater growth in new areas for stakeholders.”

We suspect Fuse won’t be the last content supplier to shake out from this evolution in the media space.

  • Jurisdiction: D. of Delaware (Judge Gross)

  • Capital Structure: $242mm 10.375% Senior Secured Notes due 2019

  • Company Professionals:

    • Legal: Pachulski Stang Ziehl & Jones LLP (Richard Pachulski, Ira Kharasch, Maxim Litvak, James O’Neill)

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

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

  • Other Parties in Interest:

    • Supporting Noteholders

      • Legal: Fried Frank Harris Shriver & Jacobson LLP (Brad Scheler, Peter Siroka, Emil Buchman, Andrew Minear) & (local) Richards Layton & Finger PA (Michael Merchant)

New Chapter 11 Bankruptcy Filing - Achaogen Inc.

Achaogen Inc.

April 15, 2019

Biopharma is where it’s at!!

San Francisco-based Achaogen Inc. ($AKAO) is the latest in a slate of biopharma debtors who have found their way into bankruptcy court — here, the District of Delaware. Achaogen is focused on “the development and commercialization of innovative antibiotic treatments against multi-drug resistant gram-negative infections.” To date, its operations have been centered around the discovery, development and commercialization of products, making it as far as clinical trials in certain instances. As if inspired by the fact that its filing came on the heels of the much-anticipated Game of Thrones (final) Season 8 premiere, the company colorfully notes its primary purpose:

Achaogen designed its lead product, ZEMDRI® (plazomicin), to fight what the Center for Disease Control (“CDC”) calls a “nightmare bacteria” and has listed as the highest category threat of “urgent.” ZEMDRI can be used to treat patients who have limited or no alternative treatment options from infections with these nightmare bacteria. Even with its current financial situation, Achaogen continues to commercialize ZEMDRI, in part because Achaogen believes that ZEMDRI can save lives for patients who may literally have no alternative.

Nightmare bacteria!! Sheesh that’s chilling.

Even more chilling is the company’s discussion of gram-negative bacteria — found “everywhere, in virtually all environments on Earth that support life.” These bacteria are becoming increasingly resistant to common antibiotics. Achaogen calls this “a global crisis…we take for granted.” The company’s core (patented) product, ZEMDRI, is designed to “retain its effectiveness in killing these more resistant bacteria.” While ZEMDRI received FDA approval for IV-treatment of patients with complicated urinary tract infections in July 2018, the FDA rejected ZEMDRI for treatment of patients with bloodstream infections, citing a lack of substantial evidence of effectiveness.

What does the company have going for it? Again, as of July 2018, it has a commercially viable product in the United States. It also has global commercialization rights. And patent protect in the US through approximately 2031 or 2032. It sells to either specialty distributors or physician-owned infusion centers. It has agreements with Hovione Limited and Pfizer for the manufacturing of its product. Finally, it has another product in development, C-Scape, which is an oral antibiotic for treatment of patients suffering from urinary tract infections caused by a particular bacteria.

So, what’s the issue? As PETITION readers have come to learn, the development and manufacture of biopharma products is a time and capital intensive process. Indeed, the company has an accumulated deficit of $559.4mm as of December 31, 2018. This bit is especially puzzling given the company’s position that the world confronts a “global crisis”:

In the past year, there has been a dramatic downturn in the availability of financing from both the debt and equity markets for companies in the anti-infective field, based in part on the withdrawal from the space by certain large pharmaceutical companies. For example, Novartis recently announced that it is shutting down its antibacterial and antiviral research, which was followed by similar moves from Eli Lilly, Bristol-Myers Squibb and AstraZeneca.3 Allergan has also recently announced its intention to divest its anti-infective business, consisting of three commercialized products. This “big pharma flight” from antiinfective research, development and commercialization has created significant challenges for early-stage biotech companies seeking to develop and commercialize novel and much needed drugs in this sector, as opportunities for partnerships, joint R&D relationships, and merger/acquisition transactions have diminished. This sector-wide trend has negatively affected not just Achaogen but many of its competitors. Achaogen, however, has been especially impacted because it has reached the point in its life cycle where it needs substantial capital infusion to drive commercialization of its recently FDA approved drug, ZEMDRI.

Look: we don’t take everything debtors say as gospel. After all, first day pleadings are an opportunity to frame the story and set the tone of a case. But if the company is right about what it’s saying and nobody appears to give two sh*ts, well, color us a wee bit concerned. Why isn’t anybody talking about this?

Anyway, in February 2018, the company entered into a loan and security agreement with Silicon Valley Bank for $50mm. The original agreement provided SVB with a security interest in virtually all of the company’s assets — including proceeds of intellectual property — but not a security interest in the IP itself. $15mm remains outstanding under the loan. In November 2018, the company retained Evercore Group LLP to run a strategic sale process but no viable purchaser emerged. It’s not worth saving the world unless you can make some dinero, we suppose.

After engaging in various liquidity maximization efforts (including job cuts), fundraising initiatives (including an insufficient equity raise), and licensing discussions with entities abroad, the company ultimately decided that nothing would generate enough liquidity for the company to avoid chapter 11. The company notes, “although Achaogen’s out-of-court sale process did not yield any acceptable bids, many parties had expressed interest in bidding at any potential 363 auction sale, where it could pursue the Assets free and clear of existing liabilities.” The company, therefore, filed for chapter 11 to pursue a new sale process; it has no stalking horse bidder teed up. To market its assets, the company has replaced Evercore with Cassel Salpeter & Co. LLC.

In support of the bankruptcy case, SVB committed to provide the company with a $25mm DIP credit facility of which $10mm is new money and $15mm is a roll-up of the aforementioned pre-petition debt. In exchange, SVB now gets a security interest in the company’s IP.

The company’s unsecured debt is comprised of lease obligations, minimum purchase requirements under its manufacturing contract, a success fee tied to the company’s FDA approval, and $18.7mm of trade debt. New Enterprise Associates Inc., a reputed Silicon Valley venture capital firm, is the company’s largest equity holder with approximately 10.76% of the company’s shares. Prior to its 2014 IPO, the company had raised $152.1mm starting with its Series A round in August 2004: it IPO’d at a valuation of $200.4mm, having issued 6.9mm shares at $12/share to the public. It’s equity is likely worth f*ck all. Well, not exactly: we suppose this isn’t ENTIRELY “f*ck all”:

Screen Shot 2019-04-15 at 2.48.04 PM.png

But it’s pretty darn close. Now the issue is what price the IP will fetch in a bankruptcy sale process. It will have to be tens of millions of dollars for NEA to have any sort of recovery.

  • Jurisdiction: D. of Delaware (Judge Shannon)

  • Capital Structure: $15mm secured debt (Silicon Valley Bank)

  • Professionals:

    • Legal: Hogan Lovells US LLP (Erin Brady, Richard Wynne, Christopher Bryant, John Beck) & (local) Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Andrew Remming, Matthew Talmo, Paige Topper)

    • Financial Advisor: Meru LLC

    • Investment Banker: Cassel Salpeter & Co., LLC

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

  • Other Professionals:

    • Prepetition & DIP Lender ($25mm): Silicon Valley Bank

      • Legal: Morrison & Foerster LLP ( Alexander Rheaume, Todd Goren, Benjamin Butterfield, David Ephraim) & (local) Ashby & Geddes PA (Gregory Taylor, Stacy Newman)

    • Official Committee of Unsecured Creditors (Hovione Limited, EsteveQuimica SA, Solar Capital Ltd.,. Crystal BioScience, World Courier)

⛽️New Chapter 11 Bankruptcy Filing - Jones Energy Inc.⛽️

Jones Energy Inc.

April 14, 2019

Austin-based independent oil and natural gas E&P company, Jones Energy Inc., filed a prepackaged chapter 11 bankruptcy to restructure its $1.009b of debt ($450mm senior secured first lien notes and $559mm unsecured notes across two tranches). In case you didn’t realize, oil and gas exploration and production is a capital intensive business.

The company operates primarily in the Anadarko Basin in Oklahoma and Texas. Its territory is the aggregation of acreage accumulated over the years, including the 2009 purchase of Crusader Energy Group Inc. out of bankruptcy for $240.5mm in cash.

We’re not going to belabor the point as to why this company is in bankruptcy: the narrative is no different than most other oil and gas companies that have found their way into bankruptcy court over the last several years. Indeed, this chart about sums things up nicely:

Screen Shot 2019-04-05 at 2.29.01 PM.png

It’s really just a miracle that it didn’t file sooner. Why hadn’t it? Per the company:

…the Debtors consummated a series of liquidity enhancing transactions, including equity raises, debt repurchases, strategic acquisitions, non-core asset sales, and modifications of their operations to reduce their workforce and drilling activities. This included a Company-wide headcount reduction in 2016 resulting in the termination of approximately 30% of the Debtors’ total workforce, as well as halting drilling activity spanning several months during the worst of the historic commodity downturn.

But…well…the debt. As in, there’s too much of it.

Screen Shot 2019-04-05 at 2.56.24 PM.png

And debt service costs were too damn high. In turn, the company’s securities traded too damn low:

Source: Disclosure Statement

Source: Disclosure Statement

What’s more interesting here is the process that unfolded. In February 2018, the company issued $450mm of 9.25% ‘23 senior secured first lien notes. The proceeds were used to repay the company’s senior secured reserve-based facility and eliminate the restrictive covenants contained therein. The company also hoped to use the proceeds to repurchase some of its senior unsecured notes at a meaningful discount to par. In a rare — yet increasingly common — show of unity, however, the company’s unsecured lenders thwarted these efforts by binding together pursuant to a “cooperation agreement” and telling the company to take its pathetic offer and pound sand. (PETITION Note: its amazing what lenders can achieve if they can solve for a collective action problem). This initiated a process that ultimately led to the transaction commemorated in the company’s announces restructuring support agreement.

So what now? The senior secured lenders will equitize their debt and come out with 96% of the common stock in the reorganized entity. Holders of unsecured debt will get 4% equity and warrants (exercisable for up to a 15% ownership stake in the reorganized company), both subject to dilution by equity issued to management under a “Management Incentive Plan.” The company has a commitment for $20mm of exit financing lined up (with the option for replacement financing of up to $150mm).

Hopefully the company will have better luck without the albatross of so much debt hanging over it.

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

  • Capital Structure: $450mm 9.25% ‘23 senior secured first lien notes (UMB Bank NA), $559mm 6.75% ‘22 and 9.25% ‘23 unsecured notes (Wells Fargo Bank NA)

  • Professionals:

    • Legal: Kirkland & Ellis LLP (James Sprayragen, Christopher Marcus, Brian Schartz, Anthony Grossi, Ana Rotman, Rebecca Blake Chaikin, Mark McKane, Brett Newman, Kevin Chang) & (local) Jackson Walker LLP (Matthew Cavenaugh, Jennifer Wertz)

    • Independent Directors: Tara Lewis, L. Spencer Wells

    • Financial Advisor: Alvarez & Marsal LLC (Ryan Omohundro)

    • Investment Banker: Evercore Group LLC (Daniel Aronson)

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

  • Other Parties in Interest:

    • Ad Hoc Group of First Lien Noteholders

      • Legal: Milbank LLP (Dennis Dunne, Evan Fleck, Michael Price) & (local) Porter Hedges LLP (John Higgins, Eric English, Genevieve Graham)

      • Financial Advisor: Lazard Freres & Co. LLC

    • Ad Hoc Group of Crossover Holders

      • Legal: Davis Polk & Wardwell LLP (Brian Resnick, Benjamin Schak) & (local) Haynes and Boone LLP (Charlie Beckham, Kelli Norfleet)

      • Financial Advisor: Houlihan Lokey Capital Inc.

    • Metalmark Capital LLC

      • Legal: Vinson & Elkins LLP (Andrew Geppert, David Meyer, Jessica Peet, Michael Garza)

Updated 4/15/19 2:05 CT

New Chapter 11 Filing - Hexion Holdings LLC

Hexion Holdings LLC

April 1, 2019

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

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

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

This is what that capital structure looks like:

Screen Shot 2019-04-01 at 12.28.48 PM.png
Screen Shot 2019-04-01 at 12.29.02 PM.png

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

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

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

  • Jurisdiction: D. of Delaware (Judge Gross)

  • Capital Structure: See above.

  • Professionals:

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

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

    • Financial Advisor: AlixPartners LLP

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

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

  • Other Parties in Interest:

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

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

      • Financial Advisor: Evercore Group LLC

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

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

      • Financial Advisor: Houlihan Lokey Capital Inc.

    • Ad Hoc Group of 1.5 Lien Noteholders

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

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

      • Legal: Simpson Thacher & Bartlett LLP

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

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

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

      • Legal: Arnold & Porter Kaye Scholer LLP

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

    • Sponsor: Apollo

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

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

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

Updated:

🚽New Chapter 11 Bankruptcy Filing - Orchids Paper Products Company🚽

Orchids Paper Products Company

April 1, 2019

We first wrote about Orchids Paper Products Company ($TIS) back in November 2018 in “🚽More Trouble in Paper-Ville (Short A$$-Wipes)🚽.” It is a piece worth revisiting because it sums up the situation rather nicely. We wrote:

Orchids Paper Products Company ($TIS) is a Okahoma-based producer of bulk tissue paper which is later converted into finished products like paper towels, toilet paper and paper napkins; it sells its products for use in the “at home” market under private label to dollar stores, discount retailers and grocery stores. Its largest customers include the likes of Dollar General Corp. ($DG)Walmart Inc. ($WMT) and Family Dollar/Dollar Tree, which, combined, account for over 60% of the company’s sales. Given the rise of the dollar stores and discount retailers and the rise in private label generally, you’d think that this company would be killing it. Spoiler alert: it’s not. In fact, it is, by definition, insolvent.

And:

This company doesn’t produce enough toilet paper to wipe away this sh*tfest. See you in bankruptcy court.

And that’s precisely where they (and affiliates) are now — in the District of Delaware.

And the story hasn’t really changed: the debtors still struggle from operational issues related to their facilities, too much competition (causing margin compression and loss of pricing power), rising input costs, and customer defections. To make matters worse, given the debtors’ deteriorating financial position, raw materials suppliers reduced credit terms given the debtors’ public reporting of its troubles. Consequently, virtually all of the debtors’ financial metrics got smoked. Gross profit? Smoked. Cash flow? Smoked. Net income? Smoooooooked.

Speaking of “smooooooked,” the company twice notes its termination of their investment banker, Guggenheim Securities. Bankers get replaced all of the time: not entirely sure why they felt the need to make such an issue of it here. That said, Guggenheim apparently marketed the company for months without finding a prospective buyer that would clear the debt. The company, therefore, hired Houlihan Lokey ($HL) to market the company. The result? They couldn’t find a buyer that would clear the debt. Nothing like paying a new banker AND presumably paying some sort of tail to your old banker just to end up with your pre-petition secured lender as your stalking horse bidder (and DIP lender)! Sheesh.

As we said, “[t]his company doesn’t produce enough toilet paper to wipe away this sh*tfest.”

  • Jurisdiction: (Judge Walrath)

  • Capital Structure: $187.3mm RCF/TL (Ankura Trust Company, L.L.C.), $11.1mm New Market Tax Loan

  • Professionals:

    • Legal: Polsinelli PC (Christopher Ward, Shanti Katona, Jerry Switzer Jr.)

    • Board of Directors: Steven Berlin, John Guttilla, Douglas Hailey, Elaine MacDonald, Mark Ravich, Jeffrey Schoen

    • Financial Advisor: Deloitte Transactions and Business Analytics LLP (Richard Infantino)

    • Investment Banker: Houlihan Lokey Capital Inc.

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

  • Other Parties in Interest:

    • Large Equityholder: BML Investment Partners LP

    • Prepetition RCF Admin Agent: Ankura Trust Company

    • DIP Admin Agent: Black Diamond Commercial Finance LLC

    • DIP Lender: Orchids Investment LLC

      • Legal: Winston & Strawn LLP (Daniel McGuire) & (local) Fox Rothschild LLP (Seth Niederman)

    • Stalking Horse Bidder

      • Legal: Skadden Arps Slate Meagher & Flom LLP (Kimberly Debeers, Ron Meisler)

    • Official Committee of Unsecured Creditors

      • Legal: Lowenstein Sandler LLP (Mary Seymour) & CKR Law (David Banker)

Updated 5/18

⛽️New Chapter 11 Filing - Southcross Energy Partners LP⛽️

Southcross Energy Partners LP

April 1, 2019

We’ve been noting — in “⛽️Is Oil & Gas Distress Back?⛽️“ (March 6) and “Oil and Gas Continues to Crack (Long Houston-Based Hotels)“ (March 24) that oil and gas was about to rear its ugly head right back into bankruptcy court. Almost on cue, Vanguard Natural Resources Inc. filed for bankruptcy in Texas on the last day of Q1 and, here, Southcross Energy Partners LP kicked off Q2.

Dallas-based Southcross Energy Partners LP is a publicly-traded company ($SXEE) that provides midstream services to nat gas producers/customers, including nat gas gathering, processing, treatment and compression and access to natural gas liquid (“NGL”) fractionation and transportation services; it also purchases and sells nat gas and NGL; its primary assets and operations are located in the Eagle Ford shale region of South Texas, though it also operates in Mississippi (sourcing power plants via its pipelines) and Alabama. It and its debtor affiliates generated $154.8mm in revenues in the three months ended 09/30/18, an 11% YOY decrease.

Why are the debtors in bankruptcy? Because natural gas prices collapsed in 2015 and have yet to really meaningfully recover — though they are up from the $1.49 low of March 4, 2016. As we write this, nat gas prices at $2.70. These prices, combined with too much leverage (particularly in comparison to competitors that flushed their debt through bankruptcy) and facility shutdowns, created strong headwinds the company simply couldn’t surmount. It now seeks to use the bankruptcy process to gain access to much needed capital and sell to a buyer to maximize value. The company does not appear to have a stalking horse bidder lined up.

The debtors have a commitment for $137.5mm of new-money post-petition financing to fund its cases. Use of proceeds? With the agreement of its secured parties, the debtors seek to pay all trade creditors in the ordinary course of business. If approved by the court, this would mean that the debtors will likely avoid having to contend with an official committee of unsecured creditors and that only the secured creditors and holders of unsecured sponsor notes would have lingering pre-petition claims — a strong power move by the debtors.

  • Jurisdiction: D. of Delaware (Judge Walrath)

  • Capital Structure: $81.1mm funded ‘19 RCF (Wells Fargo Bank NA), $430.875mm ‘21 TL (Wilmington Trust NA), $17.4mm unsecured sponsor notes (Wells Fargo NA)

  • Professionals:

    • Legal: Davis Polk & Wardwell LLP (Marshall Heubner, Darren Klein, Steven Szanzer, Benjamin Schak) & (local) Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Andrew Remming, Joseph Barsalona II, Eric Moats)

    • Financial Advisor: Alvarez & Marsal LLC

    • Investment Banker: Evercore Group LLC

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

  • Other Parties in Interest:

    • Prepetition RCF & Unsecured Agent: Wells Fargo Bank NA

      • Legal: Vinson & Elkins LLP (William Wallander, Brad Foxman, Matt Pyeatt) & (local) Womble Bond Dickinson US LLP (Ericka Johnson)

    • Prepetition TL & DIP Agent ($255mm): Wilmington Trust NA

      • Legal: Arnold & Porter Kaye Scholer LLP (Seth Kleinman, Alan Glantz)

    • Post-Petition Lenders and Ad Hoc Group

      • Legal: Willkie Farr & Gallagher LLP (Joseph Minias, Paul Shalhoub, Leonard Klingbaum, Debra McElligott) & (local) Young Conaway Stargatt & Taylor LLP (Edmon Morton, Matthew Lunn)

    • Southcross Holdings LP

      • Legal: Debevoise & Plimpton LLP (Natasha Labovitz)

    • Stalking Horse Bidder:

Updated 9:39 CT

⛽️New Chapter 11 Filing - Vanguard Natural Resources Inc.⛽️

Vanguard Natural Resources Inc.

March 31, 2019

It’s raining SCARLET 22s! Freefall!! We still STILL have a feasibility problem!!!

Vanguard Natural Resources Inc. ($VNRR) and affiliated debtors find themselves in bankruptcy court again — the second time in nearly exactly two years (its predecessor confirmed a plan of reorganization in July 2017). And they do so in crash and burn fashion: while discussions have been happening over the last several weeks with various constituencies within the company’s capital structure, the company has no deal agreed to — merely the outlines of a restructuring term sheet. This is curious given that, under the company’s proposed DIP credit facility ($130mm, of which $65mm is new money), the company has a mere 30 days from the petition date to file a plan of reorganization and must emerge from chapter 11 within 120 days. Send hopes and prayers to the Kirkland attorneys working on this one over the next few weeks.

The debtors are an oil and natural gas company with production and development activity in the Rocky Mountain, Mid-Continent, Gulf Coast and West Texas regions of the United States; they operate in eight states across nine geologic basins. They are a remnant of the first bankruptcy which saw the predecessor entity shed $850mm of debt and wipe out the existing equity. The current capital structure looks like this:

Screen Shot 2019-04-01 at 1.26.16 PM.png

The second lien noteholders include Fir Tree Capital Management LP and York Capital Management Global Advisors LLC. And the company’s equity holders are:

Source: Chapter 11 Petition

Source: Chapter 11 Petition

This is another pretty cut and dry oil and gas bankruptcy given where oil and natural gas prices are. Many investors who took ownership of distressed E&P companies circa 2015-2017 were playing an option on oil and gas trading levels. That option is clearly out of the money.

Interestingly, that option was underwritten, in part, on the company’s projections. And, so, this statement by the company’s now-CEO was particularly intriguing to us and fits nicely within our recent general theme of inquiring as to whether the industry has a feasibility problem (see Paragon Offshore here, Gymboree here, and Payless here):

I understand that the Vanguard I Plan was predicated on various assumptions that ultimately did not materialize. As discussed further herein, it is my understanding that these may have included certain assumptions about: (a) commodity prices and basin differentials; (b) the pace and volume of divestments and the existence of valuable undeveloped resources to be sold; and (c) the expected returns on a number of capital investments pursued by Vanguard upon emergence—many of which have failed to come to full fruition and have challenged the Debtors’ liquidity over the last 18 months.

Former management, meet a big bad bus. You’ve just been thrown under it.

Under bus.gif

In fact, as if saying it wasn’t enough, the new CEO spared PETITION the trouble of having to dive into the 2017 filings to see just how badly these guys botched their liquidity projections:

Source: First Day Declaration

Source: First Day Declaration

The following compounded matters: (a) mismanagement of the company’s hedge book, (b) borrowing base redeterminations, (c) refi roadshows met with “tepid” interest, (d) a series of asset sales that failed to live up to expectations — both in terms of time to completion and proceeds, and (e) capital investments that “delivered lower economic returns than expected.” It’s almost as if distressed investors who sit on boards of directors and hire their own operators have absolutely no effing clue how to run an oil and gas company. Who knew?

And so the company came dangerously close to tripping a series of covenants. That’s when the company brought in Kirkland & Ellis LLP and Evercore Group LLC and re-engaged Opportune LLP to help the company. The various advisors engaged in a number of processes that would have provided the company with crucial liquidity — including new financing, bank facility amendments and various discreet asset sales. But all prospective parties quickly realized that the assets…well…for lack of a better description…kinda, like, suck.

And so nothing could get done. Well, other than the company obtaining a commitment for $130mm of DIP financing to fund the cases (of which only $65mm is new money). What happens from here will be interesting to watch. Suffice it to say, distressed-investors-cum-oil-and-gas-owners are learning a ROUGH lesson.

And, once again, we have to ask whether company projections ought to get a bit more scrutiny than they have to date.

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

  • Capital Structure: $677.7mm RCF and $123.4mm TL (Citibank NA), $80.7mm second lien notes (Delaware Trust Company)

  • Professionals:

    • Legal: Kirkland & Ellis LLP (James Sprayragen, Christopher Marcus, Brian Schartz, Aparna Yenamandra, Richard Howell, Yates French, Kent Hayden, Timothy Bow, James Fedell, Allyson Smith Weinhouse) & (local) Blank Rome LLP (James Grogan, Philip Guffy)

    • Board of Directors: Randall Albert, Patrick Bartels Jr., W. Greg Dunlevy, Joseph Hurliman Jr., Andrew Schultz, R. Robert Sloan, L. Spencer Wells

    • Financial Advisor: Opportune LLP

    • Investment Banker: Evercore Group LLC

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

  • Other Parties in Interest:

    • DIP Agent ($130mm, $65mm New Money): Citibank NA

      • Legal: Latham & Watkins LLP (Mitchell Seider, Annemarie Reilly, Adam Malatesta) & (local) Hunton Andrews Kurth LLP (Timothy Davidson II, Joseph Rovira)

    • Ad Hoc Group of First Lien Lenders

      • Legal: Brown Rudnick LLP (Robert Stark, Steven Pohl, Justin Cunningham, Alexander Fraser) & (local) Quinn Emanuel Urquhart & Sullivan LLP (Patricia Tomasco)

    • Second Lien Ad Hoc Group (Fir Tree Capital Management LP, York Capital Management Global Advisors LLC)

      • Legal: Davis Polk & Wardwell LLP (Brian Resnick, Benjamin Schak) & (local) Porter Hedges LLP (John Higgins, Eric English, M. Shane Johnson)

    • Official Committee of Unsecured Creditors

      • Legal: Locke Lorde LLP (Philip Eisenberg)

      • Restructuring Advisor: Parkman Whaling LLC (Thomas B. Hensley Jr.)

      • Financial Advisor: The Claro Group LLC (Douglas Brickley)

Updated 5/10 at 12:25pm (#48)

New Chapter 11 Filing - Sizmek Inc.

Sizmek Inc.

March 29, 2019

New York-based Sizmek Inc., an online advertising campaign management and distribution platform for advertisers, media agencies, and publishers, filed for bankruptcy in the Southern District of New York. The company indicates that it lost access to capital when Cerberus Business Finance LLC…took control of the Company's bank accounts and sought to divert customer receivables…” and filed, in large part, to have access to its lenders’ cash collateral. Major creditors include players in the ad world, including Google Inc. ($GOOGL), Facebook Inc. ($FB) and AOL ($VZ)(yes, AOL is still, technically, a “player” in something).

The company is a portfolio company of private equity firm, Vector Capital, which took the company private — merely two years after its IPO — via a 2016 all-cash tender offer for the outstanding shares of common stock for $3.90/share, a 65% premium over the then-30-day weighted average trading price. Kirkland & Ellis LLP represented Vector in the transaction.* In 2017, the company made a $145mm acquisition of Rocket Fuel, another struggling adtech company. And then shortly thereafter, AdExchanger reported merely two years later that Vector was looking to divest the company.

We’ll have more on this once the docket is updated.

*Interestingly, after filing, Katten Muchin Rosenman LLP replaced Kirkland & Ellis LLP as debtors’ counsel in these cases.

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

  • Capital Structure: $172mm funded debt

  • Professionals:

    • Legal: Kirkland & Ellis LLP (James Sprayragen, Stephen Hessler, Marc Kieselstein, Justin Bernbrock)

    • Replacement Legal: Katten Muchin Rosenman LLP (Steven Reisman, Cindi Giglio, Jerry Hall, Peter Siddiqui)

    • Board of Directors: Eugene Davis, Mark Grether, Tom Smith, Marc Heimowitz

    • Financial Advisor: FTI Consulting Inc.

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

  • Other Parties in Interest:

    • Prepetition Secured Agent: Cerberus Business Finance LLC

      • Legal: Klee Tuchin Bogdanoff & Stern LLP (David Fidler, Whitman Holt, Michael Tuchin, Thomas Patterson)

    • Official Committee of Unsecured Creditors

      • Legal: Cooley LLP (Seth Van Aalten, Michael Klein, Robert Winning, Lauren Reichardt)

      • Financial Advisor: Province Inc. (Carol Cabello)

Updated 4/1/19 6:08 CT (#10)