Wed 10/06/2021 17:29 PM
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Relevant Documents:
RSA
Plan / Disclosure Statement
Rights Offering Procedures

Business travel management company Carlson Travel Inc. has released its prepackaged plan, disclosure statement, restructuring support agreement and rights offering materials on solicitation agent Prime Clerk’s website. Through the plan, the debtors seek to implement a restructuring that deleverages the debtors’ balance sheet from $1.6 billion prepetition to $625 million in exit notes as well as a $150 million exit revolving credit facility that is presumed to be undrawn at emergence. $500 million of the exit notes will provide new money to the estate (either via a marketed offering or a backstopped rights offering to existing creditors). The plan also provides for $350 million of new equity financing, split between a rights offering to the plan’s Class 5 and “direct allocations” to supporting parties, as further outlined below.

The debtors say they expect to seek chapter 11 protection on or before Nov. 7 in the Bankruptcy Court for the Southern District of Texas, with an eye toward obtaining an expedited combined hearing for plan confirmation and disclosure statement approval on Nov. 8 at 10 a.m. ET.

The company would join a short list of companies that have deployed 24-hour “in-and-out”-of-court confirmation strategies of prepackaged chapter 11 cases, including Belk Inc. (SDTX), Sheridan Holdings Co. I (SDTX), Fullbeauty (SDNY) and Sungard Availability Services (SDNY). The debtors are represented by Kirkland & Ellis and Jackson Walker.

As previously reported, the debtors’ plan is supported by the company’s sponsor Carlson Inc. and its parent companies (holding 100% of existing equity interests) as well as three groups of consenting stakeholders: revolving lenders and two crossover groups. The three creditor groups collectively hold 100% of the revolving credit facility claims and approximately 95% of new-money notes claims, 90% of new senior secured notes claims and 86% of third lien notes claims.

Carlson Inc. is represented by Dorsey & Whitney, the revolving lenders are represented by Latham & Watkins,and one crossover group is represented by Stroock while the other is represented by Paul Weiss. The revolving lenders’ financial advisor is FTI Consulting, the Stroock crossover group’s financial advisor is Rothschild and the Paul Weiss crossover group’s financial advisor is Evercore.

At emergence, the company would have $625 million in 8.5% exit first lien notes due 2026 and a $150 million (likely undrawn) exit revolver. An illustrative capital structure showing Carlson Travel’s funded debt as of the petition date and projected debt upon emergence is shown below:

A chart of Carlson Travel’s extensive corporate organizational structure, including its sponsor, parent and other nondebtor affiliates and subsidiaries, is available HERE.

The company began solicitation of its plan on Oct. 1 from Class 5 new senior secured notes claims, Class 6 third lien notes claims and Class 7 subordinated notes claims, which are all impaired and entitled to vote under the plan. Senior classes above Class 5 are paid in full in cash. As with most prepackaged cases, general unsecured claims would be paid in full and are otherwise unaffected by the bankruptcy. Classes below general unsecured creditors will receive no recovery.

Class 5 claims consist of $411 million in 6.75% new senior secured notes due 2025 and €325 million in floating-rate euro new senior secured notes due 2025. Such notes would receive their pro rata share of:

  • Either $125 million of cash solely to the extent the debtors place an “Exit Marketed Facility” in the market, or $125 million of exit first lien notes solely to the extent the debtors issue the exit first lien notes;

  • 100% of the new common stock, subject to dilution by a management incentive plan, or MIP, the equity rights offering, the direct allocation equity, a put option premium and new common stock issuable upon the exercise of the new warrants;

  • 100% of the equity subscription rights to purchase the equity rights offering securities; and

  • 100% of the debt subscription rights to purchase the remaining exit debt not issued to Class 5 directly.


Class 6 third lien notes claims would receive their pro rata share of two sets of new warrants for a combined 10% of reorganized equity, as outlined further below.

Treatment of Class 7 subordinated notes claims contains a death trap: If Class 7 votes to reject the plan, holders of such claims would receive no distribution through enforcement of subordination and turnover provisions in their debt documents. If Class 7 votes to accept the plan, holders of such claims would receive their pro rata share of $250,000 of cash.

According to the disclosure statement, members of a crossover group have agreed to backstop $500 million of the exit first lien notes, with the remaining $125 million of exit first lien notes to be distributed to Class 5, to the extent that the company, with the consent of the crossover groups, determines to proceed with the backstopped new money rather than third-party financing.

Further, the crossover groups have agreed to infuse $350 million of new capital into the business through their agreements to directly purchase approximately $159.25 million of reorganized equity (the direct allocation) and to backstop an approximately $191 million rights offering available to Class 5.

The $350 million in equity capital raised through the rights offering and direct allocation would be in consideration for about 88.9% of the new common stock, subject to dilution, at a 25% discount to a $525 million plan value.

The DS also discloses that the company obtained $80 million in additional bridge financing to provide the company sufficient liquidity to consummate the restructuring transactions pursuant to the terms of the RSA. This additional bridge financing, provided by certain members of the crossover groups, closed on Sept. 22 in the form of new-money notes - equivalent to and treated the same as the Class 4 new-money notes claims - that would be junior to Class 3 revolving credit facility claims.

Under the RSA, the required consenting stakeholders will consent to the company’s use of cash collateral for the company’s anticipated short stay in bankruptcy. Broadly, the parties contemplate that the financing orders would provide for the adequate protection of the RCF claims and the new-money notes claims, including payment of interest at the nondefault rate or other amounts due under the respective agreements.

The DS also says that on the effective date of the plan, which is assumed to be Nov. 19 according to the financial projections, the debtors expect approximately $775 million of gross debt and “a substantial cash balance, of which approximately $150 million would be excess cash at emergence.” Based on these amounts, the DS calculates $625 million of net exit debt and an imputed total enterprise value of approximately $1.15 billion. The projections, in turn, provide that with an assumed $775 million in post-emergence indebtedness, the reorganized company’s weighted average interest rate would be 8.5%.

The solicitation materials provide a voting deadline of Nov. 1 at 5 p.m. ET and a voting record date of Sept. 24.

Background / Events Leading to Bankruptcy / Prepetition Restructuring Efforts

Carlson Travel is a worldwide leader in business travel management, providing large global corporations, small and medium-sized businesses, military and government institutions and agencies, and nongovernmental organizations with a comprehensive suite of travel booking services for flights, hotels, rental cars and more.

Prior to the onset of the Covid-19 pandemic, the company says its business was growing and successful, managing approximately 100 meetings and events, speaking to approximately 60,000 travelers, responding to approximately 70,000 traveler emails, and facilitating or managing over 240,000 transactions through its fully integrated travel management platform in 2019. Providing services to nearly 33% of all S&P 500 and FTSE 100 companies and processing $23.1 billion in travel spending, Carlson Travel generated approximately $1.5 billion of revenue and $239 million of adjusted EBITDA in 2019 with substantial opportunities for expansion into new markets prior to the onset of the Covid-19 pandemic.

At the close of 2019, Carlson Travel was “experiencing tremendous growth” and “recorded its highest traffic, transactions, revenue, and EBITDA in the history of its business.” However, due to the impact of Covid-19, the company experienced a dramatic drop in business “nearly overnight,” with revenue dropping 57% between February and March 2020 and 66% year over year.

The company reacted to the onset of the pandemic through cost-reduction and other initiatives, which resulted in $500 million in cash savings and a permanent $300 million reduction in operating costs. Bolstering these efforts, the company also engaged its lenders in an out-of-court restructuring, entering into a restructuring support agreement with a significant majority of secured lenders, unsecured lenders and equityholders in July 2020.

The 2020 RSA provided the company with an additional $250 million of liquidity (consisting of a $125 million equity investment by equityholders and the issuance of $125 million of new secured notes). In late 2020, the company raised an additional $135 million by issuing an add-on offering to the earlier new secured notes offering. Carlson Travel also instituted an exchange offer for all of its outstanding secured and unsecured notes that extended the maturities for all issuances by two years.

The company summarizes the key terms of the 2020 restructuring as follows:

Entering 2021, it appeared that these out-of-court restructuring efforts would be enough to “weather the storm,” with the relaxation of travel restrictions and demand for the company’s services trending upward, according to the DS. However, following a spike in global Covid-19 cases, the recovery in travel volumes in spring 2021 did not provide enough liquidity to sustain the projected multiyear recovery, and the company again re-engaged with its creditors and lenders on strategic alternatives. Negotiations, facilitated by the execution of a series of forbearance agreements, continued from May until terms were reached on an amended RSA embodying the terms of the present restructuring in September.

During the negotiations, the company obtained bridge financing through the issuance of an additional $40 million of new-money notes in June and (as noted above) obtained $80 million in further bridge financing from certain members of the crossover groups in September.

Plan / Disclosure Statement

Below is a chart of the plan’s classes, along with their impairment status and voting rights:



Treatment of Claims and Interests

The debtors’ plan sets forth the following classification of and proposed distributions to holders of allowed claims and interests:

  • Class 1 - Other secured claims: Each holder of such claim would receive, at the debtors’ option (subject to the consent of the required consenting stakeholders), either: (i) payment in full in cash, (ii) the collateral securing its claim, (iii) reinstatement or (iv) such other treatment rendering such claim unimpaired under section 1124 of the Bankruptcy Code.

    • Projected amount of claims: NA. Estimated recovery: 100%.



  • Class 2 - Other priority claims: Each holder of such claim would receive treatment consistent with section 1129(a)(9) of the Bankruptcy Code.

    • Estimated amount of claims: NA. Estimated recovery: 100%.



  • Class 3 - Revolving credit facility claims: On the effective date, each holder of such claim would receive payment in full in cash, and the debtors or reorganized debtors would either cash-collateralize or replace all letters of credit and guarantees. Each ancillary facility would be canceled on the effective date, except: (i) any letter of credit or guarantee that is cash collateralized or otherwise backstopped by way of replacement letters of credit as provided above, and (ii) the JPM credit card program would be available no more than 120 days after the effective date but in no case later than March 31, 2022, provided that it would be cash collateralized and on terms acceptable to JPMorgan Chase Bank. Notwithstanding the foregoing, the debtors and reorganized debtors would use “commercially reasonable efforts” to replace and cancel all letters of credit and guarantees outstanding under the RCF and any ancillary facility in connection with the plan.

    • Estimated amount of claims: $124.8 million. Estimated recovery: 100%.

    • The debtors note the estimated amount of claims does not include $21.3 million in letters of credit issued under the revolving credit facility or $2.1 million in credit support for the JPM credit card program.



  • Class 4 - New-money notes claims: On the effective date, each holder of such claim would receive payment in full in cash.

    • Estimated amount of claims: $441 million. Estimated recovery: 100%.

    • The debtors note that the estimated amount of claims reflects the aggregate principal amount expected to be outstanding on the petition date, plus estimated accrued but unpaid interest up to the petition date, plus any applicable redemption premium.



  • Class 5 - New senior secured notes claims: On the effective date, each holder of such claim would receive:

    • Its pro rata share of either: (i) $125 million of cash, solely to the extent the debtors place the exit marketed facility (market placement would be determined on or before Oct. 15) or otherwise (ii) $125 million of the RSA’s $625 million in exit first lien notes plus:

      • (x) 100% of new common stock, subject to dilution by the MIP (up to 10% of reorganized equity), the equity rights offering securities, the direction allocation shares (which together with the rights offering would dilute the common stock issued to Class 5 noteholders to about an 11.1% stake, prior to dilution from other sources, as discussed in more detail below), the put option premium (which provides rights offering backstop parties with an additional approximately 2.4% of reorganized equity), and the new common stock issuable upon the exercise of the new warrants (10%);

      • (y) 100% of the equity subscription rights to purchase the equity rights offering securities; and

      • (z) 100% of the debt subscription rights to purchase the debt rights offering notes (the remaining exit notes not issued to Class 5 directly).



    • Estimated amount of claims: The sum of $411 million and €325 million. Estimated recovery: 27.6% (assuming an “illustrative conversion rate” of 1.1669 EUR/USD with a final conversion rate to be specified in the forthcoming plan supplement).



  • Class 6 - Third lien notes claims: On the effective date, each holder of such claim would receive its pro rata share of the new Class A warrants (with a five-year term and a price per share implied by a $2.125 billion total enterprise value) and Class B warrants (with a seven-year term and a price per share implied by a $2.5 billion total enterprise value). Each class of warrants provides for the purchase of 5% of new common stock after giving effect to the rights offering but subject to dilution by the MIP. The new warrant agreements will be provided in the forthcoming plan supplement.

    • Estimated amount of claims: $251.6 million. Estimated recovery: 4%.

    • The debtors note that the estimated amount of claims reflects the aggregate principal amount expected to be outstanding on the petition date and excludes any PIK interest payments after March 15, 2021.



  • Class 7 - Subordinated notes claims: Each holder of such claim would receive:

    • If Class 7 votes to reject the plan: no distribution through the enforcement of certain subordination and turnover provisions in the subordinated notes indenture.

    • If Class 7 votes to accept the plan: its pro rata share of $250,000 of cash.

    • Estimated amount of claims: The sum of $4 million and €5 million. Estimated recovery: 0% - 2.5%.

    • The debtors note that the estimated amount of claims reflects the aggregate principal amount expected to be outstanding on the petition date. The debtors also note that the estimated recovery rate assumes an “illustrative conversion rate” of 1.1669 EUR/USD with a final conversion rate to be specified in a (not yet filed) plan supplement.



  • Class 8 - General unsecured claims: Each holder of such claim would receive, at the debtors’ option (subject to the consent of the required consenting stakeholders), either: (i) reinstatement or (ii) payment in full in cash on the effective date or the date due in the ordinary course of business, unless otherwise agreed to by such holder.

    • Estimated amount of claims: $429.5 million. Estimated recovery: 100%.

    • The debtors note that the estimated amount of claims is based on the August 2021 balance sheets, such that the actual amount of claims “may vary materially.”



  • Class 9 - Intercompany claims: Each holder of such claim would receive, at the reorganized debtors’ option (subject to acceptability by the required consenting stakeholders), either: (i) reinstatement, (ii) cancellation without any distribution or (iii) otherwise addressed at the option of the reorganized debtors.

    • Estimated amount of claims: NA. Estimated recovery: 0% - 100%.



  • Class 10 - Intercompany interests: On the effective date, each holder of such interest would receive, at the reorganized debtors’ option (subject to acceptability of the required consenting stakeholders), either: (i) reinstatement or (ii) cancellation without any distribution.

    • Estimated amount of claims: NA. Estimated recovery: 0% - 100%.



  • Class 11 - Existing equity interests: On the effective date, each holder of such interest would have its interest canceled without any distribution.

    • Estimated amount of claims: NA. Estimated recovery: NA.




New-Money Equity and Debt Raise

According to the rights offering procedures, the $350 million in new-money equity commitments would consist of $190.75 million (54.5% of the total new money) in new money raised from the rights offering to Class 5 and an issuance of $159.25 million in new equity (45.5% of the total new money) to the “Direct Allocation Parties,” as defined, but not disclosed, in the backstop purchase agreement.

The $350 million in equity capital raised through the rights offering and direct allocation will be in consideration for about 88.9% of the new common stock, according to the DS, at a 25% discount to plan value. While Class 5 new senior secured notes claims are stated to receive 100% of reorganized common stock under the plan, the class would ultimately receive about 11.1% of the new common stock, due to the dilution from the capital raise, before accounting for any Class 5 holders’ participation in the equity rights offering. These amounts would be subject to dilution from a MIP, the backstop fee and the new common stock exercisable upon issuance of the warrants.

The DS says that after adjusting for the discount to plan value, the $350 million in equity capital implies a plan equity value of $525 million. The company projects approximately $775 million of gross debt and a substantial cash balance on the effective date, of which approximately $150 million would be excess cash at emergence. Accordingly, upon emergence, the reorganized debtors would have approximately $625 million of net debt and an imputed total enterprise value of approximately $1.15 billion.

The rights offering will be backstopped by certain backstop parties who would receive a backstop fee equal to 5% of the aggregate amount of the rights offering, paid in new common stock issued at the rights offering discount, implying a fee of approximately 2.4% of the reorganized equity.

In addition, a $500 million new-money first lien exit notes offering may also be conducted. Specifically, according to a commitment letter for the exit debt, the reorganized company would seek first to issue $625 million in exit debt to third parties on terms that are satisfactory to the company. In the event that those terms could not be met, the $625 million in notes would be issued to Class 5 new senior secured noteholders. The company would raise $500 million in cash through the issuance of $500 million in notes via a rights offering to Class 5 new senior secured noteholders, backstopped by the parties shown in the table below.

The remaining $125 million in notes would be issued to holders of the Class 5 new-money senior secured notes directly on a noncash basis. Parties backstopping the $500 million rights offering would receive a put option payment equal to 2% of the principal amount of notes backstopped.

Exit Notes Term Sheet

The term sheet for the exit notes contemplates that the reorganized company would issue $625 million in 8.5% senior secured first lien notes due 2026.

The $500 million in new-money notes would receive a 2% upfront payment, payable in cash upon issuance of the notes.

The notes would have a make whole for the first year from closing, a 4.25% prepayment premium for the second year, a 2.125% prepayment premium for the third year and a 0% prepayment premium thereafter.

The notes would not include financial covenants.

RSA Milestones

The restructuring milestones contemplated under the RSA are as follows:

  • Oct. 1: Deadline to commence solicitation of plan;

  • Oct. 20: Deadline to file plan supplement on the debtors’ restructuring website;

  • Nov. 7: Deadline to commence chapter 11 cases and file plan, DS, DS motion and backstop motion;

  • Nov. 9: Deadline for the bankruptcy court to enter confirmation order, DS approval order and backstop approval order; and

  • Nov. 30: Outside plan effective date.


Financial Projections

The DS includes the following financial projections:

 

The DS does not include a valuation analysis, but does disclose that the rights offering implies a plan equity value of $525 million and that based on the company’s approximately $775 million of projected gross debt and substantial cash balance on the effective date, approximately $150 million of cash would be excess cash at emergence. These figures impute a total enterprise value of approximately $1.15 billion.

Liquidation Analysis

The debtors attach the following liquidation analysis:
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