Tue 04/19/2022 11:18 AM
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Link to Chapter 11 Change in Debt Search Using Reorg Restructuring Dataset
Link to Credit Cloud Portal

An analysis of Reorg’s new restructuring dataset, included in Credit Cloud, reveals that since 2020, five debtors have emerged or will emerge from chapter 11 with more funded debt than they had on their respective petition dates. Three of these companies have securities trading at stressed levels, with over 10% yields, according to Solve Advisors and EMMA, with one company, Pennsylvania REIT, which emerged Dec. 10, 2020, issuing a going-concern warning in its latest financial statements. Mallinckrodt second lien notes are indicated with a 12% yield, according to Solve, and Buckingham Senior Living’s 2021B notes are indicated 42.3/43, according to EMMA. Reorg has been unable to obtain pricing information for the other two companies.

Two companies exiting chapter 11 into industry headwinds brought on by the Covid-19 pandemic, mall owner Pennsylvania REIT and senior living operator Buckingham, obtained concessions from lenders upon exit, including extended maturities, in an effort to carry the companies through the downcycle.

Mallinckrodt’s debt will increase when it emerges from chapter 11 as a result of the company using the bankruptcy process to crystallize future settlement payments related to prepetition litigation claims.

Fairmont and Pace Industries were each acquired through the chapter 11 process by prepetition security holders. Although Pace emerged with a higher debt balance, the reorganized company’s new equity owners are also the company’s new debt holders.

The table below shows the debtors, prepetition and post-chapter 11 exit debt and pre- and post-leverage based on financial projections included in the debtors’ disclosure statements:

(Click HERE to enlarge.)

An excerpt of the bankruptcy data collected by Reorg is included in the restructuring dataset in the table above. A link to the restructuring dataset can be found HERE. The data is now included in Credit Cloud, a link to which can be found HERE.

Of the companies listed, Mallinckrodt is the only debtor that has yet to emerge from chapter 11.

In the mall owner Pennsylvania REIT’s chapter 11, prepetition equity was reinstated and lenders contributed more capital as the company waited for retail to improve from the pandemic. In return, lenders that were unsecured received new first and second lien debt. Senior living operator Buckingham’s secured bondholders agreed to extend their debt, allowing the company to make refund payments to residents, necessary for keeping the community operational.

Lenders to both companies also agreed to extend maturities. Buckingham’s lenders allowed for reduced interest for five years after exit, while PREIT lenders extended maturities by just two years on average until 2023. PREIT has warned of a potential covenant default in the second half of 2022 under one of its joint venture loans.

Mallinckrodt’s increased debt load is a result of the debtors crystallizing certain litigation claims related to its opioid and Acthar gel drugs. Although the settlement amount for each litigation claim is lower than the asserted claim, Reorg considers the $1.5 billion of deferred payments debt due to set repayment dates and cross-defaults under the reorganized company’s credit facilities if those payments are not made.

Hotel operator Fairmont San Jose and die casting manufacturer Pace Industries were each acquired through bankruptcy by prepetition stakeholders. Fairmont’s equityholders acquired the hotel operator and prepetition lenders were paid in full with a new secured loan and an additional mezzanine loan to pay other bankruptcy-related claims and fund operations.

Pace was acquired by prepetition lenders that received not only equity in the reorganized company but also restructured prepetition debt into a new PIK holdco loan, which had the effect of keeping the principal value of debt intact but reduced interest.

According to Solve Advisors, PREIT’s exit second lien loans were indicated in the low 60s in February and Solve has not reported quotes on the second lien loans in March or April. Mallinckrodt has yet to emerge from chapter 11, but certain of the company’s prepetition securities will convert into exit facilities. The company’s first lien term loan was recently indicated at 92.75/93.75, according to Solve Advisors, and the company’s second lien notes were indicated at 96.5/98.5, up slightly from 96/98 in March.

Buckingham, Fairmont and Pace all have private securities and therefore Reorg has been unable to obtain pricing subsequent to these companies’ emergence from chapter 11.

Mallinckrodt

Including settlement obligations related to opioid and Acthar litigation claims, Mallinckrodt would emerge from chapter 11 with approximately $100 million more in debt than at the petition date. The company filed for chapter 11 on Oct. 13, 2020, with $5.3 billion of debt. The debtors’ plan of reorganization was confirmed on Feb. 4, and the company has said it expects to emerge during the second quarter.

Mallinckrodt’s debt load increased because the company used its bankruptcy to settle outstanding litigation claims, in effect crystallizing the amounts owed, which, according to the plan, would result in initial and deferred payments over the next eight years:

Excluding the deferred settlement payments, Mallinckrodt’s funded debt was reduced by $1.3 billion. In addition, the company would have the opportunity to fully or partially prepay the opioid payments during the first 18 months following emergence at a substantial discount.

Moreover, the company says that the settlement itself resulted in a substantial reduction in future claims. The exact amount of the opioid claims is unknown, but liabilities related to its Acthar drug by the U.S. Department of Justice totaled $650 million.

The company characterizes the bankruptcy as a success and states, “Mallinckrodt will emerge with a strengthened financial position and resolution of key litigation issues, enabling the Company to execute on its strategic priorities of improving its balance sheet and developing and commercializing therapies that improve health outcomes.”

The company, which generated free cash flow of $400 million in 2021 while in bankruptcy, said it expects cash generation to continue post-exit with reductions in advisor fees offsetting the annual settlement payments and higher interest.

Debt, leverage and interest comparison between the emerged company and annualized results prepetition are shown below:

Pace Industries

Pace Industries, a Fayetteville, Ark.-based aluminum, zinc and magnesium die casting manufacturer and services provider for the automotive industry, emerged from chapter 11 with a little over $50 million more in debt than the company had at the petition date. The company entered chapter 11 with $337.7 million in total debt, and the company emerged with $389 million on June 2, 2020, less than two months after filing for bankruptcy.

Under the plan, prepetition noteholders, consisting of funds managed by TCW and Cerberus, received new PIK holdco loans and 100% of reorganized equity for their note claims. The exit from chapter 11 was funded by a new $125 million first lien term loan, proceeds of which were used to repay the debtors’ DIP loans and provide additional capital.

TCW and Cerberus were also the DIP lenders. In addition to receiving their pro rata share of the exit first lien loan, the DIP lenders also received new warrants for 51% of reorganized equity. Prepetition equity owner KPI Holdings received no recovery, and its interests were canceled.

Although total debt increased as a result of the plan, cash interest was reduced materially, largely as a result of prepetition notes converting into new debt that pays interest in kind. Additionally, the company’s nearest maturity was extended to 2025, as compared with 2020 prepetition.

It is unclear why the company emerged with more debt than it had prepetition and existing notes did not equitize. According to commitments, Cerberus and TCW maintained the same share of notes as new loans. Cerberus owned 52.8% of prepetition notes and committed to fund 52.8% of the new loans with TCW holding the rest.

The reduced interest and extended runway provided the reorganized company time for its business to improve. Pace emerged with approximately $95 million in liquidity, including $5 million in cash and $90 million of availability on its $100 million revolver. The exit first lien loan was upsized to $125 million, according to a revised plan supplement, from the originally contemplated amount of $75 million.

Reorg assumes that as a result of the $50 million upsize, only $10 million was drawn under the company’s revolver as compared with $60 million originally contemplated in the company’s projections. According to the cash flow projections through 2023, Pace anticipated generating approximately $5 million to $10 million per year in cash, which Pace had expected to use to reduce debt.

Fairmont San Jose

Fairmont San Jose, owner of the San Jose Fairmont Hotel in San Jose, Calif., filed for chapter 11 on March 5, 2021. The debtors were party to a $175 million secured loan agreement, which was entered into to finance the hotel. The debtors emerged from chapter 11 with approximately $205 million of debt consisting of a new $180 million secured loan and a $25 million mezzanine loan, both used to fund the acquisition of the hotel by the debtors’ prepetition equity owners and to pay other costs associated with the bankruptcy.

Sam Hirbod and Eagle Canyon bought the debtors’ hotel through the bankruptcy plan which paid DIP lenders and prepetition secured lenders in full. The debtors’ prepetition organizational structure is below:

According to a declaration in support of confirmation, the plan provided for, among other things, (a) the continued corporate existence of the owner of the hotel property; (b) the continuation of the debtors’ business by entry into a new lease and execution of a new hotel management agreement with Signia Hotel Management; (c) the execution of the exit secured loan; (d) procurement of a new mezzanine loan by Eagle Canyon, “the proceeds of which will be used, subject to the terms thereof, to fund senior secured debt, reserves, the Hotel’s reopening and other Hotel-related costs”; (e) and certain additional funds for the continued operations of the hotel.

Buckingham Senior Living

At petition, Buckingham Senior Living, a Houston-based nonprofit corporation operating a 495-unit continuing care retirement community, had debt outstanding totaling $160.4 million of long-term secured municipal bond obligations split between three series of bonds - 2007, 2014 and 2015 - when the company filed for chapter 11 on June 25, 2021. At emergence, the debtors’ debt totaled $168.8 million.

In addition to the debt, the company’s obligations included more than $160 million of entrance fee liabilities, including $32 million due upon receipt of new entrance fees and $130.4 million of contingent liabilities. Entrance fees under a “standard” refundable plan per new resident range from $384,600 to $2.1 million, according to the debtors’ first day declaration. If, after the move-in date (i) a resident terminates the agreement, (ii) a resident passes away, or (iii) Buckingham terminates the agreement, then such resident is entitled to the refundable portion of his or her entrance fee.

The debtors, based in Houston, said that because of continuing challenges, including those caused by Hurricane Harvey, and compounded by the effects of Covid-19 throughout the senior living industry (and particularly the continuing care retirement community model), marketing of the residences and sales to new residents did not meet the company’s projected targets, and therefore the company was not able to meet its obligations including those of resident refunds.

The debtors filed chapter 11 with a restructuring plan agreed to with the bond trustee that included $28.5 million in new money, the deferral of payment on the company’s prepetition secured claims until the reorganized company repaid resident refund obligations for a period of up to five years and prepetition noteholders would exchange their prepetition bonds for new 2021B bonds in the principal amount of $140.3 million.

The debtors stated “through the Restructuring Transaction, the Debtor anticipates (a) paying all Resident obligations in full (though some may be paid over an extended time period); and (b) paying all trade claims in full.”

Terms of the exit notes were as follows:

  • 2021A-1 and 2021A-2 bonds: $28.5 million principal with a 7.5% interest rate maturing in 2037, secured by a first-priority lien on substantially all assets;

  • 2021B bonds: $140.3 million accreting interest at the minimum long-term applicable federal rate for the first five years following the effective date and 5% to 5.625% through 2061, secured by substantially all assets of the reorganized company but on a second lien basis.


Interest and maturity for the prepetition debt is shown below:

Therefore, noteholders willing to allow the company to reorganize, recognizing that fulfilling the refund obligation agreements were a necessary component of a reorganized company, agreed to defer receiving a meaningful portion of interest and extended maturities. After the five years following the effective date, interest would likely be higher than prepetition. Prepetition noteholders also preserved their relative ranking to the refund obligations through their secured claim but gave the company five years of increased flexibility to right size cash flows.

Pennsylvania Real Estate Investment Trust

Pennsylvania REIT’s first day declaration said the debtors “have obtained broad consensus among the lender group to a prepackaged chapter 11, which does not impair the claims or interests of all other stakeholders.” The mall owner and operator filed for chapter 11 on Nov. 1, 2020, with a restructuring support agreement entered into with 95% of prepetition lenders, consisting mostly of banks, on a plan that would reinstate mortgage loans, exchange prepetition unsecured debt for new first and second lien debt, add a $75 million revolver and reinstate prepetition equity.

The debtors entered into the RSA, dated Oct. 7, 2021, with consenting lenders including (i) Wells Fargo, (ii) Citizens Bank, (iii) Manufacturers and Traders Trust Co., (iv) MUFG Union Bank, (v) JPMorgan Chase, (vi) PNC Bank, (vii) Associated Bank and (viii) Citibank.

The company’s goal with its restructuring was to provide liquidity to allow the company additional time to navigate the uncertainty brought on by the Covid-19 pandemic.

The debtors’ capital structure prepetition and compared to amounts reported, following the company’s exit on Dec. 10, 2020, just one month after its chapter 11 filing, in its year-end 2020 financials.

After the company’s exit, Reorg reported on turnover within the lender group, citing sources who said that $114.3 million of exit loans were marketed in a BWIC during February 2021. According to sources, sellers of the loans were large banks.

Separately, during chapter 11, Strategic Value Partners, a 5% holder of prepetition loans, had originally objected to the debtors’ plan stating that the plan lacked feasibility, in part due to the debtors making no attempt to deleverage and that supporting lenders to the debtors’ restructuring support agreement were “setting themselves up for a chapter 22.” SVP later reached a settlement with the debtors that made certain modifications to covenants of the exit loan and as a result voted to accept the debtors’ plan.

As a result of the chapter 11 plan, PREIT did receive some maturity relief with exit loans maturing end of 2022 with an option to extend maturities through December 2023, one to two years later than prepetition loan maturities. On the company’s fourth-quarter earnings call, management expressed confidence it would be able to extend maturities by one year.

However, on March 15 PREIT disclosed in its 10-K that the company has determined that there is substantial doubt about its ability to continue as a going concern because of an anticipated default in the second half of 2022 related to a debt yield covenant under a joint venture loan that PREIT partially guarantees.

--Mark Fischer
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